oversight

Chehalis Tribal HA, Oakville, WA

Published by the Department of Housing and Urban Development, Office of Inspector General on 1995-10-31.

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

Issue Date
October 31, 1995
Audit Case Number
96-SE-207-1001

TO:     Jerry Leslie, Director, Northwest Office of Native American
      Programs, 0API

FROM: A. George Tilley, District Inspector General for Audit,
    Northwest/Alaska District, 0AGA


SUBJECT: Chehalis Tribal Housing Authority
    Comprehensive Improvement Assistance Program
    Oakville, Washington


We audited the Chehalis Tribal Housing Authority's use of a 1993 CIAP
grant provided to address an identified emergency situation. We wanted
to find out if the Housing Authority used the CIAP funds in accordance
with requirements to fully address their emergency sewage treatment
situation.

Our report contains one finding. This finding discloses that the Housing
Authority changed the use of the emergency funds and is pursuing a
permanent sewage treatment solution that involves the surrounding
community. However, the Housing Authority could not obtain ONAP agreement
in changing the use of funds, so problems occurred. The Housing Authority
mismanaged the procurement of its modernization contract and the
administration of this contract.

Within 60 days please give us a status report for each recommendation
in the 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 review.

Should your staff have any questions, please have them contact me or
Wayne Rivers at (206) 220-5360.

Executive Summary


The Chehalis Tribal Housing Authority (Housing Authority) was awarded
a $790,600 Comprehensive Improvement Assistance Program (CIAP) grant in
1993, with $450,000 set aside to correct an identified emergency sewage
treatment problem. The Housing Authority only drew down $63,700 of the
$450,000 in emergency funds awarded to pump, clean, and repair the
community sewer systems, and budgeted the balance for modernizing
homebuyer's Mutual Help homes.

The Housing Authority indicated that it changed the use of the funds and
the timing because it did not agree with Indian Health Service's
recommendations for permanent sewer system repairs and because HUD's
Northwest Office of Native American Programs (ONAP) said it would be
better to use the funds than to lose them. However, the Housing Authority
mismanaged the procurement of its modernization contract and the
administration of this contract. The procurement process was flawed,
project work is behind the original schedule with increasing
costs, and the Housing Authority borrowed money to pay their CIAP bills,
since funds were not forthcoming from ONAP. The pressure to use the
funds and a lack of agreement between the Housing Authority and ONAP
contributed to problems with the Housing Authority's procurement and
management of the modernization work.

Before the Housing Authority restarts its modernization project, ONAP
needs to finish its evaluation of the Housing Authority's ability to
manage the remaining CIAP work. The Housing Authority needs to show
ONAP a detailed plan on how it is going to complete the project;
including work needed, inventory on hand, anticipated costs, and its
method of collecting funds from homebuyers for extra work.

Also, we are recommending no funding for upgraded sewage treatment
processes unless they are part of a community-wide solution.

We held an exit conference at the Housing Authorityæs office on July
27, 1995. The draft finding was furnished to the Chairman of the
Housing Authorityæs Board of Commissioners on August 18, 1995, for
written comments. We received written comments on September 18,
1995, which generally agree with the finding. However, the Housing
Authority believes the entire situation leading to the audit would
not have existed had ONAP and the Housing Authority communicated
adequately and properly on the CIAP grant.

The Housing Authorityæs written responses are incorporated into the
finding as we considered appropriate. A copy of the Chairman's
letter is included in Appendix A and attachments are available in our
office upon request.
Abbreviations

   HUD Department of Housing and Urban Development
   ONAP Office of Native American Programs
   CIAP Comprehensive Improvement Assistance Program
   CFR Code of Federal Regulations
   EPA Envrionmental Protection Agency
Introduction


The Chehalis Tribal Council created the Chehalis Tribal Housing Authority
(Housing Authority) by ordinance on May 2, 1978. The Chehalis Indian
Reservation, comprising 4,225 acres, is located 25 miles southwest of
Olympia, Washington, in the southeastern corner of Grays Harbor
County and partially in Thurston County. The nearest towns,
Oakville and Rochester are both about 3 to 4 miles away.

The Housing Authority administers three HUD-financed projects under
two Annual Contributions Contracts. The Annual Contributions Contracts
require the Housing Authority to comply with applicable HUD regulations
for the Mutual Help and Low Rent programs. The Housing Authority
administers 75 housing units under the three projects, primarily for
low income Tribal members. The Mutual Help program consists of one
project of 25 units and the Low Rent program consists of two projects
with 50 units.

The Housing Authorityæs books and records are located at the
Housing Authority office at 10 Petoie Lane, 3 miles east of
Oakville, WA.

The objective of our audit was to determine if the Housing
Authority used approved CIAP funds in accordance with
requirements to fully address their emergency situation.

