oversight

Pontiac Neighborhood Housing Services, Incorporated's HOME Investment Partnership Program, Pontiac, Michigan

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-05-05.

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

          AUDIT REPORT




 PONTIAC NEIGHBORHOOD HOUSING SERVICES,
              INCORPORATED

 HOME INVESTMENT PARTNERSHIP PROGRAM

           PONTIAC, MICHIGAN

               2004-CH-1004

                MAY 5, 2004


          OFFICE OF AUDIT, REGION V
              CHICAGO, ILLINOIS



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                                                                  Issue Date
                                                                          May 5, 2004
                                                                  Audit Case Number
                                                                          2004-CH-1004




TO:          Jeanette Harris, Director of Community Planning and Development, 5FD


FROM:        Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: Pontiac Neighborhood Housing Services, Incorporated
         HOME Investment Partnership Program
         Pontiac, Michigan

We completed an audit of Pontiac Neighborhood Housing Services, Incorporated’s HOME Investment
Partnership Program. The audit was conducted based on a request from HUD’s Detroit Field Office of
Community Planning and Development. The objective of our audit was to determine whether HUD’s
rules and regulations were properly followed for the Martin Luther King Residential Project, funded by
the City of Pontiac’s HOME Program. The audit resulted in two findings.

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 contact Thomas Towers, Assistant Regional
Inspector General for Audit, at (313) 226-6280 extension 8062 or me at (312) 353-7832.




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Executive Summary
We completed an audit of Pontiac Neighborhood Housing Services, Incorporated’s HOME Program.
The audit was conducted based on a request from HUD’s Detroit Field Office Director of Community
Planning and Development for an accounting of how the HOME Program funds were used. The
objective of our audit was to determine whether HUD’s rules and regulations were properly followed
for the Martin Luther King Residential Project funded by the City of Pontiac’s HOME Program.

We concluded that Housing Services, Incorporated did not follow HUD’s requirements and its
Development Agreement with the City of Pontiac regarding the use of HOME funds for the Residential
Project. Specifically, Housing Services, Incorporated:

   v   Used $871,057 in HOME funds and another $457,651 in Program income to pay for the
       construction of nine homes that did not meet the City’s Building Code; and
   v   Did not return Program income directly generated from the use of HOME funds through the
       City’s Residential Project.




                                     Pontiac Neighborhood Housing Services, Incorporated did not
 Homes Did Not Meet The              follow HUD’s requirements and its Development Agreement
 City’s Building Code After          with the City of Pontiac to ensure homes assisted through the
 Housing Assistance                  Residential Project met the City’s Building Code. Housing
                                     Services, Incorporated used $871,057 of HOME funds to pay
                                     for the construction of nine homes that did not meet the City’s
                                     Building Code. Housing Services, Incorporated used an
                                     additional $457,651 in Program income from the sale of homes
                                     in the Residential Project to cover construction expenses of the
                                     nine homes.

                                     Pontiac Neighborhood Housing Services, Incorporated did not
  Program Income Was Not             return Program income directly generated from the use of
  Returned To The City               HOME funds through the City’s Martin Luther King Residential
                                     Project. The City provided Housing Services, Incorporated
                                     $1,373,803 in HOME funds to construct 14 homes through the
                                     City’s Residential Project. Housing Services, Incorporated
                                     received $977,554 in proceeds from the sale of the 14 homes.

                                     Beginning with Fiscal Year 2002, HUD’s Detroit Field Office
                                     began actions to recover $574,192 from the City of Pontiac
                                     over a four-year period due to disallowed project costs. In July
                                     2002, the Detroit Field Office reduced the disallowance to

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Executive Summary


                    $452,269, but failed to notify Headquarters of the lower grant
                    reduction amount.

                    We recommend that HUD’s Detroit Field Office Director of
  Recommendations   Community Planning and Development ensure the City of
                    Pontiac implements procedures and controls to correct the
                    weaknesses cited in this report.

