oversight

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

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-09-05.

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                     AUDIT REPORT




                  CITY OF UTICA
       COMMUNITY PLANNING AND DEVELOPMENT
                    PROGRAMS

                         UTICA, NEW YORK

                             2002-NY-1003

                           September 5, 2002

                         OFFICE OF AUDIT
                   NEW YORK/NEW JERSEY DISTRICT




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                                                                   Issue Date
                                                                           September 5, 2002
                                                                  Audit Case Number
                                                                           2002-NY-1003




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



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


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

 Pursuant to a request from the U.S. Department of Housing and Urban Development (HUD)
 Director, Community Planning and Development, Buffalo New York, we completed an audit of
 two development projects within the City of Utica, New York: the Utica Historic Marina Project
 and the Parkway Recreation Center Project. The primary objectives of the review were to
 determine whether: (1) the two projects were eligible activities that met a national objective of the
 Community Development Block Grant (CDBG) Program; (2) the costs charged for the projects
 were necessary, reasonable, and in accordance with Federal regulations; and (3) the City of Utica
 (Grantee) had proper budgetary and accounting controls. The results of our audit are contained
 herein and include two findings with recommendations for corrective actions.


 In accordance with HUD Handbook 2000.06 REV-3, within 60 days please give us, for each
 recommendation without management decisions, 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. Additional status reports are required at 90 days and 120 days after report issuance for
 any recommendations without a management decision. Also, please furnish us copies of any
 correspondence or directives issued because of the audit.

 Should you or you staff have any questions, please contact William H. Rooney, Assistant Regional
 Inspector General for Audit, at (212) 264-8000, extension 3976.




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Management Memorandum




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2002-NY-1003                  Page ii


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 Executive Summary
 We completed an audit of two development projects administered by the City of Utica, New York
 (Grantee): the Utica Historic Marina Project and the Parkway Recreation Center Project. The
 purpose of our audit was to determine whether: (1) the two projects were eligible activities that met
 a national objective of the CDBG Program; (2) the costs charged for the projects were necessary,
 reasonable, and in accordance with Federal regulations; and (3) the City of Utica (Grantee) had
 proper budgetary and accounting control. Our review raised concerns regarding the two projects.
 These concerns are discussed below.



                                       Utica Historic Marina Project

                                        The Utica Historic Marina Project, which is part of the
  Utica Historic Marina                 Canal Corridor Initiative, a HUD initiative, related to the
  Project may not meet its job          New York canal system, may not meet its job creation goal.
  creation goal                         This occurred because the Grantee failed to develop a plan
                                        to ensure that the required job creation goal would be met
                                        for low and moderate income families. To be an eligible
                                        activity, CDBG funds must be used to achieve one of the
                                        CDBG national objectives. One of the national objectives is
                                        to benefit low and moderate income families. As a result,
                                        we consider cost of $213,750 that was incurred with Small
                                        Cities CDBG funds from Oneida County, New York, as
                                        unsupported pending a HUD eligibility determination.
                                        Regarding a pending Section 108 CDBG Loan Guarantee of
                                        $250,000 under Oneida County’s Small Cities CDBG
                                        Program, we recommend that HUD should not provide final
                                        approval to the Section 108 Loan Guarantee until both the
                                        County and the Grantee provide assurances that an
                                        acceptable number of jobs will be created.

                                        In connection with the above, it should be noted that the
                                        Grantee expended $902,799 of the Grantee’s CDBG
                                        Entitlement Funds on the Marina Project. However, HUD
                                        disagreed with the expenditure of these funds and directed
                                        the Grantee to reimburse its CDBG Program $902,799.
                                        Accordingly, we questioned these costs pending the
                                        Grantee’s reimbursement to its CDBG Program.