To accomplish the objective, we reviewed correspondence,
reports, and other documentation concerning the sewage
treatment problems and the Housing Authorityæs CIAP
application and modernization project. We interviewed
staff at the Housing Authority, HUD's Office of Native
American Programs, Indian Health Service, the
Environmental Protection Agency (EPA), and different
contractors involved in the procurement process. We also
reviewed the Housing Authorityæs policies, procedures, and
practices related to our objective.

Our audit covered the CIAP grant approved in 1993 and
the period of September 1993 through June 1995. We
extended our audit period as necessary to fully respond to
our audit objective. We performed our audit field work at
the Housing Authority from May through July 1995.
We conducted the audit in accordance with generally
accepted government auditing standards.

AFTER CHANGING THE PURPOSE OF ITS CIAP GRANT,
THE HOUSING AUTHORITY MISMANAGED ITS
PROCUREMENT OF A MAJOR CONTRACT AND
SUBSEQUENT MODERNIZATION PROJECT

In 1993, HUD provided the Chehalis Tribal Housing Authority
(Housing Authority) with $790,600 of CIAP funding, with $450,000
of the grant set aside to correct an identified emergency sewage
treatment problem. The Housing Authority drew down only $63,700 of
the $450,000 in emergency funds awarded to pump, clean, and repair
the community sewer systems, and budgeted the balance for modernizing
homebuyeræs Mutual Help homes. The Housing Authority indicated that
it changed the use of the funds and the timing because it did not
agree with Indian Health Service's recommendations for permanent
sewer system repairs and because HUDæs Northwest Office of Native
American Programs (ONAP) said it would be better to use the funds
than to lose them. However, the Housing Authority mismanaged the
procurement of its modernization contract and the administration of this
project. The procurement process was flawed, project work is behind
the original schedule with increasing costs, and the Housing Authority
borrowed money to pay their CIAP bills, since funds were not
forthcoming from ONAP. The pressure to use the funds and a lack
of agreement between the Housing Authority and ONAP contributed to
problems with the Housing Authority's management of the modernization work.

Section 14 of the amended U.S. Housing Act of 1937 (Act)
authorizes HUD to provide assistance to public and Indian
housing authorities to improve the physical condition of
existing housing projects. Subject to appropriations, HUD
provides assistance under the Comprehensive Improvement
Assistance Program (CIAP) to Indian housing authorities
with 250 units or less. Under the Act, HUD can make
funds available for emergency or special purpose needs
separately under CIAP, without regard to other grant
requirements. Section 14(i)(1) of the Act states that
emergency needs are limited to correcting conditions which
threaten the health or safety of tenants. Under 24 CFR
950.618(f), HUD divides housing authoritiesæ CIAP
applications into two groups; Emergency Modernization
and Other Modernization. ONAP automatically selects
Indian housing authorities under Emergency Modernization
for review to determine the size of their grant. Indian
housing authorities under Other Modernization, on the
other hand, must go through a rating and ranking process
to be selected for HUD funding.

HUD's regulations for modernization of Indian housing are
at 24 CFR 950. Section 950.615(b) states that eligible
costs for Mutual Help developments include alterations,
betterments, non-dwelling additions, replacements, and
non-routine maintenance that are necessary to meet
modernization and energy conservation standards.
Modernization standards include mandatory and
development-specific work. Mandatory standards are
intended to provide decent, safe, and sanitary living
conditions. Development-specific standards permit an
Indian housing authority to undertake improvements that
are necessary or highly desirable for the long-term physical
and social viability of a development.

The Indian Health Care Amendments of 1988 (Public Law
100-713) state that it is the United Statesæ interest and
policy to provide all Indian communities and Indian homes
with safe and adequate water supply systems and sanitary
sewage waste disposal systems as soon as possible. Under
Public Law 86-121, Indian Health Service has the primary
responsibility to provide the necessary sanitation facilities
for Indian tribes.

The Housing Authority's homes and other homes on the
Chehalis Indian Reservation with septic systems face the
same type of sewage treatment problems because of the
groundwater and soils in the area. Water from
underground aquifers (groundwater) is very close to the
surface and, at times, septic systems can drain directly into
the groundwater. In addition, the predominant soils in the
area, and on the Reservation, are coarse. Excessively
permeable soils such as these coarse sands are not good for
drainfields since waste water moves through the soils
before it can be purified, contributing nitrates to the
groundwater. The combination of high groundwater and
permeable soils contributes to the problems with
maintaining water quality. According to a City of Oakville
representative on wastewater treatment, resolving the
sewage treatment problems is an issue facing current
residents, towns, and businesses in the area, especially
considering the recent growth and the growth anticipated
due to a new Casino.