                    We presented our draft audit report to the City’s Acting
                    Director of Community Development, the President of the
                    Board for Pontiac Neighborhood Housing Services, and
                    HUD’s staff during the audit. We held an exit conference with
                    the City’s staff on January 21, 2004. The City provided written
                    comments to our draft audit report. We included paraphrased
                    excerpts of the comments with each finding (see Findings 1 and
                    2). The complete text of the City’s comments is contained in
                    Appendix B. HUD’s Director of the Detroit Field Office of
                    Community Planning and Development proposed a
                    management decision dated May 3, 2004 regarding the
                    Recommendations included in this report. Appropriate entries
                    to HUD’s Audit Resolution and Controlled Actions Tracking
                    System will be made based upon HUD’s management decision.




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Table Of Contents

Management Memorandum                                                  i



Executive Summary                                                     iii



Introduction                                                          1



Findings

1. Homes Did Not Meet The City’s Building Code After Receiving
   Housing Assistance                                                 5


2. Program Income Was Not Returned To The City                       13



Management Controls                                                  17



Follow-Up On Prior Audits                                            19



Appendices

   A. Schedule Of Ineligible Costs                                   21


  B. Auditee Comments                                                23




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Introduction
Title II of the Cranston-Gonzalez National Affordable Housing Act of 1990 established the HOME
Investment Partnership Program. The Program’s objectives include providing participating jurisdictions
with various forms of Federal housing assistance. Participating jurisdictions use their funds to
accomplish the following objectives: (1) expand the supply of decent, safe, sanitary, and affordable
housing for very low and low-income Americans; (2) make new construction, rehabilitation, substantial
rehabilitation, and acquisition of such housing feasible; and (3) promote the development of partnerships
among the Federal Government, States and units of general local government, private industry, and
nonprofit organizations to effectively use all available resources to provide more housing. Another
objective of the Program is to expand the capacity of nonprofit community housing development
organizations to develop and manage decent, safe, sanitary, and affordable housing.

The City of Pontiac, a participating jurisdiction, established its HOME Program in 1992 to increase the
supply of decent, safe, sanitary, and affordable housing for low-income residents. From Fiscal Years
1992 to 2003, the City of Pontiac was awarded $8,765,771 in HOME funds. HUD made grant
reductions of $143,500 per year for Fiscal Years 2002 and 2003. This represented partial payments to
the City’s HOME Program for disallowed HOME funds on the residential housing project known as the
Martin Luther King Homes Residential Project. HUD’s Detroit Field Office of Community Planning
and Development agreed to adjust the last year of this annual reduction (2005) based on our audit
results.

The City’s Community Development Department administers its HOME Program. Within the
Department, the Federal Programs Division handles the day-to-day operations of the HOME Program.
Mary Gray-Roberson was terminated effective August 1, 2003 as the Director of the City’s Office of
Community Development. Roger Minard is the current Acting Director of the Department. Patricia M.
Lake is the Block Grant Administrator of the Federal Programs Division. The Mayor of the City is
Willie W. Payne.

The City entered into a Development Agreement, effective June 30, 1999, with Pontiac Neighborhood
Housing Services, Incorporated for the construction, marketing, and sale of 14 new single-family homes
on Martin Luther King, Jr. Boulevard to qualified low-income households. The City agreed to pay
Housing Services, Incorporated $1,521,000 for the services it provided through the Martin Luther King
Homes Residential Project.

Housing Services, Incorporated was established on December 28, 1979 as a private nonprofit
organization. Their mission was to provide low-income housing in targeted neighborhoods. The City
certified Housing Services, Incorporated as a community housing development organization. However,
the City lacked documentation to show when this occurred. The City revoked Housing Services,
Incorporated’s status as a community housing development organization, effective February 19, 2002,
for the improper use of Program funds. Housing Services, Incorporated discontinued its operations in
July 2002.

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Introduction


The City maintains its Program records at the Pontiac Silverdome. The Pontiac Silverdome is located at
1200 Featherstone Road, Pontiac, Michigan.




                                       The objective of our audit was to determine whether HUD’s
 Audit Objectives                      rules and regulations were properly followed for the Martin
                                       Luther King Residential Project funded by Housing Services,
                                       Incorporated’s HOME Program.

                                       We conducted the audit at HUD’s Detroit Field Office, City
 Audit Scope And                       Hall, and the City’s Community Development Department. We
 Methodology                           performed our on-site audit work from February 2003 to
                                       September 2003.

