Issue Date
August 11, 2004
OIG Audit Case Number
2004-KC-1005
CAO Project Number
12-2004
TO: William Rotert, Director, Office of Wayne Cauthen, City Manager
Community Planning and City of Kansas City, Missouri
Development, 7D
/signed/ /signed/
FROM: Ronald J. Hosking, Regional Inspector Mark Funkhouser, City Auditor
General for Audit, 7AGA City of Kansas City, Missouri
SUBJECT: The City’s Housing Program and the Role of the Housing and Economic
Development Financial Corporation, City of Kansas City, Missouri
HIGHLIGHTS
What We Audited & Why
The HUD Office of Inspector General and the City Auditor have issued two previous
joint reports on Kansas City’s housing programs. The first, Special Report: Kansas
City Needs a Housing Policy (April 2000), assessed the City’s overall approach to
providing affordable housing. The second, Review of Subrecipient Selection,
Monitoring and Reporting (July 2001), evaluated the City’s methods for
administering HUD funds in accordance with applicable rules. The reports
recommended the City develop a housing policy, including strategies and goals,
develop mechanisms for gathering information on housing conditions, and
strengthen processes for selecting and monitoring subrecipients.
Our prior work raised concerns about the Housing and Economic Development
Financial Corporation (HEDFC), the City’s largest subrecipient of federal
housing funds. Consequently, our original objective for this audit was to determine
whether HEDFC is using grant funds efficiently and effectively. However, while
planning the audit we concluded that the City continued to face problems we
found in our previous audits. Therefore, we expanded our audit scope to review
the City’s overall system for implementing housing policy and HEDFC’s role
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within the system. Accordingly, our sub-objectives were to answer these
questions:
• What is the City’s system for implementing housing policy?
• What is HEDFC’s role in the system?
• How well has HEDFC carried out its role in the system?
• Could changes in the system improve the City’s performance and ability
to meet its housing goals?
What We Found
The federal government, City government and non-governmental agencies each
play a role in the City’s housing system, but no one party controls spending
decisions or is held accountable for housing production or meeting other goals.
The City spends a lot of money on housing – in fiscal year 2003 the Department
of Housing and Community Development paid vendors and contractors over $34
million – but the outcomes of the City’s investment are not readily apparent. The
City’s failure to set measurable objectives and its fragmented system for
administering housing funds contribute to higher than necessary administrative
costs; lack of information; poor communication; delays; and lack of
accountability for poor performance.
In addition, the City has failed to adequately define HEDFC’s role in providing
affordable housing. The scopes of work in the City’s contracts with HEDFC are
broad and the performance standards are vague. Consequently, the City’s
Housing and Community Development Department – which is responsible for
overseeing the contracts – and HEDFC have disagreed about whether
expenditures or activities are appropriate. By entering into vague contracts the
City cedes decisions about use of public funds to HEDFC and cannot fulfill its
responsibilities as a recipient of federal grant funds.
There are significant deficiencies in HEDFC’s operations: HEDFC lacks processes
for tracking and reporting operational and financial information; its computer
systems aren’t integrated; duplicate data are entered into several systems, which staff
does not reconcile; HEDFC’s policies and procedures don’t address tracking and
reporting information about the different types of loans or projects; supporting
documents for construction loans were not readily accessible, files contained
multiple copies of some documents, while some files and documentation were
missing altogether. We also found errors in the single family production report
presented to the Board and in a loans closed report prepared for us. These
deficiencies contribute to poor system performance and a lack of assurance that the
City is getting the best results for its money. Since HEDFC is an integral component
of the City’s housing program, financial and operational problems result in not just
underperformance for HEDFC, but for the system as a whole.
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The City needs to change its system to improve its ability to address housing
needs. A number of studies in recent years – including our previous joint audits –
have made recommendations to improve the City’s processes for administering
housing funds and HEDFC’s internal processes. However, serious problems
remain. We believe that the problems are systemic and cannot be solved without
addressing the system as a whole. The City should redesign its structure to
simplify administration, reduce administrative costs, and improve performance
and accountability.
What We Recommended
We recommend that the City Manager reevaluate and revise the city’s processes for
developing housing policy and administering housing funds. The City Manager
should consider bringing some of the functions in-house and competitively award
the remaining services. At a minimum, the City’s process should:
• Identify and address housing needs using the housing condition study
performed by the University of Missouri – Kansas City, or a similar effort.
• Establish measurable goals and objectives.
• Base funding decisions on specific, pre-identified needs.
• Track and report annual progress in meeting the housing goals.
• Incorporate specific scopes of work, goals and measurements in all contracts.
• Develop monitoring procedures that ensure all entities receiving funding are
held accountable for meeting specific objectives.
• Identify and “in-source” all functions that City staff can efficiently
perform.
• Competitively award all services not performed in-house.
The City Manager should also require HEDFC to repay the $900,000 in Beacon Hill
program income it used without authorization and to repay the $600,000 balance
of the Westside Business Park Section 108 loan.
We recommend that the Director of HUD’s Office of Community Planning and
Development ensure the City develops and implements the procedures necessary to
ensure an effective and efficient housing program, and recovers from HEDFC the
$900,000 in Beacon Hill program income it used without authorization and the
$600,000 balance of the Westside Business Park Section 108 loan.
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Findings and Recommendations
Discussed
We provided discussion drafts of our audit report to the City Manager, the president
of HEDFC, and the regional director of HUD’s Office of Community Planning and
Development; and held exit conferences with HEDFC and the City Manager on July
6, 2004 and July 27, 2004 respectively. HEDFC and the City Manager provided
written comments to our findings on July 12, 2004 and July 14, 2004 respectively.
We revised the report where appropriate based on their comments. The complete
text of the comments and our evaluations of those comments are contained in
Appendices C and D.
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TABLE OF CONTENTS
Highlights 1
Background 6
Results of Audit
1: The City’s system for administering housing funds is fragmented and too complex. 8
2: The City has not clearly defined HEDFC's role in implementing housing policy. 21
3: HEDFC’s operational deficiencies contribute to poor system performance. 28
Objectives, Scope and Methodology 37
Internal Controls 38
Follow-Up On Prior Audits 40
Appendices
A. Practices in Other Cities 41
B. Schedule Of Questioned Costs And Funds To Be Put To Better Use 44
C. City Manager Comments and Auditor Evaluation 45
D. HEDFC Comments and Auditor Evaluation 48
E. Kansas City, Missouri Housing Survey Map 75
F. Schedule of Payments to HEDFC By Fund, Contract Year Paid, and
Calendar Year Funds Were Encumbered 76
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BACKGROUND
The City receives funds for housing and community development from the U.S. Department of
Housing and Urban Development (HUD). The City uses the funds to assist eligible individuals
to obtain housing; to construct or rehabilitate affordable housing; to redevelop blighted
neighborhoods; and to create business and employment opportunities. The City’s Department of
Housing and Community Development administers housing funds on behalf of the City,
primarily by contracting with not-for-profit agencies. The Housing and Economic Development
Financial Corporation (HEDFC) is the City’s largest subrecipient of housing funds.
HEDFC is a not-for-profit organization incorporated in Missouri to receive and administer funds
primarily to combat community deterioration and to secure adequate housing. HEDFC was formed
in 1997 through a merger of the Housing Development Corporation and Information Center
(HDCIC) and the Rehabilitation Loan Corporation (RLC). HEDFC’s articles of incorporation
provide for designing, constructing, repairing, remodeling and removing structures; conducting
housing related research; providing technical assistance to not-for-profit corporations; making loans
or grants; acquiring, maintaining, managing, selling or transferring real or personal property;
entering into contracts; borrowing or raising money; and investing its funds. A nine-member Board
of Directors governs HEDFC. Board members serve 3-year terms. Successors are nominated and
elected by the Board. By-Laws require a majority of Board members to be residents in investment
areas, or members of targeted populations eligible to receive benefits of the corporation’s programs,
but who are not direct or indirect recipients of program benefits.
HEDFC, or its predecessor organization HDCIC, has been the City’s designated subrecipient of
federal housing and community development funds for 29 years. The City contracts with HEDFC
annually to provide loans and grants to eligible homebuyers; loans and grants for construction and
rehabilitation of affordable housing; and economic development services. The City provided
HEDFC with $52.2 million in fiscal years 2001 through 2003.1
Exhibit 1. City Payments to HEDFC June 1, 2000, through May 31, 2003
Fund 2001 2002 2003
Economic Development Initiative 1,775,329 2,972,912 4,507,672
Section 108 Loan Guarantee 3,449,837 6,502,437 14,896,689
CDBG 1,683,406 4,652,907 2,262,580
HOME 2,618,528 4,135,242 2,752,399
Total 9,527,100 18,263,498 24,419,339
Source: City’s financial system.
Exhibit 2. City Payments to HEDFC by Fund 2001-2003
1
HEDFC’s fiscal year runs from June 1 through May 31.
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Economic Development $8,598,892 $9,255,913
Initiative
Section 108 Loan
Guarantee
$9,506,169
HOME
CDBG
$24,848,963
Source: City’s financial system.
In addition, the City authorizes HEDFC to use program income, which includes payments of
principal and interest on loans, proceeds from the sales of loans, proceeds from the sale or long-term
lease of equipment or real property, and interest earned on program income. Use of program income
is restricted to the purposes of the original grant. HEDFC collected $12 million in program income
in fiscal years 2002 and 2003. City staff were unable to provide program income records for fiscal
year 2001.
Exhibit 3. Program Income Collected by HEDFC June 1, 2000, through May 31, 2003
Fund 2001 2002 2003
CDBG Program Income Unavailable 4,548,475 5,185,914
HOME Program Income Unavailable 1,051,131 1,223,560
Total Unavailable 5,599,606 6,409,474
Source: Summary of Federal Cash Transactions reports provided by Housing and Community Development.
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RESULTS OF AUDIT
Finding 1: The City’s System For Administering Housing Funds Is Fragmented And
Too Complex
The City still lacks an integrated strategy for implementing housing policy. We recommended in
April 2000 that the City develop a clear, comprehensive housing policy including strategies and
desired outcomes. The City took some steps toward assessing housing needs but has not yet
developed a clear strategy for defining, identifying, and addressing housing needs. The current
system for administering housing funds involves the federal government, City government and non-
governmental agencies, but no one party controls spending decisions or is held accountable for
housing production or meeting other goals. Under this fragmented system, the City awards federal
grant funds to entities without a way to assess whether the system is fulfilling overall policy goals.
