oversight

Dept. of Housing Services, Norristown, PA

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-05-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                                    Issue Date

                                                                         May 20, 1996
                                                                    Audit Case Number

                                                                         96-PH-241-1016




TO:            Joyce Gaskins, Director, Office of Community
                Planning and Development, 3AD


FROM:          Edward F. Momorella, District Inspector General
                for Audit, Mid-Atlantic, 3AGA


SUBJECT:       Department of Housing Services
               County of Montgomery
               Norristown, Pennsylvania

We performed an audit of the Montgomery County Department of Housing Services (Grantee).
The purpose of the audit was to determine if the Grantee administered its HUD-funded residential
rehabilitation programs economically, effectively and in compliance with applicable regulations
and requirements, and with the terms and conditions of HUD grant agreements.

The audit disclosed that the Grantee needs to revise and strengthen procedures regarding
inspections of completed rehabilitation work, conflicts of interest, rehabilitation costs,
procurement of supplies and services, rents and occupancy, annual inspections, and contractors'
liability insurance coverage.

Within 60 days please give us, for each recommendation made in the report, a status report on:
(1) the corrective action taken; (2) the proposed corrective action and the date to be completed;
or (3) why action is considered unnecessary. Also, please furnish us copies of any
correspondence or directives issued because of the audit.

Should you or your staff have any questions, please contact Richard J. DeCarlo, Assistant District
Inspector General for Audit, at (215) 656-3401.
Management Memorandum




96-PH-241-1016          Page ii
Executive Summary
We performed an audit of the Montgomery County Department of Housing Services (Grantee)
to determine whether the Grantee administered its HUD-funded residential rehabilitation
programs economically, effectively and in compliance with applicable regulations and
requirements, and with the terms and conditions of HUD grant agreements.

Specific objectives were to determine whether the Grantee: (1) assured that rehabilitation work
was completed in accordance with its specifications and work write-ups; (2) verified that
properties met Section 8 Housing Quality Standards (HQS) and/or local codes after rehabilitation;
(3) obtained the documentation necessary to assure that rehabilitation costs were fully supported
and reasonable; (4) complied with applicable procurement requirements for purchasing supplies
and services; (5) ensured that rehabilitated rental properties were rented to low-and moderate-
income families at affordable rents; (6) determined that homeowners who received assistance
in rehabilitating their properties were eligible; and, (7) properly credited program income to the
applicable HUD program.



                                     On the basis of our testing, we found that homeowners who
                                     received assistance in rehabilitating their properties were
                                     generally eligible and program income was properly
                                     credited to the applicable HUD programs. However, we
                                     found serious problems in the other areas of the Grantee's
                                     administration of its HUD-funded residential rehabilitation
                                     programs.

                                     This report contains seven findings which detail the
                                     following deficiencies:

                                     •   The Grantee did not ensure that contractors completed
 Repair Work Not
                                         all work specified in the rehabilitation work write-ups,
 Completed and
                                         due to weaknesses in the system for performing
 Substandard Conditions
                                         inspections before and after rehabilitation, and in
 Not Corrected
                                         supervising the performance of the inspectors. As a
                                         result, 903 work items, with an estimated cost of
                                         $138,347, were not completed or were not completed in
                                         a workmanlike manner in 38 of the 39 properties which
                                         we inspected. In addition, existing substandard housing
                                         conditions were not always corrected, and rehabilitated
                                         properties did not meet HQS and/or local codes in 33 of
                                         the 39 properties inspected.




                                              Page iii                                96-PH-241-1016
Executive Summary



                            •   There were apparent conflicts of interest involving
 Conflicts of Interest
                                Grantee and subgrantee personnel, because of oversight,
                                lack of understanding as to the transactions and
                                conditions that constitute conflicts of interest, and
                                disregard for the requirements, thereby diminishing
                                public confidence in the objectivity of Grantee and
                                subgrantee staff responsible for administering HUD
                                funds.

                            •   The Grantee did not obtain required cost documentation
 Rehabilitation Costs Not
                                from rental property owners who performed
 Reasonable
                                rehabilitation work on their own properties. Instead, the
                                Grantee reimbursed these owners on the basis of cost
                                estimates which, in many instances, were inflated. As
                                a consequence, the Grantee could not ensure the
                                reasonableness of costs and may have misspent a
                                substantial amount of HUD funds.

                            •   The Grantee did not always obtain price quotations
 Procurement
                                from an adequate number of sources, publicly advertise
 Requirements Not
                                invitations for sealed bids or buy from the lowest priced
 Followed
                                vendor, as required when purchasing construction
                                supplies and services for use in its Owner Occupied
                                rehabilitation program.         The Grantee also paid
                                contractors for certain services even though the
                                contractors had actually provided price quotes for other
                                services. As a result, there was no assurance that the
                                lowest price was obtained for over $234,000 in supplies
                                and services purchased during the audit period.

                            •   The Grantee did not ensure that low-and moderate-
 Benefits to Low-and
                                income persons benefited from the Rental Rehabilitation
 Moderate-Income
                                Program, as required, because the Grantee did not
 Persons Not Assured
                                obtain the necessary documentation from property
                                owners to verify that rents were affordable and tenants
                                were qualified. In addition, we noted that four tenants
                                who paid their own utilities were overcharged for their
                                monthly rent.




96-PH-241-1016                       Page iv
                                                                  Executive Summary



                           •   Because the Grantee did not maintain and update a
 Rehabilitated Rental
                               complete list of rental properties to be inspected;
 Units Not Inspected
                               coordinate with the Montgomery County Housing
 Annually
                               Authority; or, adequately supervise the responsible
                               inspector, many of the required annual property
                               inspections were not performed. As a result, there was
                               no assurance that rental units were maintained in a
                               decent, safe and sanitary condition after rehabilitation.

                           •   The Grantee did not obtain documentation that
 Documentation Verifying
                               participating contractors had liability insurance
 Contractors' Liability
                               coverage. The Grantee, therefore, had no assurance, in
 Insurance Not Obtained
                               many cases, that it was adequately protected if the
                               actions of contractors resulted in property damage or
                               personal injuries.

                           Because the foregoing deficiencies call into question the
                           Grantee's ability to properly administer its HUD-funded
                           residential rehabilitation programs, we have provided
                           recommendations for corrective action, which will assist the
                           Grantee in complying with all requirements while providing
                           the much-needed housing rehabilitation assistance to
                           Montgomery County residents.



Recommendations            We recommended that you direct the Grantee to:

                           •   Require the contractors to reimburse the HUD-funded
                               programs for the work not done or not done in an
                               acceptable manner; reinspect all the rehabilitated
                               properties; develop a plan for correcting HQS
                               deficiencies; and implement and improve systems for
                               performing and documenting supervisory and
                               HQS/housing code inspections.

                           •   Implement additional procedures to detect and prevent
                               conflicts of interest involving Grantee and subgrantee
                               personnel.




                                    Page v                                  96-PH-241-1016
Executive Summary



                    •   Obtain supporting documentation for costs incurred by
                        rental property owners who perform their own work and
                        reimburse such owners only on the basis of actual costs
                        and reasonable overhead and profit, and develop cost
                        estimates on the basis of actual prices charged by local
                        vendors.

                    •   Implement written procurement procedures for its
                        HUD-funded activities that reflect HUD, State and local
                        requirements.

                    •   Implement procedures to verify tenant income, utility
                        allowances and rents, to ensure that rehabilitated units
                        are occupied by low-and moderate-income tenants and
                        that rents are affordable.

                    •   Strengthen procedures for scheduling and carrying out
                        annual inspections of rehabilitated properties.

                    •   Strengthen the system for ensuring that contractors
                        submit evidence of liability insurance coverage.



Auditee Comments    We discussed the draft findings with Grantee staff during
                    the audit and, where appropriate, incorporated their
                    comments into the findings. Written comments provided at
                    the conclusion of our field audit were also incorporated into
                    the findings, where appropriate.

                    We discussed the draft findings with the Montgomery
                    County Board of Commissioners during an exit conference
                    held on May 7, 1996. The Commissioners expressed their
                    concerns regarding the seriousness of the problems and
                    their willingness to work with HUD staff in order to correct
                    the problems and improve the HUD-funded property
                    rehabilitation programs for the benefit of Montgomery
                    County residents. They also discussed specific actions
                    which were being implemented to address our
                    recommendations.

                    On May 10, 1996 a letter from the Montgomery County
                    Solicitor, on behalf of the Commissioners, summarized
                    their position regarding the findings and recommendations
                    (Appendix E).