                                       To accomplish our audit objectives, we interviewed: HUD’s
                                       staff; the City’s former and current staff and officials; an
                                       attorney for the City; Housing Services, Incorporated’s former
                                       staff; Neighborhood Reinvestment Corporation’s staff;
                                       accountants; bank representatives; and 13 of the 14 owners of
                                       the homes constructed through the City’s Residential Project.
                                       In addition, a HUD Construction Analyst inspected nine of the
                                       14 homes that received assistance through Housing Services,
                                       Incorporated’s HOME Program to determine whether the
                                       homes met the City’s Building Code. Due to time constraints,
                                       the HUD Construction Analyst was unable to inspect the
                                       remaining five homes.

                                       To determine whether HUD’s rules and regulations were
                                       properly followed for the Residential Project, we reviewed the
                                       City’s: Development Agreement with Housing Services,
                                       Incorporated; HOME Program policies; HOME Program files
                                       for the Residential Project; and participant files for the HOME
                                       Program. We also reviewed Housing Services, Incorporated’s
                                       Audited Financial Statements, Board meeting minutes, payment
                                       requests and supporting documentation, cancelled checks, and
                                       bank statements.

                                       Furthermore, we reviewed: HUD’s files for Housing Services,
                                       Incorporated’s HOME Program; Title II of the Cranston-
                                       Gonzalez National Affordable Housing Act of 1990; Parts 58,
                                       84, 85, 92, 200, and 3280 of Title 24 of the Code of Federal

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       Regulations; Office of Management and Budget Circulars A-87,
       A-122, and A-133; and HUD’s Community Planning and
       Development Notices 97-9 and 03-05.

       The audit covered the period July 1, 1998 through December
       31, 2002. This period was adjusted as necessary. We
       conducted the audit in accordance with Generally Accepted
       Government Auditing Standards.

       We provided a copy of this report to the City’s Mayor and its
       Acting Director of Community Development.




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                                                                                             Finding 1


 Homes Did Not Meet The City’s Building Code
     After Receiving Housing Assistance
Pontiac Neighborhood Housing Services, Incorporated did not follow HUD’s requirements and its
Development Agreement with the City of Pontiac to ensure homes assisted through the Martin Luther
King Residential Project met the City’s Building Code. Our inspection of nine of the 14 homes in the
Residential Project identified $871,057 of HOME funds used by Housing Services, Incorporated to
pay for construction that did not meet the City’s Building Code. Housing Services, Incorporated used
an additional $457,651 in HOME Program income generated from the sale of the homes to cover
construction expenses for the nine homes. The City lacked adequate procedures and controls to ensure
the homes met the City’s Building Code. As a result, Home funds were not used efficiently and
effectively.




                                      Title II, Section 203, of the Cranston-Gonzalez National
 Federal Requirements                 Affordable Housing Act of 1990 requires that housing units be
                                      in decent condition when HOME funds are used to provide
                                      housing to low and moderate-income residents.

                                      24 CFR, Subpart F, Part 92.251(a) requires new housing
                                      constructed with HOME funds to meet all applicable local
                                      codes, ordinances, and zoning ordinances at the time of the
                                      projects’ completion.

                                      Article VII(D)(2) of the City of Pontiac’s Development
 City’s Requirements                  Agreement, effective June 30, 1999, with Pontiac
                                      Neighborhood Housing Services, Incorporated states the
                                      Martin Luther King Residential Project must comply with 24
                                      CFR Part 92.251 relating to applicable State and local property
                                      standards. Article VII(D)(2) also provides for the City of
                                      Pontiac to use the Building Officials and Code Administrators
                                      National Property Maintenance Code as its standard code.
                                      Article XIII of the Agreement states the date of completion is
                                      the date the City issues a Certificate of Occupancy per each
                                      completed home. Article XIX states the City must monitor the
                                      performance of Pontiac Neighborhood Housing Services,
                                      Incorporated in carrying out its responsibilities through Project
                                      progress reports, periodic inspections by the City’s staff, on-
                                      site monitoring, and financial documentation reviews.

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Finding 1


                            We selected nine of the 14 manufactured homes constructed
 Sample Selection And       with HOME funds through the City’s Martin Luther King
 Inspection Reports         Residential Project for inspection. We selected the homes to
                            determine whether they met the City’s Building Code upon
                            completion of the construction. The City entered into a contract
                            with Pontiac Neighborhood Housing Services, Incorporated,
                            effective June 30, 1999, for the construction, marketing, and
                            sale of the 14 new single-family homes on Martin Luther King,
                            Jr. Boulevard to qualified low-income households.

