U.S. Department of Housing and Urban Development
Great Plains Office of District Inspector General
for Audit, 7AGA
Gateway Tower II - 5th Floor
400 State Avenue
Kansas City, Kansas 66101-2406
AUDIT MEMORANDUM
2002-KC-1801
February 25, 2002
MEMORANDUM FOR: William B. Rotert, Director, Office of Community Planning and
Development, 7AD
FROM: Roger E. Niesen, District Inspector General for Audit, 7AGA
SUBJECT: Review of Enhanced Enterprise Community Funding
Kansas City, Kansas
We have completed a review of the Enhanced Enterprise Community funds awarded to the City
of Kansas City, Kansas in 1994. We performed this review to address a citizen complaint
received by our office. We reviewed the City’s selection of Enhanced Enterprise Community
subrecipients with the purpose of answering the complainant’s questions and therefore, did not
review any other aspects of the City’s Enhanced Enterprise Community program.
We did not identify any specific violations of HUD regulations; however, we did determine that
the City cannot fully support its administration of the Enhanced Enterprise Community funds.
Because the City has not maintained an adequate recordkeeping system, the City does not have
adequate support for actions taken and decisions made regarding the funds. As a result, HUD,
the Mayor/Chief Executive Officer, the City Council, and the public lack assurance that the City
administered these funds according to applicable regulations and guidelines, and in an efficient,
effective, and fair manner.
Within 60 days please provide us, 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 us copies of any correspondence
or directives issued because of the audit.
Should you or your staff have any questions, please contact me at (913) 551-5870.
Telephone: (913) 551-5870 http://www.hud.gov/oig/oigindex.html Fax: (913) 551-5877
Background
HUD’s Enterprise Community programs were designed to address severe community problems
such as high unemployment, crumbling infrastructure, and minimal access to business capital. In
late 1994, HUD designated a geographical area within the City as an Enhanced Enterprise
Community, known as the Zone. To address the community problems within the Zone, HUD
awarded $15.6 million in Economic Development Initiative grants and Section 108 loan
guarantees to the City.
The City ultimately concentrated the $15.6 million into a Zone Development Fund that consisted
of three programs:
· Project Development Program
· Job Development Program
· Small Business Development Program
The City formed the Zone Development Team, a group of civic leaders, Zone business owners and
residents, to assist it in administering the Enhanced Enterprise Community funds. The City also
implemented internal procedures to administer the HUD funds as follows:
Individuals and businesses submit to the City an application requesting access to the HUD funds to
be used to enhance the Zone. The City staff then conducts a preliminary analysis of the application
to ensure completeness and determines basic eligibility. The Zone Development Team then
evaluates applications that are complete and meet basic eligibility requirements, and makes
approval or rejection decisions. The Zone Development Team forwards recommended applications
to the City Council for final review and approval or rejection.
According to City records, the City used, or is in the process of using, the Enhanced Enterprise
Community funds to redevelop businesses along an inner City street, expand a manufacturing
business, develop a downtown hotel, and for costs associated with operating the Zone Development
Fund programs.
Objectives, Scope and Methodology
The overall review objective was to evaluate the complainant’s concerns and answer the
questions posed in the complaint. We reviewed the City’s process for selecting Enhanced
Enterprise Community subrecipients. We did not review any other aspects of the Enhanced
Enterprise Community program.
To achieve our objective, we reviewed City files, HUD’s local and headquarters files, HUD
guidelines, and Federal rules and regulations that govern the Enhanced Enterprise Community
program. We interviewed the complainant, current and former City staff, HUD officials, and
others from the local community. The review covered the $15.6 million in Enhanced Enterprise
Community funds awarded to the City in 1994.
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Audit Results
We did not identify any specific violations of HUD regulations; however, we did determine that
the City cannot fully support its administration of the Enhanced Enterprise Community funds.
Because the City has not maintained an adequate recordkeeping system, the City does not have
adequate support for actions taken and decisions made regarding the funds. As a result, HUD,
the Mayor/Chief Executive Officer, the City Council, and the public lack assurance that the City
administered these funds according to its regulations and guidelines, and in an efficient,
effective, and fair manner.
Grantees, such as the City, must comply with applicable Codes of Federal Regulations. 24 CFR
85.42 and 24 CFR 570.502 require grantees to maintain financial and programmatic records,
supporting documents, statistical records, and other records pertinent to program regulations or the
grant agreement for a period of four years from the date of the submission of the last expenditure
report, as authorized by HUD.
24 CFR 570.506 requires grantees to establish and maintain sufficient records to enable the
Secretary to determine whether the recipient met the requirements of the Community
Development Block Grant program. At a minimum, grantees must maintain records providing a
full description of each activity assisted (or being assisted) with Community Development Block
Grant funds, including its geographical location, the amount of Community Development Block
Grant funds budgeted, obligated and expended for the activity, and the provision under which it
is eligible. The statute also requires grantees to maintain evidence to support how the
Community Development Block Grant funds provided to subrecipients are expended, including
any documentation appropriate to the nature of the activity.
