oversight

HA of El Paso, TX

Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-03-06.

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

                            Audit Report
                            District Inspector General for Audit
                            Southwest District
                            Report: 98-FW-201-1003                     Issued: March 6, 1998


TO: Elinor R. Bacon, Deputy Assistant Secretary
     Office of Public Housing Investments, PT


FROM: D. Michael Beard, District Inspector General for Audit, 6AGA

SUBJECT: Housing Authority of the City of El Paso
         HOPE VI Grants
         El Paso, Texas


As part of a nationwide audit of the HOPE VI Program, we performed an audit of the
Housing Authority of the City of El Paso's (Authority) HOPE VI grants to determine if the
Authority: (1) properly procured contracts under its HOPE VI grants; (2) only expended
amounts for eligible activities; (3) met the objectives of its Revitalization Plan; and (4)
implemented its community and supportive services components effectively, efficiently, and in
a manner that will allow the activities to be sustained beyond the grant term.

The audit disclosed serious concerns relating to major Authority procurements. These
concerns include: (1) sole-source and non-competitive contracts; (2) apparent conflicts of
interest and contractor influence in Authority procurements; (3) multiple contracts being
awarded to a few contractors; and (4) poor contract documentation. In addition to
procurement concerns, the audit found the Authority may not be able to sustain its community
and supportive services. Due to the significance of the procurement problems, we are
reporting the results of our review now rather than waiting until the completion of the
nationwide audit.

Within 60 days, please furnish this office, for each recommendation in this report, a status
report on: (1) corrective action taken; (2) the proposed corrective action and the date to be
completed; or (3) why action is not considered necessary. Also, please furnish us copies of
any correspondence or directives issued related to the audit.

Please write or call me at (817) 978-9309 if you or your staff have any questions.



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Executive Summary
As part of a nationwide review, we audited the Housing Authority of the City of El
Paso's (Authority) HOPE VI grants to determine if the Authority: (1) properly
procured contracts under its HOPE VI grants; (2) only expended amounts for
eligible activities; (3) met the objectives of its Revitalization Plan; and (4)
implemented its community and supportive services components effectively,
efficiently, and in a manner that will allow the activities to be sustained beyond the
grant term. We found the Authority expended amounts for eligible activities, and
has made progress towards achieving the goals of its Revitalization Plan.
However, the Authority needs to improve its procurement practices and determine
how it will sustain its community and supportive services programs.

In general, the Authority is satisfactorily carrying out its HOPE VI grant activities.
However, the audit disclosed serious concerns relating to major Authority
procurements, including: (1) sole-source and non-competitive contracts; (2)
apparent conflicts of interest and contractor influence in Authority procurements;
(3) multiple contracts being awarded to a few contractors; and (4) poor contract
documentation. This occurred because Authority management did not ensure
strict adherence to federal and Authority procurement requirements. In addition to
procurement concerns, the audit found that, due to poor planning, the Authority
may not be able to sustain its community and supportive services programs.

Procurement practices give the appearance of favoritism

Contrary to HUD requirements and Authority policy, the Authority sole-sourced
two contracts under the Kennedy implementation grant without soliciting any bids
or proposals. Further, the Authority awarded one other contract non-
competitively, after receiving a response from only one vendor. Authority files did
not contain a written justification or price/cost analyses for these sole-source and
non-competitive awards.

The Authority awarded three HOPE VI contracts where apparent conflicts of
interest clearly existed between Authority agents or employees and contractors.
For two of the contracts, Authority agents or employees involved in the contractor
selection process had business or personal relationships with contractors they
evaluated. Further, officials of these two contractors had influence in the
Authority's awarding of two sole-source contracts and one non-competitive
contract. In a third case, the Authority awarded a contract to an entity to evaluate
the social services programs. The head trustee of the entity is also president of a
social service provider whose services the entity is responsible for evaluating.

The appearance of favoritism in Authority contracting for HOPE VI activities is
strengthened by the fact that some contractors received multiple HOPE VI
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contracts and subcontracts. Housing Development Partners, Alvidrez and
Associates, Creative Decisions, and The Communications Group received multiple
major HOPE VI awards from the Authority or from subcontracts with each other.

The Authority's poor contract documentation added to, and further complicated
procurement problems and the appearance of favoritism. The Authority had a
difficult time providing various documents such as advertisements, specifications,
bids, bid envelopes, and other documents. In some instances, Authority employees
had to fill in details from memory. In other instances, information had to be
obtained from contractors. We are recommending you require the Authority to
follow its procurement policy, take appropriate action against employees who
violate its procurement policy, provide justification and cost analyses for non-
competitive contracts, and repay the program for any awards exceeding fair value.

Future of community services funding in doubt

The Authority could not provide evidence to show how it is going to fund its
current and future community and supportive services. Based on the current
budget, the Authority would need about $687,500 annually in order to continue
providing community and supportive services after HOPE VI funds are depleted.
The Authority cannot provide information showing how it will fund these
programs. In addition, the Authority may not be able to obtain from the City the
required 15 percent supportive services match. We are recommending the
Authority make every effort to leverage public and private support to sustain the
program after the grant term and obtain matching contributions from the City.

Authority response to draft report

Authority officials responded in writing to the draft report in a December 11,
1997 letter (Appendix A), and verbally at an exit conference held January 13,
1998. The Authority partially agreed with the findings and recommendations, and
generally indicated it was or has taken corrective action, or its actions were
justified. However, although we have made some revisions to the report, in our
opinion the Authority’s response, still does not satisfactorily address the concerns
raised in the report.




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Table of Contents
Management Memorandum ..................................................................i

Executive Summary.............................................................................ii

Table of Contents ...............................................................................iv

Introduction.........................................................................................1

Findings and Recommendations

         1. Apparent Favoritism Underlies Questionable
            Authority Procurements........................................................4
         2. Authority May Not Be Able to Sustain Its Community
            and Supportive Services Programs......................................19

Management Controls .......................................................................25

Issues Needing Further Consideration................................................26

Appendices

         A. Authority Written Response to Draft Audit Report ............28
         B. Opinion by Authority’s Legal Counsel ...............................45
         C. Distribution........................................................................48




Abbreviations:

         CDBG            Community Development Block Grant
         HUD             U.S. Department of Housing and Urban
                         Development
         OIG             Office of Inspector General
         OMB             Office of Management and Budget

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Introduction
Background

The HOPE VI Program. HUD established the HOPE VI Urban Revitalization
Program for the purpose of revitalizing severely distressed or obsolete public
housing developments. Congress provided funding for HOPE VI in the
Departments of Veterans Affairs and Housing and Urban Development, and
Independent Agencies 1993 Appropriations Act. Over 5 fiscal years, 1993 to 1997,
Congress has appropriated $2.6 billion to fund planning and implementation grants
under HOPE VI. Congress intended HOPE VI to remedy the distress of family
developments that are too large to be addressed by HUD's conventional public
housing modernization program. This program provides local communities with up
to $50 million per City1 to accomplish the comprehensive revitalization of severely
distressed developments. Permitted activities include funding of the capital costs of
major reconstruction, rehabilitation and other physical improvements, the provision
of replacement housing, management improvements, planning and technical
assistance, implementation of community service programs and supportive services,
and the planning for any such activities.

The El Paso Housing Authority. The Housing Authority of the City of El Paso
(Authority) was established under Texas statute in 1937. The Authority administers
over 6,200 units of public housing as well as approximately 3,000 Section 8
certificates and vouchers. A five-person Board of Commissioners provides general
oversight of Authority activities, while Mr. Robert Alvarado, the Executive
Director, is in charge of day-to-day operations. Authority administration and
records are located at its offices at 1600 Montana Avenue in El Paso, Texas.