                            A HUD Construction Analyst inspected nine of the 14 homes
                            on June 17 and 18, 2003. Although the HUD Construction
                            Analyst was unable to inspect the remaining five homes due to
                            time constraints, he was able to inspect each type of home in
                            the Residential Project. The City declined our invitation to have
                            one of its staff members accompany us during the housing
                            inspections.

                            We provided our inspection results to HUD’s Detroit Field
                            Office Director of Community Planning and Development and
                            the City’s Acting Director of Community Development.

                            Pontiac Neighborhood Housing Services, Incorporated used
 HOME Funds Were Used       $871,057 of HOME funds from the City to pay for the
 To Pay For Construction    construction of nine homes that did not meet the City’s Building
 Work That Did Not Meet     Code. The nine homes were assisted through the City’s Martin
 The City’s Building Code   Luther King Residential Project.           Housing Services,
                            Incorporated used an additional $457,651 in HOME Program
                            income generated from the sale of the homes in the Residential
                            Project to cover construction expenses for the nine homes that
                            did not meet the City’s Building Code. Based on accounting
                            records maintained by Housing Services, Incorporated, we
                            were able to determine how the Program income was spent, by
                            property, as noted in the following chart:




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                                                               Finding 1


                              Total Costs                     Difference
                               By Home          Total         (Paid Out
                                  Per         Reimburse           Of
         Lot      Property     Housing        d By City        Program
         No.         No.       Services       Of Pontiac       Income)
          1       196            $145,241        $117,051         $28,190
          2       208              136,543        105,595          30,948
          3       234 X            142,278        101,046          41,232
          4       256 X            144,554        103,845          40,709
          5       264 X            149,493         91,508          57,985
          6       272              147,515         92,457          55,058
          7       278 X            146,335         93,503          52,832
          8       284 X            146,902         91,659          55,243
          9       292 X            149,014        100,051          48,963
          10      298              146,128         95,169          50,959
          11      304              148,975         92,474          56,501
          12      310 X            146,740         90,640          56,100
          13      316 X            145,495         90,722          54,773
          14      322 X            157,897        108,083          49,814
        Totals:                 $2,053,110     $1,373,803       $679,307
       Legend: X = inspected by HUD’s Construction Analyst


       A total of $367,609 of the $679,307 in Program income was
       not approved by the City to use for construction costs (see
       Finding 2). In all, $977,554 in Program income was generated
       through the sale of the 14 homes. The City, through two
       change orders, permitted Housing Services, Incorporated to
       use $320,470 to pay for additional construction costs. Housing
       Services returned $289,475 to the City, leaving a balance due
       of $367,609.

       The City also provided $339,700 in deferred loans through its
       Homebuyer Assistance Program to assist participants in
       purchasing the nine homes. The City recorded forgivable loan
       repayment agreements and property liens against all nine homes
       for the homebuyer mortgage assistance provided.

       The City established its Residential Project to provide the
       construction of modular homes to low-income households in the
       City. The Building and Safety Engineering Division’s Building
       Official in the City’s Community Development Department was
       responsible for the enforcement of the City’s Building Code.


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Finding 1


                                    HUD’s Construction Analyst determined that the homes in the
   HUD’s Inspector                  Martin Luther King Homes Residential Project did not meet the
   Determined The Homes Did         City’s Building Code when construction was completed.
   Not Meet The City’s              Furthermore, the City lacked adequate procedures and controls
   Building Code                    to ensure violations cited by the City’s Building Official were
                                    corrected. The housing construction work that was performed
                                    incorrectly or was not provided related to such items as: 1) an
                                    electric meter not secured to a house; 2) water penetration into
                                    the house; 3) a cover for an electrical panel in a garage was not
                                    attached; 4) weeps not provided in brick walls to allow water
                                    to escape; 5) an uncovered hole around an outdoor water
                                    faucet; 6) no cover plates for electrical fixtures; 7) porch railings
                                    not anchored to concrete slabs; 8) no cross-bracing for floor
                                    joists; 9) a lack of insulation around ducts and water pipes in
                                    unheated areas of a garage; 10) incomplete landscaping; and
                                    11) exterior electrical wiring was not outdoor wiring or in
                                    conduit. The following pictures provide three examples of
                                    construction work that was performed incorrectly or was not
                                    provided.

