oversight

City of Utica, New York Community Development Block Grant, Home, and Section 8 Existing Housing Program Utica, New York

Published by the Department of Housing and Urban Development, Office of Inspector General on 2001-12-03.

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

                            U. S. Department of Housing and Urban Development
                                            Office of Inspector General
                                           26 Federal Plaza, Room 3430
                                            New York, NY 10278 0068


December 3, 2001                                                   Audit Memorandum
                                                                   No. 2002-NY-1801

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


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


SUBJECT:      City of Utica, New York
              Community Development Block Grant, Home, and
              Section 8 Existing Housing Programs
              Utica, New York

We completed an audit of the City of Utica’s (Grantee) Community Development Block Grant
(CDBG), Home, and Section 8 Existing Housing Programs in December 1999, but postponed
issuance of a final audit report until a related on-going criminal investigation was completed.
Upon completion of the criminal investigation, we performed a review to update the status of the
four findings that we developed during our 1999 audit. The four findings pertained to: (1)
Management Controls; (2) Rehabilitation Activities; (3) Program Administration; and, (4)
Section 8 Contract Oversight. The audit period for our 1999 review was from April 1, 1997
through September 30, 1998. During our current review of the areas discussed in the four
findings, we extended the audit period to include activities through June 2001. Our follow-up
review was conducted during the period between July and October 2001.

Within 60 days, please provide us, for each recommendation cited in this memorandum, a status
report on: (1) the corrective action taken; (2) the proposed corrective action and the date to be
completed; or (3) why action is not considered necessary. Also, please provide us copies of any
correspondence or directives issued related to this review.

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

                                         SUMMARY

We conducted a review of the City of Utica, New York (Grantee) operations to determine the
current status of issues raised in draft findings prepared by our office in 1999. Our review
disclosed that deficiencies continue to exist within each of the program areas that we examined
in 1999. As such, this memorandum contains four findings that are similar to those drafted by
our office in 1999; however, the findings have been updated and modified as appropriate to
include current conditions and to incorporate corrective actions taken by the Grantee to date.
Specifically, we determined that the following reportable conditions exist:

Effective Management Controls Are Needed – (See Finding 1)

Our previous 1999 draft findings indicated that an effective organization was needed to ensure
adequate management controls. The 1999 audit found that management controls were lacking or
ineffective over: financial and accounting functions; program monitoring; and, programmatic
communications. Because of control weaknesses, reasonable assurance could not be provided
that program funds were properly used and that assets were adequately safeguarded. As a result,
ineligible and unsupported costs have been charged to HUD funded programs. Our current
review indicated that the Grantee instituted some corrective actions that should correct the
lacking or ineffective management controls, but more needs to be done.

Ineligible and Unsupported Rehabilitation Costs – (See Finding 2)

Because the Grantee did not establish adequate controls over the safeguarding of assets, CDBG
funded rehabilitation programs were charged with almost $377,000 of ineligible and unsupported
costs. Included in the questionable costs were disbursements associated with a former
employee’s theft of contractor bid deposits and disbursements for costs that were not supported
or that were not reasonable and necessary. In addition, the Grantee did not adequately account
for its rental rehabilitation loan program activities, nor could it identify with certainty the
universe or status of loans outstanding. The deficiencies occurred because management controls
did not provide for an adequate segregation of duties or establish procedures of checks and
balances to ensure that accounting and transaction cycles were appropriately processed without
circumvention. The deficiencies not only resulted in the improper use of program funds, but
have also prevented the achievement of program objectives including providing the citizens of
Utica, New York with safe and affordable housing.

Grantee Did Not Adequately Administer or Monitor Program Activities – (See Finding 3)

The Grantee did not implement adequate controls to ensure that its HUD program activities,
including those administered by subrecipients, complied with applicable HUD regulations.
Consequently, the Grantee could not demonstrate that HUD funds amounting to almost $832,000
were used for eligible and necessary activities, or that all HUD funded activities achieved
appropriate program objectives. We believe that the Grantee did not adequately administer or
monitor its activities because emphasis was not placed on establishing procedures that required
compliance with HUD requirements.

Section 8 Administrative Contract Was Not Effectively Controlled – (See Finding 4)

Besides CDBG, the Grantee administers a Section 8 Housing Assistance Program. On March 20,
1997, the Grantee contracted with Utica Community Action, Inc. (UCAI) to administer its


                                               2
Section 8 Program. During the ensuing eleven months ending February 19, 1998, the Grantee did
not effectively scrutinize UCAI’s performance to ensure that UCAI administered the program in
accordance with an established Administrative Plan and Section 8 regulations. Consequently,
UCAI has expended at least $127,352 for costs not adequately supported. We believe the cited
deficiencies occurred because the Grantee did not effectively monitor UCAI’s performance.

An exit conference was held at City Hall in Utica, New York on October 17, 2001, which was
attended by the following Grantee and HUD officials:

City of Utica, New York

Tim Julian – Mayor
Mark Mojave – Commissioner, Department of Urban and Economic Development
Heather Mowat – Budget Director
Jim Schlager – Community Development Finance Administrator

HUD – Office of Inspector General (OIG)

Alexander C. Malloy – District Inspector General for Audit
William Rooney – Assistant District Inspector General for Audit
John Cameron – Senior Auditor
Richard Roseboom – Senior Auditor


                                          Background


Title I of the Housing and Community Development Act of 1974, established the Community
Development Block Grant (CDBG) Program. The CDBG Program provides grants to States and
units of local governments to aid in the development of viable urban communities. The HOME
Program allows participating jurisdictions to use the funds for a variety of housing activities,
according to local housing needs. The Section 8 Housing Assistance Program allows the Grantee
to provide rental assistance to low-income families, and to elderly and handicapped individuals
who could not otherwise afford decent, safe, and sanitary housing.

The Programs referred to above are administered by the Grantee and its subrecipients. The
Grantee is governed by a Mayor and Common Council. The Grantee’s office is located at City
Hall, Utica, New York. The Commissioner of the Department of Urban and Economic
Development is Mark Mojave and the Comptroller is Joan Scalise.

During the audit period, from April 1997 through September 1998 (and extended when
appropriate), the Grantee administered the following:

   •   CDBG Entitlement Grants for Program Years 1997 and 1998 totaling $7,952,000.
   •   HOME Grants totaling $1,734,000.



                                               3
   •   Section 8 Housing Program approved budget of $2,185,080.

Our initial field work was completed in June 1999. The audit resulted in the development of
four draft findings, which we provided the Grantee in December 1999. Subsequently, we
discussed those findings with Grantee officials during an exit conference held on January 28,
2000. The Grantee prepared draft responses to the draft findings, and presented their written
comments to the Office of Inspector General (OIG) at the exit conference.

Because several issues contained in the 1999 draft findings related to an on-going criminal
investigation conducted by HUD’s OIG Office of Investigations, the Federal Bureau of
Investigation and the U.S. Attorney’s Office, we suspended issuance of a final audit report
pending completion of the investigation. In this regard, the investigation concluded in December
2000, when a former Grantee employee pled guilty to a felony charge of theft of federal funds,
admitting to embezzling $113,967 in HUD funds from 1994 to 1998.

Since the original draft findings were prepared in December 1999, and because the related
investigation ended a year later in December 2000, OIG decided it was prudent and necessary to
conduct additional audit work to update the status of the issues raised in our 1999 draft findings,
and to analyze the affects of relevant subsequent events pertaining to those issues, prior to
issuing a final report. The additional audit work was deemed necessary because substantial time
had elapsed since preparation of the original draft findings, and to fairly, accurately and
effectively present the issues in a final audit report. Furthermore, we believed that it was
essential that consideration be afforded to: subsequent developments; Grantee responses to the
draft findings; and, the impact of the criminal investigation on the matters raised in the draft
findings. Apart from the above, our office has received congressional inquiries regarding the
status of our 1999 draft findings.