In response to sewer system failures, in April 1993, the
Housing Authority asked Indian Health Service to look at
their community septic systems. Indian Health Service
surveyed the Housing Authority's two community sewer
systems in early July 1993, but could not determine the
exact causes of the system failures (sewage backing up into
homes and streets). Recognizing the need to repair the two
failing sewage treatment systems, the Housing Authority
applied for $753,000 in CIAP funds for sewer system
repairs on July 23, 1993. According to the Housing
Authority, the $753,000 was based on Indian Health
Service's best estimate to install a recirculating sand filter
system at their low rent project only. Indian Health
Service later estimated that a treatment system would cost
$450,000. Subsequent to the application, the Mutual Help
project's community sewer system also failed. The
Housing Authority decided to pump the septic tanks about
every other month until an acceptable design for a repaired
system was agreed upon. This stopgap measure, at an
estimated cost of $40,400 per year, alleviated the
immediate problem of sewers backing up but certainly was
not a long-term solution to problems with nitrates in the
groundwater.

Indian Health Service completed their survey and prepared
a project summary report on the sewer systems in July
1994. Their work indicated that the two main reasons for
the sewer system failures were:

1) solids build-up, most likely caused by the lack of
regular septic tank inspections and pumping; and
2) the seepage beds being installed below the seasonal
groundwater level (an original design problem).

In addition, Indian Health Service noted that the drainfields
contribute nitrates to the groundwater because of the coarse
soils in the area. They recommended that the Housing
Authority repair and continue to use the existing
community septic tanks. For the two failing systems, they
recommended installing an on-site recirculating sand/rock
filter system with denitrification facilities. This proposed
system was to serve the 49 homes (20 Mutual Help and 29
Low Rent) on the two community sewer systems.
Indian Health Service recommended this type of system in
part to decrease the amounts of nitrates draining into the
groundwater. The Tribe, EPA, Indian Health Service, and
Washington State Department of Ecology have concerns
about high nitrate levels and their effect on water quality.
According to the Director of the Chehalis Tribe's
Department of Natural Resources, the Safe Drinking Water
Act states that any nitrate level above 10 milligrams per
liter is illegal and can be dangerous to infants and pregnant
women, causing "blue baby syndrome" which can be fatal
to infants.

Although there are justified concerns on nitrate levels in the
drinking water, water tests do not show this is an
emergency situation. The only five tests of the Housing
Authority's drinking water since 1992 show that the nitrate
levels are high - but not illegal.

    Date Nitrate level
   2/10/92 5.4 mg/L
   4/19/93 5.3 mg/L
  10/20/94 3.29 mg/L
    4/3/95 6.3 mg/L
   4/19/95 4.7 mg/L

In addition, Indian Health Service had no data that would
show that their recommended system would decrease the
high nitrate levels in the drinking water. Other failed
septic systems and farms in the area are also sources for
nitrates and would need to be addressed to increase water
quality.

On September 10, 1993, HUD awarded a $790,600 CIAP
grant to the Housing Authority for emergency work and
work for handicap accessibility. This award letter stated
that the grant was divided among the Housing Authorityæs
three projects as follows:

    Mutual Help (1 project)        $263,550
    Low Rent (2 projects)          $527,050

ONAP's internal grant approval documents show that the
$790,600 was also divided into three work items, as
follows:
    Emergency                $450,000
    CIAP (Renovation of units to bring them
    up to a standard condition) $259,000
    Section 504 of the
    Rehabilitation Act        $ 81,600

According to ONAP staff, they held the $259,000 for unit
renovation in reserve in case Indian Health Service required
more than their estimate of $450,000 for the sewer system
repairs. The Executive Director stated he was not aware
that ONAP had set aside $259,000 until our draft report,
and stated that ONAP has still not told him that $259,000
was approved for unit renovation. Since HUD did not
specifically indicate the purpose of the CIAP grant in the
award letter, the Executive Director said he asked the
ONAP office what the priority of the work should be. He
stated that ONAP staff told him that the majority of the
funds were designated for the sanitary waste facility
rehabilitation.

