oversight

Hudson County Division of Community Development Community Planning and Development Programs, New Jersey, New Jersey

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-04-15.

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

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                 AUDIT REPORT




  Hudson County Division of Community Development
   Community Planning and Development Programs
               Jersey City, New Jersey
                        2002-NY-1002
                         April 15, 2002

                       OFFICE OF AUDIT
                   New York/New Jersey District




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                                                                  Issue Date
                                                                       April 15, 2002
                                                                 Audit Case Number
                                                                      2002-NY-1002




TO: Kathleen Naymola, Director, Community Planning and Development Division, 2FD


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


SUBJECT: Hudson County Division of Community Development
         Community Planning and Development Programs
         Jersey City, New Jersey

We examined the operations of the Hudson County Division of Community Development
(hereafter referred to as the Grantee) pertaining to its Community Planning and Development
Programs. Specifically, we reviewed its Community Development Block Grant (CDBG),
Emergency Shelter Grant (ESG), and HOME Investment Partnership (HOME) Programs. This
audit report contains six findings with recommendations for corrective action.

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

Should you or you staff have any questions, please contact Edgar Moore, Assistant District
Inspector General for Audit, at (212) 264-8000, extension 3976.




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Management Memorandum




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2002-NY-1002              Page ii
 Executive Summary
We have completed an examination of the operations of Hudson County Division of Community
Development (Grantee) pertaining to its administration of its Community Planning and
Development Programs. Specifically, we reviewed its Community Development Block Grant
(CDBG), Emergency Shelter Grant (ESG), and HOME Investment Partnership (HOME) Programs.
The primary objectives were to determine whether the Grantee: (1) carried out its activities in an
economical, efficient, and effective manner; (2) complied with applicable CDBG, ESG, and HOME
Program requirements, laws and regulations; and (3) had adequate controls to ensure compliance
with HUD requirements and Federal regulations. In this regard, our review disclosed that the
Grantee did not always comply with program requirements, laws and regulations; nor did it have
adequate controls to ensure that all activities were carried out in an economical, efficient, and
effective manner. Instances of noncompliance and the incurrence of uneconomical costs are
discussed in the findings and are summarized below.



                                      Contrary to HUD regulations, the Grantee provided $1
 Questionable land                    Million in CDBG funds for the purchase of land, which was
 transaction                          made by a sub-recipient without obtaining the required
                                      approval from HUD for the release of funds, and without
                                      obtaining the applicable environmental clearance from the
                                      New Jersey Department of Environmental Protection
                                      (NJDEP). In addition, the Grantee did not execute a loan
                                      agreement for a $300,000 loan that was included in the
                                      above amount, and did not record the loan on its books. We
                                      attribute this to the Grantee’s unfamiliarity with HUD
                                      regulations, and to inadequate accounting procedures for
                                      recording loans. As a result, $1 million in program cost
                                      may be ineligible because the land transaction was not
                                      approved by HUD, and may not be economically viable
                                      since the land may be contaminated. Consequently, the
                                      purchase of the land and its associated costs are considered
                                      questionable since the Grantee did not obtain the required
                                      HUD approval for the release of funds.

                                      Furthermore, we noted that weaknesses in the Grantee’s
  CDBG costs of $63,825               controls over disbursements caused questionable costs of
  are being questioned                $63,825, to be charged to the CDBG Program. This is
                                      attributable to the Grantee’s failure to properly follow: (a)
                                      its procedures for making disbursements and
                                      reimbursements to sub-recipients; and (b) Federal
                                      regulations, which stipulate that only allowable
                                      expenditures can be charged to federally financed
                                      programs.



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Executive Summary


  $126,173 in Emergency      In addition, the Grantee did not ensure that its sub-
  Shelter Grant funds        recipients expended available Emergency Shelter Grant
  were not expended          (ESG) funds timely. As a result, ESG funds, totaling
  timely                     $126,173, may not have been used for its intended purposes
                             or effectively reprogrammed to meet other ESG Program
                             needs. As such, the Grantee was not able to provide
                             adequate assurance that sub-recipients have provided all the
                             services to the homeless for which funds were provided.
                             This can be attributed to the Grantee’s lack of monitoring
                             to ensure that sub-recipients have expended their funds or
                             submitted bills for timely reimbursement of ESG expenses.

                             Our review also disclosed that the Grantee inappropriately
    Excessive salary costs   allowed sub-recipients to charge excessive salary costs to
    were charged to the      the Emergency Shelter Grant (ESG) Program. As a result,
    ESG Program              $17,280 in ESG funds were not used for its intended
                             purpose and/or for other eligible operating expenses. We
                             attribute this to the Grantee’s failure to establish controls to
                             ensure that only allowable salary amounts were charged to
                             the ESG Program.

                             Furthermore, the Grantee neither adequately documented
     Noncompliance with
                             its compliance with Federal Labor standards; nor ensured
        Federal labor
                             that contractors complied with the provisions of the Davis
      standards/Davis
                             Bacon Act. As a result, there is inadequate assurance that
         Bacon Act
                             contractors and subcontractors were eligible to perform
                             work on jobs financed with Federal funds, and that
                             employees of contractors were paid prevailing wages. We
                             attribute this to a lack of training of the Grantee’s staff on
                             Federal Labor standards, especially those pertaining to the
                             Davis Bacon Act.

                             Lastly, the Grantee did not perform inspections on
    The required HOME        completed HOME-assisted rental projects. As a result, the
    inspections were not     Grantee does not have adequate assurance that assisted
    performed                projects are meeting HUD’s housing quality standards. This
                             is due to the Grantee’s lack of controls to: a) identify the
                             properties that need inspections, b) provide dates when
                             inspections are required, and c) assign staff to perform the
                             inspections.

                             As a result of the above, we recommended that the HUD
      Recommendations        NJSO determine whether the Grantee should seek post
                             approval of the request for release of funds for the land
                             transaction. If not, inform the Grantee that the cost of the

2002-NY-1002                     Page iv
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                                                          Executive Summary


                  land, $1 million, is ineligible and should be reimbursed to
                  the CDBG Program from non-federal funds.

                  We also recommended that HUD: a) determine the
                  eligibility of the additional questioned costs of $63,625, b)
                  recognize a cost savings by recapturing $126,173 in unused
                  ESG funds, and c) instruct the Grantee to reimburse the
                  amount of ineligible costs, totaling $17,480, from non-
                  Federal funds (See Appendix A).

                  In addition, we provided recommendations that upon
                  implementation would improve the Grantee’s disbursement
                  and monitoring controls for ensuring that only eligible
                  costs, supported by adequate documentation, are charged to
                  the CDBG and ESG Programs.                Furthermore, the
                  implemented recommendations would ensure that ESG
                  funds are expended timely, that the Grantee complies with
                  Federal labor standards, and that inspections of HOME
                  assisted properties are performed timely.

                  The results of our audit were discussed with Grantee
Exit conference   officials during the audit and at an exit conference held on
                  February 05, 2002, at the Grantee’s office. On February 13,
                  2002, we received the Grantee’s written responses to the
                  findings, which are included in its entirety as Appendix B
                  to this report.    Also, we provided a summary and an
                  evaluation of the Grantee’s responses at the end of each
                  finding.




