oversight

Lower Manhattan Development Corporation, Community Development Block Grant Disaster Assistance Funds New York, New York

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-03-25.

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                   AUDIT REPORT




        Lower Manhattan Development Corporation
Community Development Block Grant Disaster Assistance Funds
                 New York, New York

                         2004-NY-1002

                         March 25, 2004



                       OFFICE OF AUDIT
                    New York/New Jersey Region




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                                                                  Issue Date
                                                                          March 25, 2004
                                                                 Audit Case Number
                                                                          2004-NY-1002




TO: Nelson R. Bregon, General Deputy Assistant Secretary for Community Planning and
                          Development, D


FROM: Alexander C. Malloy, Regional Inspector General for Audit, 2AGA

SUBJECT:       Community Development Block Grant Disaster Assistance Funds
               Lower Manhattan Development Corporation
               New York, New York


We are performing an on-going audit of the operations of the Lower Manhattan Development
Corporation (LMDC) pertaining to its administration of the Community Development Block Grant
(CDBG) Disaster Assistance Funds, which were provided to the State of New York as a result of
the September 11, 2001 terrorist attacks on the World Trade Center in New York City. The
objectives of the current review were to determine whether LMDC: (1) disbursed CDBG Disaster
Assistance Funds to eligible applicants in accordance with the HUD Approved Action Plans, (2)
implemented adequate monitoring efforts over the Residential Grant Program (RGP); and (3) has
a financial management system that adequately safeguards CDBG funds. In addition, we
determined whether LMDC adhered to its established policies and procedures while recertifying
participants of the RGP. The current review covered the period from April 1, 2003 to September
30, 2003. This report contains three findings with recommendations for corrective actions.

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

Should you or your staff have any questions, please contact Edgar Moore, Assistant Regional
Inspector General for Audit, at (212) 264-8000, extension 3976.




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2004-NY-1002              Page ii
Executive Summary
We are performing an on-going audit of the operations of the Lower Manhattan Development
Corporation (LMDC) pertaining to its administration of the Community Development Block Grant
(CDBG) Disaster Assistance Funds awarded to the State of New York following the terrorist
attacks on the World Trade Center in New York City. The objectives of the current review were to
determine whether LMDC: (1) disbursed CDBG Disaster Assistance Funds to eligible applicants
in accordance with the HUD Approved Action Plans, (2) implemented adequate monitoring
efforts over the RGP; and (3) has a financial management system in place that adequately
safeguards CDBG funds. In addition, we determined whether LMDC adhered to its established
recertification policies and procedures while recertifying participants of the RGP. This review is
the second in a series of reviews that the Office of Inspector General (OIG) plans to conduct of
LMDC’s administration of CDBG Disaster Assistance Funds. Currently, we plan to issue an audit
report every six months and include the results of each review in the Inspector General’s Semi-
Annual Report to Congress.

The results of our most recent review disclosed that LMDC generally disbursed the CDBG Disaster
Assistance Funds to eligible applicants in accordance with the HUD Approved Action Plans,
implemented adequate monitoring efforts over the RGP, has a financial management system that is
capable of adequately safeguarding the funds, and complied with its established recertification
polices and procedures while recertifying participants of the RGP. However, we noted processing
deficiencies in its Residential Grant Program (RGP) that still need to be resolved to further enhance
the efficiency of LMDC’s administration of the funds, and to prevent duplicate payments and other
related administrative deficiencies from occurring. In addition, LMDC needs to strengthen its
accounting controls by establishing and maintaining a receivable account in its General Ledger to
track and control collectible amounts owed to the RGP by grant recipients. Furthermore, our review
disclosed that HUD management should evaluate the reasonableness of LMDC’s personnel
practices that allow CDBG Disaster Assistance Funds to be used to pay employees for leave earned
and transferred from New York State Agencies, and the salary and fringe benefits of a part time
employee who does not report to an individual employed within the LMDC organizational
structure. These issues are summarized below and discussed in detail in the three findings, as well
as, in the Issues Needing Further Study and Consideration section of this report.


                               Our review disclosed that despite correcting processing deficiencies
   Processing                  in its RGP through its recertification process and its alternative
   deficiencies in the         supporting documentation requirements, LMDC still has some
   Residential Grant           processing deficiencies that need to be resolved. Specifically, during
   Program should be           our testing of a statistically selected sample of payments to new RGP
   resolved                    recipients, we found that LMDC was unable to provide adequate
                               documentation to fully support the eligibility of some grant
                               recipients. Furthermore, either the documentation supporting the
                               applicant’s eligibility was not obtained or was obtained, but not
                               scanned into the Optical Image Technology (OIT) System. As a
                               result, we concluded that grant payments totaling $86,050 are
                               questionable since they related to recipients with questionable
                               eligibility. These deficiencies are attributed to possible omissions by

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Executive Summary


                         the grant processors in obtaining all required documentation from
                         applicants, and/or possible failures to scan all pertinent documents
                         into the program administrator’s computerized processing system.

                         In addition, our review disclosed that LMDC continued to issue
   Duplicate payments
                         monthly duplicate grant payment checks either to the same
   under the
                         individual or to two individuals residing in the same housing unit.
   Residential Grant
                         Specifically, duplicate grant payment checks, totaling $5,850, were
   Program should        issued to eight (8) individuals because each individual was
   be recovered          approved to receive a grant check under two different identification
                         numbers. Furthermore, grant payments in the amount of $11,000
                         were issued to an individual who resides in a housing unit with
                         another individual who received payments for the same type of
                         grants. Thus, $16,850 of CDBG Disaster Assistance Funds was
                         improperly used. The duplication occurred because the processing
                         controls designed to prevent an individual and/or a housing unit
                         from being entered into the program’s computerized grant
                         processing system twice were flawed. However, LMDC and its
                         program administrator have instituted procedures to prevent the
                         monthly processing of payment checks, under its two-year grant
                         program, once a duplicate is identified.

                         Our review also disclosed weaknesses in LMDC’s accounting of
  Accounting controls    funds to be recovered from RGP grant recipients. Specifically, we
  over the recovery of   noted that LMDC has not established a receivable account in its
  funds should be        General Ledger to record the funds it expects to recover from grant
  strengthened           recipients who failed to comply with the RGP requirements, and/or
                         received grant payment for which they were not entitled. This
                         resulted from the fact that LMDC Officials believe that
                         maintaining a formal receivable account in its General Ledger is
                         not necessary because a Master Repayment List, which was
                         developed and maintained by an independent consultant, serves as
                         the control record for the amounts due to the program. Furthermore,
                         they believe that there is a high probability that most of the amounts
                         on the list will not be collected. However, we believe that the
                         amounts that are collectible should be periodically recorded on
                         LMDC formal accounting records; therefore, we further believe that
                         the absence of such records is a weakness in LMDC’s accounting
                         controls that could result in a misuse of RGP recoveries.
                         Furthermore, we believe that the establishment of a receivable
                         account for recoveries will strengthen LMDC’s accounting
                         procedures, and enhance LMDC’s accountability over the CDBG
                         Disaster Assistance Funds. At January 23, 2004, the Master
                         Repayment List reflected over $690,000 of RGP funds to be
                         recovered.

2004-NY-1002                         Page   iv
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                                                                  Executive Summary



                    Finally, the review disclosed two practices that warrant further
Issues needing      examination by HUD Management. These issues are discussed in
further study and   the “Issues Needing Further Study and Consideration” section of
consideration       the report and involve the use of CDBG Disaster Assistance Funds
                    to pay for: (1) annual leave accrued and transferred from various
                    New York State Departments and Institutions, and (2) the salary
                    and fringe benefits of a part-time employee who does not report to
                    a Department Head or supervisor employed within LMDC’s
                    organizational structure.

                    We recommend that HUD instruct LMDC and/or its program
Recommendations     administrator to obtain and maintain all missing documentation
                    that support the eligibility of all grant recipients, and continue
                    efforts to pursue reimbursement from ineligible recipients who
                    received overpayments, and/or duplicate payments. In addition,
                    recoveries received should be refunded to the CDBG Disaster
                    Assistance Fund. Lastly, we recommend that HUD direct LMDC
                    to establish a receivable account for all amounts it expects to
                    recover.

                    The results of our audit were discussed with LMDC officials during
Exit conference     the audit and at an exit conference held on March 04, 2004. LMDC
                    provided written comments to our draft report on March 12, 2004.
                    We included excerpts of the comments with the findings, and
                    provided the complete text of the comments in Appendix C of this
                    report.




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2004-NY-1002          Page   vi
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Table of Contents

Management Memorandum                                                      i



Executive Summary                                                     iii



Introduction                                                           1



Findings

     1. Processing Deficiencies in The Residential Grant
           Program Should be Resolved                                  7


     2. Duplicate Payments Under The Residential Grant Program
        Should be Recovered                                           13


     3. Accounting Controls Over The Recovery Of Funds Should
        be Strengthened                                               19



Management Controls                                                   23



Follow Up On Prior Audits                                             25



Issues Requiring Further Study And Consideration                      27



Appendices
   A. Schedule of Questioned Costs                                    31


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    B. Schedule of Programs under Partial Action Plans and          33
       Amounts Drawn Down as of 09/30/2003

    C. Auditee Comments                                             35

                          ____________________________________________

Abbreviations

ACS            Affiliated Computer Services
ACL            Audit Command Language
CFR            Code of Federal Regulations
CDBG           Community Development Block Grant
ESDC           Empire State Development Corporation
HOH ID         Head of Household Identification Number
HUD            U.S. Department of Housing and Urban Development
LMDC           Lower Manhattan Development Corporation
OIG            Office of Inspector General
OIT            Optical Image Technology
RGP            Residential Grant Program
TAS            Time and Attendance System




2004-NY-1002                     Page   viii
Introduction
The September 11, 2001 terrorist attacks on the World Trade Center in Lower Manhattan had an
immediate negative impact on the housing market in Lower Manhattan, which resulted in a
significant increase in vacancy rates. The residents of Lower Manhattan faced a number of
concerns regarding the effects of the tragedy such as quality of life issues, transportation issues
and the disruption caused by ongoing construction that will be necessary to rebuild Lower
Manhattan. In the aftermath of the terrorist attacks, Congress authorized HUD to provide the
State of New York with $3.483 billion of Community Development Block Grant (CDBG)
Disaster Assistance. Specifically, on November 5, 2001, the Office of Management and Budget
designated $700 million in CDBG funding for New York City out of the Emergency Response
Fund that Congress had appropriated.1 On January 10, 2002, Congress appropriated an additional
$2 billion for CDBG funding, earmarking at least $500 million to compensate small businesses,
nonprofit organizations, and individuals for their economic losses.2 Finally, on August 2, 2002,
Congress appropriated an additional $783 million of CDBG funding.3



                                  The Lower Manhattan Development Corporation (LMDC) was
    Congressional funding         created in December 2001, as a subsidiary of the Empire State
    to the State of New           Development Corporation (ESDC) to function as a joint city-state
    York for New York             development corporation. LMDC has been designated by the State
    City                          of New York to develop programs and distribute $2.783 billion of
                                  the $3.483 billion appropriated by Congress in the January 2002,
                                  and August 2002, Emergency Supplemental Acts. The Empire
                                  State Development Corp., the parent company of LMDC, is
                                  administering the remaining $700 million. A sixteen-member
                                  board of directors appointed equally by the Governor of New York
                                  State, and the Mayor of New York City, governs LMDC. The
                                  Chairman of the Board of Directors is Mr. John C. Whitehead and
                                  Mr. Kevin Rampe is the President.

