oversight

Community Development Block Grant Section 108 Loan Program, City of San Antonio, San Antonio, Texas

Published by the Department of Housing and Urban Development, Office of Inspector General on 2001-05-25.

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

                                                                    Issue Date
                                                                        May 25, 2001

                                                                   Audit Case Number
                                                                       2001-FW-1004




TO:        Donna M. Abbenante
           Acting General Deputy Assistant Secretary for Community Planning and
             Development, D

           Jeff Ruster
           Deputy Assistant Secretary for Economic Development, DEE

           John Maldonado
           Director, Community Planning and Development Division, 6JD

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

SUBJECT:        Community Development Block Grant Section 108 Loan Program
                City of San Antonio
                San Antonio, Texas


We conducted an audit of the City of San Antonio’s Section 108 Loan Program. The City used loan
funds to finance development activities at Kelly Air Force Base in San Antonio, Texas. The audit report
contains one finding. We are providing a copy of the report to the City.

Within 60 days please provide to us, for each recommendation, a status report on: (1) the corrective
action taken; (2) the proposed corrective action and the date to be completed; or, (3) why you consider
corrective action unnecessary. Also, please furnish us copies of correspondence or directives issued
because of the audit.

If you have questions, please contact Jerry Thompson, Assistant District Inspector General for Audit, at
(817) 978-9309.
Management Memorandum




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2001-FW-1004            Page ii
Executive Summary
We conducted an audit of the City of San Antonio’s Community Development Block Grant
(CDBG) Section 108 Loan Program to determine whether the City and its subrecipient, the
Greater Kelly Development Authority, expended CDBG Section 108 loan funds for eligible
activities in accordance with HUD regulations. We found that responsible City staff seemed
unfamiliar with CDBG regulations and had not taken adequate steps to ensure compliance
with applicable low- and moderate-income benefit and procurement requirements.




    The City cannot support                    The City has spent over $17 million1 of the approved $38.7
    compliance with low-mod                    million in Program funds without ensuring compliance with
    benefit requirements.                      important provisions of the Act2 or HUD CDBG regulations.
                                               Although required by CDBG regulations, City staff: did not
                                               obtain a commitment from the assisted business, Boeing
                                               Company, to provide jobs to persons of low- and-moderate
                                               income; did not adequately monitor Program activities; and
                                               cannot show the Section 108 Program benefits predominately
                                               persons of low- and moderate-income. Available job creation
                                               reports are unreliable and show the latest low- and moderate-
                                               income job creation levels to be only about 26 percent instead
                                               of the required 51 percent.3 Because the City cannot
                                               adequately show benefit predominately to persons of low- and
                                               moderate-income, all expenditures of the Section 108 Program
                                               may be in danger of being ineligible.

                                               City staff did not ensure its subrecipient, the Greater Kelly
    The City paid questioned
                                               Development Authority, used procurement procedures that
    contract costs of about
                                               provide for full and open competition as required. The City did
    $287,000.
                                               not formally review and evaluate the Greater Kelly
                                               Development Authority’s procurement procedures before
                                               authorizing the payment of contract costs totaling about
                                               $287,000 for “pre-qualified” and “team” vendors. The Greater
                                               Kelly Development Authority used procurement procedures
                                               that did not require “pre-qualified” and “team” vendors to
                                               compete for contract awards as required by CDBG regulations.
                                               Therefore, we are questioning the reasonableness of costs for
                                               contracts awarded on a noncompetitive basis.


1
  As of December 21,2000.
2
  Title 1 of the Housing and Community Development Act of 1974 as amended (42 U.S.C. 5301 et seq.).
3
  24 CFR §570.208(a)(4)(i).

                                                        Page iii                                      2001-FW-1004
Executive Summary


 City staff seemed unfamiliar   We believe City staff may have ignored, or did not become
 with requirements.             familiar with CDBG requirements because top administration
                                officials “guaranteed” the award of Section108 funds to San
                                Antonio for the redevelopment of Kelly Air Force Base. City
                                staff told us they had not performed comprehensive reviews to
                                determine compliance with job creation and procurement
                                requirements and wondered why we were so concerned. In
                                November 1997, the Vice President visited San Antonio and
                                announced that HUD was going to provide over $35 million in
                                loans to the City to attract new business to soften the blow of
                                closing Kelly Air Force Base. The Vice President and HUD
                                Secretary announced the Section 108 loan award on April 14,
                                1998. We believe the low- and moderate-income and
                                procurement requirements apply regardless of the interest of
                                high-level officials.

 Recommendations                We are recommending HUD require the City to establish
                                procedures to insure the Section 108 Program results in the
                                employment of the required level of low- and moderate-income
                                persons, suspend all Section 108 payments until they provide
                                verifiable evidence to show compliance with job creation and
                                procurement requirements, and repay all ineligible and
                                unsupported costs from nonfederal funds.