Due to disagreements between the Housing Authority and
HUD on the intended use of funds, a long delay (19
months) occurred between the grant approval and funds
allocation. The Housing Authority's Executive Director
signed Annual Contributions Contract amendments on
September 24, 1993, and sent the amendments to HUD.
The Northwest ONAP Director signed and executed these
amendments on April 26, 1995. These amendments are
the actual agreements where HUD agrees to release CIAP
funds to the Housing Authority. According to ONAP staff,
the long delay occurred because the Housing Authority did
not send in budgets showing how it was going to use funds
until 1995. The Executive Director stated that the Housing
Authority provided written budgets, showing how it
intended to use the funds, to ONAP staff on numerous
occasions, but the ONAP staff would not accept the
budgets because they did not include Indian Health Service
involvement. Under 24 CFR 950.618 (j) and (k), after
HUD approves a CIAP budget, then HUD and the Housing
Authority shall enter into an Annual Contributions Contract
amendment in order for the Housing Authority to
requisition modernization funds. By approving a budget,
HUD certifies that it agrees the assistance will not be more
than necessary to make the assisted activity feasible.
In a September 24, 1993, Board of Commissioners
meeting, the Executive Director and Board discussed the
use of the awarded CIAP funds. The minutes show that,
since repairing the septic system would take up $400,000
of the award, the Executive Director recommended
spending $40,000 to just pump the septic system for a year
and putting the money into the homes instead. The Board
approved the proposal to pump for a year. According to
the Executive Director, this was only a contingency plan
since the Housing Authority had not heard any definite
restrictions on how the funds were to be used.

The Housing Authority started the sewer repair process in
November 1993 by requesting Indian Health Service
assistance in replacing the two community septic systems.
During the Spring of 1994, Indian Health Service staff met
with the Executive Director to discuss repairing the septic
systems and drainfields. On May 3, 1994, Indian Health
Service wrote to the Executive Director that the estimated
cost of a new sewer system would be $450,000 based on
the use of a recirculating sand filter system, although
alternative systems would cost significantly less. (This
estimate was the same as the funds allotted for the
emergency work by ONAP.)

In their July 1994 report, Indian Health Service
recommended a recirculating sand filter system with
denitrification facilities costing $454,000 to correct the
Housing Authority's sewage treatment problems. Indian
Health Service stated they understood that the Housing
Authority was concerned with high nitrate levels in the
drinking water, so they included denitrification facilities in
their estimates.

The Housing Authority did not accept Indian Health
Service's July 1994 recommendations. The Executive
Director stated that the recommendations were not
acceptable since they would not fit in the community-wide
plans for a regional sewage treatment system. In addition,
the Housing Authority had data from another recirculating
sand filter system which showed that such a system was
extremely unreliable. The Executive Director stated that
Indian Health Service and HUD did not involve the
Housing Authority, the Tribe, or the Tribeæs Department of
Natural Resources in their sewer system plans, which also
led to communication problems later.

With unacceptable recommendations, on August 31, 1994,
the Housing Authority told the Tribe that it would begin
temporary repairs to the community sewer systems
immediately. The Housing Authority anticipated a æfinal
permanent sanitary waste facility designæ (from Indian
Health Service) by the end of December 1994. The
Housing Authority indicated another source of funds might
be available for a permanent facility. On September 15,
1994, the Tribe, on behalf of the Housing Authority,
informed Indian Health Service that it wanted them to
incorporate the repair of the defective sewer systems into
a long range solution to the sanitary waste disposal needs
on the Reservation. And the Housing Authorityæs Board
believed a comprehensive solution involving all the parties
(the City of Oakville, the Tribe, the Casino, and Briarwood
Farms - a neighboring chicken farm) would be to the
economic and environmental benefit of all parties.

The Housing Authority has followed up in planning and
promoting a community-wide sewage treatment solution.
On January 13, 1994, the Housing Authority hosted an
interagency conference (attended by the Tribe, HUD,
Indian Health Service, EPA, Thurston County, City of
Oakville, and Briarwood Farms) to discuss appropriate
solutions to the community problems with sewage treatment
and groundwater protection. In the Spring of 1994, the
Housing Authority sought the participation of the Tribe and
Casino in an effort to develop a Reservation-wide solution
to sanitary waste disposal/groundwater protection issues.
Finally, in August 1994, it also asked Indian Health
Service to look into the feasibility of a facility to serve the
proposed Casino as well as non-Housing Authority
customers.

In conclusion, the Housing Authority and Indian Health
Service had different ideas on how the emergency funds
should be used. The Housing Authority wanted to use the
funds for a regional solution, involving the surrounding
community, while Indian Health Service continued to
recommend a solution for just the Housing Authorityæs
community sewer systems.

Indian Health Service is no longer involved in the design
since the Tribe and Housing Authority chose to pursue
other options in developing a solution to the Reservationæs
sewage treatment problems. Indian Health Service told us
that they will still recommend a recirculating sand filter if
the Housing Authority wants their input again.

With no prospects for a viable solution from Indian Health
Service, the Housing Authority decided to start
modernizing Mutual Help homes, on ONAP staffæs advice,
but without ONAP's official approval. According to the
Executive Director, the Housing Authority started
modernization for two reasons: 1) because two Tribal
members heard from an ONAP official at a conference in
Phoenix, Arizona that ONAP was going to recapture the
CIAP funds; and, 2) because the recommendations from
Indian Health Service did not address the community-wide
needs for sewage treatment. The Housing Authorityæs
Board minutes indicate ONAP staff informally told them
that proceeding without HUD approval would be a finding,
but no activity would be worse. The Housing Authority
realized that it was not authorized to proceed with their
modernization project or with this change, but decided that
proceeding with a project that did not conform to the letter
of the regulations was preferable to losing its funding due
to further delays.

