oversight

HOME Investment Partnerships Program, City of Stockton, CA, San Joaquin County, CA Asociacion Campensina Lazaro Cardenas Inc. (ACLC), Stocktonians Taking Action to Neutralize Drugs (STAND)

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-07-31.

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
                                                                                       Pacific/Hawaii Region
                                                                        450 Golden Gate Avenue, Box 36003
                                                                       San Francisco, California 94102-3448




                                                                        MEMORANDUM NO:
                                                                          2002-SF-1804



July 31, 2002



MEMORANDUM FOR:               Steven B. Sachs
                              Director of Community Planning and Development, 9AD


                              //SIGNED//
FROM:                         Mimi Y. Lee
                              Regional Inspector General for Audit, 9AGA

SUBJECT:                      HOME Investment Partnerships Program
                              City of Stockton, CA
                              San Joaquin County, CA
                              Asociacion Campensina Lazaro Cardenas Inc. (ACLC)
                              Stocktonians Taking Action to Neutralize Drugs (STAND)


                                       INTRODUCTION

We have completed an internal audit survey of the HOME Investment Partnerships Program
(HOME). The purposes of the survey were to evaluate the susceptibility of HOME to
unnecessary risk of waste, fraud or abuse and to determine the need for and direction of any
additional internal audit coverage. As part of the internal audit survey, we completed some
limited external audit survey work at the two subject Participating Jurisdictions (PJs) and the two
subject Community Housing Development Organizations (CHDOs).

This memorandum communicates our review results and recommendations pertaining to the
external PJs and CHDOs. We will provide a separate Memorandum to the Deputy Assistant
Secretary for Grant Programs with internal recommendations addressing several departmental
and programmatic issues, but we do not believe additional internal audit coverage is warranted at
this time.
Audit Memorandum 2002-SF-1804                                HOME Investment Partnerships Program


                                              BACKGROUND

The HOME Program is authorized under Title II of the Cranston-Gonzalez National Affordable
Housing Act of 1990 as amended, and implementing Regulations are specified at 24 CFR Part
92. HOME funding is allocated to eligible State and local governments to strengthen public-
private partnerships and to expand the supply of decent, safe, sanitary, and affordable housing
for very low-income and low-income families. State and local governments that become PJs
may use HOME funds to carry out multi-year housing strategies through acquisition,
rehabilitation, and new construction of housing, and tenant-based rental assistance. PJs may
provide assistance in a number of eligible forms, including loans, advances, equity investments,
interest subsidies and other forms of investment approved by HUD. HOME Regulations require
that PJs reserve not less than 15 percent of their allocations for housing to be developed,
sponsored, or owned by approved CHDOs. Private nonprofit, community-based service
organizations receive their certification and designation as CHDOs from PJs based upon criteria
specified in 24 CFR Part 92.

                                    METHODOLOGY AND SCOPE

The scope and methodology of the audit survey work for the external audit entities included:

      ·   Review of files and interviews of staff at the two PJs and two CHDOs.
      ·   Interviews of homeowners and inspection of construction or rehabilitation work for eight1
          single family properties.
      ·   Review of HUD real estate owned (REO) and FHA insured loan files as applicable for
          the eight single family properties.
      ·   Review of five tenant files at one ACLC rehabilitated multifamily project and inspection
          of the units and interviews of tenants for three of the five.
      ·   Research of possible undisclosed identities or conflicts of interest using various public
          records and Internet resources for numerous entities or individuals.

                                            SURVEY RESULTS

Based upon the limited external audit survey work, the majority of HOME program operations
and activities at both PJs and both CHDOs appear to be in accordance with statutory and
regulatory requirements. However, our survey did identify some areas of apparent risk and
several deviations from program requirements including: (1) weaknesses in PJ monitoring of
subrecipients, (2) administrative weaknesses at both the PJ and subrecipient or CHDO level, and
(3) actual or apparent conflicts of interest.

PJ Monitoring of Contractors and Subrecipients (CHDOs)

Regulations at 24 CFR 92.504 impose responsibility on PJs for ensuring that HOME funds are
used in accordance with all program requirements and written agreements, and for taking


1
    Five ACLC properties and three STAND properties.


                                                       2
Audit Memorandum 2002-SF-1804                               HOME Investment Partnerships Program


appropriate action when performance problems arise. The Regulations require PJs to review the
performance of each contractor and subrecipient at least annually.

Although both of the PJs included in our survey did provide upfront and ongoing oversight of
CHDO activities through initial project approval, review of funding requests, and periodic
inspection of projects, neither PJ conducted actual monitoring of any overall CHDO operations.
PJ review of funding requests did not always provide the intended oversight since there were
instances where CHDOs received funding solely on the basis of their requests without any
supporting documentation. Also, upfront oversight was less than effective in some cases such as
the approval of CHDO operating cost funding without any demonstrated need for the funding.