    Approved Action               As of September 30, 2003, HUD had approved four of LMDC’s
    Plans                         Partial Action Plans and two Supplemental Partial Action Plans,
                                  which contained funding of $1,619,044,651. The programs

1
 2001 Emergency Supplemental Appropriations Act for Recovery from and Response to Terrorist Attacks on the
United States, Pub. L. 107-38, 115 Stat. 220, (2001).
2
 The Department of Defense and Emergency Supplemental Appropriations for Recovery From and Response to
Terrorist Attacks on the United States Act 2002(Emergency Supplemental Act 2002), Pub. L. 107-117, 115 Stat.
2336 (2002).
3
 The 2002 Supplemental Appropriations Act for Recovery From and Response to Terrorist Attacks on the United
States, Pub. L. 107-206.




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Introduction


                implemented under these four Partial Action Plans, and two
                Supplemental Partial Action Plans, along with the amounts drawn
                down by LMDC as of September 30, 2003 for each program, are
                shown in Appendix B.

                To meet the Congressional mandate to provide assistance to
                individuals as quickly as possible, LMDC began implementing
                Action Plan No. 1, immediately upon HUD’s approval. The
                Employment Training Assistance Program under Action Plan No.
                1 along with the programs in LMDC’s Action Plan Nos. 2, S1 and
                S2, are being administered by LMDC’s parent company, the
                Empire State Development Corporation (ESDC).

                During the current audit period, April 1, 2003 through September
                30, 2003, there was only one active program being administered by
                LMDC, “The Residential Grant Program (RGP)”. Accordingly, our
                audit efforts were concentrated on LMDC’s disbursement of funds
                to the RGP’s program administrator and other contractors,
                recipients of grants under the RGP, and administrative costs. The
                figures in Appendix B indicates that $143,857,980 in cumulative
                funds was drawn down and earmarked specifically for the RGP
                during the period ending September 30, 2003. However, it should
                be noted that only $133,356,771 of that amount relates to draw
                downs for grant recipients. The remaining $10,501,209 is
                associated with funds drawn down for the program administrator of
                the RGP, and other contractors that provided administrative
                services to the RGP. To obtain the actual amounts drawn down
                and reviewed under the RGP for the current period, we subtracted
                the amounts reviewed during our previous audit period from the
                cumulative amounts drawn down as of September 30, 2003, as
                follows:

                                                         Current Review
                               Cumulative @ As of        Period 4/01/2003
                                09/30/2003   03/31/2003 to 09/30/2003
               RGP Grants      $133,356,771 <$61,283,207>    $72,073,564
               RGP Contractors   10,501,209   <6,897,609>       3,603,600
                      Total    $143,857,980 <$68,180,816>    $75,677,164

                Because the amount authorized for a particular disbursement period
                is not disbursed until the subsequent month, the $72,073,564 shown
                above, which represents drawdowns for RGP Grants, includes
                $15,926,029 drawn in April 2003 for the March 2003 payment
                period. Note that this amount was reviewed and addressed in our
                prior report. In addition, $9,478,346 was drawn down in October

2004-NY-1002               Page   2
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2003 for the September 2003 payment period, which is not reflected
in the $72,073,564. Accordingly, actual drawdowns related to the
RGP for the current review period, April to September 2003,
amounted to $65,625,881, which was computed as follows:

Cumulative RGP Grants for the current period   $72,073,564
March 2003 RGP Grants disbursed in April 2003 <15, 926,029>
                               Sub Total        56,147,535
September 2003 RGP Grants disbursed
  in October 2003                             + 9,478,346
Actual RGP grant Draw Downs for the period
       April 1, 2003 to September 20, 2003     $65,625,881


LMDC ‘s Residential Grant Program

The Residential Grant Program (RGP) is designed to encourage
individuals to renew existing leases, sign new lease agreements or
purchase residential units in Lower Manhattan. The program
offers substantial financial incentives to offset the perceived and
real disadvantages of living in Lower Manhattan because of the
September 11, 2001 terrorist attacks. The RGP provides three
types of grants for which the criteria for eligibility along with the
amount of entitlement is dependent on the location of the
applicant’s residence within specific areas of Lower Manhattan,
characterized by LMDC as Zones 1, 2 and 3. The boundaries of
the three zones are described in Partial Action Plan No.1.
Descriptions of the three types of grants under the RGP are as
follows:

Two-Year Commitment-Based Grant

The two-year commitment-based grant is available to residents
who make a two-year or longer commitment to live in the areas of
Lower Manhattan designated as either Zone 1, or Zone 2. The
amount of the grant is based on 30% of the renter or owner’s
monthly housing costs or 50% of an owner’s housing costs if the
owner does not have a mortgage.

An applicant must occupy the housing unit for which he or she is
requesting the grant, and if a renter, he or she must had entered into
at least a two-year lease commencing on or before May 31, 2003,
and ending on or after May 31, 2003. This grant is a monthly
subsidy and is paid in equal amounts over the 24-month period that
the applicant is deemed eligible.

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               September 11, 2001 Residents Grant

               The September 11, 2001 grant is available to applicants who
               resided in any of the three zones prior to September 11, 2001, and
               continue to reside within one of the three zones through the date of
               the application and award.

               Family Grant

               The family grant is an incentive to families to make at least a one-
               year commitment to live in any of the three zones. To be eligible
               for this grant the resident must have at least one child under the age
               of 18 in the household, and must make a commitment to live in
               Lower Manhattan for at least one year.

               The maximum and minimum amount of each grant by zone is as
               follows:

                                                    Zone 1       Zone 2        Zone 3
                 Two Year Grant: Maximum           $12,000      $6,000      Not eligible
                                  Minimum           $4,000      $2,000      Not eligible
                 September 11, 2001 Grant           $1,000      $1,000      $1,000
                 Family Grant                       $1,500        $750        $750

               Each of the above grants is limited to one of each type of grant per
               eligible household unit.

               Administration of the RGP

               LMDC contracted with various entities to provide administrative
               services in connection with the RGP; thus, the costs of these
               administration contracts are considered as direct program costs.
               Specifically, LMDC contracted with Affiliated Computer Services
               (ACS) to be the program’s administrator and to perform the day-to-
               day processing of RGP grant applications. ACS is responsible for
               application intake, processing, approval and grant distribution.
               Under ACS’s procedures when an application is approved for
               payment the grant check is not disbursed until the next month;
               however, prior to disbursing the grant payments ACS obtains
               approval from LMDC.

               LMDC estimated that the total cost of the RGP would be $280.5
               million, and that 47,554 housing units would be affected (9,361


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                                                                      Introduction


                      housing units in Zone 1; 22,052 housing units in Zone 2; and
                      16,141 housing units in Zone 3).

                      During the current review, we tested LMDC’s program
Statistical samples   administrator’s compliance with the eligibility and recertification
                      requirements established for the RGP. We used statistical sampling
                      in our testing, as follows:

                      Eligibility Review:

                      From the 12,490 new grant recipients who were awarded grants
                      under the RGP for the payment periods between April 2003 and
                      September 2003; we selected a statistical sample of 272 recipients
                      for review. The 272 recipients selected and tested received RGP
                      disbursements of $1,409,172 for the above payment periods. We
                      reviewed the applications and the data in the files of each grant
                      recipient in our sample to determine whether LMDC followed its
                      RGP eligibility guidelines, policies, and procedures for processing,
                      approving and making payments to RGP recipients. We sent
                      confirmations to the 272 grant recipients requesting verification of
                      the type of grant received, their September 11, 2001 address (for
                      the September 11, 2001 grant recipients), children in the household
                      (for family grant recipients) and grant payments received for the
                      period. We also used the computer software program Audit
                      Command Language (ACL) to determine whether any individual or
                      housing unit received duplicate grant payments.

                      Recertification Review

                      Under the RGP, those recipients who received the two-year
                      commitment based grants are required to recertify their eligibility
                      for the grant every six months. From a universe of 17,699 grant
                      recipients, who received the two-year grants at least six months
                      prior to September 30, 2003, we selected two statistical samples
                      for review. The first sample of 140 grant recipients was selected
                      from those recipients who received their first two-year grant
                      payments on or before the payment period ended December 31,
                      2002. The second sample of 140 grant recipients was selected
                      from those recipients who received their first two-year grant
                      payments during the payment periods between January 31, 2003
                      and March 31, 2003. Accordingly, we selected a total of 280 grant
                      recipients who received their first two-year grant payments on or
                      before the payment period ended March 31, 2003. To examine
                      compliance with LMDC’s recertification procedures, we examined
                      whether (a) LMDC and or its program administrator provided

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Introduction


                      adequate notification to grant recipients that a recertification was
                      due; (b) grant payments were timely stopped if recipients did not
                      respond to the recertification notice; (c) supporting documentation
                      for continued eligibility was obtained and reviewed; and (d) grant
                      payments were properly adjusted based on the results of the
                      recertification.

                      In addition to the above, we tested $2,821,135 or approximately
                      33% of LMDC’s planning and administrative costs of $8,538,615
                      incurred during the period between April 1, 2003 and September
                      30, 2003.

                      As part of our review of the data within LMDC’s Disaster
                      Recovery Grant Reporting (DRGR) system and disbursement
                      database, we analyzed the systems to identify potential control
                      weaknesses. Although, we did not perform a detailed assessment of
                      the reliability of the data within these systems, we performed a
                      minimal level of testing to determine whether the data was reliable
                      for our purposes.

                      This report does not include our review of disbursements that were
                      made under the Employment Training Assistance programs, WTC
                      Business Recovery Grant (BRG) and the Large Firm Job Creation
                      and Retention programs. These programs are being administered
                      by ESDC, and are being reviewed by us during an on-going audit
                      of that corporation.

                      We performed our on-site work between September 2003 and
    Audit scope and
                      January 2004. The current review generally covered the period
    methodology
                      from April 1, 2003 through September 30, 2003, and where
                      appropriate was extended to cover periods prior and subsequent to
                      these dates.

                      Our on-going audit is being conducted in accordance with
                      Generally Accepted Government Auditing Standards.

                      We provided a copy of this report to the Auditee.




