oversight

City of Ithaca, Community Planning and Development Programs, Ithaca, New York

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-03-21.

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

      Navigate by Using "Page Up" and "Page Down" Keys.
  Hyperlinks on Table of Contents (TOC) at bottom of each page.




                 AUDIT REPORT




                 CITY OF ITHACA
      COMMUNITY PLANNING AND DEVELOPMENT
                   PROGRAMS

                   ITHACA, NEW YORK

                        2002-NY-1001

                     MARCH 21, 2002


                     OFFICE OF AUDIT
               NEW YORK/NEW JERSEY DISTRICT




TOC
                                                             EXIT
                                                               Issue Date
                                                                       March 21, 2002
                                                               Audit Case Number
                                                                       2002-NY-1001




TO: Michael F. Merrill, Director, Community Planning and Development Division, 2CD


FROM: Alexander C. Malloy, District Inspector General for Audit, 2AGA


SUBJECT:      City of Ithaca
              Community Planning and Development Programs
              Ithaca, New York


We examined the operations of the City of Ithaca, New York (Grantee) pertaining to its
Community Planning and Development Programs. Specifically, we examined its Community
Development Block Grant (CDBG) Small Cities program, Section 108 Loan and Grant Program,
and Brownfield Economic Development Initiative (BEDI) Grant. The objectives of the audit were
to determine if the Grantee carried out its U.S. Department of Housing and Urban Development
(HUD) funded programs in an effective and efficient manner, and complied with applicable
HUD requirements and Federal regulations. This report contains three findings with
recommendations for corrective action.

Within 60 days, please furnish this office, for each recommendation cited in the 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 not considered necessary. Also, please furnish us copies of any
issued correspondence or directives related to the audit.

If you have any question, please contact Garry Clugston, Assistant District Inspector General for
Audit, on (716) 551-5755, extension 5901.




TOC                                                                                       EXIT
Management Memorandum




                        THIS PAGE LEFT
                            BLANK
                        INTENTIONALLY




2002-NY-1001               Page ii

 TOC                                     EXIT
Executive Summary
We examined the operations of the City of Ithaca’s (Grantee) Community Planning and
Development Programs. Specifically, we reviewed its CDBG Small Cities Program, Section 108
Loan and Grant Program and Brownfield Economic Development Initiative (BEDI) Grant. In
addition, we reviewed the use of program income from completed Urban Development Action
Grant (UDAG) and Housing Development Grant Program (HODAG) projects. The purpose of
the examination was to determine whether the Grantee carried out activities as shown in its
applications in an economical, efficient, and effective manner and complied with applicable
requirements, laws and regulations that pertain to the Community Planning and Development
Programs. The review covered the period from July 1, 1999, to December 31, 2000.

Our review disclosed that the Grantee generally complied with HUD program requirements when
administering its Community Planning and Development Programs. However, our review
disclosed that for certain areas the Grantee did not always carry out its activities in an efficient
and effective manner, comply with the HUD regulations and charge costs to the Programs that
are necessary and reasonable.



                                      The Grantee did not implement adequate program controls
Improprieties involving               to ensure that the Developer of the Marina Realty
the Marina Realty                     Development Project complied with HUD requirements
Development Project                   and Federal regulations. Through various HUD loans and
                                      grants, the Grantee disbursed Federal funds to the
                                      Developer without adequate assurance that the funds were
                                      used to incur necessary and reasonable costs.
                                      Consequently, we found ineligible costs of $76,486.25 that
                                      represent payments for duplicate withholding taxes,
                                      unnecessary interest cost, late fee charges, unnecessary
                                      environmental cost and for restaurant equipment that was
                                      not included in the grant agreement. We also found
                                      unsupported costs of $196,811.08 that lacked adequate
                                      documentation for us to make an eligibility determination.
                                      We attribute the cause of these deficiencies to the Grantee’s
                                      failure to place adequate emphasis on establishing
                                      procedures that required compliance with HUD regulations
                                      and ensured that costs incurred were adequately supported
                                      and for eligible activities.

                                      Our review of the Grantee’s management controls disclosed
                                      that the Grantee did not adequately monitor the activities
                                      and operations of a subrecipient. We believe that adequate
                                      monitoring was not performed due to the Grantee’s general
                                      unfamiliarity with applicable program requirements. As a
                                      result, the Grantee could not demonstrate that CDBG funds


                                          Page iii                             2002-NY-1001

TOC                                                                                        EXIT
Executive Summary


                    amounting to $100,009 were used for activities allowed by
                    program requirements.

                    Our review disclosed various non-compliances pertaining
                    to accounting and administrative procedures that weakened
                    the Grantee’s system of management controls. These non
                    compliances occurred because procedures were not
                    established to ensure that adequate financial and
                    administrative controls were implemented to meet program
                    requirements. As a result, the Grantee does not have
                    adequate assurance that all activities of HUD funded
                    programs are eligible and being properly administered.
                    Consequently, we found costs, totaling $207,916 that we
                    consider questionable and/or unsupported.

                    We recommended actions that will strengthen the Grantee’s
 Recommendations    future administration of HUD funded programs. Also, we
                    recommended that you require the Grantee to repay the
                    ineligible costs of $76,486.25, and provide justification for
                    the unsupported costs of $504,736.08.

                    The results of the audit were discussed with Grantee
 Exit conference    officials during the course of the audit and at an exit
                    conference held on February 7, 2002, at City Hall, Ithaca,
                    New York. The Grantee’s written response is shown in
                    Appendix C. In addition, we have included a summary of
                    the Grantee’s comments after each finding.




2002-NY-1001            Page iv

 TOC                                                                     EXIT
Table of Contents
Management Memorandum                                                    i



Executive Summary                                                    iii



Introduction                                                          1



Findings

1.   Improprieties Occurred Involving The Marina Realty
     Development Project                                             3

2.   Inadequate Monitoring Of The Ithaca Neighborhood
     Housing Services                                                9

3.   Unsupported Use OF Program Funds And Management
     Control Weaknesses                                              15



Management Controls                                                  21



Follow Up On Prior Audits                                            23



Appendices
A    Schedule Of Ineligible And Unsupported Costs                    25

B    Schedule Of Ineligible And Unsupported Marina
     Realty Development Costs                                        27



                             Page v                   2002-NY-1001
Table of Contents


C      Auditee Comments                                            29

D      Distribution                                                41



Abbreviations

ACL            Audit Command Language
BEDI           Brownfield Economic Development Initiative
CCI            Canal Corridor Initiative
CDBG           Community Development Block Grant
CFR            Code of Federal Regulations
FY             Fiscal Year
HODAG          Housing Development Grant Program
HUD            Department of Housing and Urban Development
INHS           Ithaca Neighborhood Housing Services
OMB            Office of Management and Budget
NYDEC          New York Department of Environmental Conservation
UDAG           Urban Development Action Grant




2002-NY-1001                    Page   vi
Introduction
Title I of the Housing and Community Development Act of 1974, established the Community
Planning and Developments programs. These programs provide grants to States and units of
local governments to aid in the development of viable urban communities. The Section 108 Loan
Guarantee Program provides a means by allowing communities to finance up-front, certain
large-scale projects.

The Grantee is governed by the Mayor, Alan J. Cohen, and the Common Council. The Grantee’s
office is located at City Hall, Ithaca, New York. The Ithaca Urban Renewal Agency administers
the programs for the Grantee. The Executive Director is H. Matthys Van Cort.



                                   For Fiscal Years (FY) 1996 through 1999, the Grantee
Background                         received Community Planning and Development funds
                                   amounting to $6,119,000. Included in this amount was a
                                   Brownfield Economic Development Initiative Grant of
                                   $350,000 regarding the Marina Realty Development
                                   project. The Grantee also administered a FY 97 Canal
                                   Corridor Initiative award of $1,899,243.

                                   During the audit, we reviewed seven activities that had
                                   total incurred cost of $1,988,000, of which we examined
                                   $1,328,000. In addition, we examined funds totaling
                                   $1,287,947, used in support of the Marina Realty
                                   Development Project.

Audit objectives                   The audit objectives were to determine whether the
                                   Grantee: (1) carried out its activities as shown in its
                                   submissions to HUD in an economical, efficient and
                                   effective manner; (2) complied with applicable provisions
                                   of the Housing and Community Development Act of 1974
                                   regarding the requirements, laws and regulations of the
                                   programs; and (3) has adequate controls to ensure
                                   compliance with HUD regulations.

                                   To accomplish the audit objectives, the following audit
Scope of review                    procedures were performed:

                                   •   Examined records and files of the Grantee.

                                   •   Interviewed Grantee and HUD staff.




                                        Page 1                            2002-NY-1001


TOC                                                                                  EXIT
Introduction


                •   Reviewed the Grantee’s policies and procedures and
                    observed its operations relating to the audit objectives.

                •   Used Audit Command Language (ACL) to select and
                    analysis a sample of transactions from the Grantee’s
                    General Ledger. The sample consist of 30 transactions
                    out of a total 1396.

                •   Reviewed and evaluated the Grantee’s monitoring
                    activities.

                •   Reviewed records and files of the Grantee’s
                    subrecipient, Ithaca Neighborhood Housing Services.