96-PH-241-1016              Page vi
Table of Contents

Management Memorandum                                             i


Executive Summary                                                iii


Introduction                                                      1


Findings

    1      The Grantee Did Not Ensure That
           Contractors Completed Rehabilitation
           Work in Accordance With Specifications                 5

    2      The Grantee's Procedures Were Inadequate
           to Prevent Conflicts of Interest
                                                                15
    3      The Grantee Did Not Ensure that Rental
           Rehabilitation Costs Were Fully
           Supported and Reasonable                             21

    4      The Grantee Needs to Improve Procedures
           for Purchasing Supplies and Services                 27

    5      Improvements Are Needed to Ensure
           Rental Rehabilitation Benefits
           Low-to Moderate-Income Households                    31

    6      The Grantee Needs to Improve Systems for
           Scheduling and Conducting Annual
           Inspections of Rental Units                          35




                              Page vii                96-PH-241-1016
Table of Contents




         7       The Grantee Should Verify Contractors'
                 Insurance Coverage                                          39



Internal Controls                                                            41


Follow Up On Prior Audits                                                    43


Appendices
         A       Schedule of Ineligible Costs                                45

         B       Properties Inspected                                        47

         C       Selected Photographs                                        51

         D       Comparison of Grantee Price Estimates
                 with Local Retail Prices for Commonly-
                 Used Materials                                              57

         E       Auditee Comments                                            59

         F       Distribution                                                61


Abbreviations
                    CDBG - Community Development Block Grant
                    CFR - Code of Federal Regulations
                    HOME - HOME Investment Partnerships Program
                    HQS - Housing Quality Standards
                    HUD - U.S. Department of Housing and Urban Development
                    OIG - Office of Inspector General
                    RRP - Rental Rehabilitation Program




96-PH-241-1016                            Page viii
                                                                              Table of Contents




Introduction
The Montgomery County Department of Housing Services administers the HUD Community
Development Block Grant (CDBG), the HOME Investment Partnerships (HOME), and the
Emergency Shelter Grant (ESG) Programs. CDBG funds are used for a variety of activities such
as public facilities and improvements, and residential rehabilitation administered through
subrecipients. CDBG and HOME funds are also used for residential rehabilitation programs
administered directly by the Grantee. Emergency Shelter Grants fund rehabilitation, conversion
and operating costs of buildings used as emergency shelters for the homeless. The Grantee was
allocated the following amounts for these programs in three recent program years:


         Year               CDBG                       HOME               ESG

        1992              $ 3,467,000                   $     0          $ 75,000
        1993                3,767,000                  1,268,000           51,000
        1994                4,089,000                  1,017,000          110,000
        Totals            $11,323,000                 $2,285,000         $236,000



Montgomery County is governed by a three-member Board of Commissioners. Mr. Mario Mele
is Chairman. Mr. Robert E. Wright, Sr. was the Director of the Department of Housing Services
until April 23, 1996. On May 2, 1996 the Montgomery County Commissioners engaged a
consultant, Mr. Gerald Nugent, to oversee the County's housing and community development
programs. Grantee records are maintained at One Montgomery Plaza, Suite 508, Airy and Swede
Streets, Norristown, Pennsylvania.

The HUD-funded residential rehabilitation programs administered directly by the Grantee are
detailed below.



                                    This program provides financial assistance in the form of
 Rental Rehabilitation
                                    deferred payment loans forgiven in equal installments over
 Program
                                    a ten-year period for the repair and rehabilitation of rental
                                    properties. The maximum subsidy per unit is as follows:




                                            Page ix                                  96-PH-241-1016
Table of Contents




                               Unit Size             Amount

                              Efficiency           $ 7,000
                               1 Bedroom            13,000
                               2 Bedroom            15,500
                               3 Bedroom            17,000
                               4 Bedroom            20,000




                             Each loan must be matched by the owner. Costs that
                             exceed the maximum subsidy and the owner's matching
                             share must be paid entirely by the owner.

                             The terms of each loan agreement require that rehabilitated
                             units be used primarily for residential purposes and
                             maintained in accordance with local codes. Each loan is
                             interest-free, unless an owner violates the loan agreement
                             terms.

                             The Grantee has funded this program with CDBG, HOME
                             and funds previously authorized under Section 17 of the
                             United States Housing Act of 1937. Units rehabilitated
                             with HOME funds must be rented at affordable rates to low-
                             and very-low-income persons for specified periods, ranging
                             from 5 to 15 years.

                             This program provides grants to eligible homeowners to
 Owner Occupied
                             correct serious housing code violations. Homeowners must
 Program
                             meet the gross annual income limits to be eligible for
                             outright grants, which have a cost limitation of $17,000 for
                             the needed repairs. Matching grants are available for
                             households that do not meet the limitations for outright
                             grants. These grants require the homeowner to match each
                             dollar contributed by the Grantee toward the identified
                             needed repairs. The Grantee has funded this program
                             mainly through the CDBG program, supplemented with
                             some HOME funding.

                             These programs include the Acquisition, Rehabilitation and
 Additional Rehabilitation
                             Resale Program, which provides affordable housing by
 Programs
                             obtaining, rehabilitating and selling unoccupied houses,
                             and the Home Modification Program (Handicap Program)
                             which is designed to remove architectural barriers and


96-PH-241-1016                       Page x
                                                            Table of Contents



                    provide ramps, transfers, showers, etc. The Grantee has
                    funded theses programs with CDBG and HOME funds.

Audit Objectives    The overall objective of the audit was to determine whether
                    the Grantee administered its HUD-funded residential
                    rehabilitation programs economically, effectively and in
                    compliance with the regulations and requirements
                    pertaining to the Rental Rehabilitation, HOME and CDBG
                    programs, and with the terms and conditions of the HUD
                    grant agreements.

                    The specific objectives were to determine whether the
                    Grantee:     (1) assured that rehabilitation work was
                    completed in accordance with its specifications and work
                    write-ups; (2) verified that rehabilitated properties met
                    Section 8 Housing Quality Standards and/or local building
                    codes; (3) obtained the documentation necessary to assure
                    that rehabilitation costs were fully supported and
                    reasonable; (4) complied with applicable procurement
                    requirements for purchasing supplies and services; (5)
                    ensured that rehabilitated rental properties were rented to
                    low-and moderate-income persons at affordable rents; (6)
                    determined that homeowners who received rehabilitation
                    assistance were eligible; and (7) properly credited program
                    income to the applicable HUD program.

Audit Methodology   We selected 39, or 30 percent, of the 127 properties
                    rehabilitated under the various programs during the period
                    February 1992 through January 1995. The sample
                    consisted of 23 Rental Rehabilitation, 14 Owner Occupied
                    and two Additional Rehabilitation program properties. We
                    started with a small systematic sample of properties
                    completed during the audit period, and on the basis of the
                    results of this sample, we selected additional properties
                    based on property owners/contractors identified in the
                    initial sample whose properties had a large number of
                    deficiencies.

                    For all properties selected, we reviewed the case files and
                    inspected each property to determine whether all repair
                    work was satisfactorily completed and the properties
                    complied with HQS and/or local codes. Where possible, we
                    photographed repair work that was not performed or not
                    performed satisfactorily, and HQS violations. For Rental


                            Page xi                                96-PH-241-1016
Table of Contents



                    Rehabilitation program properties, we also reviewed
                    occupancy records and interviewed tenants to determine
                    whether rent limitations and income eligibility requirements
                    were met. We also reviewed other pertinent Grantee
                    records and interviewed Grantee staff.




Audit Scope         Audit work was performed between February 1995 and
                    November 1995, and covered the period February 1, 1992
                    through January 31, 1995. When appropriate, the review
                    was extended to include other periods.

                    We conducted the audit in accordance with generally
                    accepted government auditing standards.




96-PH-241-1016              Page xii
                                                                                      Finding 1




The Grantee Did Not Ensure That Contractors
Completed Rehabilitation Work in Accordance
            With Specifications
The Grantee did not ensure that contractors completed all work as specified on work write-ups
for the Rental Rehabilitation, Owner Occupied and Additional Rehabilitation Programs, due to
weaknesses in the systems for performing inspections before and after rehabilitation, and in
supervising the performance of the inspectors. In a sample of 39 properties that we inspected,
representing 30 percent of 127 repaired properties, contractors did not perform 692 specified
work items and did not complete 211 other work items in an acceptable workmanlike manner.
The estimated cost for the work not done or done poorly for these 903 work items is $138,347.

In addition, substandard housing conditions were not always corrected or, in some cases,
worsened because work was either not done or done poorly. As a result, the Grantee did not
effectively meet its program objective of improving housing conditions for low-and moderate-
income families.



                                    24 CFR 85.36 (b)(2) requires grantees and subgrantees to
 Repair work must be
                                    maintain a contract administration system which ensures
 completed in an
                                    that contractors perform in accordance with the terms,
 acceptable manner
                                    conditions, and specifications of their contracts or purchase
                                    orders. The Grantee's "Program Guidelines and Eligibility
                                    Criteria, Housing Rehabilitation Programs" handbook
                                    provides specific procedures for carrying out initial
                                    inspections to complete work write-ups and subsequent
                                    quality control inspections to assure work is completed in
                                    an acceptable manner. Work write-ups for each property
                                    provide specific details and instructions on the work to be
                                    done. The Grantee's "Performance Manual, Contractor
                                    Guidelines, Contractor Application" provides general
                                    specifications and guidance to participating contractors.