The Authority's HOPE VI Program. HUD has awarded the Authority $37,124,644
in HOPE VI funds, including two planning grants and one implementation grant.

In August 1994, HUD awarded the Authority a $500,000 HOPE VI planning grant
for the Kennedy Brothers Memorial Apartments. The Authority used these funds to
hire a consultant to prepare a Revitalization Plan for Kennedy Brothers. In
February 1995, HUD awarded the Authority a $36,224,644 HOPE VI
implementation grant2 for the Kennedy Brothers site. The Authority's Revitalization
Plan includes: the demolition of 124 units and the rehabilitation of the remaining
240 units, construction of a community center, construction of an additional 124
public housing units and 50 homeownership units on 45 acres purchased adjacent to
Kennedy Brothers, and community and supportive services.
 1
   For Fiscal Year 1997, the amount of funding for which an Authority could apply was reduced to $35
million.

 2
     This includes the original award of $35,224,644 and an amendment for $1,000,000.
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In April 1994 the Authority hired Housing Development Partners as project
manager for the implementation grant.

In July 1995, HUD awarded the Authority a $400,000 HOPE VI planning grant for
the Rafael Marmolejo Jr. Apartments, Ruben Salazar Park, and Sherman Plaza
housing sites (Marmolejo, Salazar, and Sherman). The Authority used these funds
to hire a consultant to prepare a Revitalization Plan for the sites. The Authority
submitted a Revitalization Plan for Ruben Salazar Park under the 1996 HOPE VI
Notice of Funding Availability, but HUD did not fund it.

Audit Objectives, Scope, and Methodology

Our audit objectives in reviewing the Authority's HOPE VI grants were to
determine if the Authority: (1) properly procured contracts under its HOPE VI
grants; (2) only expended amounts for eligible activities;3 (3) met the objectives of
its Revitalization Plan; and (4) implemented its community and supportive services
components effectively, efficiently, and in a manner that will allow the activities to
be sustained beyond the grant term.

To achieve the audit objectives we: (1) reviewed HOPE VI regulations and
guidelines, Authority procurement policy, contract files, and any related
documentation; (2) interviewed Authority, HUD, and contractor officials; and (3)
made site visits to the HOPE VI developments. Our audit procedures included:

     •   Examining the selection and award process for all HOPE VI contracts, and
         reviewing the contracts to determine eligibility of activities.

         •    The Authority let one HOPE VI contract under the Kennedy Brothers
              planning grant; a $425,000 award to Housing Development Partners.
              Housing Development Partners had three subcontracts under the
              contract. The Authority used the remaining $75,000 of the $500,000
              grant for administrative costs. The $500,000 has been fully expended.

         •    Under the Kennedy Brothers implementation grant, the Authority
              awarded 26 contracts. As of May 31, 1997, the Authority had spent
              $12,539,234 of the $36,224,644 grant (34.6 percent), including
              $312,925 of the $700,000 (44.7 percent) allocated for administration.

         •    The Authority awarded one contract for $340,000 to Barajas and
              Bustamante under the Marmolejo, Salazar, and Sherman planning grant.
              Barajas and Bustamante subcontracted with two firms under the
              contract. The Authority used the remaining $60,000 of the $400,000
              grant for administrative costs. The $400,000 has been fully expended.

 3
  Except for administrative costs, the audit scope generally did not include a detailed review of support for
HOPE VI disbursements.

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   •   Reviewing support for administrative costs the Authority charged to its
       HOPE VI grants.

   •   Reviewing the Authority's Revitalization Plan for the Kennedy
       implementation grant to determine if: (1) it met HOPE VI requirements; (2)
       the Authority will be able to successfully and timely complete the program;
       and (3) the Authority has adequate procedures to monitor the progress and
       performance of the grant.

   •   Visiting the Kennedy Brothers development to observe the location
       strengths and weaknesses, and work in progress. Also, made site visits to
       the Marmolejo, Salazar, and Sherman developments.

   •   Reviewing the community and supportive services programs for the
       Kennedy implementation grant. The review included determining whether
       the programs: (1) are eligible; (2) have clear and measurable results; (3) are
       being adequately monitored; (4) will be sustainable after the grant term; and
       (5) are receiving required matching contributions from the City.

We performed field work at the Authority offices and HOPE VI sites during
February, March, and June 1997. The audit generally covered the period August
1994 to June 1997, although the period was extended as appropriate. We
performed the audit in accordance with generally accepted government auditing
standards.




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Findings
Finding 1

Apparent Favoritism Underlies Questionable
Authority Procurements

Improper and questionable procurement practices have resulted in a strong
appearance of favoritism in Authority contracting under its HOPE VI Programs.
These improper and questionable practices include a lack of competition, conflicts
of interest, multiple awards to the same contractors, and poor contract
documentation. This occurred because Authority management did not always
adhere to federal and Authority procurement requirements.

Federal and Authority procurement requirements

The Grant Agreement requires the Authority to comply with procurement
guidelines contained in the Code of Federal Regulations (24 CFR §85.36). In
addition, the Authority has its own procurement procedures. The federal
regulations and Authority procurement procedures state that:

•   Competition:

       - All procurement transactions must be conducted in a manner providing
       full and open competition (§85.36 (c)).

       - Section III of the Authority's procurement procedures provides that, for
       small purchases between $1,500 and $15,000, price quotes will be solicited
       from at least three offerors. Formal contracting procedures (sealed bids and
       requests for proposals) are used for purchases over $15,000. Contract
       requirements shall not be artificially divided to constitute small purchases
       (i.e., to avoid formal contract procedures).

       - The Authority must perform a cost or price analysis for every
       procurement action. A cost analysis will be necessary when adequate price
       competition is lacking, and for sole-source procurements, including contract
       modifications or change orders (§85.36(f)). If only one responsive bid is
       received from a responsible bidder, award shall not be made unless a cost or
       price analysis verifies the reasonableness of the price (Authority
       procurement procedures, paragraph III C.3.)

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             - Each procurement based on noncompetitive proposals shall be supported
             by a written justification for using such procedures (III.E.2. of Authority
             procedures).

•        Procurement records:

             - Grantees and subgrantees will maintain sufficient records to detail the
             significant history of a procurement. These records must at least include the
             following: rationale for method of procurement, selection of contract type,
             contractor selection or rejection, and the basis for the contract price
             (§85.36(b)(9), and Authority procedures paragraph II.B.2.).

•        Conflict of interest and ethics:

             - Under 24 CFR §85.36 (b)(3), no employee, officer or agent of the
             Authority can participate in 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. A conflict of interest would include when: "an
             employee, officer, or agent, any member of his immediate family, his or her
             partner, or an organization which employs, or is about to employ, any of the
             above, has a financial or other interest in the firm selected for award."
             Section IX(B) of the Authority's procurement procedures "Ethics in Public
             Contracting" contains similar language.

             - The Grant Agreement further states: "In addition to the conflict of
             interest requirements in 24 CFR part 85, no person who is an employee,
             agent, consultant, officer, or elected or appointed official of the Grantee and
             who exercises or has exercised any functions or responsibilities with respect
             to activities assisted under this HOPE VI grant, or who is in a position to
             participate in a decision-making process or gain inside information with
             regard to such activities, may obtain a financial interest or benefit from the
             activity, or have an interest in any contract, subcontract, or agreement with
             respect thereto, or the proceeds thereunder, either for himself or herself or
             for those with whom he or she has family or business ties, during his or her
             tenure or for one year thereafter."4

             - Under 24 CFR §85.36(b)(3)(iv), employees cannot solicit or accept
             anything of "monetary value from contractors or parties to subagreements."