 Finding discussed with City    We discussed these issues with City officials and staff during the
 officials.                     audit and held an exit conference on April 18, 2001. The City
                                provided us a written response on April 11, 2001. The City
                                officials said our audit has helped the City ensure it will be in
                                compliance with program requirements. They agreed with us in
                                part on the procurement issues but did not agree they needed to
                                show compliance with job creation eligibility requirements
                                during the audit period. The City’s position is that the eligibility
                                criteria for job creation cited in the report is not a compliance
                                requirement until 18 months after completion of phase one,
                                which is March 31, 2003. They said this is when the City must
                                show the minimum number jobs were created and held by low-
                                and moderate-income persons as specified in the loan
                                application modification approved by HUD. However, the City
                                intends to conduct a survey and analysis of the 2000 census and
                                change the emphasis of the program from measuring
                                percentages of low- and moderate-income jobs created to
                                alleviating the effects of the base closure upon an economically
                                distressed area. The City’s response did not change our

2001-FW-1004                             Page iv
Executive Summary


                    position. We have included a summary of the City’s response
                    in the finding and included the complete written response in
                    Appendix B.




2001-FW-1004          Page v
Executive Summary




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2001-FW-1004             Page vi
Table of Contents

Management Memorandum                                                     i


Executive Summary                                                     iii


Introduction                                                              1


Finding

1    The City’s Section 108 Loan Program is in Danger of
     Not Meeting National Objectives                                          5



Management Controls                                                       17



Appendices
     A Schedule of Questioned Costs                                       19

     B Auditee Comments                                                   21

     C Distribution                                                       51




                                Page vii                   2001-FW-1004
Table of Contents


Abbreviations
       CDBG         Community Development Block Grant
       CFR          Code of Federal Regulations
       HUD          U. S. Department of Housing and Urban Development
       OIG          Office of Inspector General




2001-FW-1004                           Page viii
Introduction
                                             The City of San Antonio, Texas, is an entitlement recipient of
    Background
                                             HUD’s Community Development Block Grant (CDBG)
                                             Program. The City operates under the Council-Manager form
                                             of government and receives Program funds of between $10
                                             million to $12 million each year. The City’s Department of
                                             Housing and Community Development administers Program
                                             activities and maintains Program records at 419 S. Main, Suite
                                             200.

                                             Title I of the Housing and Community Development Act of
                                             1974 (Public Law 93-383) established the CDBG Program.
                                             The CDBG Program provides grants to states and units of local
                                             government to aid in the development of viable urban
                                             communities. Providing decent housing and a suitable living
                                             environment and expanding economic opportunities, principally
                                             for persons of low and moderate income accomplish this. All
                                             program projects and activities must either benefit low- and
                                             moderate-income persons, aid in the elimination or prevention
                                             of slums and blight, or meet other community needs having a
                                             particular urgency.

                                             The Housing and Community Development Act of 1977 (Public
                                             Law 95-128) expanded the CDBG Program to include loan
                                             guarantees. The Section 108 Loan Guarantee Assistance
                                             Program allows communities entitled to CDBG a means to
                                             finance up front certain large-scale projects beyond the scope
                                             that can be financed only by annual grants. Communities can
                                             borrow up to five times their annual CDBG amount. HUD
                                             guarantees the payments on the notes or other obligations that
                                             are used to fund the loans. Grantees are required to pledge
                                             current and future CDBG funds as security. All projects must
                                             meet the same national objectives as the CDBG Program.

                                             San Antonio is home to four Air Force Bases4 including Kelly
                                             Air Force Base where approximately 12,000 people worked
                                             until 1995. The 1995 Base Realignment and Closure
                                             Commission recommended the closure of Kelly Air Force Base
                                             by July 2001.



4
    Randolph, Brooks, Lackland, and Kelly.

                                                        Page 1                                 2001-FW-1004
Introduction


                                                   In July 1995, immediately following the news of Kelly’s closure
                                                   and realignment, the City Council formed the Initial Base
                                                   Adjustment Strategy Committee. On January 18, 1996, the
                                                   City Council created the Greater Kelly Development
                                                   Corporation, which they later rechartered as the Greater Kelly
                                                   Development Authority. An 11-member board, appointed by
                                                   the City Council, governs the Greater Kelly Development
                                                   Authority. The board’s mission is to represent San Antonio
                                                   during the redevelopment of Kelly Air Force Base and to retain
                                                   or create 21,000 good paying jobs by the year 2006.

                                                   Top administration officials “guaranteed” the award of Section
                                                   108 funds to San Antonio and said it was for the redevelopment
                                                   of Kelly Air Force Base. The Vice President visited San
                                                   Antonio on November 23, 1997, and guaranteed up to $35
                                                   million in HUD Section 108 loans for Kelly Air Force Base. In
                                                   a HUD press release dated April 14, 1998,5 the Vice President
                                                   and HUD Secretary announced the approval of a $38.7 million
                                                   HUD loan to the City for “infrastructure improvements” at Kelly
                                                   Air Force Base.