For our current review, we conducted additional audit work during July and October 2001, to
reassess and determine the up to date status of the issues contained in the 1999 draft audit
findings. To accomplish our objectives we: considered and evaluated the Grantee’s written
responses to the 1999 draft findings; reviewed documentation and correspondence generated
subsequent to the 1999 audit; updated the status of the previously raised issues; evaluated
relevant Grantee controls; interviewed pertinent Grantee officials; and, examined corrective
actions taken by the Grantee in response to our prior audit recommendations. Particulars
pertaining to the current status of reportable conditions and the deficiencies identified are
contained in the findings that follow.




                                                4
                                    Results of Review
           Finding 1 - Management Controls Need To Be Strengthened

In our 1999 draft findings we indicated that an effective organization was needed to ensure
adequate management controls. Specifically, the 1999 audit found that management controls were
either lacking or ineffective regarding: (a) Financial and accounting functions; (b) Program
monitoring; and, (c) Programmatic communications. Because of the control weaknesses the
Grantee could not demonstrate, or provide reasonable assurance, that program funds were properly
used and that assets were adequately safeguarded. Consequently, ineligible and unsupported costs
have been charged to HUD funded programs by the Grantee and are discussed in the other findings
in this report. Our subsequent review indicated that the Grantee instituted some corrective actions
that should strengthen management controls. However, to ensure that deficiencies similar to those
cited in the report do not recur, additional controls must be established.



                                     Title 24, Code of Federal Regulation (CFR), Part 570.610
Criteria                             of the CDBG Regulations requires grantees to comply with
                                     the policies, guidelines, and requirements of Title 24, CFR
                                     Part 85, OMB Circulars A-87 and A-110.

                                     Title 24, CFR Part 570.501(b) provides that grantees are
                                     responsible for ensuring that CDBG funds are used in
                                     accordance with all program requirements. It further
                                     provides that the use of designated public agencies,
                                     subrecipients or contractors does not relieve the grantee of
                                     this responsibility and that the grantee is also responsible
                                     for determining the adequacy of performance under
                                     subrecipient and procurement contracts.

                                      Title 24, CFR Part 85.20 provides that effective control and
                                      accountability must be maintained for all grant and
                                      subgrant cash, real and personal property, and other assets.
                                      Grantees and subgrantees must adequately safeguard all
                                      such property and must assure that it is used solely for
                                      authorized purposes.

 Grantee Administration               The Grantee provided the authority to administer its CDBG
                                      program to the City’s Department of Urban and Economic
                                      Development. In addition to activities implemented by the
                                      Grantee, subrecipients were also used to administer
                                      portions of the Grantee’s programs. Financial records for
                                      HUD funded activities are maintained by the City


                                                5
                    Controller based on information provided by the City’s
                    Department of Urban and Economic Development.

Results of Review   To evaluate the effectiveness of the Grantee’s management
                    and related controls, we: reviewed pertinent transaction
                    cycles; considered previous audits; interviewed Grantee and
                    subrecipient    personnel; and, examined program
                    documentation as appropriate.

                    The results of our 1999 review and draft findings disclosed
                    that the administration of HUD programs was impeded by
                    weaknesses in the Grantee’s management controls.
                    Consequently, the control weaknesses had the following
                    unfavorable affects on the Grantee’s operations:

                    Financial and Accounting Controls

                    The lack of adequate segregation of duties precluded the
                    Grantee from assuring that program assets were adequately
                    safeguarded and used for appropriate purposes. In
                    particular, controls over receipts and disbursements,
                    procurement       and      contracting,    and    supporting
                    documentation for costs, were less than sufficient. Specific
                    deficiencies attributed to the weak controls are discussed in
                    detail in the remaining findings of this report.

                    Program Monitoring Process

                    The Grantee did not properly monitor HUD program
                    activities administered in house or by its subrecipients.
                    Findings 3 and 4 of this report identify specific deficiencies
                    associated with monitoring of HUD funded activities.

                    Programmatic Communications

                    An Independent Public Accountant’s (IPA) Single Audit
                    Report (dated March 31, 1998) contained findings related to
                    poor communications between the City’s Department of
                    Urban and Economic Development and the City’s
                    Controller’s Office. Our 1999 review confirmed the issues
                    disclosed by the IPA and showed that financial transactions
                    involving HUD funds were not being posted on a monthly
                    basis. Moreover, we found that financial information
                    required to prepare submissions to HUD was not available in
                    a timely manner and may not be accurately recorded or


                              6
                                 sufficiently documented to support the information provided
                                 in the submissions. For example, information about the
                                 collection of loans made with HUD funds was not reliable
                                 because the Grantee’s ability to identify the universe of loans
                                 made with grant funds is questionable (See Finding 2).

Grantee Progress                 Subsequent to our 1999 review, and based on the
                                 recommendations contained in our draft findings, the
                                 Grantee instituted certain corrective actions associated with
                                 the deficiencies identified and discussed herein. In particular,
                                 the Grantee has made efforts to improve management
                                 controls over various aspects of its operations. Specifically,
                                 the Grantee has made improvements over safeguarding of
                                 assets by establishing controls that more effectively segregate
                                 and streamline staffing duties and responsibilities. It has also
                                 strengthen controls over monitoring of subrecipients by
                                 requiring more descriptive and restrictive budgets and
                                 enhancing scrutiny of requests for reimbursement. Moreover,
                                 the Grantee is in the process of establishing procedures to
                                 conduct on-site monitoring of subrecipient activities and
                                 fiscal management. To this end, the Grantee has conducted a
                                 monitoring site visit at one of its subrecipients. Finally,
                                 efforts undertaken by the new City management officials
                                 have lead to better communications and more effective
                                 coordination between City Departments and Agencies.

                                 However, based on the results of our updated audit work,
 Deficiencies still exist and
                                 management controls weaknesses still exist. Specifically, the
 corrective actions are needed
                                 Grantee lacks adequate fidelity bond coverage, subsidiary
                                 records are not reconciled to the general ledger in a timely
                                 manner, and some cash receipts are collected by the
                                 Department of Urban and Economic Development instead of
                                 being collected by the Comptroller’s Office. We informed
                                 the City management that the control weaknesses must be
                                 addressed before HUD can be assured that the Grantee is in
                                 compliance with applicable program requirements, and that
                                 the activities of the HUD funded programs are being
                                 administered in an effective and efficient manner.

Auditee Comments                 In summary, Finding 1 is flawed, based upon the scope of
                                 this draft audit, as to the position that "deficiencies still exist
                                 and corrective actions are needed." Accordingly, we
                                 respectfully request that this section be amended to reflect
                                 adequate standards that have been implemented to safeguard
                                 the use and administration of federal dollars.


                                            7
                    The complete text of the Grantee’s comments regarding
                    Finding 1 is contained in Appendix C of this memorandum.

                    As stated in the finding, we acknowledge that the Grantee
OIG Evaluation of
                    has instituted certain corrective actions associated with the
Auditee Comments    deficiencies identified in this report. However, contrary to
                    the Grantee’s contention that the finding is flawed,
                    weaknesses in certain areas of its operation continue to exist
                    and certain management controls need to be strengthened.

                     Specifically, although the Grantee maintains fidelity bond
                     coverage, the coverage is not in the form of a blanket bond,
                     thereby, leaving the Grantee venerable to potential losses
                     from the acts of non-covered employees. Our review
                     disclosed that Grantee employees, other than those covered
                     under the bond, have collected, or are in a position to
                     collect, funds on behalf of the City of Utica, New York.
                     We believe the adequacy of fidelity bond coverage for the
                     Grantee is particularly important given the seriousness of
                     the issues raised in Finding 2 of this report, and in
                     particular, regarding the theft of more than $113,000 in
                     Federal funds. It should be noted that the former Grantee
                     employee responsible for the aforementioned theft of
                     Federal funds was not a covered employee under the
                     Grantee’s fidelity bond.