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2002-NY-1002          Page vi
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Table of Contents




Management Memorandum                                                     i



Executive Summary                                                       iii



Introduction                                                             1



Findings

1.     The Grantee Provided $1 Million In CDBG Funds For A Land         3
       Transaction That Is Questionable

2.     Questioned Costs Of $63,825 Were Charged To The CDBG              9
       Program.

3.     Emergency Shelter Grant Funds Were Not Timely Expended          15


4.     Excessive Salary Costs Were Charged To The Emergency            19
       Shelter Grant Program

5.     The Grantee Needs To Improve Compliance With Federal Labor      21
       Standards And Ensure That Contractors Comply With Provisions
       Of The Davis-Bacon Act

6.     The Grantee Did Not Perform Inspections On Completed            27
       Home-Assisted Rental Projects




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Table of Contents




Management Controls                                                31




Follow Up On Prior Audits                                          33



Appendices
   A Schedule of Questioned Costs and Cost Efficiencies            35


   B Auditee Comments                                              37


   C Distribution                                                  41


Abbreviations

CCS            Catholic Community Services
CDBG           Community Development Block Grant
ESG            Emergency Shelter Grant
HOME           HOME Investment Partnership Program
HUD            U.S. Department of Housing and Urban Development
NJDEP          New Jersey Department of Environmental Protection
NJSO           New Jersey State Office
OIG            Office of the Inspector General
PERC           Palisades Emergency Residence Corp.
RROF           Request for release of funds




2002-NY-1002                          Page viii
Introduction
Title I of the Housing and Community Development Act of 1974 as amended, established the
Community Development Block Grant (CDBG) Program, which provides grants to States and
units of local governments to aid in development of viable urban communities. Projects or
activities under the CDBG Program must meet one of the program’s three national objectives,
which are to: (1) benefit low and moderate-income persons; (2) aid in the prevention of slums
and blight; or (3) address an urgent need (an existing condition that poses a serious or immediate
threat to the health or welfare of the community).

The Emergency Shelter Grant (ESG) Program is designed to help improve the quality of existing
emergency shelters for the homeless, make available additional emergency shelters, and meet the
costs of operating emergency shelters. The program helps to provide essential social services to
homeless individuals so that these persons have access not only to safe and sanitary shelters for
the homeless, but also to the supportive services and other kinds of assistance they need to
improve their situations. The program is also intended to restrict the increase of homelessness
through the funding of preventive programs and activities (24 CFR section 576.1).

Title II of the Cranston-Gonzales National Affordable Housing Act of 1990, created the HOME
Investment Partnerships (HOME) Program. HOME funds are made available to certain
participating jurisdictions on a formula basis. HOME was designed to strengthen public-private
partnerships to expand the supply of decent, safe, sanitary and affordable housing to low and very
low-income families.

Hudson County’s CDBG Program includes the New Jersey municipalities of East Newark,
Guttenberg, Harrison, Hoboken, Kearny, Secaucus, Weehawken, and West New York. Hudson
County’s Emergency Shelter Grant Program includes all municipalities with regard to homeless
programs under the Jersey City-Hudson County Continuum of Care Strategy. The Hudson
County Consortium for the HOME Program includes eight communities in the Urban County and
the Entitlement Cities of Bayonne, Union City and the Township of North Bergen. Hudson
County is the HOME Participating Jurisdiction.

A nine member Board of Chosen Freeholders governs Hudson County. The Hudson County
Division of Community Development (the Grantee) administers Hudson County’s CDBG, ESG
and HOME Programs. The Grantee is located in the Brennan Court House, Jersey City, New
Jersey. Ms. Susan Mearns is the Acting Housing and Community Development Division Chief.
The books and records are located at the Grantee’s Office.

Total disbursements for the year ended December 31, 2000, for each of the above programs was
as follows:

Community Development Block Grant Program           $7,232,227
HOME Investment Partnerships Program                $6,558,424
Emergency Shelter Grant Program                     $ 213,985



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Introduction




                    The objectives for this audit were to determine whether the
 Audit Objectives   Grantee: (1) carried out its activities in an economical,
                    efficient, and effective manner; (2) complied with the
                    CDBG, ESG and HOME Program requirements, laws and
                    regulations; and (3) has adequate controls to ensure
                    compliance with HUD regulations.

                    The audit covered the period from January 1, 2000, through
 Audit Scope and    December 31, 2000. However, we reviewed activities prior
 Methodology        and subsequent to the audit period as necessary. The audit
                    site work was performed between February 28, 2001, and
                    February 5, 2002.

                    In order to accomplish the audit objectives we performed the
                    following audit procedures:

                        • Examined records and files of the Grantee and
                          interviewed staff.

                        • Reviewed records and files of sub-recipients and
                          interviewed staff.

                        • Reviewed the Grantee’s policies and procedures for
                          managing its operations, and

                        • Tested selected transactions.

                    This audit was conducted in accordance with generally
                    accepted government auditing standards.

                    We provided a copy of this report to the Grantee.




2002-NY-1002            Page 2

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                                                                                       Finding 1


    The Grantee Provided $1 Million In CDBG Funds For A Land
                 Transaction That Is Questionable
Contrary to HUD regulations, the Grantee provided $1 Million in CDBG funds for the purchase
of land, which was made by a sub-recipient without obtaining the required approval from HUD
for the release of funds, and without obtaining the applicable environmental clearance from the
New Jersey Department of Environmental Protection (NJDEP). In addition, the Grantee did not
execute a loan agreement for a $300,000 loan that was included in the above amount, and did not
record the loan on its books. We attribute this to the Grantee’s unfamiliarity with HUD
requirements and Federal regulations, and to its inadequate accounting procedures for recording
loans. As a result, $1 million in program cost may be ineligible because the land transaction was
not approved by HUD, and may not be economically viable since the land may be contaminated.
Furthermore, a $300,000 loan receivable was not reflected on the Grantee’s books.
Consequently, the purchase of the land and its associated cost, $1 million, are considered
questionable since the Grantee did not obtain the required HUD approval for the release of funds.
Therefore, we recommend that the HUD NJSO evaluate the validity of the transaction and
determine the eligibility of the associated cost of $1 million.



                                     Our review disclosed that a transaction for the purchase of
   The Grantee provided              land was initiated on December 23, 2000, and finalized
   $1 million in CDBG                with payments from the Grantee to the Harrison
   funds without HUD’s               Redevelopment Agency in the amount of $250,000 on
   approval of the RROF              December 28, 2000, and another $750,000 on May 2, 2001.
                                     However, the required Request for Release of Funds
                                     (RROF) was not submitted and approved by HUD, as per
                                     24 CFR Section 58.22. Consequently, we consider the
                                     purchase of the land and its associated cost of $1 million
                                     questionable since the Grantee did not obtain the required
                                     HUD approval.

                                     24 CFR Section 58.22 entitled “Environmental Review
                                     Procedures for Entities Assuming HUD Environmental
                                     Responsibilities” provides that: “a recipient may not
                                     commit HUD assistance funds…on an activity or project
                                     until HUD or the State has approved the recipient's Request
                                     for Release of Funds (RROF) and the related certification
                                     of the responsible entity. In addition, until the RROF and
                                     related certification has been approved, the recipient may
                                     not commit non-HUD funds on an activity or project… if
                                     the activity or project would have an adverse environmental
                                     impact or limit the choice of reasonable alternatives.”



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Finding 1


                             The certification of the responsible entity refers to the
                             entity’s certification of compliance with related Federal
                             Laws and authorities (24 CFR Section 58.5).

                             Without obtaining the above HUD approval, we found that
                             in January 2001, the Harrison Redevelopment Agency
                             entered into a Subgrantee Agreement with the Grantee to
                             purchase vacant land owned by the Town of Harrison
                             (another sub-recipient) for one million dollars without
                             proper approval. The Subgrantee Agreement indicates that
                             the Harrison Redevelopment Agency shall develop the land
                             for economic development activities and shall include in
                             any agreements with developers that 51% of the new jobs
                             created shall be made available to low and moderate-
                             income persons.

   The Grantee reallocates   The Subgrantee Agreement also indicates that the Grantee
   CDBG funds to cover the   was going to provide the Harrison Redevelopment Agency
   cost of the purchase      funding by reallocating CDBG funds as follows.

