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 Exit Table of Contents 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. Exit Table of Contents Management Memorandum THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1004 Page ii Exit Table of Contents 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 Page iii 2004-CH-1004 Exit Table of Contents 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. 2004-CH-1004 Page iv Exit Table of Contents 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 Page v 2004-CH-1004 Exit Table Of Contents THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1004 Page vi Exit Table of Contents 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. Page 1 2004-CH-1004 Exit Table of Contents 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 2004-CH-1004 Page 2 Exit Table of Contents Introduction 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. Page 3 2004-CH-1004 Exit Table of Contents Introduction THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1004 Page 4 Exit Table of Contents 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. Page 5 2004-CH-1004 Exit Table of Contents 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: 2004-CH-1004 Page 6 Exit Table of Contents 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. Page 7 2004-CH-1004 Exit Table of Contents 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. 2004-CH-1004 Page 8 Exit Table of Contents 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 Page 9 2004-CH-1004 Exit Table of Contents 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. 2004-CH-1004 Page 10 Exit Table of Contents 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. Page 11 2004-CH-1004 Exit Table of Contents 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. 2004-CH-1004 Page 12 Exit Table of Contents 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. Page 13 2004-CH-1004 Exit Table of Contents 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 2004-CH-1004 Page 14 Exit Table of Contents 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. Page 15 2004-CH-1004 Exit Table of Contents 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. 2004-CH-1004 Page 16 Exit Table of Contents 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: Page 17 2004-CH-1004 Exit Table of Contents 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). 2004-CH-1004 Page 18 Exit Table of Contents 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. Page 19 2004-CH-1004 Exit Table of Contents Follow Up On Prior Audits THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1004 Page 20 Exit Table of Contents 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. Page 21 2004-CH-1004 Exit Table of Contents Appendix A THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1004 Page 22 Exit Table of Contents Appendix B Auditee Comments Page 23 2004-CH-1004 Exit Table of Contents Appendix B 2004-CH-1004 Page 24 Exit Table of Contents Appendix B Page 25 2004-CH-1004 Exit Table of Contents Appendix B 2004-CH-1004 Page 26 Exit Table of Contents Appendix B Page 27 2004-CH-1004 Exit Table of Contents Appendix B 2004-CH-1004 Page 28 Exit Table of Contents Appendix B Page 29 2004-CH-1004 Exit Table of Contents Appendix B THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1004 Page 30 Exit Table of Contents
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)