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HUD IG AUDIT Found “Significant Deficiencies”

 State spent $23 million audit found “unsupported”

State Falsely Certified Compliance & Failed to Conduct Independent Cost Analysis

After The Fact Independent Analysis Seriously Flawed

IG Recommends That HUD Consider Whether Costs Are Reasonable

NJ Could Be Required To Reimburse HUD With State Funds

Despite being spun by the Gov.’s Office as vindication and by NJ’s lapdog press as no big deal, the HUD Inspector General’s audit Report found “significant deficiencies” and $23 million in “unsupported costs” in the Christie Administration’s federally funded $25 million “Stronger than the Storm” ad campaign.

The audit also raises additional serious going forward questions: Given the seriousness and consistent pattern of very basic financial control violations, whether NJ will be required to reimburse HUD with state taxpayer dollars for unreasonable costs.

The role of the consulting form ICF, who conducted a seriously flawed “after the fact” “independent cost analysis” also should be probed further.

Before we get to the details of the HUD IG audit, let me begin with an analogy to illustrate how badly spun the media coverage is.

Let’s say I was going 75 mph in a 55 zone and got a speeding ticket.

I go to court and ask for the ticket to be dismissed because I claim I was sober and not doing anything “improper” at the time; my registration, insurance, and inspection credentials were all OK; and that I was merely “not fully compliant” with the traffic code.

Would that kind of argument fly with the judge? Of course not.

So why should that kind of argument fly in the court of public opinion, driven by the news media?

Would the news story be: “Man not fully compliant with traffic code”? Or: “Man gets ticket for speeding”?

So why has Christie’s spin, which latches on to just two phrases in the HUD IG report – i.e. that “nothing improper” was found and that the State “did not fully comply” – become the dominant narrative and framing of the news coverage? The Bergen Record story headline swallowed the Christie spin hook, line, and sinker and stood the audit on its head!

So, now on to the actual text of the IG audit. You can read the summary here and the entire document here.

I)  Background/Context

Obviously, given the direct personal involvement of a powerful, high media profile, and aggressive Governor Christie, there is a lot of politics involved in this audit.

The IG audit was released by HUD last Friday afternoon – evidence of a weekend news dump on a controversial topic that HUD was trying to duck and downplay.

Back in January, the news media got pushback from Christie supporters for calling the IG review a “federal investigation”. The IG audit was not “a federal investigation”, but it also was not “routine” – it was requested by letter of Congressman Frank Pallone (D) on August 8, 2013.

In the midst of that media and political controversy, on January 15, 2014, PEER petitioned the HUD IG to expand the scope of that audit to include several other issues, including:

1) the role of the law firm Wolff & Samson and former Christie DCA Commissioner Lori Grifa, who had been selected as Sandy funds auditors and had egregious conflicts of interest;

2) the failure of NJ to conduct a “science based risk analysis” and to consider climate change as required by new HUD rules and Obama Executive Order;

3) failure to provide a “transparent and inclusive process” required by HUD rules;

4) the State’s exemption of infrastructure from permit requirements; and

5) whether the Seaside Park boardwalk fire was eligible for Sandy funding (read the PEER letter to HUD IG).

So, there are other shoes yet to drop in the HUD IG’s shop.

Finally, a big part of the problem is that HUD has dirty hands.

HUD issued a waiver for the NJ ad campaign. That waiver sent a huge message to state officials of lax oversight.

Thus HUD itself is part of the problem, so it becomes difficult for HUD to aggressively enforce federal regulations and criticize the Christie Administration.

II)  Audit Scope and Findings

The audit looked at two different things that are being conflated in media reports:

Our objectives were to determine whether the content of the marketing campaign was proper and whether the State procured services and products for its tourism marketing program in accordance with applicable Federal procurement and cost principle requirements. 

The audit found that the content, i.e. the use of Gov. Christie in the ads, was not improper. That does not mean it was OK, just that it did not violate federal law.

But the audit also found that NJ violated federal procurement and cost principle requirements.

NJ officials made several significant mistakes. The pattern suggests, at best, incompetence, or possible fraud.

Let’s start with the most serious and most basic:

• the state falsely certified compliance with federal requirements

… although the State complied with HUD instructions by certifying that its policies and procedures were equivalent to Federal procurement requirements, it did not procure services and products for its tourism marketing program in a manner that fully met the intent of the Federal requirements. 

As stated in the audit report, the State was required to conduct a pre- bid cost estimate and post-bid cost analysis. The State certified to HUD that its procurement policies and procedures were equivalent to the Federal procurement requirements. However, its actions did not demonstrate compliance with the intent of the Federal standards.

This is really bad – attorney’s and other professionals can lose their licenses for false certifications. 

Do you think the IRS would give you a break for falsely certifying tax returns?

• the State failed to prepare an independent cost estimate before receiving bids

Contrary to regulations at 24 CFR 85.36(f), the State did not prepare an independent cost estimate and cost analysis before receiving bids or proposals and awarding a contract. The regulations required the State to make independent estimates before receiving bids or proposals. They also required the State to perform a cost analysis. An independent cost estimate serves as a yardstick for evaluating the reasonableness of the contractor’s proposed costs or prices.