                                 $250,000     Town of Harrison’s CDBG funds
                                 $250,000     Advance of Town of Harrison’s
                                              future CDBG funds
                                 $300,000     Loan of CDBG funds to be repaid
                                              to the Grantee within one year of
                                              the transfer of funds
                                 $200,000     Additional CDBG grant to the
                                              Town of Harrison
                               $1,000,000     Total

                             Based on the above schedule, it appears that the Grantee
                             reallocated funds originally ear marked for the Town of
                             Harrison so that another sub-recipient, the Harrison
                             Redevelopment Agency, could purchase land already owned
                             by the Town of Harrison. Since the Harrison Redevelopment
    The necessity and        Agency is a municipal agency within the Town of Harrison,
    reasonableness of the    we believe that the land transaction is questionable. There is
    purchase is questioned   a question as to whether it was necessary to use CDBG funds
                             of a municipal agency within the Town of Harrison (the
                             Harrison Redevelopment Agency) to acquire land that was
                             already owned by the Town.

      Town purchased         In 1977 the Town of Harrison purchased the land for a total
      land for $246,843      of $246,843. The Town owned the land for 23 years, and
                             in 1999, the land was appraised at $1,920,000, almost twice

2002-NY-1002                     Page 4
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                                                                             Finding 1


                           the price of what the Harrison Redevelopment Agency paid
                           the Town of Harrison for it. We believe that the Town of
                           Harrison could have easily donated this land to the Harrison
                           Redevelopment Agency and/or sold the land in the open
                           market for the appraised value without the use of CDBG
                           funds.

                           In addition to the above, we learned that the vacant land,
                           which is in Harrison, New Jersey, is listed as being located
                           on a Brownfield site. The United States Environmental
                           Protection Agency defines Brownfields as abandoned, idled,
                           or under-used industrial and commercial facilities where
The land is located on a   expansion or redevelopment is complicated by real or
Brownfield site            perceived environmental contamination. Accordingly, we
                           believe that if the land is environmentally contaminated it
                           may hamper any attempts for development.

                           On September 26, 2000, the Harrison Redevelopment
                           Agency obtained an environmental assessment or site
                           investigation report on the land. The report, which was
                           prepared by the an environmental/engineering consultant
                           indicates that the results of testing of the soil identified
                           areas of contamination in excess of the most stringent
                           NJDEP soil clean up criteria, including excessive
                           concentrations of PCBs and metals. The recommendations
                           contained in the site investigation report include the
                           installation of three monitoring wells and subsequent
                           monitoring of ground water. This report also recommended
                           a remedial investigation because the soil contamination
                           exceeded the clean up criteria. A remedial investigation
                           report was issued August 1, 2001, which provided specific
                           recommendations for addressing the soil contamination that
                           was present through out the site. However, although the
                           NJDEP approved the site investigation work plan on June
  The environmental        13, 2000, and has reviewed the site investigation report, it
  clearance was not        has not confirmed that all environmental issues have been
  obtained                 adequately addressed.

                           Since neither the Grantee nor the Harrison Redevelopment
                           Agency obtained HUD’s approval to use CDBG funds to
                           purchase the land, and did not obtain the required
                           environmental clearance from the NJDEP, or submit a
                           certification of compliance with Federal regulations, this
                           transaction is not in compliance with CDBG regulations.
                           Furthermore, if the land is environmentally contaminated,

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Finding 1


                          the land transaction may not be economically viable. If the
                          land has to be cleared of all environmental contaminants,
                          prior to development, this could result in thousands of
                          dollars of additional funds being disbursed. Consequently,
                          we believe that this land transaction should be evaluated by
                          the HUD NJSO as to its validity and the eligibility of the
                          associated costs of $1 million.

                          Discussions with officials of the HUD NJSO revealed that
                          they were concerned that the Grantee did not request
                          HUD’s approval. Accordingly, they believe that the cost
                          associated with the transaction should be disallowed, and
                          the funds should be repaid to the CDBG Program. In this
                          regard, we recommended that a final decision regarding a
                          post approval of the land transaction be made by the HUD
                          NJSO, and that the decision be provided to the Grantee
                          subsequent to the issuance of this report.

                          Regarding the loan, the Grantee informed us that $300,000 of
      The $300,000 loan   the $1 million that was provided to the Harrison
      was not properly    Redevelopment Agency is a loan, which was to be repaid
      documented          within one year of the transfer of the funds by the Grantee.
                          However, the terms and conditions of the loan were not
                          adequately documented.

                          24 CFR Section 85.20(2) provides that Grantees and sub-
                          recipients must maintain records, which adequately identify
                          the source and application of funds, provided for financially
                          assisted activities. These records must contain information
                          pertaining to grant or sub-grant awards and authorizations,
                          obligations, un-obligated balances, assets, liabilities,
                          outlays or expenditures, and income.

                          24 CFR Section 85.20(3) provides that effective control and
                          accountability must be maintained for all grant and sub-
                          grant cash, real and personal property, and other assets.

                          Accordingly, we believe that the Grantee should have drafted
                          an enforceable loan agreement that states the terms and
                          conditions of the loan, the parties bound, and the collateral
                          involved, along with proper signatures of the parties
                          involved.

                          The Chairman of the Redevelopment Agency told us that the
                          $300,000 loan between the Grantee and the Redevelopment

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                                                                         Finding 1


                     Agency would be repaid as soon as the property is sold to a
                     developer. The Chairman also told us that the loan is
                     documented in correspondence between his office and the
                     Grantee; however, our review of the correspondence between
                     the Redevelopment Agency and the Grantee did not reveal
                     the existence of a legally enforceable loan agreement. As a
                     result, we believe that to properly preserve the rights of the
                     Grantee in the $300,000 provided to the sub-recipient, a loan
                     agreement should be executed. Moreover, we believe that
                     this loan should be recorded as a loan receivable on the
                     books of the Grantee.


Auditee comments     The Grantee’s comments provide that actions have been
                     taken to address the environmental clearance of the site in
                     question. The land is located on a “Brownfields” site,
                     (former industrial sites that contain contaminants), that is
                     part of the Hudson County Brownfields Assessment
                     Demonstration Pilot Program (the “Program”), an initiative
                     financed by the U.S. Environmental Protection Agency. The
                     intent of the Program is to provide the resources necessary to
                     identify, assess and redevelop fallow properties throughout
                     the County. The Program is administered by the Hudson
                     County Economic Development Corporation (HCEDC). The
                     HCEDC has provided the professional services to identify
                     the surface contaminants and develop a plan of action for
                     remediation of the site. During a period of approximately
                     eighteen months, various reports including the Remedial
                     Action Work Plan on the land were prepared and submitted
                     to the New Jersey Department of Environmental Protection
                     (NJDEP), who has provided verbal approval. As a result,
                     upon receipt of written confirmation of the NJDEP’s
                     approval, the Grantee will provide documents to HUD
                     formally requesting a release of funds and submit a
                     certification of compliance with Federal laws for HUD
                     approval.

                     The Grantee has also provided the sub-recipient with a
                     Mortgage and Mortgage Note that has been executed and is
                     in the process of being recorded.



 OIG evaluation of   This finding and the recommendations have been modified
 Auditee comments    from its draft to include the results of conversations with
                     Community Planning and Development officials of the

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Finding 1


                  HUD NJSO. Accordingly, although the Grantee’s
                  comments indicate that they are attempting to obtain the
                  environmental clearances from the NJDEP and plan to
                  formally request approval of the release of funds, as well as
                  submit a certification of compliance with Federal
                  regulations. As mentioned above, we learned that officials
                  of the HUD NJSO believe that the cost associated with the
                  land transaction should be disallowed because the Grantee
                  did not obtain the required approval of the release of funds
                  from HUD. Accordingly, OIG reiterates that the HUD
                  NJSO will make the final decision to either consider
                  granting a post approval of a RROF for the land transaction
                  or declaring the cost of the land disallowed.