Even if funds are used for eligible activities, the City hasn’t established a process to ensure that
funds are used effectively.
This fragmented system, combined with a lack of measurable goals and objectives, contributes to
higher than necessary administrative costs; lack of information; poor communication; delays; and
lack of accountability for poor performance. In short, the City’s system provides little assurance that
the money it pays to vendors and contractors, which was $34 million in fiscal year 2003, will meet
its housing needs.
The City still needs a strategy to address housing needs and measurable
goals to determine whether the strategy is working
We recommended in our April 2000 report that the City develop a clear,
comprehensive housing policy including strategies and desired outcomes. The City
took some steps toward assessing housing needs – the Mayor convened a task force
to develop policy recommendations, which the City Council adopted, and the City
contracted with the University of Missouri – Kansas City to conduct the 2001
Housing Assessment Survey. However, the City has not yet developed a strategy for
defining, identifying and addressing housing needs. The City’s 2003 Consolidated
Plan is not significantly different than the 1999 Consolidated Plan. The plan does
not specify measurable goals or objectives. It states how much money is expected by
source but contains no specific actions that are to be undertaken to achieve the City’s
housing goals. City staff told us they did not use the housing assessment data to
compile the plan.
The City Council adopted a housing policy. Following our 2000 audit, the
Mayor convened a committee of 33 people associated with various aspects of
housing development and asked them to discuss and make recommendations for a
new housing policy for Kansas City. The committee met from September to
November 2001 and wrote a proposed policy that defined some broad goals,
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policies, and outcomes. These provide broad criteria for evaluating housing
programs, but don’t identify specific, quantifiable benchmarks, nor do they target
efforts to the City’s most pressing needs. The City Council adopted the policy in
Resolution No. 011428.
Housing condition survey collected detailed information. The City collected
detailed information about housing conditions in 2001. The City contracted with
the Center for Economic Information at the University of Missouri-Kansas City to
conduct the 2001 Housing Conditions Survey. The survey rated residential
housing conditions by parcel, including the roof, foundation and walls, windows
and doors, exterior paint, sidewalks and drives, lawns and shrubs, and litter. In
total, this effort detailed the condition of about 85,000 parcels of property.
The City paid $316,000 for the study, but did not use it in developing or
administering the housing plan. See Appendix D for the map of the Kansas City,
Missouri, Neighborhood Housing Conditions Survey.
Housing plan did not significantly change. Despite these efforts, the City’s
2003 Consolidated Plan is not significantly different from the 1999 Consolidated
Plan.2 The City’s 2003 Consolidated Plan still does not specify measurable goals
or objectives. The plan states how much money is expected by source but
contains no specific actions that are to be undertaken to achieve the City’s
housing goals. The 2003 Consolidated Plan is consistent with the broad goals
described in Resolution No. 011428, but emphasizes community development
activities more than the Resolution, which emphasizes housing activities.
Housing Department staff told us that they did not use the 2001 survey condition
data in compiling the 2002 and 2003 consolidated plans. The acting director said
that they did try to use the data to target CDCs in certain census tracts in the 2004
plan.
The City’s system for implementing housing policy is fragmented and
complex
The City’s system for implementing housing policy is fragmented and too
complex. The federal government, City government and non-governmental
agencies each play a role in the City’s housing system, but no one party controls
spending decisions and entities are not held accountable for housing production or
meeting other goals. The flowchart on the following pages illustrates in detail
how this process works.
2
Kansas City Missouri’s 1999 Consolidated Housing and Community Plan; Approved by HUD May 1999, and
Kansas City Missouri’s 2003 Consolidated Housing and Community Plan; Approved by HUD on May 2003.
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Exhibit 4. Kansas City’s Process for Implementing Housing Policy
CPD City Finance Neighborhood & DHCD
City HEDFC
(HUD Office of Department Housing (Department of Housing & Community (Housing & Economic Development
Community Planning (Office of Management Council Development Development) Financial Corporation)
& Budget)
and Development) Committee Start
Resolution is Kansas City Housing Policy established
approved, amended, through:
Consolidated or rejected • FOCUS HEDFC Contract Rehab apps approved
Plan is reviewed The Consolidated • U.S. Census Data
and approved. Plan is approved • Assessment of housing conditions The contract assigns HEDFC to
and sent to the City • Resolution No. 011428 carryout various “special projects”
Manager & Mayor (i.e. Beacon Hill, 18th and Vine,
for approval. etc.), provide technical assistance to
Letter is sent to CDCs & act as a lender for both
the City indicating The housing policy is used as a guide to CDCs and Homebuyers.
that the develop Requests for Proposals (RFPs)
Consolidated Plan in anticipation of how KC’s housing HEDFC assists the CDCs in
is approved. needs can best be met. drawing up applications for
financial assistance.
A “Commitment Letter” is
RFPs are communicated to the general issued indicating the amount of
public via, classified ads, public meetings funds HEDFC will provide
(held @ City Hall), & the Citizen (usually 20% of the total cost)
Participation Guide. and the number of units that
will be “taken out”.
Applications are scored according to
certain criteria stated in the Citizen
Participation Guide. HOME CDBG
Encumbrances are
recorded for costs Program Program
outlined in the Recommendations are made to the Income Income
Consolidated Plan Neighborhood & Housing and Development Program income must be
& Administrative Committee (based on the application scores) used first.
Contracts in the form of a resolution (basically a draft
. of the consolidated plan).
Is there enough
The Consolidated The consolidated Plan is modified to reflect HOME or
Plan is reviewed the approved resolution. No CDBG program Yes
Consolidated and presented to income to cover
Plan is approved the City Council
By tradition (29 years), HEDFC is the the expenditure?
City Treasury by the City for approval. City’s designated subrecipient for
CDBG Funds Manager &
administering housing and economic
Mayor and sent
HOME Funds development activities funded by CDBG,
to CPD for final
HOME and other sources. HEDFC’s
approval.
Contract is drafted and sent to the May use Must use
Neighborhood Housing and Development HOME funds CDBG funds
Committee for review.
Periodically the Contracts are
City draws down Contracts are approved by the
funds from CPD to approved. committee and
Homebuyer’s
reimburse the City sent to the full income is > 80%
Treasury. Council for Administrative Contracts for CDCs No Yes
of the median
approval. & CBOs are drafted and sent to the income
Neighborhood Housing and
Development Committee for review.
The Consolidated Plan and administrative Application
No Yes
contracts go into effect (usually June 1st). approved?
City Ordinances
are passed putting End
the Consolidated Data is entered into the IDIS system for Draw Request
projects approved in consolidated plan. HOME or CDBG reviewed and
Plan &
entitlement funds approved.
Administrative
Monitoring of HEDFC, CDCs, CBOs may be used.
IDIS system is Contracts into
used to receive effect. Loan Committee reviews
and track project Performance results related to the
the application
information consolidated plan are reported to CPD
submitted by Expenditures are via the IDIS system. Underwriting
DHCD. recorded.
Draw requests reviewed and approved. Homebuyer
Draw requests are
Payment to HEDFC is authorized. Entitlement applies for 2nd
paid.
funds are mortgage.
Consolidated requested
Annual from the City Loan/Grant
Performance and Proceeds are paid
Evaluation Report to the borrower.
(CAPER) is
Consolidated Annual Performance and
Evaluation Report (CAPER) is Take Outs repay
reviewed. Payment received the other financial
submitted to CPD.
from the City institution.
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Exhibit 4 Continued.
CDCs LISC CBOs Other Financial Contractors / Homeowners,
(Community Development (Community Based Institutions Builders Renters, Buyers,
(Local Initiative (i.e. Dean Claig, Gary
Corporations) Organizations) (i.e. Douglas Bank, Century and Realtors
Support Corporation) Bank, etc.) Gable, etc.)
Applications Applications Applications Apply for construction Homeowners apply
Loan application is at HEDFC for
submitted in submitted in submitted in financing
reviewed: rehabilitation in
response to RFPs response to RFPs response to RFPs -Credit Check order to improve
-Underwriting their current living
-Verify Commitment Letter Loan proceeds are used
to start construction. conditions.
Approved applicants Approved applicants Approved applicants -Property is appraised
are required to submit are required to are required to
required submit required submit required Construction starts
documentation to the documentation to the documentation to the Renters apply for
Construction complete. multifamily units
City. City. City.
Loan created by CDCs /
Yes Approved? No contractors.
The newly constructed
Approved Administrative Approved Administrative Approved units are inspected &
Contract. Contract. Administrative End reappraised. Realtor should
Contract. check to see if the
Temporary Certificate of homebuyer qualifies
Housing Other Activities Private funds are Loan proceeds are paid to Occupancy is attained. for a “program
Activities & Services Services are unit”.
raised locally performed. borrower (either the CDC
or Builder).
Development planning for “Program units” are
Single Family and/or Multi- Matched with ready to be sold (single
nationally Performance reports are Realtor
family units. family) or leased
raised funds. submitted to DHCD as
(multifamily).
required by contract
Builder is selected Construction
LISC increases CDCs Financing
Development Plans are
finalized. Acquisition & capacity by making low
Construction costs are interest loans available. Homebuyer
Mortgages decides to
determined
Technical assistance purchase a
Application for “Gap provided to CDCs “program unit”.
Financing” (unusual site
development costs plus any
“Non-Mortgageable Costs”
according to HOME & CDBG
regulations) and “Take-Outs”
(if unit is not sold within 20 days
of the certificate of occupancy,
HEDFC will pay off the loan).
Homebuyer applies
for a 1st mortgage
(80% of the sale price
of the home) at other
financial institution
& 2nd mortgage
(20% of the sales
Does the CDC need to price) at HEDFC (in
provide construction no particular order).
Yes financing for the No
builder?
1st Mortgage
Apply to other financial
2nd Mortgage
institution to cover the “Hard
Loan application is
Costs” of construction (usually
reviewed:
80% of the total cost)
-Credit Check
-Underwriting
CDCs utilize realtors to market --Verify Commitment Letter
the newly finished units
Submit “Draw Request” in
order to “Take Out” the
Application
Loan. Yes No
approved?
No “take out”
necessary End
Unit sells within
20 days of the Loan Proceeds (80% of
certificate of the sale price) are paid to The construction loan is
occupancy? the borrower repaid. HEDFC now holds
the note receivable.