                We performed the audit field work from May 2001 through
 Audit period   February 2002. The audit covered the period from July 1,
                1999 to December 31, 2000. However, as necessary, we
                reviewed activity prior and subsequent to the audit period.
                The audit was conducted in accordance with generally
                accepted government audit standards.

                A copy of this report was provided to the Grantee.




2002-NY-1001        Page 2


   TOC                                                               EXIT
                                                                                         Finding 1


Improprieties Occurred Involving The Marina Realty
               Development Project
The Grantee did not implement adequate program controls to ensure that the Developer of the
Marina Realty Development Project complied with HUD requirements and Federal regulations.
Through various HUD loans and grants, the Grantee disbursed Federal funds to the Developer
without adequate assurance that the funds were used to incur necessary and reasonable costs.
Consequently, we found ineligible costs of $76,486.25 that represent payments for duplicate
withholding taxes, unnecessary interest cost, late fee charges, unnecessary environmental cost
and for restaurant equipment that was not included in the grant agreement. We also found
unsupported costs of $196,811.08 that lacked adequate documentation for us to make an
eligibility determination. We attribute the cause of these deficiencies to the Grantee’s failure to
place adequate emphasis on establishing procedures that required compliance with HUD
regulations and ensured that costs incurred were for eligible activities.



Background                            In March 1997, the Grantee applied to HUD for funding
                                      under the Canal Corridor Initiative (CCI). Part of HUD’s
                                      approval included $550,000 of Section 108 Loan authority
                                      for the Marina Realty Development Project. The total cost of
                                      this project was estimated to be $1,900,000, of this amount
                                      the Developer was required to provide $1,350,000 from
                                      private sources. In addition, as part of the CCI application,
                                      the Grantee requested $350,000 of Section 108 Loan
                                      authority to be a Grant, so that the Grantee could make
                                      various public improvements in and around the marina area.

                                      In August 1998, the Grantee applied to HUD for a $350,000
                                      Brownfield Economic Development Initiative (BEDI) Grant
                                      for the benefit of the Marina Realty Development Project.
                                      In the Grantee’s BEDI application to HUD, the Grantee
                                      asked for an increase of its Section 108 Loan authority from
                                      $550,000 to $800,000.

                                      In May 1999, the Grantee submitted a formal application to
                                      HUD, which HUD subsequently approved, increasing the
                                      Grantee’s Section 108 Loan authority to $800,000.
                                      Furthermore, the total estimated cost of the Marina Realty
                                      Development Project increased from $1,900,000 to




                                          Page 3                              2002-NY-1001


TOC                                                                                     EXIT
Finding 1


                                            $2,100,0001. However, the funds expected to come from
                                            private sources decreased from $1,350,000 to $950,000.

                                            During our review of the Marina Realty Development
                                            Project, we noted various deficiencies, which are discussed
                                            in the subsections that follow. To facilitate the resolution of
                                            this finding we have included pertinent information
                                            regarding ineligible and unsupported costs in Appendix B to
                                            this report.

                                            Section 108 Loan

    Criteria                                OMB Circular A-87 provides that, to be allowable under a
                                            grant program, costs must be necessary and reasonable for
                                            proper and efficient administration of the program, and be
                                            adequately documented.

     Ineligible costs of                    Our review of the $800,000 Section 108 Loan disbursement
    $5,321.47 and                           records disclosed that the Developer made a duplicate
    unsupported costs of                    payment of $4,641.88, when it paid the quarterly
    $15,146.35                              withholding taxes. Also, our review disclosed that the
                                            Developer used $679.59 to make interest payments
                                            pertaining to CDBG loans. We consider these payments
                                            totaling $5,321.47 to be unnecessary and therefore,
                                            ineligible costs in accordance with Office of Management
                                            and Budget (OMB) Circular A- 87.

                                            Also, we found that the Developer could not provide
                                            adequate documentation for costs totaling $15,146.35. The
                                            costs consisted of: (a) payments for work and services that
                                            were not supported by billings or invoices, (b) payments to
                                            an identity of interest entity for services that are unsupported,
                                            and (c) payments for items with inconsistencies between
                                            dates and amounts on invoices and payment checks. Due to
                                            the lack of supporting documentation and the discrepancies
                                            in the information on available documents, we consider the
                                            $15,146.35 to be unsupported cost.

                                            BEDI Grant

Ineligible cost of                          HUD awards BEDI Grants to Grantees to clean up and
$21,164.78                                  redevelop environmentally contaminated industrial and
                                            commercial sites (brownfields). Our review disclosed that
1
  The Grantee initially estimated the project to cost $2,100,00 of which the Developer would provide $1,600,000
from private investments and request a $500,000 Section 108 Loan.

2002-NY-1001                                     Page 4

    TOC                                                                                                    EXIT
                                                                         Finding 1


                      the Grantee disbursed BEDI Grant funds for unnecessary
                      costs that did not pertain to the site remediation. In
                      addition, the Grantee used BEDI Grant funds to pay for
                      fines and late payment penalties. Use of Grant fund for
                      these type of costs are not allowed by OMB Circular A- 87,
                      Attachment A,C.1.a and Attachment B, Section 20 As a
                      result, the Grantee expended $21,164.78 of BEDI Grant
                      funds for ineligible costs ( $13,496.05 plus $7,668.73).

                      In addition, the Grantee disbursed $31,664.73, of BEDI
Unsupported costs     Grant funds for questionable activities. For example,
$31,664.73            $24,619.91, of Grant funds was used to pay interest costs
                      on loans provided by principals of the Developer. Also,
                      $7,044.82 was used to pay for costs incurred prior to
                      HUD’s approval of the BEDI Grant application and/or
                      lacked adequate supporting documentation. We questioned
                      whether the costs were necessary expenditures; thus, we
                      consider BEDI costs of $31,664.73 as unsupported costs
                      pursuant to OMB Circular A- 87.

                      CDBG Loans

                       The Grantee provided the Developer low interest CDBG
  Unsupported costs   loans of $50,000 and $100,000 on March 13, 2000, and
  $150,000            March 14, 2000, respectively, to assist the Developer with
                      project cost overruns. According to the HUD approved
                      Section 108 Loan application, project overruns were to be the
                      responsibility of the Developer. Moreover, according to the
                      Grantee’s Section 108 Loan application, the Developer was
                      to provide $400,000 of equity, which was to be injected in
                      the project on a pro rata basis with the funding provided by
                      HUD. The Grantee provided two CDBG loans to the
                      Developer even though the Developer was not complying
                      with the equity investment requirement. Furthermore, the
                      Grantee did not inform HUD that the proceeds from the
                      CDBG loans would be used for project overruns. Since the
                      Section 108 Loan application provides that the Developer
                      was responsible for any project costs overruns, we consider
                      the proceeds from the two CBDG loans, amounting to
                      $150,000, that were applied to the project’s cost overruns to
                      be unsupported costs.




                          Page 5                                     2002-NY-1001

TOC                                                                     EXIT
Finding 1


                   Section 108 Grant

                   In the Grantee’s CCI application, the Grantee requested
                   $350,000 of Section 108 Loan authority to be a Grant, so that
                   the Grantee could make various public improvements in and
                   around the marina area.

Ineligible costs   Our review disclosed that the Grantee used $50,000, of
$50,000            Section 108 Grant funds to reimburse the Developer for the
                   purchase of restaurant equipment. The payment of $50,000
                   to the Developer was clearly not part of the approved Section
                   108 Grant application. Thus, we consider the $50,000, used
                   to reimburse the developer for restaurant equipment to be an
                   ineligible use of Section 108 Grant funds.

                   We attribute the cause of the aforementioned deficiencies to
                   the Grantee’s failure to place adequate emphasis on
                   establishing procedures to ensure compliance with HUD
                   requirements. Unless controls are implemented to ensure
                   compliance with the program regulations, the deficiencies
                   cited in this finding may continue to recur, and HUD funds
                   may continue to be used in an inefficient and ineffective
                   manner.



Auditee comments   The Grantee agrees with some of the issues raised in the
                   finding and disagrees with others, as follows:

                   Section 108 Loan

                   The Grantee indicated that it obtained documentation for
                   some of the unsupported costs and proposes to substitute
                   eligible documented costs that were not previously
                   submitted by the Developer to offset the disputed ineligible
                   and unsupported costs.

                   BEDI Grant

                   The Grantee indicated that given the BEDI requirements
                   that the grant funds be drawn down on a pro-rata basis, the
                   Developer had to finance the up-front costs of remediation.
                   The Grantee believes that the interest payments to identity
                   of interest entities are reasonable and necessary project
                   cost. Furthermore, the Grantee states that the interest
                   charged by the site remediation contractor is another form
2002-NY-1001           Page 6

 TOC                                                                    EXIT
                                                                       Finding 1

                    of a necessary and eligible interest cost. Also, the Grantee
                    stated that the payment for costs incurred after receipt of
                    the New York Department of Environmental Conservation
                    (NYDEC) certification was eligible and necessary to
                    complete the remediation. The Grantee stated that the
                    payment for environmental soil testing done prior to the
                    BEDI Grant application was eligible based on HUD’s
                    authorization of payments for costs incurred prior to the
                    Grant approval.