                                    24 CFR 882.109 provides guidance on HUD's Housing
 Rehabilitated properties
                                    Quality Standards (HQS), which are the minimum
 must meet HQS and/or
                                    acceptable conditions necessary for the health and safety of
 local codes
                                    assisted housing residents. Each housing unit rehabilitated
                                    with funds from HUD's Rental Rehabilitation Program and
                                    HOME Investment Partnerships Program is required to



                                             Page 5                                  96-PH-241-1016
Finding 1



                                   meet these standards upon completion. In addition, it is the
                                   Grantee's policy that, upon completion of rehabilitation, all
                                   units must meet HQS and that rental units must meet local
                                   housing codes.

                                   We inspected 39 properties completed during the period
 OIG inspected properties
                                   November 1991 to July 1995, including properties
                                   rehabilitated under the Grantee's Rental Rehabilitation,
                                   Owner Occupied and Additional Rehabilitation Programs,
                                   as follows:

                      Number of       Number of
          Program     Properties        Units

    Rental
    Rehabilitation           23             34
    Owner Occupied           14             14
    Additional




                                   The Grantee's Additional Rehabilitation Programs include,
                                   among others, the Home Modification Program (Handicap
                                   Program) and the Acquisition Rehabilitation Resale
                                   Program.

                                   Of the 3,574 separate work items in the work write-ups for
 Deficiencies were noted
                                   these 39 properties, there were 903 work items that were
                                   not completed, or were not completed in an acceptable
                                   workmanlike manner in 38 of the 39 properties, as follows:


                                   Number of
                      Number of    Items Not
                      Items Not    Acceptably
      Program         Completed    Completed

    Rental                  613       141
    Rehabilitation           75        69
    Owner Occupied
    Additional               4          1




96-PH-241-1016                               Page 6
                                                                           Finding 1




                          The work write-up for the
37 properties had
                          one property where there
multiple deficiencies
                          were no deficiencies,
                          which had been modified
                          under        the       Home
                          Modification        Program
                          (Handicap Program), had
                          just two work items. On
                          the other hand, 37 of the
                          other 38 properties had
                          multiple work items not
                          completed        or       not
                          acceptably completed, and only six of these properties had
                          fewer than eight deficient items. In one property,
                          rehabilitated under the Rental Rehabilitation Program in
                          1993, 54 items were not completed and six items were not
                          acceptably completed, with the 60 items representing 41
                          percent of the 146 separate work items for this property.
                          Properties rehabilitated under the Rental Rehabilitation and
                          Owner Occupied Programs had an average of 33 and 10
                          deficient work items, respectively.
                          The estimated costs of work items not completed or not
Cost of repair work was
                          completed in an acceptable workmanlike manner totaled
estimated
                          $138,347, including $110,401 for the Rental Rehabilitation
                          Program, $26,981 for the Owner Occupied Program and
                          $965 for a property rehabilitated under the Acquisition
                          Rehabilitation Resale component of the Grantee's
                          Additional Rehabilitation Programs. Because a work item
                          could involve a number of individual steps and the use of
                          several different materials, our cost estimates are based on
                          a portion of the contract amount when only part of an item
                          was not completed or not acceptably completed. When
                          entire work items were not completed or not acceptably
                          completed, our estimates are based on the total contract
                          amounts. Details on the number and estimated costs of
                          work items not completed or not acceptably completed,
                          along with selected photographs, are presented on
                          Appendices B and C, respectively.


                                  Page 7                                  96-PH-241-1016
Finding 1




                   Examples of work not
 Repair work not
                   completed are as follows:
 completed
     •             Contractor installed old
                   ductless range hoods that
                   con- tained extensive rust
                   and grease, instead of the
                   new hoods required by the
                   work write-up. In one
                   case, the       contractor
                   installed an old 24-inch
                   range hood, although the
                   work write-up called for a new ductless 30-inch hood. The
                   old hood was designed to be vented to the exterior, even
                   though there were no ducts to the exterior. As a
                   consequence, it was virtually useless for either absorb- ing
                   or venting smoke and odors from the stove.

                   •   Windows were not repaired as required by the work
                       write-up and specifications at one property. Sash rails
                       did not meet for weather tightness and locking. Pull
                       chains were missing, so that sashes would not stay in
                       place. Locks were broken. These are also serious HQS
                       violations, since occupants do not have adequate
                       security or protection from the elements. At other
                       properties deteriorated wood windows were simply not
                       replaced with new double hung or sliding vent
                       windows, as called for in the work write-ups.

                   •   A new hot water heater in one unit was not installed and
                       placed on solid four-inch concrete blocks, as required
                       by the specifications. The water heater in the unit was
                       placed on the floor, and rust marks near the bottom of
                       the appliance indicated that it was not new. At other
                       properties new heaters and water heaters were installed,
                       but were not placed on the four-inch concrete blocks.


96-PH-241-1016              Page 8
                                                    Finding 1



•   Instead of wooden hand railings for stairways, two-by-
    four-inch lumber was installed. "Two by fours" cannot
    be gripped as easily as standard railings, especially by
    small children. They also have sharp edges and can
    splinter easily. This is also an HQS violation.

•   Single bulb wall-hung light fixtures were installed in
    several units instead of the ceiling-hung fixtures called
    for in the work write-up.

•   Ceiling repairs were not made after installation of duct
    work, which left rooms with new duct work in an
    unsightly condition.

•   A hallway wall was not finished and painted two coats
    after an old door opening was enclosed in one property.
    In another, the wall was not repaired around a new
    electrical outlet, which was not grounded and, therefore,
    an HQS violation.

•   New plywood sheathing was not installed to the main
    roof as required by the work write-up.

•   New plywood mounting board was not installed to
    support a new fuse box.

•   Flue liner was not installed level with the concrete floor,
    and a cover was not installed for the sump pump pit.

•   Basement walls were not completely refinished, as
    required by work write-ups.

•   An old boiler was not removed after a new one was
    installed, and in another property an old oil tank was not
    replaced, as required by the work write-ups.

•   New counter top ends were not finished with the same
    laminate as the top, and the counter top was not sealed
    along the wall, which is also an HQS violation.

•   Subfloor was not installed in accordance with specifica-
    tions and the carpet does not appear to be FHA-
    approved. The file did not contain any statement or



         Page 9                                    96-PH-241-1016
Finding 1



                              indication from the supplier that it was FHA-approved,
                              as required by the work write-up.




                          Repair work was classified as unacceptable workmanship
 Repairs were completed
                          where the contractor performed some work but used sloppy
 in an unacceptable
                          or inappropriate installation techniques, or shoddy
 manner
                          materials.

                          Examples of unacceptable
                          workmanship    are    as
                          follows:

                          •   Woodwork       in    a
                              bedroom was not
                              adequately    painted,
                              leaving chipping and
                              peeling paint on the
                              woodwork, which is an
                              HQS violation.

                          •   Discharge lines from hot water heaters were not
                              properly installed. The discharge line should extend to
                              approximately six inches from the floor, to prevent
                              injury should the water heater discharge. This is an
                              HQS violation.

                          •   Electric outlets and switches installed in a kitchen were
                              not flush with the wall and the openings were not
                              sealed, or were too close to the sink. These are HQS
                              violations.

                          •   New exterior wrought iron handrail was not installed.
                              Instead, the old railing was installed, with the rusting
                              areas partially covered with paint.

                          •   Basement steps were not installed flush with the risers,
                              and the new wood was not painted two coats.




96-PH-241-1016                    Page 10
                                                                                     Finding 1



                                  •   Front concrete sidewalk was not properly repaired and
                                      was left dangerously sloped.

                                  •   Exterior door did not meet specifications, the dead bolt
                                      was not in line, and the door did not receive two coats
                                      of paint.

                                  •   New exterior steps made from pressure treated wood,
                                      including a landing from the back door, were not
                                      installed. Instead, one new wooden step was installed.

                                  HQS violations which we identified related to conditions
Properties had HQS
                                  existing before the rehabilitation occurred but not corrected,
violations after
                                  or to conditions caused by the contractor's poor
rehabilitation
                                  workmanship. We observed a total of 243 separate HQS
                                  violations at 33 of the 39 properties inspected, as follows:


                                  Number of
                     Number of      HQS
 Program             Properties   Violations

 Rental                 23            207
 Rehabilitation         10             36




                                  The following are examples of the conditions we observed:
HQS violations
                                  •   Electrical wiring to the basement, to exterior outlets and
                                      to the kitchen garbage disposal were exposed. Wiring
                                      in such areas should be placed in protective conduits to
                                      prevent severing, which could lead to injuries and\or
                                      fires. In another unit, a bedroom outlet was placed at
                                      the end of the room near an existing outlet. Although
                                      HQS requires only two electrical outlets per bedroom,
                                      this installation will result in the resident using
                                      hazardous extension cords in order to operate lamps or
                                      appliances on the other side of the room.

                                  •   Exhaust fan in bathroom was not vented to the exterior.
                                      HQS require either an operable window or an exhaust
                                      fan for venting to the exterior.