Recommendations   We recommend that the HUD NJSO:

                  1A.     Determine whether, based on the information
                          provided in this finding, the Grantee should seek
                          post approval for a RROF for the land transaction. If
                          not, inform the Grantee that the cost of the land, $1
                          million, is ineligible and should be repaid to the
                          CDBG Program from non-Federal funds.

                  1B.     Require the Grantee, if post approval is considered,
                          to submit all documentation required to evaluate the
                          validity of the land transaction. In addition, if the
                          transaction is subsequently approved, the Grantee
                          should be required to execute an enforceable loan
                          agreement with the sub-recipient for the $300,000
                          loan that was made, and record the amount of the
                          loan on its books as a loan receivable.

                  1C.     Instruct the Grantee to develop procedures to ensure
                          that, for future transactions, the required request for
                          release of funds and certification of compliance with
                          Federal regulations are submitted to and approved by
                          HUD prior to releasing any CDBG funds to sub-
                          recipients.

                  1D.     Instruct the Grantee to develop procedures to ensure
                          that future loans to sub-recipients are adequately
                          documented and that the documentation is
                          maintained. In addition, all loans should be properly
                          recorded on the Grantee’s books.

2002-NY-1002            Page 8

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                                                                                         Finding 2


      Questioned Costs Of $63,825 Were Charged To The
                       CDBG Program
Weaknesses in the Grantee’s controls over disbursements have caused questionable costs of
$63,825, to be charged to the CDBG Program. We attribute this to the Grantee’s failure to properly
follow: (a) its procedures for making disbursements and reimbursing sub-recipients, and (b) Federal
regulations that require only allowable expenditures to be charged to Federal programs.
Consequently, the Grantee’s program costs contained certain questionable costs, which we
identified and recommended that HUD make an eligibility determination on those costs. We also
recommended that HUD instruct the Grantee to develop procedures that will ensure that its controls
over disbursements are properly followed. If any of the questioned costs is determined to be
ineligible by HUD, the Grantee will be instructed to reimburse that amount to the CDBG Program
from Non-Federal funds.



                                      OMB Circular A-87, Cost Principles for State and Local
      Criteria
                                      Governments provides the guidelines as to the allowability
                                      of costs. It provides that to be allowable cost must be:
                                      necessary and reasonable for the proper and efficient
                                      performance and administration of Federal awards;
                                      adequately documented; and accorded consistent treatment
                                      through the application of generally accepted accounting
                                      principles.

                                      24 CFR Part 85.20, the Standards for Financial
                                      Management Systems, provide that Accounting records
                                      must be supported by source documentation as cancelled
                                      checks, paid bills, payrolls, time and attendance records,
                                      contract and sub-grant award documents, etc.

                                      During our review we tested three months of CDBG
                                      disbursements made by the Grantee to its sub-recipients.
                                      We noted that while controls over disbursements were
                                      generally adequate, we believe that improvements are
                                      needed. We learned that the Grantee did not always require
      Improvements                    sub-recipients to submit vendor invoices and/or payroll
      needed in the                   records with requests for reimbursement. Some sub-
      Grantee’s controls              recipients obtained reimbursement with vouchers that were
                                      certified by the sub-recipient, but were not supported with
                                      attached invoices. We believe that weaknesses in the
                                      Grantee’s controls have caused sub-recipients to be
                                      reimbursed for items that were not adequately supported.



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Finding 2


                              In connection with the above, we performed site visits
                              and/or requested additional documentation from four sub-
                              recipients to ensure that amounts reimbursed to them were
                              adequately supported. The four sub-recipients chosen were
                              the Town of West New York, The Town of Kearny, The
                              Town of Harrison, and The Hudson County Economic
                              Development Corporation. Our review of documents from
                              the Town of West New York revealed that all items tested
                              were supported with appropriate source documents and
                              canceled checks. However, our test results at the other sub-
                              recipients disclosed deficiencies, which are discussed in the
                              following paragraphs.

                              During our visit to the Town of Kearny, we found that this
    The Town of Kearny was    sub-recipient was reimbursed $53,625, for costs that were
    reimbursed $53,625 for    not adequately supported. This amount relates to six
    unsupported costs         invoices for expenses pertaining to a Senior Citizen Health
                              Program, legal services, title fees, engineering cost and the
                              purchase of asphalt. As support for these items, the sub-
                              recipient submitted a voucher requesting payment and
                              reports/memo’s explaining what was done instead of
                              vendor invoices. We attribute this to the Grantee’s failure
                              to adequately review sub-recipient vouchers for supporting
                              documentation. As a result, we consider costs, totaling
                              $53,625, associated with these items as unsupported and
                              questioned.

  Sub-recipient’s financial   Additionally, we found that the Town of Kearny did not
  management system is        maintain its financial management system in accordance
  not in accordance with      with the requirements of 24 CFR 85.20. Its accounting
  Federal regulations         records were not maintained in a manner that would
                              adequately identify the source and application of funds.
                              Also, the Town did not properly maintain and obtain source
                              documents such as paid bills and contracts to support all
                              disbursements. We believe that this lead to the Town of
                              Kearny being reimbursed twice for various invoices
                              amounting to $62,073.48. In this case, the sub-recipient had
                              failed to mark its invoices as paid when submitting
                              vouchers to the Grantee for reimbursement. Although this
    Improvement needed        amount was repaid during our review, we believe that
    in Grantee monitoring     proper Grantee monitoring would have prevented it from
                              occurring and detected that the sub-recipient’s financial
                              system was not being maintained properly. Therefore, we
                              recommend that the Grantee monitor and assist this sub-
                              recipient in ensuring that its accounting system and records

2002-NY-1002                      Page 10
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                                                                               Finding 2


                           are maintained in accordance with Federal regulations (24
                           CFR 85.20).

                           Our review at the Town of Harrison revealed that the Grantee
    Town of Harrison       reimbursed $10,000 to this sub-recipient for salary costs paid
    reimbursed $10,000     to the Senior Citizens' Health Educator, which were not
    for costs that is      adequately supported. Officials of the Township claimed that
    unsupported.           Town vouchers supported these expenses. Officials of the
                           Town provided a workload report and statistical information,
                           which indicated that the services stipulated in the scope of
                           services section of an agreement executed with the Grantee
                           were being provided. However, we were not provided with
                           the contract/agreement, payroll records, or vendor invoices,
                           which would support the voucher. We attribute this to the
                           Grantee’s failure to review the sub-recipient’s reimbursement
                           vouchers for adequate supporting documents. Thus, we
                           believe that the reimbursement is unsupported and as such is
                           being questioned. Accordingly, we recommend that the HUD
                           NJSO determine the eligibility of the costs associated with
                           the $10,000 reimbursement. If any costs are ineligible, the
                           Grantee should be instructed to reimburse the CDBG
                           Program the amount of the ineligible costs from non-Federal
                           funds.

                           Our review of the Hudson County Economic Development
 Hudson County Economic    Corporation (HCEDC) revealed that the Grantee reimbursed
 Development Corporation   this sub-recipient $200 for expenses associated with
 was reimbursed $200 for   entertainment and charitable activities, which are ineligible.
 ineligible costs          Specifically, we noted that the Grantee reimbursed the
                           HCEDC $100 for the cost of a Chamber of Commerce
                           Christmas Party, and $100 for a Taste of Hudson benefit, for
                           the Hudson Cradle Charity. However, costs associated with
                           entertainment and charitable donations are generally not
                           allowable expenses under OMB Circular A-87. As a result,
                           we have questioned the $200 since we believe that the
                           amount is ineligible and should be reimbursed to the CDBG
                           Program from non-Federal funds.