                                       Parkway Recreation Center

                                        The Grantee used CDBG funds to help finance the
 Activity may not meet a                renovation of a Ski Chalet in spite of a warning by HUD
 National Objective                     that the activity may not meet a national objective of the
                                        CDBG Program.         This occurred because the Grantee

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 Executive Summary


                     decided to rehabilitate and connect an existing Ski Chalet
                     that abutted the new recreation facility that the Grantee
                     constructed for its youth. Our review disclosed that the
                     Grantee referred to the construction of the new recreation
                     facility as Phase 1 and to the Ski Chalet as Phase II of its
                     Parkway Recreation Center Project. HUD told the Grantee
                     that the use of CDBG funds to rehabilitate the Ski Chalet
                     may not meet a national objective. Despite this warning, the
                     Grantee charged the CDBG program at least $255,158 of
                     costs associated with the renovation of the Ski Chalet
                     (Phase II). Since the Ski Chalet activity may not meet a
                     CDBG national objective, the costs, $255,158, that we
                     identified as being associated with the activity are
                     considered unsupported pending a HUD eligibility
                     determination.

                     We are recommending that HUD ensure that the Grantee
                     repays the $902,799 of ineligible costs to the CDBG
                     Program from non-Federal funds. We also recommend that
                     HUD make eligibility determinations regarding the
                     unsupported costs involving both the Marina and Parkway
                     Recreation Center Projects Finally, we recommend that
Recommendations      HUD should not provide final approval to the Section 108
                     Loan Guarantee until assurances are provided that an
                     acceptable number of jobs will be created.


                     On July 30, 2002, we held an exit conference at City Hall,
Exit Conference      Utica, New York that was attended by the following
                     Grantee and HUD officials:

                     City of Utica, New York

                     Timothy Julian, Mayor
                     Mark Mojave, Commissioner, Department of Urban and
                     Economic Development
                     James Schlager, Finance Director, Department of Urban
                                      and Economic Development

                     HUD-Office of Inspector General (OIG)

                     William H. Rooney, Assistant Regional Inspector General
                     John Cameron, Senior Auditor
                     Richard Roseboom, Senior Auditor


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                                           Executive Summary


      The Grantee’s written response to our draft findings was
      provided to us on August 14, 2002. The response is
      summarized at the end of each finding and is shown in its
      entirety in Appendix A of this report.




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Table of Contents




Management Memorandum                                                     i



Executive Summary                                                      iii



Introduction                                                              1



Findings

1.     Utica Historic Marina Project May Not Meet The Job
       Creation Goal                                                  3


2.     The Ski Chalet Project May Not Meet a National
       Objective of the CDBG Program                                  9



Management Controls                                                   15



Follow Up On Prior Audits                                             17



Appendices
     A Schedule of Questioned Costs and Funds Put to Better Use       19
     B Auditee Comments                                               21
     C Utica Photos                                                   25
     D Distribution                                                   27




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Table of Contents



Abbreviations

CDBG                Community Development Block Grant
CCI                 Canal Corridor Initiative
FT                  Full Time
HUD                 U.S. Department of Housing and Urban Development
OIG                 Office of Inspector General
PT                  Part Time




2002-NY-1003                      Page viii
 Introduction
 HUD approved the Utica Historic Marina Project as part of the Canal Corridor Initiative. The Canal
 Corridor initiative commenced with a Notice of Funding Availability that was published in the
 Federal Register of December 3, 1996 (Volume 61, Number 233). The Notice announced the
 availability of Small Cities CDBG and Section 108 Guaranteed Loans to fund eligible development
 activities related to the New York State Canal System.

 Oneida County, New York obtained HUD approval for the Small Cities funding to develop a
 Marina, located in Utica, New York. Although Oneida County, New York obtained the funding for
 the Utica Historic Marina Project funding, the City of Utica (Grantee) designed, implemented, and
 administered the Project.

 The Grantee also administers its own CDBG Entitlement Program under Title 1 of the Housing and
 Community Development Act of 1974, as amended. The Grantee used some of its CDBG
 Entitlement funds to develop the Marina and to construct the Parkway Recreation Center. Both the
 Utica Historic Marina Project and the Parkway Recreation Center are the subject of this audit.