Questionable procurement practices lend to appearance of favoritism

Authority management did not always adhere to federal and Authority procurement
requirements. As a result, the Authority has engaged in improper and questionable
procurement practices that give a strong appearance of favoritism in its HOPE VI

    4
        The Grant Agreement also provides instances when HUD may approve a conflict of interest.

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contracting. These improper and questionable procurement practices include: (1) a
lack of competition in major contract awards; (2) conflicts of interest, questionable
relationships, and significant contractor influence in the contracting process; (3)
multiple awards to the same contractors; and (4) poor contract documentation.

Sole-source and non-competitive awards

Contrary to HUD requirements and Authority policy, the Authority awarded two
contracts under the Kennedy implementation grant on a sole-source basis, without
soliciting any bids or proposals. Further, the Authority awarded one other contract
non-competitively, after receiving a response from only one vendor. Authority files
did not contain either written justification or price/cost analyses for these sole-
source and non-competitive awards. As a result, the Authority could not be sure
that it paid a fair and reasonable price for the services, or obtained the best services
available. Also, other contractors may not have had a fair opportunity to bid on the
contracts.

Creative Decisions. On August 10, 1995, the Authority entered into a contract
with Creative Decisions for $14,9005 to develop Request for Proposals (RFP) for
the eight community and supportive services components at Kennedy Brothers.
Based upon documentation provided, the Authority sole sourced this contract,
making the award without soliciting bids or proposals from other vendors. The
Authority's files did not include a cost/price analysis or written justification why it
did not solicit bids or proposals from other vendors as required by its procurement
policy.

Jones and Neuse. On August 24, 1995, the Authority made an award to Jones and
Neuse for asbestos abatement specifications and contract bid document preparation.
The Authority split the award into three contracts, all let on the same day, totaling
$14,999,6 just $1 below the $15,000 threshold requiring sealed bids or proposals
and Board approval. The Authority later approved a $4,207 change order for work
outside the scope of the original contract. Again, the Authority did not solicit
offers from other vendors, perform a cost/price analysis, or provide written
justification for sole sourcing the contract as its procurement policy requires.

The Communications Group. The Authority awarded one of three social services
contracts under the Kennedy implementation grant non-competitively. The
Authority awarded a $150,000 contract to The Communications Group, the only
vendor who responded to the Request for Proposal, to run the Small Business
Center. The Authority did not document efforts to attract additional providers or
that it performed a cost/price analysis to determine price reasonableness.


 5
     This is $100 below the $15,000 threshold that requires formal contracting procedures.

 6
    The contracts included $2,826 for professional services for demolition assessment; $3,500 for friability
assessment, and $8,673 for asbestos assessment assistance.

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Conflicts of interest and contractor influence

The Authority awarded three HOPE VI contracts where apparent conflicts of
interest clearly existed between Authority agents or employees and contractors.
For two of the contracts, Authority agents or employees involved in the contractor
selection process had business or personal relationships with contractors they
evaluated. Further, officials of these two contractors had influence in the
Authority's awarding of two sole-source contracts and one non-competitive
contract. In a third case, the Authority awarded a contract to an entity to evaluate
the social services programs. The head trustee of the entity is also president of a
social service provider whose services the entity is responsible for evaluating.

Housing Development Partners. An apparent conflict of interest existed between
Housing Development Partners, the project manager for the Kennedy
implementation grant, and two architect firms. In selecting an architect for the
Kennedy Brothers implementation grant, an official of Housing Development
Partners, in his capacity as a project manager official for Kennedy Brothers,
evaluated and ranked Alvidrez and Associates, and Barajas and Bustamante. At the
time the Housing Development Partners official evaluated the architects, Housing
Development Partners was a subcontractor for Barajas and Bustamante on the
planning grant for Marmolejo, Salazar, and Sherman. Further, under the planning
grant for Kennedy Brothers, Housing Development Partners subcontracted with
Alvidrez and Associates. The Authority awarded the contract to Alvidrez and
Associates. The Housing Development Partners official should have recused
himself from evaluating the architects. The Authority knew, or should have known,
of these business relationships relating to HOPE VI contracts and subcontracts.

The Housing Development Partners official also influenced the Authority's award of
two sole-source contracts (discussed above). According to the official, he
recommended that the Authority use Creative Decisions because of the owner's
work during the planning grant. It appears that the Authority hired Creative
Decisions as a result of the Housing Development Partners' recommendation.
Creative Decisions subcontracted for Housing Development Partners under the
Kennedy Brothers planning grant. The Housing Development Partners official also
said his firm determined the need for asbestos abatement services and recommended
that the Authority use Jones and Neuse. Therefore, Housing Development Partners
influenced the Authority's decision to award these sole-source contracts. However,
it is the Authority's responsibility for ensuring it procures services properly.

Creative Decisions. In its consultant proposal for the Marmolejo, Salazar, and
Sherman planning grant, the firm of Barajas and Bustamante listed Creative
Decisions as a subcontractor, budgeted for $60,000. The Authority's Director of
Housing Management (Housing Director), a long time friend of the Creative
Decisions' owner, served on the selection committee that evaluated proposals for
the contract. In August 1995, the Housing Director gave Barajas and Bustamante a




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rating of 95 out of 100, and the other firm an 84. Based on the selection
committee's recommendation, the Authority awarded Barajas and Bustamante a
$340,000 contract. Creative Decisions received a $60,000 subcontract from
Barajas and Bustamante. The Housing Director acknowledged that in February
1996, less than 6 months after she evaluated the Barajas and Bustamante proposal,
she made a trip to France that was paid for by the owner of Creative Decisions.
The Director considers the trip a birthday gift. The Housing Director said that
everyone is aware of her friendship with the owner. Under 24 CFR
§85.36(a)(3)(iv), employees cannot solicit or accept anything of "monetary value
from contractors or parties to subagreements."

According to the Housing Director, she verbally informed the Assistant Executive
Director7 of her friendship with the owner and questioned whether she should be on
the selection committee. The Assistant Executive Director told her that the
Executive Director selected her to be on the committee and she should serve and be
impartial. Nevertheless, due to her longtime relationship with the owner of Creative
Decisions, the Housing Director at a minimum should have recused herself from
evaluating the proposals. Further, the Housing Director should have no
involvement with the monitoring of the contract or supervising those employees
who do.

The owner of Creative Decisions also influenced the Authority's award of a non-
competitive contract (discussed above). The sole-source contract that the
Authority awarded to Creative Decisions required it to develop the Requests for
Proposals for the eight components of the Social Service Plan. The Authority
received a total of five responses to the three Requests for Proposals developed by
Creative Decisions which resulted in contracts. The owner of Creative Decisions
chaired the selection committee that evaluated the responses. As a result of the
selection committee's recommendation, the Authority awarded one of the three
contracts non-competitively to The Communications Group, the only respondent to
the Request for Proposal for the Small Business Center.

The Communications Group, and El Paso Community College. The Authority
awarded two supportive services contracts to The Communications Group for the
Small Business Center ($150,000) and the Computer Literacy Program ($100,000).
In addition, the Authority entered into a Memorandum of Agreement with the
Board of Trustees of the El Paso County Community College District (El Paso
Community College) to evaluate its HOPE VI social services.8 The Memorandum
of Agreement states the Authority will pay the El Paso Community College $32,000
over a 4-year period. However, the individual who signed the Memorandum of
Agreement as Chairwoman of the Board of Trustees of the El Paso Community
College is also the President of The Communications Group.



 7
     No longer employed by the Authority.

 8
   The HOPE VI grant agreement allows the Authority to enter into non-competitive subgrants with non-
profit entities or state and local governments for community and supportive service activities.

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Therefore, the head trustee of the entity that will evaluate social services is also
president of the firm whose social services are to be evaluated. This is a clear
conflict of interest which the Authority should never have allowed.