Indian Health Service provided the Housing Authority with
the plans for temporary repairs to the sewer system in
September 1994. A contractor completed Indian Health
Service recommended temporary repairs in November
1994 for $31,000. The repairs did alleviate the emergency
situation and the need for continual septic tank pumping.
However, as is the case with other sewage disposal systems
in the area, a sewage treatment problem still exists. Indian
Health Service stated that insufficiently treated waste water
is still entering the groundwater and contributing to high
nitrate levels in the drinking water supply. They believe
this is a potential long-term threat that cannot be fully
addressed by temporary repairs, but needs to be addressed
on a community-wide basis.

To start modernization work, in August 1994 the Housing
Authority requested proposals for work at 25 Mutual Help
units. Available information from the Housing Authority
and a bidding contractor indicates that ONAP staff was
aware that the Housing Authority intended to have
modernization work done and that it requested bids on this
major modernization project.

As demonstrated below, the Housing Authority
mismanaged the procurement of its modernization contract
and the project administration. Specifically:

  - The Housing Authority's procurement was flawed and
    did not result in fair and open competition;

  - Project work is behind schedule and costs on the first
    nine homes could be as high as $71,027 per home;

  - The Housing Authority borrowed money when funds
    were not forthcoming from ONAP; and

  - The Housing Authority may incur extra costs due to
    homebuyer requests with no provisions for homebuyer
    payments for work items.

   These issues are described in more detail below.

   A. The Housing Authorityæs procurement of a major
   modernization project was flawed and did not result in
   fair and open competition

   Although the Housing Authority extended the bid due
   date, it initially received only one bid. The following
   day, September 23, 1994, the Executive Director sent
   letters to seven different contractors. In the letters, the
   Executive Director stated that the Housing Authority
   was unable to provide additional specifications or bid
   submission forms due to technical and staff difficulties,
   so it did not receive competitive bids or comparable
   estimates. Therefore, it waived bonding requirements
   related to sealed bidding and requested estimates from
   interested parties by September 30, 1994.

   In response to the letters, the Housing Authority
   received estimates from six contractors before
   September 30, 1994, including the original bidder. It
   then selected the original bidder to do modernization
   work at 25 Mutual Help homes for $623,804. The
   Housing Authority and contractor signed a contractor-
supplied Modernization and Rehabilitation Contract on
November 11, 1994.

As indicated by the letters to the contractors, the main
problem with the procurement was a lack of complete
bid specifications which prevented contractors from
knowing just what was to be done. Although the
Housing Authority hosted three pre-bid conferences, it
did not use an architect to develop detailed plans to
provide to the bidders. The Executive Director said he
permitted contractors to submit proposals in their own
format, with the hope that more local contractors might
bid. But, with this latitude, the three bidding
contractors we talked to each had a different
understanding of what work was to be done and said
the bid specifications were either vague or incomplete.

For example;

- One bidding contractor said he included the
  anticipated homebuyer requests or additions in
  his bid, so the bid was necessarily higher than
  usual.

- Another bidding contractor understood that
  homebuyer requests or additions were to be
  handled on a case-by-case basis for each
  homebuyer.

- The winning bidder said it was going to finance
  the homebuyer requests directly with the
  homebuyer, after discussing options with them.

Each contractor we talked to said it was difficult to bid
the project using the specifications provided. (One
contractor said there were too many questions that the
Housing Authority could not answer, so they did not
bid the project.) The Executive Director admitted the
Housing Authority had problems with their
procurement, but said ONAP staff informed him that a
flawed procurement process was better than not
spending the CIAP funds.

B. Project work is behind schedule and modernizing costs
on the first nine homes could be as high as $71,027 per
home

Project work is behind the original schedule and costs
are exceeding expectations. Modernization work began
in November 1994 and, under the contract, was
expected to be completed by March 1995. However,
as of June 1995, work has only been completed in nine
homes. There is an ongoing dispute between the
Housing Authority and the contractor on the amount
due the contractor for work on these nine homes. If all
accounts payable and the contractoræs final claim for
payment are included, costs could be as high as
$71,027 per home. If the Housing Authority's figures
for the contract are considered, the costs could be as
high as $46,575 per home. The Housing Authority and
contractor both contributed to and had reasons for the
delay and increased costs.

According to Board meeting minutes, the contractor did
not have appropriate supplies, disabled the power to the
community septic system, did not coordinate workers
and supplies, and cut skylights in inappropriate places
among other issues. On March 16, 1995, the Housing
Authority terminated the contract due to lack of
performance. The Housing Authority then started
paying suppliers and construction workers directly (a
force account system).