                     Concerning the Grantee’s comments on reconciliation of
                     subsidiary records, we remind the Grantee that it could not
                     provide us with adequate assurance as to the accuracy of
                     the rental rehabilitation loan subsidiary records. In
                     particular, Grantee officials informed us that they were
                     unsure if the subsidiary records reflected all loans made, or
                     if all of the loans recorded in the subsidiary records were in
                     fact legitimate. Furthermore, the Department of Urban and
                     Economic Development requested, in correspondence
                     dated July 6, 2001, that the City’s legal department
                     determine the collectibility of some 15 rental rehabilitation
                     loans. The correspondence showed balances due the City of
                     more than $173,000 and indicated that many of the loans
                     have been delinquent for several years. As such, these 15
                     delinquent loans have continued to be carried on the
                     Grantee’s books and subsidiary records for many years
                     despite the likelihood that they are not collectible.



                              8
                   Apart from the above, the Grantee’s most recent completed
                   Independent Public Accountant (IPA) audit dated
                   December 19, 2000 for the year ended March 31, 2000
                   included several concerns and findings applicable to
                   internal controls. For instance, the IPA found that Federal
                   loans, grants, and repayments of loans are not being
                   recorded timely or accurately to the general ledger and that
                   duties are not properly segregated. The IPA also noted that
                   subrecipients were not being monitored to ensure
                   compliance with applicable Federal regulations.

                   As we commend the Grantee for its efforts to improve
                   management controls, we disagree with the comments
                   indicating that adequate standards have been implemented
                   to safeguard the use and administration of federal dollars.
                   To the contrary, we reiterate, as stated in the finding, that
                   management control weaknesses still exist and must be
                   addressed before HUD can be assured that the Grantee is in
                   compliance with applicable program requirements and that
                   it is administering HUD programs in an effective and
                   efficient manner.


                  We recommend that you require the Grantee to:
Recommendations
                  1A.    Establish and implement the management controls
                         needed to correct the deficiencies cited in this
                         finding regarding fidelity bond coverage,
                         reconciliation of subsidiary records and cash
                         receipts collection.




                            9
           Finding 2 - Ineligible and Unsupported Rehabilitation Costs

Because the Grantee did not establish adequate controls over the safeguarding of assets, the
administration of its rehabilitation programs resulted in the disbursement of almost $377,000 of
CDBG funds for costs associated with a former employee’s theft of contractor bid deposits and for
costs that were either unsupported, unreasonable or unnecessary. Moreover, the Grantee did not
adequately account for the activities administered under its rental rehabilitation loan program, nor
could it identify with certainty the universe or status of loans outstanding. The deficiencies
occurred because management controls did not provide for an adequate segregation of duties or
establish procedures of checks and balances to ensure that accounting and transaction cycles were
appropriately processed without circumvention. The deficiencies not only resulted in the improper
use of program funds, but have also prevented the achievement of program objectives including
providing the citizens of Utica, New York with safe and affordable housing.


                                      In our 1999 draft audit findings, we mentioned that because
Background
                                      the Grantee failed to ensure that there was adequate
                                      segregation of duties pertaining to the administration of its
                                      rehabilitation programs, more than $500,000 of CDBG funds
                                      were disbursed either for work not performed, costs not
                                      supported, or costs that were not reasonable and necessary.
                                      In addition, we mentioned that the Grantee could not identify
                                      or account for $45,186.35 of bid security deposits received
                                      from contractors. More significantly, the Grantee was unable
                                      to identify the universe of rehabilitation loans outstanding, or
                                      whether the loans outstanding were authentic. In our
                                      subsequent follow up review of these issues, we concluded
                                      that almost $377,000 of costs are in question. The details are
                                      as follows.

                                      During our initial survey in 1998, we met with officials of
                                      the Grantee and the Oneida County District Attorney’s
                                      Office. They advised us that significant lapses in the
                                      Grantee’s system of controls had permitted at least $234,391
                                      in grant funds to be shown as being spent for rehabilitation
                                      work on 19 properties even though rehabilitation work was
                                      not performed at those sites. In addition, the District
                                      Attorney’s Office found that at least $45,186.35 in bid
                                      security deposits received from contractors could not be
                                      accounted for.




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                               Subsequent to the preparation of our December 1999 draft
Subsequent Development         findings, an ongoing investigation by the U.S. Attorney’s
                               Office, the FBI, and HUD’s OIG (Office of Investigation),
                               into activities of a former City of Utica, New York employee
                               was completed in December 2000.

                               As part of the investigation, HUD OIG’s Office of
                               Investigation examined the $234,391 of disbursements
                               originally identified by the Oneida County District
                               Attorney’s Office. The examination showed that the
                               $234,391 disbursed was based on invoices fraudulently
                               created by the former City employee. The investigation also
                               showed that the $234,391 disbursed related to both legitimate
                               amounts due contractors for actual invoices submitted to the
                               Grantee, and additional amounts paid to contractors to offset
                               stolen bid security deposits. In an attempt to conceal the
                               theft, the former City employee admitted to destroying
                               certain contractor invoices received and replacing them with
                               fraudulently created invoices. By doing so, the former
                               employee could process payments that included both:
                               legitimate amounts due the contractor; and, amounts needed
                               to offset the stolen bid deposits.
$113,967 of Ineligible Costs
Were Used to Offset Stolen     The former City employee was able to perpetrate the fraud
Bid Deposits                   not only because the employee had complete control over the
                               Grantee’s rehabilitation program, but because inadequate
                               systems of checks and balances existed to detect the
                               wrongdoing. The investigation concluded with a conviction
                               of the former City employee who pled guilty to a felony
                               charge of theft of Federal funds by admitting to embezzling
                               $113,967 in HUD funds from 1994 to 1998. Accordingly, the
                               $113,967 of costs charged to the program was not necessary
                               or reasonable and is therefore ineligible.

Scope and Methodology          As mentioned in our 1999 draft finding, to address the issues
                               and to determine the extent of program losses, we: examined
                               pertinent records and files; performed site visits to
                               rehabilitated properties; and, evaluated the Grantee
                               management’s administrative and financial controls. In this
                               regard, and because of the deficiencies originally identified
                               by the Oneida County District Attorney’s Office and other
                               control weaknesses noted during the survey, a sample of
                               rehabilitation activities associated with six other properties
                               was reviewed for propriety. We found that the costs


                                         11
                                attributed to the six properties were substantially ineligible or
                                unsupported for funding. Accordingly, in our 1999 draft
                                findings, we considered $53,900 to be ineligible and
                                $220,708.33 to be unsupported.

Other costs associated with     As a result of our subsequent review of the six properties, we
rehabilitation activities are   concluded that $53,900 should be considered ineligible and
ineligible ($53,900) and        $208,708.33 should be considered unsupported. The details
unsupported ($208,708.33)       are as follows:

                                Property A and B, Ineligible Costs $53,900

                                In 1994 and 1995, the Grantee made three loans totaling
                                $53,900 to an owner to rehabilitate the adjacent properties.
                                Our review disclosed deficiencies related to the loans and
                                rehabilitation work that render the costs ineligible. The
                                deficiencies are as follows:

                                      •   In 1996, the Grantee was advised by a subrecipient
                                          that an inspection of Property A did not show
                                          evidence of rehabilitation work. The files
                                          supporting the rehabilitation work could not be
                                          located.

                                      •   Property B was not owned by the loan recipient and
                                          the documentation for the rehabilitation work
                                          could not be provided for review.

                                      •   The properties were demolished by the Grantee
                                          shortly after the purported rehabilitation.

                                      •   Loan payments were not made by the owner nor
                                          was there evidence that the Grantee ever sought
                                          collection of the loan. More significantly, the
                                          Grantee’s loan receivable register did not include
                                          the loans pertaining to the properties.


                                Property C, Unsupported Costs $92,589.93

                                In 1995, the program was charged with $92,589.93 for
                                rehabilitation work on a property that was demolished within
                                months of the purported rehabilitation. We are contesting the
                                costs because we believe the expenditure of funds represents
                                an uneconomical and unreasonable use of program funds


                                          12
    and; therefore, does not meet the objectives of the CDBG
    program. Moreover, the documentation supporting the work
    performed was not adequate to assure that the costs were
    properly procured and monitored.

    Property D, Unsupported Costs $54,750

    We are questioning the reasonableness of program charges
    for the following reasons:

•   The loan documentation shows that in 1997, two loans were
    made to the owner on the same date. Although there appears
    to be two separate loan agreements, we found that the same
    signature page was used for both agreements.