The City cannot adequately support its administration of the Enhanced Enterprise Community
funds because it:
· cannot provide minutes of all meetings of the Zone Development Team, the group
designated by the City to assist it in administering the funds;
· did not maintain a register or log of applications submitted for Enhanced Enterprise
Community funds;
· cannot adequately document all of the citizen applications it received for private business
loans; and
· cannot support its underwriting review of a business venture that ultimately received $4.2
million of the Enhanced Enterprise Community funds.
The City does not have a complete record of the meetings and ensuing discussions and decisions
made by the Zone Development Team. The minutes of meetings that the City does have make
reference to other meetings for which the City cannot provide minutes. As a result, we were unable
to assemble a complete history of decisions made by the Zone Development Team. A complete
history of the City’s processing of applications is important to answer challenges and provide
assurance the funds were appropriately awarded.
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The City did not maintain a register or log of the applications submitted for Enhanced Enterprise
Community funds. The City provided a list of 18 applications it said it received requesting the
Enhanced Enterprise Community funds. A former City employee told us that the City received
over 200 applications. This same former employee provided to us a list of 31 names of individuals
he said had applied for Enhanced Enterprise Community funds while he was still an employee of
the City. Because the City did not maintain a register or log of applications, we have no way to
determine whether the list of 18 applicants is accurate, or whether the City actually received more
applications.
Additionally, the City does not have records to support all 18 applications it said it received. We
selected a sample of five and found the City was not able to locate any records for one of the
applicants.
The City also cannot support its efforts to evaluate the feasibility of a business venture that
ultimately received $4.2 million of the HUD funds. The business venture was the first project
funded with the Enhanced Enterprise Community funds and was intended to expand an existing
business that would create jobs for Zone residents. City staff said the Zone Development Team and
City staff evaluated the proposal using underwriting criteria commonly used by the Small Business
Administration and conventional and private lenders, and HUD rules and regulations. However,
the City cannot provide any documentation to show how it applied the criteria in the decision-
making process.
Auditee Comments
[HUD awarded the Enhanced Enterprise Community funds to the City of Kansas City, Kansas in
1994, but since that time the City government has become known as the Unified Government.]
Excerpts from the Unified Government’s comments on our draft finding follow. Appendix A
contains the complete text of the comments.
Minutes were produced for all meetings of the Zone Development Team where action on loans took
place. Other meetings were held during the formative stages of the Zone Development Team and
where training was conducted. Minutes were not taken since there was no substantive action
regarding the administration of the Enhanced Enterprise Community Funds. Minutes of such
meetings were not required by any statute, rule or regulation identified by the Office of Inspector
General for Audit.
OIG Evaluation of Auditee Comments
24 CFR 85.42 and 24 CFR 570.502 require grantees, such as the City, to maintain financial and
programmatic records, supporting documents, statistical records, and other records pertinent to
program regulations or the grant agreement for a period of four years from the date of the
submission of the last expenditure report, as authorized by HUD. In addition, 24 CFR 570.506
requires grantees to establish and maintain sufficient records to enable the Secretary to determine
whether the recipient has met the requirements of the Community Development Block Grant
program. Minutes of meetings of the Zone Development Team, the group tasked with making
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major decisions regarding the Enhanced Enterprise Community funds, are inherently important to
support decisions made and actions taken on the Federal funds. The lack of minutes for meetings
held where there was no substantive action taken does not mean the Team did not discuss important
issues or make decisions that are an important part of the project history. Without a complete
record of meeting minutes, HUD, the City, and City residents have no assurance that funds are
properly administered.
Auditee Comments
The Unified Government disputes the allegation or inference that applications other than those
identified were received. A system was in place to receive, process, and track progress on
applications through frequently held meetings of the Department of Development staff and status
reports generated. As the Enhanced Enterprise Community Program progressed, a detailed
application, approved by HUD, was developed and utilized. Mere inquiries regarding the program
or eligibility received a response but were not considered as applications.
Given the limited number of applications received, a register or log was not maintained and such is
not required by any statute, regulation or rule identified by the Office of Inspector General for
Audit.
The system is being refined through the development of an Access database for the collection and
management of program data for Community Development Block Grant, Section 108 loan
guarantee, Enhanced Enterprise Community, HOME Investment Partnership Program and other
programs. A consultant was hired in September 2001 to create a program-wide system of
collecting and maintaining data so that it is accessible to staff. Such a system will standardize
record keeping, allowing for inter-program cross-referencing, and greatly facilitate reporting
requirements.