Monitoring efforts by DHCD
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Many parties are involved in the system. The federal government, City Council,
City departments, HEDFC, Community Development Corporations, and private
financial institutions and builders each play a role in implementing the City’s
strategy for addressing housing needs.
The federal government, City Council and City departments primarily provide
money, set policy and monitor policy implementation:
Exhibit 5. Government Roles in Administering Housing Funds
Agency Roles
HUD Office of Community Responsible for approving the City’s Consolidated
Planning and Development Plan, tracking project information in the IDIS system,
(CPD) making CBDG and HOME funds available to the City,
and reviewing the Consolidated Annual Performance
Evaluation Report (CAPER).
City Council Responsible for adopting the City’s Consolidated Plan
and approving City contracts for more than $250,000.
Neighborhood & Housing Hears testimony on the staff’s proposed Consolidated
Development Committee (a Plan and contracts and may amend the Plan or
standing committee of the City contracts before passing them out of Committee for
Council) the full Council to consider.
City Housing and Community Responsible for developing the Consolidated Plan,
Development Department drawing up contracts, monitoring subrecipients and
contractors, and submitting the CAPER to HUD. The
department also disburses funds to CDCs, LISC,
CBOs for administrative costs, and to HEDFC for
administrative and program costs in accordance with
the Consolidated Plan and individual contracts.
City Finance Department Responsible for encumbering funds for costs outlined
in the Consolidated Plan.
Source: Interviews with City Council members, HUD staff; reviewing related documents.
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Non-government agencies receive government funds to implement policies and
monitor implementation:
Exhibit 6. Private and Non-Profit Organizations’ Roles in Administering Housing Funds
Agency Roles
Housing and Economic Acts as a lending institution for both CDCs and
Development Financial homebuyers. Also responsible for providing technical
Corporation (HEDFC) assistance to CDCs, promoting economic
development, and carrying out “special projects”:
large scale developments for which CDCs can’t
perform.
Community Development Neighborhood-based not-for-profit organizations that
Corporations (CDCs) work to revitalize their communities through new and
rehabilitated housing, commercial development,
neighborhood organizing, and a variety of residential
services.
Local Initiative Support National not-for-profit corporation that provides grants,
Corporation (LISC) loans and equity investments to CDCs for
neighborhood development. LISC is based in New
York and operates in thirty-seven major cities across
the U.S., including Kansas City. National LISC
matches locally raised funds. The CDCs then
designate the funds to a variety of projects in their
respective neighborhoods.
Community Based Perform a variety of services for the community such
Organizations (CBOs) as child development and senior citizen center
activities. CBOs generally do not perform housing-
related services, but may receive funding through the
Consolidated Plan.
Other Financial Institutions Provide construction loans to CDCs and contractors in
addition to home loans to homebuyers.
Contractors/Builders Build and rehabilitate houses under contract with
HEDFC or CDCs.
Source: Interviews with City Council members, HUD, Housing Department, HEDFC, LISC and CDC
staff; reviewing related documents.
Each year, the City develops an approved consolidated plan for implementing
housing policy. The process involves the City seeking proposals, identifying the
proposals that will be funded, submitting its plan to HUD for review, and then
funding the projects. Exhibit 7 summarizes how the City develops and implements
its annual plan.
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Exhibit 7. Developing and Implementing Kansas City’s Annual Consolidated Plan
Agency Activity Output
Housing The Housing Department develops a Request for Proposals
Department request for proposals, based on Forging
Our Comprehensive Urban Strategy,
census data, the 2001 housing condition
assessment, and housing policy goals
adopted by council resolution.
CDCs, CBOs, Respond to the RFP with proposals. Proposals
general
contractors
and LISC
Housing Reviews proposals, scoring them based on Draft resolution for
Department criteria from the Citizen’s Participation Plan. City Council
consideration
City Council Considers and may amend the draft Draft consolidated
resolution. plan as an adopted
resolution
Mayor and Review and approve the adopted Draft approved
City Manager consolidated plan. consolidated plan
HUD Reviews the City’s consolidated plan. Letter accepting the
consolidated plan
City Council Considers the consolidated plan. Consolidated plan
adopted by ordinance
Housing Drafts contracts to fund administrative costs Draft contracts
Department of organizations that submit proposals.
Housing Drafts a contract with HEDFC, which, by Draft contract
Department tradition, doesn’t submit a proposal.
City Council Considers and approves draft contracts by Contracts approved by
ordinance if the contract amount exceeds ordinance.
$250,000.
Source: Interviews with City Council members, HUD, Housing Department, HEDFC, LISC and CDC
staff; reviewing related documents.
The City doesn’t systematically identify needs. Instead of the City targeting
housing needs to address, the contractors and subrecipients drive this process because
the contractors and subrecipients determine which projects will be performed by
submitting their proposals. An effective process would have the City identify its
needs, then identify projects to address those needs, and then contract with parties that
can complete the projects.
The City hasn’t established clear lines of authority and responsibilities. The
fragmented system creates duplicate efforts, increasing costs and confusion. For
example, CDCs have to apply separately for administrative and program costs. CDCs
apply to the City for administrative costs then apply to HEDFC for program funding.
This duplicate effort can lead to confusion about who a CDC is accountable to. City
staff told us they have few options for addressing poor performance. HEDFC
management told us they’ve been forced to pay off CDC construction loans that
should never have been made. Exhibit 8 summarizes the construction and
rehabilitation process for single family homes.
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Exhibit 8. Constructing and Rehabilitating Single Family Housing
Agency Activity Output
Housing Makes payments to CDCs and HEDFC Payments
Department based on contracts.
CDCs Apply to HEDFC for financing projects Development plans;
included in consolidated plan agreements with
builders.
HEDFC Reviews feasibility, provides technical Commitment letter
assistance if needed, determines grant
financing necessary to cover “unusual”
costs of construction in the urban core.
CDCs Use commitment letter to obtain financing Draw request to
from a bank; begins project, submit invoices HEDFC;
or requests for reimbursement to HEDFC as Periodic progress
work progresses. reports to the Housing
Department
HEDFC Reviews and approves draw requests. Payments to vendors
HEDFC is required to use CDBG and and reimbursements
HOME program income first, before to CDCs
requesting additional grant funds.
HEDFC HEDFC requests funds from the City if Request entitlement
program income is insufficient to cover funds from City
expenditures. Housing Department
Housing Reviews HEDFC’s monthly financial reports Payments to HEDFC
Department and bank statements. Reviews CDC
progress reports.
CDCs Once construction is completed, apply to Draw request to
HEDFC for “take-out” of loan. HEDFC
HEDFC Approves payment. Pays construction
loan; holds mortgage
on property.
CDC Markets and sells house. Provides the Sales price
sales price to HEDFC prior to closing.
HEDFC Calculates difference between outstanding Amount due on loan
loan and sales price; writes off difference if
house sells for less than amount due.
Buyer Pays HEDFC at closing Payment
Source: Interviews with City Council members, HUD, Housing Department, HEDFC, LISC and CDC
staff; reviewing related documents.
Federal grant funds are awarded to entities in the system without a way to
determine whether the system is fulfilling the City’s goals. Even if funds are used
for eligible activities, the City hasn’t established a process to ensure that funds are
being used effectively.
Fragmented, complex system increases costs, weakens accountability
The fragmented system along with a lack of clear performance goals contributes to
high administrative costs; lack of information and poor communication; delays;
lack of accountability; and creates an environment in which there is friction and
“finger-pointing” among the major players. Without clear performance criteria for
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making funding decisions and holding entities accountable, the City's system is
driven by the agencies that receive the money. Private agencies make decisions
about the use of public funds rather than the City.
Administrative costs are increased. According to HEDFC's audited financial
statement and the City's financial management system, the Housing Department
and HEDFC spent over $4.9 million on administrative costs in fiscal year 2003,
not counting the CDCs' administrative costs paid through city grants.
Administrative costs amounted to more than 40 percent of CDBG and HOME
funds for the year. Clearly defined lines of authority and areas of responsibility
would help ensure that administrative costs are held to a minimum, resulting in
more funds being available to address the City’s housing needs.
Decision makers lack adequate information. The City Council still lacks timely
and accurate information to make decisions. Council members told us that the
Housing Department provides information to the City Council’s Neighborhood
Development and Housing committee but the information has been inaccurate and
untimely and reports don’t reconcile. In addition, Council members are concerned
that the Housing Department and/or HEDFC have, in some cases, approved
funding for much larger amounts than originally approved by the Council. We
also reported in our July 2001 report that City housing officials did not provide the
City Council with adequate information to support decisions in awarding HUD
funds.
The Comprehensive Annual Performance Evaluation Report (CAPER) – required
by HUD to monitor the use of funds – provides inadequate information to assess
system performance. For example, the annual report doesn’t show the number of
units produced or the cost per unit, information that is readily available in annual
reports we reviewed from other cities.3 HEDFC management told us they have
this information, but the annual report is not their responsibility. HEDFC
management provided us with this information separately, but we couldn’t verify
its source.4
The lack of accurate information also contributed to the City’s $4.8 million
shortfall in CDBG and HOME programs in early 2004. The Housing Department
overestimated program revenue, and then the City appropriated funds based on
overstated revenues. Weaknesses in the Housing Department’s budgeting and
reporting processes exacerbated the problem, as the Housing Department hadn’t
3
We reviewed information from Boston, MA; Minneapolis, MN; Cleveland, OH; Indianapolis, IN, Springfield, MO;
and St. Joseph, MO. We selected these cities because regional HUD directors identified them as having well
performing systems for administering housing funds and their housing stocks are similar in age to Kansas City. We
intended to compare Kansas City’s production and performance to these cities, but could not due to lack of
information about Kansas City’s performance.
4
HEDFC staff provided unit and cost information in emails dated April 26, 2004, and May 3, 2004. Staff said that
the data were from the 2001-2002 CAPER. We could not find similar information in the most recent (2002-2003)
CAPER. The cost figures staff provided were not consistent with the total amount of payments HEDFC received
from the City or with expenses reported in HEDFC’s audited financial statements.