 A Mayor and Common Council govern the Grantee. The Grantee’s office is located at City Hall,
 Utica, New York. The Mayor is Timothy Julian; the Commissioner of the Department of Urban and
 Economic Development is Mark Mojave; and the Comptroller is Joan Scalise.



                                      The audit objectives were to determine whether: (1) the two
  Audit Objectives                    projects were eligible activities that met a CDBG national
                                      objective; (2) the costs charged for the projects were
                                      necessary, reasonable, and in accordance with Federal
                                      regulations; and (3) the City of Utica (Grantee) had proper
                                      budgetary and accounting control.

                                      To accomplish our audit objectives, the following audit
  Audit Scope and                     procedures were performed:
  Methodology
                                          •   Interviewed HUD staff at the Buffalo, New York
                                              Office.

                                          •   Examined pertinent HUD files to obtain various
                                              background information.

                                          •   Reviewed pertinent requirements for the Canal
                                              Corridor Initiative and the Section 108 Loan
                                              Guarantee Program, and the CDBG Program.

                                          •   Interviewed officials at Oneida County, New York.
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Introduction



                  •   Reviewed Oneida County files pertaining to the Utica
                      Historic Marina Project.

                  •   Interviewed officials at the Grantee’s Department of
                      Urban and Economic Development.

                  •   Reviewed Grantee’s Project files pertaining to the
                      Marina and Parkway Recreation Center.

                  •   Reviewed the applicable costs charged for the Marina
                      and Parkway Recreation Center for appropriateness
                      and eligibility.

                  •   Reviewed the Grantee’s budgetary and accounting
                      processes relating to the Marina and Parkway
                      Recreation Center.

                  •   Performed site visits to the Marina and Parkway
                      Recreation Center Projects.

                  •   Examined procurement records relating to the two
                      projects.

               Regarding the Marina, $487,500 of Small Cities funds were
               budgeted for the Project. In addition, the Grantee provided
               $902,799 of its Entitlement funds for the Project. As
               explained in Finding 1, we essentially reviewed all of the
               applicable costs charged for this project. Regarding the
               Parkway Recreation Center Project, the Grantee budgeted
               $1,053,693. As explained in Finding 2, we used the non-
               representative method to select a sample of 21 invoices
               amounting to $431,230.

               We performed the audit field work from November 2001
               through June 2002. The audit covered period from January 1,
               1997 through October 31, 2001, and was extended where
               necessary. The audit was conducted in accordance with
               generally accepted government auditing standards.

               A copy of this report was provided to representatives of the
               Grantee and Oneida County, New York.




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                                                                                           Finding 1


    Utica Historic Marina Project May Not Meet
               The Job Creation Goal
 The Utica Historic Marina Project, which is part of the Canal Corridor Initiative, a HUD initiative
 involving grants from the Small Cities CDBG Program and loans from the Section 108 Loan
 Guarantee Program to fund development activities related to the New York canal system, may not
 meet its job creation goal. This occurred because the Grantee failed to develop a plan to ensure
 that the required job creation goal would be met. As a result, we consider cost of $213,750 that was
 incurred with Small Cities CDBG funds from Oneida County, New York, as unsupported pending a
 HUD eligibility determination. Regarding a pending Section 108 CDBG Loan Guarantee of
 $250,000, which is under Oneida County’s Small Cities CDBG Program, we recommend that HUD
 should not provide final approval to the Section 108 Loan Guarantee until both the County and the
 Grantee provide assurances that an acceptable number of jobs will be created.

 In connection with the above, it should be noted that the Grantee expended $902,799 of the
 Grantee’s CDBG Entitlement Funds on the Marina Project. The Grantee attempted to justify the
 expenditures that were made with these funds by stating that the Marina would service low and
 moderate income families. However, HUD disagreed and directed the Grantee to reimburse its
 CDBG Program the $902,799. At the completion of our fieldwork, the Grantee had not reimbursed
 the money to its CDBG Program.