                                            Page 11                                 96-PH-241-1016
Finding 1



                           •   Hand railings to the third floor and to the basement
                               were missing.

                           •   Electrical switch box, junction box and cover plate were
                               missing.

                           •   Large hole in the kitchen ceiling was not required to be
                               repaired and painted.

                           •   Ceiling fixture and switch in a bedroom were not
                               replaced. The owner told us that they have been
                               inoperable for years.

                           •   First floor windows do not have locking hardware,
                               which left the residents without adequate security.

                           •   Exterior steps are a safety hazard because the top step is
                               10 inches below the door threshold. HQS and
                               Montgomery County guidelines require that no step be
                               more than eight inches high.

                           •   Chipping and peeling paint on exterior wood surfaces
                               was required to be removed. Paint on old structures is
                               probably lead-based. Also, peeling paint on a bedroom
                               ceiling was not repaired after a roof leak was fixed.

                           •   Water heater flue vent did not have an adequate up-flow
                               for exhaust gases to be vented to the exterior.

                           Grantee staff did not ensure that all work items were
 Systemic weaknesses
                           completed in a workmanlike manner and that HQS
 caused deficient repair
                           violations were identified and corrected because of:
 work
                           •   Weaknesses in the system for supervising the work site
                               performance of both the rehabilitation and the quality
                               control specialists. The former is responsible for
                               identifying substandard housing conditions and for
                               preparing work write-ups in order to correct each
                               deficiency, and the latter is responsible for ensuring that
                               each work item is completed in an acceptable manner.
                               The Director told us that follow-up inspections were
                               performed on a "spot" basis in order to verify that the
                               quality control specialist had performed adequately.



96-PH-241-1016                      Page 12
                                                                     Finding 1



                       However, these follow-up inspections were apparently
                       not performed on a routine basis and have not been
                       performed at all in several years.

                   •   weaknesses in procedures for performing HQS
                       inspections before and after rehabilitation. Although
                       the rehabili- tation specialists are responsible for
                       carrying out these inspections, they do not formally
                       document each HQS and/ or code violation on a room
                       by room, system by system (i.e. roofing, plumbing,
                       electrical, heating and hot water systems) basis through
                       the use of a check- list. This increases the likelihood
                       that some violations will not be identified.

                   •   weaknesses inherent in the Rental Rehabilitation
                       program, which relied largely on "owner contractors"
                       who performed contract work on their own properties.
                       Profit incentives for these participants came from their
                       roles both as contractors and as owners of rental
                       properties. As contractors, the less they spent on
                       materials and labor the higher the profit. Property
                       owners who are not also the contractors have no such
                       incentive.

                   The large number of work items not done or not done in an
                   acceptable workmanlike manner, and the extent of such
                   items in nearly every property inspected, as well as the
                   number and extent of HQS violations, indicate widespread
                   problems in the Grantee's residential rehabilitation
                   programs. As a result, it appears that these programs have
                   not been very effective in improving the housing conditions
                   of the low-and moderate-income residents they are intended
                   to serve.



Auditee Comments   The Grantee acknowledged the deficiencies and assured
                   that they will take all steps necessary to correct the
                   problems.


Recommendations    We recommend you direct the Grantee to:




                           Page 13                                 96-PH-241-1016
Finding 1



                 1A. Require the contractors to reimburse the HUD-
                 funded programs for the work not completed or not
                 acceptably completed.

                 1B.   Reinspect all other properties in which rehabilitation
                       was completed during the period January 1992 to
                       the present and require contractors to reimburse the
                       program for work items not completed or not
                       acceptably completed.

                 1C.   Implement a system for performing and
                       documenting supervisory inspections on a routine
                       basis to follow up on the work of both rehabilitation
                       and quality control specialists. The supervisors
                       performing these follow-up inspections should, if
                       practicable, be rotated on a regular basis in order to
                       increase the likelihood that more than one
                       supervisor visits each property and reviews the
                       performance of the rehabilitation and quality control
                       specialists.

                 1D.   Develop a plan to assure that the HQS deficiencies
                       noted during our property inspections are corrected.

                 1E.   Improve the system for performing HQS/housing
                       code inspections by documenting these inspections
                       on a room by room, system by system basis. After
                       the initial inspection is performed a work write-up
                       should be prepared to address each identified
                       violation.




96-PH-241-1016          Page 14
           Finding 1




Page 15   96-PH-241-1016
                                                                                       Finding 2




 The Grantee's Procedures Were Inadequate to
        Prevent Conflicts of Interest
The Grantee's procedures were not adequate to prevent apparent conflicts of interest involving
Grantee and subgrantee personnel, because of oversights and a lack of understanding as to the
transactions and conditions that constitute conflicts of interest. It is also evident that certain
Grantee employees disregarded requirements governing conflicts of interest. Diminished public
confidence in the objectivity of Grantee and subgrantee staff responsible for administering HUD
funds can result when previously undisclosed conflicts become known.



                                     The following are apparent conflicts of interest which we
 Conflicts of Interest
                                     observed during our review:

                                     •   The Director of the Department of Housing Services
                                         hired two contractors, who actively participate in the
                                         housing rehabilitation program either as general
                                         contractors or subcontractors, to perform work on
                                         properties that he owns, including his personal
                                         residence.

                                         One of the contractors told us that he performed repairs
                                         on a number of properties owned by the Director,
                                         including his personal residence. We identified at least
                                         15 transactions, totaling over $40,000, between this
                                         contractor and the Director occurring over the six-year
                                         period from 1989 through 1995.               Information
                                         subsequently provided claimed that the contractors were
                                         hired at arms-length, based on the quality of their work,
                                         and were paid the full price.

                                     •   A relative of the Director of the Department of Housing
                                         Services received a contract for roofing work in 1991.
                                         Information subsequently provided claimed that the
                                         individual was a distant relative. However, in our
                                         opinion, any family relationship creates the appearance
                                         of a conflict of interest.




                                              Page 15                                 96-PH-241-1016
Finding 2



                 •   A Housing Services Department rehabilitation specialist
                     who is involved with the administration of contracts
                     supported by HUD funds had a contractor perform
                     repairs on two properties that the employee owns in
                     Norristown. The contractor was an active participant in
                     the Grantee's residential rehabilitation programs.

                 •   A Quality Control Inspector involved in the
                     administration of contracts supported by HUD funds
                     had a contractor perform repairs on his residence. The
                     contractor, who was an active participant in the
                     Grantee's residential rehabilitation programs, told us
                     that he provided this work at a discount.

                 •   A board member of the Willow Grove Development
                     Corporation (WGDC), a non-profit subgrantee, was one
                     of four partners who sold seven town houses to the
                     subgrantee for $420,000. The properties were to be
                     rented to low-and moderate-income families. This
                     transaction was partially funded with $100,000 in
                     CDBG funds and $150,000 in HOME funds. Another
                     board member's firm received a $25,000 broker's
                     commission in connection with the subgrantee's
                     purchase of the town houses.

                 •   Another WGDC board member's firm received a $2,750
                     real estate broker's commission in connection with the
                     subgrantee's purchase of a property using $50,000 in
                     CDBG funds. This property was also purchased in
                     order to be rented to a low-or moderate-income family.


                 •   An officer of Community Housing Services (CHS), a
                     non-profit organization, rented a house from a for-profit
                     developer. CHS and the housing developer participated
                     in two projects that were partially supported with HUD
                     funds. In one project they were partners in a 24-unit
                     rental property which received a $65,000 low interest
                     deferred payment loan. In the other project, CHS
                     received $60,700 in CDBG funds to support the
                     purchase of a six-unit property in Norristown built by
                     the housing developer.




96-PH-241-1016           Page 16
                                                                           Finding 2



                       •   A relative of an officer of Habitat for Humanity, a
                           subgrantee non-profit organization, purchased a home
                           in Norristown from the Department of Housing
                           Services that had been rehabilitated under the
                           Department's          Acquisition/Rehabilitation/Resale
                           program. Because the properties in this program are
                           sold at less than the cost of acquisition and
                           rehabilitation, the purchaser received a financial benefit.
                           In addition, for only this purchase the Grantee paid the
                           purchaser's share of the transfer tax as well as all
                           closing costs, totaling $3,696.

                       24 CFR 570.611(b), Conflicts Prohibited, provides that
Conflicts Prohibited
                       "except for the use of CDBG funds to pay salaries and other
CDBG Program
                       related admini-strative or personnel costs, the general rule
                       is that no persons described in paragraph (c) of this section
                       who exercise or have exercised any functions or
                       responsibilities with respect to CDBG activities assisted
                       under this part, or who are in a position to participate in a
                       decision making process or to gain inside information with
                       regard to such activities, may obtain a financial interest or
                       benefit from a CDBG assisted activity or with respect to the
                       proceeds of the CDBG assisted activity, either for
                       themselves or those with whom they have family or
                       business ties, during their tenure or for one year thereafter."