Auditee comments           The Grantee will request instructions from HUD for the
                           treatment of furniture purchases, and for the proper
                           accounting treatment under the CDBG Program. The
                           Grantee contends that a refund from the Town of Kearny in
                           the amount of $62,116.20 has been received. The sub-
                           recipient, the Town of Harrison, has provided the Grantee

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Finding 2


                      with the Professional Services Contract of the Senior
                      Citizen’s Health Educator and quarterly reports for the
                      periods that these services were paid. The Grantee has also
                      met with officials of the Town of Kearny and has offered
                      technical assistance in establishing files for new activities
                      that will be undertaken. In addition, the Town of Kearny
                      has commissioned an independent audit and terminated its
                      Chief Financial Officer. Furthermore, the Grantee has met
                      with and instructed its sub-recipients as to the forms and
                      appropriate documentation required to request funds. The
                      Grantee has instituted an internal muti-level review process
                      were sub-recipient’s requests for reimbursement and
                      supporting documentation is reviewed for compliance and
                      accuracy prior to making payment. Sub-recipients must
                      now track all contract amounts and reconcile all voucher
                      requests.




  OIG evaluation of   Based on discussions with officials of the HUD NJSO, we
  Auditee comments    learned that the $12,520.60 of furniture purchased by the
                      Grantee for program administration is an eligible CDBG
                      costs; therefore, we eliminated the issue from the finding.
                      The $62,116.20 reimbursed by the Town of Kearny was not
                      questioned because it was repaid during our audit.
                      However, HUD has to make an eligibility determination on
                      the question costs discussed in this finding. If any costs are
                      determined to be ineligible, the amount of those costs
                      should be reimbursed to the CDBG Program from non-
                      Federal funds. Lastly, we believe that the Grantee’s actions
                      regarding assisting the Town of Kearny to maintain its
                      records in accordance with Federal regulations and
                      establishing procedures for the review of vouchers prior to
                      payment is responsive to our recommendations.



Recommendations:      We recommend that the HUD NJSO:

                      2A.      Determine the eligibility of all questioned costs,
                               totaling $63,825, discussed in this finding, and
                               instruct the Grantee to reimburse the CDBG
                               Program the amount of any ineligible costs from
                               non-Federal funds.


2002-NY-1002                Page 12
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                                                   Finding 2


2B.      Monitor and assist the Grantee in ensuring that the
         Town of Kearny maintains its financial records in
         accordance with Federal regulations (24 CFR
         85.20).

2C.      Instruct the Grantee to develop procedures to ensure
         that all vouchers submitted for reimbursement by
         sub-recipients are adequately reviewed for proper
         supporting documentation prior to payment.




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                                                                                       Finding 3


      Emergency Shelter Grant Funds Were Not Timely Expended
Contrary to Federal regulations, the Grantee did not ensure that sub-recipients expended
available Emergency Shelter Grant (ESG) funds timely. As a result, $126,173 in ESG funds may
not have been used for their intended purpose, or effectively reprogrammed to meet other ESG
Program needs. In addition, the Grantee was unable to provide us with adequate assurance that
sub-recipients have provided all funded services to the homeless in a timely manner. We attribute
this to the Grantee’s lack of monitoring to ensure that sub-recipients expend the amount of ESG
funds allocated to them timely, and submitted bills for timely reimbursement. Accordingly, we
recommend that the Grantee be instructed by HUD to determine whether sub-recipients spent or
reprogrammed the amount of ESG funds allocated to them. If not, HUD should recapture those
funds and recognize a cost savings.



 Criteria                            24 CFR 576.35 (b), provides that each formula city, county,
                                     territory, and Indian tribe must spend all of the grant
                                     amounts it was allocated or awarded under §576.5 or
                                     §576.31 within 24 months of the date of the grant award by
                                     HUD.

                                     We reviewed the amount of Emergency Shelter Grant
                                     (ESG) funds that the Grantee disbursed to four shelters.
                                     The review disclosed that for each activity allocated ESG
                                     funds, from 1995 through 1998, there was some funding
                                     that were not utilized within 24 months of the grant award,
                                     as required. In 1995 the ESG budget allocation for the
                                     Hudson County Housing Resource Center was $45,000,
                                     however, none of the funds have been used. The Palisades
                                     Emergency Residence Corp. (PERC) has not drawn down
                                     $51,759 of ESG funds awarded for the years 1996 through
                                     1998. The Hoboken Clergy Coalition's shelter has not used
                                     funds totaling $28,765 from its 1998 grant. Additionally,
   $126,173 in ESG                   although Catholic Community Services (CCS) had its 1995
   funds were not                    ESG funds that were allotted to the St Lucy’s and the
   utilized within 24                Anthony House shelter reprogrammed to other activities;
   months                            the CCS left a balance of $549 and $100, respectively in the
                                     accounts of these two shelters. As a result, $126,173 in the
                                     Grantee’s ESG funds were not utilized or reprogrammed in
                                     a timely manner.

                                     We attribute the above to a lack of adequate monitoring by
                                     the Grantee to ensure that sub-recipients spent the allotted
                                     funds within 24 months of the grant award. We believe that
                                     adequate Grantee monitoring would have ensured that all

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Finding 3


                          sub-recipients had the capacity to provide the services and
                          spend the funds in a timely manner. Accordingly, the
                          Grantee did not have adequate assurance that sub-recipients
                          have provided all funded emergency shelter services to the
                          homeless.

                          A Grantee official, the former Housing and Community
                          Development Division Chief, explained that he was not
                          aware that Hudson County Housing Resource Center was
                          allocated $45,000 in 1995, that has not been utilized. He
                          agreed that the books show an outstanding balance for the
                          1995 grants; however, he stated that since HUD’s Line of
                          Credit Control System (LOCCS), takes out the funding in a
                          first in, first out manner, all of the 1995 grant funds are
                          considered expended; therefore, this finding does not apply.

                          Contrary to the above, we believe that this finding is valid; in
                          fact, discussions with HUD New Jersey State Office (NJSO)
                          officials revealed that the regulations of the ESG Program
                          require the Grantee to disburse grant monies timely and in
                          accordance with the Consolidated Plan and/or activities for
                          which the grant was allotted. Therefore, if disbursed funds
       ESG funds should   were not timely spent on the activities for which they were
       be repaid or       allotted, and if HUD has not approved a reallocation of the
       recaptured         funds, then the ESG Program should be reimbursed the
                          amount of these funds. Furthermore, if the funds have not
                          been used, then HUD should recapture them and recognize a
                          cost savings.



Auditee comments          The Grantee’s comments indicate that its Housing and
                          Community Development Deputy Chief has been directed to
                          oversee all ESG Projects. The expenditure of funds within 24
                          months as established by the regulations has been identified
                          as a high priority. The Grantee has met with sub-recipients
                          and identified eligible expenses for drawing down prior years
                          funds. They will continue to assist the sub-recipients in
                          identifying a schedule of drawdowns based on the budget for
                          activities. Furthermore, the Grantee has developed an in-
                          depth monitoring system to monitor its ESG Program. Sub-
                          recipients are required to submit detailed budgets, including
                          sources and expenses, quarterly and annual reports, adhering
                          to the information requested by HUD. In addition, other
                          required information such as job descriptions for the staff

2002-NY-1002                  Page 16
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                                                                      Finding 3


                    funded by the ESG Program must be submitted. The
                    Grantee’s comments indicate that it is committed to
                    maintaining an increased monitoring effort of its ESG sub-
                    recipients to ensure that funds are spent in a timely manner
                    and that reporting documents and other information is
                    submitted as required.


OIG evaluation of   The Grantee generally concurs with this finding, as its
Auditee comments    comments are responsive to our recommendations.




Recommendations     We recommend that the HUD NJSO:

                    3A. Instruct the Grantee to determine whether its sub-
                        recipients spent or reprogrammed the amount of ESG
                        funds discussed in the finding, which totaled $126,173
                        for the years 1995 to 1998. If not, HUD should
                        recapture any amounts not expended within the 24
                        months after the date of the grant award.