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                                                                                        Finding 1


      Processing Deficiencies in The Residential
         Grant Program Should be Resolved
Although LMDC has corrected processing deficiencies in the Residential Grant Program (RGP)
through its recertification process and its alternative supporting documentation requirements, our
review disclosed that some processing deficiencies still need to be resolved. Specifically, our testing
of a statistically selected sample of payments to RGP recipients disclosed that contrary to program
requirements, LMDC’s program administrator was unable to provide adequate documentation to
fully support the eligibility of some grant recipients. In addition, we found that the program
administrator either did not obtain or obtained but did not scan into its Optical Image Technology
(OIT) system the documentation that supports the eligibility of all applicants. Consequently, we
found that grant payments totaling $86,050 are questionable since they relate to recipients with
questionable eligibility. These deficiencies are attributed to possible omissions by grant processors
in obtaining all pertinent information from applicants, and to possible omissions by the program
administrator’s staff in scanning all pertinent documents into its OIT system. Thus, we recommend
that HUD instruct LMDC and/or its program administrator to continue to obtain and maintain all
missing documentation that supports the eligibility of all grant recipients. If missing documentation
cannot be obtained, we recommend that the amount of the associated grants be reimbursed to the
program. In addition, HUD should instruct LMDC and its program administrator to properly seek
reimbursement from those recipients who are ineligible.


                               LMDC Residential Grant Program (RGP)

    Background                 The Lower Manhattan Development Corporation’s (LMDC)
                               Residential Grant Program (RGP) provides financial incentives to
                               retain and attract residents to Lower Manhattan. Grant awards are
                               made based on an individual applicant’s eligibility and housing
                               unit certification. To qualify, residents must live in one of the
                               three eligible designated zones. Renters and owners meeting
                               certain criteria are eligible for three types of grants: Two-Year
                               Commitment-Based Grants; September 11, 2001 Residents Grants;
                               and Family Grants (See the Introduction section of this report for a
                               description of the types of grants). Only one of each type of grant is
                               awarded per housing unit.

                               LMDC contracted with Affiliated Computer Services (ACS), the
                               program administrator, to run the day-to-day operations of the
                               RGP; specifically, to take applications, obtain documentation,
                               approve applicants for the grant awards, and to compute and
                               disburse grant payments. The program administrator and LMDC’s
                               staff established specific guidelines for the program based on the
                               criteria for the RGP proposed in the HUD approved Partial Action

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Finding 1


                 Plan, dated June 7, 2002 (amended September 25, 2002), and
                 through its alternative supporting documents list and recertification
                 procedures instituted in May and July 2003 respectively.

                 For our audit period April 2003 through September 2003, LMDC
   Scope and
                 approved disbursements totaling $66,919,881. This amount
   methodology
                 represents $65,625,881 in HUD drawdowns for the above period
                 plus $1,294,000 in adjustments (voided checks, recouped grant
                 amounts, reissued checks, etc). Of this amount $43,516,509 was
                 disbursed to 12,490 new RGP recipients who were approved for
                 grant awards during the current period. From a universe of 12,490
                 new recipients, we selected a statistical sample to perform our audit
                 testing. Our sample was selected using a stratified variable plan and
                 dollar units. The statistical sample consisted of 272 new RGP
                 recipients, representing $1,409,172 in RGP disbursements made
                 between the period April and September 2003. We reviewed the
                 application and the supporting documents submitted by grant
                 recipients in our sample by utilizing the administrator’s
                 computerized systems (Optical Image Technology (OIT), and
                 Connexions), as well as, the hard copy files for certain recipients.
                 We determined whether LMDC and its program administrator
                 followed its eligibility processing criteria and the RGP guidelines.
                 We also sent confirmations to our sample RGP grant recipients to
                 verify the data on record with LMDC and its program administrator.

   Criteria      Title 24 of the Code of Federal Regulations (CFR) Part 570.489
                 (d)(1) provides that “ a state shall have fiscal and administrative
                 requirements for expending and accounting for all funds received
                 under this subpart. These requirements… must (i) be sufficiently
                 specific to ensure that funds received under this subpart are used in
                 compliance with all applicable statutory and regulatory provisions
                 and (ii) ensure that funds received under this subpart are only spent
                 for reasonable and necessary costs of operating programs under
                 this subpart.” Furthermore, Part 570.490 provides that “ the state
                 shall establish and maintain such records as may be necessary to
                 facilitate review and audit by HUD of the state’s administration of
                 CDBG funds…”

                 RGP requirements were established based on the HUD approved
                 Partial Action Plan No.1. These requirements are provided to all
                 applicants in an RGP application package, which includes specific
                 eligibility criteria as set forth in the “One Page Fact Sheet” and in the
                 “Supporting Documentation List”. RGP applicants are required to
                 submit specific documentation to substantiate program eligibility, an


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                                                                                  Finding 1


                        applicant’s identification, current address,         family    members
                        (children), and rental or housing costs.

                        The results of our review disclosed that despite new changes in
Processing              program requirements instituted by LMDC through its alternative
deficiencies found      supporting documentation, we still found processing deficiencies.
                        Specifically, the program administrator was still unable to provide
                        adequate documentation to fully support the eligibility of some
                        grant recipients. The results also disclosed that the program
                        administrator either did not obtain or obtained but did not scan into
                        its Optical Image Technology (OIT) system all documentation that
                        supports the eligibility of the applicants. The details are described
                        below:

                        Although LMDC and its program administrator improved the
Eligibility of 18
                        method of maintaining and retrieving hard copy files, they were not
recipients is not
                        able to provide us with all required documentation to support the
fully supported
                        eligibility of some grant recipients. The test results of our statistical
                        sample of 272 new RGP recipients disclosed that the eligibility of
                        18 recipients, who received grant payments totaling $86,050,
                        during the period between April 2003 and September 2003, is not
                        fully supported. Specifically, the review disclosed that neither the
                        program administrator’s OIT system nor the hardcopy files
                        contained sufficient documentation to fully support some
                        recipients’ eligibility for a RGP grant. Examples of supporting
                        documents that were missing included documents that identify the
                        recipient (e.g. identification), recorded deeds or executed leases,
                        co-op or condominium contracts, mortgage bills or payment
                        coupons, current rent statements or other valid receipts for rent
                        payments. Of the 18 cases in question, LMDC officials were still
                        researching our concerns for 9 cases, at the end of our audit
                        fieldwork. Therefore, the eligibility of the 18 grant recipients is
$86,050 in grant        questionable and the associated grant payments of $86,050 is
payments is             considered unsupported due to insufficient supporting
unsupported             documentation. As such, we believe that further reviews by
                        officials of LMDC, its program administrator, and HUD is needed.
                        We attribute this deficiency to possible omissions by the program
                        administrator’s grant processing staff in obtaining and scanning all
                        documents required to support an applicant’s eligibility and grant
                        computation into its OIT system.

                        In consulting with a statistician, we evaluated the results of our
Statistical             testing and projected them over the entire population of new RGP
evaluation of the       recipients. Our stratified variable sample consisted of 272 of a
results of our review   total population of 12,490 new RGP recipients, representing

                                      Page   9                                     2004-NY-1002


                                                                                      TOC
Finding 1


                    $1,409,172, of $43,516,509 in disbursements made during the
                    period of April through September 2003. Based on the results of
                    our sample, we estimated that the population contains
                    approximately 827 questionably supported grant awards, totaling
                    approximately $3,415,306. Note that our sample was selected
                    using a 95 percent confidence level and 3 percent materiality level.

                    Considering the significance of these projections, we believe that
                    LMDC and its program administrator need to take the necessary
                    steps to ensure that all documentation needed to support recipients’
                    eligibility is properly obtained and maintained, and/or scanned into
                    the program administrator’s OIT system. Accordingly, we believe
                    that LMDC and its program administrator should continue to
                    correct these deficiencies during the recertification process.


                    In response to the HUD OIG draft audit report, LMDC officials
   Auditee          contend that corrective actions have been taken on all items
   comments         identified in the report. LMDC officials conducted a full audit of
                    each of the 18 applications and, in some instances, made phone calls
                    to landlords to verify the residency for applicants missing one or
                    more pieces of documentation. LMDC officials stated that their
                    review confirmed that all 18 applicants cited in the OIG draft report
                    were fully eligible for the grants they were awarded. Specifically,
                    LMDC officials stated that of the 18 applicants cited, 8 were eligible
                    per LMDC’s procedures and the supporting documentation was
                    found in the scanned files at the time of the award. Of the remaining
                    10 applicants, some documents were not scanned or found in the
                    hard copy files during the HUD IG audit. However, in each instance,
                    LMDC officials stated that they located other documents in the files
                    that provided evidence of each applicant’s eligibility. LMDC has
                    and continues to obtain supporting documentation as required.



   OIG evaluation   Part of our review of the RGP Program focused on whether new
                    grant recipients, at the time of the grant award, provided supporting
   of Auditee       documents in accordance with the eligibility criteria set forth in
   comments         LMDC’s “One Page Fact Sheet” and “Supporting Documentation
                    List.” LMDC officials admit that some documents that support a
                    recipient’s eligibility were not scanned into the administrators
                    computer system or found in hardcopy files during our review. At
                    the conclusion of our fieldwork, the documentation in the files of
                    18 of the recipients in our sample did not fully support their
                    eligibility for a grant from the RGP; therefore, we disagree with
                    LMDC officials’ comment that the supporting documentation was

2004-NY-1002                    Page 10
                                                                              TOC
                                                                         Finding 1


                  found in scanned files at the time of the award for 8 of the 18
                  recipients cited in our draft report. Furthermore, the fact that
                  LMDC officials attempted to provide other alternative documents
                  that was not on LMDC’s Supporting Document List to justify a
                  grant recipient’s eligibility indicates that the information provided
                  was not adequate. LMDC officials and its program administrator
                  were kept fully abreast of all deficiencies uncovered during the
                  audit, and were given an opportunity to resolve some of the
                  missing documentation issues prior to the completion of our
                  fieldwork. However, at the conclusion of our fieldwork,
                  documentation to support the eligibility of 18 grant recipients was
                  still missing and/or incomplete.


Recommendations   We recommend that HUD, the General Deputy Assistant Secretary
                  for Community Planning and Development, require LMDC and/or
                  its program administrator to:

                  1A.    Continue to obtain and maintain all missing documents
                         needed to support the eligibility of the 18 grant recipients in
                         our sample whose eligibility has been questioned.

                  1B.    Obtain reimbursement from those recipients who are
                         determined to be ineligible for program assistance, and
                         reimburse to the RGP program any amount of the $86,050
                         that cannot be supported.

                  1C.    Continue to perform post reviews of the eligibility of grant
                         recipients and computations of grant amounts during the
                         recertification process to identify and correct processing
                         deficiencies to the extent deemed necessary.




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2004-NY-1002    Page 12
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                                                                                    Finding 2


     Duplicate Payments Under The Residential
       Grant Program Should be Recovered
During the current audit, we continued our review of grants awarded and paid under the
Residential Grant Program (RGP) by analyzing the payment data provided by the Lower
Manhattan Development Corporation (LMDC). Our review disclosed that contrary to program
requirements, LMDC continued to issue monthly duplicate grant payment checks either to the
same individual or to two individuals residing in the same housing unit. Specifically, our review
disclosed that duplicate grant payment checks, totaling $5,850, were issued to eight (8)
individuals because each individual was approved to receive a grant check under two different
identification numbers. It also disclosed one instance where grant payments in the amount of
$11,000 were issued to an individual who resides in a housing unit with another individual who
is receiving payments for the same type of grant. Thus, $16,850 of CDBG Disaster Assistance
Funds was improperly used. The duplication occurred because the processing controls designed
to prevent an individual and/or a housing unit from being entered into the program’s
computerized grant processing system twice were flawed. However, we noted that LMDC and its
program administrator have instituted procedures to prevent the monthly processing of payment
checks, under its two-year grant program, once a duplication is identified. Accordingly, we
recommend that LMDC continue its efforts to recover all duplicate payments and to return all
recovered funds to the CDBG Disaster Assistance Funds.