In these instances of apparent conflicts of interest and contractor influence, it is the
Authority who bears ultimate responsibility. Irrespective of contractor involvement,
the Authority must be held accountable for ensuring adherence to procurement
requirements and avoiding the appearance of conflict of interest and undue
contractor influence in Authority contracting.

Multiple contracts to the same contractors

The appearance of favoritism in Authority contracting for HOPE VI activities is
strengthened by the fact that some contractors received multiple HOPE VI
contracts and subcontracts:

Housing Development Partners. The Authority awarded two contracts worth
$1,837,000 to Housing Development Partners from its HOPE VI grants. Also,
Housing Development Partners received a $120,000 subcontract on the HOPE VI
contract awarded to Barajas and Bustamante.9 According to one of its officials,
Housing Development Partners has been performing work for the Authority since
1993. By relationships developed from its previous affiliation with the Authority
and working on the planning grant for Kennedy Brothers, Housing Development
Partners appears to have had an unfair advantage over competitors for Project
Manager and other contracts.

Alvidrez and Associates. Alvidrez and Associates performed architectural and
engineering work as a subcontractor on the Kennedy planning grant ($51,400
subcontract). This work involved feasibility studies used to design a revitalization
plan for the Kennedy Brothers development. As such, Alvidrez and Associates
apparently had an unfair advantage over competitors bidding on the architectural
contracts under the Kennedy implementation grant. Alvidrez and Associates had
intimate knowledge of the required work product for the implementation grant
because they helped prepare the work requirements under the planning grant.
Alvidrez and Associates received three architectural and engineering contracts on
the Kennedy implementation grant for rehabilitation and demolition ($554,000), a
multipurpose center ($227,500), and housing units ($376,092). The Authority's
procurement policy (paragraph VI.B.) recognizes the possibility of contractors
having an unfair advantage:

         "Specifications shall be scrutinized to ensure that organizational conflicts of
         interest do not occur (for example, having a consultant perform a study of




 9
   The Housing Development Partners partner said that he had assisted the Authority in preparing the
application for the planning grant.

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       the PHA's computer needs and then allowing that consultant to compete for
       the subsequent contract for the computers)."

Creative Decisions (and Agave Institute). As discussed above, Creative Decisions
received a $14,900 sole-source contract for developing Requests for Proposals and
was also a subcontractor ($60,000) of Barajas and Bustamante on the Marmolejo,
Salazar, and Sherman planning grant. In addition, Creative Decisions received
$4,000 as a subcontractor of Housing Development Partners on the Kennedy
planning grant. Further, Agave Institute employed the owner of Creative Decisions
prior to her starting Creative Decisions. Housing Development Partners
compensated Agave Institute $5,600 as a subcontractor on their Kennedy Brothers
planning grant contract. Also, Authority records showed other transactions (non-
HOPE VI) with Creative Decisions and Agave Institute.

The Communications Group (and El Paso Community College). As previously
discussed, the Authority awarded two supportive services contracts, one non-
competitively, to The Communications Group for the Small Business Center
($150,000) and the Computer Literacy Program ($100,000). In addition, the El
Paso Community College, whose head trustee is the president of The
Communications Group, received a $32,000 non-competitively awarded contract to
evaluate social services.




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The following summarizes in matrix form the issues of inadequate competition,
conflicts of interest and contractor influence, and multiple awards to the same
contractors:

           SS/NC = sole source/non-competitive
           CI = conflict of interest/contractor influence
           MC = multiple contracts to the same contractors
 Contractor                             Contract/Amount10                    SS/NC     CI       MC
 Creative Decisions/           Kennedy Plan                        $ 4,000    X          X        X
 Agave Institute                 (Agave)                             5,600
                               Kennedy Implementation               14,900
                               Marmolejo Plan                       60,000
                                                                   $84,500
 Housing Development           Kennedy Plan                   $ 425,000                  X       X
 Partners (HDP)                Kennedy Implementation          1,412,000
                               Marmolejo Plan                    120,000
                                                              $1,957,000
 The Communications            Kennedy Implementation                         X          X       X
 Group11                        Small Business                    $150,000
 (TCG)                          Computer                           100,000
                                                                  $250,000

 El Paso Community             Kennedy Implementation              $32,000
 College (EPCC)
 Alvidrez & Associates         Kennedy Plan                       $ 51,400               X       X
                               Kennedy Implementation
                                Demolition                       554,000
                                Community Center                 227,500
                                Housing                          376,092
                                                              $1,208,992
 Jones and Neuse               Kennedy Implementation              $14,999    X          X
                                change order                         4,207
                               TOTAL                               $19,206



The overall pattern leads to the conclusion that the Authority needs to take
measures to promote a more competitive procurement environment, and to avoid
real or apparent conflicts of interest. This type of procurement environment can be
realized only if top Authority management sets an example by: (1) avoiding
conflicts of interest and questionable relationships, whether in fact or appearance;
(2) ensuring that the Authority strictly adheres to federal procurement requirements
and Authority policies and procedures; and (3) actively and aggressively seeking
procurement sources.

 10
      Including subcontracts under HOPE VI contracts.

 11
      Also known as Technology and Communications Gateway, Inc.

                                                                                                11
                                                                       98-FW-201-1003



Poor contract documentation

As previously stated, Authority contract files did not contain price/cost analyses or
written justification for sole-source and non-competitive contracts, nor did it
document efforts to attract additional providers. As a result, the Authority did not
provide other vendors with an opportunity to obtain contracts, nor can the
Authority be sure it obtained the best services at the lowest price. In the case of
the sole-source award to Creative Decisions, this appears to have also resulted in
unnecessary services and excessive costs. In addition, Authority procurement files
in general were not in order, and OIG staff had difficulty obtaining documents.

Creative Decisions’ contract illustrates poor contract documentation. The sole-
source contract that the Authority awarded to Creative Decisions to develop
requests for proposals was a fixed price contract based on an estimated 149 hours
of work at $100 per hour. The Authority could not provide any documentation as
to the reasonableness of the compensation paid to Creative Decisions. Therefore,
the Authority and HUD cannot be sure that the price paid for the services was fair
and reasonable. Also, the files did not document why the Authority needed the
services and why staff could not prepare the requests for proposals as it does for
other services.

The need for a consultant to prepare the requests for proposals becomes even more
questionable, given that: (1) the objectives and goals of the community and
supportive services components were already developed under the planning grant;
(2) the requests for proposals elicited few responses and resulted in only three
contracts; and (3) the Authority paid Creative Decisions the full contract amount
even though not all the work had been performed. As a result, the Authority
appears to have contracted for unnecessary services and paid excessive costs.

Creative Decisions appears to have performed some work twice. Part of the work
the contract required Creative Decisions to perform appeared to have already been
done under the planning grant. Housing Development Partners developed the
objectives and goals of the community and supportive services components under
the Kennedy planning grant. Creative Decisions, as a subcontractor to Housing
Development Partners under the Kennedy planning grant, developed draft requests
for proposals for the eight components. The draft requests for proposals, submitted
to HUD in March 1995 as part of the Community Service Implementation Plan,
included public notices which the Authority later used to advertise the components.
However, under Task #1 of the August 3, 1995 contract with Creative Decisions,
the format calls for “8 RFP Components with a Service Plan each ready for Public
Notice.” As such, it appears the Authority paid Creative Decisions for work that
was, at least in part, already performed and paid for under the planning grant.

The eight requests for proposals elicited few responses; only three contracts
awarded. The end result of the Creative Decisions contract further draws into
question the Authority’s need for the services. As noted in the following table, the

                                                                                    12
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Authority received a total of five responses to six requests for proposals issued, and
has awarded only three contracts to vendors.