The bulkhead above the electrical
panel in the garage for the house
at 278 Martin Luther King, Jr.
Boulevard prevented the panel
cover from fitting properly. An
uncovered electrical panel can be
very dangerous to children in the
home.




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                                                                                            Finding 1


A section of brick was omitted to
allow the placement of a hose bib
for an outside water faucet at 278
Martin Luther King Jr., Boulevard.
The large hole was not sealed.




Uninsulated pipes were running
through an unheated garage for an
above bathroom at 316 Martin
Luther King Jr., Boulevard. The
piping must have an insulated
sleeve or the garage must be heated
to prevent water lines from
breaking.




                                      In his inspection report, HUD’s Construction Analyst stated he
                                      could not provide an overall cost estimate for the work that was
                                      improperly performed or not provided. He said contractors
                                      would be needed to provide estimates—mainly due to the
                                      uncertainty of the extent of some of the problems. For
                                      example, the brick facing on the Stonecreek style homes lacked
                                      weep holes to permit moisture to escape. However, to
                                      determine the extent of any damage, part of the brick would
                                      have to be removed.

                                      Other observations by HUD’s Analyst included: 1) bedroom
                                      floors over garages were not insulated; 2) vinyl siding was
                                      encased in concrete; 3) concrete forms were not removed after
                                      the concrete cured; and 4) poured foundation walls on the first

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Finding 1


                               level of all Stonecreek homes. These walls could have been
                               framed out of wood studs and properly finished with vinyl siding
                               or brick. Instead, the concrete walls are cold and not insulated.

                               The City re-inspected the homes in April 2002 and issued
                               notices of violation to the housing contractors. The contractors
                               never replied to the City’s notices. Therefore, the City filed a
                               complaint with the State against the contractors’ licenses and
                               decided to have a new contractor complete the repairs. The
                               City obtained and accepted a proposal from a contractor on
                               September 12, 2002 to complete repairs for the 14 homes for
                               $94,090. The contractor stopped making the repairs when
                               eight of the 14 homeowners would not allow access to their
                               homes due to a joint lawsuit against the City for code violations
                               and deplorable conditions. The City paid the contractor
                               $55,275 for the repairs the contractor was able to complete.

                               The City’s Building Official issued temporary Certificates of
                               Occupancy for nine homes subject to special conditions. The
                               special conditions in the temporary Certificates of Occupancy
                               for the nine homes were either not detailed or did not contain
                               violations identified by HUD’s Construction Analyst. For
                               example, the temporary Certificate of Completion for 278
                               Martin Luther King, Jr. Boulevard was subject to the special
                               conditions of landscaping and minor repairs.

                               The City of Pontiac lacked adequate procedures and controls
 The City of Pontiac Did Not   to ensure HOME Program income from the sale of the 14
 Have Adequate Procedures      homes was returned by Housing Services, Incorporated (see
 For Ensuring Program          Finding 2). As a result, HUD lacked assurance that the homes
 Income Was Returned           met the City’s Building Code. Prior to any sales of the homes,
                               Housing Services submitted payment requests to the City along
                               with supporting documentation as each phase of construction
                               passed inspection, such as electrical and plumbing. However,
                               once these funds were exhausted, Housing Services used
                               Program income after each closing to pay for continued
                               construction expenses without first obtaining inspection and
                               approval from the City. As a result, the City lost control over
                               the Program income and could not ensure that HOME funds
                               were appropriately used.



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                                                                            Finding 1


                     Subsequent to a monitoring review by HUD’s Detroit Field
Reduction Of HOME    Office of Community Planning and Development in 2002, the
Program Allocation   City of Pontiac’s HOME Grant was reduced by $574,192 over
Resulting From HUD   a four-year period to cover costs that exceeded the maximum
Review               per unit subsidy allowed (24 CFR Part 92.250(a)). The
                     amount included $330,346 that exceeded maximum
                     development costs and $121,923 due to an ineligible over-
                     income homebuyer. However, the amount also erroneously
                     included another $121,923 as a reduction. The actual
                     reduction should have been $452,269 over four years. HUD’s
                     Detroit Field Office recognized this mistake, but was waiting for
                     the conclusion of our audit before making any adjustments to
                     the reduction that the City previously agreed to.