                                                   In a commitment letter and loan agreement dated July 27, 1998,
                                                   the City loaned HUD Section 108 proceeds to the Greater
                                                   Kelly Development Authority to fund major facility renovations
                                                   at Kelly as required by Boeing. The City entered into a
                                                   Regulatory Agreement with the Greater Kelly Development
                                                   Authority effective August 4, 1998. The Agreement defines the
                                                   terms and conditions, as restricted by HUD and City
                                                   requirements, the two parties are to follow during the
                                                   rehabilitation and operation of Kelly Air Force Base for the
                                                   term of the loan. The agreement requires the Greater Kelly
                                                   Development Authority to follow HUD recordkeeping and
                                                   reporting regulations, and to maintain records showing that most
                                                   of the Kelly jobs would be available to, or held by, low- and
                                                   moderate-income persons.

                                                   On February 20, 1998, Boeing agreed to move some of its
                                                   aerospace operations to Kelly Air Force Base and to hire as
                                                   many as 850 Kelly workers. Boeing signed a sublease
                                                   agreement with the Greater Kelly Development Authority on


5
    HUD officially approved the City’s $38.7 million application for Section-108 loan funds on April 13, 1998.

2001-FW-1004                                            Page 2
                                                                                                     Introduction


                                              April 17, 1998, agreeing to use Kelly facilities for aircraft repair
                                              and maintenance operations.6

                                              The audit objective was to determine if the City expended
    Audit Objective, Scope, and               Section 108 loan funds for eligible activities in accordance with
    Methodology                               HUD regulations. To accomplish this objective, we:

                                              •   Obtained and reviewed applicable laws and CDBG
                                                  regulations;
                                              •   Obtained and reviewed monitoring reports and
                                                  correspondence from the City and the Greater Kelly
                                                  Development Authority;
                                              •   Conducted interviews with HUD employees in San Antonio
                                                  and Washington D. C.;
                                              •   Conducted interviews with employees of the City, the
                                                  Greater Kelly Development Authority, and related entities;
                                              •   Obtained and reviewed accounting reports and other
                                                  financial information from HUD offices in Washington D.C.,
                                                  the City, and the Greater Kelly Development Authority;
                                              •   Obtained an understanding of procurement policies,
                                                  procedures, and controls at the City and the Greater Kelly
                                                  Development Authority and related entities;
                                              •   Reviewed professional services and construction contracts
                                                  awarded by the Greater Kelly Development Authority and
                                                  related entities for compliance with federal and state
                                                  requirements; and
                                              •   Obtained and analyzed job creation reports to determine
                                                  compliance with the loan agreement, CDBG regulations,
                                                  and the Act.

    Audit Period                              We substantially performed fieldwork from June 1999 through
                                              September 2000. The audit work was periodically delayed by
                                              other, higher priority audit assignments and personnel conflicts.
                                              The audit generally covers 2 calendar years ending
                                              December 31, 1999, although we extended the review period,
                                              when appropriate. We conducted the audit in accordance with
                                              generally accepted government auditing standards.




6
    Boeing Sublease Agreement Paragraph 18.

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Introduction




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2001-FW-1004    Page 4
                                                                                              Finding


       The City’s Section 108 Loan Program is in
       Danger of Not Meeting National Objectives
The City has spent over $17 Million7 in Section 108 loan funds to redevelop Kelly Air Force
Base without ensuring the activity meets the Program’s national objectives and complies with
HUD regulations. The $17 million includes $287,000 for contracts awarded without
competition as required. The City agreed to use Program funds to create job opportunities for
low- and moderate-income persons but has not followed key Program requirements. The City:
(1) did not obtain a required commitment from Boeing Company to create low- and moderate-
income jobs before spending Program funds to upgrade Boeing facilities; (2) did not
adequately monitor Program activities; and (3) cannot show the Section 108 Program is
generating low- and moderate-income job opportunities as required by CDBG regulations.
Also, the City did not adequately monitor the Greater Kelly Development Authority to ensure
maximum free and open competition when it awarded contracts under the Program. The City
may have ignored, or did not become familiar with CDBG regulations because they believed
the administration awarded Section 108 loan funds to ensure continued employment for
displaced Kelly workers and not specifically to create job opportunities for predominately low-
and moderate-income persons. Consequently, the City cannot show compliance with CDBG
eligibility requirements and all Program expenditures may be ineligible.




    Requirements                    In determining eligibility, Title 24, Code of Federal Regulation
                                    (CFR), Section 570.200, provides that an activity may be
                                    assisted in whole or in part with CDBG funds only if the activity
                                    complies with all of the following: (1) Section 105 of the Act;
                                    (2) national objectives; (3) the primary objective; (4)
                                    environmental review procedures; and (5) cost principles. The
                                    primary objective of the CDBG Program8 as described in Title I
                                    of the Act (42 U.S.C. 5301), section 101(c) is the development
                                    of viable communities, decent housing, suitable living conditions,
                                    and economic opportunities principally for persons of low
                                    and moderate income (emphasis added).9

                                    Title 24, CFR, Section 570.506 provides that each recipient
                                    shall establish and maintain sufficient records to enable the
                                    Secretary to determine whether the recipient has met the