•   The loans were not recorded on the Grantee’s receivable
    records and the Grantee did not receive any of the required
    loan repayments.

•    Other than the copies of the loan agreements, no other
     supporting documentation was provided to justify the loan.
     Therefore, we were unable to assure that the costs were
     reasonable, that rehabilitation work was actually performed,
     or that the owner provided the corresponding equity
     investment of $54,750.

    Property E, Unsupported Costs $61,368.40

    The owner of this property received $64,920 for
    rehabilitation work in 1995 and 1996. Our review of the
    program files disclosed that the files did not contain
    sufficient documentation to make a determination as to the
    reasonableness or propriety of the costs. In addition, the files
    did not include documentation showing that the owner
    contributed the required equity of $16,230.

    More importantly, our review found that the owner has not
    made any payments on the outstanding loan since August
    1996, after making only five monthly repayments. The long-
    term delinquency occurred despite the fact that the owner
    received Section 8 subsidy payments for a tenant at the
    property. Accordingly, the remainder of the outstanding
    program funds amounting to $61,368.40 is considered
    unsupported.



              13
                   Property F

                   In 1997, the Grantee provided $12,000 to rehabilitate a three
                   unit residence. Based on documentation provided by the
                   Grantee subsequent to our 1999 draft finding, and since
                   repayments on the loan are current, we are no longer
                   questioning the costs associated with the loan.

                   However, our review of Grantee documentation relating to
                   the loan showed weaknesses in controls over loan procedures
                   and processing that warrant corrective action. Specifically,
                   we found that the Grantee allowed the loan recipient to use
                   receipts for costs incurred in 1995 and 1996 to meet the
                   required equity contributions for the loan even though loan
                   application and approval occurred in 1997. This practice not
                   only complicates verification of the expenditures for
                   authenticity, but raises concerns as to the reasonableness of
                   the Grantee’s award process for loans. In particular, allowing
                   equity matches from periods prior to loan application could
                   create an appearance of preferential treatment or favoritism
                   in the Grantee’s process of awarding loans.

                   The deficiencies described above are contrary to the
                   regulations of the CDBG program, as well as, OMB Circular
                   A-87. Because of the deficiencies, program funds have been
                   used in an improper manner and the Grantee’s ability to
                   achieve required program objectives has been adversely
                   affected.

Auditee Comments   The Grantee requests that sentencing for the former Grantee
                   employee be allowed to occur prior to a determination that
                   the city must repay funds.

                   The Grantee intends to undertake appropriate steps to secure
                   available information, subsequent to identification of the
                   universe of loans in question, to detail costs totaling
                   $208,708 against those projects at property addresses
                   identified as part of the audit. For Property C, the Grantee
                   contends that the rehabilitation costs incurred were eligible
                   for funding.

                   The complete text of the Grantee’s comments regarding
                   Finding 2 is contained in Appendix C of this memorandum.




                             14
OIG Evaluation of   Regarding the ineligible costs associated with for the former
Auditee Comments    Grantee employee, the Grantee’s CDBG program must be
                    reimbursed for the loss. The reimbursement can come from
                    the Grantee or the former employee. The Grantee must
                    coordinate the reimbursement with HUD..

                    Regarding the Grantee’s comments on Property C, the issue
                    raised in the finding is not the eligibility of rehabilitation
                    costs associated with Property C; but, the fact that the
                    property was demolished within months of the purported
                    rehabilitation work. Thus, we believe that the costs
                    associated with the rehabilitation work is questionable.


Recommendations     We recommend that you require the Grantee to:

                    2A.    Reimburse the ineligible costs totaling $167,867
                           ($113,967 plus $53,900) to the CDBG program
                           from non-Federal funds.

                    2B.    Provide all available information on the
                           unsupported costs amounting to $208,708.33, so
                           that our office can make all eligibility
                           determinations.

                    2C.    Reimburse the programs for any of the unsupported
                           costs found to be ineligible.

                    2D.    Implement corrective actions to provide assurance
                           that the proper controls exist regarding the approval,
                           disbursement, and collection of funds related to the
                           rehabilitation activities administered by the Grantee.




                              15
     Finding 3 - Grantee Did Not Adequately Administer or Monitor Program
                                   Activities

The Grantee did not implement adequate controls to ensure that HUD program activities, including
those administered by subrecipients, complied with applicable HUD regulations. Consequently, the
Grantee could not adequately demonstrate that HUD funds amounting to almost $832,000 were
used for eligible and necessary activities, or that all HUD funded activities achieved appropriate
program objectives. We believe that the Grantee did not adequately administer or monitor its
activities because emphasis was not placed on establishing procedures that required compliance
with HUD requirements.




Background                                   In our 1999 draft audit findings, we mentioned that the
                                             Grantee did not have assurance that HUD funds amounting
                                             to over $781,000 were used for eligible costs. As part of our
                                             1999 draft findings, we reviewed two activities administered
                                             directly by the Grantee: the Bankers Trust Economic
                                             Development Activity1; and, a contract awarded to Sutton
                                             Companies regarding monitoring of the Grantee’s HOME
                                             Program. In addition, we examined the program files for
                                             three subre1cipients participating in HUD programs during
                                             the review period: Utica Community Action, Inc.; Grow
                                             West, Inc.; and, Utica Neighborhood Housing Services. In
                                             our subsequent review of these activities, we concluded that
                                             HUD funds amounting to almost $832,000 are questionable
                                             pertaining to the above mentioned activities. The details are
                                             as follow.

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

Review Results                               As a result of our reviews, we concluded that deficiencies
                                             existed relating to the performance of the Grantee and its
                                             subrecipients regarding the administration of HUD funded
                                             programs and activities. For instance, we found that the

1
    Currently called the Adirondack Bank Building.



                                                       16
                              Grantee’s files did not always contain all of the required
                              documentation necessary to support program costs and the
                              eligibility of activities. In addition, we identified financial
                              control weaknesses that has led to the improper and
                              questionable use of program funds. Details pertaining to the
                              more significant weaknesses are discussed separately by
                              activity and/or subrecipient below:

                              Bankers Trust Economic Development Activity

                              The Grantee expended at least $646,153.17 for the benefit
Economic Development
                              of a private for-profit developer, without ensuring that the
Activity, Unsupported Costs
                              economic development activity complied with HUD
of $646,153.17
                              regulations or their own Economic Development
                              Guidelines. Consequently, we are unable to determine
                              whether the activity was appropriate or meets a CDBG
                              program objective.        In addition, we found various
                              deficiencies involving procurement, contracting, and
                              supporting documentation for costs incurred. We consider
                              the $646,153.17 to be unsupported costs pending a HUD
                              eligibility determination.

Background                    In August 1996, the Grantee began using CDBG funds to
                              make various improvements and repairs to the Bankers
                              Trust Building. Even though the property was owned by
                              the City’s Urban Renewal Agency (URA), these
                              improvements were an economic development activity for
                              the benefit of a private for-profit developer. By the time
                              the property was officially conveyed to the developer and
                              the local Industrial Development Agency on May 1 1998,
                              the Grantee had expended at least $646,153.17 on
                              improvements. Despite the large expenditure, the Grantee
                              sold the building to the developer for $1, and did not
                              require any repayment of the improvements from the
                              developer.

                              Title 24, CFR Part 570.209 prescribes underwriting
Criteria
                              guidelines for Grantees to evaluate and select economic
                              development projects. The objectives of the underwriting
                              guidelines are to ensure that: (1) project costs are
                              reasonable; (2) all sources of project financing are
                              committed; (3) CDBG funds are not substituted for non-
                              Federal financial support; (4) the project is financially
                              feasible; (5) the return on the owner's equity investment
                              will not be unreasonably high; and, (6) CDBG funds are


                                        17
                            disbursed on a pro rata basis with other finances provided
                            to the project.

                            The Grantee also established their own Economic
                            Reinvestment Program guidelines that incorporate some of
                            the above cited HUD guidelines.