                                               Background of Utica Historic Marina Project
 Background of Utica Historic
 Marina Project                                The following chronology of key events provides
                                               background on the Utica Historic Marina Project.

                                               September 1997:

                                               HUD approves the Canal Corridor Initiative
                                               application from Oneida County, New York. The
                                               Marina Project, located in Utica, New York, was part
                                               of the approved application.

                                               The Marina Project was expected to cost $500,100
                                               with $487,500 of the funds coming from HUD:
                                               $237,500 of Small Cities CDBG funds and a
                                               $250,000 Small Cities Section 108 Loan. All of the
                                               HUD funding flowed through Oneida County, New
                                               York to the City of Utica, New York (Grantee).




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Finding 1


                            The HUD approved Canal Corridor application stated that
                            the Marina would create 60 jobs. (35 full time and 25 part
                            time).

                            August 1998:

Grantee expands scope of    The Grantee greatly expanded the planned scope of the
Marina Project; estimated   Marina Project. The Grantee obtained professional cost
cost now $2.6 million       estimates of $2.6 million for the Marina project. The
                            Grantee did not provide any documentation as to the source
                            of the additional funding.

                            August 2000:

                            The Grantee provided the County with a revised Small
                            Cities Section 108 Loan Guarantee application for the
                            Marina Project. The total budget was over $2,500,000.
                            Almost $2,000,000, was budgeted as Grantee funds. The
                            Grantee did not mention that it was using its CDBG
                            Entitlement funds for the Marina Project.

                            The application also included a letter from the Grantee
                            dated August 10, 2000, regarding the funding sources for
                            the Marina Project. The letter stated that the Grantee would
                            provide an additional $2,000,000 as part of its capital plan.
                            The letter also reiterated that 5 full-time (FT) and 10 part-
                            time (PT) jobs would be created. The 10 PT jobs equate to
                            5 FT jobs; therefore, the total FT jobs to be created would
                            be 10.

                            March 2001:

                            The Grantee requested $237,500 of Small Cities CDBG
                            funds from the County. The County sent the Grantee
                            $213,750.

                            June 2001:

                            As of this time period the Grantee provided over $900,000
                            of it CDBG Entitlement Funds for the Marina Project. The
                            Grantee wrote to HUD stating that this was an eligible use
                            of CDBG funds because it considered the Marina as a
                            public use facility available to low and moderate income
                            families. Note: under the Canal Corridor Initiative the
                            Marina was considered an economic development project,

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                                                                                             Finding 1


                                        whereby jobs would be created for low and moderate
                                        income families.

                                        November 2001:
      Use of $902,799 in CDBG
      Entitlement Funds is ineligible   HUD officially told the Grantee that the $902,799 of
                                        CDBG Entitlement funds expended on the Marina Project
                                        by the Grantee was ineligible because the activity did not
                                        benefit low and moderate income families. HUD directed
                                        the Grantee to repay its CDBG Entitlement Program with
                                        non-Federal funds.

                                        February 2002:

                                        The Grantee filed its annual consolidated plan. The plan
                                        included $300,000 of local funds for partial repayment of
                                        the $902,799 of ineligible costs mentioned above.
                                        However; a written agreement did not exist between HUD
                                        and the Grantee regarding repayment of the remaining
                                        funds.

                                        Small Cities CDBG Funds Tied to Marina Project May
                                        Not Meet Job Creation Criteria

If jobs are not created at the          HUD approved the Small Cities CDBG funds for the Marina
Marina the additional HUD               Project based upon at least 10 jobs being available for low
funds may be ineligible                 and moderate income families. However, our discussions
                                        with County and Grantee officials indicated that the Marina
                                        Project had not created any jobs. Furthermore, Grantee
                                        officials told us that there are no solid numbers available or
                                        plans in place regarding how many or what types of jobs the
                                        Grantee anticipates creating.