                       Paragraph (c) Persons Covered, provides that "the conflict
                       of interest provisions of paragraph (b) of this section apply
                       to any person who is an "employee, agent, consultant,
                       officer, or elected official or appointed official of the
                       recipient, or of any designated public agencies, or
                       subrecipients which are receiving public funds under this
                       part."

                       Paragraph (d) provides that HUD can grant exceptions
                       provided there is a public disclosure of the nature of the
                       conflict and an opinion from the recipient's attorney that no
                       state or local law would be violated if HUD granted the
                       exception.




                                Page 17                                  96-PH-241-1016
Finding 2



                          24 CFR 92.356 and 511.12 provide the same prohibitions
 Conflicts Prohibited -
                          and exceptions for activities financed through the Home
 HOME and RRP
                          Investment Partnerships (HOME) and Rental Rehabilitation
                          Programs. These provisions apply in all cases not governed
                          by 24 CFR 85.36, including the acquisition and disposition
                          of real property.

                          24 CFR 85.36 (b)(3) which applies to all three programs
 Standards of Conduct
                          provides that " grantees and subgrantees will maintain a
 Required
                          written code of standards of conduct governing the
                          performance of their employees engaged in the award and
                          administration of contracts. No employee, officer or agent
                          of the grantee or subgrantee shall participate in the
                          selection, or in the award or administration of a contract
                          supported by Federal funds if a conflict of interest, real or
                          apparent, would be involved".

                          The Commonwealth of Pennsylvania ethics requirements
 Conflicts Prohibited -
                          for public officials and employees are set forth in Act 9,
 State Law
                          passed in 1989. Specifically, Chapter 15, paragraph 403(a)
                          prohibits public officials and employees from engaging in
                          conduct that constitutes conflict of interest.

                          The Grantee also has its own requirements regarding
 Conflicts Prohibited -
                          conflicts of interest in Section 6 of its Employee Handbook,
 Grantee Requirements
                          which is provided to each employee in the Housing
                          Services Department. The Grantee also provides a
                          "Handbook for CDBG Subrecipients on Administrative
                          Systems" to each subgrantee. This handbook describes in
                          detail HUD requirements pertaining to conflicts of interest.
                          In addition, the Grantee provides technical assistance to its
                          subgrantees on all applicable HUD requirements.

                          There was no evidence that the Grantee requested that HUD
 Waivers Not Requested
                          grant exceptions for any of these transactions. Apparently,
                          the officers of the non-profit organizations were not aware
                          that they were involved in conflicts of interest that must be
                          disclosed. However, supervisors and employees of the
                          Housing Services Department should have known that
                          ongoing business relationships with contractors who
                          participate in the Department's rehabilitation programs
                          constitute conflicts of interest. In this regard, Grantee staff
                          informed us that the WGDC and CHS were contacted
                          regarding the conflicts cited by our audit.


96-PH-241-1016                    Page 18
                                                                      Finding 2



                   The Grantee should provide subgrantee personnel with a
                   better understanding of conflicts of interest and encourage
                   public disclosure, where necessary, in order to help prevent
                   undisclosed conflicts from occurring. The Grantee should
                   also take appropriate action to deter its own employees
                   from engaging in business transactions that could result in
                   conflicts of interest.



Auditee Comments   The Grantee acknowledged the deficiencies and assured us
                   that they will take all steps necessary to correct the
                   problems.


Recommendations    We recommend that you direct the Grantee to:

                   2A.    Submit a detailed plan of action to ensure that
                          Grantee officials and employees comply with all the
                          required Federal, State and local prohibition against
                          engaging in activities which result in conflicts of
                          interest. This plan should include the types of
                          conflicts detailed in this finding.

                   2B.    Implement additional procedures to detect conflicts
                          of interest in subgrantee organizations, including
                          review of documents submitted by subgrantees to
                          determine if conflicts of interest exist; and,
                          appropriate follow-up action, such as disapproval of
                          proposed transactions that involve a conflict of
                          interest, or request that HUD grant an exception.

                   2C.    Strengthen procedures to train Grantee and
                          subgrantee staff to identify and disclose or, when
                          appropriate, avoid activities that involve conflicts of
                          interest.




                           Page 19                                   96-PH-241-1016
Finding 2




96-PH-241-1016   Page 20
                                                                                       Finding 3




     The Grantee Did Not Ensure That Rental
    Rehabilitation Costs Were Fully Supported
                  and Reasonable
The Grantee did not obtain required cost documentation from rental property owners who
performed rehabilitation work on their own properties. Instead, the Grantee reimbursed the
owners based on cost estimates which, in many instances, were inflated. This reimbursement
method was apparently caused by a misunderstanding between a Grantee employee and a staff
member in HUD's Pennsylvania State Office who provided guidance by telephone. As a
consequence, the Grantee could not ensure the reasonableness of costs and may have misspent
a substantial amount of HUD funds in its Rental Rehabilitation program due to inflated estimates.



                                     24 CFR 85.20(b), which is applicable to the CDBG, HOME
 Programs should be
                                     and Rental Rehabilitation programs, requires grantees to
 charged for actual costs
                                     follow applicable OMB cost principles and to maintain
                                     accounting records supported by source documentation,
                                     including paid bills. OMB Circular A-87, Cost Principles
                                     for state and local governments, provides in Attachment A
                                     for charging Federal programs on the basis of costs
                                     incurred.

                                     24 CFR 511.10 (f) (4) provides specific guidance to
 Owners can perform
                                     Grantees who permit participating owners to perform part
 repair work on their
                                     or all of the work on their properties under the HUD Rental
 properties
                                     Rehabilitation Program. It states that if the owner is not a
                                     practicing, licensed contractor eligible rehabilitation costs
                                     are limited to the costs of materials purchased by the owner
                                     and used on the project, and the cost of other eligible work
                                     performed       by     practicing,    licensed   contractors,
                                     subcontractors or tradesmen on the project. When owners
                                     are licensed, practicing contractors eligible costs can also
                                     include the contractor's paid labor, overhead and profit,
                                     similar to what these items would be on a project not owned
                                     by the contractor.




                                             Page 21                                  96-PH-241-1016
Finding 3




                             HUD policy regarding such owner/contractors had been set
 Invoices for actual costs
                             forth in October 1988 in Notice CPD-88-37, Rental
 must be submitted
                             Rehabilitation Program Policy for Assisting "Self Help"
                             Projects. Paragraph 4 of this Notice also provided that the
                             grantee must establish and implement adequate procedures
                             to ensure that owner/contractors submit proper
                             documentation for rehabilitation costs. It also provided that
                             invoices submitted in such cases must be from actual
                             materials suppliers and/or contractors/subcontractors, and
                             not merely an invoice from the owner to the grantee.

                             Nineteen of the 23 rental rehabilitation properties reviewed
 Cost estimates were used
                             were rehabilitated by owner/contractors. In all 19 cases the
 for reimbursing
                             Grantee used either an "in-house" cost estimate prepared by
 owner/contractors
                             its rehabilitation specialist as a basis for reimbursment or
                             the owner/contractor's bid if it was within 15 percent of the
                             estimate, instead of actual, documented costs. The Grantee
                             did not obtain any source documentation such as invoices,
                             subcontracts, etc. from these owner/contractors, with one
                             exception.

                             According to the Grantee's rehabilitation specialist who
                             worked on the rental program, several years ago, he
                             attempted to obtain source documentation, including
                             invoices, from one owner/ contractor who was very active
                             in the program. The documentation that was provided,
                             however, was voluminous, unorganized and difficult to
                             relate to a specific property. He also said that in response
                             to his inquiry, a HUD staff member told him via telephone
                             that it was not necessary to obtain source documentation
                             from owner/contractors. However, he did not ask for or
                             receive this guidance in writing. Subsequently, the Grantee
                             did not request owner/contractors to provide source
                             documentation to support costs, but relied solely on cost
                             estimates as a basis for reimbursement.

                             The Grantee reimbursed owner/contractors for rehabilitation
 Cost estimates were
                             work performed on the basis of inflated cost estimates.
 inflated and based on
                             Because cost estimates for the Rental Rehabilitation
 estimating manuals
                             program were developed using commercially available cost
                             estimating manuals (published annually) the estimated costs
                             for materials were generally well in excess of prices
                             charged by local retailers. In addition, the estimates


96-PH-241-1016                       Page 22
                                                                              Finding 3



                           included a large, poorly supported allowance for overhead
                           and profit. As a result, a substantial portion of HUD funds
                           used for housing rehabilitation were misspent.
                           The Grantee reimbursed owners who performed their own
                           work for the cost of materials, overhead and profit in
                           accordance with 24 CFR 511.10 (f)(4), as if they were
                           practicing, licensed contractors.          In some cases,
                           owner/contractors were also reimbursed for labor costs.
                           The Grantee continued this practice for all rental
                           rehabilitation projects, including those funded through the
                           CDBG and HOME programs.