          Criteria           Title 24 of the Code of Federal Regulations (CFR) Part 570.489
                             (d)(1) provides that “ a state shall have fiscal and administrative
                             requirements for expending and accounting for all funds received
                             under this subpart. These requirements… must (i) be sufficiently
                             specific to ensure that funds received under this subpart are used in
                             compliance with all applicable statutory and regulatory provisions
                             and (ii) ensure that funds received under this subpart are only spent
                             for reasonable and necessary costs of operating programs under
                             this subpart.” Furthermore, Part 570.490 provides that “ the state
                             shall establish and maintain such records as may be necessary to
                             facilitate review and audit by HUD of the state’s administration of
                             CDBG funds…”

                             The RGP requirements are provided in the LMDC Partial Action
                             Plan, which was approved by HUD on June 7, 2002 and amended
                             September 25, 2002. The Action Plan provides for three types of
                             grants: (i) Two-Year Commitment-Based Grants, (ii) September
                             11, 2001 Residents Grants, and (iii) Family Grants. Eligibility for
                             the grants are restricted to zones specified by LMDC, and each
                             eligible housing unit is entitled to receive only one of each type of
                             grant as prescribed for that zone. The two-year commitment-based

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Finding 2


                        grants are paid over a period of 24 months while the September 11,
                        2001 grants and the Family grants are one-time payments.

                        Our audit disclosed that contrary to the above requirements,
   Program              LMDC’s program administrator approved two of the same grants
   administrator        either for the same individual or for two different individuals
   approved duplicate   residing in the same household unit. Using the analytical program,
   grant payments       Audit Command Language, (ACL), we performed an analysis of
                        the payment data furnished by the program administrator for the
                        payment periods from September 1, 2002 through September 30,
                        2003. The results of the analysis disclosed that eight individuals
                        received duplicate grant awards and payments because each
                        individual was assigned two different identification numbers. Also,
                        for one (1) instance there were two different individuals residing in
                        the same housing unit who received payments for the same type of
                        grant. Pursuant to program requirements, each eligible housing unit
                        is only entitled to one of each type of grant.

                        Officials of both LMDC and the program administrator informed
                        us that each RGP application that is received is provided a Head of
                        Household Identification (HOH ID) number in the program
                        administrator’s computer system to be used as a means of tracking
                        the progress of that application. We were also informed that there
                        are processing controls within the system that would prevent an
                        individual from being assigned more than one HOH ID number.
                        We were further informed that the system would prevent duplicate
                        grant awards to the same housing unit. The program
                        administrator’s procedures provide that the initial step in
                        processing an application, is for staff to search the computer
                        database for four unique identifiers: name, social security number,
                        address and date of birth to determine if the individual or
                        household unit already exists in the database. This search was to
                        prevent any duplication of individuals and/or household units.
                        However, the system only recognizes a duplication if all four of the
                        unique identifiers are present. Thus, allowing a duplication to
                        occur if one to three identifiers are the same.

   The program          Our review disclosed that duplicate grant payment checks, totaling
   administrator        $5,850, were processed and issued to eight individuals who were
   processed and        approved to receive payments under two different identification
   issued duplicate     numbers. We also noted one instance where payments totaling
   grant payments       $11,000 were made to an individual residing in a housing unit with
                        a different individual who is receiving monthly payments for the
                        same type of grant.        However, LMDC and its program


2004-NY-1002                       Page 14
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                                                                              Finding 2


                       administrator stopped making monthly payments to this individual
                       once they identified the duplication.

                       Apparently, the search performed by the program administrator’s
                       staff of the program’s computerized database did not identify the
                       individuals or the same address (housing unit) before creating
                       another HOH ID number in the system for those individuals. Thus, a
                       flaw in the program’s computerized processing system allowed
                       duplicate grant awards and payments to be generated for certain
                       individuals. These duplicate payments are ineligible costs that should
                       be removed from total program cost. Details pertaining to the
                       duplicate payments are as follows:


                             Original   Additional Duplicate       Duplicate
                             HOH ID     HOH ID * Period Paid        Amount
                              16938          244     12/31/2002 $ 1,950.40
                                90         11412     05/31/2003      149.73
                              63591        10690     12/31/2002-     249.99
                                                     02/28/2003
                               28237       40728     06/30/2003    1,750.00
                                82          6311     05/31/2003      250.00
                               26597       21882     04/30/2003      500.00
                               5431         7061     05/31/2003      500.00
                                676         1257     04/30/2003      500.00
                               18042       18047     02/28/2003- 11,000.00
                                                     03/31/2003
                                    Total Ineligible Amount      $16,850.12
                             * Relates to an applicant who already has an HOH
                               ID or two different individuals in the same
                               housing unit.

                       Although we identified the above duplicate payments during our
LMDC instituted        review, we noted that LMDC and its program administrator have
procedures to          instituted procedures to discontinue the processing of monthly
discontinue            checks under one of the HOH ID numbers once a duplication of
processing duplicate   monthly grant payments is identified. Specifically, the program
payment checks         administrator removes one of the HOH ID numbers from the
                       “Active” database file and places it in an “Inactive” database file;
                       thus preventing additional duplicate payment checks from being
                       processed.




                                    Page   15                                  2004-NY-1002


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Finding 2


  LMDC has               Furthermore, LMDC has undertaken action to recover duplicate
  undertaken action      payments by issuing demand letters to those individuals who
  to recover duplicate   received the duplicate payments. However, as of the date of the
  payments               completion of our fieldwork, LMDC had not received
                         reimbursements for the duplicate payments cited in this finding.



                         LMDC officials concur with the audit finding that duplicate
   Auditee
                         payments were made for the nine (9) cases identified in the audit.
   comments              However, LMDC officials contend that all of the cases had already
                         been discovered by the RGP Program Administrator through its
                         quality assurance process or by the RGP Compliance Auditor and
                         in all nine cases the duplicate identification number was
                         deactivated and frozen to prevent further processing of checks for
                         the duplicate identification number. For seven of the nine cases
                         identified by the HUD-OIG, the grant recipient was still owed
                         payments for the eligible two-year grant award and the RGP
                         Program Administrator made adjustments to the still active
                         identification number to recoup the ineligible payments that were
                         made to the duplicate identification numbers. For the other two
                         cases (HOH 18047 and HOH 40728), LMDC officials sent
                         recoupment letters to the grant recipients to recover the duplicate
                         payments resulting in the repayment of $11,000 by one of the
                         individuals.


   OIG evaluation        The actions taken by LMDC are responsive to our audit
                         recommendations. However, for the seven cases referred to above,
   of Auditee            LMDC officials did not make the adjustments until after the end of
   comments              our audit fieldwork. In addition, the $11,000 repayment did not
                         occur until after our audit exit conference.


                         We recommend that HUD, the General Deputy Assistant Secretary
  Recommendations        for Community Planning and Development:

                         2A.    Require LMDC to continue its efforts to recover the
                                $16,850 in duplicate payments cited in the finding and
                                return the money recovered to the CDBG Disaster
                                Assistance Funds.




2004-NY-1002                        Page 16
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                                                  Finding 2


2B.   Require LMDC to continue its procedures to discontinue the
      processing of monthly checks under one of the HOH ID
      numbers when a duplicate is identified.

2C.   Require LMDC and/or the program administrator to continue
      to perform quality control reviews designed to identify
      duplicate grant payments.




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2004-NY-1002    Page 18
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                                                                                     Finding 3


    Accounting Controls Over The Recovery of
         Funds Should be Strengthened
Our review disclosed a weakness in LMDC’s accounting controls pertaining to the recovery of
funds disbursed from the CDBG Disaster Assistance Funds. Specifically, we noted that LMDC has
not established a Receivable Account, within its accounting system, to record funds to be recovered
from grant recipients who did not comply with the established criteria for keeping a grant from the
RGP or who received grant payments for which they were not entitled. LMDC provided us with an
informal Master Repayment List, which showed in excess of $690,000 owed to the RGP; however,
its General Ledger does not contain a receivable account to which collectible amounts due the RGP
can be posted. LMDC officials believe that it is not necessary to establish a formal “Accounts
Receivable” in its General Ledger to record potential recoveries because the Master Repayment
List, which was developed and being maintained by an independent consultant, serves as the
control record for the amounts due to the program. Furthermore, they believe that there is a high
probability that most of the amounts on the list will not be collected. However, we believe that the
amounts that are collectible should be periodically recorded on LMDC formal accounting records,
therefore, we believe that the absence of such records is a weakness in LMDC’s accounting controls
that could result in a misuse of RGP recoveries. Furthermore, we believe that the establishment of a
receivable account for recoveries will strengthen the accounting procedures, and enhance LMDC’s
accountability over the CDBG Disaster Assistance Funds.



          Criteria            Title 24 of the Code of Federal Regulations (CFR) Part 570.489
                              (d)(1) provides that a State shall have fiscal and administrative
                              requirements for expending and accounting for all funds received
                              under this subpart. The requirements must: (i) Be sufficiently
                              specific to ensure that funds received are used in compliance with
                              all applicable statutory and regulatory provisions and (ii) Ensure
                              that funds received are only spent for reasonable and necessary
                              costs of operating programs. Part 570.490 provides in part that the
                              State shall establish and maintain such records as may be necessary
                              to facilitate review and audit by HUD of the state’s administration
                              of CDBG funds.

                              LMDC provided us with a Master Repayment List that shows the
    LMDC maintains a          recipients who either failed to comply with established criteria for
    Master Repayment          keeping a grant from the RGP, or were not entitled to receive a
    List                      grant from the RGP. The list is comprised of individuals who:
                              violated the commitments upon which the grant awards were
                              based, received duplicate grant payments, responded to LMDC’s
                              advertised RGP Amnesty Program, and received grants
                              fraudulently. As of January 23, 2004, the list showed a balance of
                              $691,582 as the amount owed to the RGP by individuals.