PJ monitoring reviews of overall CHDO operations are necessary in part to ensure that HOME
funding is provided only for reasonable, necessary, eligible expenditures and is not duplicative of
funding from other Federal, State or local sources. They are also necessary for assessing the
actual ongoing performance of the CHDOs. Since HUD is not involved in CHDO initial
approvals and does not monitor CHDO operations, it is essential that PJs perform comprehensive
annual reviews of their operations.

PJ Administrative Weaknesses

In addition to problems with subrecipient monitoring, we found other administrative weaknesses
at both of the PJs included in our survey. Neither PJ was in compliance with OMB Circular A-
87 relative to the allocation of some PJ administrative costs. Although the methods used
appeared reasonable, they deviated from the OMB requirements.

City of Stockton employees do not maintain the required individual activity reports (time sheets)
documenting the amount of time spent on HOME versus other activities. Rather, salary costs are
allocated to HOME based on estimates by supervisors as to how much time staff spends working
on the various programs.

Most San Joaquin County employees who work on HOME activities do maintain the required
time sheets evidencing time spent on HOME versus other HUD and non-HUD funded activities.
The exception is the accounting staff. The County accounting staff salaries are allocated
between HOME and other HUD and non-HUD funded activities on the basis of estimated
revenue from each source.

CHDO Administrative Weaknesses

Neither of the CHDOs we reviewed was in compliance with OMB Circular A-122 relative to the
documentation or allocation of operating costs as required by their grant agreements with the
PJs. Neither CHDO maintained personal activity reports for employees evidencing time spent on
HOME versus other activities. STAND prepared time sheets only differentiating work time
versus leave or holiday time, and ACLC prepared time sheets allocating work hours between
different projects but some of the projects received funding from other sources in addition to
HOME.




                                                 3
Audit Memorandum 2002-SF-1804                                          HOME Investment Partnerships Program


Neither CHDO maintained records demonstrating a need for operating cost funding. The CHDO
requests for operating cost funds did not identify any funding shortfalls and in fact, pay raises
and bonuses provided to principal staff suggest the operating cost funds were not needed. For
example, the ACLC Chief Executive Officer received a 22.8 percent pay raise in March 1999
and an 18.4 percent bonus in December 2000. ACLC paid more money in staff bonuses in 2000
and 2001 than they received in operating cost funding during the period from the City of
Stockton.

Neither CHDO maintained board meeting minutes evidencing important administrative or
HOME related activities. ACLC maintained minutes which appear to reflect most HOME
related activity but did not have documentation of board approval for staff raises and bonuses.
STAND was unable to produce even informal minutes evidencing board involvement in any
HOME related activity.

One of the CHDOs (STAND) used an unlicensed contractor for some rehabilitation work.
Although this contractor normally did relatively small scope jobs at reasonable prices and
apparently completed the work satisfactorily, a license was required for much of the work.
Moreover, STAND’s use of this unlicensed contractor leaves both STAND and homeowners
with little recourse if problems should occur.

Actual or Apparent Conflicts of Interest

HOME program Regulations at 24 CFR 92.356 provide in part that “No persons … who exercise
any functions or responsibilities with respect to activities assisted with HOME funds or who are
in a position to participate in a decision making process or gain inside information with regard to
these activities, may obtain a financial interest or benefit from a HOME-assisted activity, or have
an interest in any contract, subcontract or agreement with respect thereto, or the proceeds
thereunder, either for themselves or those with whom they have family or business ties, during
their tenure or for one year thereafter.”

ACLC appears to have violated these Regulations with an office lease agreement with a
corporation partially owned by one of the ACLC board members, and with the award of HOME
loan funds to an ACLC employee. The lease agreement has been disclosed in audited financial
statements submitted to both PJs2 who provide ACLC with HOME funding but no “exception”3
to the conflict of interest provisions in the Regulations has been obtained. The employee who
received the HOME funded loan was otherwise eligible and does not appear to have received
special consideration, but again the required exception was not obtained. ACLC also used
HOME funds to purchase a property from a City of Stockton Community Development
Committee member. Although not a clear violation of the Regulations, this transaction leaves an
appearance of possible conflict of interest.



2
  City of Stockton and San Joaquin County.
3
  An exceptions to the conflict of interest restriction may be granted on a case-by-case basis when it will serve to
further the purposes of HOME and the effective and efficient administration of the PJ’s program or project, (24 CFR
92.356(d)).


                                                         4
Audit Memorandum 2002-SF-1804                               HOME Investment Partnerships Program




                     AUDITEE COMMENTS AND OIG EVALUATION

Both PJs and both CHDOs provided written responses to the draft report. The draft report and
their responses were also discussed at an exit conference on May 28, 2002. The written and
verbal comments provided are summarized below and we made changes to this final report
where appropriate.