                           The Grantee's rehabilitation specialist who worked on the
Staff did not attempt to
                           Rental Rehabilitation program relied on two commercially-
determine current market
                           available estimating manuals which are published annually,
prices
                           in order to develop "in-house" cost estimates. The Grantee
                           reimbursed the amount an owner/contractor bid for a
                           particular project, providing it was within 15 percent of the
                           estimate. If the bid was not within this range, the Grantee
                           made the reimbursements based on the estimate. The
                           rehabilitation specialist did not attempt to determine the
                           current market prices of commonly-used materials in order
                           to establish a basis for estimating costs, nor did the Grantee
                           solicit bids from other contractors when owner/contractors
                           were involved.

                           Analysis and review of cost estimates developed during the
                           audit period disclosed the following:

                           •   The estimated cost for commonly-used materials
Estimated costs exceeded
                               substantially exceeded current retail prices charged for
retail prices
                               these items. Specifically, our comparison of material
                               costs shown on "in-house" estimates prepared during
                               the audit period for 15 commonly-used items, including
                               drywall, range hoods, water heaters, etc., with current
                               prices charged by local retailers (Appendix D) indicated
                               that the local prices were generally lower. Of the 15
                               items compared, the local price of only one, drywall,
                               was currently higher than the Grantee's estimate.

                               For purposes of comparison the prices charged by local
                               retailers were adjusted by the same percentage (50
                               percent) provided in the estimating manual most often
                               used by the Grantee's rehabilitation specialist.


                                   Page 23                                   96-PH-241-1016
Finding 3




                              •   The Grantee gave owner/contractors a 50 percent
 Overhead and profit
                                  allowance for overhead and profit, as recommended in
 based on manual
                                  one of its cost estimating manuals, although it had no
                                  evidence that these participants received such a
                                  percentage on rehabilitation work on properties they
                                  did not own.

                              •   The Grantee did not have evidence that every
 Evidence needed that
                                  owner/contractor who was reimbursed for overhead and
 owners were licensed,
                                  profit was actually a licensed, practicing contractor, as
 practicing contractors
                                  required. Of the 23 rental rehabilitation properties
                                  which we sampled, 19 were completed by five
                                  differentowner/contractors. There was some evidence
                                  that two were actually licensed, practicing contractors,
                                  because they had participated in the Owner Occupied
                                  program, and one owner/contractor claimed to be
                                  licensed and presented a list of other contracts
                                  completed. However, the Grantee had very little
                                  evidence that the two others, including one owner who
                                  had completed 12 of the 23 properties in our sample,
                                  were licensed, practicing contractors.

                              As a consequence, Rental Rehabilitation program costs
                              were higher than necessary because the Grantee's estimating
                              methods resulted in materials costs that were higher than
                              prices charged by local suppliers for similar items and the
                              estimates included questionable and unsupported mark-ups.
                              In addition, some of the participating owner/contractors
                              may have been ineligible for these mark-ups.

                              During the audit, the Grantee's Director told us that:
 Grantee staff attempted to
 justify noncompliance
                              •   The Grantee should not be held responsible if HUD
                                  provides incorrect guidance.

                              •   One of the most active owner/contractors usually
                                  performed many more repair items than are shown on
                                  the work write-ups, in order to bring properties up to
                                  Housing Quality Standards. These additional items
                                  were not reimbursed. Therefore, at least in regard to
                                  these properties, the program achieved its purpose and
                                  received value for the funds expended, even if some
                                  items were overestimated.


96-PH-241-1016                        Page 24
                                                                             Finding 3



                          •     Comparison of the Grantee's cost estimates to prices
                                charged by local building supply stores affiliated with
                                national chains is questionable, because contractors in
                                the program do not make purchases at such stores.

                          While we cannot be certain as to the guidance provided by
 OIG opinion that
                          HUD staff over the telephone in this matter, HUD usually
 noncompliances are not
                          issues all policy changes in writing. In this regard, the
 justified
                          guidance that was supposedly given represented a
                          significant change in policy.

                          Although one or more owners may have made more repairs
                          than are shown on the work write-ups, the Grantee cannot
                          document the specific items that were done, or the cost or
                          necessity of this other work.

                          With regard to the building supply stores used by
                          owner/contractors, our review of copies of invoices from
                          the one instance in which an owner/contractor provided
                          them to the Grantee noted that they included some from a
                          nationally-affiliated chain. On the other hand, if an
                          owner/contractor prefers particular suppliers, we do not
                          believe the HUD-funded program should pay the additional
                          costs when these suppliers charge significantly higher
                          prices.



Auditee Comments          The Grantee acknowledged the deficiencies and assured us
                          that they will take all steps necessary to correct the
                          problems.


Recommendations           We recommend that you require the Grantee to:

                          3A.      Obtain supporting documentation for the costs of
                                   materials, labor, and subcontracts incurred by
                                   owners who perform their own work under the
                                   Rental Rehabilitation program.

                          3B.      Reimburse contractors who perform work on their
                                   own properties only for actual material and paid
                                   labor costs, and for overhead and profit similar to



                                    Page 25                                96-PH-241-1016
Finding 3



                       what these costs would be for properties not owned
                       by such contractors.

                 3C.   Develop material cost estimates on the basis of
                       actual prices charged by local vendors
                       supplemented, where necessary, by cost estimating
                       manuals. Estimates of installation costs should
                       likewise be developed on the basis of amounts
                       charged by arms-length contractors for similar work
                       items.




96-PH-241-1016          Page 26
                                                                                       Finding 4




 The Grantee Needs to Improve Procedures for
      Purchasing Supplies and Services
The Grantee did not always obtain price quotations from an adequate number of sources, publicly
advertise invitations for sealed bids or buy from the lowest-priced vendor, as required when
purchasing construction supplies and services for use in its Owner Occupied rehabilitation
program. In addition, the Grantee paid contractors for certain services even though the
contractors had actually provided price quotes for other services. Because the Grantee had no
written procurement procedures and staff responsible for purchasing these supplies and services
were not familiar with HUD procurement requirements, there was no assurance that the lowest
price was obtained for over $234,000 in supplies and services purchased during the audit period.



                                    24 CFR 85.36(b) provides that Grantees will use their own
 Grantee must comply
                                    procurement procedures which reflect applicable State and
 with Federal and State
                                    local laws and regulations and will maintain records
 procurement
                                    sufficient to detail the significant history of a procurement.
 requirements
                                    Paragraph (c)(3) provides that Grantees must have written
                                    selection procedures. Paragraph (d)(1) provides that, "small
                                    purchase procedures are those relatively simple and
                                    informal methods for securing services, supplies, or other
                                    property that do not cost more than $25,000 in the
                                    aggregate. If small purchase procedures are used, price or
                                    rate quotations will be obtained from an adequate number
                                    of qualified sources."            The Commonwealth of
                                    Pennsylvania, however, requires publicly advertised
                                    solicitations and sealed bids for purchases of supplies or
                                    equipment costing over $10,000.

                                    The Grantee did not follow applicable requirements when
 Grantee did not comply
                                    purchasing construction supplies and services for properties
 with requirements
                                    undergoing rehabilitation under its Owner Occupied and
                                    Acquisition/ Rehabilitation/Resale programs.          Items
                                    purchased included heating systems, kitchen cabinets and
                                    appliances, storm doors, windows and certain inspection
                                    services.

                                    In the five-year period ended September 30, 1995, the
                                    Grantee:




                                             Page 27                                  96-PH-241-1016
Finding 4



                      •   obtained price quotations from only one source for 14,
                          or approximately 40 percent, of 35 small purchase
                          contracts awarded.

                      •   purchased construction items costing more than $10,000
                          in the aggregate without obtaining competitive sealed
                          bids in response to public advertisements.

                      •   made awards to other than the lowest bidder for nine, or
                          approximately 25 percent, of the 35 contracts awarded.
                          There was no justification documented in the Grantee's
                          files for these actions.

                      •   awarded supply contracts to the lowest bidder, but then
                          made purchases from other vendors in at least three
                          instances. Again, there were no written justifications
                          for these actions.

                      •   continued purchasing supplies and services from
                          vendors after the expiration of contract periods, without
                          soliciting new price quotes.

                      •   awarded contracts for certain inspection services to low
                          bidding vendors, but then also purchased other, more
                          expensive services from these same vendors without
                          soliciting any price quotes. For example, the vendor
                          who submitted the lowest bid and was awarded a
                          contract for wood-destroying insect inspections was
                          also paid for treatment services when the inspection
                          results indicated an insect infestation. However, the
                          Grantee had not solicited price quotes for treatment
                          services from this vendor or any others. The vendor
                          was paid $32,693 for inspection and treatment services
                          in this manner.

                          We noted the Grantee also obtained chimney cleaning
                          and insulation installation services on a non-competitive
                          basis in a similar manner after awarding contracts for
                          chimney and insulation inspection services.