                            Despite the above criteria, the Grantee did not perform any
Special consideration may   underwriting or other financial analysis of the project.
have been afforded the      Therefore, the Grantee does not have adequate assurance
developer                   that underwriting objectives were achieved. Moreover,
                            several facts indicate that the Grantee may have afforded
                            the developer special consideration. These facts are as
                            follows:


                                   •     The Grantee could not provide a written
                                        agreement between the Grantee agencies
                                        involved and the developer regarding the federal
                                        CDBG funding. Consequently, the developer
                                        was never officially obligated to comply with
                                        requirements such as: (1) the level of equity
                                        investment and Grantee’s ability to verify the
                                        equity; (2) how the activity meets a national
                                        objective; (3) how the Grantee will verify the
                                        number of jobs created; (4) how the Grantee
                                        will determine the amount of federal assistance
                                        needed; and (5) if federal assistance represents
                                        an unreasonably high return of owners equity.

                                   •    The building was sold to the developer for $1,
                                        shortly after the Grantee expended the
                                        $646,153.17 to improve the property. The
                                        Grantee could not provide evidence that any
                                        competing developers were offered the
                                        improved building for $1.

                                   •     A financial analysis was not performed to
                                        determine if the cash flows of the project could
                                        afford repayment of a loan by the Grantee to the
                                        developer.

                                   •    File memorandums indicate that the developer
                                        was allowed to request that the Grantee perform
                                        certain work items as early as August 1996,


                                       18
            using CDBG funds. The URA did not officially
            select the developer until October 1996. The
            URA’s minutes indicate that the title would pass
            to the developer in about a month from January
            1997, but the title was not transferred until May
            1998, after the Grantee had expended
            $646,153.17 of CDBG funds to pay for the
            various improvements.

       •    The URA’s minutes indicate that the developer
            was allowed to lease the building to tenants
            since October 1996, even though URA
            continued to own the building and make repairs
            with CDBG funds until May 1998. The Grantee
            could not provide evidence that repayment of
            CDBG funds was requested from the developer.
            Therefore, the developer enjoyed full ownership
            benefits of the property, while the Grantee
            continued to pay for repairs and improvements
            using CDBG funds.

       •    The developer continues to own and lease the
            property while not being liable to the Grantee
            for any financial or national objective
            obligations.

The Grantee had responded to our 1999 draft findings by
stating that the Builders Trust activity could be construed as
an elimination of slum and blight. In our opinion, the
activity may not qualify as a slum and blight activity for the
following reasons:

   •   The Grantee charged the activity’s costs to their
       Economic Reinvestment Program, a Revolving
       Loan Fund for Economic Development. This
       program requires the Grantee to conduct extensive
       underwriting of a project. The Grantee could not
       provide evidence of any underwriting analysis.

   •   The developer requested that the Grantee perform
       certain work items as early as August 1996, the time
       period when CDBG funded improvements began. In
       our opinion, this indicates that the work was for the
       benefit of the developer, and not for the elimination
       of a slum and blight purpose.


           19
                              •   Much of the work conducted was for items that may
                                  not constitute structural or emergency repair
                                  normally associated with slum and blight activities.
                                  For example, over $85,000 was spent on building
                                  "clean up" and over $124,000 was expended on
                                  elevator repairs.

                           The Grantee's failure to follow HUD or local underwriting
                           guidelines for this project precluded an appropriate
                           determination as to the level or type of federal assistance
                           needed for the activity. The Grantee could not provide any
                           analysis to determine if the developer's revenues and cash
                           flows were sufficient to amortize the $646,153.17 of
                           improvements as a loan. Moreover, evidence exists that the
                           developer was generating lease revenue as early as October
                           1996, while requesting that certain work items be
                           performed by the Grantee. Also, the developer was not
                           required to provide any evidence of owner’s equity or job
                           creation goals. Accordingly, we are requesting that HUD
                           make an eligibility determination on the Grantee's use of
                           the $646,153.17.

                           Sutton Companies (HOME Contract)
$9,000 Unsupported costs
                           In July 1995, the Grantee entered into an agreement with the
                           Sutton Companies to review its HOME program. The
                           contract services were complete in December 1995, with
                           $9,000 of the maximum contract amount of $9,500 being
                           paid to the contractor.

                           Our 1999 draft findings showed that the Grantee could not
                           document that the costs were reasonable and necessary to
                           carry out their programs. We found that the scope of
                           services to be provided by the contractor was vague and that
                           the Grantee was unable to provide the final report for our
                           review. Accordingly, the $9,000 was considered an
                           unsupported cost.

                           In our subsequent review, we again asked for the final report.
                           The Grantee was still unable to provide the final report for
                           our review. Consequently, the $9,000 remains unsupported
                           pending a HUD determination.




                                     20
                             Title 24, CFR Part 85 contains the requirements that
Criteria                     Grantees are to follow regarding program monitoring
                             including the activities administered by subrecipients. In
                             addition, Part 85 provides financial management standards
                             that must be met by the Grantee and subrecipients.

                             Utica Community Action, Inc. (UCAI)

                             The Grantee awarded UCAI HOME funds as part of a
$176,500 Unsupported costs   project known as Operation Restore. The funds were
                             awarded so that UCAI could purchase numerous parcels of
                             City owned land from the URA to facilitate their
                             development plans. The 1999 draft findings questioned
                             $176,500 because of weaknesses in the Operation Restore
                             development plans. Our current review noted that UCAI
                             appears to be fulfilling their role as developer as some
                             progress has been made and UCAI recently combined their
                             Operation Restore efforts with the City of Utica and Utica
                             Housing Authority’s HOPE VI application.

                             Notwithstanding the above, a more important issue may be
                             the necessity and reasonableness of the costs. While we
                             recognize that acquisition is an eligible HOME activity, we
                             noted that the $176,500 was primarily a transfer of federal
                             funds from the HOME program to the City’s URA. The
                             City owned the parcels (through the URA) and could have
                             simply transferred the title to the UCAI for development
                             purposes. Moreover, we noted that the costs included a
                             developer fee of $30,000 paid to UCAI and a fee of
                             $20,000 paid to URA. There was not adequate supporting
                             documentation for either fees or an explanation as to why
                             the fees were necessary.

                             Accordingly, we consider the $176,500 as unsupported costs
                             and are requesting that HUD make an eligibility
                             determination as to the necessity and reasonableness of the
                             costs.


                             Grow West, Inc.

                             Our 1999 draft findings regarding the subrecipient files
                             maintained by the Grantee and our site visit to the
                             subrecipient found several administrative and financial




                                      21
weaknesses. The more significant matters are outlined
below:

   •   Documentation supporting costs claimed were
       inadequately supported. Examples include invoices
       that did not contain adequate information detailing
       the costs; amounts on invoices did not always agree
       with check amounts, and invoices that were not
       marked cancelled when actually paid.

   •   Weaknesses regarding the procurement services
       were found. The weaknesses include: no evidence
       of ranking and rating of proposals; missing contract
       documents; contracts documents that lacked
       necessary information; and, a potential conflict of
       interest associated with the awarding of one
       contract.

As explained below our subsequent follow up review
indicated that the Grantee has improved its monitoring of
this subrecipent.


Utica Neighborhood Housing Services

Our initial 1999 draft findings indicated that the activities
administered by this subrecipient showed the following
weaknesses:

   •   The Grantee reimbursed the subrecipient for costs
       incurred prior to the Notice to Proceed. This violates
       the contract for services executed with the Grantee.

   •   Supporting documentation was not always adequate
       enough to make eligibility determinations regarding
       payments to the subrecipient for costs claimed.

   •   Budget amounts contained in the contract with the
       subrecipient were not detailed enough to adequately
       control and monitor the use of funds. For example,
       payroll costs were not detailed by employee, position,
       or salary proration.

   •   Weaknesses in budget controls may have resulted in
       CDBG funds being used to pay a disproportionate


          22
                           amount of the subrecipient’s general operating
                           expenses. For example, in the period between April
                           and June 1996, CDBG funds were paid to reimburse
                           the subrecipient for 72 percent of its general
                           operating costs for the period.