The contractor admitted they had shortcomings in their
work, but said blame can also be placed with the
Housing Authority. The contractor said that they did
not receive anything in writing on exactly what the
Housing Authority wanted done. According to the
contractor, the Housing Authority allowed homebuyers
wide latitude in the changes done to their homes, so
they did not know what to expect. The contractor
ended up doing a lot of work (without going through a
change order process) that was not included in their
original contract, due to requests from the Executive
Director and homebuyers.

On April 11, 1995, the contractor sent their final bill
to the Housing Authority, asking for $340,581 in
payment (in addition to the $93,412 already paid). The
Housing Authority has prepared a counterproposal to
this billing. The differences are shown below:

                        Contractor Housing
                                Authority
Work under contract             $ 163,668 $ 93,594
Work requested by Executive Director
  - not by change order          53,675      40,727
Customized homebuyer requests          28,995      15,936
Inventory                    92,260      69,934
Expenses for end of contract        95,395     53,125
Less payment made                 (93,412) (93,412)
Costs incurred by Housing Authority -0-          (46,315)
Amount withheld for septic system       -0-     (13,078)
        TOTAL DUE                $340,581 $120,512


This indicates that there were significant differences
between the original contract and the work actually
done, contributing to work delays. For example,
according to the Executive Director, due to construction
problems, the contractor stated they would donate the
extra work to some homebuyers. However, the
contractors billing includes $28,995 for customized
homebuyer requests.

As of June 6, 1995, the Housing Authority had spent
$272,763 and incurred accounts payable of $25,900 for
modernization work in nine homes. With the ongoing
dispute between the Housing Authority and contractor,
the eventual cost of the modernization is unknown.
According to the contractor's final billing, the Housing
Authority owes them $340,581. However, in the
Housing Authority's counterproposal, it states that it
owes the contractor $120,512. Therefore, the total
costs per home could range from $46,575 (using the
Housing Authority's figures) to $71,027 (using the
contractor's figures). In August 1995, the contractor
indicated that the contract closeout amount will increase
at least $20,000 due to interest and attorney fees. The
contractor filed a lawsuit against the Housing Authority
on August 30, 1995, asking for a $550,000 judgment.

We realize that the Housing Authority has spent funds
to purchase doors, windows, insulation, and other
supplies for all 25 units. But, based on the figures
above, we question whether comparable work at the
other 16 units can be completed within the $790,600
grant amount.


C. The Housing Authority borrowed money after their
grant award was initially recaptured

Partially because of the Housing Authority's failure to
proceed in a timely manner under their CIAP program,
ONAP notified the Housing Authority on January 10,
1995, that the remaining CIAP funds were recaptured.
This letter was the first written correspondence from
ONAP regarding the CIAP project since September
1993. On January 18, 1995, the Housing Authority
appealed the action. ONAP staff discussed the issues
behind this action at a March 2, 1995, meeting with
the Housing Authority and rescinded the recapture of
funds, but placed the Housing Authority under a high
risk designation. ONAP staff stated that this meeting
was the first time they were aware that the Housing
Authority intended to spend money on modernization
instead of emergency sewer system repairs.

As indicated above, ONAP staff said they did not
receive acceptable budgets from the Housing Authority.
Therefore, ONAP was not able to execute the Annual
Contributions Contract amendments until April 26,
1995. Without funds available from ONAP to pay for
expenses already incurred (and with no timeframe on
the appropriation), the Housing Authorityæs Board
obtained a $175,000 line of credit from their local bank
on February 2, 1995, with a due date of August 2,
1995. This line of credit was obtained before ONAP
actually agreed to provide CIAP funds to the Housing
Authority and after ONAP notified the Housing
Authority that their grant award was recaptured. The
Board obtained a loan of $160,000 on May 9, 1995.
The total amount of $335,000 is now due on December
31, 1995.

Since the Housing Authority and ONAP could not agree
on Annual Contributions Contract amendments and
proposed budgets, the Housing Authority incurred
interest expenses on its line of credit. The interest rate
on the first $175,000 of the line of credit is 6 percent
and the interest rate on the $160,000 increase is 10
percent. As of June 8, 1995, the Housing Authority
had incurred about $4,500 in interest expenses.

The Housing Authority used these funds from the line
of credit and funds from ongoing operations to:

1)Pay the modernization contractor $93,412 on
     February 3, 1995, for work performed.
2)Pay a local contractor $31,000 for temporary
      repairs to the failed sewer systems.
3)Pay for other expenses, including the following:
   $36,631 for materials from Home Base,
   $ 7,900 for nine containers to store
          household items, and
   $ 5,568 for septic tank pumping.