                      The rehabilitation specialist who was responsible for
 Grantee staff gave
                      ordering supplies and services for the Owner Occupied and
 reasons for
                      Acquisition/ Rehabilitation/Resale programs told us that he
 noncompliance
                      tried to obtain the most reasonable prices for the Grantee,


96-PH-241-1016                Page 28
                                                                                     Finding 4



   but he did not use written procedures and was not familiar with HUD requirements
   pertaining to procurement. He also said that the Grantee has discontinued direct buying of
   construction supplies and services except for wood-destroying insect inspections. Additional
   comments from Grantee staff offered detailed explanations for the individual situations cited
   above, which, in our opinion, do not obviate the violations of the procurement requirements.

                                   The Grantee did not obtain price quotes from an adequate
                                   number of sources and, in some instances, did not obtain
                                   any price quotes before buying supplies and services. As a
                                   consequence, it not could assure that it had obtained the
                                   most reasonable prices. We noted, for example, that the
                                   price of oil-fired boilers increased twice when the Grantee
                                   obtained price quotes from only one source. Subsequently,
                                   the price decreased by nearly eight percent when the
                                   Grantee solicited quotes from two suppliers.



Auditee Comments                   The Grantee acknowledged the deficiencies and assured us
                                   that they will take all steps necessary to correct the
                                   problems.


Recommendation                     We recommend you direct the Grantee to:

                                   4A.     Develop written procurement procedures for its
                                           HUD-funded rehabilitation activities which include:
                                           solicitation of price quotes from an adequate number
                                           of sources when carrying out small purchase
                                           transactions; advertisement of solicita- tions and
                                           sealed bids when purchasing supplies costing over
                                           $10,000; and, maintenance of records sufficient to
                                           detail the significant history of a procurement,
                                           including rationale for contractor selection or
                                           rejection.




                                            Page 29                                 96-PH-241-1016
Finding 4




96-PH-241-1016   Page 30
                                                                                       Finding 5




   Improvements Are Needed to Ensure Rental
    Rehabilitation Benefits Low-to Moderate-
               Income Households
The Grantee is not ensuring that low-and moderate-income persons are benefiting from the Rental
Rehabilitation program, as required. Because the Grantee did not obtain the necessary
documentation from property owners to verify that rents were affordable and tenants were
qualified, there was no assurance that rehabilitated rental units benefited low-to moderate-income
households. In addition, we noted that four tenants who paid their own utilities were overcharged
for their monthly rent, based on the utility allowance for the Section 8 program.



                                     24 CFR 92.252(a)(5) provides that units rehabilitated with
 Rehabilitated units must
                                     HOME funds must remain affordable for a minimum
 remain affordable
                                     specified period, which varies between 5 and 15 years,
                                     based on the amount spent per unit. Paragraph (b) provides
                                     that participating jurisdictions must review and approve
                                     rents and monthly allowances for tenant-paid utilities and
                                     services proposed by owners. The maximum monthly rent
                                     must be recalculated by the owner and reviewed and
                                     approved by the participating jurisdiction annually.

                                     24 CFR 570.208 (a)(3) provides that an eligible CDBG
 Occupancy by low-to
                                     housing activity carried out for the purpose of providing or
 moderate-income
                                     improving permanent residential structures, upon
 households at affordable
                                     completion, will be occupied by low-and moderate-income
 rents is required
                                     households. For rental housing, occupancy by low-and
                                     moderate-income households must be at affordable rents to
                                     qualify under this criterion. The recipient must adopt and
                                     make public its standards for determining affordable rents
                                     for this purpose.

                                     24 CFR 511.10 (a)(4) provides that benefit for lower
                                     income families under the Section 17 Rental Rehabilitation
                                     program will be considered to occur only where dwelling
                                     units in projects rehabilitated with rental rehabilitation
                                     grants are initially occupied by such families after
                                     rehabilitation.




                                              Page 31                                 96-PH-241-1016
Finding 5




                                  The Grantee has attempted to comply with these
 Grantee must obtain
                                  requirements by including, in a package sent to each owner
 tenant profiles, income
                                  who applies for the Rental Rehabilitation program, a
 verifications and leases
                                  schedule showing maximum rents per unit. In addition, the
                                  Grantee requires owners to send in with each application for
                                  occupied units (1) tenant profiles which show occupants'
                                  names, incomes, monthly rents and monthly utility
                                  payments; (2) income verifications; and, (3) lease copies in
                                  order to verify rents. For units that are vacant at the time
                                  applications are submitted, owners must provide this
                                  documentation as soon as each unit is occupied. The
                                  Grantee requires owners to submit income verifications and
                                  lease copies annually for the duration of each loan
                                  agreement. For units rehabilitated with CDBG funds, the
                                  Grantee adopted rent limits based on 65 percent of the area
                                  median income, as defined by HUD as the affordable rent
                                  standard in response to 24 CFR 570.208 (a)(3).

                                  The Grantee did not always obtain tenant profiles, income
 Occupancy Upon
                                  verifications and lease copies before rehabilitation or after
 Completion
                                  initial occupancy. Some tenant profiles that were sent in
                                  were not fully completed. Others were sent in late. The
                                  following shows the results of a sample of occupancy
                                  information obtained by the Grantee for 31 units
                                  rehabilitated during the audit period.


                                                                               Income
                                                                No            Amounts
                       Total                        Lease      Tenant        Not Given on
                      No. of    Income Not           Not      Profiles         Tenant
        Program       Tenants     Verified         Obtained   Received         Profiles

         HOME           9           4                  4         0                0
         CDBG           14         11                  8         3                2
        SECT 17          8          8                  8         0                2




                                  Owners did not always complete tenant profile information
 Utility Allowances
                                  pertaining to monthly payments for utilities and services.
                                  As a consequence, the Grantee could not verify that owners
                                  adhered to rent limitations when tenants paid for their
                                  utilities. We noted that at least 19 tenants in our sample
                                  paid for their own utilities. For purposes of comparison we


96-PH-241-1016                               Page 32
                                                                       Finding 5



                   calculated gross rents for these 19 tenants using the
                   Montgomery County Housing Authority's schedule of
                   utility allowances for the Section 8 program. This
                   comparison indicated that four tenants were overcharged as
                   follows:




                   Grantee staff commented that only one tenant, whose
                   property was rehabilitated with HOME funds, was
                   overcharged, since the other three tenants were CDBG-
                   funded properties which do not require rent caps. However,
                   in our opinion, the regulations provide that, upon
                   completion, the requirement for low-and moderate-income
                   occupancy includes consideration of tenant-paid utilities.

                   The Grantee did not obtain all tenant profiles for units in the
 Occupancy After
                   HOME program, which are due each year after completion.
 Completion
                   For the nine HOME units in our sample, there were four
                   already completed more than a year as of April 30, 1995.
                   However, the Grantee had obtained no tenant profiles for
                   any of these units as of June 2, 1995.

                   The Grantee's housing specialist who is responsible for
                   obtaining tenant profiles and leases told us that some
                   owners have been uncooperative, even though they agreed
                   to submit the documentation under the terms of the loan
                   agreements. She also told us there was no evidence tenant
                   profiles were obtained before she came to work for the
                   Grantee in 1993.



Auditee Comments   The Grantee acknowledged the deficiencies and assured us
                   that they will take all steps necessary to correct the
                   problems.



                           Page 33                                   96-PH-241-1016
Finding 5




Recommendations   We recommend you require the Grantee to:

                  5A.   Develop and implement procedures to verify tenant
                        incomes to ensure they are low-to moderate-income
                        persons.

                  5B.   Direct owners to establish utility allowance
                        amounts, where appropriate, and monitor the rents
                        being charged to verify tenants are not overcharged.

                  5C.   Require the owners of the three properties cited in
                        this finding to reimburse the tenants for the
                        overcharged rents.

                  5D.   Require the uncooperative owners to repay their
                        loans if they do not comply with the regulations.




96-PH-241-1016           Page 34
                                                                                         Finding 6




    The Grantee Needs to Improve Systems for
       Scheduling and Conducting Annual
           Inspections of Rental Units

The Grantee did not complete all annual inspections of rental units after rehabilitation, as
required. Because the Grantee did not maintain and update a complete list of rental properties
to be inspected; coordinate with the Montgomery County Housing Authority; or, adequately
supervise the inspector responsible for carrying out the inspections, there was no assurance that
rental units were maintained in a decent, safe and sanitary condition after rehabilitation.



                                     24 CFR 92. 504 provides that agreements must require that
 Annual inspections of
                                     owners of rental housing assisted with HOME funds
 rental properties are
                                     maintain the housing in compliance with Section 8 Housing
 required
                                     Quality Standards (HQS) and local code requirements for
                                     the duration of the agreement. The Grantee's loan
                                     agreements require owners to maintain properties in
                                     accordance with local property codes and agree to annual
                                     inspections to be conducted by the Grantee. The Grantee
                                     included these same provisions in loan agreements for
                                     properties rehabilitated with CDBG and Rental
                                     Rehabilitation program funds.