                    CDBG Loans

                    The Grantee provided in its comments that the Developer
                    was responsible for reasonable cost overruns, but that the
                    scope of the overruns of $1.1 million was far above a
                    normal or expected range of cost overrun, and due to the
                    fact that the project faced a very real prospect of failing.
                    The Grantee stated that the two CDBG loans require
                    repayment by the Developer.

                    Section 108 Grant

                    The Grantee stated that the $50,000, provided to the
                    Developer was to implement components of the waterfront
                    promenade trail and allow public access to the Developer’s
                    parking area. The Grantee believes that this was an efficient
                    use of Grant funds to gain valuable public access and
                    convenient trailhead parking that are necessary for the
                    success of the promenade trail.




OIG evaluation of   Concerning the Grantee’s response regarding ineligible and
auditee comments    unsupported Section 108 Loan costs, the HUD Field Office
                    needs to determine if the substitution of other eligible
                    costs is acceptable.

                    Regarding the BEDI Grant, we believe that the interest
                    payments to the identity of interest entity are simply not
                    necessary and reasonable costs. The $13,496.05 charge by
                    the contractor could have been avoided, if the Developer
                    had promptly paid the contractor. Also, since the NYDEC
                    letter of June 11, 1999, indicated that the remediation was
                    complete, cost incurred after that date are not eligible

                        Page 7                                      2002-NY-1001

TOC                                                                   EXIT
Finding 1

                   charges to the BEDI Grant. Concerning the costs incurred
                   prior to the BEDI Grant application, the Grantee’s letter to
                   HUD requested approval of pre-award costs to be incurred
                   in late February, 1999; however, the cost that we are
                   questioning, was paid on July 23, 1997, prior to the
                   submission date of the BEDI application to HUD.

                   The addition of the CDBG loans funds changed the amount
                   of Federal assistance to the project and the dollars per job
                   ratio of the project. The HUD Field Office needs to make a
                   determination as to the eligibility of the use of the CDBG
                   loan funds to pay for project cost overruns.

                   The supporting documentation for the $50,000, Section 108
                   Grant indicates that it was used for restaurant (kitchen)
                   equipment not public improvements. As a result, we
                   consider the cost to be an ineligible use of Section 108
                   Grant funds.




 Recommendations   We recommend that you:

                   1A. Determine the eligibility of the $196,811.08 of
                       unsupported cost discussed in this finding.

                   Also, we recommend that you instruct the Grantee to:

                   1B   Reimburse the applicable program the amount of the
                        ineligible costs of $76,486.25 from non-Federal funds
                        and to seek reimbursement from the Developer.

                   1C. Reimburse the amount of any unsupported costs
                       determined to be ineligible from non-Federal funds.

                   1D. Instruct the Grantee to implement procedures to
                       ensure that all development activities comply with
                       Federal regulations and program requirements.




2002-NY-1001            Page 8

 TOC                                                                    EXIT
                                                                                                   Finding 2


           Inadequate Monitoring Of The Ithaca
             Neighborhood Housing Services
Our review of the Grantee’s management controls disclosed that the Grantee did not adequately
monitor the activities and operations of a subrecipient, the Ithaca Neighborhood Housing
Services (INHS). We believe that adequate monitoring was not performed due to the Grantee’s
general unfamiliarity with applicable program requirements. As a result, the Grantee could not
demonstrate that CDBG funds, amounting to $100,009, were used for activities allowed by
program requirements.




 Background                         During the audit period the Grantee awarded its subrecipients
                                    more than half of its program funding, the majority of which
                                    was provided to a single subrecipient, INHS. We examined
                                    the program files for seven activities administered by INHS,
                                    representing $1,328,000 of the $1,988,000 of CDBG funds
                                    provided by the Grantee to INHS during the period 1996
                                    through 1999. The activities administered by INHS included
                                    housing improvement and home ownership opportunities for
                                    low to moderate income persons.


                                       Distribution of HUD Funding Provided by Grantee
                                                       1996 through 1999




                                                                        $2,629,000




                                     $1,502,000


                                                                                      $1,988,000




                                       Grantee Administered   INHS - Subrecipient    Other Subrecipients




                                        Page 9                                       2002-NY-1001

TOC                                                                                                  EXIT
Finding 2


                              The purpose of our review was to evaluate the Grantee’s
                              management controls and monitoring efforts regarding the
                              administration of its HUD funded activities. Specifically,
                              we sought to determine if the Grantee and its subrecipient,
                              INHS: complied with CDBG requirements; incurred only
                              costs that were necessary and reasonable; and, successfully
                              administered activities that resulted in program objectives
                              being achieved.

 Criteria                     Title 24, Code of Federal Regulations (CFR) Part 85
                              contains the requirements that grantees are to follow
                              regarding program monitoring, including the activities
                              administered by subrecipients.    In addition, Part 85
                              provides financial management standards that must be met
                              by the grantee and subrecipients. Finally, Title 24, CFR
                              Part 570.501 provides that the grantee is responsible for
                              determining the adequacy of performance under
                              subrecipient agreements.

                              Contrary to the requirements, the Grantee did not
                              effectively administer or monitor activities managed by
                              INHS. Among other things, our review disclosed that a
                              formal monitoring policy had not been implemented and
                              the Grantee had not performed on site monitoring of
                              INHS’s activities. Details pertaining to some of the
                              weaknesses identified are described in greater detail below:

                              Inadequate support for program costs

Grantee provided funds        Agreements executed between the Grantee and the INHS
without adequate supporting   provided for program funds to be disbursed based on
documentation                 receipt of a request for payment specifying the costs
                              incurred and receipt of appropriate supporting
                              documentation. Contrary to this requirement, our review of
                              the program files disclosed that the Grantee routinely
                              provided program funds to the INHS without obtaining
                              sufficient documentation. Consequently, several instances
                              were found where funds were disbursed prior to the work
                              being completed. In one instance, funds were disbursed to
                              the INHS nearly fifteen months prior to the work being
                              completed.

                              Six of the seven agreements that we reviewed provided that
                              the INHS would receive a program delivery fee for its
                              housing rehabilitation and home ownership activities.

2002-NY-1001                      Page 10

 TOC                                                                              EXIT
                                                                                     Finding 2


                                  Payments for such fees were to be documented by
                                  timesheets, invoice, or other appropriate information to
                                  evidence the costs associated with the rehabilitation and
                                  home ownership activities. Our examination of the program
                                  files revealed that the Grantee paid INHS the program
                                  delivery fees without any supporting documentation to
                                  justify the payments. Because there was no documentation
                                  to determine the eligibility of the costs charged as program
                                  delivery fees, we consider the entire amount charged under
                                  the six agreements, amounting to $77,352 as unsupported
                                  costs.

                                  Inadequate reporting of program objectives

                                  Title 24, CFR Part 570.503 provides, in part, that the grantee
Subrecipient performance
                                  is responsible for assuring that subrecipients submit
reports inadequate
                                  performance reports regarding their activities. We found that
                                  the reports submitted by INHS were not always of sufficient
                                  detail to determine if HUD program objectives were being
                                  met. Moreover, we noted instances where inaccurate
                                  information provided by INHS was included on the
                                  performance reports submitted to HUD.

                                  Rehabilitation work not supported

   Rehabilitation work not        In addition to our review of the program files maintained by
   supported                      the Grantee, we examined the project files for a housing
                                  rehabilitation activity managed by INHS. We found that
                                  for the most part the rehabilitation work and associated
                                  costs were adequately supported. However, our review
                                  disclosed instances where:

                                  •   there was no evidence that an initial and/or final
                                      inspection of the property to be rehabilitated had been
                                      performed; and

                                  •   there was no evidence of final approval of the
                                      construction work by the homeowner.


  Supporting
  Cooperativedocumentation
                 Agreement with   We also noted an instance where the project file did not
  CityinoffileSan Bernardino
  not                             contain supporting documentation for the rehabilitation
                                  costs pertaining to one property. The INHS received a total
                                  of $22,657 for the rehabilitation of this property; however,
                                  there was no evidence that the work had been done. Due to
                                  the lack of documentation to support that the rehabilitation

                                      Page 11                                     2002-NY-1001

 TOC                                                                                EXIT
Finding 2


                    work had been performed, we consider the $22,657 as
                    unsupported costs.

                    The weaknesses described above underscore the need for
                    improvements in the Grantee’s monitoring of its HUD
                    programs. Unless corrective actions are implemented, the
                    Grantee will not have adequate assurance that the INHS is
                    complying with program regulations.


Auditee comments    The Grantee concurred that program delivery fees paid to
                    INHS for the seven activities audited were not properly
                    documented. However, the Grantee believes that the
                    delivery fees were reasonable and necessary because of
                    program achievements. Also, the Grantee provided that
                    corrective action has already instituted.

                    In its response, the Grantee stated that prior to this audit
                    finding, its staff discovered that $22,657 of CDBG funds
                    were mistakenly paid to the subrecipient in advance of
                    rehabilitation work being completed. The Grantee indicated
                    that it requested and received a rebate of the over paid
                    funds from the subrecipient and that the subrecipient has
                    submitted documentation that the rehabilitation work in
                    question has been satisfactorily performed, including final
                    approval of the construction work by the homeowner.