                                        Our review disclosed that the Grantee expended $213,750 of
                                        Small Cities CDBG funds on the Marina Project. The funds
                                        were provided by HUD through Oneida County, New York
                                        as part of the Canal Corridor Initiative Program. In addition,
                                        the County and the Grantee are awaiting HUD’s approval on
                                        a $250,000 Small Cities Section 108 Loan

                                         In accordance with Title 24, Code of Federal Regulations
                                        (CFR) Part 570.209 (b)(3)(i)(A) $50,000 is the amount HUD
                                        uses as its benchmark for job creation and amount of CDBG
                                        assistance. For example, if only three jobs are created, than in
                                        theory only $150,000 of CDBG funds should be provided.

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Finding 1


                                             Since the Marina Project had not created any jobs, and the
                                             Grantee and County do not have a plan regarding how many
                                             jobs will be created, we consider the $213,750 of Small
                                             Cities CDBG funds provided for the Marina Project as
                                             unsupported costs pending a HUD eligibility determination.
                                             Also, HUD should not provide final approval to the Small
                                             Cities Section 108 Loan Guarantee until both the County and
                                             Grantee provide assurances that an acceptable number of
                                             jobs will be created.

Auditee Comments                             Regarding the $902,799 of ineligible costs, the Grantee has
                                             already provided $300,0001 to its CDBG Program from
                                             non-Federal funds.        The Grantee completed its first
                                             monitoring of the Marina regarding jobs. Although, there
                                             is no time frame in which to accomplish the job goals, the
                                             Grantee believes that it will be achieved. (See Appendix A,
                                             for the Grantee’s entire response.)


OIG Evaluation of                            HUD needs to ensure that the Grantee continues to
Auditee Comments                             reimburse its CDBG Program from non-Federal funds and
                                             HUD must ensure that jobs are created within a reasonable
                                             time period.


                                             We recommend that HUD:

                                             1A.       Ensure that the Grantee reimburses its CDBG
                                                       Program the balance of the $902,799 of ineligible
                                                       costs from non-Federal funds.

                                             1B.      Follow up on the Grantee’s progress regarding its
                                                      job creation goals at the Marina Project and give the
                                                      Grantee a specified period of time to meet the job
                                                      creation goals.

                                             1C.      Apply the $50,000 per job standard and make a
                                                      determination how much of the $213,750 of Small
                                                      Cities CDBG funds are eligible costs.

                                             1D.      Require the Grantee to reimburse the County for any
                                                      Small Cities CDBG funds that is determine to be
                                                      ineligible.

1
  After the completion of our field work, at our exit conference the Grantee provided us with evidence that it
reimbursed its CDBG Program $300,000.

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                                                        Finding 1



      1E     Should not provide final approval to the $250,000
             Section 108 Loan Guarantee until both the County
             and the Grantee provide assurances that an acceptable
             number of jobs would be created.




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                                                                                           Finding 2




   The Ski Chalet Project May Not Meet National
         Objective of the CDBG Program
  The Grantee used CDBG funds to help finance the renovation of a Ski Chalet in spite of a
  warning by HUD that the activity may not meet a national objective of the CDBG Program.
  This occurred because the Grantee decided to rehabilitate and connect an existing Ski Chalet that
  abutted the new recreation facility that the Grantee constructed for its youth. Our review
  disclosed that the Grantee referred to the construction of the new recreation facility as Phase 1
  and to the Ski Chalet as Phase II of its Parkway Recreation Center Project. Regarding this
  Project, HUD told the Grantee that the construction of the new recreation facility was an eligible
  CDBG activity; but, the use of CDBG funds to rehabilitate the Ski Chalet may not meet a
  national objective. Despite this warning, the Grantee charged the CDBG Program at least
  $255,158 of costs associated with the renovation of the Ski Chalet (Phase II). Since the Ski
  Chalet activity may not meet a CDBG national objective, the costs totaling $255,158, that we
  identified as being associated with the activity are considered unsupported pending a HUD
  eligibility determination.