                        If it is determined that funds were expended on
                        ineligible activities, the ESG Program should be
                        reimbursed the amount of the ineligible activities from
                        non-Federal funds.

                    3B. Instruct the Grantee to develop procedures that will
                        ensure that sub-recipients spend Emergency Shelter
                        Grant funds, within 24 months of the grant award, as
                        required. Procedures should also allow excess funds to
                        be recaptured by HUD.




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                                                                                             Finding 4


  Excessive Salary Costs Were Charged To The Emergency
                   Shelter Grant Program
Contrary to Federal regulations, the Grantee allowed sub-recipients to charge excessive salary costs
to the Emergency Shelter Grant (ESG) Program. As a result, $17,280 in ESG funds was not used
for its intended purpose or for eligible operating expenses. We attribute this to the Grantee’s lack of
controls to ensure that only allowable salary amounts were charged to the ESG Program.
Consequently, we recommend that the Grantee reimburse the ESG Program the amount of these
funds from non-Federal funds and seek reimbursement from its sub-recipients.


 Criteria                               Title 24 of the CFR, part 576.21(a)(3) indicates that
                                        Emergency Shelter Grants can be expended for shelter
                                        maintenance, operation, rent, repairs, insurance, security,
                                        fuel, equipment, utilities, food, and furnishings. However,
                                        not more than 10 percent of the grant amount may be used
                                        for costs of staff.

                                        We reviewed the Grantee’s reimbursements of Emergency
                                        Shelter Grant (ESG) funds to its sub-recipients. Specifically,
                                        we reviewed all payment vouchers for the period between
                                        January 1, 2000 and April 30, 2001, which documented the
                                        personnel costs reimbursed to three ESG sub-recipients: the
                                        Hoboken Clergy, the Palisades Emergency Rescue
                                        Corporation (PERC), and the Catholic Community Services.
                                        Our review revealed that the Grantee reimbursed these sub-
                                        recipients over $17,280 in unsupported salary costs as
                                        follows:


                                                 Grant   Total     Salary        10%           Excess
                                                 Year    Grant     Charged      Allowed        Salary
                                  Hoboken
                                  Clergy
                                  Coalition        98    $38,000   $10,967.33     $3,800      $7,167.33
                                       “
                                                   00    38,000     7,880.53      $3,800      4,080.53
                                  Palisades
                                  Emergency
                                  Rescue           00    50,000     5,192.58      5,000        192.58
                                  Corp.
                                  Catholic
                                  Community
                                  Services–St      99    60,000     11,840.00     6,000       5,840.00
                                  Lucy
                                                                                Total        $17,280.44

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Finding 4


                      We attribute the reimbursements of excess payroll cost to the
                      sub-recipients to the Grantee’s lack of adequate controls to
     Excess salary    ensure that sub-recipients are not exceeding the ten percent
     charges should   limit on salary costs. As a result, three sub-recipients
     be reimbursed    improperly allocated excessive salary costs to the program,
                      and improperly received ESG funds. Thus, we recommend
                      that the Grantee be instructed to reimburse the ESG Program
                      the amount of the excess salary charges, totaling $17,280,
                      from non-Federal funds, and seek reimbursement from the
                      sub-recipients.



Auditee comments      The Grantee’s comments indicate that their former Housing
                      and Community Development Division Chief required the
                      sub-recipients to voucher ESG funds using a percentage
                      calculation for each line item, (salary, supplies, professional
                      contracts, etc.), based upon the dollar amount of various
                      funding sources. As a result of this method of accounting,
                      capped line items were not accounted for properly. The
                      Grantee has advised its sub-recipients that salaries will not
                      be reimbursed to avoid this situation in the future.



OIG evaluation of     The Grantee generally agrees with this finding, as their
Auditee comments      actions are responsive to the recommendations. However,
                      since salary costs are an allowable program expense, we
                      believe that the establishment of adequate accounting and
                      budgetary controls could ensure that the 10 percent ceiling
                      is not exceeded.


Recommendations       We recommend that the HUD NJSO:

                      4A.      Instruct the Grantee to reimburse the $17,280 in
                               excess salary cost to the ESG Program from non-
                               Federal funds, and seek reimbursement from the
                               sub-recipients.

                      4B.      Instruct the Grantee to inform its sub-recipients of
                               the ten percent limitation for salary costs and
                               establish procedures to ensure that salary costs in
                               excess of ten percent of the total grant amount are
                               not reimbursed from ESG Funds.

2002-NY-1002                Page 20
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                                                                                        Finding 5


  The Grantee Needs To Improve Compliance With Federal Labor
Standards And Ensure That Contractors Comply With Provisions Of
                     The Davis-Bacon Act
The Grantee neither adequately documented its compliance with Federal Labor Standards, nor
ensured that contractors complied with the provisions of the Davis Bacon Act that pertain to the
payment of prevailing wages. As a result, there is inadequate assurance that
contractors/subcontractors were eligible to perform work on jobs paid for with Federal funds, and
that employees of contractors were paid prevailing wages. According to a Grantee official, the
deficiencies occurred because certain staff members need training on Federal Labor standards. In
this regard, we recommend that the HUD NJSO assist the Grantee in obtaining training and provide
technical assistance to them on the requirements of Federal Labor Standards, especially those
pertaining to the Davis Bacon Act.



                                     HUD Handbook 1344.1, paragraph 1-3 provides that the
 Criteria                            Davis Bacon Act requires that Federal construction
                                     contracts in excess of $2,000 contain provisions for the
                                     payment of prevailing wages and have a monitoring
                                     mechanism to ensure compliance with its requirements.

                                     In addition, HUD Handbook 1344.1 Paragraph 1-6 provides
                                     that Community Development Agencies are responsible to
                                     HUD for ensuring compliance with Federal labor standards;
                                     some of those requirements are as follows:

                                         •    Ensuring that all bid documents, contracts, and
                                              subcontracts contain Federal labor standards
                                              provisions and the applicable Department of Labor
                                              wage determinations. Also, Agencies are to ensure
                                              that contractors are eligible for Federally assisted
                                              work.

                                         •    Conducting on-site project inspections, which
                                              include employee interviews and checking for
                                              posting of Federal wage determinations, as well as,
                                              the review of weekly payrolls of contractors.

                                          • Correcting all violations of labor standards
                                            promptly.

                                          •   Maintaining full documentation attesting to all
                                              administrative and enforcement activities with

                                         Page 21                                     2002-NY-1002


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Finding 5


                                      respect to Federal labor standard requirements;
                                      such documentation to be made freely available for
                                      HUD review. Such documentation shall include all
                                      weekly payrolls, copies of wage determinations
                                      and any applicable changes or modifications,
                                      notices of start of construction, on-site inspection
                                      reports and employee interviews, and any other
                                      records utilized in enforcement administration –
                                      including records of wage restitution made, and
                                      pre-construction conference minutes.

                              Our review of the Grantee’s FY1999 Independent Public
       Noncompliance          Accountant’s (IPA) Report, revealed indications that the
       with Davis Bacon       Grantee may not be complying with provisions of the Davis
       reported in prior      Bacon Act pertaining to prevailing wages; we noted that this
       IPA report             was a prior year 1998 finding, which was not corrected. The
                              IPA report also reported that the Grantee’s construction
                              contracts omitted required documents including Davis Bacon
                              payroll certifications. As a result, we selected three of the
                              Grantee’s six largest construction projects that had
                              disbursements in our audit period for Program Years 1999
                              and 2000, and performed detailed file reviews to evaluate the
                              Grantee’s compliance with Federal labor standards and/or the
                              Davis Bacon Act. The three projects reviewed are:

                              The St. Joseph School for the Blind - a contract for building
                              alterations. The contract amount was $117,900. The CDBG
                              funding for this project was $105,000.