OIG evaluation of   The statement that the Grantee believes that the program
auditee comments    delivery costs were reasonable or necessary, does not alter
                    the fact that the subrecipient has not provided
                    documentation to support the program costs. The lack of
                    supporting documentation and adequate monitoring of the
                    subrecipients activities seriously weakens the Grantee
                    controls over the use of the CDBG funds.

                    The Grantee states that a rebate of the over payment of
                    $22,657, and final approval of the construction work by the
                    homeowner has been received. However, the Grantee did
                    not provide any evidence to support these facts.




2002-NY-1001            Page 12

 TOC                                                                     EXIT
                                                                   Finding 2




Recommendations   We recommend that you:

                  2A. Determine the eligibility of the unsupported costs of
                      $77,352 pertaining to the program delivery fees and the
                      $22,657 associated with the rehabilitation work.

                  Also, we recommend that you instruct the Grantee to:

                  2B    reimburse the programs from non-Federal funds for any
                        amount determined to be unsupported.

                  2C. Implement corrective actions that will ensure
                      compliance with program regulations regarding
                      monitoring the performance of program activities.




                       Page 13                                  2002-NY-1001

TOC                                                                 EXIT
Finding 2




               THIS PAGE LEFT
                   BLANK
               INTENTIONALLY




2002-NY-1001    Page 14

   TOC                          EXIT
                                                                                    Finding 3




    Unsupported Use Of Program Funds And
       Management Control Weaknesses
Our review disclosed various non-compliances pertaining to accounting and administrative
procedures that weakened the Grantee’s system of management controls. These non-compliances
occurred because procedures were not established to ensure that adequate financial and
administrative controls were implemented to meet program requirements. As a result, the
Grantee does not have adequate assurance that all activities of the Community Planning and
Development Programs are eligible and being properly administered. Consequently, we found
costs, totaling $207,916 that we consider unsupported.



                                  OMB Circular A-87, Cost Principles for State and Local
Criteria                          Governments provides that grantees are responsible for the
                                  efficient and effective administration of grant programs
                                  through sound management practices. In addition, Title 24,
                                  CFR, Part 85.40 provides that grantees are responsible for
                                  managing the day-to-day operations of grant and subgrant
                                  supported activities to ensure compliance with applicable
                                  Federal requirements.

Scope                             We selected a random sample of transactions from the
                                  Grantee’s financial data files using Audit Command
                                  Language (ACL) software. Also, as part of our survey
                                  work we examined the Grantee’s general ledger activity
                                  report for the operating cash account. Based on our survey
                                  work we selected a sample of transactions to review. The
                                  review examined the documentation supporting the costs
                                  related to the transactions, and the allowability and
                                  reasonableness of the expenditures.

                                  The following items should not be considered all-inclusive;
                                  rather, they represent only those non-compliances found as a
                                  result of our review.

                                  Accounting and administrative deficiencies

                                  A.    Questionable Use of Urban Development Action
                                        Grant (UDAG) Program Income funds


                                       Page 15                           2002-NY-1001

TOC                                                                                     EXIT
Finding 3


                              The Grantee authorized the expenditure of $57,000 of
UDAG program income           UDAG program income to settle a notice of claim filed by a
used to pay settlement        former employee. A Stipulation and Agreement was
claim                         executed between the parties to resolve the matter and settle
                              the notice of claim without litigation or administrative
                              proceedings. The Agreement provided for payment to the
                              former employee in the amount of $54,367.32 representing
                              one year’s salary, payroll taxes, and the sum of $2,032.26 as
                              an allowance towards the purchase of a chair and a computer.
                              In addition, the Grantee agreed to pay the former employee’s
                              health insurance premiums for a period of one year, not to
                              exceed a total cost of $2,632.68. The Grantee used $57,000
                              of UDAG program income to make the abovementioned
                              payments.

Criteria                      OMB Circular A-87 establishes principles and standards for
                              determining costs for Federal awards carried out through
                              grants, cost reimbursement contracts, and other agreements
                              with State and local governments. Attachment A of the
                              Circular provides that Governmental units are responsible for
                              the efficient and effective administration of Federal awards
                              through the application of sound management practices and
                              that costs charged be necessary and reasonable for the proper
                              and efficient performance and administration of federal
                              awards. Attachment B of the Circular provides that fines,
                              penalties, damages, and other settlements resulting from
                              violations (or alleged violations) or failure of the
                              governmental unit to comply with Federal, State, or local
                              laws and regulations are unallowable. Moreover, Exhibit A
                              of the UDAG grant agreement provides that program income
                              and/or miscellaneous revenues received shall be spent for
                              activities eligible under Title I of the Housing and
                              Community Development Act of 1974, as amended.

Questionable use of $57,000   We question whether the Grantee’s use of UDAG program
of UDAG program income        income to settle a claimed filed by a former employee
                              represents an eligible activity under Title I of the Housing
                              and Community Development Act. Accordingly, we consider
                              the $57,000 used to settle a former employee’s claim against
                              the Grantee to be a questionable use of program income of
                              the UDAG program.




2002-NY-1001                      Page 16

TOC                                                                                EXIT
                                                                              Finding 3


                          B. Unsupported Costs

                          Adequate controls have not been implemented to ensure
                          that program income of the Housing Development Grant
                          Program (HODAG) is used in accordance with program
                          requirements. Our review disclosed that for the Grantee’s
                          Fiscal Years 1999 and 2000, HODAG program income,
                          totaling $130,000 ($65,000 per fiscal year) were used for
                          costs that were not adequately supported. Our review
                          disclosed that the Grantee provided $65,000 per fiscal year
                          to the Ithaca Neighborhood Housing Services (INHS). The
                          Grantee could not provide any documentation as to how
                          INHS used the HODAG program’s funds. Accordingly, we
                          consider the $130,000 as unsupported costs.

Criteria                  The HODAG grant agreement provides, in part, that program
                          income shall be treated as miscellaneous revenue, and shall
                          be used by the Grantee to support the construction,
                          rehabilitation or operation of real property to be used
                          primarily for low and moderate income residential rental
                          purposes. In addition, OMB Circular A-87 provides that, to
                          be allowable under a grant program, costs must be necessary
                          and reasonable for proper and efficient administration of the
                          program, and be adequately documented.

                          C.    Unsupported Payments to Contractor

 Payments to contractor    The Grantee did not adequately support payments made to
 lack adequate            an independent contractor. A comparison of the contractor’s
 documentation            billing records with the services included in the contract
                          showed that they generally did not contain adequate
                          descriptions identifying the services performed Title 24,
                          CFR Part 85.20(b)(6) provides that accounting records must
                          be supported by source documentation. Accordingly, we
                          consider $20,916 as unsupported costs.

                          D.    Inadequate Segregation of Duties

Lack of segregation of    Various weaknesses were noted that illustrate an inadequate
duties                    segregation of duties among employees. They include:

                          •    Grantee receipts, such as lease payments, are received
                               by the same individual that prepares the deposit slip and
                               takes the receipts to the bank.


                               Page 17                                     2002-NY-1001

TOC                                                                          EXIT
Finding 3


                      •    The Grantee’s fee accountant prepares checks and
                           reconciles the bank accounts.

                      •    An individual with authority to draw down grant funds
                           is also authorized to sign checks.

                      •    The Grantee’s procedures do not ensure that different
                           employees are responsible for purchasing and voucher
                           approval. On occasion, the same individual initiated
                           the purchase and approved it.

                      E.      Weakness in Controls Over Safeguarding of Assets

Assets not properly   In addition, we noted weaknesses in the Grantee’s controls
safeguarded           over safeguarding assets. They include:

                      •    Vouchers are not cancelled; and checks are cross-
                           referenced to Request For Payment documentation
                           instead of the actual invoices paid.

                      •    The Grantee does not ensure that unissued checks are
                           kept in a secure area. Instead, the Grantee forwards the
                           check orders from the printer directly to the fee
                           accountant. Moreover, at the time of our review,
                           Grantee officials were unsure whether checks ordered
                           are pre-numbered or pre-printed.

                      •    According to the Grantee, two signatures are required
                           on all checks. However, the printed checks do not
                           indicate that two signatures are needed. Therefore, it is
                           possible that a check with only one signature could be
                           issued and cashed by a recipient.


                      The above deficiencies have reduced the Grantee’s ability to
                      establish a reliable system to evaluate its overall program
                      performance. Unless corrective actions are implemented, the
                      control and accountability over program funds could be
                      adversely affected.




Auditee Comments      The Grantee provided comments on the following items in
                      the finding:

2002-NY-1001               Page 18

 TOC                                                                        EXIT
                                                                        Finding 3



                    Settlement Claim

                    In its response, the Grantee provided that in its view the
                    Grantee was protecting the Federal financial interest and
                    the best interests of the CDBG program when it settled the
                    notice of claim without litigation. The Grantee believed
                    that this use of UDAG program income was consistent with
                    the Act’s primary objective and specifically, that the
                    activity is an authorized eligible activity under Section
                    105(a)(12), and Section 105(a)(13).

                    HODAG program income funds

                    The Grantee’s response provides that the City erred in its
                    agreements with INHS by not specifying that use of
                    HODAG funds must be in accordance with program
                    requirements.