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been held accountable to the City’s normal budgetary controls. For example, the
former City manager did not include Housing Department funds in formal
quarterly financial analyses. The City’s Office of Management and Budget
considered housing funds to be “continuing funds” and did not require an annual
reappropriation of unexpended funds. Therefore, the shortfall wasn’t found and
corrected. About $18 million that the City paid to HEDFC in contract year 2002-
03 was actually encumbered between January 1996 and December 2001. See
Appendix E for a schedule of funds paid by contract year and the year they were
encumbered. KPMG conducted a performance audit, released April 2004, to
determine the amount of the shortfall. KPMG made a number of recommendations
to the City to improve internal and external reporting, grants monitoring and
contracting and reimbursement processes.
Stakeholders complained of slow payments. CDCs, banks and HEDFC all
complained to us about slow payments:
• CDCs and vendors complained to us about slow payments from HEDFC.
We saw files with invoices submitted more than once and loans paid off
more than 60 days after approval. Delaying loan pay offs increases interest
costs needlessly.
• Representatives from three of four banks we talked to said they don’t work
with HEDFC because of slow turnaround time.
• HEDFC complained to us about slow payments from the City.
Untimely draw downs. The City’s single audits in the past three years have cited
untimely draw downs of federal funds as a concern. The City’s untimely draw
downs result in borrowing from other City funds or incurring unnecessary interest
costs and other fees. For example, the City’s decision to draw down funds from a
line of credit for the Beacon Hill development rather than using federal funds
resulted in up to $82,500 in unnecessary stand-by fees. While the interest incurred
is similar to the amount that would have been incurred using federal funds, the
stand-by fees are specific only to the line of credit financing.5
The system weakens accountability. The fragmented system weakens overall
accountability because control of spending and accountability for housing
production is not clearly defined. For example, the Housing Department doesn’t
hold CDCs accountable for poor housing production. Program managers haven’t
consistently completed quarterly monitoring reports. Staff had not done 2003
quarterly reports for 3 of the 6 CDCs we reviewed. Housing Department
management told us they have few options for addressing poor performance and
that the City Council will fund agencies regardless of performance.
5
The $10 million line of credit incurs a “stand-by” fee of 15 basis points due quarterly on the undrawn portion of the
line of credit. Therefore, HEDFC is currently holding the $10 million dollar line of credit open at a cost of $7,500
per quarter. From the time the loan was established (10/26/2001) through the current quarter (06/30/2004), that is a
maximum expense of $7,500 per quarter for 11 quarters, or $82,500.
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HEDFC’s practice of “taking out” loans is another example of weakened
accountability. Upon approving a project, HEDFC provides the CDC with a
commitment letter to pay the bank. The CDC uses the commitment letter to get
private financing. HEDFC then pays off (“takes-out”) the loan three weeks after
the certificate of occupancy is issued if the house hasn’t sold. The “take-out”
practice rewards CDCs even if they’ve built housing that is less desirable. CDCs
lack the financial incentive to market the homes once the loan is taken out because
they no longer owe the bank. HEDFC management told us that they perform take-
outs to improve CDCs’ credit to allow them to obtain more financing. HEDFC
management also told us that the practice of take-outs has resulted in paying for
loans that should never have been made. As a result, homes are built or
rehabilitated but sell slowly. In December 2003, HEDFC had an inventory of 30
unsold homes (see also Finding 3).
Environment of mistrust. We observed “finger-pointing” and friction between
City and HEDFC staff. In interviews, staff from the City and HEDFC blamed each
other for problems. Back-and-forth correspondence between City and HEDFC
staff indicated a lack of responsiveness and delayed responses to requests for
information. In some cases the City and HEDFC had disagreements about
documentation and ownership of property. Staff also dispute responsibilities, with
HEDFC staff taking on responsibilities the City staff believe are their own and
vice versa.
The City is required to have an adequate system
The City is responsible for using federal housing funds to achieve City goals and
national objectives. Federal regulations allow cities flexibility in deciding how to
spend HUD grant funds within established guidelines. However, federal
requirements also dictate that “Governmental units are responsible for the efficient
and effective administration of Federal awards through the application of sound
management practices… Each governmental unit… will have the primary
responsibility for employing whatever form of organization and management
techniques may be necessary to assure proper and efficient administration of
Federal awards.”
These requirements also stipulate that “a cost is reasonable if, in its nature and
amount, it does not exceed that which would be incurred by a prudent person
under the circumstances prevailing at the time the decision was made to incur the
cost. The question of reasonableness is particularly important when governmental
units or components are predominately federally-funded.”
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The City must improve its system
A number of studies in recent years have raised concerns about the City’s
processes or HEDFC’s processes and made recommendations for improvement. In
the past, the City justified not changing the structure because an attorney in the
City’s Law Department had provided an oral opinion that the City was prohibited
from directly administering a loan program. The Law Department issued a written
opinion in October 2003 that the City is not prohibited from making loans as long
as there is a public purpose before public funds are loaned; the funding source
permits such a loan; and a recipient such as a CDC has empowered itself to receive
or use the loan funds for the purposes for which the loan is made.
We conclude that the City’s problems are systemic and cannot be solved without
addressing the system as a whole. The City should redesign its program to
simplify administration and/or reduce layers, as well as reduce costs.
Recommendations
1A. We recommend that the City Manager reevaluate and revise the city’s
processes for developing housing policy and administering housing funds.
The City Manager should consider bringing some of the functions in-house
and competitively award the remaining services. At a minimum, the City’s
processes should:
• Identify and address housing needs using the UMKC housing condition
study or a similar effort.
• Establish measurable goals and objectives.
• Base funding decisions on specific, pre-identified needs.
• Track and report annual progress in meeting the housing goals.
• Incorporate specific scopes of work, goals and measurements in all contracts.
• Develop monitoring procedures that ensure all entities receiving funding are
held accountable for meeting specific objectives.
• Identify and “in-source” all functions that City staff can efficiently
perform.
• Competitively award all services that City staff does not perform.
1B. We recommend that the HUD Director, Office of Community Planning and
Development ensure the City develops and implements the procedures necessary
for an effective and efficient housing program. These changes should ensure that
the City’s processes:
• Identify and address housing needs using the UMKC housing condition
study or a similar effort.
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• Establish measurable goals and objectives.
• Base funding decisions on specific, pre-identified needs.
• Track and report annual progress in meeting the housing goals.
• Incorporate specific scopes of work, goals and measurements in all contracts.
• Develop monitoring procedures that ensure all entities receiving funding are
held accountable for meeting specific objectives.
• Identify and “in-source” all functions that City staff can efficiently
perform.
• Competitively award all services that City staff does not perform.
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Finding 2: The City Has Not Clearly Defined HEDFC's Role In Implementing Housing
Policy
The City has failed to adequately define HEDFC’s role in providing affordable housing. The scopes
of work in the City’s contracts with HEDFC are broad and the performance standards are vague.
Consequently, the Housing Department – which is responsible for overseeing the contracts – and
HEDFC have disagreed about whether expenditures or activities are appropriate and about the
disposition of program income.
By entering into vague contracts, the City cedes decisions about use of public funds to HEDFC and
cannot fulfill its responsibilities as a recipient of federal grant funds.
Contracts don’t adequately define HEDFC’s role
The City contracts annually with HEDFC to service the $90 million portfolio of
loans made with CDBG and HOME funds, make loans to CDCs to carry out
construction and rehabilitation projects consistent with the Consolidated Plan,
provide technical assistance to CDCs, and make loans to eligible home buyers.
The scope of work described in the current contract is broad. Under its annual
contract with the City6, HEDFC is to provide:
(1) Housing Loan and Development Programs: administering CDBG and HOME
funded housing development activities in designated areas; administering and
processing loans for specific multi-family projects (Chambers and Hanover
buildings and others as approved by the Housing director); financing, monitoring
and providing technical assistance for specific development projects (Columbus
Park In-Fill); assisting in redeveloping certain sites (Troostwood); acting as project
manager for certain sites (Holy Temple Homes, Guinotte Manor); and providing
predevelopment activities and lending services for Beacon Hill.
(2) Economic Development Services: provide the necessary services as a lender
and administrator of federally funded loans and grants to carry out economic,
commercial and industrial projects including 18th and Vine Redevelopment and
Heritage Business Park Renovation.
(3) Public Facilities Services: provide funding as authorized to specific agencies
for renovation projects.
(4) Home Ownership Counseling Services: enter into a cooperative agreement
with the Family Resource Center to provide home ownership counseling services
to potential HEDFC clients.
6
Consolidated Community, Housing, and Economic Development Programs and Administration, June 1, 2003
through May 31, 2004.
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(5) Administrative and Regulatory Services: administer the housing programs,
prior contract activities, and all active loans from prior periods in accordance with
policies and procedures and federal regulations. HEDFC is authorized to approve
or reject loan applications based on determination of eligibility. HEDFC is
authorized to determine the final disposition of defaulted loans, including
foreclosure on properties and managing or renting acquired real estate.
These services are broadly defined and do not include specific, measurable goals.
For the most part, it is not possible to trace in the contract the resources devoted to
a specific program activity and the expected outcomes for the year.
Eligible activities are broadly defined. The contract describes eligible HOME
program activities as including construction of new affordable homes, purchase
and rehabilitation of existing homes, and the development of affordable housing by
Community Housing Development Organizations (CHDO). The contract
describes eligible CDBG program activities as including maintenance of vacant
land and structures prior to disposition, home ownership counseling services,
housing rehabilitation, new housing construction, multi-family housing
development, economic development, public facilities services, and planning and
administration activities.
The City hasn’t established clear performance standards for HEDFC. The
contract outlines performance goals from the Consolidated Plan – noting that in
order to achieve the goals, HEDFC will need to receive adequate applications from
borrowers and CDCs in sufficient numbers – and requires monthly progress
reports to be submitted to the City. However, the performance goals are vague.
The contract sets goals for numbers of loans and units but because housing
production spans contract years, it’s not clear whether a unit is counted more than
once – when the loan is approved, while the unit is under construction, and again
when the unit is complete. Neither City Housing nor HEDFC staff could clarify
what the goal means without doing “further research.” HEDFC’s president told us
that the contract authorizes a certain amount of spending and it isn’t possible to
produce the number of units called for with the funding provided.
Exhibit 9. 2003 Activities and Goals
Program/Activity Goal
Rehabilitation Loan Program 35 Loans
Home Ownership Assistance Programs 120 Loans
Targeted Rehabilitation of Vacant Homes & New Construction 180 Units
Downtown Multi-Family Housing 75 Units
Total Housing Units 410 Loans
End Loan Closings 155 Loans
Loan Processing 165 Applications
Source: Non-Municipal Agency Funding and Services Contract Housing and Community
Development Department and Housing and Economic Development Financial Corporation
Consolidated Community, Housing and Economic Development Programs and Administration,
contract no. 2003-002.