      RFP Component                          No. of Responses                         End Result
                                                                                    12
Substance abuse                                      2                   Contract
Economic Development                                 1                   Contract
Arts                                                 0                   Performed in-house
Education                                            2                   Contract
Recreation                                           0                   Performed in-house
Security                                             0                   MOU with El Paso Police
Day Care                                            n/a                  Not yet implemented
Health Care                                         n/a                  Not yet implemented

The Authority paid the full contract amount even though not all work was
performed. Accounting records provided by the Authority show Creative Decisions
had been paid the full contract amount in December 1995. However, in a February
27, 1997 letter to the Authority, Creative Decisions stated that the contract work
for the Health Care component had not been completed and would finalize the
project as soon as the Authority was ready. In addition, the contract required
Creative Decisions to “…organize the pre-proposal conference and review the
proposals…” (Task #2), and “…consolidate the RFP’s process based on the
organizational tasks and 8 Program Service Plans…” (Task #3). However, as
shown in the table above, the Authority did not issue requests for proposals for two
components, nor receive any responses to requests for proposals for three other
components. Given this, Creative Decisions could not have performed all the tasks
for these five components. However, the Authority has not reduced its
compensation to Creative Decisions commensurate with the reduction in services
provided.

The Authority did not maintain good procurement files. The Authority's
procurement files with respect to HOPE VI contracts in general were not in order.
The Authority had a difficult time providing various documents such as
advertisements, specifications, bids, bid envelopes, and other documents. In some
instances, Authority employees had to fill in details from memory. In other
instances, information had to be obtained from either Housing Development
Partners or other contractors. The Authority's files should contain all of the
documentation regarding procurements.

Authority response to draft audit report and OIG evaluation

Authority officials responded in writing to the draft report in a December 11, 1997
letter (Appendix A), and verbally at an exit conference held January 13, 1998. The
Authority partially agreed with the findings and recommendations, and generally
indicated it was or has taken corrective action, or its actions were justified.

12
   The Authority later canceled this contract after having paid about 10 percent of the contract amount and is
performing the services in-house.

                                                                                                          13
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However, although we have made some revisions to the report, in our opinion the
Authority’s response, still does not satisfactorily address the concerns raised in the
report.

Authority response: procurement policies and practices

In its written response, the Authority stated it:

        •   Would hire a firm to prepare a strategic plan which includes a review of
            procurement policies and procedures;
        •   Received a legal opinion regarding federal and state procurement
            requirements, and that the legal opinion would guide their revised
            policies and procedures;
        •   Was changing and improving its procurement organization;
        •   Issued instructions requiring cost or price analyses; and
        •   Scheduled procurement training for staff.

The Authority also indicated it awarded only one social services contract non-
competitively, rather than two as stated in the draft report, and made significant
efforts to attract providers for the contract that was awarded non-competitively.

At the exit conference and in documentation subsequently provided, the Authority
said that, in addition to the contract for a strategic plan, it was having a certified
public accountant review internal controls, including procurement, and prepare a
manual. In addition, the Authority’s legal counsel maintained that the Authority
was following state law in procuring professional services without competition. In
his verbal and written statements, the legal counsel indicated:

        •   The Authority must follow either state or federal procurement law, but
            not both. As an entity created by the State of Texas and as a division of
            the City of El Paso, the Authority is subject to state laws applicable to
            municipalities, not federal procurement regulations. State law is more
            stringent than federal requirements.
        •   For professional services, state law requires municipalities to determine
            a firm’s demonstrated competence and qualifications, and then negotiate
            a fair and reasonable price.
        •   State law does not provide details on how a housing authority must
            determine demonstrated competence and qualifications. An authority
            could use oral testimony and prior experience.
        •   State law explicitly prohibits the Authority from entering into a
            professional services contract on the basis of competitive bidding. The
            Authority would violate state law were it to follow some of the HUD
            procurement regulations.

Appendix B contains the legal counsel’s opinion. Attached to the opinion were
copies of the Texas Professional Services Procurement Act, federal procurement

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regulations, and Texas Attorney General Opinions (cited in the legal opinion and
not included in Appendix B).

OIG evaluation: procurement policies and procedures

The Authority appears to be making substantial efforts to improve its procurement
process. However, the Authority not only needs to ensure that it establishes proper
procurement policies and procedures, but that it follows these policies and
procedures. For example, the Authority had adequate written policies and
procedures to address ethics and conflicts of interest but did not always follow its
written policies and procedures. The OIG revised the report to indicate that the
Authority awarded one, rather than two, social services contracts non-
competitively. Regarding the social services contract that was awarded to The
Communications Group non-competitively, it is not enough for the Authority to
state after the fact that it “did extraordinary efforts to attract additional providers”
and made a “good faith review of available providers.” The Authority needs to
document its efforts to attract competition, and provide written justification why
contracts are awarded on a non-competitive basis.

The OIG disagrees with the Authority’s legal counsel’s opinion regarding the
procurement of professional services, and is concerned that the Authority intends to
use the opinion as a guide for the preparation of its procurement policies and
procedures. The OIG maintains:

       •   The Authority must comply with federal procurement regulations as
           stated in 24 CFR §85.36.
       •   Federal and Texas procurement requirements for professional services
           are consistent with each other. The Authority can comply with both
           federal and state laws without violating either.

Federal procurement regulations allow a State to follow the same policies and
procedures it uses for procurements from its non-federal funds. Other grantees
must follow federal procurement regulations (24 CFR §85.36 (a)). Although the
Authority may have been created by State law, federal regulations do not consider
housing authorities to be states. In its definition of a “State,” the Code of Federal
Regulations states: “The term does not include any public or Indian Housing agency
under the United States Housing Act of 1937.” Rather, the regulations consider
housing authorities to be local government entities (24 CFR §85.3). As such, the
Authority must follow federal procurement requirements as stated in 24 CFR
§85.36.

The Authority’s legal counsel indicates the Authority would violate state law if it
followed HUD procurement regulations for obtaining professional services. We
disagree. Texas law does not allow the Authority to enter into a professional
service contract (professional services include accounting, architecture, land
surveying, medicine, optometry, professional engineering, and real estate
appraising) on the basis of competitive bids. However, federal procurement
                                                                                      15
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regulations make a distinction between competition by sealed bids (where awards
are made primarily on the basis of price), and competitive proposals (where awards
are made based on qualifications and other factors, which may include price).
Regarding architect and engineering professional services, the regulations
specifically allow for competitive proposals where the most qualified competitor is
selected, and then a fair and reasonable price is negotiated. This method does not
use price as a selection factor. The Texas law prohibits competitive bidding for
professional services where the selection is price based. Even one of the attorney
general opinions (JM-1189) cited by the legal counsel makes it clear that the
competitive bidding prohibition refers to awarding professional service contracts on
the basis of price:

        “The courts . . . have recognized that when the acquisition of professional
        services is involved; competitive bidding may actually be detrimental to the
        public interest . . . ‘To hold that the [competitive bidding] act would require
        that the services . . . belonging to a profession such as that of the law, of
        medicine, of teaching, civil engineering, or architecture should be obtained .
        . . only through competitive bidding would give a ridiculous meaning to the
        act . . . Such a construction would require the selection of attorneys,
        physicians, school teachers, and civil engineers by competitive bids, the only
        test being the lowest bid for the services . . .’ The legislature has
        incorporated this thinking into competitive bidding statutes by enacting
        exemptions for professional services.”

There is nothing in the Texas law cited by the legal counsel to indicate any
prohibition of a selection process for professional services that includes a
competitive evaluation of qualifications and other factors. In reference to architect,
engineer, and survey services, the State law states that the procuring entity shall “. .
. first select the most highly qualified provider of services . . .” (emphasis added).
This appears more to encourage, rather than prohibit, a comparison of providers,
but certainly does not conflict with federal requirements.

