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We audited the U. S. Department of Housing and Urban Development’s (HUD) Community Development Block Grant (CDBG) 2008 Disaster Recovery assistance for Hurricane Ike and other disasters, administered by the Texas Department of Rural Affairs (the State). Our objective was to determine whether the State administered HUD’s Disaster Recovery funds used for infrastructure and revitalization contracts in compliance with the supplemental appropriations requirements, HUD’s policies, and the State of Texas’ Disaster Recovery action plan. This is the fifth audit of Texas’ administration of Disaster Recovery funds, and it was conducted as part of the Office of Inspector General’s (OIG) commitment to HUD to implement oversight of Disaster Recovery funds to prevent fraud, waste, and abuse.

The State did not follow Federal and State requirements and best practices for its infrastructure and revitalization professional services and project management services contracts. It failed to do so because it disregarded various requirements. Specifically, the State (1) improperly procured its professional services and project management services contracts, (2) improperly increased the project management services company’s contract, (3) included ineligible contract provisions, (4) failed to ensure the contract payment type was consistent, (5) failed to prevent questionable charges, (6) did not ensure its budgets clearly assigned costs according to HUD CDBG cost categories, and (7) did not ensure its project management services contract contained specific and quantifiable performance measures. As a result, the State paid $9.06 million in questioned costs. In addition, the State failed to adequately monitor its professional and project management services contracts due to staffing cutbacks and disagreements in the department originally responsible for overseeing the funds. Therefore, it did not review the contractor’s performance or its accounting for, allocation of, or support for the eligibility of its costs.

The Texas General Land Office recognized that the project management services contract had problems and terminated it during our audit, which will prevent the State from improperly spending more than $75.01 million in Disaster Recovery funds.

We recommend that HUD’s Deputy Assistant Secretary for Grant Programs require the State to (1) repay $919,570 in ineligible markup costs, (2) support or repay an estimated $7.59 million in unsupported inflated costs, (3) repay $542,477 in unreasonable and unnecessary inflated costs, and (4) document its termination of the professional services contract and its deobligation of the funds, which will result in $75.01 million in Disaster Recovery funding being put to better use. In addition, HUD should require the State to adopt and follow sound agency business procedures for its Disaster Recovery-funded procurements and payments to ensure they comply with Federal and State policies.