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The City has also contracted with HEDFC for additional services. For example,
the City entered into a cooperative agreement with HEDFC in February 2000 to
implement the Beacon Hill Housing Development Project. Under the agreement,
which is referred to in the annual contract, HEDFC is to coordinate with the
Beacon Hill task force to monitor its selection of a master developer, assess the
feasibility of the project plan, and perform predevelopment activities including
acquiring property and demolishing structures consistent with the plan. The
agreement requires HEDFC to submit reports to the City, but doesn’t specify any
performance standards.
Roles aren’t clear to other stakeholders. While most stakeholders perceive that
HEDFC’s primary role is to provide low or no interest loans and grants to eligible
home buyers and to CDCs to rehabilitate or construct homes in targeted areas, the
City also contracts with HEDFC to acquire and develop properties. Almost 80
percent of the funding the City paid to HEDFC in the 2002-03 contract year was
for direct development activities – $14.8 million in Section 108 funds and $4.5
million Economic Development Initiative grants out of a total of $24.4 million.
However, HEDFC doesn’t have policies and procedures in place for conducting
development activities. Other stakeholders believe that HEDFC’s role as a
developer is inconsistent with their role as a lending institution.
City Housing and HEDFC disagree about the appropriate use of funds
and other program issues.
Because the contracts aren’t clear, City Housing staff and HEDFC have disagreed
about the appropriate use of program income and whether expenditures or
activities were appropriate. HEDFC believes it is authorized to make certain
decisions, but City Housing staff believes it is not. For example, Housing staff
questions the amount of money spent on the Beacon Hill project and the costs of
rehabilitating two houses within the project. HEDFC has responded that the costs
were authorized and the activities within the scope of their contracts.
HEDFC spent more than authorized by contract on Beacon Hill. The City’s
contract with HEDFC authorized spending $10 million in Section 108 loan
guarantee funds and $1.25 million in Brownfields Economic Development
Initiative funds to:
• acquire vacant and blighted structures;
• abate known environmental contaminants;
• demolish dangerous or obsolete structures;
• relocate displaced residents;
• construct new housing; and
• rehabilitate existing housing.
HEDFC spent about $12.2 million on the Beacon Hill development between May
4, 2000, and December 31, 2003. City records show that only about $300,000 has
been drawn down from the Brownfields fund. Housing staff questions where the
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additional $1.8 million spent came from. HEDFC’s monthly financial reports
show that HEDFC spent about $900,000 in Beacon Hill program income on the
project. However, neither the current annual contract nor the Beacon Hill
cooperative agreement authorizes HEDFC to spend Beacon Hill program income.
HEDFC management told us that they could not control the costs on the project
because the City’s Law and City Planning and Development departments were
responsible for condemnation proceedings and negotiating the costs of properties.
HEDFC spent about $600,000 to rehabilitate two houses within the Beacon
Hill project. HEDFC selected two single family homes on Tracy Avenue to
renovate as model homes. HEDFC’s president told us that the rehabilitation
projects, while more expensive than intended, are part of an overall plan that the
City’s Housing Department doesn’t yet see. He said that investors are interested in
the properties – which are not yet for sale – but in the meantime they serve as
educational laboratories for developers and investors to see how older homes can
be restored and learn what not to do in order to keep costs down.
Exhibit 10. These photos show the front and back of 2523 Tracy. HEDFC spent
$327,999 restoring the home.
(5/7/04)
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Exhibit 11. These photos show the front and back of 2518 Tracy. HEDFC spent
$263,835 restoring the home. (5/7/04)
Contracts authorized use of public funds to rehabilitate housing. HEDFC’s
general counsel and director of lending wrote an opinion that the rehabilitation
activities were eligible under federal regulations and authorized by the City under
the 2001 and 2002 Consolidated Plans, HEDFC’s annual contracts with the City
for 2001 and 2002, the cooperative agreement for the Beacon Hill redevelopment,
as well as CBDG eligibility and State Historic Preservation guidelines. The City’s
Law Department reviewed the opinion and concurred that the agreements provide
HEDFC authority to acquire and restore properties without restriction on costs.
HEDFC failed to fully repay the Section 108 loan for the Westside Business
Park. HEDFC was required to fully secure the $7.1 million Section 108 Westside
Business District loan from HUD. The loan was supposed to be secured through
property obtained and improvements made to that property. The property was sold
to a developer and the sales proceeds should have gone toward repaying the
Section 108 loan. After much delay, HEDFC repaid the City most of the loan
amount but has yet to pay the outstanding balance of $597,388.
Monitoring focuses on compliance not effectiveness. In the absence of clear
performance standards, City Housing staff focuses monitoring efforts on technical
financial compliance of detailed transactions by reviewing bank statements and
supporting documents for individual payments. This is time-consuming for City
staff and frustrating for HEDFC. HEDFC management told us that City Housing
staff is narrowly interpreting HUD regulations in requiring HEDFC to use program
income before drawing down federal funds and cite this requirement as one of the
primary causes of their cash flow problem. However, Housing staff perceives that
they have little control over how HEDFC spends funds.
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By entering into vague contracts the City cedes decisions about use of public funds
to HEDFC and cannot fulfill its responsibilities as grantee. As the grantee, the
City is responsible under federal regulations for ensuring that use of the grant
funds will meet national objectives and that subrecipients comply with applicable
federal requirements and that performance goals are being achieved.
Unclear role prevents adequate assessment of HEDFC’s effectiveness
HEDFC’s unfocused mission and poorly defined performance goals prevent
meaningful assessment of whether the agency is performing effectively. Other
system stakeholders believe that HEDFC should solely act as a lender rather than
developer.
HEDFC’s primary role is lending. Most stakeholders perceive that HEDFC’s
primary role is to act as a lender. The president of HEDFC described its primary
mission as providing assistance to low-income families in Kansas City’s urban
core through a variety of programs including loans for rehabilitation, and
construction of new housing and economic development. He said that HEDFC
occasionally acts as a developer for the City for large-scale projects because other
agencies lack the skills and capacity to fulfill this role.
Most funding has been for development activities. Almost 80 percent of the
funding HEDFC received from the City in the 2002-03 contract year was for direct
development activities – $14.9 million in Section 108 funds and $4.5 million
Economic Development Initiative grants. However, HEDFC doesn’t have policies
and procedures in place for conducting development activities.
Exhibit 12. City Payments to HEDFC by Fund, June 1, 2002, through May 31, 2003
9%
CDBG
11%
HOME
Economic Development
62% 18% Initiative
Section 108
Source: City’s financial system.
Stakeholders we talked to perceive that HEDFC’s primary role should be to act as
a lender. Representatives of area CDCs that we talked to said that HEDFC has
multiple roles, primarily lending and developing. Representatives of 4 of the 5
CDCs we talked to told us that HEDFC should act solely as a lender and that it is a
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conflict of interest for HEDFC to act as a developer because they, in effect, make
loans or grants to themselves.
The City needs to ensure that each entity in the system has clear roles and
responsibilities. The City should establish mechanisms for holding each entity –
including HEDFC – accountable. Each contract should specify the scope of work
agreed to and how the City will know that the agreed upon work was completed.
Recommendations
We recommend that the City Manager:
2A Require HEDFC to repay the $900,000 in Beacon Hill program income it used
without authorization.
2B Require HEDFC to repay the $600,000 balance of the Westside Business Park
Section 108 loan.
2C Ensure that the scopes of work and performance standards in all housing
contracts are sufficiently clear so that the City can effectively manage, monitor
and report on the contractor’s performance. Contracts should clarify how much
discretion the contractor may exercise in carrying out activities on behalf of the
City.
We recommend that the HUD Director, Office of Community Planning and
Development:
2D Ensure the City recovers from HEDFC the $900,000 in Beacon Hill program
income it used without authorization and reprograms the money to be used
for eligible activities.
2E Ensure the City recovers from HEDFC the $600,000 balance of the Westside
Business Park Section 108 loan and reprograms the money to be used for
eligible activities.
2F Ensure the City structures its future contracts with clear scopes of work and
performance standards so that the City can effectively manage and monitor
contractor performance.
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Finding 3: HEDFC’s Operational Deficiencies Contribute To Poor System Performance
HEDFC lacks processes for tracking and reporting operational and financial information; its
computer systems aren’t integrated; duplicate data are entered into different systems, which staff does
not reconcile; policies and procedures don’t address tracking and reporting information about the
different types of loans or projects; supporting documents for construction loans were disorganized
and not readily accessible, some files and documents were missing, and we found errors in reports.
Although several previous studies have recommended HEDFC improve its procedures for tracking
and reporting operations, problems remain.
HEDFC’s financial position is weak. Liquidity ratios and cash flow coverage ratios decreased while
debt ratio increased between 2000 and 2002. HEDFC’s cash position improved in 2003 with
increased funding, but cash flow coverage was negative in three of the five years we reviewed.
HEDFC experienced high interest expense relative to net income in some years and income and
expenses fluctuated. These ratios reflect HEDFC’s financial dependence on the City.
Since HEDFC is an integral component of the City’s housing program, these problems result in not
just underperformance for HEDFC, but for the system as a whole. The system failed to meet housing
production goals for the year ending May 31, 2003. The city’s annual contract with HEDFC called
for 190 "loans or units" of targeted rehabilitation of vacant homes or new construction, but only 54
houses were sold or completed. The houses also took a long time to sell once completed.
HEDFC operational controls and processes are deficient
There are significant deficiencies in HEDFC’s operations:
• HEDFC’s financial audit wasn’t timely. HEDFC's financial audit for the year
ending May 31, 2003, was issued July 1, 2004. The auditor issued a qualified
opinion because the scope of audit work was limited by missing
documentation. Federal regulations and City code require agencies receiving
funds to complete financial audits.
• The financial audit identified six reportable conditions, four of which were
material weaknesses.7 Material weaknesses included payments to vendors of
about $329,000 that the auditors could not trace to executed contracts or
purchase orders, adjustments to accounting records during the audit
amounting to about $26.4 million, and adjustments to accounting records to
reduce receivables based on the auditor’s verification of information from
third parties. The auditors also questioned whether the spending to restore the
7
Housing and Economic Development Financial Corporation Financial Statements Together With Independent
Auditor’s Report for the Year Ended May 31, 2002. A reportable condition is a deficiency in the design or operation of
an entity’s internal control structure that could adversely affect the entity’s ability to record and report financial data. A
material weakness is a significant deficiency in which the design or operation of specific internal controls does not ensure
that errors or irregularities material to the financial statements will be detected promptly by employees in the normal
course of their work.