Authority response: conflicts of interest

Regarding the official who accepted a trip to France from a contractor, the
Authority stated that, although it erred in allowing the official to participate in the
ranking of proposals, “ . . . extenuating events lessen the validity of the allegation to
a point that it is not strong enough to justify disciplinary action.” The extenuating
events include the participation of two Commissioners of the Board (on a five-
member committee) which “removed the possibility of conflict,” and verbal
disclosure by the Director of Housing Management to the former Deputy Executive
Director. The response further stated that recently adopted provisions of the
Personnel Policy Handbook were designed to prevent future problems of a similar
nature.




                                                                                      16
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OIG evaluation: conflicts of interest

The Authority’s response ignores the issue of the trip to France which in our
opinion justifies disciplinary action. Also, the Authority’s reluctance to take action
raises doubts as to how serious it is about addressing the issues of conflicts of
interest, contractor influence, and favoritism discussed in this report.

Authority response: sole-source contracts and cost analyses

As a justification for its sole-source award to Creative Decisions, the Authority
attached to its response a memorandum from Housing Development Partners. The
Authority indicated it awarded the sole-source award to Jones and Neuse because
HUD officials from Washington had scheduled a visit to Kennedy to kick-off the
demolition. Further, at the exit conference the Authority stated Texas state law
does not require competition for professional services (discussed above). The
Authority agreed that cost analyses should have been performed for these two
contracts.

OIG evaluation: sole-source contracts and cost analyses

The memorandum from Housing Development Partners praises Creative Decisions.
However, this does not constitute a sole-source justification, which would
document that the services were only available from a single source. The
memorandum does, however, support the OIG’s contention that the Authority is
unduly influenced by contractors. Also, the OIG fails to see how a visit from HUD
officials justifies a sole-source award. Federal procurement regulations allow for
sole-source purchases in the event of an emergency, but a visit from HUD officials
does not constitute an emergency. As discussed above, the OIG disagrees with the
Authority’s contention that it does not have to use a competitive process for
professional services contracts.

Authority response: adjust the Creative Decisions contract for decrease in work

Creative Decisions completed seven of eight Requests for Proposals and drafted
and revised an eighth Request for Proposal for the Health Care component.
Creative Decisions agreed to complete the task at the Authority’s convenience.

OIG evaluation: adjust the Creative Decisions contract for decrease in work

Revisions to the draft report, discussed in the “Poor Contract Documentation”
section above, address the Authority’s response. The OIG maintains the contract
should be adjusted for work already performed in the planning phase and for work
not performed.




                                                                                    17
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Recommendations

We recommend you require the Authority to:

1A.   Provide steps it intends to take to ensure the Authority will follow its
      procurement policy in all cases, and avoid future recurrences of problems
      discussed in this finding, especially in regards to: (1) full and open
      competition; (2) ethics and conflicts of interest; and (3) full documentation
      of all procurement transactions, including determining price reasonableness.

1B.   Ensure its procurement policies and procedures fully comply with federal
      requirements as stated in 24 CFR §85.36, especially as it pertains to
      competitive requirements for the procurement of professional services.

1C.   Take appropriate action against employees who violate the Authority's
      procurement policy, including the Housing Director who accepted a gift
      from a subcontractor.

1D.   Provide written justification for the sole-source contracts awarded to
      Creative Decisions and Jones and Neuse, and provide cost analyses for these
      contracts and the non-competitive award to The Communications Group to
      determine price reasonableness. Require the Authority to repay the HOPE
      VI Program any amounts in excess of fair value.

1E.   Adjust the Creative Decisions contract for the decrease in work.




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Finding 2

Authority May Not Be Able to Sustain Its
Community and Supportive Services Programs

The Authority did not have documentation or other evidence to show how it will
continue to fund its community and supportive services throughout and beyond the
term of the revitalization of the project. The Authority has significantly exceeded
its budget for two service providers. Less than halfway through the contract
periods, the Authority has expended 60 percent and 94 percent of funds for the
Small Business Center and Computer Literacy Program, respectively. Further,
based on the current budget, the Authority would need approximately $687,500
annually in order to continue providing community and supportive services after
HOPE VI funds are spent. The Authority cannot provide information showing how
it will fund these programs. In addition, the Authority may not be able to obtain the
required 15 percent supportive services match from the City. As a result, the
Authority may not be able to achieve its goal of providing residents with the
opportunity to attain economic and social self-sufficiency. This occurred because
the Authority did not adequately plan for maintaining and sustaining its community
and supportive services programs.

The Community Service Plan

The Grant Agreement requires the Authority to have a community service program
throughout the term of the revitalization project. Also, HUD encourages grantees
to continue the community service plan beyond the term of the revitalization
project. The Grant Agreement states that one of the overall HOPE VI objectives is
to ". . . address the condition of people in public housing, and not merely of the
bricks and mortar themselves. The parties will emphasize community and
supportive services, as well as other means appropriate to each community, so as to
have the broadest possible effect in meeting the social and economic needs of the
residents and the surrounding community."

According to the Authority's Community Service Plan:

       "The HOPE VI concept is a true Community Development Concept. It
       recognizes the importance of linking and integrating local services, social
       services, private sector efforts, and community efforts to maximize the
       impact of existing programs and resources . . . The goal is to provide
       opportunities for residents to be integrated into the larger community
       through training, employment opportunities, and volunteer service
       opportunities to achieve economic and social self-sufficiency."


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         " The El Paso Community Service Implementation Plan was specifically
         designed toward the goal of sustainability. The eight service providers are
         funded through other resources or, in the case of economic development,
         will be funded by self-generated funds for its continued operation. The
         community center will be available for many years to provide space for
         program activities . . . It is anticipated that funding for the AmeriCorps
         VISTA program will continue.

         It is anticipated that each of the eight program areas will generate funds to
         sustain their operations or will maintain their current funding resources. It is
         also anticipated over the 5-year period of time that certain activities such as
         community services may be needed to a lesser extent. Other activities such
         as the resident-owned businesses are anticipated to grow and perpetuate
         themselves which will enhance the community outcomes."

The Community Service Plan identified eight supportive service components:

         •   Day care services
         •   Education, computer literacy, and tutoring services
         •   Substance abuse
         •   Primary health care services
         •   Economic development; small business center
         •   Community security services
         •   Arts; multicultural academy of arts
         •   Recreational services

For the community services aspect of its plan, the Authority's "...program design is
to engage resident volunteers in the delivery of services in each of the eight
program areas." As a vehicle to implement the resident volunteer concept, the
Authority entered into an agreement with the Corporation for National Service to
use AmeriCorps VISTA leaders and resident volunteers.13 The Community Service
Plan projected the use of 30 VISTA workers per year in the program.

Current community and supportive services

As of June 1997 the Authority: (1) had contracts with firms to operate a Small
Business Center and Computer Literacy Program; (2) was itself running the
substance abuse, security, arts, and recreation components; and (3) had not
established the day care or health care components. The Authority used VISTA




 13
     The Corporation for National Service is a congressionally-established organization that administers
national service programs that provide community services. CNS administers the AmeriCorps VISTA
(Volunteers in Service to America) program, which recruits volunteers to serve in poverty related projects.
VISTA workers receive nominal stipends for their services.

                                                                                                          20
                                                                                        98-FW-201-1003



workers extensively to assist in the six active components.14 Also, the Authority
had a Memorandum of Understanding with the El Paso Police Department as part
of the security component.

