oversight

New Covenant Housing Corporation, Inc. Community Development Block Grant And HOME Programs Milwaukee, Wisconsin

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-10-29.

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

                                                               Issue Date
                                                                       October 29, 2002
                                                               Audit Case Number
                                                                       2003-CH-1002




TO:           Robert S. Berlan, Director of Community Planning and Development, Milwaukee
                Field Office



FROM:         Heath Wolfe, Regional Inspector General for Audit, Region V

SUBJECT:      New Covenant Housing Corporation, Inc.
              Community Development Block Grant And HOME Programs
              Milwaukee, Wisconsin

                                      INTRODUCTION

We completed an audit of New Covenant Housing Corporation’s Parkwest Townhouses Phase II
project. The audit resulted from a citizen complaint to our Office. The objectives of our audit
were to determine whether the complainant’s allegations were substantiated and whether HUD’s
rules and regulations were followed. The complainant’s specific allegations were: the general
contractor overseeing the project’s construction shifted costs from the general operating account
to the concrete and carpentry accounts; reimbursement claims for concrete and carpentry costs
were inflated; some payroll reimbursement claims were for individuals who did not work on the
project; and excessive equipment was purchased for the project.

To accomplish our audit objectives, we reviewed New Covenant Housing Corporation’s policies
and procedures for the period January 1, 1995 through March 31, 2000. We also reviewed and
evaluated the New Covenant’s: management controls for safeguarding cash and other monetary
assets; Independent Accountant’s reports for the period January 1, 1999 through December 31,
2000; and invoices and expenditures charged to the Community Development Block Grant and
HOME Programs. In addition, we conducted site visits of Parkwest Townhouses Phase II project.

We reviewed New Covenant Housing Corporation’s records, HUD’s records, and the City of
Milwaukee, Wisconsin’s records for Parkwest Townhouses Phase II project. We interviewed New
Covenant’s Executive Director and consultant who assisted with the project’s development, HUD’s
staff, officials from the State of Wisconsin’s Economic Development Authority and the City of
Milwaukee, the project’s two architects, and the complainant. We performed our on-site audit work



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between January 2002 and April 2002. We conducted the audit in accordance with Generally
Accepted Government Auditing Standards.

In accordance with HUD Handbook 2000.06 REV-3, within 60 days please provide us, for each
recommendation without a management decision, a status report on: (1) the corrective action
taken; (2) the proposed corrective action and the date to be completed; or (3) why action is
considered unnecessary. Additional status reports are required at 90 days and 120 days after
report issuance for any recommendation without a management decision. Also, please furnish
us copies of any correspondence or directives issued because of the audit.

Should you or your staff have any questions, please have them contact Ronald Huritz, Assistant
Regional Inspector General for Audit, at (312) 353-6236 extension 2675 or me at (312) 353-
7832.

                                        SUMMARY

We found that no Federal funds were directly spent on construction costs for Parkwest
Townhouses Phase II project. However, New Covenant Housing Corporation failed to
follow Federal requirements and its Community Development Block Grant contract with the
City of Milwaukee, Wisconsin by using $18,700 in Block Grant funds to pay ineligible costs.
The ineligible costs consisted of interest expense related to a bank loan owed by Parkwest for
construction materials and professional service expenses that were unrelated to the project.
The payment of the ineligible costs occurred because New Covenant’s Executive Director
did not exercise adequate control over cost reports submitted to the City of Milwaukee. As a
result, HUD funds were not efficiently and effectively used, and were not available for
eligible Block Grant purposes.

                                      BACKGROUND

New Covenant Housing Corporation, Inc. was awarded $500,000 in Community
Development Block Grant funding from the City of Milwaukee, Wisconsin in January 1995.
The City awarded the funds for the purpose of developing Parkwest Townhouses Phase II, a
34-unit project located in Milwaukee, Wisconsin. In April 1997, the City increased the
Block Grant award to $650,000 and awarded an additional $25,000 in HOME funds for the
project. Construction of the project was completed in March 2000. New Covenant Housing
Corporation drew down funds from January 1995 through March 2000 for the project. The
Executive Director of New Covenant is John Moutry. New Covenant’s books and records
are located at 2331 North 39th Street, Milwaukee, Wisconsin.