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houses on Tracy was eligible under federal regulations due to conflicting
documentation.
• The corporation’s computer systems aren’t integrated; duplicate data are
entered into different systems, which staff does not reconcile.
• The corporation’s policies and procedures don’t address tracking and
reporting information about the different types of loans or projects.
• Supporting documents for construction loans are not readily accessible. Files
contain multiple copies of some documents, while some files and
documentation are missing altogether.
• Some reports are inaccurate. We found errors in the single family production
report presented to the Board and in a loans closed report prepared for us.
• Board reports vary in format and content – it is difficult to gather consistent
information, especially about multi-family or special projects.
• HEDFC does not use detailed program budgets, or compare actual program
expenditures to budgeted expenditures.
• Grant funds were commingled. HEDFC deposited four HOME entitlement
payments totaling $230,157 into the CDBG income account in fiscal year
2003. Federal regulations require separate HOME and CDBG accounts.
• HEDFC did not consistently document periodic on-site inspections of work
performed.
• HEDFC did not consistently complete monitoring reports required under
City contracts.
• HEDFC does not maintain perpetual, real-time inventory of assets.
• HEDFC does not compare its performance to benchmarks or standards.
• HEDFC does not market its programs to targeted users.
Previous studies have noted similar operational problems
Two recent consultant reports and our July 2001 performance audit raised
concerns about HEDFC’s internal processes. However, we continue to see
problems, including inaccurate reports, missing information, disorganized files,
lack of common accounting practices, and little tracking of production progress.
At the City’s request, the National Congress for Community Economic
Development (NCCED) studied HEDFC as part of a review and analysis of the
City’s affordable housing programs. NCCED reported in August 2001 that
HEDFC’s internal processes and procedures lacked administrative discipline and
compromised the organization’s participation in financial transactions. The report
also concluded that HEDFC’s management information systems and procedures
for tracking and reporting operations required significant improvements. The
report recommended simplifying and standardizing internal procedures, rewriting
the policies and procedures manual, eliminating duplicative processes, and
automating paper processes to the extent possible.
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In April 2002, BKD, LLP performed an operations review of HEDFC’s internal
procedures and information technology, and assessed communication, procedures
and reporting between HEDFC and the City. The review made several
observations and recommendations to HEDFC management about the
organization’s problems with tracking and reporting information. BKD noted
significant problems with loan documents being lost. Each department (within
HEDFC) tended to maintain a separate file related to their piece of a given project
or loan, resulting in multiple copies of some documents and other documents
getting lost.
The study reported a lack of standardized written procedures for day-to-day
processing. Each department (within HEDFC) developed its own procedures,
tracking mechanisms, and software without considering the organization as a
whole. HEDFC maintained an unnecessary and time-consuming cash availability
report on a daily basis. HEDFC entered loan disbursement and payment records
twice into their accounting system. Financial reports to HEDFC Board of
Directors did not include enough explanatory language. HEDFC failed to
accomplish proper and timely reporting as required by the City, contractual
obligations, and regulatory agencies. The report recommended HEDFC:
• establish a process to identify and ensure that documents are properly filed;
• adopt detailed, written standardized procedures;
• reconcile the loan ledger to the general ledger at least monthly until an
integrated system is implemented;
• clarify contract terminology and standardize reporting requirements; and
• look for ways to eliminate or automate manual processes
While BKD provided management a discussion draft in April 2002, the report was
never finalized or released publicly. HEDFC management disagreed with most of
the observations and recommendations.
Previous management letters accompanying HEDFC’s financial audits in fiscal
years 1999 through 2002 noted issues related to management controls including
individual loan balances not reconciled to the general ledger, inadequate
documentation in loan files, out-dated policies and procedures manuals, and
inadequate separation of duties.
Our July 2001 performance audit also raised concerns about HEDFC’s lack of an
integrated management information system. We noted that HEDFC created
reports from the accounting system, at least two stand-alone databases, and several
stand-alone spreadsheets. Maintaining these systems required duplicate data entry,
increasing the risk of data errors. We didn’t make specific recommendations to
HEDFC, but recommended that the Housing Department develop procedures for
overseeing subrecipients, including guidance on validating reported progress
through on-site reviews.
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HEDFC’s financial condition has declined
HEDFC’s financial position is weak. Liquidity and cash flow coverage ratios
decreased while the corporation’s debt ratio increased between 2000 and 2002.
HEDFC’s cash position improved in 2003 with increased city funding, but cash flow
coverage was negative in three of the five years we reviewed – operations consumed
more cash than they generated. HEDFC experienced high interest expense relative to
net income in some years, and net income fluctuated. HEDFC’s general and
administrative expenses have been high and consistently exceeded budgets. These
ratios reflect that HEDFC is financially dependent upon the City and may be unable to
survive funding delays.
Ability to cover short-term needs declined since 2000. The quick ratio has
declined since 2000. Days cash on hand declined in 2002 but increased in 2003.
Liquidity ratios focus on whether an organization has enough cash and/or other
liquid resources to meet its obligations in the near term.
Exhibit 13. Liquidity Ratios Fiscal Years 1999-2003
1999 2000 2001 2002 2003
Quick 6.3 9.4 4.1 1.8 1.3
Days cash on 244 328 243 123 286
hand
Source: Audited financial statements.
Ability to cover long-term obligations has declined since 2000. HEDFC’s debt
ratio increased, primarily due to a $10 million line of credit with Fannie Mae to
finance development activities at Beacon Hill. HEDFC paid off the line of credit
in 2003 with Section 108 loan guarantee funds. HEDFC’s cash flow coverage has
decreased since 2000 and was negative in three of the five years we reviewed,
indicating that operations consumed more cash than they generated. HEDFC’s
times-interest-earned ratio shows large fluctuations, reflecting large fluctuations in
net income. The times-interest-earned ratio in 1999 was below 1.0, indicating that
not enough income was available to pay interest expenses. Leverage and coverage
ratios focus on whether an organization can meet its long-term obligations – the
debt ratio compares debt to total assets; cash flow coverage and times-interest-
earned ratios focus on the ability to make payments on debt. Jointly, these ratios
provide a picture of an organization’s solvency. Decreasing coverage ratios and
increasing debt indicate that HEDFC is financially weak and dependent upon the
City for funds.
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Exhibit 14. Leverage and Coverage Ratios Fiscal Years 1999-2003
1999 2000 2001 2002 2003
Debt .01 .01 .05 .10 .10
Times- 0.91 13.65 11.25 1.23 1.5
interest-
earned
Cash flow -3.8 3.3 -8.8 -12.8 1.7
coverage
Source: Audited financial statements.
HEDFC’s general and administrative expense ratio has been high but has
decreased as expenses have increased.
Exhibit 15. Administrative Expense Ratio Fiscal Years 1999-2003
1999 2000 2001 2002 2003
General and 0.56 0.70 0.31 0.17 0.15
administrative
expenses
Source: Audited financial statements .
HEDFC has exceeded its administrative budget by increasing amounts since fiscal
year 1999. HEDFC’s chief financial officer told us that they cover costs through
non-federal sources including fees, other grants, or lines of credit. The City has
held HEDFC’s funding for administration relatively constant in recent years.
Exhibit 16. Comparison of Budgeted to Actual Administrative Expenses
1999 2000 2001 2002 2003
Budgeted
Administrative 1,685,000 1,635,000 1,750,000 1,600,000 1,649,950
expense
Actual
Administrative 1,705,790 2,072,218 2,053,543 2,209,654 2,429,193
expense
Administrative
expense in 20,790 437,218 303,543 609,654 779,243
excess of budget
Source: Audited financial statements.
The City failed to meet affordable housing production goals
The City, HEDFC, and local community development corporations failed to meet
housing production goals for the year ending May 31, 2003. The system achieved
less than a third of its housing production goal and multi-family housing was not
completed. Single family houses took a long time to sell, once they were
complete.
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The City’s housing system achieved less than a third of its housing production
goals. The City’s contract with HEDFC for the fiscal year ending May 31, 2003,
established a goal of 190 "loans or units" of targeted rehabilitation of vacant
homes or new construction. According to HEDFC’s Single Family Housing
Production Report, the agency working with local CDCs completed 54 houses.
The report lists an additional 37 addresses where construction is underway; 20
addresses with a status of application/underwriting; 12 addresses with a status of
planning and development; 1 site acquisition; and 1 contractor selected.
As we reported in July 2001, the housing production report combines information
from prior years as well as the current year, preventing analysis of whether
subrecipients met the yearly contracted performance standards. All of the units
listed as sold or completed in 2003 were started in a prior period. However, even
counting all of the projects listed regardless of when they were started, the system
produced well below the goal of 190 units.
Exhibit 17. Number of Single Family Homes
Sold or Completed During 2002-03 Contract Year
Project Status Units
Sold/Closed 32
Sold 6
Sold-Under Foreclosure 5
Sold-Under Contract 1
Construction Completed 14
Total 58
Unduplicated 54
Source: Single Family Housing Production
Report June 1, 2002 through June 1, 2003
attached to Board minutes 6/19/03.
The number of days until sale is long. The houses are taking a long time to sell.
We selected a representative sample of 9 of the 54 houses reported as completed in
the year ending May 31, 2003. One of the houses has not yet sold, although a
certificate of occupancy was issued in November 2001. The median number of
days between when HEDFC approved the CDC’s application for financing and the
sale of the home was 466 days.8 The median number of days between when the
City issued a certificate of occupancy or final inspection and the sale of the home
was 293 days.
8
This figure excludes two of the nine addresses for which HEDFC could not provide an application for funding.
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Exhibit 18. Time to Produce and Sell a Sample of Homes
Days
Between
Application Days
Days Approved Between
Between And Certificate
Application Certificate Of
Approved Of Occupancy
Address Type of Project And Sale Occupanc And Sale
y
2012 Olive New Construction --9 --9 -3
4141 Tracy Rehabilitation 441 148 293
4409 Paseo New Construction 273 218 55
4415 Paseo New Construction 466 465 1
10
5325 Swope New Construction 528 -- --10
6200 Tracy Rehabilitation 492 113 379
7205 Askew New Construction --9 --9 308
3901 Forest Rehabilitation 221 --10 --10
4016 E 16th Terrace New Construction 144311 54111 90211
Sources: HEDFC project files; Jackson County Tax and Real Estate records, City Codes
Administration Department records.