                     HUD already reduced the City’s HOME Program funds by
                     $287,000 for Fiscal Years 2002 and 2003 ($143,500 each
                     year), and is reducing the 2004 funding by another $143,500.
                     This would leave a balance of $55,263 due from the City for
                     2005 ($452,269 plus $33,494 identified in Finding 2, less
                     $430,500 reduced from the Program through Fiscal Year
                     2004). Since HUD was planning on reducing the Program’s
                     funding by $143,500 in 2005, a total of $88,237 would need to
                     be put back into the Program.




 Auditee Comments    [Excerpts paraphrased from the City of Pontiac’s comments on
                     our draft finding follow. Appendix B, pages 25 to 29, contains
                     the complete text of the City’s comments for this finding.]

                     The City disagreed with some statements made in the finding
                     regarding responsibility for: 1) issuing the Certificates of
                     Occupancy; 2) ensuring that the construction work was
                     provided in accordance with the Development Agreement; and
                     3) ensuring that the homes met the City’s Building Code when
                     construction was completed. However, the City indicated that
                     it would work closely with HUD to finish the homes and issue
                     final Certificates of Occupancy. The City also identified various
                     procedural changes to its HOME Program to show that it has
                     already taken corrective actions to assure assisted homes meet
                     the City’s Building Code and HUD’s regulations.


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Finding 1




   OIG Evaluation Of   The City of Pontiac is in general agreement with our
   Auditee Comments    Recommendations. The City stated that it plans to finish the
                       homes and issue final Certificates of Occupancy. The City also
                       identified various procedural changes to its HOME Grant
                       Program that appear to address the control weaknesses found
                       during our audit. We revised the finding to clarify the City’s
                       responsibilities.




   Recommendations     We recommend that HUD’s Detroit Field Office Director of
                       Community Planning and Development ensure the City of
                       Pontiac:

                       1A.      Completes the construction work for the nine homes
                                cited in this finding so that final Certificates of
                                Occupancy can be issued. If the City is unable to
                                comply, it should reimburse its HOME Program
                                $842,945 ($871,057 plus $457,651, less HUD’s
                                adjusted four-year Program reduction of $485,763)
                                from non-Federal funds.

                       1B.      Implements procedures and controls to assure assisted
                                homes meet the City’s Building Code as required by
                                HUD’s and the City’s requirements.

                       1C.      Implements procedures and controls to monitor
                                developers of projects funded under the City’s HOME
                                Program to ensure the developers follow the Program’s
                                requirements.




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                                                                                           Finding 2


Program Income Was Not Returned To The City
Pontiac Neighborhood Housing Services, Incorporated did not return income directly generated from
the use of HOME Program funds through the City of Pontiac’s Martin Luther King Residential Project
despite the requirement in their Development Agreement with the City. The City provided Housing
Services, Incorporated $1,373,803 in HOME funds to construct 14 homes through the City’s
Residential Project. Housing Services, Incorporated received $977,554 in proceeds from the sale of
the 14 homes. The City lacked procedures and controls to ensure Housing Services, Incorporated
remitted $367,609 of the Program income back to the City. As a result, fewer funds were available for
the City’s HOME Program.




                                      Article XV of the City of Pontiac’s Development Agreement,
 City’s Development                   effective June 30, 1999, with Pontiac Neighborhood Housing
 Agreement                            Services, Incorporated states all repayments, proceeds from the
                                      sale of the homes, program income, interest, unspent
                                      construction contingency dollars, and other returns on the
                                      investment of HOME funds in the Martin Luther King
                                      Residential Project will be returned to the City.

                                      Pontiac Neighborhood Housing Services, Incorporated was a
 Background                           community housing development organization. The City’s
                                      Martin Luther King Homes Residential Project was fully funded
                                      with HOME Program funds. The City initially provided
                                      Housing Services, Incorporated $1,373,803 in HOME funds to
                                      construct 14 homes through the City’s Residential Project.
                                      Housing Services, Incorporated received $977,554 in proceeds
                                      from the sale of the 14 homes. The following table shows the
                                      proceeds Housing Services, Incorporated received from the
                                      sale of each of the 14 homes.




