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 2004-09-15.

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

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                   AUDIT REPORT




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

                          2004-NY-1004

                       September 15, 2004



                    OFFICE OF AUDIT
                 New York/New Jersey Region


                                                             TOC
                                                                  Issue Date
                                                                          September 15, 2004
                                                                 Audit Case Number
                                                                          2004-NY-1004




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 Lower Manhattan Development Corporation’s
(LMDC) 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
grant recipients in accordance with the guidelines established under the United States
Department of Housing and Urban Development (HUD) approved Action Plans, (2)
implemented adequate procedures for monitoring the programs financed with CDBG funds; and
(3) has a financial management system in place that adequately safeguards funds. The current
review covered the period from October 1, 2003 to March 31, 2004. This report contains one
finding 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, and/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) 264-4174.




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                                           Page i                               2004-NY-1004
Management Memorandum




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2004-NY-1004              Page ii
Executive Summary
We are performing an on-going audit of the Lower Manhattan Development Corporation’s
(LMDC) 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 review were to determine whether LMDC (1) disbursed
CDBG Disaster Assistance Funds to eligible grant recipients in accordance with the guidelines
established under the United States Department of Housing and Urban Development (HUD)
approved Action Plans, (2) implemented adequate procedures for monitoring the programs
financed with CDBG funds, and (3) has a financial management system in place that adequately
safeguards funds. This review is the third in a series of reviews that the Office of Inspector
General (OIG) plans to conduct of LMDC’s administration of the CDBG Disaster Assistance
Funds. We plan to issue an audit report every six months and include the results of each review in
the Inspector General’s Semiannual Report to Congress.

The results of our review disclosed that LMDC generally disbursed the CDBG Disaster Assistance
Funds to eligible applicants in accordance with the HUD approved Action Plans, adequately
monitored the programs included in the HUD approved Action Plans, and has a financial
management system capable of adequately safeguarding the funds. Our review did not disclose any
exceptions regarding grant disbursements under the Disproportionate Loss of Workforce or the
Utility Restoration and Infrastructure Rebuilding Programs. However, we noted processing
deficiencies in the Employment Training Assistance Program (ETAP) that need to be resolved to
enhance the efficiency of LMDC’s administration of the funds and prevent other related
administrative deficiencies from occurring. These issues are summarized below and discussed in
detail in the finding.



                              Our review disclosed certain processing deficiencies in the
Processing deficiencies
                              Employment Training and Assistance Program (ETAP) that need
in the Employment
                              to be corrected to enhance the efficiency of the program. We found
Training Assistance
                              that contrary to the program’s application instructions and program
Program need to be
                              guidelines the program adminsitrator approved and disbursed grant
resolved
                              payments as reimbursement for training costs to businesses without
                              obtaining adequate supporting documentation. This occurred
                              because the grant processor failed to follow program guidelines.
                              As a consequence, supporting documentation that training costs
                              reimbursed with HUD CDBG Disaster Assistance Funds were
                              necessary, reasonable, and consistent with the stated goals of
                              participating businesses’ approved training projects was not
                              available for review. Thus, we consider the training costs
                              reviewed, totaling $87,394, unsupported pending an eligibility
                              determination by HUD.

                              We recommend that HUD instruct LMDC and/or its program
                              administrator to obtain and maintain all missing documentation
 Recommendations
                              that support the grantee training costs charged to the ETAP, and

                                          Page iii                           2004-NY-1004

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Executive Summary


                    pursue reimbursement from those grant recipients who cannot
                    support their costs. All recoveries should be refunded to the
                    CDBG Disaster Assistance Fund.

                    The results of our audit were discussed with officials of LMDC and
 Exit conference    its program administrator during the audit and at an exit conference
                    on August 31, 2004. LMDC provided written comments to our draft
                    report on September 3, 2004. We included excerpts of the comments
                    with the finding and provided the complete text of the comments in
                    Appendix B of this report.




2004-NY-1004                    Page   iv
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Table of Contents

Management Memorandum                                                  i



Executive Summary                                                    iii



Introduction                                                          1


Finding

     Processing Deficiencies in the Employment Training              7
     Assistance Program Need to be Resolved


Management Controls                                                  13


Follow Up On Prior Audits                                            15


Appendices
   A. Schedule of Questioned Costs                                   17

   B. Auditee Comments                                               19
                      ____________________________________________
Abbreviations

CFR        Code of Federal Regulations
CDBG       Community Development Block Grant
DLW        Disproportionate Loss of Workforce
ESDC       Empire State Development Corporation
ETAP       Employment Training Assistance Program

                             Page v                   2004-NY-1004
Table of Contents


FCC    Federal Communications Commission
FERC   Federal Energy Regulatory Commission
HUD    United States Department of Housing and             Urban
       Development
LMDC   Lower Manhattan Development Corporation
NYSPSC New York State Public Service Commission
OIG    Office of Inspector General
URIR   Utility Restoration and Infrastructure Rebuilding




2004-NY-1004               Page   vi
Introduction
The September 11, 2001, terrorist attacks on the World Trade Center in Lower Manhattan took a
devastating toll on New York City. The attacks claimed many lives. In addition to the loss of
many lives, many businesses suffered a disproportionate loss of their permanent New York City
workforce, and some individuals who survived were displaced from the workforce because of the
destruction of their employers’ businesses and needed to obtain other skills for employment in
the New York City area. In addition, the attacks inflicted widespread destruction upon the energy
and telecommunications utility infrastructure, resulting in extensive disruptions in services to the
business and residential communities of 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 Funds. 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 16-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 John C. Whitehead and Kevin Rampe
                                  is the President.



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.