                              The Boys and Girls Club - a contract for building
                              rehabilitation. The contract amount and CDBG funding was
                              $250,000.

                              The Meadowview Handicap Project – a contract for
                              handicap access ramps. The contract amount was
                              $1,075,001. The CDBG funding for this project was
                              $300,000.

                              The Grantee’s files on the above projects did not contain
      Inadequate monitoring
                              documentation showing that the Grantee adequately
      still present
                              monitored the contractors’ payrolls to ensure that prevailing
                              wages were paid, as required by the Davis Bacon Act. The
                              files were not properly maintained and did not always
                              include executed contracts and wage rate determinations.
                              Also, there was a lack of documentation showing that the

2002-NY-1002                      Page 22
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                                                                            Finding 5


                      Grantee performed on-site job interviews with workers, and
                      reviewed contractors’ payrolls.

                      The specifics regarding each project is as follows:

                      A review of the contract file for the St. Joseph School for
St. Joseph School     the Blind project revealed that the contract did not contain
for the Blind         the applicable wage rate determinations even though the
                      project manual, which is incorporated into the contract,
                      states that the bidder agrees to comply with The Prevailing
                      Wage Act [Davis Bacon]. Although the contract files
                      contained payrolls certified by the contractor, they did not
                      contain documentation of on-site employee interviews by
                      the Grantee verifying the amount of wages paid and job
                      classifications. Also, the contract files did not contain
                      documentation showing that the Grantee verified that
                      contractors were eligible to participate in HUD's programs.

                      A review of the contract file for the Boys and Girls Club
Boys and Girls Club   contract file revealed that weekly Payrolls on a U.S.
                      Department of Labor Form WH347, were on file for the
                      weeks ended March 29, 2000 through April 25, 2001.
                      However, the President of another Construction Company
                      certified them. There was no explanation in the files on why
                      one contractor certified the payroll of another contractor.
                      However, we learned that the person that made the
                      certification was the President of both companies. The
                      payrolls of the construction companies for the weeks ended
                      August 23, 2000 through September 27, 2000 were available,
                      but were not certified. Furthermore, there were no payrolls
                      on file for subcontractors.

                      Initially, the Grantee’s Community Development Division
                      did not have a copy of the contract. However, the Director
                      was able to obtain an unexecuted copy of the contract from
                      the Boys and Girls Club, which did mention that contractors
                      must comply with the provisions of the Davis Bacon Act; but
                      it did not contain wage rate determinations.

                      Furthermore, the file contained minutes of a pre-construction
                      meeting held with the general contractor, architects, and
                      representatives of the Hoboken Boys & Girls Club, but there
                      was no evidence that a representative of the Grantee attended
                      the pre-construction meeting.        Also, there was no
                      documentation showing that the Grantee verified that

                          Page 23                                     2002-NY-1002


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Finding 5


                             contractors were eligible to participate in HUD's programs
                             (that the contractor was not on the Federal Debarred List).

                             A review of the contract files for the County Meadowview
    County Meadowview        Handicap Access ramp project revealed that the contract had
                             a provision for the payment of prevailing wage rates as
                             promulgated by the New Jersey State Department of Labor.
                             However, our review of the State of New Jersey's
                             Department of Labor website revealed that New Jersey
                             prevailing wages are not necessarily the same as Davis
                             Bacon prevailing wages, and that if both were applicable to a
                             project, the more stringent requirements and higher wages
                             would apply.

                             The Affirmative Action Compliance Officer for the
                             Grantee’s Office of Engineers, who is in charge of
                             monitoring the Meadowview project, stated that he compared
                             the certified payrolls with New Jersey prevailing wage rates
                             to ensure compliance. However, the Compliance Officer
                             stated that he did not perform on-site employee interviews or
                             examine pay stubs. He stated that he was not aware that he
                             was required to examine payroll records and perform on-site
                             employee interviews. The Compliance Officer stated that the
                             former Community Development Division Chief never told
                             him that the CDBG Program was also funding the project.
                             He said had he known that CDBG funds were involved; he
                             would have ensured full compliance with Federal
                             regulations, regarding Davis-Bacon wages. He stated that he
                             verified that the contractor chosen for the ramp project was
                             not on the State of New Jersey Debarred Contractors List;
                             however, he did not check the Federal Debarred Contractors
                             List because he was not aware that it was required.

                             Also, we noted that the contract files contained certified
                             payrolls from each of the subcontractors that worked on the
                             construction job. However, the files did not contain
                             documentation showing that the onsite employee interviews
                             were conducted. These interviews are performed to
                             determine whether employees are being paid as stated in
                             contractor’s payroll records and are working as classified.

                             We believe that adequate Grantee monitoring would have
   Better documentation      ensured that contract files contained the proper
   of monitoring is needed   documentation to attest to compliance with provisions of
                             the Davis Bacon Act. By not adequately documenting wage

2002-NY-1002                     Page 24

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                                                                             Finding 5


                         rate determinations, employee interviews, contractor payroll
                         reviews, and checking the Federal Debarred List, etc., the
                         Grantee did not have documented evidence that employees of
                         contractors were in the proper occupational classifications,
                         and received the mandated pay and benefits. Accordingly, we
                         believe that this leaves the Grantee/sub-recipients exposed to
                         potential litigation and claims from employees who may not
                         have received the benefits they were entitled, and/or to
                         possible penalties from the Department of Labor.

                         Furthermore, we believe that pre-construction conferences
                         and wage rate determinations should be properly documented
                         in the contract files to document the Grantee’s compliance
                         with Federal Labor Standards and that contractors and sub-
                         contractors were informed of the various requirements for
                         compliance with provisions of the Davis Bacon Act.

                         The Grantee’s Acting Chief of the Division of Community
     Adequate training
                         Development informed us that the monitoring for
     is needed
                         compliance with provisions of the Davis Bacon Act was not
                         performed because the Division’s staff lacked the training to
                         do the monitoring required. The Acting Chief indicated that
                         HUD was contacted and attempts were made to obtain
                         training on monitoring compliance with provisions of the
                         Davis Bacon Act.



 Auditee comments        The Grantee’s comments provide that an office staffed with
                         trained and knowledgeable employees has been created to
                         institute a system to ensure compliance with the provisions
                         of the Davis Bacon Act. The Grantee has requested and
                         received, on December 19, 2001, training by the HUD
                         NJSO on the provisions of the Davis Bacon Act. Grantee
                         employees as well as municipal sub-recipients attended the
                         training. The Grantee has also developed a construction file
                         checklist, to be used to ensure that construction files
                         adequately document compliance with Federal Labor
                         standards and compliance with provisions of the Davis
                         Bacon Act, prior to advancing construction funds.



OIG evaluation of        The Grantee generally agreed with this finding, as its
Auditee comments         comments are responsive to the recommendations. We

                             Page 25                                     2002-NY-1002


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Finding 5


                    confirmed that the HUD NJSO has provided training to the
                    Grantee on monitoring compliance with provisions of the
                    Davis Bacon Act.


 Recommendations:   We recommend that the HUD NJSO:

                    5A.      Continue to assist the Grantee in obtaining training
                             and technical assistance on compliance with Federal
                             labor standards, including ensuring that contractors
                             comply with provisions of the Davis Bacon Act.

                    5B.      Instruct the Grantee to implement a monitoring
                             system that will ensure that all Federal Labor
                             Standards are complied with and that the files of
                             construction    projects      contain     adequate
                             documentation evidencing all compliances.




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                                                                                          Finding 6


        The Grantee Did Not Perform Inspections On Completed
                   HOME-Assisted Rental Projects
Contrary to Federal regulations, the Grantee did not perform inspections on completed HOME-
assisted rental projects. As a result, the Grantee does not have adequate assurance that assisted
projects are meeting HUD’s housing quality standards. We attribute this to the Grantee’s lack of
controls to: a) identify the properties that need inspections, b) provide the dates when the
inspections are required, and c) assign staff to perform the inspections. Therefore, we recommended
that the Grantee develop procedures that will ensure that inspections of HOME-assisted properties
are timely performed and documented.