As of June 6, 1995, the Housing Authority had spent
$353,835 for administration, repairs to the two
community sewer systems, and work on 9 of the 25
Mutual Help homes. The Housing Authority drew
down $232,100 from HUDæs Letter of Credit Control
System (LOCCS) on June 7, 1995, to cover these
expenses, divided as follows:

    Administration           $ 28,000
    Site Improvement (sewer systems) 63,700
    Dwelling Structures        136,350
    Non-Dwelling Equipment          4,050

D. The Housing Authority may incur extra costs due to
homebuyer requests with no provisions for homebuyer
payments for work items

The focus of the contract between the contractor and
Housing Authority was on modernizing the 25 Mutual
Help homes. However, the contractor said they ended
up doing a lot of customization according to homebuyer
and Housing Authority requests, in addition to bringing
the homes up to code. The contractor estimated that
about 40 percent of the work was for homebuyer or
Housing Authority requests in addition to code work.
In the final billing from the contractor, about 35
percent of the charges for work and materials were for
work requested by the Executive Director or
homebuyer.

Before modernization work started, in a November 17,
1994, Board of Commissioners meeting, the Board
discussed equity upgrades involved with CIAP
(homebuyer requests to be paid by the homebuyer).
The meeting minutes state that the upgrades will be
approved as long as they are put in writing and
feasible.

The Executive Director stated that the contractor was to
use a homebuyer coordinator to discuss possible extra
work with homebuyers. The homebuyer then had a
choice of what changes they could have done to their
home and whether they wanted to pay more than the
base package allowance for any home improvement.
The Executive Director said all homebuyers understood
they would have to pay for: any wall moving, moving
the laundry area, skylights, cabinet upgrades, flooring
(carpet and linoleum) upgrades, bathroom fixtures
upgrades, a pellet stove, a pedestal for the stove, and
other requests. He stated that they would pay for these
changes through charges to their equity account or
some type of repayment agreement.

Assuming that homebuyers with a small balance in their
equity account would have to pay for improvements
some other way, a review of the homebuyersæ Monthly
Equity Payment Accounts would show how many
repayment agreements will be needed. As of April 1,
1995, only four of the nine homebuyers with work done
had more than $1,000 in their Monthly Equity Payment
Account and one homebuyer even had a negative
balance of $1,366. This indicates there may be
problems with collecting money for extra work at five
of the nine homes, since the Housing Authority has yet
to set up repayment agreements.

For example, at 7 Lacamus Lane, where the homebuyer
had a $81.03 Monthly Equity Payment Account balance
(as of April 1, 1995), the contractor's final billing
indicates they did the following for $4,808:

Removed wall between kitchen and laundry area        $ 200
Removed wall between kitchen and living room           200
New hearth wall pad                           100
Enclose new water tank location and install new door 350
Moved laundry into hallway                      850
Installed tub through exterior wall             350
Customized cabinets (above allowance)              1,420
Extra charge for carpeting above vinyl            360
Bath accessories, plumbing fixtures (above allowance) 896
New electrical fixtures and circuits (above allowance) 82

              Total customizing costs     $4,808

None of the types of improvements above deal with an
emergency condition or work to bring the home up to
code. To accomplish the same type of work at other
homes, the Housing Authority needs to make sure that
it can actually collect funds from these homebuyers
before spending money to make the improvements.
Otherwise, the Housing Authority will not be able to do
as much with the CIAP grant as it could. As of June
1995, the homebuyer ledger cards show the Housing
Authority has received no payments from homebuyers
for the improvements. The work done with no
payments could be considered zero percent interest
loans of HUD funds to homebuyers. The Executive
Director indicated that the contractor has settled with
the homebuyers for the work in excess of the basic
work under the project. If this is the case, then the
contractor's final billing is incorrect.

HUD awarded CIAP funds to the Housing Authority to
correct an emergency situation which was temporarily
repaired at a significantly lower cost. The Housing
Authority chose not to repair their community sewer
systems as proposed by Indian Health Service because, in
their view, it would not be in the best interests of the
community. The sewage treatment problem to be
addressed is a community-wide problem and there is no
data to show that spending the $450,000 as proposed would
have reduced nitrate levels and improved water quality.
We believe HUD should provide no further funding to
address this sewage treatment problem unless it is part of
a community-wide solution.

The Executive Director indicated that he was aware that a
community-wide solution was necessary before receiving
Indian Health Service's recommendations. Therefore, he
asked Indian Health Service to use the $450,000 to address
the sewage treatment problems as part of a community-
wide solution. However, Indian Health Service continues
to recommend a new sewer system that would be specific
to the Housing Authority.