The Authority contracted with The Communications Group to provide services for
4 years in the Small Business Center and Computer Literacy Program for $150,000
and $100,000, respectively. However, after 1½ years the Authority has paid The
Communications Group $90,348 (60 percent) of the Small Business Center contract
and $94,353 (94 percent) of the Computer Literacy Program contract. The
Authority could not satisfactorily explain the high budget overruns. According to
an Authority official, the purchase of capital items (computers, furniture, and
equipment) in the first year accounted for the funds depletion. However, the
Authority's budget for the community and supportive services program allocates
$75,000 for capital expenditures apart from the $150,000 and $100,000 budgeted
for the Small Business Center and Computer Literacy Program.15

The total budgets for the Small Business Center and Computer Literacy Group
amount to $328,887 and $267,711, respectively. The budget amounts include
HOPE VI and non-HOPE VI funding sources. Authority officials said the
difference between the budgets and the contract amounts will be funded by other
grants and donations. However, the Authority could not provide specific
information on the source of the grants and donations. Also, after the first 1½ years
of the 4-year contracts, all payments for the two programs had been made with
HOPE VI funds. Without significant outside resources it is difficult to understand
how The Communications Group will continue to provide services for the
remaining 2½ years with the remaining funds, especially the Computer Literacy
Program, with a contract balance of less than $6,000.

Future community and supportive services

The Authority budgeted $1,225,000 for the eight components of its Community
Service Plan, including a $150,000 match from the City for 4 years. The budget
also allocated $2 million, principally for the cost of the program coordinator, the
VISTA workers, and administration. Based on this budget the Authority would
need $687,500 per year16 for community and supportive services. The Housing
Director said local businesses have approached the Authority indicating an interest
 14
     A September 1995 report by the Housing Research Foundation on the Authority's HOPE VI Program
stated that the Authority's community and supportive services: (1) lacked performance outcomes and specific
goals to measure program effectiveness and (2) did not make a distinction between community services and
supportive services (i.e., the Authority developed a social service plan, and added a VISTA component to
each of the supportive services programs). We substantially agree with this assessment and may include the
issues in our nationwide report.

  15
     The Assistant Executive Director said the computer equipment had been inventoried and would remain
the property of the Authority.

 16
   Equals $1,225,000 + $2,000,000 divided by 4 years. The Authority also budgeted $1,000,000 to build a
community center.

                                                                                                        21
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in participating in the program when the community center is completed. However,
the Authority does not have any concrete evidence, such as firm commitments from
local businesses, to show how the programs will be sustained after the grant term.

Fifteen percent supportive services match from the City

Article VIII of the Grant Agreement states: "The Grantee will use best efforts to
cause the City in which the Grantee is located to provide contributions for
supportive services in an amount equal to 15% . . . of the HOPE VI grant funds
awarded to the Authority for supportive services under the Revitalization Plan."
HUD awarded the Authority $1 million for supportive services, and therefore, the
City's match should be $150,000.17 Article XVIII of the Grant Agreement states
that failure of the City to provide contributions for supportive services, to the extent
it constitutes a material breach or occurrence, will constitute a default by the
grantee.

To further complicate matters, the City never provided a written commitment for
the funds, which the Authority should have included in its application. Instead, the
application stated the Authority had submitted a funding request to the City for
$150,000 in Community Development Block Grant (CDBG) funds. The application
stated: "The request has been reviewed by staff of the Department of Community
and Human Development and their recommendation for approval has been
presented to the CDBG Community Advisory Committee . . . Final approval by the
City Council will be granted by mid-May. The Housing Authority of the City of El
Paso will forward evidence of approval to the Office of Distressed and Troubled
Housing Recovery immediately upon approval."

The City did not grant the Authority the $150,000 requested. In April 1996 the
City signed a contract granting the Authority $26,000 for alcohol and substance
abuse therapy services. However, in August 1996 the City reduced the contract to
$16,000 and reallocated the funds for HOPE VI recreational activities. As of
April 30, 1997, the Authority has only billed and received $10,013 from the City.

The Authority has received in-kind contributions that it could, but did not, use to
meet part of the 15 percent matching requirement. Authority records showed in-
kind contributions from the El Paso Police Department of $4,192 from October
through December 1996. In addition, the Small Business Center and Computer
Literacy Program made in-kind contributions of office furniture and equipment
valued at $9,000 and $1,209, respectively in 1996.18

 17
    The Authority subsequently allocated an additional $75,000 from community services to supportive
services for a total budget of $1,225,000 ($1,000,000 + $150,000 + $75,000).

 18
    The Authority also provided documentation showing additional in-kind contributions of $6,785 for the
Small Business Center. The additional contributions represented payroll costs of the administrative officer.
However, the contract budget for the Small Business Center already included the administrative officer's
payroll costs.

                                                                                                          22
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Authority’s response to draft report

Sustainability of community and supportive services. The Authority stated that, per
HUD’s instructions, it recently submitted a 6-month plan that alters the emphasis
from supportive services to economic development. Also, the Authority entered
into a contract with the University of Texas at El Paso to establish a community
development corporation. According to the services agreement with UTEP, the
Authority will pay the University $39,620 to establish the community development
corporation and a revolving loan fund.

Funding for the Small Business Center and Computer Literacy Program. The
Authority indicated these programs had expenditures that were overstated as a
result of capital expenditures that subsequently were transferred to a different
account. The Small Business Center contract has not been amended; nor have the
HOPE VI budgets been increased. The Authority agrees that The Communications
Group needs to intensify efforts to leverage funds. By the end of the program, the
community based businesses will pay a fee to the Small Business Center and the
Center will be self sustaining.

City match. The Authority states it intends to take every step possible to acquire
the funding. It is preparing a justification to substitute in-kind services provided by
the El Paso Police Department for cash in-kind contributions from CDBG funds.

OIG evaluation of Authority’s response

Sustainability of community and supportive services and funding for the Small
Business Center and Computer Literacy Program.19 The ability of the Authority to
sustain these services remains highly questionable. In addition to funds already
used, the Authority will spend another $39,620 to establish a community
development corporation and a revolving loan fund. However, the Authority’s
contract with The Communications Group for the Small Business Center already
included in its budget a revolving loan fund. Further, the HOPE VI budget for the
Small Business Center and Computer Literacy Program includes $123,654 in
projected sources of income from non-HOPE VI funds for years 1 and 2 (not
including the revolving loan fund and in-kind donations). However, after 1½ years,
all funds spent for these programs have been HOPE VI funds. The transfer of
capital expenditures amounted to about $31,000 for both programs and does little
to resolve the issue of sustainability.

City match. The OIG agrees the Authority should continue to make every effort to
obtain the matching funds or in-kind contributions.




 19
     The two recommendations in the draft report for these issues (2A and 2B) have been combined into one
recommendation in the final report; the primary concern being the future sustainability of these programs.

                                                                                                       23
                                                                   98-FW-201-1003

Recommendations

We recommend you require the Authority to:

2A.   Explain how it will sustain its community and supportive service programs
      throughout the grant term and beyond, and take measures, such as obtaining
      commitments from businesses and leveraging private and public support, to
      obtain funding for these programs.

2B.   Make every effort to obtain from the City contributions for supportive
      services in an amount equal to 15 percent of the HOPE VI grant funds
      awarded to the Authority for supportive services under the Revitalization
      Plan.




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Management Controls
In planning and performing our audit, we obtained an understanding of the
management controls that were relevant to our audit. Management is responsible
for establishing effective management controls. Management controls, in the
broadest sense, include the plan of organization, methods, and procedures adopted
by management to ensure that its goals are met. Management controls include the
processes for planning, organizing, directing, and controlling program operations.
They include the systems for measuring, reporting, and monitoring program
performance.