  Background                           In 1998, the Grantee’s former Mayor conceived a plan to
                                       construct a recreation center within the City of Utica’s limits
                                       to provide activities for the City’s youth. On May 6, 1998,
                                       the Utica City Council introduced the Parkway Recreational
                                       Center activity. Initially, the Grantee budgeted $1,000,000 of
                                       State funds to construct the new recreation facility.

                                       In May 1999, the Grantee increased the budget to over
                                       $2,000,000. The Grantee’s Department of Urban and
                                       Economic Development showed the following sources of
                                       funds for the Project:

                                       State Funds                    $1,000,000
                                       Capital Fund                      450,000
                                       Utica Foundation                  150,000
                                       CDBG                              551,425
                                        Total                         $2,151,425

Parkway Recreation Center              Within a few months of securing funding for the Project a
Project expands into a second          new scope of work was determined that significantly
phase                                  expanded the activity.


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Finding 2



               Additionally, the Grantee also decided to rehabilitate an
               existing Ski Chalet that it owned. Since the Ski Chalet
               abutted the new recreation facility, the Grantee connected it
               to the new facility. The Grantee referred to the construction
               of the new recreation facility as Phase 1, and to the
               rehabilitation of the Ski Chalet as Phase II, of its Parkway
               Recreation Center Project. In August 1998, the Grantee’s
               Architect estimated that the total project cost of both phases
               would exceed $4 million.

               With the addition of Phase II, the Parkway Recreation
               Center’s budget increased from $2,151,425 to $4,387,124.
               Moreover, the portion of CDBG funding included in the
               budget increased from $551,425 to $1,053,693; thus,
               increasing the proposed use of CDBG funds to over
               $500,000. As shown below, adding the Ski Chalet to the
               Project (Phase II) increased the proposed amount of CDBG
               funds for the Parkway Recreation Center by 91 percent.


                                    Parkway Recreation Center



                             $1,200,000
                       A $1,000,000
                       m $800,000
                       o
                           $600,000
                       u
                       n   $400,000
                       t   $200,000
                                    $0
                                             I                I & II
                                                 Project Phases




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                                                                                           Finding 2



                                                  Accounting for Project costs

                                                  The Grantee’s Department of Urban and Economic
                                                  Development’s budget and summary of accounting
                                                  for the Parkway Recreation Center, as of February
                                                  15, 2002, showed the following:




                                Funding Source                         Budget           Expended

                 General Fund                                              $529,040        $501,459
                 State Grant           T                                  1,000,000          947,063
                 Capital Fund H-56504-4.44500
                                       t                                      4,391            4,391
                 Capital Fund H-81641-4.44104
                                       T                                    800,000          794,237
                                       t
                 Capital Fund H-81641-4.44105                               500,000          499,200
                                       T
                 Capital Fund H-81641-4.44106                               300,000          286,986
                 Parks Foundation H-56506-.44101                              5,000            5,000
                 Utica Foundation & Donation                                195,000           95,000
                 CDBG                                                     1,053,693        1,040,944
                 TOTAL BUDGET                                            $4,387,124       $4,174,280


      Criteria
                                       Title 24, Code of Federal Regulation (CFR) Part 85.20,
                                       Standards for financial management systems, requires
                                       grantees and subgrantees to: report accurate, current and
                                       complete disclosure of the financial results of financially
                                       assisted activities; maintain records which adequately
                                       identify the source and application of funds; maintain
                                       effective control and accountability for all grant and subgrant
                                       cash, personal property and other assets; and, compare actual
                                       expenditures and outlays with budgeted amounts for each
                                       grant or subgrant.