                                   FINDING
         Block Grant Funds Were Used For Ineligible And Unrelated Expenses

New Covenant Housing Corporation, Inc. violated Federal requirements and its Community
Development Block Grant contract with the City of Milwaukee, Wisconsin. Specifically,
New Covenant disbursed $18,700 of Community Development Block Grant funds for
ineligible interest expense and costs not related to the construction of Parkwest Townhouses



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Phase II project. This situation occurred because New Covenant’s Executive Director failed
to exercise adequate control over the submission of cost reports to the City. As a result,
$18,700 in HUD funds was not efficiently and effectively used, and was not available for
eligible Block Grant purposes.

                 City’s Contract Provisions and Federal Requirements

The contract between the City of Milwaukee, Wisconsin and New Covenant Housing
Corporation, effective January 1, 1995, required New Covenant to comply with the cost
principles of Office of Management and Budget Circular A-122, Cost Principles for Non-
Profit Organizations, regarding the use of Community Development Block Grant funds for
Parkwest Townhouses Phase II project. The contract limited New Covenant’s use of Block
Grant funds only for administrative or soft costs incurred that were reasonable and directly
related to the project. Soft costs are defined as non-construction related costs.

Attachment B, Section 23(a)(1), of Office of Management and Budget Circular A-122
prohibits the use of Federal funds to pay for interest on borrowed capital. Attachment A,
Sections A(4)(a) and A(4)(b), states cost is allocable to a Federal award if it is incurred
specifically for the award. Any cost allocable to a particular award or other cost objective
may not be shifted to other Federal awards to overcome funding deficiencies, or to avoid
restrictions imposed by law or by the terms of the award.

                         Interest Expense Was Improperly Paid

New Covenant Housing Corporation, Inc. improperly used $13,576 of Community
Development Block Grant funds to pay for interest expense between January 1996 and
August 1999. New Covenant’s Executive Director said he relied on an outside consultant,
engaged to assist with the development of Parkwest Townhouses Phase II project, to
determine if expenses were eligible. The consultant said he was not aware that interest
expense was an ineligible cost for Community Development Block Grant funding. He also
said the City of Milwaukee, Wisconsin treated interest costs as an allowable expense in his
prior dealings and the City did not notify him that interest expense was not eligible.

The first table on page 4 of this report shows the Community Development Block Grant funds
disbursed by New Covenant for ineligible interest expense.




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                             Ineligible Interest Expense
  Certification                                                               Amount
     Date                 Description Per New Covenant’s Records             Disbursed
   01/30/96       Construction Interest 12/31/95 per note dated 12/27/95       $1,216
   03/05/96       Loan Interest Jan 30 - Feb 29 1996                              962
   05/03/96       Interest through 4/30/96                                      1,903
   09/05/96       Interest on Lumber Purchase Loan for May and June 96          1,987
   09/05/96       Interest on Lumber Purchase Loan for July and August 96       1,987
   11/18/96       Interest on Lumber Purchase Loan for Sept and Oct 96          1,987
   01/16/97       Interest on Lumber Purchase Loan for Nov 96                     898
   01/16/97       Interest on Lumber Purchase Loan for Dec 96 & Jan 97          1,987
   08/02/99       96 City Real Estate Tax Bill Interest Due                      311
   08/02/99       97 City Real Estate Tax Bill Interest Due                      219
   08/02/99       97 County Real Estate Tax Bill Interest Due                      76
   08/02/99       98 City Real Estate Tax Bill Interest Due                        32
   08/02/99       98 County Real Estate Tax Bill Interest Due                      11
                                             Total                           $13,576

                  Costs Unrelated To The Project Were Improperly Paid

New Covenant Housing Corporation, Inc. disbursed $5,124 in Community Development
Block Grant funds between September 1995 and March 1996 for expenses not related to
Parkwest Townhouses Phase II project. According to New Covenant’s invoices, the
unrelated costs were for the preparation of 1993 and 1994 income tax returns and financial
statements. The limited partnership that owns Parkwest Townhouses Phase II was not
formed until August 30, 1995. Therefore, the costs for the tax returns and financial
statements were not directly related to the project. New Covenant’s consultant said he
viewed Parkwest Townhouses as a continuous project from Phase I through Phase III. He
said the costs of the tax returns and financial statements were charged to Phase II because
they came due when funding for the project was available.