                    Subsequent to our 1999 review the Grantee established
                    firmer controls over its monitoring efforts of the CDBG
                    activities administered by subrecipients, Grow West and
                    Utica Neighborhood Housing. Moreover, the Grantee
                    contends that these two subrecipients are generally
                    complying with the Grantees requirements regarding
                    subcontract administration and supporting documentation
                    for costs. We commend the Grantee for their efforts in this
                    regard, but must remind the City that the draft issues raised
                    during our 1999 review, as detailed above, need to be
                    addressed.


Auditee Comments    Although the Grantee acknowledges that it did not follow
                    prescribed underwriting guidelines required by Title 24, CFR
                    Part 570.209 when approving and funding the Banker’s Trust
                    project, the Grantee contends that the activity was of an
                    eligible type. The Grantee further contends that the activity
                    achieved the National Objective of creating low/moderate
                    jobs. As such, the Grantee believes the costs incurred for the
                    activity should be deemed eligible.

                    The complete text of the Grantee’s comments regarding
                    Finding 3 is contained in Appendix C of this memorandum.

                    The Grantee response acknowledges that it did not follow
OIG Evaluation of   prescribed underwriting guidelines required by Title 24,
Auditee Comments    CFR Part 570.209 when approving and funding the
                    Banker’s Trust project.

                    The audit finding discusses how the lack of underwriting
                    precluded an appropriate determination as to the level or
                    type of federal assistance needed for this activity. The
                    Grantee response does not address the underwriting issues
                    raised in the finding. For example, the Grantee requests that
                    the $646,153.17 of federal assistance be deemed eligible.
                    The Grantee bases this request on the assertion that
                    low/moderate jobs were created. While Title 24,CFR Part
                    570.203 (b) allows for assistance to developers for the


                              23
                  purpose of job creation, this does not change the fact that
                  no underwriting rules were considered when “awarding”
                  the developer funding.

                  Accordingly, we are asking HUD to render an eligibility
                  determination based upon the facts presented in the finding.


Recommendations   We recommend that you:

                  3A.     Determine the eligibility of the unsupported costs of
                          $646,153.17 pertaining to the Bankers Trust
                          economic development project.

                  3B.     Determine the eligibility of the $9,000 paid to
                          Sutton Companies for the review of the HOME
                          program.

                  3C.     Determine the eligibility of the $176,500 of HOME
                          funds awarded to UCAI for the purchase of City
                          owned land.

                  3D      Instruct the Grantee to reimburse the CDBG
                          program from non-Federal funds for any amounts
                          that you determine to be ineligible.

                  3E      Instruct the Grantee to implement procedures to
                          ensure that all Economic Development activities
                          comply with Federal regulations and local
                          requirements.

                  3F      Instruct the Grantee to continue their efforts to
                          monitor program activities as required by Title 24,
                          CFR Part 85. The monitoring should ensure that the
                          financial management systems of subrecipients are
                          in compliance with program regulations and that
                          program goals are being achieved.




                            24
  Finding 4 - Section 8 Administrative Contract Was Not Controlled Effectively

  Besides CDBG, the Grantee administers a Section 8 Housing Assistance Program. On March 20,
  1997, the Grantee contracted with Utica Community Action, Inc. (UCAI) to administer its Section 8
  Program. During the ensuing eleven months ending February 19, 1998, the Grantee did not
  effectively scrutinize UCAI’s performance to ensure that UCAI administered the program in
  accordance with the established Administrative Plan and Section 8 regulations. Consequently,
  UCAI expended at least $127,352 for costs that were not adequately documented. We believe the
  cited deficiencies occurred because the Grantee did not effectively monitor UCAI’s performance to
  ensue compliance with the Section 8 administrative plan.


  Background                           In our 1999 draft audit findings, we mentioned that UCAI
                                       expended at least $127,352 in unapproved and inadequately
                                       documented costs and had not returned $43,234 in Section 8
                                       funds to the Grantee. Our subsequent follow up on these
                                       issues disclosed that UCAI expended at least $127,352 for
                                       costs that are inadequately documented. Also, after our
                                       inquiries, in September 2001, UCAI returned the $43,234 to
                                       the Grantee. The details of our review are as follows:

                                       In March 1997, the City of Utica, New York entered into an
                                       agreement with UCAI to administer its Section 8 Program.
                                       The agreement provided that UCAI would administer the
                                       program in accordance with the provisions of the
                                       administrative plan, equal opportunity plan and Section 8
                                       regulations. The agreement covered the term from March
                                       1997 through December 31, 1999. However, in February
                                       1998, pursuant to a decision and order of a New York State
                                       Administrative Law Judge, the Grantee was required to
                                       restore the administration of the program with the City.

                                       Our decision to review the matter was based on our initial
                                       survey work that included review of an IPA report
                                       commissioned by the Grantee to evaluate UCAI’s
                                       administration of the Section 8 Program. The report obtained
                                       questioned costs and evidence of a scope impairment caused
                                       by UCAI’s reluctance to permit the accountant to review its
                                       administrative costs.

                                       The scope of our review included an examination of the
Scope of Review                        accountant’s report and supporting audit work papers. In
                                       addition, we reviewed the administrative agreement executed



                                                 25
                     by the Grantee and UCAI, as well as other documentation
                     maintained by the Grantee.

s noted.
Deficiencies noted   We believe the Grantee’s lack of contract oversight limited
                     assurance that the Section 8 Program was being properly
                     administered and permitted the deficiencies discussed in the
                     following subsections to remain undetected.

                     UCAI Has Incurred         Inadequately   Documented     and
                     Unapproved Costs

                     Despite the provisions of the Section 8 Administrative Plan
                     requiring Grantee approval of all expenditures from the
                     operating reserve in excess of the annual ongoing
                     administrative fee, UCAI expended a net amount of
                     $127,352 without the required approval. Moreover, the IPA
                     report questioned the costs because they were not adequately
                     documented.

                     Subsequent to preparation of our 1999 daft findings, the
                     Grantee requested and received documentation from UCAI
                     regarding the unsupported net expenditures of $127,352.
                     Even though the Grantee obtained additional cost related
                     documentation, our current review of the documentation
                     showed it to be incomplete and/or inadequate, thus
                     precluding us from making an eligibility determination.
                     Particulars regarding the documentation weaknesses are
                     contained in Appendix A of this report.

                     Use of Section 8 Funds for Capital Acquisition Costs

                     Section E of the Program Agreement provides that assets
                     purchased with Section 8 funds in excess of $1,000 shall be
                     returned or other compensation made to the Grantee when
                     the property is no longer needed in the project or program
                     for which it was purchased. Our review showed that
                     included in the $127,352 of unsupported costs (Appendix
                     A) was $91,070 incurred primarily for soft costs associated
                     with the purchase of real estate. Consequently, a HUD
                     determination is necessary to establish if and how such
                     capital assets should be controlled.




                               26
                         Excess Section 8 Funds

                         Our review of the IPA’s report and supporting
                         documentation showed that UCAI collected from the Grantee
                         $43,234 more in Section 8 funds than it had expended. The
                         provisions of the agreement entered into with UCAI clearly
                         warranted the return of the funds. Despite the requirement,
                         the excess funds were not returned to the Grantee until
                         September 2001, subsequent to the time that we had advised
                         the Grantee that the draw of excess funds would remain a
                         reportable condition. Consequently, a cost efficiency of
                         $43,234 has been recognized.

Corrective Actions are   The matters discussed in this finding constitute non-
Needed                   compliance regarding the agreement executed with UCAI.
                         Moreover, the deficiencies cited indicate a general lack of
                         control and effective oversight by the Grantee with regard to
                         contractor performance of its HUD funded Section 8
                         Program. Consequently, it is imperative that immediate
                         corrective actions be undertaken to resolve the questioned
                         costs and disposition of assets issues raised in the finding.



Auditee Comments         The Grantee generally agreed with the issues raised in the
                         finding.

                         The complete text of the Grantee’s comments regarding
                         Finding 4 is contained in Appendix C of this memorandum.