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Finding 2

                                                                     Proceeds
                                      Property Address               From Sale
                           196 Martin Luther King, Jr. Boulevard       $78,532
                           208 Martin Luther King, Jr. Boulevard        71,538
                           234 Martin Luther King, Jr. Boulevard        70,515
                           256 Martin Luther King, Jr. Boulevard        71,538
                           264 Martin Luther King, Jr. Boulevard        65,803
                           272 Martin Luther King, Jr. Boulevard        60,682
                           278 Martin Luther King, Jr. Boulevard        74,138
                           284 Martin Luther King, Jr. Boulevard        65,803
                           292 Martin Luther King, Jr. Boulevard        65,803
                           298 Martin Luther King, Jr. Boulevard        71,538
                           304 Martin Luther King, Jr. Boulevard        65,803
                           310 Martin Luther King, Jr. Boulevard        65,803
                           316 Martin Luther King, Jr. Boulevard        71,538
                           322 Martin Luther King, Jr. Boulevard        78,520
                                            Total                     $977,554


                      In accordance with 24 CFR Part 92.503 and HUD’s CPD
                      Notice 97-9, the City required Housing Services, Incorporated
                      to return all HOME Program income from the Residential
                      Project to the City.       However, the City amended its
                      Development Agreement effective March 23, 2000 and
                      September 22, 2000 to allow Housing Services, Incorporated
                      to retain $320,470 in Program income to offset construction
                      costs. Therefore, the City provided Housing Services,
                      Incorporated a total of $1,694,273 in HOME funds for the
                      Residential Project ($1,373,803 plus $320,470). Housing
                      Services, Incorporated returned $289,475 of the sale proceeds
                      to the City in December of 2001, and discontinued its
                      operations in July 2002. Contrary to the City’s Development
                      Agreement, Housing Services, Incorporated did not remit the
                      remaining $367,609 of Program income to the City.

                      In July 2002, HUD’s Office of Grant Programs and the City
 The City Agreed To   agreed to reduce future HOME funding to the City by
 Reductions In HOME   $574,000 over a four-year period (Fiscal Year 2002 through
 Funding              2005). This was based on the Detroit Field Office of
                      Community Planning and Development’s monitoring findings.
                      HUD’s Detroit Field Office staff realized that the actual
                      reduction should have been $452,269, but failed to notify HUD
                      Headquarters in time to adjust the programmed reduction in
                      Grant funds. HUD’s Detroit Field Office decided to wait for
                      our audit results before making any final adjustments. The
                      reduction in funding was due to the use of HOME funds for
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                                                                                       Finding 2


                               ineligible activities through the City’s Residential Project known
                               as Martin Luther King Homes. The ineligible activities included
                               excessive development costs resulting from Housing Services,
                               Incorporated use of Program income for construction costs and
                               providing housing to one ineligible participant.

                               HUD did not include $33,494 in HOME Program income that
HUD Did Not Include            Housing Services failed to remit to the City as part of its
$33,494 In Program Income      Agreement with the City. This is noted in the following chart:
That Housing Services Failed
To Remit                                                             HUD’s          Audit’s
                                Description of HOME Costs            Figures        Figures
                                Costs Reimbursed By City             $1,373,803     $1,373,803
                                Engineering Services                      8,880          8,880
                                Total Costs Paid By City             $1,382,683     $1,382,683
                                Program Income                          944,060        977,554
                                Total Generated By Program           $2,326,743     $2,360,237
                                Maximum Development Costs             1,706,922      1,706,922
                                Amount of Cost Overruns                $619,821      $653,315
                                Program Income Returned                -289,475       -289,475
                                Program Income Due the City
                                                                       $330,346      $363,840
                                Ineligible/Over Income Buyer
                                                                        121,923        121,923
                                Reduction in HOME Grant
                                                                       $452,269      $485,763
                                Difference from Audit
                                Additional Reduction to HOME                          -452,269
                                                                                       $33,494

                               The maximum development costs for the Project was based on
                               $121,923 as the maximum allowable unit development cost for
                               a three bedroom housing unit multiplied by the 14 homes.