The following table shows the Community Development Block Grant funds disbursed by
New Covenant for expenses unrelated to Parkwest Townhouses Phase II project.

                                 Unrelated Expenses
  Certification                                                               Amount
     Date              Description Per New Covenant’s Records                Disbursed
   09/08/95     New Covenant Limited Partnership Tax Return – 94               $2,640
   04/15/97     Reversal of Part of the $2,640 for Tax Return – 94               (981)
                Accounting – Audit of 93 –94 Combined Financial
   03/05/96     Statements                                                      2,145
   03/05/96     Accounting – Audit Statements for 93 & 94                       1,320
                                            Total                              $5,124




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As a result of the funds misspent by New Covenant Housing Corporation for ineligible and
unrelated expenses, Federal requirements and the Community Development Block Grant
contract between New Covenant and the City of Milwaukee were violated. Furthermore,
$18,700 of HUD funds was not effectively used and was not available for eligible Block
Grant activities.

                                   AUDITEE COMMENTS

We provided our draft finding to New Covenant Housing Corporation’s Executive Director and
HUD’s staff during the audit. New Covenant’s legal counsel provided his comments on the
draft finding on July 12, 2002. We held an exit conference with New Covenant’s Executive
Director on August 9, 2002. We included the comments from New Covenant’s legal counsel in
Appendix B of this report. New Covenant’s Executive Director and the Director of the City of
Milwaukee, Wisconsin’s Community Block Grant Administration were provided with copies of
the audit memorandum report.

[Excerpts paraphrased from the comments provided by New Covenant’s legal counsel on our
draft finding follow. Appendix B, pages 11 and 12, contains the complete text of the
comments for the finding.]

The construction interest expense that was part of the Parkwest Townhouses Phase II project
was clearly part of all of New Covenant’s contract documents submitted and approved by the
City of Milwaukee. At the time the project was undertaken, there was a need to limit the cost of
lumber because increasing prices could have made the project infeasible. Therefore, the entire
project would have been unable to meet the low-income housing tax credit requirements if the
lumber was not purchased by prepayment.

The different phases of New Covenant’s Parkwest Townhouses were a series of projects and
developed in accordance with a master plan. Therefore, the sequence of payments for amounts
associated with all of the projects, including the accounting and auditing fees, was in accordance
with the general plan, and was and should be deemed permissible. New Covenant does not
believe that any adjustment should be made to any of the aligned items.

                     OIG EVALUATION OF AUDITEE COMMENTS

We disagree the interest expense was included in the contract documents approved by the City
of Milwaukee. The contracts are silent on the matter of interest. Furthermore, the contract
between the City of Milwaukee and New Covenant Housing Corporation contained specific
language requiring New Covenant to comply with the cost principles of Office of Management
and Budget Circular A-122, Cost Principles for Non-Profit Organizations. The Circular
expressly prohibits the use of Federal funds for the payment of interest expense.

We also disagree that the different phases of Parkwest Townhouses were regarded as a series
of projects for funding purposes. The Community Development Block Grant funds that were
the subject of this audit were allocated specifically for New Covenant’s Parkwest
Townhouses Phase II project. Expenses incurred for accounting and auditing fees for time



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periods before Parkwest Townhouses Phase II was initiated are not eligible to be paid with
the Block Grant funds. Office of Management and Budget Circular A-122 states that a cost
is allocable to a Federal award if it is incurred specifically for the award. Since the
accounting and audit expenses were not related to the award of the Block Grant funds for
Parkwest Townhouses Phase II, the expenses are unallowable and should be repaid to the
City of Milwaukee’s Block Grant Program.

                                 RECOMMENDATION

We recommend that the Director of Community Planning and Development, Milwaukee Field
Office, ensures that New Covenant Housing Corporation, Inc.:

1A.     Reimburses the City of Milwaukee, Wisconsin’s Community Development Block
        Grant Program $18,700 from non-Federal funds for the improper payment of interest
        expense and costs not related to the construction of the Parkwest Townhouses Phase
        II project. If New Covenant is unable or unwilling to reimburse for the improper
        payments, then HUD should ensure that the City of Milwaukee reimburses its Block
        Grant Program from non-Federal funds for the payments.