OIG Evaluation of        The Grantee’s comments indicate that they will institute
Auditee Comments         corrective actions pertaining to the recommendations in this
                         finding.




Recommendations          We recommend that you require the Grantee to:

                         4A.    Require UCAI to provide complete and conclusive
                                documentation in support of the $127,352 in
                                questioned costs.




                                   27
4B.    Require UCAI to reimburse the Grantee for any costs
       determined to be ineligible including costs that
       cannot be adequately documented.


Additionally, we recommend that you:

4C.    Advise the Grantee of your determinations
       regarding the disposition of assets purchased with
       Section 8 operating reserve funds.




         28
                                                                                                                        APPENDIX A
                                                                                                                         (Page 1 of 2)
Section 8 Contract Monitoring Analysis


Analysis of Operating Reserve

Source:    Dermody, Burke & Brown – Independent Accountants’ Report Dated March 26, 1998.

Gross Amounts transferred out of operating reserve     $159,694
Amount reimbursed to operating reserve                 ($32,342)
Net Amount transferred out of operating reserve        $127,352


IPA Identified Cash Outflow Transactions and OIG Analysis of Grantee Cost
Documentation

                      Capital
Date       Amount     Costs      Description                                 Notes

8/15/97 $ 3,710                   Computer Software                            1
8/25/97      5,876                Start-up Costs                               1
8/29/97    30,000 $30,000 Hygeia (Environmental Testing)                       2,3,5
8/29/97     5,000        5,000 land Acquisition Costs                          3
9/11/97      1,350       1,350 Environmental Testing                           1,3
9/12/97    20,000 20,000 Environmental Testing                                 2,3,5
11/12/97   20,000 20,000 Environmental Testing                                 3,4,5
11/18/97     1,700       1,700 Legal Fees                                      3,5
11/18/97   13,020 13,020 Allied American Abstract – Title Work                 3,6
1/20/98    20,000                 Security for Housing                         7
1/15/98      5,329                Escrow for Self-Reliance Program             1
2/1998       1,380                Additional Security Payment                  7
2/1998     32,342                 Subsidy Payment – Housing Related            1
                (13)              Excess Credit for Returned Bid Deposit       8
         ------------ ----------
         $159,694 $91,070                    Total
         ======= ======
Notes
1        The Grantee provided no supporting documentation for the cost. As such, the cost is unsupported.
2        Supporting documentation is not descriptive; it does not identify the properties tested, when the properties were tested, or what the
         results of the testing were.
3        Section E of the Program Agreement between the Grantee and UCAI provides: assets purchased with Section 8 funds in excess of
         $1,000 shall be returned or other compensation made to the Grantee when the property is no longer needed in the project or program
         for which it was purchased. The cost is unsupported pending a HUD determination regarding the disposition and control over capital
         assets purchased with Section 8 operating reserve funds.
4        Payment of $18,400 exceeds invoiced amount by $400. The check copy included in the supporting documentation for $18,400 was
         not a cancelled check. Moreover, the supporting documentation is not descriptive; it does not identify when the properties were
         tested, or what the results of the testing were. Also, the invoice documented in the file is dated 11/4/97 even though the check was
         dated 10/17/97. A second payment for $1,600 on 10/17/97 did not evidence the applicable properties, the date work was performed,
         or the results of the testing performed.
5        Supporting documentation did not contain evidence of a contract, nor did the documentation detail or verify that proper procurement
         procedures were followed.




                                                                     29
                                                                                                                 APPENDIX A
                                                                                                                  (Page 2 of 2)


6   Represents payment to the contractor’s attorney for a third party billing. Although the documentation evidences payment made by the
    contractor to its attorney, it does not evidence that payment was made to the third party vendor.
7   Documentation regarding contract procurement must be reviewed for propriety before an eligibility determination can be made.
8   No deficiency noted.




                                                              30
                                                                                     APPENDIX B
                                                                                     (Page 1 of 1)
SCHEULDE OF INELIGIBLE AND UNSUPPORTED COSTS AND COSTS
EFFICIENCIES



        Findings No.          Ineligible              Unsupported            Cost
                              Costs (1)               Costs (2)              Efficiency (3)

           2               $167,867.00                $208,708.33
           3                                           831,653.17
           4                                            127,352.00               $43,234.00
                            _________                  _________                  ________
        TOTALS             $167,867.00               $1,167,713.50               $43,234.00


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

  (3)      A cost efficiency is an action by management in response to the Inspector General’s
           recommendations to prevent improper obligation or expenditure of funds or to avoid
           further unnecessary expenditures.




                                                31
                                                                                           APPENDIX C
                                                                                           (Page 1 of 6 )
GRANTEE COMMENTS




CITY OF UTICA
URBAN & ECONOMIC DEVELOPMENT
l Kennedy Plaza, Utica New York, 13502
315-792-0181 fax: 315-797-6607
TIMOTHY J. JULIAN
MAYOR
                                                                  MARK F.MOJAVE
                                                                  Commissioner
October 30, 2001

Mr. Alexander C. Malloy
District Inspector General for Audit
US. Department of Housing & Urban Development Office of Inspector General
26 Federal Plaza Room 3430 New York, New York 10278 0068

RE: City of Utica Draft CDBG Program Audit

Dear Mr. Malloy:

This letter is in response to the four tentative audit findings developed as part of the original 1999 draft
audit, and revisited during this past summer, relating to the City of Utica's prior use of various Housing &
Urban Development (HUD) programmatic funds.

We thank you for yours and your staffs time spent in bringing closure to these issues dating back several
years ago. We are hopeful that you will consider the comments contained herein in the spirit of moving
forward in ensuring that federal dollars are put to the best use while being mindful of programmatic
requirements.




Cc:     Mayor Tim Julian
        James Sahlager, Finance Administrator




                                                    32
                                                                                     APPENDIX C
                                                                                     (Page 2 of 6)
                                         Draft Finding 1

Recommendation 1A

With regards to those items you have qualified as deficiencies as part of Draft Finding 1A, the
following written response is offered:

The fist component of Finding 1 states that "management control weaknesses still exist" based
upon the specific finding that "the Grantee lacks adequate fidelity bond coverage." It should be
noted that as of January 2000 the Department of Urban & Economic Development made the
administrative decision that the Economic Reinvestment Program (ERP) payments in particular
would be collected by the Comptroller's office directly. This Program comprises the largest
volume of activity, a well as the largest cumulative dollar amount. Accordingly, the value of cash
receipts currently handled annually by Department of Urban & Economic Development financial
staff is approximately twenty percent (20%) of what it was prior to the Comptroller's office
receiving ERP payments directly. Please find attached a current City of Utica Fidelity Bond
Coverage schedule. The schedule coverage for the Finance Administrator within the Department
of Urban & Economic Development, listed at $175,000, is currently more thaw two times the
amount of cash receipts handled annually against the Rental Rehab program. Accordingly,
fidelity bond coverage currently exceeds operational requirements.

The second component of Finding 1 states that "subsidiary records are not reconciled to the
general ledger in a timely manner”. Please find included as an attachment to this document a
departmental ERP reconciliation, the same that has been forwarded to the Comptroller's office. It
is against this list from the Department's Economic Reinvestment Program (ERP) for payments
received to date (10/26/01) for the month of October that the Comptroller's office will make
adjusting entries to reconcile the City's general ledger. The reconciliation occurs monthly subject
to closeout for cash receipts for that particular month. An October reconciliation against the city's
general ledger would be available five (5) business days after months and. It should be noted that
the Comptroller's office has a staff person dedicated to the monthly task of reconciling the city's
general ledger to the Department of Urban & Economic Development’s accounting of ERP loans.

Lastly, concerning the observation that "cash receipts are collected by various City Departments
instead of exclusively collected by the Comptroller's Office", it was our understanding that the
scope of the Inspector General's audit was within the framework Of the Department of Urban &
Economic Development’s activities concerning the administration of Community Development
Block Grant (CDBG) funds. Regardless of this fact, it should be noted that the City of Utica is a
medium sized city. Like many other medium-sized cities, Utica has made the administrative
decision so as to allow the City Clerk's office to collect Marriage License fees, the City Codes
Department to collect provided which provides an enact schedule of coverage by position for
these cash receipts functions.