7
  As of December 21,2000.
8
  24 CFR §570.1 (c).
9
  42 U.S.C. § 5301 sec. 101(c).

                                                Page 5                                  2001-FW-1004
Finding


                                      requirements. The City, as the recipient, is responsible for grant
                                      administration including monitoring10 and records keeping to
                                      ensure and to demonstrate compliance with all Program
                                      requirements. 11 The City must document that at least 51
                                      percent of all jobs will be held by, or will be available to, low-
                                      and moderate-income persons.12 Jobs that are not held by
                                      low- and moderate-income persons may be considered to be
                                      available to those persons only if: (1) special skills and training
                                      are not a pre-requisite or (2) the assisted business agrees to hire
                                      unqualified persons and provide training and (3) the grant
                                      recipient and assisted business take actions to ensure low- and
                                      moderate-income persons receive first consideration for filling
                                      such jobs.13

                                      Where the recipient chooses to document that at least 51
                                      percent of the jobs will be available to low- and moderate-
                                      income persons, documentation will include: (1) a written
                                      agreement containing: (a) a commitment by the assisted
                                      business that it will make at least 51 percent of the jobs
                                      available to low- and moderate-income persons and will
                                      provide training for any of those jobs requiring special skills or
                                      education; (b) a listing of the jobs to be created, which jobs will
                                      be held by low- and moderate-income persons, and which will
                                      require special skill and education; and (c) a description of
                                      actions to be taken by the recipient and the business to ensure
                                      low- and moderate-income persons receive first consideration
                                      for those jobs and (2) a listing by job title of the permanent jobs
                                      filled, which jobs were available to low- and moderate-income
                                      persons, and a description of how such consideration was given
                                      to such persons for those jobs. The description shall include
                                      what hiring process was used; which low- and moderate-
                                      income persons were interviewed for a particular job; and
                                      which low- and moderate-income persons were hired.14

                                      CDBG grant recipients must also comply with OMB cost
                                      principles and federal procurement regulations15 that require:
                                      (1) costs reflect sound business practices, arms-length

10
   24 CFR §570.501(b).
11
   24 CFR §570.506(b).
12
   24 CFR §570.208(a)(4)(i).
13
   24 CFR §570.208(a)(4)(iii).
14
   24 CFR §570.506(b)(5).
15
   24 CFR §570.502(a) & 502(a)(12).

2001-FW-1004                              Page 6
                                                                                                          Finding


                                              bargaining, and market prices for comparable goods or
                                              services;16 (2) competitive solicitation for all purchases in excess
                                              of $100,000;17 (3) documentation sufficient to detail the
                                              significant history of a procurement;18 and (4) require all
                                              procurement be conducted in a manner providing full and open
                                              competition.19

                                              The laws of the State of Texas require purchases above
                                              $15,000 to be competitively selected through sealed bidding or
                                              sealed proposals.20 Requests-for-Proposals must solicit [price]
                                              quotations and specify the relative importance of price and
                                              other evaluation factors.21 Texas Civil Statutes, Chapter 2254,
                                              require the selection of professional services on the bases of
                                              demonstrated competence and qualifications for a fair and
                                              reasonable price.

     The City said it would use               In its Section 108 loan application, the City stated Boeing
     Section 108 funds to create              would hire and train unqualified persons to help meet low- and
     jobs for predominately low-              moderate-income benefit requirements. The City certified that,
     and moderate-income                      in the aggregate, at least 70 percent of all CDBG funds as
     persons .                                defined by Title 24, Section 570.3(e), to be expended during 1,
                                              2, or 3 consecutive years specified for its CDBG Program will
                                              be for activities which benefit low- and moderate-income
                                              persons. Also, under the caption “Compliance with HUD
                                              National Objectives for Community Development,” the
                                              application stated:

                                                   “The Greater Kelly Development Corporation’s vision of
                                                   creating economic opportunities for Kelly Air Force Base
                                                   and San Antonio will be accomplished by maintaining Kelly
                                                   as a world-class maintenance, manufacturing, and
                                                   distribution based industrial park. As a result, a total of
                                                   21,000 good paying jobs will be created to support the
                                                   activities, stimulated by Boeing, with the Section 108
                                                   assistance.”22



16
   OMB Circular A-87 Attachment A part C. Basic Guidelines.
17
   24 CFR §85.36(d)(1).
18
   24 CFR §85.36(d)(1).
19
   24CFR §85.36(c).
20
   Title 8 of the Texas Local Government Code, §252.021.
21
   Title 8 of the Texas Local Government Code, §252.042.
22
   Amended application, page 29.

                                                              Page 7                                2001-FW-1004
Finding


                                 Also:

                                     “…Boeing fully intends to utilize the Department of Labor
                                     sponsored services provided by Alamo Workforce
                                     Development and the Texas Smart Jobs program to
                                     develop the maintenance skills of the San Antonio work
                                     force. What this specifically means is that Boeing has
                                     agreed to hire unqualified persons and will provide the
                                     necessary training utilizing the City of San Antonio’s Job
                                     Training Partnership Act (JTPA) sponsored programs….
                                     This will serve to substantiate the City’s efforts to document
                                     that at least 51% of the jobs being created and retained will
                                     be available to and held by low- and moderate-income
                                     persons.”

                                 The City listed Boeing as a key to the Kelly redevelopment and
                                 job creation plan and expected Boeing to hire local workers for
                                 over 95 percent of the positions created. The City also said
                                 Boeing would try to give low- and moderate-income persons
                                 first consideration for filling new jobs.

                                 The City did not ensure the Greater Kelly Development
     The City did not follow     Authority obtained a written commitment from Boeing before
     CDBG Program                releasing Program funds totaling over $17 million to upgrade
     requirements.               Boeing facilities. In September 2000, after more than a year
                                 since our first request for a copy of the agreement and job
                                 information, the City provided a “Draft” Employment Practices
                                 Plan and job report23 that did not meet CDBG requirements.
                                 For example, the Plan did not include: a written commitment by
                                 the business to make 51 percent of the jobs available to low-
                                 and moderate-income persons; a provision for hiring and
                                 training unskilled workers for qualifying skilled positions; or
                                 planning and reporting provisions including: (a) a projection of
                                 full-time jobs to be created; (b) identification of which jobs
                                 would be available to low-and moderate-income persons; (c)
                                 required training; or (d) what actions would be taken to ensure
                                 low- and moderate-income persons receive first consideration
                                 for employment.

                                 Although the City’s agreement with the Greater Kelly
                                 Development Authority included provisions for the employment

23
     Dated September 28, 2000.

2001-FW-1004                        Page 8
                                                                                                            Finding


                                                  of low- and moderate-income persons, the City did not ensure
                                                  the agreement between the Greater Kelly Development
                                                  Authority and Boeing contained similar provisions. The City
                                                  and the Greater Kelly Development Authority entered into a
                                                  Regulatory Agreement effective August 4, 1998. The
                                                  Regulatory Agreement provides that at least 51 percent of the
                                                  total jobs created be held by or made available to persons of
                                                  low and moderate income in compliance with HUD CDBG
                                                  national objectives described in 24 CFR §570.208(a)(4). 24
                                                  The Boeing Sublease agreement, dated April 17, 1998,
                                                  between the Greater Kelly Development Authority and Boeing
                                                  includes employment incentives for hiring displaced Kelly
                                                  workers. Specifically, the agreement states, “Boeing will exert
                                                  a good faith effort to attain at least 50% of the qualified local
                                                  hires from either current and/or displaced Kelly AFB
                                                  workers.”25 The Sublease however does not include an
                                                  incentive or provision for hiring predominately low- and
                                                  moderate-income persons.

                                                  On August 17, 2000, a City Official told us the Boeing job
                                                  creation commitment and agreement would be completed by
                                                  the end of September 2000. However, as already noted, the
                                                  draft employment practices plan and job report dated
                                                  September 28, 2000, did not comply with CDBG regulations.
                                                  We consider the Boeing commitment and job creation reports
                                                  to be tardy, at minimum, because HUD approved the Program
                                                  in 1998 and the City has expended over $17 million dollars to
                                                  upgrade Boeing facilities.

                                                  The City’s job reports show the Section 108 Program is
     The City cannot show Kelly
                                                  creating many jobs for San Antonio residents including many
     redevelopment activities are
                                                  jobs for persons of low- and moderate-income. However, the
     providing jobs predominately
                                                  reports also show the City is not achieving a 51 percent job
     for persons of low and
                                                  creation-level for low- and moderate-income persons as
     moderate income.
                                                  proposed in the City’s Section 108 loan application, and as
                                                  required by CDBG regulations. Job creation reports provided
                                                  by the City are unreliable because they contain many errors and
                                                  inconsistencies and show low- and moderate-income job
                                                  creation levels of only about 26 to 46 percent. For example,
                                                  job reports included: empty income fields; erroneous

24
     Paragraph 6, “Employment Commitments”.
25
     Boeing Sublease Agreement dated April 17, 1998, Paragraph 33.2.

                                                                Page 9                                 2001-FW-1004
Finding


                           classifications of low- and moderate-income individuals; and
                           changes in the number of dependents and income data for
                           numerous low- and moderate-income individuals between
                           reporting periods. The most recent job report, dated
                           September 28, 2000, does not include cumulative job creation
                           data and shows that persons of low and moderate income fill
                           only about 26 percent of all new jobs created. The City’s
                           earlier reports dated August 24, 1999, and November 30,
                           1999, show low- and moderate-income job creation levels of
                           between 43 and 46 percent. City staff questioned our concern
                           for and were unfamiliar with low- and moderate-income
                           classification criteria and job creation requirements. Now they
                           are seeking technical assistance from the San Antonio HUD
                           staff. This should ensure greater accuracy and consistency in
                           any future job reports.

 The City used Program     The City paid contract costs of about $287,000 for “pre-
 funds to pay questioned   qualified” and “team” vendors without ensuring compliance with
 contract costs of about   procurement regulations. This is because: (1) the Greater Kelly
 $287,000.                 Development Authority agreed to noncompetitively award
                           contracts to “pre-qualified” and “team” vendors in their contract
                           with EG&G Management Services and (2) the City did not
                           formally review the Greater Kelly Development Authority’s
                           procurement policy and procedures before authorizing
                           reimbursement to the Greater Kelly Development Authority for
                           these contract costs.

                           On November 24, 1997, the Greater Kelly Development
                           Authority entered into a professional and personal services
                           contract with EG&G Management Services for Implementation
                           Phase Services of the Kelly redevelopment plan. In the
                           contract, EG&G agrees to provide technical, personal, and
                           professional services either directly, or by engaging the services
                           of subcontractors, agents, and representatives. Section II.C,
                           “Professional, Personal and Technical Services Subcontracting
                           Plan” directs EG&G to conduct on an annual basis an open
                           competitive process to select prequalified subcontractors to
                           perform work under the contract. This section also includes the
                           following: “It is hereby acknowledged by [the Greater Kelly
                           Development Authority] that current Contractor Team
                           Members (existing Contractor team subcontractors) including:
                           EG&G, Klynveld Peat Marwick Goerdeler (KPMG), United
                           Parcel Service (UPS), Trammell Crow Company (TCC),

2001-FW-1004                   Page 10
                                                                                                 Finding


                                      Operational Technologies, Inc. (OpTech), Saldana &
                                      Associates, Vickrey Associates, Ricondo & Associates, Foster
                                      CM Group, and J.D. Gonzalez Associates are considered
                                      “Pre-qualified” within their recognized disciplines and to the
                                      extent that they continue to provide satisfactory services for [the
                                      Greater Kelly Development Authority], will not need to
                                      participate in any annual pre-qualification selection process to
                                      be eligible for potential new work.”

                                      The Greater Kelly Development Authority personnel said they
                                      did not conduct an annual competitive process as required by
                                      Section II.C. and agreed they awarded contracts to pre-
                                      qualified and team vendors without formal competition.
                                      Contracting personnel also said they did not formally document
                                      their rationale for the selection of pre-qualified and team
                                      vendors. The following table shows the vendors and amounts
                                      of the noncompetitive awards.

                                                  Task      Authorized     Paid by Sec.
                                Vendor            Order     Amount         108 funds 26    Subtotals
                                Team vendors:
                                Ricondo           1         $ 274,942      $ 70,945
                                                  1366         74,519        35,495
                                Saldana           6            44,944        44,711
                                Vickrey           4           108,565        93,973
                                                  10           38,540        20,415
                                                                                           $ 264,540
                                Prequalified vendor:
                                PDI               3            72,757          22,470          22,470

                                Total Questioned Contract Costs                             $287,010

                                      City staff seemed unfamiliar with CDBG regulations and told us
      The City did not adequately
                                      they had not performed comprehensive reviews to determine
      monitor job creation and
                                      compliance with job creation and procurement requirements.
      procurement requirements.
                                      Responsible City staff believed HUD provided Section 108
                                      loan funds to ensure continued employment for Kelly workers
                                      and wondered why we were asking questions about compliance
                                      with low- and moderate-income job creation requirements. We
                                      believe they may have ignored, or did not become familiar with
                                      CDBG requirements because top administration officials


26
     As of May 30, 2000.

                                                 Page 11                                   2001-FW-1004
Finding


                                           “guaranteed” the award of Section 108 funds to San Antonio
                                           for the redevelopment of Kelly Air Force Base.

                                           Responsible staff at the City and the Greater Kelly
                                           Development Authority said top administration officials
                                           guaranteed Section 108 loan funds to ensure Kelly workers had
                                           a job when the base closed down. According to a November
                                           24, 1997 newspaper article included in San Antonio Office of
                                           CPD27 files, the Vice President came to San Antonio and
                                           “guaranteed” approval of the HUD Section 108 loan to help
                                           make Kelly “a world-class commercial center.” Also, on
                                           April 14, 1998, HUD issued a news release stating:

                                               “The Clinton Administration will provide $38.7 million in
                                               Department of Housing and Urban Development loan
                                               guarantees to San Antonio, TX for infrastructure
                                               improvements to attract a Boeing Co. aircraft maintenance
                                               facility expected to create more than 1,100 jobs at Kelly
                                               Air Force Base, Vice President Al Gore and HUD
                                               Secretary Andrew Cuomo announced today.”

                                           Although top administration officials made these
                                           announcements, we do not believe this is a valid reason for the
                                           City to ignore key Program requirements including: monitoring
                                           responsibilities; the creation of jobs for predominately low- and
                                           moderate-income persons; and compliance with procurement
                                           regulations. The City’s Section 108 Program must meet a
                                           CDBG national objective to be eligible for CDBG assistance.
                                           The City applied for Section 108 assistance with the stated
                                           national objective of benefit to low- and moderate-income
                                           persons. Specifically, the City agreed to use Section 108 funds
                                           for job creation and retention activities pursuant to 24 CFR
                                           §570.208(a)(4). Since the City cannot show the Program is
                                           providing jobs for predominately low- and moderate-income
                                           persons, all Program expenditures are in danger of not meeting
                                           Section 108 eligibility requirements.