Significant controls

We determined that the following internal controls were relevant to our audit
objectives:

Administrative controls:       Selection and award of contracts
                               Eligibility of grant activities
                               Monitoring of programs
                               Measurement of program results
                               Sustainability of community and supportive services

We assessed all of the relevant controls identified above.

Significant weaknesses

It is a significant weakness if internal controls do not give reasonable assurance 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:

•   The Authority lacks internal administrative controls to ensure major
    procurements are: (1) awarded using full and open competition; (2) free of
    appearances of conflict of interest; and (3) adequately reviewed for price
    reasonableness (Finding 1).

•   The Authority lacks internal administrative controls to ensure adequate planning
    for community and supportive services under its HOPE VI Program so that
    these services can be sustained after the grant term (Finding 2).




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Issues Needing Further
Consideration
In addition to the findings, the audit identified issues needing further consideration.
Although important, we did not think these issues warranted being reported as audit
findings. However, these issues could become significant if not timely addressed.
Also, some of the issues may be raised in the nationwide report.

Authority has not resolved environmental noise issue

Federal regulations state that "It is HUD's general policy to provide minimum
national standards applicable to HUD programs to protect citizens against noise in
their communities and places of residence."20 In an August 9, 1995 letter, the
Assistant Secretary, Office of Public and Indian Housing informed the Authority:

           "...the Environmental Assessment conducted by HUD staff from the Texas
           State Office has projected unacceptably high noise levels from the proposed
           Lee Trevino Highway and the widening of Zaragosa Road. [The Authority]
           will have to submit plans for noise attenuation measures which will bring the
           noise environment to a level acceptable to the criteria and standards required
           in 24 CFR §51.103. The attenuation measures will have to be approved by
           the Assistant Secretary for Community Planning and Development before
           [the Authority] proceeds with the demolition of the stone wall along
           Zaragosa Road or any new construction or modernization."

Despite this directive, the Authority proceeded to demolish the stone wall and begin
modernization work without obtaining the Assistant Secretary's approval. As a
result, Kennedy Brothers residents may not be protected from unacceptably high
noise levels.

Authority improperly allocated administrative time

Article IV of the planning and implementation grant agreements for Kennedy
Brothers and Marmolejo, Salazar, and Sherman state that the Authority will comply
with the cost principles of Office of Management and Budget Circular A-87. OMB
Circular A-87 requires that when employees work on several activities, the
Authority should maintain documentation supporting the distribution of the
employees' salaries. The distribution can be based upon either the actual time spent
on the activity by the employee or on a statistical or other quantifiable measure of

 20
      Code of Federal Regulations (24 CFR §51.101(a)).

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                                                                      98-FW-201-1003



employee effort. Further, budget estimates or other distribution percentages before
the employee performs the services do not qualify as support for charges to federal
awards and may be used only for interim accounting purposes under certain
conditions.

The Authority charged administrative costs against the Marmolejo, Salazar, and
Sherman planning grant by allocating a percentage of employee's salary, including
40 percent of the Executive Director's salary and 50 percent of the Assistant
Executive Director's salary from July to November 1996. The Budget Officer
allocated the salaries based on pre-established percentages. However, the Fiscal
Year 1997 budget allocated only 10 percent of the Executive Director’s and
Assistant Executive Director's salaries to the Marmolejo, Salazar, and Sherman
planning grant.

Authority officials agreed that the 40 and 50 percent allocations to the Marmolejo,
Salazar, and Sherman planning grant did not reflect actual time during the period.
They stated the Authority did not allocate any cost during 1995, and therefore
increased the 1996 allocation so the time charges would be reflective of the time
over the entire grant period. Authority officials claimed that they determined the
pre-established percentages or allocations based on studies done of the actual work
performed. However, the Authority could not produce those studies or the support
for those studies. Further, if the Authority performed the studies, its Fiscal Year
1997 Operating Budget should be reflective of the allocations. Authority staff
stated that it has always allocated employee's time in this manner and that the staff
actually may have spent more time on the activity than the Authority charged.
However, improper accounting for administration in the past is not a valid reason to
continue the practice. The Authority should have an allocation method that
supports and accurately reflects time charges.

Improved accountability needed for salvaged materials

To encourage the use of more water efficient fixtures, the El Paso water department
pays $73 for every water closet brought in if it can be shown that the closet will be
replaced with a water efficient closet. Based on 364 units at Kennedy Brothers, this
would amount to as much as $26,572. The Authority allowed the resident council
members to organize the removal of water closets from the Kennedy Brothers site.
The resident council paid tenants minimum wage to remove the water closets, and
other incurred expenses for the transportation of the commodes to the water
department. The resident council kept the remaining money for its use. Authority
officials explained that they wanted to involve the residents and provide some jobs.
A project manager official stated that in theory, the amount of the scrap water
closets would have off-set some of the cost of demolishing and rehabilitating the
units. Although the Authority should encourage resident council initiatives, such
activities should have the Board's prior approval. Further, the Authority should
consider placing some restrictions on the resident council's use of funds received
from such activities.

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                                        98-FW-201-1003




Appendices
Appendix A

Authority Written Response to Draft Audit Report




                                                   28
                                       98-FW-201-1003

Appendix B

Opinion by Authority’s Legal Counsel




                                                  29
                                                                  98-FW-201-1003

Appendix C

Distribution
Secretary's Representative, 6AS
Comptroller, 6AF
Director, Accounting, 6AAF
Director, Public Housing, 6APH
Deputy Assistant Secretary, Office of Public Housing Investments, PT (4)
Deputy Secretary, SD (Room 10100)
Hal C. DeCell III, A/S for Congressional and Intergovernmental Relations, J (Room
10120)
Karen Hinton, A/S for Public Affairs, W (Room 10132)
Jon Cowan, Chief of Staff, S (Room 10000)
Robert Hickmott, Counselor to the Secretary, S (Room 10234)
Patricia Enright, Sr Advisor to the Secretary for Communication Policy, S (Room
10222)
Gail W. Laster, General Counsel, C (Room 10214)
Saul N. Ramirez, Jr., Assistant Secretary for CPD, D (Room 7100)
Marilynn A. Davis, Assistant Secretary for Administration, A (Room 10110)
Nicolas P. Retsinas, Assistant Secretary for Housing, H (Room 9100)
Kevin Marchman, Acting A/S for Public & Indian Housing, P (Room 4100)
Assistant to the Deputy Secretary for Field Management, SDF (Room 7106)
Assistant to the Secretary for Labor Relations (Acting), SL (Room 7118)
Public Housing ALO, PF (Room 5156) (3)
Acquisitions Librarian, Library, AS (Room 8141)
Chief Financial Officer, F (Room 10164) (2)
Deputy Chief Financial Officer for Operations, FF (Room 10166) (2)
Director, Hsg. & Comm. Devel. Issues, US GAO, 441 G St. NW, Room 2474
 Washington, DC 20548 Attn: Judy England-Joseph
Mr. Pete Sessions, Govt Reform & Oversight Comm., U.S. Congress,
 House of Rep., Washington, D.C. 20515-4305
The Honorable Fred Thompson, Chairman, Comm. on Govt Affairs,
 U.S. Senate, Washington, D.C. 20510-6250
The Honorable John Glenn, Ranking Member, Comm. on Govt Affairs,
        U.S. Senate, Washington, D.C. 20510-6250
Cindy Sprunger, Subcomm. on Gen. Oversight & Invest., Room 212,
        O'Neill House Ofc. Bldg., Washington, D.C. 20515
The Honorable Dan Burton, Chairman, Comm. on Govt Reform & Oversight,
        House of Representatives, Washington, D.C. 20515-6143
Inspector General, G
Auditee
Investigations, 6AGI
FBI Special Agent, David. G. Franco




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