                                                 33
                                                                                    APPENDIX C
                                                                                    (Page 3 of 6)

In summary, Finding 1 is flawed, based upon the scope of this draft audit, as to the position that
"deficiencies still exist and corrective actions are needed." Accordingly, we respectfully request
that this section be amended to reflect adequate standards that have been implemented to
safeguard the use and administration of federal dollars.




                                         Draft Finding 2

Recommendation 2A

We would respectfully request that sentencing for the former Grantee employee be allowed to
occur prior to a determination that the city must repay funds. Specifically, we would like to await
judicial determination of appropriate restitution, if any, of the amount embezzled, $113,967. If, in
fact, restitution in that amount to the City of Utica is not to occur as a condition of sentencing,
then the City would review its' rights under the law in seeking restitution.

Recommendation 2B

With regards Finding 2B, it is our intention to undertake appropriate steps to secure available
information, subsequent to identification of the universe of loans in question, to detail costs
totaling $208,708 against those projects at property addresses identified as part of the audit.

With regards to Property C in particular, it should be noted that the expenditure of funds occurred
within a targeted urban area under the direction of one administration. Upon a change in
administration, with then newly elected Mayor Hanna re-establishing urban development
priorities, it was decided that Property C no longer played a key role in re-establishing this
portion of the city's core urban neighborhood. It was further decided that property C in fact
inhibited implementation of a newly established economic development initiative. The decision
was subsequently made to demolish Property C. In summary, at the time of investment of
$92,589.93 in CDBG dollars, the project could be demonstrated to have met eligibility criteria. In
addition, costs were appropriate for the level and type of work necessary to stabilize the
commercial property in question with required procurement procedures adhered to. Accordingly,
regardless of this administration's or your own agency's opinion as to the wisdom of the decision
made to tear down Property C, we would respectively request that our citizenry not be penalized
for decisions made in accordance with shifting priorities under the Hanna administration and that
the expenditure be determined to be eligible.




                                                34
                                                                                    APPENDIX C
                                                                                    (Page 4 of 6)
                                         Draft Finding 3

Recommendation 3A

Finding 3A speaks to inadequate administration and monitoring of program activities relating to
what is known as the Banker's Trust Building Project. The city acknowledges that, dating back to
August of 1996, then prescribed underwriting guidelines, as referenced in Title 24, CFR Part
570.209, were not strictly adhered to by the city, nor its agencies, in making an eligibility
determination for this project.

However, it must be stated the Banker's Trust project, prior to identification of a developer, did
qualify as an eligible activity under CFR Part 570.203 (a), whereby eligibility includes
"commercial or industrial improvements carried out by the grantee or a nonprofit sub-recipient,
including: acquisition, construction, rehabilitation and installation of real property equipment and
improvements" which began in August 1996. Subsequent to identification of a potential
developer and conveyance of ownership interest on May 1, 1998 the project would again qualify
as an Eligible Activity in accordance with CFR Part 570.203 (b) that allows for "assistance to
private for-profit entities for an activity determined by the grantee to be appropriate to carry out
an economic development project. This assistance may include: grants, loans or technical
assistance." In addition, that assistance offered was made in furtherance of a National Objective,
that being the creation of Low/Moderate Jobs listed outlined as a criteria in CFR Part 570.208
(a)(4).

Accordingly, in keeping with the national standard of one Low/Mod job to be created for every
$35,000 in CDBG dollars provided against a total of $646,153.17 expended for this project, the
city shall provide documentation of low/mod jobs created, with a pre-established goal of 18.5.
Included as an attachment to this letter are two job monitoring reports from Mr. Harold T. Clark,
President of Adron LLC. The first document, dated May 14, 1998, certifies that there are 14 new
hires, with 9 of those qualifying as Low/Mod. The second document, dated October 16, 2001,
certifies 47 new hires with 25 of those qualified as Low/Mod. Additional supporting
documentation will be provided for review and approval. Accordingly, we request that these
costs of $646,153.17 be deemed eligible.


Recommendation 3B

A final report of the Sutton Companies HOME Contract bas been secured and is being forwarded
to the HUD area office as supporting documentation to this response. Accordingly, we would
request that these costs of $9,000 be deemed eligible as an administrative charge to the HOME
program from which the funds were paid.




                                                35
                                                                                  APPENDIX C
                                                                                   (Page 5 of 6)

Recommendation 3C

The Department of Urban & Economic Development has requested additional supporting
documentation against a $30,000 developer’s fee paid to UCAI and a $20,000 developer's fee
paid to URA. Upon receipt of the same, it shall be forwarded for review in order to determine
eligibility.

Recommendation 3D

Reimbursement from non-federal funds for amounts determined to be ineligible shall be made.

Recommendation 3E

In support of implementing procedures to ensure that all Economic Development activities
comply with federal regulations and local requirements, please find attached the City of Utica,
Department of Urban & Economic Development’s Policies and Procedures Manual, effective as
of September 2001. The attached manual has been developed in concert with the active oversight
and input of the HUD area office in Buffalo.

Recommendation 3F

In support of programmatic monitoring activities of sub-recipients, as required by Title 24, CFR
Part 35, please find attached a memo from the Departmental Grants Administrator referencing a
schedule for financial on-site monitoring based upon annual benefit received. Also included is
the city's draft "Guidelines for Sub-recipient Monitoring" that will be implemented upon final
approval by the HUD area office. Please bear in mind that this methodology for sub-recipient
monitoring was derived with the active support and oversight of HUD Buffalo.

                                        Draft Finding 4

Recommendation 4A

Te city received reimbursement of the $43,234 held by UCAI on September 4, 2001 (copy
attached).

Recommendation 4B

UCAI has been required to provide complete and conclusive documentation in support of the
$127,352 in questioned coats.




                                               36
                                                                                  APPENDIX C
                                                                                  (Page 6 of 6)

Recommendation 4C

UCAI shall be required to reimburse the City of Utica for any costs determined to be ineligible
including costs that cannot be adequately documented.

Recommendation 4D

Please advise as to the determination regarding the disposition of assets purchased with Section 8
operating reserve funds and the city will act accordingly.




                                               37
                                                                                APPENDIX D
                                                                                (Page 1 of 2)
Distribution

Commissioner, City of Utica, Department of Urban & Economic Development, Utica, New York
The Honorable Mayor, City of Utica, Utica, New York
Principal Staff
(Acting) Secretary’s Representative, New York./New Jersey, 2AS
Director, Community Planning and Development, 2CD, Buffalo Area Office,
Senior Community Builder, Buffalo Office, 2CS
Assistant General Counsel, New York/New Jersey, 2AC
CFO, Mid-Atlantic Field Office, 3AFI
Office of the Deputy Assistant Secretary for Grant Programs, (Attn: Special Advisor/Comptroller
– DOT) Room 7220)
Acquisitions, Librarian, Library, AS, Room 8141

Armando Falcon, Director
Office of Federal Housing Enterprise Oversight
1700 G Street, NW, Room 4011
Washington, DC 20515

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

Cindy Fogleman
Subcommittee on Oversight and Investigations, Room 212
O’Neill House Office Building
Washington, DC 20515

Stanley Czerwinski, Associate Director
Resources Community and Economic Development Division
US General Accounting Division Office
441 G Street NW, Room 2T23
Washington, DC 20515

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




                                              38
                                                 APPENDIX D
                                                 (Page 2 of 2)

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

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

The Honorable Dan Burton
Chairman
Committee on Governmental Reform
2185 Rayburn Building
House of Representatives
Washington, DC 20515-6143

The Honorable Henry A. Waxman
Ranking Member
Committee on Governmental Reform
2204 Rayburn Building
House of Representatives
Washington, DC 20515-4305

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

The Honorable Charles E. Schumer
Member, United States Senate
313 Hart Senate Office Building
Washington, DC 20510

The Honorable Sherwood Boehlert
Member, United States House of Representatives
2246 Rayburn House Office Building
Washington, DC 20515 3223



                                            39