The Housing Authority mismanaged the procurement of its
modernization contract and the administration of this
project. The procurement process was flawed, project
work is behind the original schedule with increasing costs,
and the Housing Authority had to incur interest on funds it
borrowed for the project. The Housing Authority
proceeded with its modernization although it did not have
approved budget revisions and ONAP's approval for funds
reprogramming. This absence of detail planning and
following through raises questions on the Housing
Authority's ability to manage a major modernization
project.

However, we believe that ONAP's informal
recommendation to use the funds now or they may be
recaptured may have been the impetus behind the Housing
Authority's decision to rapidly proceed with their
modernization project. In addition, the sense of urgency
may have contributed to the Housing Authority bypassing
standard controls over procurement. The Housing
Authority indicated it processed budget revisions to the
extent of their capability and made many attempts to
reprogram the use of the CIAP funds. However, ONAP
did not accept the budget revisions or funds reprogramming
that showed the Housing Authority's intent to use the funds
for anything other than the sewer system repairs
recommended by Indian Health Service.

HUD is in the process of evaluating the Housing
Authority's ability to administer its modernization program.
We believe this evaluation's emphasis should be on the
Housing Authority's preparation of detailed work
requirements for each home, the costs, who will pay for
the extra work, and whether competitive bids are necessary
to complete the work.
Auditee Comments

The Housing Authority basically agreed with the report,
but stated the draft does not adequately reflect its position
that the entire situation would not have existed if ONAP
had adequately communicated with the Housing Authority.
It also believes that the communication problem is
continuing and suggests independent mediation to resolve
the issue.

The Housing Authority stated that it believes the report
should also suggest recommendations for ONAP. In their
responses, the Housing Authority documented specific
examples of failures by ONAP to adequately and properly
communicate with the Housing Authority. It believes that
with adequate and proper communication, the Housing
Authority could and would manage procurement and
modernization in compliance with their own policies and
HUD's requirements.

The Housing Authority provided us with their version of a
report. In its version of the report, the Housing Authority
did not agree that it will not be able to complete the
modernization work within the $790,600 grant. The
Housing Authority stated that it has purchased materials for
all 25 units that is included in the $272,763 spent on homes
to date. It also provided us with their counterproposal to
the contractor's final billing, which is significantly lower.

We do recognize that ONAP staff's communication with
the Housing Authority may have contributed to some of the
issues in the report and this is reflected in the report.
However, it is still the Housing Authority's responsibility
to follow sound business practices for procurement and
project management.

For completing the modernization work, we still have
questions on whether the Housing Authority will be able to
complete comparable work at the other units. As of
June 6, 1995, the Housing Authority had spent $353,835
of the $790,600 CIAP grant and incurred at least $146,412
in payables (using the Housing Authority's counterproposal
amount). This leaves $290,353 for the 16 remaining units,
or an average of $18,147 per unit. This is significantly
lower than the $46,575 per unit spent and incurred as of
June 6, 1995.


Recommendations

We recommend that you:

1A. Finish your evaluation of the Housing Authority's
ability to manage the remaining work by having the
Housing Authority develop and provide a detailed
plan on; its modernization needs, inventory on
hand, anticipated costs, methods of homebuyer
repayments for extra work items, and whether
competitive bids are necessary.

1B. Provide no CIAP money for upgraded sewage
treatment processes unless they are part of a
community-wide solution.

1C. Look for ways to improve the working relationship
with the Housing Authority with the ultimate
objective of effectively serving the homebuyers and
tenants.


Management Controls

In planning and performing our audit, we considered the Housing
Authority's management controls to determine our auditing procedures
and not to provide assurance on management controls.

Management control is the process by which an entity obtains
reasonable assurance as to achievement of specified objectives.
Management 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 management control categories
relevant to our audit objectives were the Housing
Authority's policies, procedures, and practices for ensuring
that:

  - CIAP funds are spent in accordance with HUD's requirements.
    - The procurement process ensures fair and open
      competition, resulting in selecting the best qualified
      product or service.

    - Project oversight identifies construction problems
      and management corrects identified problems.

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

A significant control weakness exists if the controls do not
give reasonable assurance that resources are used in
accordance with applicable laws, regulations, and policies;
that resources are safeguarded against waste, loss, and
misuse; and that reliable data is obtained, maintained, and
fairly disclosed in reports.

Based on our audit, we believe the following items are
significant weaknesses:

    - The procurement process was flawed, since the
      Housing Authority did not provide complete bid
      specifications, preventing contractors from knowing
      just what was to be done.

    - Communication between the contractor and Housing
      Authority was not well documented. Specifically,
      the contractor did not receive anything in writing on
      project requirements and the Housing Authority did
      not receive written descriptions or estimates for
      homebuyer requests from the contractor. This
      contributed to problems with completing the work
      and eventual contract termination.
.