Exhibit 19. These photos show two front views of 4016 E. 16th Terrace. This house has
not yet sold although a certificate of occupancy was issued in November 2001 (4/23/04).
Public funding per unit varied. The amount of public funding and appraised
values of the houses we sampled varied. One of the houses received no public
9
HEDFC was unable to provide an application for funding for our review.
10
City records did not show a certificate of occupancy or final inspection date.
11
This house has not sold, the figures are time elapsed through May 12, 2004.
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funding; the maximum was $81,462. The median public funding per unit was
$18,736. The ratio of direct public funding to appraised value varies significantly.
Exhibit 20. Ratio of Direct Public Funding to Appraised Value for a Sample of Homes
Ratio of Funding
Public Appraise to Appraised
Address Funding d Value Value
2012 Olive 6,557 118,000 $1.00:$18.00
4141 Tracy 81,462 43,329 $1.00:$0.53
4409 Paseo 19,893 102,000 $1.00:$5.13
4415 Paseo 20,453 103,000 $1.00:$5.04
5325 Swope 18,736 108,104 $1.00:$5.77
6200 Tracy 52,303 59,390 $1.00:$1.14
7205 Askew 17,673 92,000 $1.00:$5.21
3901 Forest 0 11,904 Not applicable
4016 E 16th Terrace 4,483 145,000 $1.00:$32.35
Source: HEDFC project, disbursement, and cash receipt files; Jackson County Tax and Real Estate
records.
Multi-family housing not completed. The City’s contract with HEDFC for the
fiscal year ending May 31, 2003, also called for 99 units (2 loans) of downtown
multi-family housing. We didn’t see any reports in the Board minutes that multi-
family housing was completed during the 2002-2003 contract year. HEDFC’s
president told us that they made the loans, but they can’t make the developer do
the work.
HEDFC met the target for number of home ownership assistance loans,
but not for rehabilitation loans
The City’s contract with HEDFC for the fiscal year ending May 31, 2003, set
performance goals of 120 home ownership assistance loans and 40 rehabilitation
loans. HEDFC made more home ownership assistance loans and fewer
rehabilitation loans than called for in the contract. HEDFC made 15 rehabilitation
loans and 134 home ownership assistance loans (118 HOME and 16 CBDG). The
CBDG loans were made to families/individuals with higher than 80 percent of the
median income. HEDFC increased the number of consumer loans closed in 2002-
03 over prior years.
Exhibit 21. Number of Loans Closed by Type and Contract Year, June1, 2000 – May 31,
2003
Contract CDBG HOME HOPE Rehab UDAG Total
Period
2000-01 29 68 1 10 5 113
2001-02 35 86 1 21 143
2002-03 16 118 15 149
Total 80 272 2 46 5 405
Source: Loans Closed June 1, 2000 through May 31, 2003 report provided by HEDFC.
Contract doesn’t define loan servicing performance goals. The City contracts
with HEDFC to service the portfolio of loans made with CDBG and HOME funds.
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HEDFC staff provides a monthly report to the Board on delinquent loan payments.
HEDFC’s overall default rate - measured as the percent of outstanding loans
delinquent for 90 days or more – was 7.4 percent in fiscal year 2003, which is
higher than the national average of about 2 percent for FHA mortgages. We
excluded HOME loans from the calculation because these loans are converted to
grants once the homeowner has remained in the home for an established period of
affordability. HOME loan recipients are only required to repay the loan if they
move or sell the home before the period of affordability is up. HEDFC’s default
rate on second mortgages was much higher than the overall rate. The average
monthly percent of second mortgage loans delinquent for 90 days or more was
18.6 percent in fiscal year 2003. The bulk of the delinquent second mortgage
accounts were 180 days or more delinquent.
Exhibit 22. Average Percent of Loans Delinquent June 2002 – May 2003
Number of Days Delinquent
Type of Loan 30 60 90 120 150 180 & Total
over 90+
Rehabilitation 5.15% 2.37% 0.92% 0.60% 0.72% 2.27% 4.51%
Second Mortgage 10.63% 3.25% 1.50% 0.69% 0.57% 15.83% 18.58%
Overall 6.28% 2.55% 1.04% 0.62% 0.69% 5.07% 7.42%
Source: Monthly Delinquency Reports June 2002 through May 2003.
Recommendations
We recommend that the City Manager:
3A Clearly define the packages of housing services the City plans to contract for
and develop a competitive process to award all housing contracts.
As we recommended in findings 1 and 2, the City Manager should develop clear
scopes of work, clear performance standards, and methods for monitoring
contractors’ performance. Once these processes are in place, the City should
not enter into contracts with HEDFC unless HEDFC demonstrates an ability to
perform the work and is selected through a competitive process.
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Objectives, Scope and Methodology
Our overall audit objective was to determine whether the Housing and Economic Development
Financial Corporation (HEDFC) is using grant funds efficiently and effectively. Our sub-
objectives were to determine the City's system for implementing housing policy; to determine
HEDFC's role in the City's system for implementing housing policy; to determine how well
HEDFC has carried out its role in the City's system for implementing housing policy; and to
determine if changes in the City's system for implementing housing policy could improve the
City's performance and ability to meet its housing goals.
To meet our audit objectives, we interviewed City and HEDFC staff and officials, representatives
from Community Development Corporations, and other contractors. We reviewed selected City
and HEDFC files, financial records and correspondence. We reviewed the City’s Consolidated
Housing and Community Development plans for the past five years, and reviewed contracts,
monitoring reports, accounting records, and payments. We also compiled performance data to
compare with other cities.
We performed audit work from September 2003 through April 2004. The audit covered the period
for HEDFC’s fiscal year 2003, or from June 1, 2002 through May 31, 2003. We conducted the
audit in accordance with generally accepted government auditing standards.
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INTERNAL CONTROLS
Internal Control is an integral component of an organization’s management that provides reasonable
assurance that the following objectives are being achieved:
• Effectiveness and efficiency of operations;
• Reliability of financial reporting; and
• Compliance with applicable laws and regulations.
Internal controls relate to management’s plans, methods, and procedures used to meet its mission,
goals, and objectives. Internal controls include the processes and procedures for planning,
organizing, directing, and controlling program operations, and the systems put in place for measuring,
reporting, and monitoring program performance.
Relevant Internal Controls
We determined the following management controls were relevant to our audit
objectives:
• The City's controls over spending of federal housing funds.
• HEDFC’s controls over personnel recruiting and training.
• HEDFC’s controls over loan marketing, origination, approval, and servicing.
• HEDFC’s controls over performance management and reporting.
• HEDFC’s controls over financial recording, management, and reporting.
• HEDFC’s controls over asset management and safeguarding.
• HEDFC’s controls over loan / grant approval.
We assessed the relevant controls identified above.
It is a significant weakness if internal controls do not provide reasonable assurance
that the process for planning, organizing, directing, and controlling program
operations will meet an organization’s objectives.
Significant Weaknesses
As noted in Finding 1, the City’s system for administering housing funds is
fragmented and overly complex.
As noted in Finding 2, the City has not clearly defined HEDFC's role in
implementing housing policy.
As detailed in Finding 3, the Housing and Economic Development Financial
Corporation (HEDFC) does not have adequate internal controls.
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Separate Communication of
Minor Deficiencies
No minor deficiencies were provided to the auditee.
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FOLLOW-UP ON PRIOR AUDITS
The HUD Office of Inspector General and the City Auditor have issued two previous
joint reports on Kansas City’s housing programs . The first, Special Report: Kansas
City Needs a Housing Policy (April 2000), assessed the City’s overall approach to
providing affordable housing. The second, Review of Subrecipient Selection,
Monitoring and Reporting (July 2001), evaluated the City’s methods for
administering HUD funds in accordance with applicable rules. The reports
recommended the City develop a housing policy – including strategies and goals,
develop mechanisms for gathering information on housing conditions, and
strengthen processes for selecting and monitoring subrecipients. As explained in
the body of this report, the conditions reported in those reports still exist.
We reviewed the BKD audit report dated April 12, 2002 and noted that HEDFC's
organizational structure lacks a cooperative team focus, and management has
failed to achieve a successful merger. Also, the report noted that after the merger
it appeared that many of the employees of RLC were made subordinate to
employees of HDCIC. Employees in the organization appeared to have lost sight
of why they are there and what the mission of the organization is.
We reviewed the NCCED report and noted that HEDFC's organizational structure
did not encourage communication between and among organizational units or
vertical integration of processes. The report described how each unit in the
organization appears to operate autonomously with little knowledge of what the
other units do or how the operation of one unit affects the operation of the other
with respect to processing applications or administering loans. Also, HEDFC's
mission is a combination of the missions RLC and HDCIC had before the merger.
These two missions were not the same. As a result, HEDFC's programs and
procedures tend to be relatively complicated.
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Appendix A
Practices in Other Cities
We reviewed procedures in several cities that HUD regional directors characterized as “models”
to identify practices that could improve the City's performance and ability to meet its housing
goals. Following are some examples of practices implemented by other cities that could be
beneficial to Kansas City.
Widespread input into needs assessment
The City of San Francisco has several committees that meet to discuss what areas of
the City have the greatest need for CDBG and HOME funds. The City then uses a
committee to determine what amount of money will be available for each area.
The City of Indianapolis determines housing needs by requesting Citizen
Participation through surveys and town meetings. The City prioritizes these needs
and reviews the five-year plan.
Request for proposals from all subrecipients
The City of San Francisco requests proposals from various Community
Development Corporations (CDCs) and holds public hearings before granting the
CDCs any spending authority.
The City of Indianapolis puts together selection criteria and advertises requests for
proposals. The staff reviews the proposals in teams of three and makes
recommendations to the Director who then sends them to the Mayor and City
Council for final approval. After a public comment period, they submit the
approved requests to HUD.
The City of Boston issues a request for proposal that meets the requirements for
both City applications as well as state applications for funding. The applicant
submits the one-stop application to the City, which in turn submits it to the state.