The Unified Government provided a list of all 18 loan applicants received for the Enhanced
Enterprise Community Funds. As indicated above, mere inquiries regarding the program or
eligibility received a response but were not considered as applications. Complete records for one
applicant were not produced, although sufficient information to identify the applicant was
provided. The Unified Government is in the process of locating and assembling additional
documentation with respect to this applicant, which will be provided for review.
OIG Evaluation of Auditee Comments
We acknowledge there is not a specific requirement to maintain a register or log; however, 24 CFR
85.42 and 24 CFR 570.502 require grantees to maintain financial and programmatic records,
supporting documents, statistical records, and other records pertinent to program regulations or the
grant agreement for a period of four years from the date of the submission of the last expenditure
report, as authorized by HUD. In addition, 24 CFR 570.506 requires grantees to establish and
maintain sufficient records to enable the Secretary to determine whether the recipient has met the
requirements of the Community Development Block Grant program.
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On three separate occasions, current City staff reported different totals of the number of
applications received. In addition, a former City employee claims that the City received over 200
applications. Without a register or log of Enhanced Enterprise Community applications received,
we have no way to determine how many applications the City actually received.
The City’s response said the City is developing an Access database to collect and manage program
data. If the City follows through with developing and implementing the database, and it tracks
applicants for Federal funds, it should help resolve the record keeping problems noted in our
review.
Auditee Comments
The Unified Government did in fact use standard underwriting principles in its review and
processing of the first application received and approved for EEC funding. The City’s DRAFT
Section 108 Application and Closing Process procedures required that staff obtain appropriate
financial information including: (1) uses and sources of funds, (2) 3 year projections and cash flow
statements, (3) personal and corporate financial statements, (4) experience of developer, (5) market
studies. The City staff also attended HUD sponsored training on the Section 108 Loan program.
The materials generated by the training program contained debt coverage ratios and loan to value
ratios that served as guides in analysis of this first loan. The materials produced for training also
suggested using a checklist for use in financial analysis. While a checklist showing analysis of all
the information received cannot be produced 5 years after the fact, many meetings were held with
HUD staff in both the Regional and National Offices on underwriting issues. The regulations did
not mandate adoption by a municipality of rigid underwriting guidelines and none were imposed by
either the Regional or National HUD staffs, but both the loan application submitted to HUD and
the final loan documents reflect analysis of underwriting guidelines appropriate to reduce risk to
the City and to insure compliance with the National Objectives of the Housing and Community
Development Act.
OIG Evaluation of Auditee Comments
We agree that Federal regulations did not mandate the use of specific underwriting guidelines.
The City asserted that its staff followed standard underwriting principles as well as internal
procedures in its review and processing of the first application received and approved for
Enhanced Enterprise Community funding. Specifically, the City said it used underwriting
criteria commonly used by the Small Business Administration and conventional and private
lenders. Although we considered the underwriting principles of such entities reasonable criteria,
the City’s records did not contain documentation of how it used these principles to evaluate the
applicant information.
Further, in its response, the City asserted that its staff followed DRAFT Section 108 Application
and Closing Process procedures to guide its evaluation of loan applications received. However,
these internal procedures were dated and transmitted to staff in July 1996, two months after the
first application was submitted to HUD in May 1996. Therefore, the internal procedures
presented in the City’s response do not appear valid as criteria for evaluating and processing the
first business loan application. Even if the City used these or similar internal procedures in
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evaluating the first business loan approved, the City’s records did not contain documentation to
show how the criteria was used to evaluate the applicant information.
Recommendations
We recommend the Director, Office of Community Planning and Development:
1A. Ensure the City establishes and implements a system to collect and manage HUD-
related program data. The system should be designed to ensure the City can
adequately support the administration of HUD funds.
1B. Take appropriate administrative actions if the City does not provide the records
necessary to demonstrate that it is administering HUD funds according to Federal
regulations.
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Appendix A
Auditee Comments
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Appendix A
Auditee Comments
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Appendix A
Auditee Comments
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Appendix A
Auditee Comments
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Appendix B
Distribution Outside of HUD
Chairman, Committee on Governmental Affairs, 706 Hart Senate Office Building,
United States Senate, Washington, DC 20510
Ranking Member, Committee on Governmental Affairs, 340 Dirksen 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
Director, Housing and Telecommunications Issues, United States General Accounting Office,
441 G Street NW, Room 2T23, Washington, DC 20548
Senior Advisor, Subcommittee on Criminal Justice, Drug Policy & Human Resources,
B373 Rayburn House Office Building, Washington, DC 20515
Chief, Housing Branch, Office of Management & Budget, 725 17th Street NW, Room 9226,
New Executive Office Building, Washington, DC 20503
House Committee on Financial Services, 2129 Rayburn House Office Building,
Washington, DC 20515
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Review of Enhanced Enterprise Community Funding Kansas City, Kansas
Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-02-25.
Below is a raw (and likely hideous) rendition of the original report. (PDF)