                                       The results of our review indicated that as of February 15,
                                       2002, the Grantee expended $4,174,280 of the $4,387,124
                                       budgeted for the Parkway Recreation Center Project, of
                                       which $1,040,944 of those expenses were charged to the
                                       CDBG Program.

                                       Title 24, CFR Part 570.200(a)(2) requires that CDBG
                                       grantees must certify that their projected use of funds has

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  Finding 2


                                been developed so as to give maximum feasible priority to
                                projects that will carry out one of the national objectives: (1)
                                benefit to low and moderate income families, (2) aid in the
                                prevention and elimination of slums or blight, or (3) urgency
                                of need.

  Accounting records were not   During the review, we examined relevant accounting
  adequately maintained         records and related documentation that was maintained by
                                the Grantee’s Comptroller’s Office and the Grantee’s
                                Department of Urban and Economic Development.
                                Although the Grantee’s official accounting records are
                                maintained by the Comptroller’s Office, detailed subsidiary
                                accounting records for CDBG assisted projects are
                                maintained by the Department of Urban and Economic
                                Development. Neither the Comptroller’s office nor the
                                Department of Urban and Economic Development
                                maintained detailed records for the Parkway Recreation
                                Center Project reflecting costs by phases. Therefore, the
                                Grantee was unable to provide us with total costs incurred
                                with CDBG funds relative to Phase I and Phase II.

                                The distinction is important because HUD advised the
                                Grantee, in correspondence dated November 26, 2001, that
                                Phase I of the Parkway Recreation Center appears to
                                service an area that meets the low and moderate income
                                national objective. However, HUD stated that Phase II (Ski
                                Chalet) might not meet the low and moderate income
                                national objective. Accordingly, the use of CDBG funds for
                                the Ski Chalet may not be eligible.

                                Since the Grantee could not provide us a detail listing of
                                disbursements by Phase for the Parkway Recreation Center,
                                we selected a sample of costs that the Grantee charged to the
                                CDBG Program. Our objective was to determine whether
                                CDBG funds were used to pay for costs associated with
                                Phase II of the Parkway Recreation Center project.

At least $255,158 of the        To test costs charged to the CDBG Program for the Project
Parkway Recreation Center       during the period June 2000 through May 2001, we used a
costs are Phase II costs        non-representative sampling method to select 21 invoices,
                                which reflected costs of $431,230. A review of the 21
                                invoices disclosed that 11, reflecting costs of $255,158,
                                related to expenditures associated with Phase II of the
                                Parkway Recreation Center Project.


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                                                                        Finding 2


                     Since the Grantee did not account for Project costs by each
                     phase, it is possible that more CDBG costs could have been
                     incurred for Phase II of the Parkway Recreation Center.
                     Because HUD told the Grantee that costs applicable to Phase
                     II might not meet a national objective, the Grantee must
                     organize its accounting records to differentiate between
                     Phase 1 and Phase II costs of its Parkway Recreation Project.


 Auditee Comments    The Grantee believes that HUD based its opinion regarding
                     the low and moderate income national objective on a
                     narrow definition of the criteria. The Grantee is prepared to
                     document the eligible uses of the Phase II, Ski Chalet to the
                     HUD Area Office. The Grantee will perform a complete
                     analysis of all CDBG expenditures to distinguish between
                     Phase 1 and Phase II costs per the OIG’s recommendation.
                     (See Appendix A, for the Grantee’s entire response.)




 OIG Evaluation of   HUD has determined that the Ski Chalet may not meet the
 Auditee Comments    low and moderate income national objective. If the Grantee
                     can document that the Ski Chalet meets the low and
                     moderate income national objective, the Grantee should
                     provide the documentation to the HUD Area Office.


                     We recommend that HUD:

                     2A.      Make an eligibility determination regarding the
                              $255,158 of unsupported CDBG costs.

                     2B.      Require the Grantee to distinguish between Phase 1
                              and Phase II costs of its Parkway Recreation Center
                              Project.