                                          Page 19                                     2004-NY-1002

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Finding 3


                          During our review of duplicate household units, we identified four
  Grant recipients
                          instances where the grant recipients broke their commitments to
  broke their
                          live in Lower Manhattan; however, the amounts paid to them were
  commitments
                          not included in the above balance. We believe that the payments
                          made to these recipients should be added to the balance. The
                          identification numbers and the potential amounts to be collected
                          from these recipients total $18,509.60, as detailed below:

                                  HOH ID#              Amount
                                 1572                  $6,000.00
                                 12703                 $5,500.00
                                 28519                 $5,500.00
                                 24958                 $1,509.60
                                                Total $18,509.60

                          We were informed by LMDC officials that an independent
   An independent         consultant developed and maintains the Master Repayment List
   consultant             based on RGP information on broken commitments, repayments,
   developed and          etc., that is retrieved from the program administrator’s computer
   maintains the          system. Repayments due from RGP recipients are sent primarily to
   Master Repayment       the program administrator who is responsible for scanning a copy
   List                   of the payments into the grant recipients’ file along with an
                          explanation detailing the reason for the repayment. The program
                          administrator then transmits the payments to LMDC’s Finance
                          Department who forwards the receipts to its Parent Company, the
   Repayments
                          Empire State Development Corporation (ESDC), to be deposited
   received are used to
                          into LMDC’s bank account. At the end of the month, when the
   reduce draw down
                          RGP grant payment roster is prepared, the amount to be drawn
   requests from HUD
                          down from HUD is reduced by the amount of the repayments
                          received.

                          LMDC officials believe that the current method of utilizing a
   LMDC officials         consultant to maintain the Master Repayment List provides
   believe the controls   adequate controls over the repayments because the consultant is
   over repayments are    independent of the program administrator. Furthermore, they
   adequate               believe that since there is adequate segregation of duties regarding
                          this list, and it is not probable that most of the amounts on the
                          Master Repayment list will be collected, there is no need to
                          establish a formal receivable account in the General Ledger.

                          However, we believe that LMDC should establish a formal
  LMDC should
                          Receivable account in its General Ledger. Since the Master
  establish a formal
                          Repayment List contains amounts related to grant recipients who:
  Receivable account in
                          have come forward under the amnesty program, moved within city
  its General Ledger
                          limits; were prosecuted, and were identified as recipients of

2004-NY-1002                         Page 20
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                                                                           Finding 3


                    duplicate payments etc., we believe that there is a probability of
                    collecting these amounts. Accordingly, we believe that a receivable
                    account should be established to reflect the amounts that have a
                    reasonable probability of being collected. Furthermore, we believe
                    that maintaining the accounts receivable in an “off-book” informal
                    manner makes the funds vulnerable to misappropriation since the
                    amounts owed to the program can be manipulated without leaving an
                    accounting trail. Also, after the RGP has ended, a formal receivable
                    account will ensure that funds still owed are tracked for collection.

                    As such, we believe that LMDC should strengthen its accounting
                    controls by establishing a formal Accounts Receivable in its
                    General Ledger to record amounts for which there is a reasonable
                    expectation for recovery. We believe this will enhance its
                    accountability over the CDBG Disaster Assistance Funds.


                    LMDC officials believe that its current processes and controls are
Auditee             adequate for safeguarding CDBG funds. However, they will
comments            undertake an additional review to determine if there are any benefits
                    to establishing a receivable account in their accounting records. In
                    addition, LMDC officials state that they agree with three (3) of the
                    four (4) additional cases that we identified as broken commitments,
                    and that they have added these three cases to the Master Repayment
                    List. However, LMDC officials state that the fourth case is not a
                    broken commitment because the grant recipient moved within an
                    eligible zone and therefore is not obligated to repay the grant.


                    To strengthen the accounting controls and enhance its
OIG evaluation      accountability over the CDBG Disaster Assistance Funds, we still
of Auditee          believe that LMDC should establish a receivable account in its
comments            General Ledger for the recovery of RGP funds. Regarding the
                    fourth case that LMDC maintains is not a broken commitment, we
                    believe that HUD management should review the files of this case
                    to ensure that the grant recipient still meets all requirements of the
                    RGP.


                    We recommend that HUD, General Deputy Assistant Secretary for
Recommendations Community Planning and Development, require LMDC to:

                    3A.    Establish a formal Receivable account in its accounting
                           records to track the collectable funds owed to the RGP.


                                 Page   21                                  2004-NY-1002

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Finding 3


               3B.   Add the appropriate amount of the $18,509.60 discussed in
                     the finding as funds associated with broken commitments
                     to its Master Repayment List. Also, any portion of this
                     amount that is reasonable expected to be collected should
                     be added to the receivable account when established.




2004-NY-1002            Page 22
                                                                   TOC
Management Controls
In planning and performing our audit, we considered the management controls of LMDC to
determine our auditing procedures, not to provide assurance on the controls. Management controls
include the plan of organization, methods and procedures adopted by management to ensure that its
goals are met. Management controls include the processes for planning, organizing, directing, and
controlling program operations. Management controls include the systems for measuring,
reporting, and monitoring program performance.


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

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

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

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

                             We assessed all the relevant controls identified above.

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

                             Our review disclosed weaknesses in the application and processing
   Weaknesses                controls of the Residential Grant Program (RGP), as well as, in the
                             controls over the accountability of potential recoveries due from
                             grant recipients (see Findings 1, 2, and 3).




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Follow Up On Prior Audits
We issued Audit Report number 2003-NY-1006 on September 30, 2003. The report contains two
audit findings with recommendations for corrective action. The findings involve processing
deficiencies in the RGP and duplicate payments made to grant recipients. All recommendations
related to these audit findings have been sustained and LMDC has implemented corrective actions
to close all except recommendation 2A. In this recommendation, LMDC was instructed to recover
$7,500 in duplicate payments that were disbursed to grant recipients. As of September 30, 2003,
only $3,000 of the $7,500 had been recovered.

Although corrective actions related to these findings have been implemented during the current
review period, we noted that there is still a need to resolve processing deficiencies and duplicate
payments within the RGP. Deficiencies noted during the current review are being reported on again
in this audit report under Findings 1 and 2.




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Issues Needing Further Study and Consideration
During our review, we noted two practices that warrant further examination by HUD Management.
These issues involve the use of CDBG Disaster Assistance Funds to pay for: (1) annual leave
accrued and transferred from various New York State Departments and Institutions, and (2) the
salary and fringe benefits of a part-time employee who does not report to a Department Head or
supervisor employed within LMDC’s organizational structure. The details are provided below:



                                Our review disclosed that LMDC has adopted a personnel policy
 A reciprocal agreement         established by its Parent Company, ESDC, which we believe
 between ESDC and the           requires further evaluation by HUD, in light of the fact that
 New York State                 LMDC is funded solely by HUD CDBG Disaster Assistance
 Department of Civil            Funds. Although neither LMDC nor ESDC is considered a
 Service allows employees       State Agency, there is a reciprocal agreement between ESDC
 to transfer leave and          and the New York State Department of Civil Service which
 service credits                allows employees to transfer leave and service credits between
                                positions from New York State Departments and Institutions to
                                ESDC/LMDC, and conversely. Accordingly, employees from
                                various New York State Agencies can transfer up to twenty
                                days of accrued annual leave. Furthermore, at the discretion of
                                the ESDC’s Chairman, the Parent Company offers an Annual
 The Annual Leave Cash-         Leave Cash-In Program that allows newly hired transferees to
 In/Cash-Out Programs           LMDC to receive cash payments in exchange for one or two
 allow employees to             weeks of accrued annual leave subject to several conditions.
 receive cash payments          One of which is that the annual leave "cashed-in" must not
 for annual leave               reduce the employee’s remaining accrued annual leave to less
 transferred into the           than two weeks (75 hours). In addition, LMDC has adopted
 Corporation                    ESDC’s Cash-Out Program wherein employees are paid a
                                maximum of 350 hours of accrued annual leave at termination.
                                It should be noted that although the New York State
                                Department of Civil Service has a policy regarding Cash-Outs,
                                no such policy exists concerning Cash-Ins.

                                During our review of LMDC’s salaries and fringe benefits
                                charged to planning and administrative expenses, and
                                reimbursed with HUD CDBG Disaster Assistance Funds, we
                                noted that several employees received cash payments in
                                exchange for annual leave earned and transferred from various
 $34,260 in HUD CDBG            New York State Agencies. Because this leave was earned prior
 Disaster Assistance            to the employees’ tenure with LMDC, and LMDC is financed
 Funds was used to pay          solely by the HUD grant, we question whether the payment of
 for annual leave               such expenses has relevance to the purpose for which the
 transferred from various       CDBG grant funds were intended. Moreover, our analysis
 New York State Agencies        revealed that during the period of February 2002 through
                                September 2003, LMDC made cash payments totaling $34,260

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Issues Needing Further Study and Consideration


                                to six employees in exchange for 707.25 hours of annual leave
                                earned and transferred from various State agencies. It is our
                                contention that compensation to employees should be
                                commensurate with the amount of time or effort actually
                                devoted to the CDBG Disaster Grant activities designed under
                                the Partial Action Plans to rebuild and revitalize Lower
                                Manhattan. Accordingly, we question whether these payments
                                should have been made with CDBG Disaster Assistance Funds.
                                As such, HUD should determine the reasonableness of
                                LMDC’s Cash-In/Cash-Out Programs, which allow transferees
                                to receive cash payments made with HUD CDBG Disaster
                                Assistance Funds in exchange for leave accrued outside of an
                                employee’s tenure with LMDC. If the policy is deemed
                                unreasonable, then HUD should direct LMDC to cease the
                                practice.

                                In addition to the above, our review disclosed that LMDC
 LMDC has a part-time           retains a part-time employee whose position is deemed
 employee who is not            questionable, given that he does not report to a Department
 assigned to a supervisor       Head or supervisor employed within the corporation’s
 employed within the            organizational structure. The employee serves in the capacity
 organizational structure       of Senior Advisor to the Chairman of the Board of Directors,
                                and performs tasks exclusively for the Chairman. Moreover,
                                since this employee is not assigned to a supervisor, does not
                                have office space, or a telephone number at LMDC’s site, and
                                works remotely from his private office, we are not assured that
                                his efforts benefit the organization as a whole. As such, we
                                question whether he should be on LMDC’s payroll, especially
                                in view of the fact that his timesheets are authorized by the
                                Chairman (a non-LMDC employee) and then faxed to the
                                Payroll Department for processing. Customarily, timesheets are
                                authorized by a Department Head or supervisor and submitted
                                through LMDC’s automated Time and Attendance System
                                (TAS).

                                As Senior Advisor to the Chairman, the employee is required to
                                work twenty-three hours per week including weekends. Based
                                upon discussions with the employee and his position
                                description, we learned that his responsibilities consist of
                                advising the Chairman on all matters concerning public
                                appearances and media related activities. As a result, we are
                                not certain that his duties further the overall mission of LMDC,
                                which is to rebuild and revitalize Lower Manhattan. In this
                                regard, we request that HUD evaluate the reasonableness and
                                necessity of this position and determine whether this employee

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              Issues Needing Further Study and Consideration


should be on LMDC’s payroll. The results of HUD’s
evaluation should be properly communicated to LMDC in
writing.




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                                                                             Appendix A
Schedule of Questioned Costs

                                  Type of Questioned Cost
            Finding
            Number         Ineligible 1/          Unsupported 2/
               1                                 $86,050
               2           $16,850
               3               -                       -
                 Totals    $16,850                $86,050


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 HUD-insured program or
     activity and eligibility cannot be determined at the time of 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 costs. 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.