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                               MANAGEMENT CONTROLS

In planning and performing our audit, we considered the management controls of New
Covenant Housing Corporation, Inc. in order to determine our auditing procedures, not to
provide assurance on the controls. Management controls include the plan of organization,
methods, and procedures adopted by management to ensure that its goals are met. Management
controls include the processes for planning, organizing, directing, and controlling program
operations. They include the systems for measuring, reporting, and monitoring program
performance.

We determined the following management controls were relevant to our audit objectives:


·   Program Operations - Policies and procedures that management has implemented to
    reasonably ensure that a program meets its objectives.


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


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


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

We assessed all of the relevant controls identified above.

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

Based upon our review, we believe the following items are significant weaknesses:

·   Program Operations

New Covenant Housing Corporation, Inc. did not administer its Community Development
Block Grant funds according to program requirements. Specifically, New Covenant improperly
used $18,700 in Block Grant funds to pay interest expense and costs not related to the
construction of Parkwest Townhouses Phase II project (see Finding).




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·      Compliance with Laws and Regulations

New Covenant Housing Corporation, Inc. did not follow HUD’s regulation and Office of
Management and Budget Circular A-122 regarding interest expense and the payment of costs
not related to the award of Community Development Block Grant funds for the construction of
Parkwest Townhouses Phase II project (see Finding).

·      Safeguarding Resources

New Covenant Housing Corporation, Inc. improperly paid $18,700 in Block Grant funds for
interest expense and costs not related to the construction of Parkwest Townhouses Phase II
project (see Finding).




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                           FOLLOW-UP ON PRIOR AUDITS

This is the first audit of New Covenant Housing Corporation, Inc. by HUD’s Office of Inspector
General. The latest Independent Accountant’s Report for New Covenant covered the fiscal year
ending December 31, 2000. The Report contained no findings.




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                                                                                 Appendix A

                         SCHEDULE OF INELIGIBLE COSTS


                      Recommendation
                         Number                     Ineligible Costs 1/

                             1A                          $18,700
                            Total                        $18,700


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




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                                      Appendix B

       AUDITEE COMMENTS




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                                                                              Appendix C

                         DISTRIBUTION OUTSIDE OF HUD

The Honorable Joseph Lieberman, Chairman, Committee on Government Affairs, 706
       Hart Senate Office Building, United States Senate, Washington, DC 20510
The Honorable Fred Thompson, Ranking Member, Committee on Governmental Affairs,
       340 Dirksen Senate Office Building, United States Senate, Washington, DC 20510
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, Committee on Financial Services, 2129 Rayburn House Office Building,
       United States House of Representatives, Washington DC 20515
Clinton C. Jones, Senior Counsel, Committee on Financial Services, B303 Rayburn Building,
       United States House of Representatives, Washington DC 20515
Sharon Pinkerton, Senior Advisor, Subcommittee on Criminal Justice, Drug Policy &
       Human Resources, B373 Rayburn House Office Building, United States Housing of
       Representatives, 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 of Housing Branch, Office of Management and Budget, 725 17th
       Street, NW, Room 9226, New Executive Office Building, Washington, DC 20503
Linda Halliday (52P), Department of Veterans Affairs, Office of Inspector General, 810
       Vermont Avenue, NW, Washington, DC 20420
William Withrow (52KC), Department of Veterans Affairs, Office of Inspector General
       Audit Operations Division, 1100 Main, Room 1330, Kansas City, Missouri 64105-
       2112
Kay Gibbs, Committee on Financial Services, 2129 Rayburn House Office Building,
       United States House of Representatives, Washington DC 20515
George Reeb, Assistant Inspector General for Health Care Financing Audits
John Moutry, Executive Director of New Covenant Housing Corporation, Inc.
Steven L. Nahan, Director of Community Block Grant Administration, City of Milwaukee,
       200 East Wells, Room 606, Milwaukee, Wisconsin 53202




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