                                     The Grantee's listing of units due for annual inspection was
 Listing of properties was
                                     not complete. Specifically, the listing should have 157
 incomplete and not all
                                     properties. However, 24 properties were not on the listing.
 properties were inspected
                                     Also, the Grantee's inspector did not conduct inspections at
                                     all of the properties on the listing. We identified six listed
                                     properties that were not inspected, but should have been
                                     inspected at least once. We also noted that:

                                     •   There was no system for ensuring that newly-
                                         rehabilitated rental units were added to the listing during
                                         the audit period. Twelve of the 24 units that should
                                         have been on the listing were completed in 1993 and
                                         1994. The inspector responsible for carrying out these
                                         inspections told us that he was provided a listing when




                                              Page 35                                  96-PH-241-1016
Finding 6



                             he began work in 1993, but that he has not yet added
                             units completed in 1993 and 1994.


                         •   The Grantee had never compiled a complete listing of
                             units to be inspected. Twelve of the twenty four units
                             that should have been on the listing were completed
                             between 1985 and 1988.

                         •   The Grantee relied on the Montgomery County Housing
                             Authority to inspect units whose tenants received
                             housing subsidies under the Authority's Section 8
                             program, but did not regularly obtain information on the
                             results of these inspections. Therefore, if a Section 8
                             tenant moved or if a unit repeatedly failed to pass
                             Section 8 HQS, the Grantee would not have the
                             information necessary to respond appropriately. We
                             noted at least one unit that the inspector told us was
                             occupied by a tenant receiving a Section 8 subsidy but
                             which, in fact, was not.

                         The Grantee did not complete all annual inspections as
 Inspection system and
                         required because it had no system for updating the list of
 supervision were
                         properties to be inspected or obtaining information on the
 inadequate
                         results of inspections carried out by Housing Authority
                         inspectors. In addition, the inspector responsible for
                         carrying out inspections was not adequately supervised in
                         order to ensure that properties on the list were timely
                         inspected. As a consequence, the Grantee's annual
                         inspection system was not effective in ensuring that owners
                         maintained rehabilitated properties as required.

                         Grantee staff informed us that attempts were made to add
                         newly-rehabilitated units to the listing, and that the method
                         for inspecting units would be changed.



Auditee Comments         The Grantee acknowledged the deficiencies and assured us
                         that they will take all steps necessary to correct the
                         problems.


Recommendations          We recommend that you direct the Grantee to:


96-PH-241-1016                   Page 36
                                                 Finding 6



6A.   Develop a complete list of properties to be inspected
      and establish a system to update the list on a regular
      basis.

6B.   Coordinate with the Housing Authority in order to
      obtain the results of Authority inspections of
      properties that are also in the Grantee's Rental
      Rehabilitation program.

6C.   Establish a system to supervise the inspector
      responsible for annual inspections to ensure that all
      inspections are performed timely.




       Page 37                                  96-PH-241-1016
Finding 6




96-PH-241-1016   Page 38
                                                                                     Finding 7




       The Grantee Should Verify Contractors'
                Insurance Coverage
The Grantee did not obtain documentation assuring that contractors participating in the Owner
Occupied rehabilitation program had liability insurance coverage, as required. This occurred
because there was insufficient oversight and some confusion concerning the responsibility for
obtaining and reviewing insurance certificates. As a consequence, the Grantee had no assurance,
in many cases, that it was adequately protected from liability if the actions of participating
contractors resulted in property damage or personal injuries.



                                    The Grantee's Contractor Instructions and Application
 Evidence of liability
                                    requires that participating contractors provide evidence of
 insurance is required
                                    comprehensive general and automobile liability coverage.
                                    For each job under contract, the contractor must furnish a
                                    Certificate of Insurance containing the appropriate
                                    homeowner's name and address.

                                    During the audit period, 43 Owner Occupied program
 Evidence of liability
                                    contracts were completed by 13 different contractors.
 insurance was not
                                    However, the Grantee's files indicated that 11 of these
 obtained
                                    contractors failed to provide Certificates of Insurance for
                                    periods when rehabilitation jobs were completed. Only two
                                    contractors provided Certificates covering periods when six
                                    different rehabilitation jobs were completed. Therefore 37,
                                    or 86 percent, of the Owner Occupied program
                                    rehabilitation jobs were completed without evidence that
                                    the contractors had sufficient insurance coverage. For the
                                    two Certificates of Insurance that were submitted, neither
                                    listed the homeowner's name and address, as required.

                                    There was confusion among Grantee staff concerning who
 Grantee staff was
                                    is responsible for collecting and checking the documents, as
 confused
                                    well as insufficient supervision.          Specifically, one
                                    rehabilitation specialist told us that another staff member
                                    obtains and checks insurance documents. However, the
                                    supervisory rehabilitation specialist acknowledged that
                                    rehabilitation specialists have this responsibility. In this
                                    regard, Grantee staff provided a memorandum which was
                                    recently issued to the rehabilitation staff reminding them



                                            Page 39                                 96-PH-241-1016
Finding 7



                   that it is their responsibility to obtain valid contractors'
                   insurance certificates.



Auditee Comments   The Grantee acknowledged the deficiencies and assured us
                   that they will take all steps necessary to correct the
                   problems.


Recommendation     We recommend that you direct the Grantee to:

                   7A.    Strengthen the system for ensuring that contractors
                          submit evidence of insurance coverage for each
                          rehabilitation job, by reemphasizing to staff
                          members assigned this task the necessity of
                          verifying insurance coverage and by providing the
                          necessary supervisory oversight.




96-PH-241-1016             Page 40
Internal Controls
In planning and performing our audit, we considered internal control systems of the Montgomery
County Department of Housing Services to determine our auditing procedures and not to provide
assurance on internal control. Internal control is the process by which an entity obtains
reasonable assurance as to achievement of specified objectives. Internal control consists of
interrelated components, including integrity, ethical values, competence, and the control
environment which includes establishing objectives, risk assessment, information systems,
control procedures, communication, managing change and monitoring.



                                    We determined that the following internal control
 Control Categories
                                    categories were relevant to our audit objectives:

                                    •   Property Inspections

                                    •   Conflicts of Interest

                                    •   Cost Reasonableness

                                    •   Procurement

                                    •   Occupancy

                                    •   Contractor Qualifications

                                    We evaluated all of the relevant control categories
 Scope of Work
                                    identified above by determining the risk exposure and
                                    assessing control design and implementation.

                                    A significant weakness exists if internal control does not
 Significant Weaknesses
                                    give reasonable assurance that the entity's goals and
                                    objectives are met; that resource use is consistent with laws,
                                    regulations, and policies; that                      resources
                                    are safeguarded against waste, loss, and misuse; and that
                                    reliable data are obtained, maintained, and fairly disclosed
                                    in reports. Based on our                           review, we
                                    believe the following items are significant weaknesses:

                                    •   Property Inspections (Findings 1 and 6)

                                    •   Conflicts of Interest (Finding 2)

                                    •   Cost Reasonableness (Finding 3)


                                            Page 41                                   96-PH-241-1016
Internal Controls



                    •   Procurement (Finding 4)

                    •   Occupancy (Finding 5)

                    •   Contractor Qualifications (Finding 7)




96-PH-241-1016              Page 42
Follow Up On Prior Audits
This was the first OIG audit of Montgomery County's HUD-funded residential rehabilitation
programs. Prior audits of Montgomery County operations performed by independent auditors
contained no findings pertaining to the HUD-funded programs.




                                          Page 43                             96-PH-241-1016
Follow Up On Prior Audits




96-PH-241-1016              Page 44
                                                                                    Appendix A

Schedule of Ineligible Costs
                                Finding                Ineligible

                                    1              $138,347


Ineligible amounts are not allowed by law, contract, HUD or local agency policies or regulations.




                                             Page 45                                 96-PH-241-1016
Appendix A




96-PH-241-1016   Page 46
          Appendix B




Page 47   96-PH-241-1016
Appendix B




96-PH-241-1016   Page 48
          Appendix B




Page 49   96-PH-241-1016
Appendix B




96-PH-241-1016   Page 50
                                                                     Appendix B



                                                                     Appendix F

Distribution
Secretary's Representative, 3AS
Director, Office of Community Planning and Development, 3AD
Internal Control and Audit Resolution Staff, 3AFI
Director, Field Accounting Division, 3AFF
Assistant to the Secretary for Field Management, SC(Room 7106)
Audit Liaison Officer, COM (Room 7228) (3)
Acquisitions Librarian, Library, AS (Room 8141)
Chief Financial Officer, F (Room 10166) (2)
Deputy Chief Financial Officer for Operations, FO (Room 10166) (2)
Associate General Counsel, Office of Assisted Housing and
 Community Development, GC (Room 8162)
Assistant Director in Charge, US GAO, 820 1st ST. NE Union Plaza,
 Bldg. 2, Suite 150, Washington, DC 20002
 Attn: Mr. Cliff Fowler

Board of Commissioners (3)
County of Montgomery
Court House
Swede and Airy Streets
Norristown, PA 19404-0311




                                          Page 61                    96-PH-241-1016
Appendix F




96-PH-241-1016   Page 62
          Appendix F




Page 63   96-PH-241-1016