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                                                                                                                   Appendix B


                                   Lower Manhattan Development Corporation
                                       CDBG Disaster Assistance Funds

             Schedule of Programs under Partial Action Plans and Amounts Drawn
                                   Down as of 09/30/2003

                            LMDC           LMDC           LMDC          LMDC           LMDC          LMDC
                            Partial        Partial        Partial       Partial        Partial       Partial                       Draw Downs
                          Action Plan    Action Plan    Action Plan   Action Plan    Action Plan   Action Plan                        As Of
PROGRAM                      No. 1          No. 2          No. 3         No. 4         No. S1        No. S2           Total          09/30/03
             Date HUD      06/07/ 2002
             Approved     & 09/25/2002    11/22/2002     06/14/2003     08/06/2003    09/15/2003     09/15/2003
Residential Grant
Program                   $280,500,000            $0             $0            $0             $0            $0     $280,500,000    $143,857,980
Employment Training
Assist.                   $ 10,000,000            $0             $0   ($9,500,000)            $0            $0         $500,000       $129,017
Design/ Install. Of
Interim Memorial             $350,000             $0             $0            $0             $0            $0         $350,000             $0
WTC Business
Recovery Grant
Program                            $0    $150,000,000            $0    $74,500,000            $0            $0     $224,500,000    $212,995,384
Small Firm Attraction
and Retention Grant                $0    $50,000,000             $0            $0             $0            $0      $50,000,000             $0
Large Firm Job                           $150,000,00
Creation & Retention               $0              0             $0            $0             $0            $0     $150,000,000     $4,000,000
Renovation of
Columbus Park
Pavilion                           $0             $0       $428,571            $0             $0            $0         $428,571             $0
History & Heritage
Downtown NYC
Marketing Initiative               $0             $0     $4,664,000            $0             $0            $0       $4,664,000             $0
Short Term Capital
Projects                           $0             $0             $0    $69,405,000            $0            $0      $69,405,000             $0
Long Term Planning                 $0             $0             $0    $13,894,848            $0            $0      $13,894,848             $0
Business Recovery
from
Disproportionate
Loss of Workforce                  $0             $0             $0            $0    $33,000,000            $0      $33,000,000             $0
Emergency and
Temporary Service                                                                                   $250,000,00
Response                           $0             $0             $0            $0             $0              0    $250,000,000             $0
Permanent Restoration
and Infrastructure
Improvements                       $0             $0             $0            $0             $0   $330,000,000    $330,000,000             $0
Service Interference               $0             $0             $0            $0             $0    $60,000,000     $60,000,000             $0
Construction for
Carrier Neutral Lateral
Conduits                           $0             $0             $0            $0             $0    $50,000,000     $50,000,000             $0
Redundant Fiber
Connections to Critical
Facilities                         $0             $0             $0            $0             $0    $20,000,000     $20,000,000             $0
Mandated
Infrastructure
Improvements                        $0           $0              $0             $0            $0    $25,000,000      $25,000,000             $0
Administration             $15,042,500           $0     $18,954,477     $7,805,255            $0    $15,000,000      $56,802,232    $16,044,976
              TOTALS      $305,892,500 $350,000,000     $24,047,048   $156,105,103   $33,000,000   $750,000,000   $1,619,044,651   $377,027,357




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                             Appendix C
Auditee Comments




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                                                                                  Appendix C
Auditee Comments
           LMDC Response to HUD OIG Draft Report for March 2004

LMDC has reviewed the draft audit report from the HUD Office of the Inspector General (IG).
This audit covered the period from April 2003 through September 2003 and reviewed whether
LMDC (1) disbursed CDBG Disaster Assistance Funds to eligible applicants in accordance with
the HUD Approved Action Plans, (2) implemented adequate monitoring efforts over the
Residential Grant Program (RGP); and (3) has a financial management system in place that
adequately safeguards CDBG funds. LMDC has taken corrective actions on all of the specific
RGP items identified in the report. Many of these items were identified by LMDC, its program
administrator, its compliance auditor, and/ or its internal auditor, and corrective actions on these
items began as early as August 2003. With regard to HUD’s recommendation to establish a
receivable account in our financial account system, LMDC believes that its current processes and
accounting controls are adequate to safeguard CDBG funds. However we will undertake an
additional review to determine whether it is appropriate to implement additional accounting or
administrative controls.

LMDC Residential Grant Program

Throughout the development and implementation of the RGP, LMDC has sought to maintain a
balance between establishing controls to ensure that only eligible applicants receive grants and
providing a flexible process so that all eligible applicants can receive grants. LMDC established
flexible documentation requirements to accommodate the varying types of housing arrangements
throughout Lower Manhattan, specifically low- and moderate-income specialized housing.
LMDC’s procedures include specific instructions on alternative methods to document eligibility
for low- and moderate-income residents in specialized housing. Of the 18 cited applicants, 8 are
eligible per LMDC’s procedures and the documentation found in the scanned file at the time of
award. LMDC found that for the remaining 10 applications some complete documentation was
not scanned or found in the hard copy files during the HUD IG audit. However, in each instance
the applicant’s eligibility was supported by other documentation in the file. LMDC controls are
working; preventative and detective controls throughout the process exist to ensure that grants
are made only to eligible applicants. LMDC has and continues to take corrective actions to
obtain supporting documentation as required for the 10 cases cited by the HUD IG.

Eight of the nine duplicate payments issues raised by the HUD IG are for the Two-Year
Commitment-Based Grant. This is the only grant which is calculated based on an applicant’s
housing costs. The Two-Year Commitment-Based Grant is subject to recertification every six
months. As a result, the housing costs for each of these applications may be reviewed up to four
times. Additionally, the payments for the Two-Year Commitment-Based Grants are paid out
over the two-year period of the lease with the last payment being made after the two-year lease
ends. This multiple review process and the payment of the full value of the grant over a period
of time minimizes the risk that miscalculations in grant awards made at the initial eligibility
determination will result in actual over payments or under payments to recipients over the full
two-year period. Of the nine duplicate payments identified by the HUD IG for their sample,
seven of the applicants had their monthly payments adjusted to ensure they receive the correct
amounts by the end of their two-year lease periods. Of the two remaining applicants one was the

2004-NY-1002                              Page 36
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                                                                                       Appendix C
roommate (HOH 18047) of a previously approved applicant living in the same housing unit
(HOH 18042). The roommate (18047) repaid LMDC $11, 000, the full amount of their
overpayment. In the other case, an applicant received a duplicate grant award for both the
September 11th and Family grants (HOH 28237/40728). LMDC has initiated the recoupment
process for this applicant.

LMDC has controls in place to minimize duplicate awards to one individual or to more than one
individual living in the same housing unit. LDMC has other detective controls in place to
identify potential duplicate applications and awards. After potential duplicate awards are
identified, LMDC investigates these cases, stops all payments, deactivates the duplicate
application in the system, and voids payments, if applicable. If any duplicate payments are
made, LMDC initiates the recoupment process to recover funds from the applicant.

LMDC has reviewed the complete HUD IG Draft Audit Report and taken necessary corrective
actions. LMDC will continually monitor, audit, and update procedures accordingly.

Development of Residential Grant Program Process and Controls

The development of the Residential Grant Program was structured around the following goals:
   • Ensure payments are made only to fully eligible applicants by establishing numerous and
       significant controls;
   • Ensure all eligible residents of Lower Manhattan can take advantage of the RGP by
       structuring the application process with flexibility to accommodate the various types of
       housing arrangements in Lower Manhattan, particularly the low- and moderate-income
       specialized housing found throughout the area;
   • Expedite the development of the program to provide benefits to residents of Lower
       Manhattan as quickly as possible; and
   • Ensure that all eligible residents and potential residents are aware of the program.

Throughout the development of the program, LMDC established numerous and significant
controls to minimize the risk of providing grants to ineligible applicants. A summary of these
controls is included in Appendix A.

Response to HUD IG Draft Report

LMDC has reviewed the draft audit report from the HUD Office of the Inspector General (IG).
This audit reviews LMDC Residential Grant Program (RGP) applications approved from April 1,
2003 through September 30, 2003. LMDC has taken corrective actions on all of the items
identified in the report. Many of these items were identified by LMDC, its program
administrator, its compliance auditor, and/ or its internal auditor, and corrective actions on these
items began as early as August 2003.

LMDC established numerous and significant controls to ensure that funds were disbursed to
eligible applicants in accordance with the HUD Approved Partial Action Plan in a timely manner
and that financial management systems existed to adequately safeguard the funds.


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Appendix C



Please find below the issues raised in the report and the corrective actions LMDC has taken. As
stated above, these issues were anticipated in the design of the program and secondary controls
were established to minimize risk.

Finding 1: Processing Deficiencies in the Residential Grant Program Should be Resolved

LMDC Review, Response, and Corrective Actions
HUD OIG indicate in the draft Report that LMDC was unable to provide all required
documentation to support the eligibility of some grant recipients. LMDC has reviewed the 18
applicants identified by HUD OIG.

Please find below LMDC’s review of the 18 files:
    • All of the 18 applicants cited were fully eligible for the grants they were awarded. Even
        though some documents for the cases cited in this report were illegible, not scanned or,
        in a few cases, unlocatable, other documents were on file to provide evidence of each
        applicant’s eligibility. Due to established controls requiring multiple forms of
        documentation, none of the 18 files listed in this report were ineligible. Consequently,
        the total value of approved applications that are not eligible is $0.
    • HUD IG reported that the proof of two-year housing cost for HOH 63546 that was
        scanned was illegible. The hard copy file was pulled and the proof of two-year housing
        cost was rescanned into the system on 1/23/04. This applicant is fully eligible.
    • HUD IG reported that the proof of identification for HOH 47030 and HOH 29810 that
        was scanned was illegible. The hard copy files were pulled and the identification was
        rescanned into the system on 1/23/04 for HOH 47030 and on 2/05/04 for HOH 29810.
        These applicants are fully eligible.
    • HUD IG reported that the proof of identification for HOH 24574 that was scanned was
        illegible. Applicant provided, in addition to illegible birth certificate, a copy of a Social
        Security Card and a letter from her social worker at the Co-Op Village Senior Care
        Center satisfying the requirements for proof of identification as delineated in
        "Acceptable Alternate Forms of Supporting Documentation”.1 This information was
        scanned on February 18, 2003. This applicant is fully eligible.
    • HUD IG reported that one applicant (HOH 28021) was missing proof of identification.
        Applicant provided valid proof of identification at time of application as well as after
        getting married. Applicant married between the time of initial application submission
        and date of approval. Proof of identification was scanned into the system under her
        married name on 05/19/03. Also, a State of New York Marriage License further
        clarifying this matter is on file.
    • HUD IG reported two applicants’ (HOH 45740 and HOH 53029) two-year housing costs
        were not for the correct time period. HOH 45740 was contacted and updated proof of
        two-year housing costs was provided. This was scanned into the system on 1/27/04.