                               The City lacked adequate procedures and controls to ensure
The City Lacked Adequate       Housing Services, Incorporated returned Program income from
Procedures And Controls        the sale of the 14 homes. The City allowed sales proceeds to
                               be paid directly to Housing Services, Incorporated without any
                               recourse for obtaining the Program income. As a result, fewer
                               funds were available for the City’s HOME Program.

                               During Fiscal Year 2002, the City initiated action to require all
                               Program income generated by community housing and
                               development organizations to be returned to the City before
                               these funds can be spent on eligible HOME activities.



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Finding 2




    Auditee Comments   [Excerpts paraphrased from the City of Pontiac’s comments on
                       our draft finding follow. Appendix B, pages 29 to 31, contains
                       the complete text of the City’s comments for this finding.]

                       The City disagreed with the statement that future HOME
                       Program funds were already reduced by $452,269 for the four-
                       year period of Fiscal Years 2002 through 2005. The actual
                       Grant reduction for the four-year period was $574,192. The
                       City did not dispute the $33,494 in additional Program income
                       owed to the HOME Program, but stated that repaying this
                       amount from the City’s General Fund would create an
                       economic hardship. Since the City had taken a greater per year
                       Grant reduction from HUD for its HOME Program in error, it
                       requested that the $33,494 be included in the calculation of the
                       Grant reduction agreement with HUD.



   OIG Evaluation Of   The City generally concurred with our draft audit report and
   Auditee Comments    Recommendations for this finding. Based on the City’s
                       statement, we revised the finding regarding the Grant reduction
                       agreement.




   Recommendations     We recommend that HUD’s Detroit Field Office Director of
                       Community Planning and Development ensure the City of
                       Pontiac:

                       2A.      Reimburses the additional HOME Program income of
                                $33,494 by including this amount in the Grant reduction
                                agreement with HUD.

                       2B.      Implements adequate procedures and controls to
                                ensure developers return Program income to the City in
                                accordance with executed written agreements.




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Management 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 that the following management controls were
 Relevant Management                  relevant to our audit objectives:
 Controls
                                      •   Program Operations - Policies and procedures that
                                          management has implemented to reasonably ensure that a
                                          program meets its objectives.

                                      •   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 during
                                      our audit of Pontiac Neighborhood Housing Services,
                                      Incorporated’s HOME Investment Partnership Program.

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

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


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Management Controls


                      •   Program Operations

                      The City of Pontiac failed to ensure Pontiac Neighborhood
                      Housing Services, Incorporated: 1) followed HUD’s
                      requirements and its Development Agreement with the City to
                      ensure homes assisted through the Martin Luther King
                      Residential Project met the City’s Building Code; and 2)
                      returned Program income directly generated from the use of
                      HOME funds through the City’s Residential Project (see
                      Findings 1 and 2).

                      •   Compliance with Laws and Regulations

                      The City did not ensure Housing Services, Incorporated
                      followed Title II, Section 203, of the Cranston-Gonzalez
                      National Affordable Housing Act of 1990 and HUD’s
                      regulations regarding homes assisted through the Residential
                      Project and the return of Program income generated from the
                      use of HOME funds (see Findings 1 and 2).

                      •   Safeguarding Resources

                      The City did not ensure Housing Services, Incorporated:
                      effectively used $871,057 of HOME funds to pay for the
                      construction of nine homes that did not meet the City’s Building
                      Code; and returned $33,494 of Program income directly
                      generated from the use of HOME funds through the City’s
                      Residential Project. Housing Services, Incorporated also used
                      $457,651 in Program income generated from the sale of the
                      homes to pay for additional construction costs for these nine
                      homes, without full approval from the City (see Findings 1 and
                      2).




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Follow-Up On Prior Audits
This is the first audit of Pontiac Neighborhood Housing Services, Inc’s HOME Program by HUD’s
Office of Inspector General. The latest Independent Auditors’ Report for Housing Services,
Incorporated covered the period ending June 30, 2001. The report contained no findings.




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                                                                                     Appendix A

Schedule Of Ineligible Costs

                          Recommendation
                              Number               Ineligible Costs 1/

                                  1A                  $842,945
                                  2A                    33,494
                                 Total                $876,439


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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