The council responded to the news by firing all 22 employees in the department.
But City Manager Phil Kamlarz, who prepared one of the reports, said only eight will be terminated outright. The 14 others are protected by union contracts and will have to be transferred to other departments.
This puzzled Councilman Kriss Worthington.
"If they messed up, why in the world would we want to move them to another department, where they can mess up there, too?" he asked.
The two reports list 14 instances of blatant misuse of $25million in federal funds and claim that city staffers "actively thwarted" an investigation by a new director who began uncovering possibly illegal practices last summer.
City Attorney Manuela Albuquerque, who prepared the other report, said that in her 22 years as city attorney she had never seen such a large problem in any department.
"We have information that could constitute criminal wrongdoing or fraud," she said.
She said she has no idea how much money was lost. She found fraud in every facet of thedepartment, "everything the housing authority does. We have evidence they were just blatantly not following the rules, and it was very, very troubling."
She said her office has forwarded information to the U.S. Department of Housing and Urban Development's Office of the Inspector General, and that HUD can refer the matter to federal prosecutors.
The reports document questionable practices of 14 full-time and eight part-time staffers at the agency that disburses rent subsidies under HUD's Section 8 program.
In addition to paying rent for dead tenants, Albuquerque said the housing authority staffers:
-Gave some clients more subsidies than they were entitled to;
-Paid Section 8 rent for tenants who didn't qualify financially;
-Subsidized rents for ineligible families while eligible ones stayed on waiting lists;
-Failed to verify whether subsidized apartments were occupied;
-Paid retroactive subsidies to landlords.
Albuquerque recommended that the city contract out the housing aid program because the city is "incapable of competently providing ... services."
Larry Bush, a regional HUD spokesman, said the agency recommended the City Council dissolve itself as the authority board and appoint others to run the housing program.
"We had told Berkeley their program was coming to the end of our patience," Bush said. "We're looking for who is going to fix it, not who is to blame."
Berkeley's Housing Authority has been in troubled status for mismanagement since 2002. Serious problems surfaced in 2005 when a city audit revealed the housing authority gave HUD fraudulent data, Albuquerque said.
Housing Authority manager Sharon Jackson resigned in early 2006 during that investigation, but Albuquerque said it wasn't clear exactly where the fault lay. Jackson now works for Benicia's housing authority.
Albuquerque said the abuses came to light when new manager Tia Ingram took over last summer. Ingram reported two to four alarming claims of staff wrongdoing each day, according to Albuquerque.
She said housing authority staffers thwarted or resisted Ingram's attempts to investigate and report the problems.
Councilman Gordon Wozniak called for an independent commission to investigate the scandal.
"We need to find out what went wrong and why we didn't catch it earlier," he said. "I apologize for not asking the tough questions before. There are a lot of people around here who haven't done their job."
The council approved Mayor Tom Bates' nominees to the new governing board, including two tenants, a local minister, a deputy state attorney general and a staffer for Bates' wife, Assemblywoman Loni Hancock (D-Berkeley/El Cerrito/Lamorinda).
MediaNews writer Martin Snapp contributed to this story.