                     2C.      Make an eligibility determination regarding any
                              additional CDBG funded Phase II costs identified
                              by the Grantee’s actions resulting from
                              Recommendation 2B above.




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Finding 2




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

                                              •      Compliance with Laws and Regulations-
                                                     Controls to ensure that the projects meet a
                                                     national objective.

                                              •      Safeguarding Resources- Controls to ensure that
                                                     project costs charged to HUD are necessary,
                                                     reasonable, and in compliance with pertinent
                                                     Federal regulations.

                                              •      Validity and Reliability of Data- Grantee
                                                     Budgetary and Accounting controls

                                       We assessed the relevant controls identified above.

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

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

                                          •   Grantee did not ensure that the Projects met a
                                              national objective. Audit Findings 1 and 2. (Program
                                              Operations)(Compliance        with     Laws      and
                                              Regulations).



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 Management Controls


                       •   Grantee did not ensure that all project costs charged
                           to HUD are necessary, reasonable, and in compliance
                           with federal regulations. Audit Findings 1 and 2.
                           (Safeguarding Resources).

                       •   Grantee did not have adequate budgetary and
                           accounting controls. Audit Finding 2. (Validity and
                           Reliability of Data).




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 Follow Up On Prior Audits
 There were no prior audit reports specifically pertaining to the Grantee’s Historic Marina and
 Parkway Recreation Center Projects.




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 Follow Up On Prior Audits




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                                                                                   Appendix A

 Schedule of Questioned Costs and Funds Put to
 Better Use
             Recommendation        Unsupported Costs (1)         Funds Put To Better Use (2)
                Number
                    1A                             $902,799
                    1C                             $213,750
                    1E                                                          $250,000
                    2A                              $255,158
               Total                              $1,371,707                    $250,000




 1/   Unsupported costs are costs charged to a HUD-financed or HUD-insured program or
      activity and eligibility cannot be determined at the time of audit. The costs are not
      supported by adequate documentation or there is a need for a legal or administrative
      determination on the eligibility of the 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.

 2/   Funds Put To Better Use pertain to future costs that can be avoided or reprogrammed.




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                                                      Appendix A




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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 C
 UTICA PHOTOS




                      Ski Chalet




                Utica Historical Marina




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                                            Appendix C




                Parkway Recreation Center




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                                                 Appendix D

 Distribution
 Mark Mojave, Commissioner
 Department of Economic Development
 1 Kennedy Plaza
 Utica, New York 13502

 Timothy Julian, Mayor
 City of Utica
 1 Kennedy Plaza
 Utica, New York 13502

 Ralph J. Eannace Jr.
 Oneida County Executive
 800 Park Avenue
 Utica, New York 13501

 John Kent
 Deputy Commissioner
 Oneida County
 Department of Planning
 321 Main Street
 Utica, New York 13601

 Sharon Pinkerton, Senior Advisor
 Subcommittee on Criminal Justice
 Drug Policy & Human Resources

 Stanley Czerwinski, Director
 Housing & Telecommunication Issues
 U.S. General Accounting Office

 Steve Redburn, Chief Housing Branch
 Office of Management and Budget

 The Honorable Fred Thompson
 Ranking Member
 Committee on Governmental Affairs

 The Honorable Joseph Lieberman
 Chairman
 Committee on Governmental Affairs




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 Appendix D


 Andy Cochran
 House Committee on Financial Services

 Clinton C. Jones, Senior Counsel
 Committee on Financial Services

 Kay Gibbs
 Committee on Financial Services

 Linda Halliday
 Department of Veterans Affairs
 Office of Inspector General

 William Withrow
 Department of Veterans Affairs
 OIG Audit Operations Divison

 George Reeb
 Assistant Inspector General for Health Care Financing Audits

 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

 The Honorable Sherwood Boehlert
 2246 Rayburn Building
 House of Representatives
 Washington, DC 20515 3223




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