                    Unsupported Payments to Contractor

                    To address the finding, the Grantee said that the standard
                    contract has been modified and the independent contractor
                    is now attaching further documentation to its timesheet
                    identifying what specific services were performed.

                    Inadequate Segregation of Duties and Assets Not
                    Properly Safeguarded

                    In its comments, the Grantee agrees to adopt policies and
                    institute procedures to further segregate duties to the extent
                    practicable given the small size of the staff. Also, the
                    Grantee agrees to adopt all controls recommended in the
                    audit to assure that assets are adequately safeguarded.




OIG evaluation of   Regarding the Grantee response, OMB Circular A-87,
                    Attachment B, Section 20, clearly provides that the
auditee comments
                    payment of settlements resulting from violations (or alleged
                    violations) or failure of the governmental unit to comply
                    with Federal, State, or local laws and regulations are
                    unallowable.




                        Page 19                                     2002-NY-1001

TOC                                                                   EXIT
Finding 3




 Recommendations   We recommend that you:

                   3A. Determine the eligibility of the unsupported costs of
                       $57,000 pertaining to the settlement claim, the
                       $130,000 of HODAG program income funds and
                       $20,916 in payments to a contractor.

                   Also, we recommend that you instruct the Grantee to:

                   3B. Reimburse the applicable programs for any of
                       unsupported costs found to be ineligible.

                   3C. Establish procedures to ensure that all contract services
                       are adequately identified prior to payment.

                   3D. Establish procedures to provide for an adequate
                       separation of duties for those individuals who
                       maintain control over cash.

                   3E. Adopt controls to ensure that assets are adequately
                       safeguarded.




2002-NY-1001           Page 20

 TOC                                                                    EXIT
Management Controls
In planning and performing our audit, we obtained an understanding of the management controls
that were relevant to our audit. Management is responsible for establishing effective
management controls. Management controls, in the broadest sense, include the plan of
organization, methods and procedures adopted by management to ensure 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 objective:
 controls
                                   •   Program operations – Policies and procedures that
                                       management has implemented to reasonably ensure that
                                       a program meets its objectives.

                                   •   Validity and Reliability of Data – Policies and
                                       procedures that management has implemented to
                                       reasonably ensure that valid and reliable data are
                                       obtained, maintained, and fairly disclosed in reports.

                                   •   Compliance with Laws and Regulations – Policies and
                                       procedures that management has implemented to
                                       reasonably ensure that resource use is consistent with
                                       laws and regulations.

                                   •   Safeguarding Resources – Policies and procedures that
                                       management has implemented to reasonably ensure that
                                       resources are safeguarded against waste, loss, and
                                       misuse.

                                   We assessed the relevant control 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 that significant
   Significant weaknesses          weaknesses exists in the following management controls.
                                   These weaknesses are described in the findings section of
                                   this report.


                                       Page 21                            2002-NY-1001

TOC                                                                                      EXIT
Management Controls


                      •   The Grantee did not implement adequate program
                          controls to ensure that the Developer of the Marina
                          Realty Development Project complied with HUD
                          regulations. Finding 1 (Program Operations)
                          (Compliance with Laws and Regulations).

                      •   The Grantee did not properly monitor its subrecipient
                          activities. Finding 2 (Program Operations).


                      •   The Grantee did not maintain adequate supporting
                          documentation for costs. Finding 1, 2 and 3 (Validity
                          and Reliability of Data).


                      •   The Grantee did not have adequate controls to ensure
                          that costs were eligible and properly supported. Finding
                          1, 2 and 3        (Validity and Reliability of Data),
                          (Safeguarding Resources).




2002-NY-1001              Page 22

   TOC                                                                     EXIT
Follow Up On Prior Audits
An audit of the Grantee was performed by an Independent Auditor for the period ended
December 31, 1999. The report did not contain any audit findings.




                                       Page 23                           2002-NY-1001

TOC                                                                                     EXIT
Follow up On Prior Audits




                            THIS PAGE LEFT
                                BLANK
                            INTENTIONALLY




2002-NY-1001                   Page 24

 TOC                                         EXIT
                                                                                    Appendix A


Schedule Of Ineligible And Unsupported Costs

              Finding                  Ineligible                     Unsupported
              Number                      (1)                            (2)
                 1                    $76,486.25                     $196,811.08
                 2                                                   $100,009.00
                 3                                                   $207,916.00
               Total                  $76,486.25                     $504,736.08


 (1) Ineligible costs are costs charged to a HUD financed or insured program or activity that
     the auditor believe are not allowable by law, contract, or Federal, State, or local policies
     or regulations.

 (2) Unsupported costs are costs charged to a HUD financed or insured program or activity
     and eligibility cannot be determined at the time of audit. The costs are not supported by
     adequate documentation or there is a need for a legal or administrative determination on
     the eligibility of the cost. Unsupported costs require a future decision by HUD program
     officials. This decision, in addition to obtaining supporting documentation, might
     involve a legal interpretation or clarification of Departmental policies and procedures.




                                       Page 25                              2002-NY-1001

TOC                                                                                        EXIT
Appendix A




                        THIS PAGE LEFT
                            BLANK
                        INTENTIONALLY




               (THIS PAGE LEFT BLANK INTENTIONALLY)




2002-NY-1001               Page 26

TOC                                                   EXIT
                                                                                       Appendix B

Schedule Of Ineligible And Unsupported Marina Realty Development Costs
         Check                                                                           Foot
         Date        Number Payee/Description                 Ineligible     Unsupported Note
Section 108 Loan
         1/23/99         1065 Accelerated Info & Doc Filing                        $20.00     1
         3/1/99          1078 Accelerated Info & Doc Filing                        $37.00     1
                 N/A     1272 Miller & Flash                                    $3,000.00     2
         11/18/99        1273 Miller & Flash                                      $200.00     2
         3/27/00         1361 Data Flow                                            $47.69     1
         3/31/00         1366 Ithaca Urban Renewal Agency          $554.59                    3
         4/3/00          1368 Ithaca Urban Renewal Agency          $125.00                    3
         4/4/00          1369 Data Flow                                            $22.74     1
         4/13/00         1384 Public Abstract                                      $80.00   4,5
         4/20/00         1394 Richard Ruswick                                    $148.50      6
         4/20/00         1393 Accelerated Info & Doe Filing                       $113.00     1
         5/3/00          1405 Miller & Flash                                    $1,397.45   2,5
         5/11/00         1417 Mariette Geldenhuys                                  $24.86     8
         5/26/00         1424 Data Flow                                          $233.28    7,4
         6/15/00         1448 Mariette Geldenhuys                                  $29.33     7
         7/7/00          1475 Sciarabba Walker & Company                        $4,040.00     7
         7/18/00         1491 Kristin Baker                                       $486.00     1
         7/28/00         1507 Chris Purdy                                       $1,004.30     2
         8/7/00          1526 Sciarabba Walker & Company                        $1,645.00     7
         8/16/00         1538 1st Cardinal Corp                                 $1,000.00     7
         10/10/00        1592 Gish Logging                                      $1,310.00     1
         10/10/00        1591 Ithaca Journal                                      $307.20     1
                 N/A      N/A IRS/TCTC Fed Withholding           $4,641.88                    8
                     Subtotal for Section 108 Loan               $5,321.47     $15,146.35

BEDI Grant
       7/23/97           1569 GAI                                               $6,763.50    9
       7/1/99            1165 Patricia Purdy                                      $281.32    7
       8/16/00           1542 Patty Purdy                                      $10,826.82   10
       8/16/00           1543 Stephen B. Flash                                 $12,806.99   10
       8/29/00           1561 Iacovelli Bros.                   $13,496.05                  11
                 N/A      N/A Paolangeli Contractor              $7,668.73                  12
                 N/A      N/A Chris Purdy                                        $986.10    10
                     Subtotal for BEDI Grant                    $21,164.78     $31,664.73

CDBG Funds
      3/9/00            11005 Steve Flash/Marina Realty                        $50,000.00   13
      3/14/00           11019 Marina Realty of Ithaca, LLC                    $100,000.00   13
                     Subtotal for CDBG Loans                                  $150,000.00

Section 108 Grant
        3/8/01          11385 Marina Realty of Ithaca, LLC      $50,000.00                  14
                     Subtotal for Section 108 Grant             $50,000.00

        Total Ineligible and Unsupported costs                  $76,486.25 $196,811.08




                                            Page 27                             2002-NY-1001

TOC                                                                                            EXIT
Appendix B



Footnotes
   1      No evidence that cost is related to the project. OMB Circular A-87, Attachment A,
          C.1.h
   2      Payment to identity of interest entity for services or costs that are unsupported and/or
          unreasonable. OMB Circular A-87, Attachment A, Section C.1.a
   3      Cost for interest payment on the CDBG loans are ineligible. Title 24, CFR 570.703
   4      Check dated prior to Invoice. OMB Circular A-87, Attachment A, C.1.h
   5      Check amount does not agree with invoice(s). OMB Circular A-87, Attachment A,
          C.1.a
   6      Payment for services that are not supported. OMB Circular A-87, Attachment A,
          C.1.j
   7      Inadequate supporting documentation. OMB Circular A-87, Attachment A,C.1.j
   8      Represents a duplicative charge for amount that was paid on 10/16/00, check no.
          1603. Thus, the cost is ineligible. OMB Circular A-87, Attachment A, C.1.a
   9      Represents costs incurred prior to the date of the BEDI application. OMB Circular A-
          87, Attachment A, C.1.a
   10     Payments to identity of interest entity for interest costs that may not be a necessary or
          reasonable project cost. OMB Circular A-87, Attachment A, C.1.a
   11     Costs do not pertain to site remediation, costs incurred after Certification. OMB
          Circular A-87, Attachment A, C.1.a
   12     Service Charges or late payment fees not necessary and reasonable for Grant
          Administration. OMB Circular A-87, Attachment B, Section 20
   13     Represents CDBG funds used for cost overruns. Budget overruns are the
          responsibility of the Developer in accordance with the Section 108 award.
   14     An invoice for restaurant (kitchen) equipment supported the costs. The Section 108
          Grant funds were to be used for public improvements. Thus, the cost is ineligible.