This process takes place twice per year; once for homeownership and once for
rental assistance. The City reviews the applications in house and scores each based
on pre-released scoring criteria. The application is then submitted to the state along
with the City's tentative housing commitments. They receive applications from both
for-profit and not-for-profit businesses, though most approvals go to CDCs.
Required performance monitoring for all subrecipients
In San Francisco, after receiving their funding, the CDCs are required to provide
annual budgets to the City for the length of their agreement (usually 50-75 years).
In Indianapolis, the City writes contracts yearly and requires project sponsor
training prior to disbursing funds. The contracts are performance based and not
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reimbursed until certain benchmarks are reached. The benchmarks are based on a
timeline to prevent the CDCs from lagging in drawing down funds and to keep
production on schedule. Indianapolis developed their own standards that must be
met. They require a minimum of two bids for all work performed in excess of
$2,000 before it will be reimbursed. If work comes in more than 10% higher or
lower than the budgeted estimate, the staff will inspect the work before payment is
made. Additionally, The City monitors each project at least once per year. The
monitoring process begins with a written notice sent two weeks in advance. They
then complete an entrance with the Director, do some file reviews, and then
complete an exit conference. They then follow-up with a letter for documentation
purposes.
Outsourcing by competitive bid
San Francisco outsources the management of its loan portfolio to an independent
company. They pay a nominal flat fee per loan per month. The independent
company handles the City's closings as well.
The City of Cleveland, puts their HOME funds up for bid yearly. Almost all of the
funds go to one agency every year. This agency has member groups that receive the
funds for long-term lease agreements. They fund long term lease periods for 15
years, when the tax credits expire. At this point, the renters take ownership. The
only compensation the independent agency gets is a small development fee that is
included in the City's administrative budget.
The City of Minneapolis outsources their residential finance program to an
independent company for administrative costs equal to approximately 10% of their
total budget. Additionally, Minneapolis has a sub-recipient agreement with another
agency to handle all of the mortgage foreclosures counseling and prevention
program for administrative costs equal to approximately 25% of their total budget.
This agreement calls for servicing a loan portfolio of 900 loans (as well as other
services) for an administration fee reimbursing actual expenses not to exceed a
certain dollar amount. This is the equivalent of a very nominal monthly fee per
loan. The contract contained very specific goals as well as detailed consequences if
the stated goals are not met.
Maintaining good relationships with related entities
The City of Boston has developed a relationship with various banks where if the
bank does the initial intake and the City helps with assistance of closing costs or
down payments, the buyer gets a 1% discount on their rate.
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Providing easy access to services for potential users
Additionally, the City of Boston has "Home Centers" in several spots all over the
City, targeting the needy areas that market the programs available to the lower
income eligibles. They do outreach such as attending community meetings,
providing information to libraries and other resource centers, etc. Before any
person receives assistance, they are required to go through an education program
where they receive a certificate of completion prior to applying for assistance.
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Appendix B
Schedule of Questioned Costs and Funds Put to Better Use
Recommendation Type of Questioned Cost Funds Put to
Number Ineligible 1/ Unsupported 2/ Unnecessary/Unreasonable3/ Better Use 4/
2A $900,000
2B $600,000
Totals $1,500,000
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.
2/ Unsupported costs are costs charged to a HUD-financed or insured program or activity
and eligibility cannot be determined at the time of the audit. The costs are not supported
by adequate documentation or there is a need for a legal or administrative determination
on the eligibility of the cost. Unsupported costs require a future decision by HUD
program officials. This decision, in addition to obtaining supporting documentation,
might involve a legal interpretation or clarification of Departmental policies and
procedures.
3/ Unnecessary/unreasonable costs are those, which are not generally recognized as
ordinary, prudent, relevant, and/or necessary within established practices.
Unreasonable costs exceed the costs that would be incurred by a prudent person in
conducting a competitive business.
4/ Funds To Be Put To Better Use are quantifiable savings that are anticipated to occur if
an OIG recommendation is implemented, resulting in a reduced expenditure in
subsequent periods for the activity in question.
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Appendix C
City Manager’s Comments and Auditor’s
Evaluation
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Auditor’s Evaluation of Auditee
The City Manager generally agreed with all audit recommendations. The City Manager’s
Office has formed a Citizen’s Task Force to develop a more specific housing policy and is
making significant changes to the City’s process for implementing that policy.
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Appendix D
HEDFC’s Comments and Auditor’s Evaluation
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See Note 1
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See Note 1
See Note 2
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See Note 3
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See Note 4
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See Note 5
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Auditor’s Evaluation of Auditee
The President and Chief Executive Officer of HEDFC recommended that all conclusions
and many of the recommendations of the audit report be disregarded. While we did not
address any recommendations to HEDFC, we did provide a draft audit report to HEDFC
management for review and comment since we discuss HEDFC’s role within the city’s housing
system as well as certain aspects of its performance. We did not request that they specifically
respond to the findings that deal directly with the City’s housing system (findings 1 and 2).
However, HEDFC provided extensive comments on those findings. In those comments, HEDFC
disagreed with most of the content of the findings and reflected a strong desire to see the City
maintain its program as it existed during our audit period. It is important to note that those
comments come from the perspective of the recipient of most of the city’s housing funds. If
implemented, the recommendations in this report will enable the City to exercise significantly
more control over its program, and its program participants, including HEDFC. As a program
participant, HEDFC has participated in Kansas City’s system for implementing housing programs
under annual contractual agreements, but has no authority to speak for the city. The City Manager
generally agreed with the findings and recommendations. We have included his response in
Appendix C.
Therefore, we focused our review on HEDFC’s response to the third finding, which deals with
HEDFC’s financial viability and performance. We looked for assertions of fact in HEDFC’s
response that contradict facts in our report. As such, we are not specifically responding to
assertions that our statements were inaccurate without explanation. We are also not responding to
assertions that our statements were inaccurate when there was also implicit acceptance (e.g.
where the response said that they would try to improve in this area).
For the most part, HEDFC’s response states that the findings are inaccurate and misleading, but
does not provide facts that contradict our report. We noted the following assertions that
contradict the facts in our report:
Note 1 We did see project budgets in our review of a sample of files. However, we
distinguish between individual project budgets and detailed annual program or
operating budgets. The project budgets do not cover a specified time-period and
the source of funds is not clear. We did not see any roll-up of individual project
budgets that would clearly identify the planned source and use of funds overall for
a given time period.
Note 2 Both HUD and the City (the parties with regulatory authority) cited the
commingling as a problem. HUD regulations require participating jurisdictions to
maintain separate accounts for CDBG and HOME trust funds. The city contract
defines these accounts as separate bank accounts (the definitions CDBG Program
Income Depository Account and HOME Trust Fund Account state that each is “a
single account, at a FDIC insured financial institution”). HEDFC does maintain
separate bank accounts for the different funds and in the instance described
deposited HOME funds into the CDBG account.
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Note 3 When we say HEDFC doesn’t market its programs to users, we mean all people
who are eligible for the programs. We agree that HEDFC’s participation in HUD
workshops would educate some eligible people about the programs. However, an
adequate marketing effort would ensure that as many eligible people as possible
know about the programs and how to participate in them. The fact that HEDFC
spent all of the money has no bearing on whether people eligible for the programs
know they exist.
HEDFC’s response says that the Chambers project was completed in April 2003.
Note 4
We say in our report that Board minutes did not provide information on multi-
family housing completed in contract year 2003. These two statements are not
contradictory. This point reinforces our conclusions that annual performance goals
are vague and it is hard to tell what the city is getting for its significant spending
on housing.
The annual contracts refer to HEDFC as a designated subrecipient, which is the
Note 5
term HUD uses to describe agencies, authorities, or organizations receiving funds
from the grantee to undertake eligible activities. The primary distinction between
a contractor and a subrecipient is the method used for selecting the agency –
contractors are selected through a competitive process. City staff told us that
HEDFC is not required to submit an application to receive funding. Staff told us
that in the past, HEDFC submitted "Pro Forma Statements" that described the
sources and uses of funds for activities planned during the year. We asked for and
reviewed an example pro forma statement – it is not a response to an RFP.
HEDFC’s President agreed that HEDFC is not required to submit an application to
receive funding but said that in the last couple of years HEDFC has done so.
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Appendix E
Kansas City, Missouri, Housing Survey Map
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Appendix F
Payments to HEDFC by Fund, Contract Year Paid, and Calendar Year Funds were Encumbered
Year Paid Calendar Year Funds Were Encumbered
HEDFC FUND
Contract Year <> 1996 1997 1998 1999 2000 2001 2002 2003 Total
1 Economic Development Initiative-HUD 1,775,329 1,775,329
Grant
1 HOME Investment Fund 21,400 21,400
1 HUD Section 108 Loan Fund 250,000 668,367 2,531,470 3,449,837
1 Community Development-26th Yr 989,096 989,096
1 Community Development-23rd 104,926 104,926
1 Community Development-24th 212,283 212,283
1 Community Development-25th 377,101 377,101
1 HOME Investment Fund 94 250,000 17,627 1,798,950 530,551 2,597,128
2 Economic Development Initiative-HUD 1,845,100 1,127,811 2,972,912
Grant
2 HUD Section 108 Loan Fund 2,130,060 4,371,980 397 6,502,437
2 Community Development-26th Yr 810,404 810,404
2 Community Development-27th Yr 26,544 859,254 885,798
2 Community Development-22nd 118,283 118,283
2 Community Development-23rd 720,379 455,627 447,000 1,623,006
2 Community Development-24th 648,873 500,000 1,148,873
2 Community Development-25th 66,542 66,542
2 HOME Investment Fund 94 1,770,453 2,364,789 4,135,242
3 Economic Development Initiative-HUD 3,670,576 837,096 4,507,672
Grant
3 HUD Section 108 Loan Fund 3,200,880 871,173 8,324,636 2,500,000 14,896,689
3 Community Development-27th Yr 750,500 750,500
3 Community Development-28th Yr 350,000 416,343 766,343
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3 Community Development-23rd 198,386 547,351 745,737
3 HOME Investment Fund 94 80,400 35,152 2,636,847 2,752,399
Total 600,000 250,000 12,460,589 1,659,122 11,225,983 14,957,007 4,956,695 3,600,541 2,500,000 52,209,937
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The City's Housing Program and the Role of the Housing Economic Development Financial Corporation, City of Kansas City, Missouri
Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-08-11.
Below is a raw (and likely hideous) rendition of the original report. (PDF)