City of Stockton

The City took the position that no exception to the conflict of interest restrictions was necessary
for the assistance provided to the ACLC employee, and the property purchased by ACLC from a
member of the City’s Community Development Committee did not represent either a real or
apparent conflict of interest. Whereas we interpreted paragraphs (b), (c) and (d) of 24 CFR
92.356 as applicable to the ACLC employee loan, the City contends paragraph (f)(1) is
applicable. We have requested a legal opinion on this issue in conjunction with the National
memorandum report. Regardless of the legal opinion (as relates to the applicability of 24 CFR
92.356 conflict of interest restrictions to CHDOs in general), the original Loan and CHDO
Agreement executed between the City of Stockton and ACLC in 1994, includes conflict of
interest restrictions, which we believe prohibit each of the apparent conflicts. However, we have
reworded the recommendation to include the possibility there may not actually be a conflict of
interest with respect to any of the issues identified including the property purchased from the
Community Development Committee member.

San Joaquin County

The County indicated annual monitoring of all of its CHDOs has taken place but also stated that
documentation of the monitoring activity could be and will be improved. They also contend the
one and only allocation of CHDO operating expense funds (to STAND) was necessary and
clearly demonstrated. The County indicated the intention to comply with all of the draft
recommendations applicable to their HOME program.

STAND

STAND expressed the definite necessity for the operating expense funding received from the
County. They also said the missing board meeting minutes have been located and they have
discontinued using the unlicensed contractor. STAND welcomed the assistance of HUD and/or
the PJs in establishing procedures for allocating administrative and operating costs in accordance
with OMB Circular A-122 and their grant agreement.

ACLC

ACLC’s written response provided explanation and justification for each of the issues in the draft
report applicable to their operations. Based on their response and accompanying documentation,
we removed a section of the report dealing with low-income community representation. ACLC
requested that we include a copy of their response in the final report in order for their



                                                 5
Audit Memorandum 2002-SF-1804                            HOME Investment Partnerships Program


explanations to be heard and to include recognition of their record of serving the community.
We made changes to the final report and recommendations where applicable, and have included
ACLC’s response as Attachment A.




                                              6
Audit Memorandum 2002-SF-1804                               HOME Investment Partnerships Program




                                   RECOMMENDATIONS

We recommend that you:

           1A.    Require both PJs to prepare and submit schedules of planned comprehensive
                  subrecipient and contractor monitoring reviews.

           1B.    Instruct the PJs to determine whether operating cost funding provided to the
                  CHDOs was necessary and reasonable and recover any amounts that cannot
                  be demonstrated as both necessary and reasonable.

           1C.    Instruct the PJs to establish acceptable documentation for CHDO and
                  subrecipient payment requests.

           1D.    Assist the PJs in establishing procedures for allocating administrative costs to
                  HOME which comply with OMB Circular A-87.

           1E.    Instruct the PJs to assist the CHDOs in establishing procedures for allocating
                  operating costs to HOME, which comply with OMB Circular A-122 and the
                  grant agreements.

           1F.    Instruct the PJs to require the CHDOs to maintain board meeting minutes
                  evidencing all important administrative and HOME related activities.

           1G.    Instruct the PJs to verify that STAND has discontinued the use of the
                  unlicensed contractor.

           1H.    Evaluate the actual or apparent conflicts of interest involving (a) the ACLC
                  board member and the ACLC office lease agreement, (b) the ACLC employee
                  HOME funded loan, and (c) the ACLC purchase of property from a City of
                  Stockton Community Development Committee member and if conflicts are
                  confirmed, either grant exceptions if allowable under the Regulations or
                  provide appropriate direction to remedy the conflicts.


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

Should you or your staff have any questions, please contact me at (415) 436-8101.




                                                7
Audit Memorandum 2002-SF-1804       HOME Investment Partnerships Program
                                                            Attachment A




                                8
Audit Memorandum 2002-SF-1804       HOME Investment Partnerships Program
                                                            Attachment A




                                9
Audit Memorandum 2002-SF-1804        HOME Investment Partnerships Program
                                                             Attachment A




                                10
Audit Memorandum 2002-SF-1804                              HOME Investment Partnerships Program
                                                                                    Attachment B


                                DISTRIBUTION OUTSIDE OF HUD

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

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

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

The Honorable Joseph Lieberman
Chairman, Committee on Governmental Affairs,
706 Hart Senate Office Building, United States Senate
Washington, DC 20501

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

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

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

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

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


                                              11
Audit Memorandum 2002-SF-1804                  HOME Investment Partnerships Program
                                                                        Attachment B



Steven J. Pinkerton, Director
Department of Housing and Redevelopment
City of Stockton
305 N. Eldorado Street Suite 200
Stockton, California 95202

Ben Hulse, Director
Community Development Department
San Joaquin County
1810 E. Hazelton Ave.
Stockton, California 95205

Board of Directors
ACLC, Inc.
42 N. Sutter Street Suite 406
Stockton, California 95202

Board of Directors
STAND
P.O. Box 30231
1209 East 8th Street
Stockton, California 95213




                                          12