1
    Acceptable Alternate Forms of Supporting Documentation revised 11/12/02


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                                                                                         Appendix C
           This applicant is fully eligible. HOH 53029 submitted updated proof of two-year
           housing costs at recertification. This information was scanned on 01/30/04.
       •   HUD IG reported one applicant (HOH 52589) was missing proof of two-year housing
           costs. Applicant supplied proof of two-year housing costs at recertification. This was
           scanned 03/02/04. This applicant is fully eligible.
       •   HUD IG reported two applicants (HOH 52809 and HOH 51912) were missing proof of
           current address. Applicants reside in an Interim Multiple Dwelling (IMD). Applicants
           residing in an IMD may provide 3 consecutive rent checks as alternative documentation
           in lieu of a two-year lease. 2 HOH 52809 submitted consecutive cancelled checks for
           rent payments from July 2002 through month of application March 2003. This was
           originally scanned 05/06/03. The hard copy was pulled and rescanned on 03/02/04.
           Applicant HOH 51912 was contacted and submitted consecutive cancelled checks for
           rent payments from July 2002 through month of application March 2003. This was
           scanned 3/10/04. These applicants are fully eligible.
       •   HUD IG reported one applicant (HOH 53297) did not have proof of two-year housing
           costs. Applicant provided at time of application proof of two-year housing costs in the
           form of a notarized letter from building’s management agent. This was scanned
           05/29/03. This applicant is fully eligible.
       •   HUD IG reported that one applicant (HOH 55791) did not have acceptable proof of
           current address. The applicant provided a HUD 1 Uniform Settlement Statement By
           reviewing additional supporting documentation, it can be determined that the applicant
           was the owner of and resided at the address at the time of application. This is supported
           because the applicant provided, in addition to the HUD 1, at the time of application the
           unit’s tax assessment and a mortgage statement clearly demonstrating ownership of the
           unit. Based on this review the applicant is fully eligible.
       •   HUD IG reported that one applicant (HOH 51839) was in rent arrears at the time of the
           eligibility decision. Per the RGP Rights and Responsibilities, LMDC reserves the right
           to deny, investigate, or terminate eligibility if an applicant or recipient is over 30 days
           late on rent, maintenance, mortgage, or common charges. This applicant’s current rent
           statement showed no more than two months rent due. LMDC has not and will not deny
           eligibility to applicants in this situation.3 At recertification this applicant provided an
           updated rent statement showing no arrears. This applicant is fully eligible.
       •   HUD reported that one applicant’s (HOH 47038) proof of identification was no longer
           valid at the time the eligibility decision was made. The applicant submitted an I-94 with
           an expiration date of 06/29/03 indicating legal residence through date of application
           (02/14/03) as proof of identification. LMDC is obtaining updated documentation.
       •   HUD IG reported that one applicant (HOH 51104) did not have support for the family
           grant, was missing the rent restriction form, and that two-year housing costs was not for
           the correct time period. During recertification applicant submitted a copy of the rent
           restriction form, copy of school letter verifying the child’s date of birth and current
           address. These documents were scanned into OIT on 02/06/04 and 02/19/04 respectively.
           LMDC is in the process of obtaining required legible rent stubs.


2
    LMDC RGP Doc 9 LOFT (Rev 0 - 9/06/02)
3
    RGP Rights & Responsibilities – LMDC.RGP.Doc.12 (Rev. 0 – 8/15/02)

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Appendix C
    •   Three applicants have all of the supporting documentation, but the supporting
        documentation may not be fully compliant. The three non-compliant pieces of
        documentation are an illegible birth certificate (HOH 52762), a rent statement indicating
        arrears in excess of thirty days (HOH 57514), and a section 8 landlord tenant agreement
        not for the correct time period (HOH 31717). Despite the missing documentation, after a
        full audit of these applications, it is determined that these applicants are fully eligible and
        their eligibility is supported by the other documentation in their files. LMDC is
        obtaining fully completed documentation from each of these applicants.

LMDC conducted a full audit of each of the 18 applications and, in some instances, made phone
calls to landlords to verify residency for applicants missing one or more pieces of
documentation. The results of the full audit confirmed that all applicants are eligible for the
grants received.

LMDC’s Response to HUD IG’s Statistical Evaluation

LMDC’s review confirms that none of the 18 recipients cited as having incomplete
documentation were ineligible at date of award.

HUD IG Recommendations Summary and Status

LMDC is complying fully with each of the recommendations by the HUD IG. The
recommendations and the status of LMDC’s compliance is as follows:

        HUD IG Recommendation 1A: Obtain and maintain all missing documents needed to
        support the eligibility of the 18 grant recipients whose eligibility has been questioned.
        Date started: December 19, 2003
        Target date complete: March 30, 2004
        Status: Thirteen of the 18 cases reported are complete and their eligibility is fully
        supported. Explanations of these cases and copies of their case files have been or will be
        provided to HUD IG.
        Of the five cases where documents were missing or incomplete, the Program
        Administrator is collecting or completing documentation. LMDC will ensure that the
        corrective action is completed promptly.

        HUD IG Recommendation 1B: Obtain reimbursement from those recipients who are
        determined to be ineligible for program assistance.
        Status: COMPLETE - LMDC completed a full audit of all case files to ensure that each
        applicant was fully eligible. The results of the audit indicate that all applicants were fully
        eligible at the time of award.

        HUD IG Recommendation 1C: Continue to perform post reviews of the eligibility of
        grant recipients and computations of grant amounts during the recertification process to
        identify and correct processing deficiencies to the extent deemed necessary.
        Status: ON-GOING


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                                                                                      Appendix C
Finding 2: Duplicate Payments Under The Residential Grant Program Should be
Recovered

LMDC Review, Response, and Corrective Actions

HUD IG reported nine individuals that were either approved to receive a grant check under a
different identification number or reside in the same household unit with a grant recipient. Each
of the nine cases identified by the HUD IG had already been discovered by the RGP Program
Administrator through its Quality Assurance (QA) process or by the Compliance Auditor. After
potential duplicate cases are identified through the QA process, the case is frozen and any checks
already processed are held and not released for payment. The case is researched to determine if
they are duplicates and as soon as research is complete, the duplicate case is deactivated and all
checks are voided. The non-duplicate case is unfrozen and checks are released. Of the nine
duplicate cases identified by the HUD IG, seven cases were discovered by the Program
Administrator prior to the applicant’s status end date and the grant payment were adjusted going
forward to preclude an overpayment of the applicant’s eligible grant award.

Please find below the status of the nine cases:
    • All of the nine duplicate cases were deactivated.
    • All checks processed where funds were not disbursed have been voided.
    • All funds drawn down from HUD where funds were not disbursed were returned to HUD
        as a credit in a subsequent drawdown.
    • Recoupment letters were sent to the two applicants that received duplicate payments for
        the total amount of $12,750.00.
    • One of the applicants that received duplicate payments (HOH 18047) has repaid LMDC
        the total value of the duplicate payment for a total amount of $11,000.00.
    • The $11,000.00 repaid to LMDC will be deposited in the LMDC RGP bank account and
        will be returned to HUD as a credit in a subsequent drawdown.
    • The total value of outstanding funds from the duplicate payments reported is $1,750.00.

       HUD IG Recommendation 2A: Recover the $16,850.00 in duplicate payments and
       return the recovered amount to the CDBG Disaster Assistance Fund.
       Date started: August 2003
       Target date complete: April 30, 2004
       Status: The Program Administrator has adjusted the grant payments of seven of the
       applicants going forward who received duplicate payments to preclude an overpayment of
       the applicant’s eligible grant award. LMDC had issued recoupment letters to the two
       remaining applicants receiving duplicate payments totaling $12,750. To date, one of the
       applicants has returned the funds totaling $11,000.00. The $11,000.00 will be returned to
       the CDBG Disaster Assistance Fund in the next month’s drawdown request. The total
       value of outstanding funds in $1,750.00.
.
       HUD IG Recommendation 2B: Continue to discontinue the processing of monthly
       checks under one of the HOH ID numbers when a duplicate is identified
       Status: ON-GOING


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Appendix C
       HUD IG Recommendation 2C: Continue to perform quality control reviews designed to
       identify duplicate grant payments.
       Status: ON-GOING

Finding 3. Accounting Controls Over The Recovery of Funds Should be Strengthened

LMDC Review, Response, and Corrective Actions

LMDC has reviewed HUD OIG’s finding related to accounting controls pertaining to the
recovery of funds disbursed from the CDBG Disaster Assistance Grant. HUD identified four
instances where it appeared that grant recipients broke their commitments, but the amounts paid
to them were not included in LMDC’s outstanding balance. LMDC has reviewed these cases
and three of these cases were on LMDC’s Master Repayment List since the end of January:

       HOH ID #                      Amount
       1572                         $6,000.00
       12703                        $5,500.00
       28519                        $5,500.00

For the other case on the HUD list of omissions (HOH 24958), it has been determined that this is
not a broken commitment, and funds are not owed to the RGP program since the grantee moved
within an eligible zone.

The report states that “Informal records could result in a misappropriation of funds”. There is
nothing informal about LMDC’s existing procedures and accounting controls. Procedures are
documented in LMDC’s Finance Department GAM and in the RGP operating procedures. A
Master Repayment List is maintained by an independent consultant that has no role in the
collection or receipt of funds. Changes to this list are made only through an established
procedure that requires approval of LMDC RGP staff for any reduction, and is subject to the
review of both LMDC’s Compliance Auditor and LMDC’s Internal Auditor. Actual collections
are handled by additional groups: the RGP program administrator (ACS), and LMDC’s
Investigations Department. Furthermore, all collections pass through LMDC’s Finance
Department which maintains a log of all collections, and monitors the return of these funds to the
Grant Program.

In addition, the report asserts that “maintaining the accounts receivable in an “off-book” manner
makes the company vulnerable to misuse because amounts owed to the program can be
manipulated without an accounting trail”. In reality, LMDC’s extensive separation of duties,
and multiple required approvals for changes to the Master Repayment List provide adequate
protection against manipulation. Although it is not part of LMDC’s General Ledger accounting
system, there are significant controls over entries and deletions to LMDC’s Master Repayment
List. As discussed above, the list is maintained by an independent consultant who has no role in
the receipt and handling of funds. No item can be removed from the list by the consultant
without approval of LMDC RGP staff. This approval is further subject to review by the RGP
Compliance Auditor and LMDC’s Internal Auditor. Furthermore, all collections are handled
separately by the RGP Program Administrator or the LMDC Investigations Department. These

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collections must pass through the LMDC Finance Department which maintains a log of all
collections, and monitors the return of these funds to the Grant Program. Finally LMDC RGP
staff maintain another log of repayments which is used to calculate reductions to monthly
drawdown amounts.

The report also asserts that because there is some probability of collecting some of the funds
owed to the RGP, a receivable account should be maintained on LMDC’s General Ledger.
LMDC believes that without an established history of collection efforts and repayments, there
would be no basis for estimating a receivable amount to be included in our financial statements.
We do not think it would be appropriate to treat this possibility of collections as a financial asset.

HUD OIG Recommendations Summary and Status

“Establish a formal Receivable account in its accounting records to track the probable funds
owed to the RGP”

LMDC will further review its processes, controls, and accounting practices to determine if there
is any benefit to establishing a receivable account in our accounting records. We will re-examine
all our existing practices, policies, recordkeeping, and internal controls related to amounts due to
the RGP program. We will then make a determination, in consultation with our independent
Auditor as to the appropriate steps to take.