Without this independent cost estimate, what HUD called “a yardstick for evaluating the reasonableness of contractor’s proposed costs or prices”, there was no way for the Christie administration to know whether the bids that were submitted were reasonable.

This is like walking into the auto dealer to buy a car without having any idea if the car might cost $20,000 or $75,000.

It is really bad practice. An embarrassment. Evidence of incompetence or corruption, or both.

• the state failed to develop a yardstick or methodology for evaluating reasonableness of costs

Although the State did not adopt the Federal procurement standards, it needed to ensure that its alternate policies and procedures met the intent of the Federal requirements. Therefore, it needed to demonstrate that it developed a yardstick for evaluating the reasonableness of contractors’ proposed costs or prices, and evaluated the separate elements that made up the contractors’ total costs.

Again, the Christie team was flying blind – in an industry (advertising) and tasks with a highly subjective and variable cost structure that no one in the administration had expertise in or knew about.

• the state relied on a superficial analysis of reasonable costs

The State asserted that its $25 million budget for its tourism marketing activity was reasonable and justified based on a comparison it performed with the State of Louisiana’s $30 million Economic Revitalization Small Tourism Business Support Program, established in the aftermath of Hurricanes Katrina and Rita in 2005. HUD had granted Louisiana a waiver in the amount of $30 million to conduct marketing and outreach services activities. In our opinion, this comparison of summary budget information did not satisfy the requirement to perform an independent cost estimate and analysis because it did not consider the contractors’ proposed costs before it received bids or proposals and did not determine whether the pricing of the separate elements that made up the total costs in the contractors’ proposals were fair and reasonable.

This finding suggests that the Christie team try to take advantage of HUD’s prior waiver to Louisiana, using it as a green light for “anything goes” “you  can’t enforce those requirements on us”.

• the state provide a seriously flawed after the fact “independent cost analysis”

At the end of the audit, the State provided us an independent cost estimate report related to its contract award. The report, dated May 13, 2014, was prepared by ICF International, a technology, policy, and management consulting firm. The report incorrectly stated that the State had a waiver for the requirement to develop an independent cost estimate.  

The ICF Report seems designed to frustrate the ability of HUD auditors to compare actual costs to reasonable costs, defeating the entire purpose of an independent cost analysis. Again, we see the abuse of the HUD waiver – ICF falsely stated that HUD had issued a waiver from the independent cost analysis. IF ICF thought HUD had waived those requirements, why did they think they were conducting an “after the fact” independent cost analysis?

How much was ICF paid for this incompetent coverup?

• the state violated federal rules by waiving completive bid requirements for selected contractor MWW

The State’s contract with MWW Group required the contractor to provide copies of at least three quotes or proposals when submitting invoices for payment. However, shortly after the State awarded the contract, it waived the requirement because the contractor claimed that it would hinder its ability to move quickly on certain activities. Although the State had the authority to waive the specific contract requirement, since this action changed the terms of the contract, it should have formalized the change and issued a contract modification because the regulations at 24 CFR 85.36 (b)(9) required the State to maintain records sufficient to detail the significant history of the procurement. The regulations at 24 CFR 85.36(c) required the State to conduct all procurement transactions in a manner providing full and open competition. Also, the regulations at 24 CFR 85.36(d) required the State to obtain bids from an adequate number of sources regardless of the procurement method unless the noncompetitive proposal method was selected. The State could not provide adequate documentation to show that it met the intent of these requirements. …  As a result, HUD had no assurance that marketing services and products were acquired competitively, and that associated disbursements totaling $19.5 million were supported. 

This one is really unbelievably bad. No documents exist that can demonstrate the costs are reasonable.

I think we are getting beyond incompetence here and into fraud territory.

• the state failed to support contract labor costs

When submitting invoices for payment, the contract required the contractor to provide copies of weekly timesheets for employees assigned to do the work referenced in the invoice. The State did not have timesheets to support $3.5 million in labor costs charged by the contractor’s employees.

State employees don’t get paid without submitting time sheets. Do you?

Try to get paid under almost any contract without providing backup documentation like time sheets.

• HUD found $23 million in “unsupported” costs

AS with most government documents, as IF Stone said, most to the good stuff is buried at the end.

See Appendix A for the “Schedule of questioned costs” $22,986,481  

Unsupported costs are those charged to a HUD-financed or HUD-insured program or activity when we cannot determine eligibility at the time of the audit. Unsupported costs require a decision by HUD program officials. This decision, in addition to obtaining supporting documentation, might involve a legal interpretation or clarification of departmental policies and procedures.

Appendix B has some juicy comments from the audit team. Again, buried at the end of the document, no reporter is ever likely to read that far!

III) Audit recommendations and their implications

Here is what IG recommended: Bottom line: NJ taxpayers could be on the hook for $23 million in HUD reimbursements: