oversight

Department of Housing and Community Development Review of Subrecipient Selection, Monitoring and Reporting Kansas City, Missouri

Published by the Department of Housing and Urban Development, Office of Inspector General on 2001-07-09.

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

                           AUDIT REPORT




            Office of Inspector General
           Office of Audit, Great Plains               City Auditor’s Office
U.S. Department of Housing and Urban Development   City of Kansas City, Missouri
          Report Number 2001-KC-1004                 Report Number 16-2001




                REVIEW OF SUBRECIPIENT
         SELECTION, MONITORING AND REPORTING


                       CITY OF KANSAS CITY
                   DEPARTMENT OF HOUSING AND
                    COMMUNITY DEVELOPMENT


                          KANSAS CITY, MISSOURI
                              JULY 9, 2001



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                                             Issue Date
                                          July 9, 2001


                                        OIG Audit Case Number
                                         2001-KC-1004
                                         CAO Project Number
                                             16-2001




TO:       William B. Rotert                                     Stanley Barrett
          Director, Community Planning and                      Director of the Department of Housing
           Development, 7AD                                      and Community Development
          U.S. Department of Housing and Urban                  Kansas City, Missouri
           Development




FROM:     Roger E. Niesen, District Inspector General           Mark Funkhouser
           for Audit, 7AGA                                      City Auditor
          U.S. Department of Housing and Urban                  Kansas City, Missouri
           Development


SUBJECT:       Department of Housing and Community Development
               Review of Subrecipient Selection, Monitoring and Reporting
               Kansas City, Missouri

We have completed an audit of the Department of Housing and Community Development of the
City of Kansas City, Missouri (City). The audit was the second joint effort between the local Office
of Inspector General, U.S. Department of Housing and Urban Development (HUD) and the City
Auditor’s Office of Kansas City, Missouri. The first report, “Kansas City Needs a Housing Policy,”
was issued in April 2000. This report focuses on the activities of the City’s Department of Housing
and Community Development and its use of subrecipients to accomplish housing-related program
objectives administered with HUD funds.

The overall objectives of our audit were to determine whether the City is adequately ensuring that
HUD funds are administered in an efficient and effective manner, and in accordance with
applicable rules, regulations and guidance. More specifically, our objectives were to determine
whether the: (1) City actively and effectively monitors its subrecipients, (2) results reported to the
City by subrecipients are adequately supported, and (3) results of the City’s housing efforts,
through its subrecipients, are accurately and completely reported to City administrators.



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                                                                           Management Memorandum


We found the City does not have a formal process for selecting subrecipients, does not adequately
monitor subrecipients, and does not provide adequate information to the City Council.

For recommendations to HUD, we request that within 60 days, the Director of Community
Planning and Development provide to the Office of Inspector General, for each recommendation in
this report, a status report on: (1) the corrective action taken; (2) the proposed corrective action and
the date to be completed; or (3) why action is considered unnecessary. Also, please furnish the
Office of Inspector General copies of any correspondence or directives issued because of the audit.

For recommendations to the City, the Director of the Department of Housing and Community
Development must submit the audit tracking report to the City Manager six months after the audit
report is released by the City Auditor. Subsequent audit tracking reports must be submitted to the
City Manager’s Office every six months until all recommendations are resolved or a follow-up
audit is conducted.

Should you or your staff have any questions, please contact Roger Niesen at (913) 551-5870 or
Mark Funkhouser at (816) 513-3300.




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Executive Summary
We have completed an audit of the Department of Housing and Community Development of the
City of Kansas City, Missouri (City). The audit was the second joint effort between the local Office
of Inspector General, U.S. Department of Housing and Urban Development (HUD) and the City
Auditor’s Office of Kansas City, Missouri. The first report, “Kansas City Needs a Housing Policy,”
was issued in April 2000.

This report focuses on the activities of the City’s Department of Housing and Community
Development and its use of subrecipients to accomplish housing-related program objectives
administered with HUD funds. The overall objectives of our audit were to determine whether the
City is adequately ensuring that HUD funds are administered in an efficient and effective manner,
and in accordance with applicable rules, regulations and guidance. More specifically, our
objectives were to determine whether the: (1) City actively and effectively monitors its
subrecipients, (2) results reported to the City by subrecipients are adequately supported, and (3)
results of the City’s housing efforts, through its subrecipients, are accurately and completely
reported to City administrators.

We found the City does not have a formal process for selecting subrecipients, does not adequately
monitor subrecipients, and does not provide adequate information to the City Council.

Because the City does not have a formal selection process, HUD, the Mayor, the City Council and
the public lack assurance that Federal grants are awarded according to applicable regulations and
guidelines, and in an efficient, effective and fair manner. Moreover, the City’s selection process
lacks accountability and does not offer the City any defense against occurrences or allegations of
favoritism or improper influence.

The lack of adequate monitoring causes a lack of assurance that subrecipients are accomplishing
their specific goals related to improving communities in Kansas City, Missouri. In addition,
because City housing officials do not provide adequate information to the City Council, HUD,
the Mayor, the City Council, and the public lack assurance that Federal grants are awarded to
organizations that best serve the housing and community development needs of Kansas City,
Missouri. Moreover, this process lacks accountability and can lead to a public perception that
awards are arbitrary or unjust.



                                      The City awarded more than $85 million in HUD funds
 City Housing Officials Do            from 1998 through 2001, and yet City housing officials do
 Not Have a Formal                    not have a formal process to evaluate applications for HUD
 Process for Selecting                funds. Specifically, City housing officials do not document
 Subrecipients                        their evaluation process, reasons for selecting or rejecting
                                      applicants, or justification for the amounts recommended
                                      for award to the selected subrecipients. City housing
                                      officials said they do not consider it a priority to document
                                      their deliberations and final decisions for funding

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                            subrecipients. Additionally, one City housing official said
                            the deliberations are too sensitive to record because City
                            documents are open to public scrutiny. As a result, HUD,
                            the Mayor, the City Council, and the public have no
                            assurance that Federal grants are awarded according to
                            applicable regulations and guidelines, and in an efficient,
                            effective and fair manner. Moreover, this process lacks
                            accountability and does not offer the City any defense
                            against occurrences or allegations of favoritism or improper
                            influence (see Finding 1).

                            The City awarded $60 million in HUD funds from 1998
City Housing Officials Do   through 2000, but City housing officials did not adequately
Not Adequately Monitor      monitor the subrecipients that received those funds. City
Subrecipients               housing officials do not have policies and procedures to
                            ensure adequate monitoring of subrecipients and proper
                            action by City officials if performance standards are not
                            met.     The U.S. Department of Housing and Urban
                            Development has continually expressed similar concerns to
                            City housing officials since early 1997. Although City
                            housing officials have taken action in recent years aimed at
                            oversight improvements, these efforts were limited and
                            oversight is still not adequate. Oversight is not adequate
                            because City housing officials do not consider it a priority
                            to conduct comprehensive, well-documented reviews of
                            subrecipient performance. As a result, HUD, the Mayor,
                            the City Council, and the public lack assurance that
                            subrecipients are accomplishing their specific goals related
                            to improving communities in Kansas City, Missouri. They
                            also lack assurance that Federal grants were used
                            efficiently, effectively and according to applicable
                            regulations and guidelines (see Finding 2).

                            City housing officials do not provide information to the
City Housing Officials Do   City Council necessary to make defendable, fully informed
Not Provide Adequate        decisions when awarding HUD funds. The City awarded
Information to the City     more than $85 million in HUD funds from 1998 through
Council                     2001 without adequate information on which to base its
                            decisions. City housing officials said they provide the
                            information they deem necessary or that is specifically
                            requested by the City Council. City housing officials
                            consider this information adequate for Council members to
                            make decisions. However, this information is limited in
                            scope and is not presented in a comprehensive package. As
                            a result, HUD, the Mayor, the City Council, and the public

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                          lack assurance that Federal grants are awarded to
                          organizations that best serve the housing and community
                          development needs of Kansas City, Missouri. Moreover,
                          this process lacks accountability and can lead to a public
                          perception that awards are arbitrary or unjust (see Finding
                          3).

                          We recommend the Director of the Department of Housing
Recommendations for the   and Community Development establish and implement a
City                      formal selection process for awarding Federal grants to
                          subrecipients, written policies and procedures for oversight
                          of subrecipients, and adequate, standardized information
                          packages for the City Council to use in making funding
                          decisions. We further recommend the Director establish
                          and implement standardized periodic reporting to the City
                          Council to keep Council members updated on subrecipient
                          progress throughout the contract year, and an in-house
                          mechanism to provide accurate subrecipient progress
                          information to City administrators.

                          We recommend the Director of Community Planning and
Recommendations for       Development ensure the City follows the aforementioned
HUD                       recommendations, or if the City fails to do so within the
                          reasonable timeframes recommended, consider imposing
                          appropriate administrative sanctions.

                          We provided a copy of this report to the City’s Director of
                          the Department of Housing and Community Development
                          for comment on May 7, 2001. We received the Director’s
                          initial written comments on May 30, 2001 and final
                          comments on June 14, 2001. The final comments are
                          incorporated into the Findings as appropriate and included
                          in their entirety in Appendix A. We also provided a copy
                          of this report to HUD’s Director of Community Planning
                          and Development of the Kansas City, Kansas office.




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Table of Contents

Management Memorandum                                                              i



Executive Summary                                                                iii



Introduction                                                                      1



Findings

1. City Housing Officials Do Not Have a Formal Process for Selecting
        Subrecipients                                                              4

2. City Housing Officials Do Not Adequately Monitor Subrecipients                  9

3. City Housing Officials Do Not Provide Adequate Information to the
        City Council                                                              24



Management Controls                                                                31



Follow Up On Prior Audits                                                          33



Appendices
   A    Auditee Comments                                                           34

   B    Distribution                                                               38




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Introduction
Each year, the City of Kansas City, Missouri (City) uses millions in HUD funds, particularly
Community Development Block Grants and HOME Investment Partnerships Program funds, to
address its housing needs. For 2001, the City awarded $25 million to address its housing needs. Of
this amount, HUD provided $15 million in block grants and HOME funds. To receive block grant
and HOME funds, Federal regulations require cities to develop a document that assesses various
housing needs in their community, and which designs affordable, special-needs housing strategies
and action programs to meet those needs. The City of Kansas City, Missouri develops this
document, the “Consolidated Housing and Community Development One-Year Action Plan and
Five-Year Plan,” obtains City Council approval, and submits the plan to HUD for final approval
each year. The One-Year Action Plan serves as a guide for allocating available resources toward
programs and projects that promote the City’s overall housing and community development goals
and objectives.

Recipients of block grant and HOME funds, such as the City, are responsible for grant
administration. Recipients may perform work directly through their own staff or indirectly through
contractors and subrecipients. Subrecipients are public or private non-profit agencies, authorities or
organizations receiving funds from the recipient to undertake activities eligible for assistance under
the HUD programs. The City of Kansas City, Missouri uses subrecipients extensively, and has for
many years. The City obtains its subrecipients through an application process conducted each year.
The City publishes its “Citizen Participation Plan and Application Guide to the Consolidated
Housing and Community Development Plan” each year. The guide describes how citizens,
organizations, non-profit corporations, and for-profit businesses can be involved in the planning,
development, implementation and monitoring of the City’s Consolidated Plan. The City accepts
applications from interested parties and the City’s Department of Housing and Community
Development is responsible for reviewing applications for block grant and HOME funds. This
department selects and recommends to the City Council the subrecipients to receive the Federal
funds. The department is also responsible for monitoring the subrecipients’ administration of the
City’s block grant and HOME funds. This audit report focuses on the Department of Housing and
Community Development’s selection and monitoring of subrecipients, and reporting to City
administrators on subrecipient accomplishments.



                                       The overall objectives of our audit were to determine
 Audit Objectives                      whether the City is adequately ensuring that HUD funds are
                                       administered in an efficient and effective manner, and in
                                       accordance with applicable rules, regulations and guidance.
                                       More specifically, our original objectives were to determine
                                       whether the:
                                              • City actively and effectively monitors its
                                                  subrecipients.
                                              • overall results the City accomplished in providing
                                                  housing with HUD-related funds are reasonable
                                                  in relation to the funds expended.

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                                                                    Introduction


                         •     results reported to the City by subrecipients are
                               adequately supported.
                         •     results of the City’s housing efforts, through its
                               subrecipients, are accurately and completely
                               reported to City administrators.
                         •     results comply with the City’s housing needs as
                               defined in the City’s plans.

                  We were not able to accomplish 2 of our 5 objectives.
                  Because the use of funds is not specifically categorized by
                  subrecipients to correlate with block grant and HOME funds,
                  we were not able to determine if the overall results the City
                  accomplished in providing housing with HUD-related funds
                  is reasonable in relation to the funds expended. During our
                  audit, we determined that subrecipients receive funding from
                  many sources in addition to HUD block grant and HOME
                  funds. The subrecipients combine the funds from various
                  sources and use the funds to meet administrative and
                  operations costs, accomplish housing production needs, and
                  provide economic development opportunities and
                  community outreach services. Therefore, we could not
                  determine the true cost of subrecipient efforts in relation to
                  HUD funds.

                  In addition, because the City has not yet adopted a housing
                  policy, we could not determine whether the results of
                  subrecipient efforts comply with the City’s housing plans.
                  In April 2000, the Office of Inspector General and the City
                  Auditor’s Office of Kansas City, Missouri issued a report
                  stating the City needs a housing policy. The City currently
                  bases its housing strategy on what is contained in its
                  Consolidated Housing and Community Development Plan.
                  This Plan includes only vague descriptions of the City’s
                  housing strategies.

                  We performed our on-site work from December 2000
Audit Scope and   through April 2001. To meet our audit objectives, we
Methodology       interviewed HUD program staff, City staff, and a City
                  Council member. We reviewed the City’s contract files,
                  subrecipient reimbursement requests and supporting
                  documentation, subrecipient applications for funding, City
                  recommendations for funding, the City’s Consolidated
                  Housing and Community Development Plans, and housing
                  production reports provided to City administrators. We
                  also reviewed the City’s subrecipient monitoring files,

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                                              Introduction


subrecipients’ audited financial statements, monthly and
annual progress reports, and the City’s in-house monitoring
reports and related correspondence. We also viewed four
videotaped meetings of the City’s Planning, Zoning and
Economic Development Committee during which the
Committee deliberated over the “2001 Consolidated
Housing and Community Development Plan.”

We performed on-site reviews of five subrecipients.
During these reviews, we interviewed subrecipient staff,
reviewed Board of Directors’ minutes, and reviewed
supporting documentation related to the subrecipients’ use
of Federal funds. For one subrecipient, we also assessed
the controls over its management information system.

The audit covered funding years 1998 and 1999, and was
adjusted as necessary.    We conducted the audit in
accordance with generally accepted government auditing
standards.




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                                                                                         Finding 1


  City Housing Officials Do Not Have a Formal
       Process for Selecting Subrecipients
The City awarded more than $85 million in HUD funds from 1998 through 2001, and yet City
housing officials do not have a formal process to evaluate applications for HUD funds.
Specifically, City housing officials do not document their evaluation process, reasons for
selecting or rejecting applicants, or justification for the amounts recommended for award to the
selected subrecipients. City housing officials said they do not consider it a priority to document
their deliberations and final decisions for funding subrecipients. Additionally, one City housing
official said the deliberations are too sensitive to record because City documents are open to
public scrutiny. As a result, HUD, the Mayor, the City Council, and the public lack assurance
that Federal grants are awarded according to applicable regulations and guidelines, and in an
efficient, effective and fair manner. Moreover, this process lacks accountability and does not
offer the City any defense against occurrences or allegations of favoritism or improper influence.



                                     The City’s use of Community Development Block Grants
                                     and HOME Investment Partnerships Program funds is
                                     governed by several sections of the Code of Federal
                                     Regulations (CFRs), the Office of Management and Budget
                                     Circular A-87, and guidance developed by HUD.

                                     24 CFR Part 85.20 states that the financial management
 HUD Requirements                    systems of grantees and subgrantees must meet internal
                                     control standards. The regulation also says that effective
                                     control and accountability must be maintained for all grant
                                     and subgrant cash, real and personal property, and other
                                     assets.

                                     24 CFR Part 85.22 (b) requires State, local, and Indian tribal
                                     governments to follow the Office of Management and
                                     Budget Circular A-87, “Cost Principles for State and Local
                                     Governments.” The City of Kansas City, Missouri is a local
                                     government according to 24 CFR Part 85.3.

                                     Office of Management and Budget Circular A-87,
 Office of Management                Attachment A, paragraph A(2)(a)(1) states that governmental
 and Budget Requirements             units are responsible for the efficient and effective
                                     administration of Federal awards through the application of
                                     sound management practices.




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                                                                                 Finding 1


                           HUD Guidebook, “A Guidebook for Grantees and
Other HUD Guidance         Subrecipient    Oversight    –    Managing      Community
                           Development Block Grants,” dated August 1993 states that a
                           thoughtful pre-award assessment of potential subrecipients
                           can:
                               • reduce the risk of major problems later on, and
                               • increase the chances for success.

                           The guidebook provides a checklist of criteria for selecting
                           subrecipients and assessing risk, and says that a grantee
                           should use such criteria to determine whether a prospective
                           subrecipient has the necessary systems in place for the
                           Federal requirements that impact the type of activity being
                           proposed. The guidebook also provides a risk analysis
                           matrix that can be used to guide the selection process.
                           Further, regardless of the selection approach used, grantees
                           are encouraged to make selection criteria explicit and, as
                           much as possible, to tie the criteria directly to the block grant
                           program requirements. This will serve several purposes,
                           among them:
                               • by presenting the criteria explicitly at the beginning
                                   of the process, you can reduce the number of
                                   questions which may arise over the objectivity and
                                   fairness of your assessments; and
                               • by tying the criteria to the Federal program
                                   requirements, grantees can begin to educate
                                   prospective subrecipients and the community at large
                                   about the regulatory constraints that limit how the
                                   grantee operates the local block grant program.

                           City housing officials do not have a formal process to
Formal Selection Process   review and select applications for award of block grant and
Does Not Exist             HOME funds. Although City housing officials conduct a
                           formal process for obtaining applications for the funding,
                           they do not document their evaluation process or reasons
                           for selecting or rejecting individual applications received.
                           Further, City housing officials do not document their
                           justification for the amounts and recipients recommended
                           for award (also see Finding 3).

                           We reviewed the 44 applications submitted for 2001 block
                           grant and HOME funds and found notations indicating City
                           housing staff reviewed 10 of the 44 applications. We found
                           no evidence the staff reviewed the remaining 34
                           applications. City housing officials confirmed that no

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                           formal process is used to select the applicants to receive
                           funding. Instead, City housing officials hold internal
                           meetings to discuss the applications and make decisions
                           regarding which applications to fund and for what amount.
                           City housing officials do not ensure consistent and fair
                           consideration of applications because they do not use an
                           evaluation form, checklist, risk analysis, or rating system.

                           We also noted that 3 of the 44 applications were considered
                           for funding even though they were not date stamped by the
                           City housing staff to show they were submitted by the
                           application deadline.       The City funded 2 of the 3
                           applications, for a total of $90,000.

                           The City solicits applicants through its “Citizen
Application Guide is       Participation Plan and Application Guide to Kansas City,
Available                  Missouri’s Consolidated Housing and Community
                           Development Plan.” The guide describes how citizens,
                           organizations, non-profit corporations, and for-profit
                           businesses can be involved in the planning, development,
                           implementation, and monitoring of Kansas City’s
                           Consolidated Plan. The guide also explains the application
                           process that interested parties are to use when applying for
                           funding of activities to meet the City’s needs.

                           For block grant funds, the guide describes the City’s
                           general strategies, goals and objectives for housing and
                           community development, and sets forth funding priorities
                           and generalized selection criteria. Although the guide
                           provides basic block grant selection criteria and states that
                           each proposal will be reviewed to determine the extent to
                           which the project or program meets the criteria, the guide
                           does not explain the City’s specific evaluation process or
                           the level of importance placed on each of the criteria.

                           For HOME funds, the guide describes the general purposes
                           of the HOME Program, and directs a majority of such
                           funding to a current subrecipient, the City’s lender. The
                           remainder is set aside, per Federal regulations, for qualified
                           Community Housing Development Organizations.

                           City housing officials do not consider the development of a
Formal Selection Process   formal selection process a priority. They indicated resources
Not a Priority             are better used to accomplish program objectives rather than
                           document them. One housing official said deliberations were

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                          documented in the past, but were discontinued because they
                          were too sensitive to be open to public scrutiny. We believe
                          documented deliberations are an important control that helps
                          ensure efficient and equitable use of funds, and that public
                          scrutiny is an important factor that contributes to proper use
                          of Federal funds.

                          Formal selection and funding processes, including systems
 Formal Selection and     to ensure consistency and equal consideration of applicants,
 Funding Process Needed   are necessary to provide HUD, the Mayor, the City Council,
                          and the public assurance that Federal grants are awarded
                          according to applicable regulations and guidelines, and in
                          an efficient, effective and fair manner. Formal selection
                          and funding processes also help ensure accountability and
                          provide the City a defense against occurrences or
                          allegations of favoritism or improper influence.



Auditee Comments          The Director of the Department of Housing and Community
                          Development of the City of Kansas City, Missouri responded
                          to our draft report with written comments. Excerpts from
                          these comments follow. Appendix A contains the complete
                          text of the comments.

                          The City’s Department of Housing and Community
                          Development concurs with developing an additional step to
                          add a written analysis for each application for funding, which
                          will evaluate the application against the criteria published in
                          the Citizens Guide. This procedure will be implemented in
                          the next annual planning cycle commencing September
                          2001.



Evaluation of Auditee     The actions the City’s housing officials intend to take should
Comments                  ensure consistency and equal consideration of applicants if
                          the written analysis is completed on all applications, and
                          City staff fully document in writing their recommendations
                          for each application, including justification for the amount
                          of funding (if any) recommended.




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                                                                         Finding 1




Recommendation for   We recommend the Director of the Department of Housing
the City             and Community Development of the City of Kansas City,
                     Missouri:

                     1A.     Establish and implement a formal selection process
                             for awarding Federal grants to subrecipients before
                             the next funding cycle. This process should
                             include:
                             (1) a mechanism, such as an evaluation form, risk
                                  analysis, or rating system, that ensures each
                                  applicant receives equal consideration in
                                  relation to the specific list of criteria
                                  established.
                             (2) a requirement to fully document its reasons for
                                  recommending or rejecting funding to each
                                  applicant, and the amount of funding
                                  recommended for award.



Recommendation for   We recommend the Director of Community Planning and
HUD                  Development ensure the City of Kansas City, Missouri:

                     1A.     Establishes and implements a formal selection
                             process for awarding Federal grants to
                             subrecipients, or if the City fails to do so within the
                             reasonable timeframe recommended, consider
                             imposing appropriate administrative sanctions.




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                                                                                       Finding 2


     City Housing Officials Do Not Adequately
              Monitor Subrecipients
The City awarded $60 million in HUD funds from 1998 through 2000, but City housing officials
did not adequately monitor the subrecipients that received those funds. City housing officials do
not have policies and procedures to ensure adequate monitoring of subrecipients and proper
action by City officials if performance standards are not met. The U.S. Department of Housing
and Urban Development has continually expressed similar concerns to City housing officials
since early 1997. Although City housing officials have taken action in recent years aimed at
oversight improvements, these efforts were limited and oversight is still not adequate. Oversight
is not adequate because City housing officials do not consider it a priority to conduct
comprehensive, well-documented reviews of subrecipient performance. As a result, HUD, the
Mayor, the City Council, and the public lack assurance that subrecipients are accomplishing their
specific goals related to improving communities in Kansas City, Missouri. They also lack
assurance that Federal grants were used efficiently, effectively and according to applicable
regulations and guidelines.



                                     The City’s use of Community Development Block Grants
                                     and HOME Investment Partnerships Program funds is
                                     governed by several sections of the Code of Federal
                                     Regulations (CFRs), the Office of Management and Budget
                                     Circular A-87, and guidance developed by HUD.

                                     24 CFR Part 85.20 states that the financial management
 HUD Requirements                    systems of grantees and subgrantees must meet internal
                                     control standards. The regulation also says that effective
                                     control and accountability must be maintained for all grant
                                     and subgrant cash, real and personal property, and other
                                     assets.

                                     24 CFR 85.40(a) says grantees are responsible for managing
                                     the day-to-day operations of grant and subgrant supported
                                     activities. Grantees must monitor grant and subgrant
                                     supported activities to assure compliance with applicable
                                     Federal requirements and that performance goals are being
                                     achieved. Grantee monitoring must cover each program,
                                     function, or activity.

                                     24 CFR 570.501(b) says the grantee is responsible for
                                     ensuring that Community Development Block Grant funds
                                     are used in accordance with all program requirements. The

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                                                                              Finding 2


                          use of subrecipients does not relieve the recipient of this
                          responsibility.   The recipient is also responsible for
                          determining the adequacy of the performance under
                          subrecipient agreements and for taking appropriate action
                          when performance problems arise.

                          24 CFR 92.504(a) says the participating jurisdiction is
                          responsible for managing the day-to-day operations of its
                          HOME program, ensuring that HOME funds are used in
                          accordance with all program requirements and written
                          agreements, and taking appropriate action when performance
                          problems arise. The use of State recipients, subrecipients, or
                          contractors does not relieve the participating jurisdiction of
                          this responsibility. The performance of each subrecipient
                          and contractor must be reviewed at least annually.

                          24 CFR Part 85.22 (b) requires State, local, and Indian tribal
                          governments to follow the Office of Management and
                          Budget Circular A-87, “Cost Principles for State and Local
                          Governments.” The City of Kansas City, Missouri is a local
                          government according to 24 CFR Part 85.3.

                          Office of Management and Budget Circular A-87,
Office of Management      Attachment A, paragraph A(2)(a)(1) states that governmental
and Budget Requirements   units are responsible for the efficient and effective
                          administration of Federal awards through the application of
                          sound management practices.

                          HUD Guidebook, “A Guidebook for Grantees and
Other HUD Guidance        Subrecipient    Oversight   –    Managing      Community
                          Development Block Grants,” dated August 1993 says
                          monitoring can be aimed simultaneously at:
                              • meeting program regulations,
                              • measuring progress toward performance goals, and
                              • improving the product or service being delivered.

                          The guidebook also says that monitoring should not be a
                          “one-time event.” To be an effective tool for avoiding
                          problems and improving performance, monitoring must
                          involve an on-going process of planning, implementation,
                          communication, and follow-up.

                          Grantees should develop a monitoring plan so resources can
                          be matched with the needs and capacity of the subrecipients.
                          In addition to the questions of how often and how thoroughly

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                         to monitor, the monitoring plan should specify when the
                         grantee expects to visit each subrecipient. The monitoring
                         plan should also specify the particular items or documents
                         the grantee will examine in the course of each visit. To
                         ensure that grantees examine the correct items for the activity
                         area in question, as well as to promote thoroughness and
                         consistency in monitoring, it is helpful to use standardized
                         monitoring checklists or workbooks for on-site reviews. The
                         checklist should also specify the steps to follow in the site
                         inspection or file review to measure compliance.

                         The guidebook also identifies the three most important
                         strategies for effective monitoring as:
                              • on-site field visits,
                              • open communications, and
                              • assisting subrecipients in creating good record-
                                  keeping systems.

                         Grantees should keep a clear written record of the steps
                         followed and the information reviewed during the on-site
                         visit. Grantees should also document any conversations with
                         subrecipient staff. Grantees will find this information
                         invaluable in analyzing information, developing conclusions
                         from the monitoring visit, and explaining the basis for any
                         findings that appear in monitoring letters. Being able to
                         identify the sources of the information used to arrive at
                         conclusions is particularly important if the subrecipient
                         disputes any of the findings.

                         City housing officials do not adequately monitor
Monitoring Efforts Are   subrecipients receiving block grants and HOME funds.
Not Adequate             Specifically, City housing officials have not established and
                         implemented written policies and procedures to ensure City
                         housing staff adequately monitor subrecipients and take
                         appropriate action when performance standards are not met.
                         Further, City housing officials do not adequately validate
                         subrecipients’ reported progress, which could be
                         accomplished by conducting sufficient on-site reviews.

                         We reviewed the City’s monitoring files for contract years
                         1998 and 1999 for five subrecipients. We evaluated the
                         files to determine whether City housing officials ensured
                         monthly performance reports were submitted, reviewed and
                         followed up on when necessary; and whether City housing
                         officials adequately verified the reported progress. We

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found problems with the City housing officials’ monitoring
efforts in all five cases. For example:

The City awarded one subrecipient Federal funds totaling
$30,000 for contract years 1998 and 1999 to conduct an 8-
week summer youth camp. Although the subrecipient
submitted a report for each year summarizing the specific
activities and progress of the camp, the monitoring file for
1998 showed no indication of review of the report or any
other oversight efforts by City housing staff.          The
monitoring files indicated City housing officials reviewed
the 1999 progress report, but there was no evidence of other
actions, such as on-site reviews, to verify the accuracy of
the report.

We noted a discrepancy between the 1998 progress report
and the documentation supporting use of the Federal funds.
The 1998 progress report showed 130 participants attended
the camp while expenditure documents showed the
subrecipient paid the camp for 176 participants, indicating a
potential overpayment of Federal funds to the camp. City
housing officials received both the 1998 progress report and
the expenditure documentation and should have identified
the discrepancy and disallowed reimbursement until the
discrepancy was resolved.

The 1999 progress report and the documentation supporting
use of the Federal funds also indicated discrepancies that
were not identified and resolved by City housing staff. The
report indicated 130 participants attended the camp while
expenditure documents showed the camp was paid for only
98 youth. Although this discrepancy did not indicate
overpayment of Federal funds, City housing staff should
have questioned the validity of the progress report and
whether Federal funds were used to provide services to as
many youth as claimed by the subrecipient.

The City awarded another subrecipient Federal funds of
$10,677,000 for contract year 1998 and $13,815,500 for
contract year 1999 to perform numerous housing-related
services as the City’s lender. We determined that the
subrecipient did not submit monthly progress reports, as
required in its contract, but instead submitted one report for
contract year 1998 that covered the first ten months of the
contract year. For contract year 1999, the subrecipient

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                           submitted sporadic, interim reports that covered different
                           activities and different time periods. Further, except for
                           two instances, we found no evidence City housing officials
                           reviewed the interim reports.

                           In addition to inadequate in-house monitoring of reports
Validation of Reported     submitted by subrecipients, City housing officials did not
Progress is Not Adequate   adequately validate subrecipients’ reported progress, which
                           could be accomplished by conducting sufficient on-site
                           reviews. City housing officials had no documentation to
                           support on-site visits, with the exception of minor notations
                           indicating visits were accomplished. The notations provided
                           little or no details of the intent or results of the reviews.

                           Our on-site reviews revealed that subrecipients could not
                           fully support the results reported to City housing officials
                           for the 1998 and 1999 contract years. As a result, we
                           concluded that City housing staff relied too heavily on the
                           subrecipients’ self-reported monthly progress reports and
                           did not make sufficient effort to validate the reports. For
                           example:

                           The City awarded one subrecipient Federal funds of
                           $282,000 for contract year 1998 and $225,000 for contract
                           year 1999 to provide program coordination and services in
                           support of rehabilitation and redevelopment activities. Of
                           the 31 activities assigned to the subrecipient in the two
                           contract years, the subrecipient adequately supported only 19
                           of the activities. For example, the subrecipient could not
                           fully support that it assisted 45 individuals with applications
                           for City programs, or that warranty/punch lists were
                           completed for 20 houses. The subrecipient could not fully
                           support reported results because it either did not accomplish
                           them or did not retain detailed records to support that it had
                           accomplished them.

                           The City awarded another subrecipient Federal funds of
                           $225,000 in program year 1998 and another $225,000 in
                           program year 1999 to provide program coordination and
                           services in support of rehabilitation and redevelopment
                           activities. The subrecipient could not produce sufficient
                           documentation to fully support reported results for contract
                           years 1998 and 1999. Although the subrecipient adequately
                           supported progress reported for its multi-family housing,
                           community development, economic development, and

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neighborhood support service activities, the subrecipient did
not adequately support reported progress related to single-
family housing production. For example, the subrecipient
could not fully support the dates construction ended or the
dates of individual property sales. Because the monthly
progress reports submitted by the subrecipient did not always
contain property addresses when summarizing work
completed, the subrecipient was not able to specifically
identify the housing units counted/reported on in its progress
reports.

The subrecipient attempted to support the progress reports by
providing us with spreadsheets that tracked housing
production information for single-family new construction
and rehabilitation. The Executive Director told us she used
the spreadsheet data in reporting on the housing production
in the monthly progress reports to City housing officials.
We attempted to verify the data on the spreadsheet, but found
numerous discrepancies between the spreadsheet data and the
subrecipient’s project files. In general, the project files did
not provide an adequate audit trail of the activities taking
place on a unit and we could not rely on the spreadsheets as
support for the progress reports submitted to City housing
officials. Moreover, because progress was reported without
specific detail, such as addresses, individual housing units
could have been reported in more than one contract year. We
were not able to verify whether the subrecipient’s actual
accomplishments were correctly reported or had been
overstated.

As previously indicated, the City awarded another
subrecipient Federal funds of $10,677,000 for contract year
1998 and $13,815,500 for contract year 1999 to perform
numerous housing-related services as the City’s lender.
City housing officials said they monitor this subrecipient
primarily by attending its monthly Board of Directors’
meetings and reviewing the monthly Board reports and
attachments. However, the subrecipient’s Board minutes
indicated City housing staff did not begin attending the
monthly Board meetings until February 2000. Further,
merely attending Board meetings provides no assurance
that proper procedures are followed and funds are
effectively used.




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                       The monitoring files provided other evidence of oversight
                       efforts and communications with the subrecipient, such as
                       correspondence between City housing officials and the
                       subrecipient and internal City memorandums. However,
                       this documentation was sporadic and typically pertained to
                       financial issues, not the overall progress of the subrecipient
                       toward meeting its housing-related performance standards.
                       We identified no other evidence of review by City housing
                       staff.

                       Our on-site review of this subrecipient also raised other
                       concerns. This subrecipient administers a majority of the
                       block grant and HOME funds awarded to the City each
                       year.     As such, City housing officials rely on this
                       subrecipient     for     data    on     housing  production
                       accomplishments. We noted that the subrecipient does not
                       have an integrated management information system. The
                       subrecipient creates numerous housing production reports
                       each month for its Board of Directors and City housing
                       officials. These reports are derived from the general ledger
                       accounting system, at least two stand-alone databases, and
                       several stand-alone spreadsheets. The maintenance of these
                       various systems, databases and spreadsheets requires
                       similar data entries in the various systems.

                       The duplication of systems and similar data entry increases
                       the risks of data errors and conflicting information, and
                       therefore diminishes the integrity of the housing production
                       data provided to its Board and City housing officials.
                       Because City housing staff rely on this subrecipient for
                       housing production data, City administrators may be
                       making decisions related to block grant and HOME funds
                       without having accurate data (also see Finding 3). City
                       housing officials said they had only recently become aware
                       of the subrecipient’s lack of an integrated management
                       information system. We believe City housing officials
                       would have recognized this risk much sooner had they
                       validated reported progress by conducting on-site reviews.

                       City housing staff said that when the Grants Monitoring
On-site Reviews Not    Division began in the Fall of 1998, City housing
Supported by Housing   management did not support performing on-site reviews of
Management             subrecipients. The division monitored subrecipients by
                       reviewing the annual financial statement audits and the
                       monthly progress reports submitted by the subrecipients.

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                       City housing staff said on-site reviews were conducted
                       occasionally, but with no pattern of consistency. City
                       housing managers provided no direction on the need for,
                       the frequency of, or documentation required for on-site
                       reviews. City housing staff said their managers requested
                       only an internal memorandum that summarized the site
                       visits. However, we did not find any such memorandums
                       in the monitoring files for the five subrecipients reviewed
                       in contract years 1998 and 1999.

                       Although HUD’s local program office and Office of
HUD Previously         Inspector General have continually expressed monitoring
Expressed Monitoring   concerns in recent years, City housing officials have not
Concerns               implemented a comprehensive monitoring system. In April
                       1997, HUD informed the City that its extensive use of
                       subrecipients required a significant measure of oversight by
                       the City in order to assure that activities were administered in
                       accordance with Federal requirements and that reasonable
                       performance goals were achieved. HUD also strongly
                       encouraged the City to use HUD guidance contained in “A
                       Guidebook for Grantees and Subrecipient Oversight –
                       Managing Community Development Block Grants” in the
                       day-to-day administration of its programs.

                       Specifically, HUD expressed concern that City housing
                       officials had not used a formal system of “risk analysis” to
                       target technical assistance and oversight to those agencies
                       and activities that were of greatest concern. HUD also
                       strongly encouraged the City to develop and implement a
                       comprehensive system of subrecipient management that
                       included elements described in the guidebook. HUD
                       extended its assistance to the City by offering to provide
                       technical assistance and training to establish and implement a
                       comprehensive monitoring system. HUD further noted that
                       City housing officials had not performed in-depth, on-site
                       monitoring of subrecipients, and recommended that the City
                       place a priority on routinely performing on-site monitoring.

                       In September 1998, HUD conducted a limited review and
                       found City housing officials had initiated some procedures to
                       strengthen its subgrantee monitoring efforts. These included:
                           • a monthly item-by-item written progress review of
                               performance measures in subrecipient contracts;
                           • pre-award training conferences with subrecipients to
                               review local and Federal requirements; and

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                           •   development of a three-person, in-house monitoring
                               division.

                        In December 1998, HUD’s Office of Inspector General
                        reported that City housing officials had not adequately
                        monitored the performance of two particular subrecipients
                        and recommended strengthening of monitoring procedures.

                        In August 2000, HUD reported that the City had
                        strengthened its subrecipient management and oversight
                        activities, with one important exception. City housing
                        officials had not conducted an in-depth monitoring review
                        of the City’s lender, the City’s largest and highest profile
                        subrecipient. HUD informed the City it was imperative for
                        the City to take immediate action. City housing officials
                        responded that while they may not have monitored this
                        subrecipient in the same manner as other subrecipients,
                        City housing staff attended the subrecipient’s monthly
                        Board of Directors’ meetings, and the monthly production
                        was reviewed in detail during these meetings. In this way,
                        staff monitored the subrecipient’s performance against
                        contract production goals in lieu of on-site monitoring.
                        HUD responded that while attendance at monthly Board
                        meetings may keep City housing officials apprised of the
                        subrecipient’s production, it did not provide any assurance
                        of the subrecipient’s compliance with applicable Federal
                        statutes and regulations.

                        Since the time of the 1997 HUD review, City housing
                        officials have been responsible for administering over $80
                        million in Federal block grant and HOME funds.

                        In response to HUD’s local program office and Office of
Improvements Made Are   Inspector General reports, City housing officials took steps
Not Adequate            to improve oversight of subrecipients. However, these
                        improvements were limited and are still not adequate to
                        ensure Federal funds are properly used. City housing
                        officials initially responded to HUD’s concerns by
                        establishing the Grants Monitoring Division within the
                        City’s Department of Housing and Community Development
                        in the Fall of 1998. However, City housing officials did not
                        establish and implement written policies and procedures to
                        guide the new division. As a result, the division does not
                        conduct consistent levels of oversight, perform sufficient
                        on-site reviews or consistently document oversight efforts.

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City housing officials originally staffed the Grants
Monitoring Division with four employees, but the staff
soon diminished to three. The division maintained a staff
of three employees until December 1999 when one
employee retired. City housing officials did not replace the
individual, but instead divided the job duties between the
two remaining employees until October 2000 when a third
staff member was again added. During the ten months the
division had only two staff members, the staff members
incurred additional duties when the City’s priority shifted
from subrecipient monitoring to fully implementing HUD’s
grant accounting system at the City. Division staff
members said the implementation of the system required
significant amounts of staff time to complete. We believe
the City’s failure to fully staff the division and the changes
in    priorities    from     subrecipient     monitoring    to
implementation of a HUD accounting system contributed to
the City’s inadequate monitoring efforts.

Another improvement the City made was in its
requirements for subrecipient reporting. City housing
officials required more subrecipient performance reporting
for the 1999 contract year than in 1998. In 1998, the
contract required subrecipients to submit only monthly
reports of the subrecipients’ performance progress
according to the contract performance standards. In 1999,
City housing officials expanded the requirements and
provided exhibits illustrating the expected reporting format.
Specifically, the 1999 contract required:
    • itemized lists of property and equipment purchased
        with funds provided in the contract.
    • monthly financial reports which included the budget
        and any amendments, the current month‘s
        expenditures, previous expenditures, and remaining
        balance available.
    • monthly performance reports that evaluated the
        subrecipients’ progress toward meeting the contract
        services and goals.
    • an annual performance report identifying
        accomplishments,       problems      or    conditions
        contributing to failure to perform services or
        achieve goals under the contract, and proposed
        changes to correct such failures.


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                   City housing officials also recently implemented an
                   evaluation form they created for conducting on-site visits.
                   Although the form addresses general subrecipient activities,
                   it does not address specific activities as detailed in the
                   HUD guidebook previously mentioned. The guidebook
                   contains an extensive checklist of items to verify when
                   conducting on-site reviews. However, the City’s form is
                   limited and not sufficient to ensure City housing officials
                   conduct adequate on-site reviews. City housing staff said
                   the Grants Monitoring Division recently set a goal of
                   conducting at least one on-site visit of each subrecipient
                   this year.

                   Although City housing officials have taken these actions to
                   improve monitoring in recent years, the culmination of
                   these efforts does not constitute an effective oversight
                   system. City housing officials created a Grants Monitoring
                   Division to improve subrecipient monitoring efforts, but
                   did not make sure the division had policies and procedures
                   to ensure adequate monitoring of subrecipients and proper
                   action by City housing staff if performance standards were
                   not met. As previously mentioned, City housing officials
                   also did not ensure the division had sufficient staff to
                   perform its duties adequately. Further, City housing
                   officials required more progress reports from subrecipients,
                   but increased subrecipient reporting is not an improvement
                   if there is no effort to ensure that subrecipient progress
                   reports are accurate.       Similarly, development of an
                   evaluation form is not effective unless it is sufficiently
                   detailed and site reviews are actually conducted.

                   HUD guidance was available in contract years 1998 and
HUD Guidance Was   1999, and is currently available to City housing officials for
Available          use in its monitoring efforts. For example, City housing
                   staff maintains HUD guidance such as “A Guidebook for
                   Grantees and Subrecipient Oversight – Managing
                   Community Development Block Grants,” dated August
                   1993. The guidebook provides valuable information on
                   how to implement a comprehensive system of subrecipient
                   oversight, including detailed examples of risk assessments,
                   checklists and suggestions for documenting oversight
                   efforts. City housing staff also maintains the “Community
                   Planning and Development Monitoring Handbook.”
                   Although the handbook is an internal HUD document,
                   HUD’s local office provided the handbook to the City to

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                           use as a tool in conducting reviews of subrecipients.
                           Further, City housing officials received training relative to
                           subrecipient monitoring and HUD’s local office offered,
                           and continues to offer, its assistance to the City in
                           establishing a comprehensive system of subrecipient
                           oversight. However, as previously indicated, City housing
                           officials still have not followed HUD’s guidance and
                           implemented a comprehensive oversight system to monitor
                           subrecipients.

                           City housing officials believe detailed documentation of
 Well-documented           oversight efforts is not a priority. They said recent
 Monitoring System Not a   improvements and ongoing correspondence and meetings
 Priority                  with subrecipients provide the necessary level of oversight
                           and that resources are better used to accomplish program
                           objectives rather than perform and document reviews.

                           We believe comprehensive, well-documented oversight
 Comprehensive             efforts are a major component of adequate control over the
 Monitoring System         use of funds awarded to subrecipients. Comprehensive
 Needed                    systems of oversight are necessary to ensure subrecipients
                           are using Federal funds efficiently, effectively and
                           according to applicable regulations and guidelines. A
                           comprehensive system also helps ensure resources are used
                           to improve Kansas City, Missouri’s communities.



Auditee Comments           The Director of the Department of Housing and Community
                           Development of the City of Kansas City, Missouri responded
                           to our draft report with written comments. Excerpts from
                           these comments follow. Appendix A contains the complete
                           text of the comments.

                           The City’s Department of Housing and Community
                           Development accepts the recommendations, which are fully
                           compatible with the current program design. During the past
                           year while transitioning to use of the federal IDIS reporting
                           system, the Department has substantially enhanced its
                           information database. This will result in more standardized
                           and detailed reporting by all subrecipients, including the
                           City’s lending agency, which is cited in the report. Effective
                           monitoring and continuing oversight for both users of funds
                           and projected results has always been a priority for the block
                           grant program. Monitoring should not be regarded as a

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                        “gotcha” exercise, but rather as an ongoing process to
                        strengthen program delivery and effectiveness. With the
                        commencement of the new contract year (June 2001), the
                        Department is codifying field monitoring procedures in one
                        document, with full implementation by the fully staffed three
                        person monitoring unit. Utilizing risk analysis, subrecipients
                        will be visited on a monthly, bi-monthly, or quarterly basis to
                        test and verify activity reports, provide technical assistance to
                        support the work of subrecipients as well as review of
                        accomplishments toward achieving overall contract goals.
                        The Department will consult with the local HUD office on a
                        continuing basis to refine its reporting systems with written
                        documentation of both site visit monitoring and technical
                        assistance provided by staff.

                        Since it is absent in the audit report, the record should note
                        that the block grant program has always required year-end
                        audit reports, performed by Certified Public Accountants, of
                        all subrecipient contracts. These audit reports provide
                        accountability of program funds as well as provide
                        determination that the subrecipient complied with the terms
                        and conditions of the contracts. Also, the audit reports
                        disclose any concerns or matters relating to the subrecipients’
                        accounting internal controls.           This procedure has
                        substantially contributed to the accountability and monitoring
                        of the program for 26 years. In addition, HUD requires a
                        detailed year-end activity report – both quantitative and
                        qualitative – which accounts for all expenditures and
                        accomplishments.



Evaluation of Auditee   The Director refers to enhancement of the Department’s
Comments                information database as a tool to ensure more standardized
                        and detailed reporting by all subrecipients. While we
                        recognize that the database exists, we did not evaluate its use
                        or effectiveness because it was not yet tested or implemented
                        by the time we completed our audit fieldwork in April 2001.
                        Although the database may ensure more standardized and
                        detailed reporting by all subrecipients, this does not reduce
                        the City’s responsibility to oversee and validate its
                        subrecipients’ reported progress.

                        The Director also refers to the Department’s reliance on year-
                        end audits performed by Certified Public Accountants as part

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                     of its monitoring efforts. While we agree that year-end
                     financial audits of subrecipients are an important element of
                     a comprehensive oversight system, these audits do not
                     address the efficient and effective use of Federal funds in
                     meeting program objectives. City housing officials need to
                     conduct their own reviews to ensure subrecipients comply
                     with applicable regulations and use Federal funds in the most
                     efficient and effective manner.

                     The City’s Department of Housing and Community
                     Development accepts our recommendations, which the
                     Director said are fully compatible with the Department’s
                     current program design. If the Director follows through on
                     our recommendations, such actions should help ensure
                     adequate control over the use of funds awarded to
                     subrecipients.



Recommendation for   We recommend the Director of the Department of Housing
the City             and Community Development of the City of Kansas City,
                     Missouri:

                     2A.      Establish and implement written policies and
                              procedures for oversight of subrecipients before the
                              next funding cycle. The policies should:

                              (1)    be based on HUD’s guidance.
                              (2)    include policies and procedures for oversight
                                     of the City’s subrecipients, including direction
                                     on actions to take when subrecipients fail to
                                     meet performance standards.
                              (3)    include specific guidance on validating
                                     reported progress through on-site reviews of
                                     subrecipients.



Recommendation for   We recommend the Director of Community Planning and
HUD                  Development ensure the City of Kansas City, Missouri:

                     2A.      Establishes and implements a comprehensive
                              system of subrecipient oversight acceptable to
                              HUD, or if the City fails to do so within the


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   reasonable timeframe recommended, consider
   imposing appropriate administrative sanctions.




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        City Housing Officials Do Not Provide
       Adequate Information to the City Council
City housing officials do not provide information to the City Council necessary to make defendable,
fully informed decisions when awarding HUD funds. The City awarded more than $85 million in
HUD funds from 1998 through 2001 without adequate information on which to base its decisions.
City housing officials said they provide the information they deem necessary or that is specifically
requested by the City Council. City housing officials consider this information adequate for
Council members to make award decisions. However, this information is limited in scope and is
not presented in a comprehensive package. As a result, HUD, the Mayor, the City Council, and the
public lack assurance that Federal grants are awarded to organizations that best serve the housing
and community development needs of Kansas City, Missouri. Moreover, this process lacks
accountability and can lead to a public perception that awards are arbitrary or unjust.



                                      The City’s use of Community Development Block Grants
                                      and HOME Investment Partnerships Program funds is
                                      governed by several sections of the Code of Federal
                                      Regulations (CFRs) and the Office of Management and
                                      Budget Circular A-87.

                                      24 CFR Part 85.20 states that the financial management
 HUD Requirements                     systems of grantees and subgrantees must meet internal
                                      control standards. The regulation also says that effective
                                      control and accountability must be maintained for all grant
                                      and subgrant cash, real and personal property, and other
                                      assets.

                                      24 CFR 85.40(a) says grantees are responsible for managing
                                      the day-to-day operations of grant and subgrant supported
                                      activities. Grantees must monitor grant and subgrant
                                      supported activities to assure compliance with applicable
                                      Federal requirements and that performance goals are being
                                      achieved.

                                      24 CFR 570.501(b) says the grantee is responsible for
                                      ensuring that Community Development Block Grant funds
                                      are used in accordance with all program requirements. The
                                      use of subrecipients does not relieve the recipient of this
                                      responsibility.   The recipient is also responsible for
                                      determining the adequacy of the performance under


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                          subrecipient agreements and for taking appropriate action
                          when performance problems arise.

                          24 CFR 92.504(a) says the participating jurisdiction is
                          responsible for managing the day-to-day operations of its
                          HOME program, ensuring that HOME funds are used in
                          accordance with all program requirements and written
                          agreements, and taking appropriate action when performance
                          problems arise.

                          24 CFR Part 85.22 (b) requires State, local, and Indian tribal
                          governments to follow the Office of Management and
                          Budget Circular A-87, “Cost Principles for State and Local
                          Governments.” The City of Kansas City, Missouri is a local
                          government according to 24 CFR Part 85.3.

                          Office of Management and Budget Circular A-87,
Office of Management      Attachment A, paragraph A(2)(a)(1) states that governmental
and Budget Requirements   units are responsible for the efficient and effective
                          administration of Federal awards through the application of
                          sound management practices.

                          City housing officials do not provide adequate information
Information Provided to   to the City Council to make defendable, fully informed
City Council is Not       decisions when awarding HUD funds. City housing
Adequate                  officials provide the City Council with limited subrecipient
                          information that the housing officials deem necessary, and
                          other information specifically requested by Council
                          members. The information is generally provided early in
                          the calendar year when the budget is being developed and
                          public hearings and discussions on subrecipient funding
                          applications and recommendations are held. City housing
                          officials do not provide standardized, periodic reporting to
                          the City Council on subrecipients’ progress toward meeting
                          the City’s housing and community development needs.
                          Therefore, the City Council does not have a perpetual
                          history of subrecipient performance on which to base its
                          decisions.

                          City housing officials said they provide the information
                          they deem necessary for the City Council to make decisions
                          regarding the award of Federal funds. These housing
                          officials believe they provide adequate information in the
                          “Proposals and Funding Recommendations for the
                          Consolidated Housing and Community Development

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Action Plan” provided to the City Council. However, our
review of the Proposals and Recommendations booklets for
years 1998 through 2001 determined the booklets do not
include important information, such as specific
explanations of why individual applications are
recommended or are not recommended for funding, or the
justification for the amount of funding recommended.

We also noted that the Proposals and Recommendations
booklets do not indicate the amount of individual
subrecipient funding awarded in prior years, and even more
importantly, do not provide information on past
performance of subrecipients applying for funding each
year. City housing officials said prior year funding
information is provided to the City Council when the
Department of Housing and Community Development
presents its part of the City’s overall budget to the City
Council.     However, we do not believe the budget
information provides the level of detailed individual
subrecipient funding information needed by the City
Council to make future funding decisions. The City
Council member we interviewed (the Chairman of the
Planning, Zoning and Economic Development Committee)
said the Council needs City housing officials to provide
individual subrecipient funding information from prior
years.

City housing officials also said they provide summary
information of subrecipient past performance to the City
Council in supplemental spreadsheets, separate from the
Proposals and Recommendations booklet. We reviewed
supplemental spreadsheets provided to the City Council to
make decisions on funding for 2000. The spreadsheets
covered the period from June through December 1999. Our
review of the supplemental spreadsheets determined that
the data was confusing, contained discrepancies, and was
not adequate to provide the information necessary for the
City Council to make well-informed decisions. For
example, the spreadsheets summarized totals of housing
production, but mixed production from prior years as well
as the current year, making analysis of whether
subrecipients met their yearly contracted performance
standards impossible. Further, the spreadsheet did not
contain any analysis by City housing staff of whether the
individual subrecipients were on schedule with housing

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                           production goals, or whether the goals would be met by the
                           end of the contract year. In addition, the data on
                           community service activities were merely activity totals
                           that were not compared to contractual performance
                           standards. The spreadsheet also did not provide any
                           information on the status of economic development
                           activities, a major thrust of some subrecipients.

                           City housing officials’ reliance on subrecipients for
Subrecipient Reports May   progress data may put the City Council at risk of making
Not Be Accurate            decisions based on inaccurate data. As previously indicated
                           in Finding 2, City housing officials rely on subrecipients’
                           progress reports for data on the status of housing and
                           community-related activities. This same data is used in
                           reporting subrecipient performance information to the City
                           Council. However, we found that City housing officials did
                           not adequately validate subrecipients’ reported progress,
                           and that subrecipients could not fully support the results
                           reported to City housing officials for the 1998 and 1999
                           contract years.

                           We noted in Finding 2 that the City’s reliance on its largest
                           and highest profile subrecipient causes significant concern.
                           We found that the subrecipient does not have an integrated
                           management information system. The subrecipient creates
                           various housing production reports for the City, derived
                           from the general ledger accounting system, at least two
                           stand-alone     databases,    and    several     stand-alone
                           spreadsheets. The maintenance of these various systems,
                           databases and spreadsheets requires similar data entries in
                           the various systems by several departments and individual
                           employees. The duplication of systems and similar data
                           entries increases the risks of data errors and conflicting
                           information, and therefore diminishes the integrity of the
                           housing production data provided to the City. Because City
                           housing officials rely on this subrecipient for housing
                           production data, City Council members have no assurance
                           they are making award decisions based on accurate data.

                           The City Council frequently increases funding to certain
City Council Does Not      subrecipients, mainly the community development
Always Follow City         corporations, beyond the funding amounts recommended by
Award Recommendations      City housing officials.       Funding awards to such
                           corporations are typically directed for administration and
                           operations costs. As a result, City Council actions to

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                          increase funding designated for administration and
                          operations costs reduces the funding available for actual
                          housing production. We reviewed the 36 funding awards
                          for community development corporations for 1998 through
                          2001 and found the City Council increased the
                          administration and operations funding in 16 instances.
                          Because City housing officials do not document their
                          funding     deliberations   and     decisions     regarding
                          recommendations (also see Finding 1), and do not provide
                          complete information to the City Council, there is no
                          assurance these decisions provide the most effective use of
                          funds.

                          We also noted that the City Council approved funding for
City Funds Poor           organizations not recommended for funding by City
Performers                housing officials. City housing officials said they have
                          tried to eliminate funding to subrecipients that they believe
                          are no longer adequately providing needed services to the
                          City, but the City Council consistently overrides their
                          recommendations. A City housing official also said it takes
                          a great deal of documentation to convince the City Council
                          to eliminate funding to a poor performer, so most
                          subrecipients are allowed to continue receiving Federal
                          funds from the City. Again, because City housing officials
                          do not document their deliberations and decisions on what
                          organizations to fund, adequately monitor and document
                          subrecipient performance (also see Finding 2), and provide
                          the City Council comprehensive information, there is no
                          assurance the City Council’s decisions result in the most
                          effective use of funds.

                          City housing officials need to provide the City Council with
City Council Needs More   more complete information regarding the individual
Complete Information      applicants and City housing staff recommendations for
                          subrecipient funding. Without comprehensive information,
                          the City Council is at risk of providing Federal funds to
                          organizations that are not best able to serve the City’s
                          housing and community development needs. Further, the
                          City Council could make funding decisions that cannot
                          withstand public scrutiny, and give the appearance that
                          awards are arbitrary or unjust.




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Auditee Comments        The Director of the Department of Housing and Community
                        Development of the City of Kansas City, Missouri responded
                        to our draft report with written comments. Excerpts from
                        these comments follow. Appendix A contains the complete
                        text of the comments.

                        The City’s Department of Housing and Community
                        Development concurs with our recommendations. The
                        Director said that the recommendations are consistent with
                        the Department’s current practices, but can be expanded.
                        The Director also said that this past year, the City Council
                        has been involved in substantive discussions to more clearly
                        define housing policies; and the Department’s expanding
                        data base and information system capacity will assist
                        decision-makers and planners at all levels. Also, use of the
                        Citywide Housing Survey married with the 2000 Census
                        Data will provide another valuable instrument in this regard.



Evaluation of Auditee   The actions the City’s housing officials intend to take to
Comments                establish and implement standardized information packages
                        and a mechanism to provide these to City administrators
                        should provide the City Council with complete information
                        to make informed funding decisions and ensure efficient
                        and equitable use of funds. However in order for this to
                        occur, the information needs to be consistent among all
                        subrecipients and clearly document current and past
                        performance.



Recommendations for     We recommend the Director of the Department of Housing
the City                and Community Development of the City of Kansas City,
                        Missouri:

                        3A.      Establish and implement adequate, standardized
                                 information packages, before the next funding
                                 cycle, to provide to the City Council for use in
                                 making funding decisions.       The information
                                 provided should clearly demonstrate subrecipients’
                                 prior funding provided by the City and past


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                              performance, including comparisons of subrecipient
                              performance standards and actual accomplishments.

                     3B.      Establish and implement an in-house mechanism,
                              before the next funding cycle, to provide accurate
                              subrecipient progress information to City
                              administrators and periodic reporting to the City
                              Council to keep members updated on subrecipient
                              progress throughout the contract year.



Recommendation for   We recommend the Director of Community Planning and
HUD                  Development ensure the City of Kansas City, Missouri:

                     3A.      Establishes and implements adequate, standardized
                              information packages to provide to the City Council
                              for use in making funding decisions, or if the City
                              fails to do so within the reasonable timeframe
                              recommended, consider imposing appropriate
                              administrative sanctions.

                     3B.      Establishes and implements an in-house mechanism
                              to provide accurate subrecipient progress
                              information to City administrators and periodic
                              reporting to the City Council, or if the City fails to
                              do so within the reasonable timeframe
                              recommended, consider imposing appropriate
                              administrative sanctions.




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Management Controls
In planning and performing our audit, we considered the management controls of the Department of
Housing and Community Development of the City of Kansas City, Missouri to determine our
auditing procedures, not to provide assurance on the controls. Management controls 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.



                                     We determined the following management controls were
Relevant Management                  relevant to our audit objectives:
Controls
                                         •   Developing and implementing policies and
                                             procedures that reasonably ensure programs meet
                                             objectives.

                                         •   Safeguarding resources.


                                     We assessed the relevant controls identified above.

                                     It is a significant weakness if management controls do not
                                     provide reasonable assurance that the process for planning,
                                     organizing, directing, and controlling program operations
                                     will meet an organization’s objectives.

                                     Based on our review, we believe the following items are
 Significant Weaknesses              significant weaknesses:

                                         •   The City awarded more than $85 million in HUD
                                             funds from 1998 through 2001, and yet City housing
                                             officials do not have a formal process to evaluate
                                             applications for HUD funds. Specifically, City
                                             housing officials do not document their evaluation
                                             process, reasons for selecting or rejecting
                                             applicants, or justification for the amounts
                                             recommended for award to the selected
                                             subrecipients (see Finding 1).

                                         •   The City awarded $60 million in HUD funds from
                                             1998 through 2000, but City housing officials did
                                             not adequately monitor the subrecipients that

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                                 Management Controls


    received those funds. More specifically, City
    housing officials do not have policies and
    procedures to ensure adequate monitoring of
    subrecipients and proper action by City officials if
    performance standards are not met (see Finding 2).

•   City housing officials do not provide information to
    the City Council necessary to make defendable,
    fully informed decisions when awarding HUD
    funds. The City awarded more than $85 million in
    HUD funds from 1998 through 2001 without
    adequate information on which to base its decisions
    (see Finding 3).




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Follow Up On Prior Audits
The Office of Inspector General issued an Audit Related Memorandum in April 2000 regarding
housing policies for the City of Kansas City, Missouri (City). The memorandum transmitted a
report issued as a result of a joint effort with the City Auditor’s Office of the City of Kansas City,
Missouri. The report contained one finding and one recommendation. The report disclosed that
the City needed a housing policy. The City based its housing policy on its “Consolidated
Housing and Community Development Plan,” which included only vague descriptions of the
City’s housing strategies. When these strategies were used to measure performance, any
outcome could be viewed as a success. The report also disclosed that the City did not maintain
current housing-related data that could be used for identifying and developing effective housing
policy, strategies and activities. The report contained no recommendations for HUD and the City
has not completed actions on the single recommendation made to City administrators.

The Office of Inspector General issued an audit on the Community Development Block Grant
program of the City of Kansas City, Missouri on December 8, 1998. The report contained three
findings and three recommendations. The review concentrated on monitoring of subrecipients
and the related activities of selected subrecipients. The report stated the City made some
improvements in its monitoring of subrecipients, however, the City needed to make further
improvements. Specifically, the City did not adequately oversee the performance of one
subrecipient and did not hold its Board of Directors responsible for effecting collections of
monies loaned. As a result, businesses receiving loans seldom made the required payments,
therefore, loan repayments were not available to make new loans. Regarding another
subrecipient, the City did not ensure the subrecipient complied with contract award requirements.
Specifically, the subrecipient did not have a written contract for a major sanitary sewer
installation and did not properly monitor the contractor's work. As a result, the subrecipient and
its contractor were in dispute over the propriety of a $157,000 change order at the time of the
report. Further, the City executed contracts with community development corporations to
perform housing activities and included performance standards that were not met. The three
recommendations to resolve the findings were closed on March 22, 2000.

The Office of Inspector General issued an audit on the Section 108 loan guarantee program of the
City of Kansas City, Missouri on January 10, 1992. The report contained one finding and one
recommendation. The City received a $1,755,000 Section 108 guaranteed loan for a specific
redevelopment project. The City contracted with an outside agency (administrator) to administer
the Section 108 loan. The administrator used part of the Section 108 loan proceeds to repay City
loans used to purchase project land. The City then transferred the land and the remaining loan
proceeds to the developer. In return for the land and loan proceeds, the developer gave the
administrator a $1,755,000 promissory note. The developer subsequently paid the administrator
$1,218,000 on the note. The administrator used the loan repayment to fund two escrow accounts
($1,000,000 and $215,000) to subsidize project mortgage payments and rents. A legal opinion from
HUD General Counsel stated that use of Section 108 loan repayments to fund escrows was
improper and escrows to subsidize mortgage payments and rents were an improper use of
Community Development Block Grant funds. The recommendation to resolve the finding was
closed on March 30, 1995.


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                                       Appendix A

Auditee Comments




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                                                                                Appendix B

OIG Distribution Outside of HUD
Chairman, Committee on Governmental Affairs, 340 Dirksen Senate Office Building,
  United States Senate, Washington, DC 20510
Ranking Member, Committee on Governmental Affairs, 706 Hart Senate Office Building,
  United States Senate, Washington, DC 20510
Chairman, Committee on Government Reform, 2185 Rayburn Building,
  House of Representatives, Washington, DC 20515
Ranking Member, Committee on Government Reform, 2204 Rayburn Building,
  House of Representatives, Washington, DC 20515
Subcommittee on Oversight and Investigations, Room 212, O’Neil House Office Building,
  Washington, DC 20515
Associate Director, Resources, Community, and Economic Development Division,
  United States General Accounting Office, 441 G Street, NW, Room 2T23,
  Washington, DC 20548
Chief, Housing Branch, Office of Management and Budget, 725 17th Street, NW, Room 9226,
  New Executive Office Building, Washington, DC 20503
Director, Office of Federal Housing Enterprise Oversight, 1700 G Street, NW, Room 4011,
  Washington, DC 20552
Director, Subcommittee on Criminal Justice, Drug Policy and Human Resources, B373 Rayburn
  House Office Building, Washington, DC 20515




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