2002-NY-1001                              Page 28

TOC                                                                                        EXIT
                                                                                                      Appendix C

Grantee Comments




                                                                   February 11, 2002

Mr. Alexander C. Malloy
District Inspector General for Audit
Office of Inspector General
U.S. Department of Housing and Urban Development
Lafayette Court Building
465 Main Street
Buffalo, NY 14203-1780


        Re:     Grantee’s Response to Draft Audit Findings
                City of Ithaca’s Small Cities Community Development Block Grant Program


Dear Mr. Malloy:

Our goal is to use the audit as a learning tool to improve our efforts to utilize HUD funds in an efficient and
effective manner to address community development needs. Thank you for the opportunity to provide the
following comments on the draft audit findings:

1       Finding 1 - Canal Corridor Initiative

To establish the context for the Marina Realty of Ithaca, LLC (MRI) project, it is important to highlight the
following two points:

1.      The MRI project was an extremely complicated public/private project that successfully overcame a
        series of feasibility obstacles to achieve the principal program objectives to revitalize the underutilized
        commercial waterfront by converting a brownfield site into a vital restaurant/marina destination that
        employs 88 FTE jobs and generates substantial tax revenues.

2.      The project sustained extraordinary cost overruns and encountered extensive delays that were beyond
        the control of the Developer and the grantee. The Developer pledged private investment of $1.75
        million dollars in the Section 108 loan application (excluding BEDI). A statement summarizing project
        expenses, provided by MRI’s fee accountant, indicates that MRI ultimately invested over $2.8 million
        dollars (excluding BEDI) in the project by the time the restaurant opened on 1/31/01. To further




                                              Page 29                                          2002-NY-1001

     TOC                                                                                            EXIT
Appendix C


document project costs, the grantee has requested the Developer to provide a detailed listing of project
expenses.

Section 108 Loan

Unsupported Section 108 Loan Costs

Of the $800,000 disbursed through the Section 108 loan, the draft audit identified $5,321.47 as ineligible costs
and $15,146,35 of costs lacking adequate supporting documentation. We do not dispute the items categorized
as ineligible expenses. Given the project’s large cost overruns, we propose to substitute eligible documented
costs that were not previously submitted by the developer to offset the disputed ineligible costs.

For the unsupported costs, the largest single expense item was an $4,040.00 payment to Sciarabba Walker &
Company, Inc., MRI’s fee accountant. We agree that original cost documentation was inadequate in the form of
a one-page summary statement covering five previous invoices and lacking a full description of the services
rendered. MRI has now submitted the individual invoices to substantiate the expense, which if acceptable, will
reduce the unsupported costs to $11,106.35.

The grantee is working closely with the Developer to resolve the other unsupported costs items identified by
seeking additional supporting documentation for each cost item. This additional cost documentation is
anticipated to be available by the time the audit is finalized.

In addition to providing further documentation for the listed unsupported costs, we propose to submit additional
eligible documented project costs that were not previously submitted by the developer for reimbursement as a
means to ensure there are at least $800,000 of supported Section 108 loan costs.
Based on the above, the total amount of ineligible and unsupported costs to date is $16,427.82. Following are
proposed additional Section 108 loan costs submitted by the Developer.

        check           check
        date            number           Payee/Description                                Amount

        11/16/00        1635             Ellsworth Engineers/ HVAC & Plumbing Design               $1,769.30
        12/4/00         1642             Sign-A-Rama/ 2 neon signs                         $7,000.00
        12/5/00         1650             J.C. Watt Distributing/ beer draft equip.         $4,602.11
        12/5/00         1654             EFD of Ithaca, Inc./ logo, letterhead, stationary $1,534.00
        12/5/00         1651             Univera Healthcare/pre-opening health insur. $2,190.99
                                                                                          $17.096.40

In addition to the costs listed above, the Developer has submitted extra documented project costs.

To prevent unsupported costs from occurring in the future, the grantee proposes to institute the following
enhanced procedures and heightened criteria for approving project cost submittals to ensure that project cost
files contain adequate supporting documentation that each cost is necessary and reasonable:




2002-NY-1001                                 Page 30

   TOC                                                                                                EXIT
                                                                                                       Appendix C



    1. require that each submitted cost is supported by a written invoice or bill that clearly indicates the
        services or goods purchased are related to the project and itemize out the services/goods provided;
    2. continue grantee’s policy of requiring submission of a copy of the front and back of the cashed check as
        proof of payment of project costs, where applicable;
    3. apply heightened scrutiny for adequacy of supporting documentation and reasonableness of costs paid
        to any identity of interest entity; and
    4. require borrower to submit cost documentation in a manner that summarizes and organizes cost
        submissions by category of authorized use of funds consistent with the project’s approved budget. In
        addition, the summary submission of costs must identify the check date, check number, vendor and
        payment amount.

$90,000 of Section 108 Funds Not Used for Purchase of Land

For reasons beyond the control of the Developer and the grantee, this property targeted for acquisition and
renovation was unavailable for purchase when the Section 108 funds became available. The property remains in
ownership by New York State and is administered by NYDEC. The grantee remains in negotiations to date
with NYDEC to gain ownership of the property, and the Developer indicates strong interest in acquisition when
the property becomes available.

Section 108 loan funds originally earmarked for property acquisition were used for non-construction cost
overruns of the restaurant/marina project to ensure that primary job creation and revitalization objectives were
accomplished. The grantee believed it had authority to redirect the Developer’s use of loan funds from property
acquisition to other eligible project costs to reflect the unavailability of the property for acquisition and under-
estimates of project costs.

At the time that the Section 108 Loan application was developed, the property’s administrator, NYDEC,
indicated they were supportive of sale of the property directly to the Developer. The Developer planned to
acquire the site, remove a portion of the building extending into the permanent flood control easement, lease
space to the Community Flyfisher program for their retail store and expand parking for the restaurant. By the
time the Section 108 funds became available, the property’s tenant had mounted a legal and political campaign
to retain tenure at the property in perpetuity, even thought the NYDEC had concluded that the property was
surplus. Through a subsequent DEC administrative proceeding it was ruled that the tenant’s rights to occupy the
property would extinguish upon transfer of the property from DEC to a buyer. DEC is now working to transfer
the property to the grantee, rather than the Developer. Further complicating this land transfer are DEC-required
survey methodology requirements that differ from accepted modern survey technique. The Community
Flyfisher program found suitable lease space on the southern side of Inlet Island at a similar lease rate.

Records on file indicate that both the Developer and the grantee have expended extensive resources to gain
acquisition of the property. The Developer indicates they are still interested in acquiring the property if it is
ever made available to them.


BEDI Grant

Per a telephone call of 1/9/02 from Gary Clugston to Nels Bohn, it our understanding that the concern raised in
the draft audit about the method of procurement and selection of a contractor by the Developer for the site
remediation work will be removed from the final audit.


                                               Page 31                                          2002-NY-1001

   TOC                                                                                                    EXIT
Appendix C


The audit identified a total of $21,164.78 as ineligible costs and $31,664.73 as unsupported costs from this
funding source. The largest category of disputed costs are for interest charges associated with covering the time
period from when the site remediation work was undertaken in the spring of 1999 and when BEDI funds were
accessible to the Developer for reimbursement in August 2000. We submit that interest costs for this time
period were necessary and reasonable project expenses.

Given the BEDI requirements and the particular circumstances of the project, interest costs were a necessary
project cost. Due to terms of the BEDI grant agreement, BEDI funds must be drawn down on a pro-rata basis in
conjunction with Section 108 loan advances. Per applicable CDBG regulations, Section 108 loan funds can
only be disbursed on a pro-rata basis with other project financing, essentially requiring building construction to
commence prior to any disbursement of Section 108 loan funds. Since a significant portion of the restaurant
building’s footprint overlaps with the site remediation area, the site remediation work had to precede building
construction, thereby requiring the Developer to finance the up-front costs of remediation until BEDI funds
could be secured.