                                      24 CFR Part 92.504(d) provides that for HOME assisted
     Criteria                         rental housing, during the period of affordability (i.e., the
                                      period for which the non-Federal entity must maintain
                                      subsidized housing), the participating jurisdiction must
                                      perform on-site inspections to determine compliance with
                                      property standards of Sec. 92.251 and verify the information
                                      submitted by the owners in accordance with the requirements
                                      of Sec. 92.252 no less than: (a) every three years for projects
                                      containing 1 to 4 units, (b) every two years for projects
                                      containing 5 to 25 units, and (c) every year for projects
                                      containing 26 or more units. Inspections must be based on a
                                      sufficient sample of units.

                                      Accordingly, the participating jurisdiction must perform on-
                                      site inspections of rental housing occupied by tenants
                                      receiving HOME-assisted tenant-based rental assistance, to
                                      determine compliance with housing quality standards.

                                      During our review of fifteen subsidized housing projects that
       Grantee inspections            were rehabilitated through the HOME Program, we found
       not performed                  that the Grantee did not perform inspections of ten completed
                                      projects. Specifically, one project should have been inspected
                                      every three years, five should have been inspected every two
                                      years, and four should have been inspected annually. Each
                                      project had from one to six inspections that had not been
                                      performed. Without these inspections, the Grantee does not
                                      obtain adequate assurance that the properties are being
                                      maintained in accordance with HUD’s housing quality
                                      standards. As such, the Grantee is not assured that tenants are
                                      living in decent safe and sanitary housing.



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Finding 6


                               During the course of the audit, the Grantee’s HOME
                               Program Coordinator conceded that there are no controls or
                               monitoring systems in place to identify when HOME-
                               assisted projects should be inspected. Also, the Grantee does
                               not have staff assigned to perform these inspections.

                               Grantee officials indicated that they had contracted with
      Contracted third party   two Public Housing Authorities (PHA’s) to perform some
      inspections not          of the inspections. However, we noted that the contracts
      performed                had not been fully executed and that the contractors have
                               not performed any inspections. We were also informed that
                               other parties such as the State of New Jersey might have
                               inspected some projects; however, the HOME Program
                               Coordinator stated that inspections performed by the other
                               parties have not always been provided to the Grantee. We
                               noted that, the Grantee recently hired a monitor for the
                               HOME Program inspections. However, the HOME monitor
                               is also responsible for lead-based paint compliance and has
                               spent most of his time on that program; therefore, the
                               required HOME inspections had not been scheduled and
                               conducted at the time of our review.

                               We believe that the deficiencies discussed in this Finding
                               have diminished the Grantee’s ability to administer its
                               HOME-assisted program in an efficient and effective
                               manner, and represent a noncompliance with program
                               regulations. Unless controls are implemented to ensure that
   Procedures are needed to    the required housing quality inspections are performed, the
   ensure that housing         Grantee cannot be assured that HOME funds are being
   quality inspections are     effectively used. Furthermore, the deficiencies cited in this
   performed                   finding will continue to recur, and HUD will not be assured
                               that tenants assisted with Federal funds are living in housing
                               that is decent safe and sanitary.



 Auditee comments              Grantees officials indicated that they have received
                               approval to enter into a contract with the Housing
                               Authorities of Secaucus and West New York to provide
                               inspections of completed HOME Assisted rental projects.




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                                                                    Finding 6




OIG evaluation of   The Grantee generally agrees with this finding, as their
Auditee comments    actions are responsive to our recommendations.



Recommendations     We recommend that the HUD NJSO require the Grantee to:

                    6A.      Immediately perform the housing quality
                             inspections on all completed HOME-assisted
                             projects that are past due.

                    6B.      Develop procedures that will ensure that all
                             completed HOME-assisted projects are timely
                             inspected, as required, and that all deficiencies
                             noted are timely corrected.




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                   Finding 6




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Management Controls
In planning and performing our audit, we considered the management controls of the Hudson
County Division of Community Development to determine our auditing procedures, not to provide
assurance on the controls. Management controls include the plan of organization, methods and
procedures adopted by management to ensure that its goals are met. Management controls include
the processes for planning, organizing, directing, and controlling program operations. They include
the systems for measuring, reporting, and monitoring program performance.



                                      We determined the following management controls were
 Relevant management                  relevant to our audit objectives:
 controls
                                         •   Controls over cash receipts and disbursements.
                                         •   Controls over monitoring of HUD programs.
                                         •   Controls over supporting documentation for costs.
                                         •   Controls over the timeliness of expending funds.

                                      We assessed all the relevant controls identified above.

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

                                      Our review found significant weaknesses in all
 Significant weaknesses               management controls tested. The controls weaknesses are
                                      detailed in the six findings contained in this report.




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Follow Up On Prior Audits
An Independent Public Accountant performed an audit of the County of Hudson for the year
ended December 31, 1999. The report contained two finding that were applicable to the HUD
programs. The first finding pertained to timely expenditure of CDBG funds, which was corrected
during our audit period. The other finding required the Grantee to develop and implement
procedures to ensure compliance with all fiscal and program requirements and maintain written
sub-recipient agreements with all sub-recipients. We found that the Grantee has maintained
written sub-recipient agreements with all sub-recipients.

The IPA audit report also indicates that a prior finding from a 1997 Compliance Review
performed by HUD, remains unresolved. This finding pertains to maintaining documentation for
construction contracts that show compliance with the Davis Bacon Act. We found that this issue
is still occurring, as we noted that the Grantee did not adequately monitor to determine whether
construction contractors complied with applicable provisions of the Davis Bacon Act (see
Finding 5).




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                                                                                   Appendix A
Schedule of Questioned Costs and Cost Efficiencies

        Finding                               Type of Questioned Cost
        Number             Ineligible 1/          Unsupported 2/        Cost Efficiency 3/

            1                                     $1,000,000.00

            2                $200.00                  63,625.00

            3                                                             $126,173.00

            4              17,280.00

            5                   -                        -                     -

            6                   -                        -                     -

                           $17,480.00             $1,063,625.00          $126,173.00


1/   Ineligible costs are costs that are charged to a HUD-financed activity that the auditor
     believes are not allowable by law, contract or Federal, State or local policies or
     regulations.

2/   Unsupported costs are costs charged to a HUD-financed activity, for which the eligibility
     could not be determined at the time of the audit. The costs were not supported by
     adequate documentation or there is a need for a legal or administrative determination on
     the eligibility of the costs. 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.

3/   Cost efficiencies are actions by management to prevent or avoid an improper or
     unnecessary obligation or expenditure. In this case, HUD would realize a cost savings if
     the Grantee/sub-recipient’s unused Emergency Shelter Grant funds are recaptured.




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                             Appendix B

Auditee Comments




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Appendix B




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          Appendix B




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Appendix B




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                                                                              Appendix C

Distribution
Acting Chief, Hudson County Division of Community Development, Hudson County, NJ
Principal Staff
Regional Director, New York/New Jersey, 2AS
Director, Community Planning and Development, New Jersey State Office, 2FD
Acting State Coordinator, New Jersey State Office, 2FS
Assistant General Counsel, New York/New Jersey, 2AC
CFO, Field Audit Liaison Officer Eastern USA, 3AFI
CPD - Special Advisor/Comptroller, DOTM
CPD – Alternate Audit Liaison Officer, DOT
Acquisitions Librarian, Library, AS, Room 8141

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

Stanley Czerwinski, Associate Director,
Housing and Telecommunications Issues
United States General Accounting Office
441 G Street NW, Room 2T23,
Washington, DC 20548

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


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




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Appendix C


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 Building
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




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