                                           The City agreed to work with the Greater Kelly Development
     Auditee Comments
                                           Authority and Boeing to develop a job-creation plan and to

27
     Community Planning and Development.

2001-FW-1004                                  Page 12
                                                          Finding


document the hiring of low- and moderate-income persons to
fulfill the 51 percent requirement. The City also has obtained an
agreement dated September 29, 2000, between Greater Kelly
Development Authority and Boeing on employment practices
and recordkeeping related to hiring low- and moderate- income
persons. They are modifying the plan to include the required
language. The City did not agree that any requirements related
to the hiring of low- and moderate- income persons applied
during the period of our review. They said HUD approved the
City’s modified application, which stated the creation of the
specified number of low- and moderate- income jobs would not
be required until 18 months after construction completion, or
March 31, 2003. The City said because of this, the City does
not concur with our job-creation conclusions. The City also
said it is going to conduct a survey and analysis of the 2000
census to determine whether the project will qualify under the
area benefit criteria instead of the criteria contained in its
application. The City said it will work with HUD to shift the
emphasis from measuring percentages of low- and moderate-
income jobs created, to alleviating the effects of the base
closure upon an economically distressed area.

The City agreed with the audit’s procurement compliance
conclusions with respect to the awarding of professional
services contracts totaling approximately $287,000. However,
it did not agree that the City generally did not monitor the
awarding of contracts. The City said it is currently withholding
payment on $95,295 related to professional services contracts
because the documentation submitted does not meet the federal
or local criteria for full and open competition. The City said it
officially notified the Greater Kelly Development Authority on
March 27, 2001, that all payments and reimbursements would
be immediately suspended until such time as the issues outlined
in the draft report are addressed and resolved. Also, on
March 29, 2001, the City officially notified Greater Kelly
Development Authority of the need for several documents to
demonstrate progress toward meeting job creation
requirements. The City plans to take other corrective action to
assure compliance with procurement requirements, including
conducting an independent review of Greater Kelly
Development Authority’s procurement activities and increasing
monitoring. The City said it is committed to following up on the
corrective actions already taken and planned to assure

          Page 13                                   2001-FW-1004
Finding


                     compliance with all Loan Program requirements. The City’s
                     complete response is contained in Appendix B.




                     Although the City did not agree with parts of the audit, the
 OIG Evaluation of   City’s actions and planned actions appear responsive. The
 Comments            City’s response did not change our position on the issues but
                     we did make a minor revision to our draft related to the City’s
                     monitoring of contract awards. We agree the City monitored
                     the awarding of contracts to some extent but we still believe it
                     did not do it adequately to ensure full and open competition for
                     all contracts awarded. We do not agree with the City’s
                     statement that compliance regarding job creation should not be
                     required until 18 months after the end of the construction phase.
                     Regardless of the City’s statements, they were preparing
                     occasional job creation reports but they were unreliable. The
                     criteria stated in the finding show requirements for certain
                     documentation to start before the actual creation of the jobs.
                     Specifically, the City must comply with documentation
                     requirements as provided by Title 24, Code of Federal
                     Regulations, Section 570.506 (b)(5). Such documentation
                     includes a written agreement containing the commitment by the
                     assisted business to make at least 51 percent of the jobs
                     available to low- and moderate-income individuals. It should
                     also include a listing by job title of the permanent jobs to be
                     created indicating which jobs will be available to low- and
                     moderate-income persons, which jobs require special skills or
                     education, and which jobs are part-time, if any. We believe, in
                     response to the draft audit, the City’s actions and planned
                     actions to create 51 percent of the jobs for low- and moderate-
                     income persons are steps in the right direction. We do not
                     know whether the City can meet the program’s national
                     objectives by shifting the emphasis of the program from
                     measuring the percentages of low- and moderate-income jobs
                     created to alleviating the effects of the base closure upon an
                     economically distressed area, as the City says it will attempt to
                     do. Until the City takes sufficient steps to meet the national
                     objectives, all expenditures of the program remain in danger of
                     being ineligible.




2001-FW-1004            Page 14
                                                                         Finding


Recommendations   We recommend HUD require the City to:

                  1A. Establish procedures to ensure the Section 108 Loan
                      Program results in the employment of the required level of
                      low- and moderate-income persons.

                  1B. Suspend all Section 108 payments for Kelly
                      redevelopment activities until the City can provide a
                      verifiable job creation plan and data supporting low- and
                      moderate-income job creation levels of at least 51
                      percent.

                  1C. Reimburse the CDBG Program from nonfederal funds an
                      amount equal to all Section 108 expenditures for Kelly
                      redevelopment activities if the City cannot satisfactorily
                      show the Program meets or exceeds the eligibility
                      requirement to benefit low- and moderate-income
                      persons.

                  1D. Conduct a formal review of procurement procedures
                      used by the Greater Kelly Development Authority to
                      ensure full and open competition for procurement and
                      contract awards.