If one agrees that interest costs were necessary, then the issue of reasonableness must be addressed. In the
spring of 1999, the Developer found themselves facing a large bill from their site remediation contractor, but
unable to access BEDI funding. In addition, the contractor was charging a 2% interest per month on the unpaid
balance. The Developer sought and received personal loans from the partners and their relatives to raise the
cash to pay the contractor well over $200,000. The loans were evidenced by written promissory notes with an
interest rate established at 9.5% annually, just below prevailing market rates available from commercial lenders.
Furthermore, there were no closing costs charged for these loans. We submit that these interest payments to
identity of interest entities in the amount of $24,619.91 are reasonable and resulted in lower interest charges
than if the Developer sought loan financing from a local commercial lender. Furthermore, we believe the
$7,668.73 in interest charged to the Developer by the site remediation contractor is another form of a necessary
and eligible interest cost, rather than an ineligible cost as identified in the draft audit.

The other ineligible cost identified in the audit is a payment of $13,496.05 to Iacovelli Bros., the contractor who
prepared the building site and constructed the restaurant building foundation. The audit identified this cost as
ineligible because the “costs do not pertain to site remediation where incurred after Certification” (by NYDEC).
Although this cost was incurred after receipt of the NYDEC certification that the soil contamination had been
adequately removed, the work by Iacovelli was directly related to the site remediation. The work involved
removal of debris that was back-filled in one area of the remediation area by the site remediation contractor. In
addition, the work returned that portion of the site to grade with #4 stone so the site would structurally support
redevelopment of the site.

The Developer explained to the grantee at time of submission of the request for payment that the work was
necessary to correct site remediation deficiencies associated with the material used to backfill one area of the
site. In testing the soils for the foundation, Iacovelli discovered a “hole” of organic debris in the site
remediation area that was different from the rest of the remediated area. To properly prepare the site for the
foundation, debris from the “hole” was removed and stone brought in to return the area to grade.

The argument supporting this cost as an eligible BEDI cost is that site remediation is not complete simply when
the soil contamination has been removed, but only after the site has been brought back to grade in a manner that
supports the intended reuse as a new restaurant. In fact, the BEDI grant requires redevelopment of the site as a
condition of the award. This cost was authorized for payment to the Developer based on a verbal explanation of
the nature of the work conducted to support the written invoice, but we recognize now that the written
documentation lacks adequate detail. The Developer has requested a certified statement from Iacovelli Bros.
further specifying the work performed.

2002-NY-1001                                  Page 32

   TOC                                                                                                  EXIT
                                                                                                   Appendix C


A payment of $6,763.50 to GAI Environmental Services, Inc. for environmental soil testing at the project site was
identified as an ineligible cost because the cost was incurred prior to the date of the BEDI application. The
environmental testing was necessary to document and characterize site contamination thereby making site
remediation eligible for BEDI assistance.

HUD approved the grantee’s request for a pre-award approval authorizing future payment for cost incurred prior to
grant approval. The grantee concluded that the cost of environmental investigation is an eligible project cost
associated with site remediation. As the BEDI grant agreement does not require a Developer match for the site
remediation activities, the grantee authorized reimbursement for this cost as an eligible pre-award BEDI project
cost.

CDBG Loans

The audit asserts that two loans from the IURA-administered Community Development Revolving Loan Fund
(CD-RLF) awarded to the Developer to assist in covering cost overruns are unsupported because the grantee’s
Section 108 loan application stated that the developer was responsible for any project cost overruns. Because
the CD-RLF is capitalized from CDBG program income, the audit concluded that CDBG funds were not
allowed to be used to assist in covering project cost overruns.

We submit that the Developer was responsible for reasonable cost overruns, but that the scope of the overruns,
estimated at $600,000 at the time the loans were approved, but eventually rising to over $1.1 million based on
the Developer’s accountant’s statement of project expenses, was far above a normal or expected range of cost
overrun. The grantee faced the very real prospect of the project failing. The Developer, the grantee and the
grantee’s economic development consultant met to analyze the impacts of the overruns on the pro forma and
project feasibility, and determined that partial loan assistance from the grantee was appropriate to rescue the
project. The grantee agreed to lend 25% of the $600,000 cost overrun on the condition that the Developer
covered the remaining $400,000 gap, including an additional equity injection of $200,000.

Based on the Developer’s total project expenses, the two CDBG loans totaling $150,000 account for less than
15% of the ultimate cost overrun, with the remainder was covered with non-federal funds. The CDBG loans
require repayment by the Developer and the grantee was careful to ensure that such funding did not exceed the
allowable thresholds for federal funding assistance per FTE job created.




                                             Page 33                                        2002-NY-1001

  TOC                                                                                                 EXIT
Appendix C


Section 108 Grant

The grantee awarded a $50,000 deferred loan to the Developer from the Section 108 grant funds earmarked for
the waterfront promenade trail to implement components of the waterfront promenade trail. Per the executed
3/14/01 loan agreement, the Developer agreed to provide the grantee with the following benefits in return for
the loan assistance:
1. grant the right for public use of the restaurant’s privately-owned parking area (approximately 33 spaces) at
     no charge as trailhead parking for the public waterfront promenade trail,
2. make improvements to facilitate a waterfront dock walkway along the Barge Canal on the restaurant
     property and grant a permanent public easement to allow the public to access and use the dock walkway;
3. maintain the publicly-owned parking located in the immediate vicinity (approximately 20 stalls); and
4. grant a permanent 25-foot wide easement for the public waterfront promenade trail across approximately
     120 linear feet of private property along the Flood Control Channel.
The grantee considers the above purchased benefits for the public waterfront promenade to constitute fair and
reasonable compensation for the loan assistance.

Our position is that the loan was an efficient use of grant funds to gain valuable public access and convenient
trailhead parking that are necessary for the success of the promenade trail. Viewed in this context, the primary
issue is whether the grantee received benefits/rights of reasonable and comparable value to the $50,000 deferred
loan, not that the Developer documented that the loan proceeds were injected into the project as documented by
cost receipts for project furniture, fixtures & receipts.

It is important to note that the grantee is working to significantly expand the scope of the promenade trail into a
destination recreational resource to draw people to Inlet Island rather than the more modest amenity described
in the original CCI application. Adequate trailhead parking will be critical to its success. The grantee has
committed additional funds into the waterfront promenade trail, even though the CCI award did not require any
local match for this component. The City has earmarked $175,000 of local funds to augment CCI funding for
development and construction of the promenade. Moreover, the City submitted a $560,000 grant application to
the NYS Clean Air/Clean Water Bond Act for additional funds to implement the full waterfront promenade
trail.




2002-NY-1001                                  Page 34

   TOC                                                                                                  EXIT
                                                                                                   Appendix C



Finding 2 - Monitoring


Due to a combination of staff vacancies, a small staff size and a heavy workload, we were unable to conduct as
much formal on-site monitoring of sub-recipients as desired for the period audited. Nevertheless, our records
show that INHS has uniformly met performance goals and implemented programs on budget. Measured on a
per-unit basis ($861/unit) or as a percentage of CDBG funding (8%), INHS delivery fees appear to be very
reasonable (see attached table “INHS Delivery Fees for CDBG Programs 1996-1997”). During the audit time
period the grantee recognized the importance of monitoring and created a “grants monitor” job position,
increasing the staff to four full-time employees administering HUD funding.

Inadequate Support for Program Costs

We concur that program delivery fees paid to INHS for the seven activities audited were not properly
documented by timesheets, invoices, or other evidence of direct costs, but we believe the delivery fees were
reasonable and necessary in light of the documented record of program achievements and a review of sub-
recipient files evidencing extensive efforts carried out by INHS to successfully implement the housing
rehabilitation and home ownership activities reviewed.

Grantee has already instituted corrective action that requires future requests for payments for delivery charges
are supported with direct cost documentation of costs incurred by the sub-recipient. INHS has been informed
that future requests for payment must include evidence of direct costs incurred, such as timesheets and invoices
rather than a negotiated fixed delivery fee.

A recent on-site monitoring visit included inspection of files that demonstrated that INHS maintains records
evidencing the following scope of work for home rehabilitation and home ownership activities:

Home Rehabilitation –
• service request form/intake
• inspection report
• work write-up
• specifications/drawings
• bids/bid summary
• owner/contractor agreement/change orders
• pay-out approvals
• final acceptance of work
• ledger sheet
• certificate of compliance

Home Ownership –
• application/intake
• income verification
• house inspection & work write-up
• income/expense statement
• coordination with private/public lenders
• loan underwriting, including a credit report and verification of employment & due diligence
• loan commitment letter
• promissory note
                                             Page 35                                        2002-NY-1001

  TOC                                                                                                EXIT
Appendix C


•   mortgage

Furthermore, the attached table “INHS Delivery Fees for CDBG Programs 1996-1997” shows that shows that
the INHS activities audited were successfully administered and program objectives were achieved.

Performance of delivery work by INHS is confirmed by a very close working relationship between INHS and
the City that includes City/IURA membership on INHS committees directly overseeing implementation of the
activities. For instance, the INHS Rehabilitation Committee is chaired by a member of the Planning &
Development Department and must approve each rehabilitation project. Similarly, the INHS Loan Committee
approves each loan commitment. The Director of Community Development for the IURA is a member of this
loan committee. Moreover, the INHS Board of Directors includes two members of the City’s Department of
Planning and Development.