However, if we determine that there is an internal control benefit to additional accounting
controls for receivables, we will most likely establish a reserve account to offset the full amount
of the receivable. Without an established history of collection efforts, it is not appropriate to
treat these receivables as an asset in our Financial Statements.

“Add the additional $18,509.60 in broken commitments identified in this finding to its Master
Repayment List. Also, any portion of this amount that is reasonable expected to be collected
should be added to the receivable account when established.”

LMDC has reviewed these cases and found that three of these cases were on LMDC’s Master
Repayment List:

       HOH ID #                        Amount
       1572                           $6,000.00
       12703                          $5,500.00
       28519                          $5,500.00

The other case on the HUD list of omissions (HOH 24958), is not a broken commitment, and
funds are not owed to the RGP program. The case came to the attention of LMDC because the
recipient’s mail was returned, and some checks had not been cashed. However it has since been
determined that the grantee moved within an eligible zone, and therefore was not obligated to
repay their grant.




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                                                                                  Appendix C
Auditee Comments
                                           Appendix A

LMDC RGP Controls
Throughout the development of the program, LMDC established numerous and significant
controls to minimize the risk of providing grants to ineligible applicants. Highlights of the
program and these controls follow.

Development of application package and approval process
   1. The application package was developed to ensure eligible applicants can receive grants
      while minimizing risk of fraudulent or ineligible applicants receiving grants. The RGP
      application requires multiple forms of supporting documentation to verify identity,
      address, residency, two-year housing costs, age and address of child, and September 11,
      2001 residency.1

    2. Lower Manhattan is an area with a considerable number of varying rental and home
       ownership options. These include Mitchell-Lama low- and moderate- income rentals and
       cooperative apartments managed by NYC’s Department of Housing and Urban
       Development and the NYS Division of Housing and Community Renewal, rent stabilized
       apartments and rent controlled apartments regulated by the NYS Division of Housing and
       Community Renewal, New York City Housing Authority affordable housing, loft
       apartments governed by the Loft Control Board, co-operative apartments and
       condominiums, apartments with rents subject to rent regulation by legal agreement, low-
       and moderate- income housing in 80/20 buildings, and apartments subsidized by other
       programs including Section 8 and the Senior Citizen’s Rent Increase Exemption Program
       (SCRIE). LMDC and the Program Administrator met with each of these organizations
       during the design of the program and reviewed the various types of housing agreements
       that exist between tenants, owners, landlords, and managing agencies. LMDC then
       developed the procedures and documentation requirements to ensure that residents of
       each type of housing could participate in the Residential Grant Program. LMDC issued
       specific instructions pertaining to many of these types of housing providing alternative
       methods to document residency and trained its eligibility specialists on the multiple types
       of documentation they would receive.2

    3. In developing the application package including the supporting documentation
       requirements, LMDC implemented many controls including requiring copies of both
       sides of cancelled checks; the requirement that the applicant must be named on the lease
       or deed; the requirement that all approval letters and checks and monthly EFT statements
       will only be sent to the address on the lease or deed; and the requirement that original
       utility bills are required to verify current residence. 3



1
  LMDC.RGP.Doc 9 (Rev 1 – 11/17/02)
2
  LMDC.RGP.Doc 9 NYCHA (Rev 1 – 9/3/02); LMDC.RGP.Doc 9 LOFT (Rev 0 – 9/6/02); and LMDC Residential
Grant Program - Program Manual, 4.3 Special Case Housing Policy (Version 1, October 2002)
3
  LMDC.RGP.Doc 9 (Rev 1 – 11/17/02)

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                                                                                                  Appendix C
    4. The Residential Grant Program application requires multiple forms of documentation to
       verify housing costs including a filled out application with certifications by the applicant
       as to accuracy, proof of current address including leases or deeds, and proof of two-year
       housing costs including copies of both sides of cancelled checks and/or current rent
       statement.4

Recertification process every six months for Two-Year Commitment-Based Grants
   5. The Two-Year Commitment-Based Grants require recertification every six months and
       resubmission and reevaluation of documentation verifying current residence and proof of
       two-year housing costs.5

Building Eligibility System
   6. LMDC worked with New York City’s Department of Buildings, Department of Housing
       Preservation and Development, Department of City Planning, Department of Finance,
       Fire Department of New York, New York City Loft Board, New York City Housing
       Authority, and the New York State Division of Housing and Community Renewal, to
       create a comprehensive database of the approximately 2,000 residential buildings in
       Lower Manhattan matching applications in all three zones with the buildings’ legal
       residential and health and safety status. The system completes a check of the street
       address and unit number prior to approval of an application to ensure that the address is a
       valid address and an eligible building.6

Development of the automated RGP Application and Payment System
   7. LMDC and its Program Administrator created the automated RGP Application and
      Payment System. All of the information provided by the applicant through their
      application and supporting documentation is entered in the system. The RGP Application
      and Payment System validates and calculates benefits based on the information
      provided.7

    8. The RGP Application and Payment System has extensive business rules to minimize data
       entry errors, ensure application completion, and to ensure that grants are calculated
       accurately.8

    9. The program administrator and the program delivery agent complete application intake
       by filling out the electronic application form in the RGP Application and Payment
       System in its entirety for the applicable grants, imaging all required documentation for a




4
  LMDC.RGP.Form.1 (Rev 0 – 8/15/02) and LMDC.RGP.Doc 9 (Rev 1 – 11/17/02)
5
  LMDC Residential Grant Program - Program Manual, 7.0 Recertification Policy, Section 7.1 (Version 1, July
2003)
6
  LMDC Building Eligibility System, Appendix B – Data Policies and Procedures (9/11/2003)
7
  LMDC Residential Grant Program - Program Manual, 5.0 Grant Distribution Policy, Section 5.1.1 (Version 2,
September 2003)
8
  Detailed System Requirement, Revised 8/8/02

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Appendix C
        complete application, confirming that the application is complete,9 and certifying
        application completion in the RGP Application and Payment System.
    10. A second review is done prior to application approval. The Program Administrator
        verifies eligibility of all complete applications. After eligibility verification, the Program
        Administrator processes eligibility through the automated system.10 All grant
        calculations are completed by the automated system.11 The Program Administrator
        verifies the results of the eligibility processing.12 All denials are reviewed and approved
        at a higher level.

    11. LMDC and its Program Administrator created detailed instructions on application data
        entry, reviewing documentation, eligibility review, and eligibility processing.13 All
        individuals processing applications attended comprehensive training.

    12. The RGP Application and Payment System completes a system check of the street
        address and unit number prior to approval of an application to ensure that a prior
        application for that grant has not been approved.14

    13. LMDC required the Program Administrator to provide a document imaging system. The
        Program Administrator provided an Optical Image Technology (OIT) system. This
        allows all users of the RGP system including the two community offices, the Program
        Administrators grant processing office, LMDC, and all monitors and auditors to access
        and review files at the desktop. The hard copy files are also retained.

Monitoring and auditing
  14. LMDC hired a compliance auditor, Ernst and Young, specifically for the Residential
      Grant Program to assist LMDC in minimizing the risk of loss from fraud while allowing
      for the prompt payment of valid grants.15 The Compliance Auditor reviewed LMDC’s
      application package and application review and approval process and made
      recommendations to ensure adequate controls were in place.



9
  LMDC Residential Grant Program - Program Manual, 2.5 Mail In Application Policy, Section 2.5.3 (Version 1,
August 2002); LMDC Residential Grant Program - Program Manual, Attachment 4C – Eligibility Review Procedure
(Rev. 1- 10-10-02); and LMDC Residential Grant Program - Program Manual, Attachment 4D – Process Eligibility
Procedure (Rev. 0 – 9-26-02)
10
   LMDC Residential Grant Program - Program Manual, Attachment 4D – Process Eligibility Procedure (Rev. 0 – 9-
26-02)
11
   LMDC Residential Grant Program - Program Manual, 5.0 Grant Distribution Policy, Section 5.1.1 (Version 2,
September 2003)
12
   LMDC Residential Grant Program - Program Manual, Attachments 4D – Process Eligibility Procedure (Rev. 0 –
9-26-02)
13
   LMDC Residential Grant Program - Program Manual, Attachment 4A – Application Data Entry Procedures (10-
31-02.doc); LMDC Residential Grant Program - Program Manual, Attachment 4B – Current Address Procedures
(Rev.1 – 10-10-02); LMDC Residential Grant Program - Program Manual, Attachment 4C – Eligibility Review
Procedure (Rev. 1- 10-10-02); and LMDC Residential Grant Program - Program Manual, Attachment 4D – Process
Eligibility Procedure (Rev. 0 – 9-26-02)
14
   Detailed System Requirement, Revised 8/8/02
15
   Ernst & Young Compliance Auditor Contract, LMDC Contract No. F40950

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                                                                                              Appendix C
     15. The Compliance Auditor developed and implemented a plan for pre- and post-eligibility
         verification audits of applications, recertifications, and payments at levels established by
         the audit plan.16 The Compliance Auditor conducted full and partial audits of
         applications for inaccurate, false, or fraudulent information and documentation. The
         Compliance Auditor conducts spot visits to verify initial and continuing eligibility of
         applicants. The Compliance Auditor submitted “pretext” applications as a test of the
         eligibility validation process, and particularly of the eligibility specialists’ ability to spot
         errors, omissions, and intentional misrepresentations.

     16. LMDC, its program administrator, and its Compliance Auditor completed an extensive
         testing process of the RGP Application and Payment System to ensure that the system
         calculates grant amounts correctly based on the information entered in the system.17

     17. In addition to the system testing, the first round of grant approvals included a substantial
         quality assurance and auditing component to ensure accuracy of the application decisions
         and grants distributed. This review began at the supervisory level, including the
         implementation managers and the quality assurance team of the program administrator,
         additional monitoring and review by LMDC, and review by the compliance auditor team
         of Ernst and Young. 18

     18. LMDC’s quality assurance process for the first eight months of the program included a
         comparison of housing costs, building zone, and grant amounts awarded to ensure that
         grants were calculated correctly by the system and to identify issues for review by the
         Program Administrator. Issues found during this process resulted in the correction of
         specific applications, if required, additional training on issues found, and the creation of
         quality assurance reports to focus in on specific issues.19

     19. Numerous Quality Assurance (QA) Reports are run regularly to check for duplicate
         applications and inconsistent and illogical data entry. Monthly Quality Assurance (QA)
         Reports are generated and reviewed when payments are authorized including reports for
         duplicate social security number, and duplicate date of birth with the same street
         address.20




16
   LMDC Residential Grant Program - Program Manual, 5.0 Grant Distribution Policy, Appendix 5B
17
   LMDC RGP Application and Payment System Testing Results
18
   LMDC.RGP.QA Form 2 (Rev. 0 – 9/19/02)
19
   LMDC RGP Grant Distribution Files, Export/Enrollment Comparison, September 2002 – April 2003
20
   LMDC RGP Grant Distribution Files, QA/QC Reports

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