                  1E. If the City can show the Kelly redevelopment activities
                      meet the Section 108 Program eligibility requirements,
                      provide support for the reasonableness of the $287,000
                      paid to “pre-qualified” and “team” vendors or reimburse
                      the CDBG Program from nonfederal funds for any
                      amounts not supported as reasonable and not awarded
                      competitively.

                  We also recommend HUD:

                  1F.   Review and determine if the Boeing agreement (response
                        Attachment 5, Appendix B) is sufficient to ensure
                        compliance with job-creation requirements, if it contains
                        appropriate remedies for noncompliance, and if job-
                        creation requirements should more appropriately be
                        made part of the Boeing Sublease agreement, also



                            Page 15                                 2001-FW-1004
Finding


               1G.     Suspend Section 108 assistance payments to the City
                       until the City can provide verifiable evidence to show
                       sufficient progress is being made to meet the national
                       objectives of the Program.




2001-FW-1004         Page 16
Management Controls

In planning and performing the audit, we obtained an understanding of the management
controls relevant to the audit objectives. Management is responsible for establishing
effective management controls, and in a broader sense, these include a plan of organization,
methods, and procedures to ensure management goals are met. Management controls include
the process for planning, organizing, directing, and controlling program operations. They
include the systems for measuring, reporting, and monitoring program performance.




 Significant Controls.             The following significant controls were relevant to our audit
                                   objectives:

                                   •   Program administration.
                                   •   Compliance with laws and regulations.

                                   We assessed these relevant control categories to the extent they
                                   impacted the audit objectives.

 Significant Weakness.             A significant weakness exists if management controls do not
                                   give reasonable assurance 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 this
                                   review, we believe the following item to be a significant
                                   weakness:

                                   •   The City did not properly administer the Section 108 Loan
                                       Program by expending millions of CDBG funds without
                                       ensuring compliance with CDBG eligibility and federal and
                                       state procurement requirements (see Finding).




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                                                                                                            Appendix A


Schedule of Questioned Costs


                                                                     Type of Questioned Costs
         Issue                                                              Unsupported 1/


1C. Program eligibility                                                         $17,575,8412/




         TOTAL                                                                  $17,575,841




1 Unsupported costs are those which eligibility cannot be clearly determined during the audit since such costs were not
  supported by adequate documentation to establish eligibility.
2 Program funds disbursed by the City to the Greater Kelly Development Authority as of December 21, 2000.




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Auditee Comments




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                                                                                        Appendix C

Distribution
Secretary's Representative, 6AS
Comptroller, 6AF
Director, Accounting, 6AAF
Acting General Deputy Assistant Secretary for CPD, D
Deputy Assistant Secretary for Economic Development, DEE
Director, Office of CPD, 6JD
Deputy Secretary, SD (Room 10100)
Chief of Staff, S (Room 10000)
Office of General Counsel, C (Room 10214)
Assistant Secretary for Housing/FHA, H (Room 9100)
Assistant Secretary for Public & Indian Housing, P (Room 4100)
Office of Policy Development and Research (Room 8100)
Assistant Secretary for FHEO, E (Room 5100)
Assistant Secretary for Congressional and Intergovernmental Relations, J (Room 10120)
Assistant Secretary for Administration, A (Room 10110)
Assistant Secretary for Public Affairs, W (Room 10222)
FTW ALO, AF (2)
CPD ALO, DOT (Room 7220) (2)
Dept. ALO, FM (Room 2206) (2)
Acquisitions Librarian, Library, AS (Room 8141)
Director, Hsg. & Comm. Devel. Issues, US GAO, 441 G St. NW, Room 2T23
      Washington, DC 20548 Attn: Stan Czerwinski
Henry A. Waxman, Ranking Member, Committee on Govt Reform,
      House of Rep., Washington, D.C. 20515
The Honorable Fred Thompson, Chairman, Committee on Govt Affairs,
      U.S. Senate, Washington, D.C. 20510
The Honorable Joseph Lieberman, Ranking Member, Committee on Govt Affairs,
      U.S. Senate, Washington, D.C. 20510
Cindy Fogleman, Subcomm. on Gen. Oversight & Invest., Room 212,
      O'Neill House Ofc. Bldg., Washington, D.C. 20515
The Honorable Dan Burton, Chairman, Committee on Govt Reform,
      House of Representatives, Washington, D.C. 20515
Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug Policy & Human
      Resources, B373 Rayburn House Ofc. Bldg., Washington, D.C. 20515
Steve Redburn, Chief, Housing Branch, Office of Management and Budget
      725 17th Street, NW, Room 9226, New Exec. Ofc. Bldg., Washington, D.C. 20503
Andrew R. Cochran, Sr. Counsel, Committee on Financial Services,
       House of Representatives, Washington, D.C. 20515
Inspector General, G
Mayor, City of San Antonio
City Manager, City of San Antonio

                                               Page 51                              2001-FW-1004
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Texas State Auditor
Bennett, San Antonio Current




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