Rehabilitation Work Not Supported

Prior to the audit finding, grantee staff discovered that $22,657 in CDBG funds were mistakenly paid to the
sub-recipient in advance of rehabilitation work being completed in the Southside Home Improvement Program,
Phase II. Grantee requested and received a rebate of the over-paid funds from the sub-recipient and a letter
certifying that any interest earned on the pre-payment will be provided to HUD.

After the audit fieldwork was completed, the sub-recipient submitted documentation that the rehabilitation work
in question has been satisfactorily performed, including final approval of the construction work by the
homeowner.




2002-NY-1001                                Page 36


    TOC                                                                                             EXIT
                                                                                                      Appendix C


Finding 3 – Management Controls

UDAG Program Income Used to Pay Settlement Claim

The draft audit questioned the use of $57,000 in UDAG program income to settle a legal claim filed against the
grantee by a former employee.

In our view, the grantee was protecting the federal financial interest and the best interests of the CDBG program
when it settled the notice of claim without litigation. The settlement represented a compromise fairly reached
between the grantee and a former employee to the benefit of all parties.

After consultation with the grantee’s Attorney, the grantee determined it was in the best interest of the CDBG
program to settle the notice of claim, effectively resulting in the employee’s resignation. Considerations in this
decision included:
    1. the legal costs of litigation;
    2. the staff time required for litigation;
    3. the impact on the grantee’s ability to effectively and efficiently administer and implement CDBG
        programs while litigation against a key employee proceeded;
    4. the risk of losing the initial litigation and the cost of an appeal; and
    5. the on-going organizational dysfunction stemming from management’s dissatisfaction with an
        employee and the employees dissatisfaction with management.

Overall, the grantee concluded that the cost of a negotiated settlement outweighed the cost of not settling an
imminent legal claim. The settlement was critical to the grantee’s successful ability to properly plan and
execute community development activities.

It is our understanding that, per the UDAG close-out agreement, UDAG program income is deemed as
miscellaneous revenue, the use of which is not governed by 24 CFR Part 570. Such miscellaneous revenue may
be used for activities eligible under Title I of the Housing and Community Development Act of 1974, as
amended (the Act). We believe that this use of UDAG program income was consistent with the Act’s primary
objective to develop viable urban communities by providing decent housing and suitable living environments
and expanding economic opportunities. Specifically, we view the activity as an authorized eligible activity
under Section 105(a)(12) and Section 105(a)(13).

Section 105(a)(12)(B)(v) of the Act authorizes “activities necessary … to develop a policy-planning-
management capacity” so that the recipient may more rationally and effectively “carry out management,
coordination, and monitoring of activities necessary for effective planning implementation.” As stated above, a
major consideration in the decision to settle the claim was to eliminate interference with the grantee’s ability to
manage and carry out effective planning implementation.

Section 105(a)(13) of the Act authorizes “payment of reasonable administrative costs related to planning and
execution of community development and housing activities…” We believe the use of UDAG program income
in this case was a reasonable administrative costs.




                                              Page 37                                         2002-NY-1001

   TOC                                                                                                  EXIT
Appendix C


Unsupported Costs - $130,000 in HODAG program income funds unsupported

The City erred in its agreements with INHS by not specifying that use of HODAG funds must be limited to
support “the construction, rehabilitation or operation of real property to be used primarily for low and moderate
income residential rental purposes” as required by the HODAG close-out agreement and requiring
documentation of how HODAG program income was used. INHS mistakenly concluded that such funding was
available for general administrative expenses to support their general operations and deposited HODAG funds
in their Operating fund rather than the Rental Management fund. Part of the confusion is caused by the manner
in which the City structures assistance to INHS through the City Controller’s office. In each of the two years
examined in the audit, the City provided INHS with $85,000 in assistance through a single annual agreement, of
which $65,000 was derived from HODAG program income and $20,000 from non-federal funds.

One of the three major programs operated by INHS is the development and operation of rental housing for
low/mod income persons. INHS owns and operates a rental housing program that includes 97 housing units, of
which low/mod persons at affordable rent levels occupy the vast majority.

In the past INHS has not kept time records for the various activities that its employees engage in. Nor has INHS
developed an approved indirect cost plan to allocate out indirect costs. While HODAG funds were deposited
into the Operating fund, this fund provides significant financial support for the Rental Management fund in the
form of staff, office space, office equipment and supplies. Considering just direct costs of personnel, INHS
estimates that the Rental Management function received more than $77,000 in 1999 and over $85,000 in 2000
from the time of personnel paid from the Operating fund (see attached table “Ithaca NHS – Operations
Contribution to Rental Management 1999-2000”). This calculation is based on a time study conducted three
years ago and INHS Executive Director’s analysis of tasks performed by each employee and the each
employee’s corresponding allocation of time spent on the rental program for each employee. This contribution
from the Operations fund to the rental program exceeds the HODAG income received in each year.

To remedy this deficiency, the City will develop a separate agreement with INHS for the use of any HODAG
funds in the future. Such agreement will require documentation on how INHS uses HODAG program income
for an eligible activity and will further require submission of time sheets or other appropriate documentation as
a condition of payment. INHS has agreed to have their employees each maintain time records by funded activity
in the future.

Unsupported Payments to Contractor

The audit indicated that $20,916 of payments to an independent contractor lacked adequate documentation as
contractor invoices/time sheets only specified the amount of hours spent on each program. Because this
independent contractor was implementing two housing rehabilitation programs he maintained regular office
hours in the IURA offices at City Hall to be easily available by property owners and contractors, so grantee
management on a regular basis oversaw his work. The contractor attended weekly staff meetings. Furthermore,
the contractor reported to an IURA oversight committee to gain loan approvals and to provide status reports on
a regular basis.




2002-NY-1001                                 Page 38

   TOC                                                                                                EXIT
                                                                                                     Appendix C


To address this finding, the independent contractor is now attaching further documentation to their timesheet
identifying what specific services were performed. To prevent such a finding in the future, the grantee’s
standard contract form for independent contractor services has been modified to specifically require
documentation on contractor invoices to identify specific services performed during the billing period.

Inadequate Segregation of Duties

The grantee agrees to adopt policies and institute procedures to further segregate duties to the extent practicable
given the small staff size. Procedures will be established to provide for adequate separation of duties for those
individuals who maintain control over cash.

Assets Not Properly Safeguarded

The grantee agrees to adopt controls recommended in the audit to assure that assets are adequately safeguarded.
Please note that the grantee has instituted the use of new checks that specify that a check can only be issued and
cashed by a recipient with two signatures from the grantee.

We request clarification of the issue raised with respect to reimbursing employees for out-of-pocket costs,
where no purchase order is prepared, if the employee is required to submit a receipt and such reimbursement is
approved by management for payment. It appears that a payment voucher system for every payment will be
unnecessarily unwieldy for small purchases, especially in light of the fact that the grantee does not maintain a
petty cash fund.

I very much appreciate this opportunity to provide comments and look forward to working with you and the
HUD-Buffalo office to resolve any outstanding issues and improve our performance.




                                              Page 39                                         2002-NY-1001

   TOC                                                                                                  EXIT
Appendix C




               THIS PAGE LEFT
                   BLANK
               INTENTIONALLY




2002-NY-1001      Page 40

  TOC                           EXIT
                                                                          Appendix D

Distribution
Director, City of Ithaca, Department of Planning & Development, Ithaca,
  New York
Mayor, City of Ithaca, Ithaca, New York
Principal Staff
Regional Director, New York/New Jersey
Director, Community Planning & Development, Buffalo Area Office
Field Office Director , Buffalo Area Office
Assistant General Counsel, New York/New Jersey
CFO, Mid-Atlantic Field Office
Special Advisor/Comptroller, DOTM
Acquisitions Librarian

Sharon Pinkerton, Senior Advisor
Subcommittee on Criminal Justice
Drug Policy & Human Resources
B373 Rayburn Housing Office Building
Washington, DC 20515

Stanley Czerwinski, Director
Housing & Telecommunications Issues
US General Accounting Division Office
441 G Street, NW, Room 2T23
Washington, DC 20503

Steve Redburn, Chief Housing Branch
Office of Management and Budget
725 17th Street, NW, Room 9226
New Executive Office Building
Washington, DC 20503

The Honorable Fred Thompson
Ranking Member
Committee on Governmental Affairs
340 Dirksen Senate Office Building
United States Senate
Washington, DC 20510

The Honorable Joseph Lieberman
Chairman
Committee on Governmental Affairs
706 Hart Senate Office Building
United States Senate
Washington, DC 20510

                                         Page 41                          2002-NY-1001

TOC                                                                            EXIT
Appendix D



The Honorable Dan Burton
Chairman
Committee on Government Reform
2185 Rayburn Building
House of Representatives
Washington, DC 20515

The Honorable Henry A. Waxman
Ranking Member
Committee on Governmental Reform
2204 Rayburn Building
House of Representatives
Washington, DC 20515

Andy Cochran
House Committee on Financial Services
2129 Rayburn, H.O.B
Washington, DC 20515

Clinton C. Jones, Senior Counsel
Committee on Financial Services
U.S. House of Representatives
B303 Rayburn H.O.B.
Washington, DC 20515




2002-NY-1001                            Page 42

 TOC                                              EXIT