                                                Page 1                                           2004-NY-1004

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Introduction


 Approved action plans     As of March 31, 2004, HUD had approved five of LMDC’s Partial
                           Action Plans and two Supplemental Partial Action Plans, which
                           contained funding of $1,621,465,704. The programs implemented
                           under these Action Plans, along with the amounts drawn down by
                           LMDC as of March 31, 2004, for each program, are as follows:

                                                  Budget        Disbursed        Balance
                                                    as of          as of           as of
                         Programs                3/31/2004      3/31/2004       3/31/2004
               Residential Grant                 $280,500,000   $191,315,545       $89,184,455
               Employment Training
               Assistance                           $500,000       $208,273          $291,727
               Interim Memorial                     $350,000                          $350,000
               Business Recovery Grant           $224,500,000   $214,173,039       $10,326,961
               Small Firm Attraction
               And Retention Grants               $50,000,000                      $50,000,000
               Large Firm Job Creation
               And Retention                     $150,000,000    $39,487,770      $110,512,230
               Renovation of Columbus
               Park Pavilion                        $428,571                          $428,571
               History And Heritage,
               Downtown Marketing
               Initiative                          $4,664,000       $15,709         $4,648,291
               Short-Term Capital
               Projects                           $69,405,000     $6,015,973       $63,389,027
               Long-Term Planning                 $13,894,848                      $13,894,848
               Disproportionate Loss of
               Workforce                          $33,000,000    $30,491,810        $2,508,190
               Utility Restoration And
               Infrastructure Rebuilding         $735,000,000    $45,489,325      $689,510,675
               Chinatown Tourism And
               Marketing                           $1,000,000                       $1,000,000
               Lower Manhattan
               Information                       $1,300,000                         $1,300,000
               Administration                   $56,923,285      $26,776,910       $30,146,375
                        TOTALS               $1,621,465,704     $553,974,354    $1,067,491,350


                           To meet the Congressional mandate to provide assistance to
                           individuals as quickly as possible, LMDC began implementing the
                           programs under its Action Plans immediately upon receiving
                           HUD’s approval. During the current audit period, October 1, 2003
                           through March 31, 2004, CDBG funds were disbursed to grant
                           recipients under the following programs: Residential Grant,

2004-NY-1004                          Page   2
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                                                                     Introduction


                      Employment Training Assistance, Business Recovery Grant, Large
                      Firm Job Creation and Retention, History and Heritage Downtown
                      New York City Marketing Initiative, Short-Term Capital Projects,
                      Disproportionate Loss of Workforce, and Utility Restoration and
                      Infrastructure Rebuilding Programs. Funds were also disbursed for
                      administrative expenses.

                      During the audit we concentrated our efforts on funds disbursed for
                      the Employment Training Assistance, the Disproportionate Loss of
                      Workforce and the Utility Restoration and Infrastructure
                      Rebuilding Programs. These programs are being administered by
                      LMDC’s parent company ESDC, which is participating as a sub-
                      recipient of LMDC. We did not review funds disbursed for any
                      other programs or for administrative expenses.

                      Employment Training Assistance Program

Employment            The Employment Training Assistance Program (ETAP) was
Training Assistance   developed to provide grants to train current and prospective
Program               employees of businesses and not-for-profit organizations located in
                      the area south of 14th Street. Priority was to be given to
                      individuals directly affected by the events of September 11. Under
                      LMDC Partial Action Plan No.1, approved by HUD on June 7,
                      2002, and amended on September 25, 2002, $10 million was
                      allocated to the ETAP. Because this program was similar to those
                      offered by Federal, State, and City governments, as well as by not-
                      for-profit organizations, under Partial Action Plan No. 4, LMDC
                      reallocated up to $9.5 million of these funds to the Business
                      Recovery Grant Program (BRG). LMDC reallocated these HUD
                      funds to target situation in which there was an immediate demand
                      for funding and limited alternative sources of financing.
                      Consequently, $500,000 is now the amount allocated for the
                      ETAP.

                      Originally, ESDC established December 31, 2003, as the deadline
                      for businesses to submit applications for grant awards under the
                      ETAP; however, this date was later amended to May 12, 2003. A
                      business requesting a grant under the ETAP must have submitted
                      an application to ESDC with a description of its training program,
                      a detailed training program budget, and other supporting
                      documentation as required by the program administrator (ESDC)
                      by May 12, 2003. The business must receive written approval from
                      ESDC before starting its training program. The training program
                      must be completed within one year of the date of ESDC’s
                      approval. The ETAP grant award amount is the lesser of 50

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Introduction


                     percent of the ESDC-approved training budget or 50 percent of the
                     actual training costs incurred and paid. The maximum ETAP grant
                     award to a business located in the designated “Eligible Area” is
                     $100,000 and to a business located in the designated “Priority
                     Area” is $125,000. Grant payments are disbursed to the business
                     by wire transfer upon completion of the ESDC-approved training
                     program and the business’ submission of proof of payment with
                     appropriate supporting documentation. Businesses approved for
                     ETAP grant awards must submit their request for reimbursement
                     no later than February 1, 2005, and the business is required to
                     remain at its Lower Manhattan location for at least two years after
                     the date it receives its grant payment. As of March 31, 2004, a total
                     of $208,273 in ETAP grant awards had been disbursed to 10
                     businesses.

                     World Trade Business Recovery from Disproportionate Loss
                     of Workforce Program

                     The Disproportionate Loss of Workforce (DLW) Program,
 Disproportionate
                     approved by HUD on September 15, 2003, was developed to assist
 Loss of Workforce
                     Lower Manhattan firms that lost a disproportionate share of their
 Program
                     workforce due to the attacks of September 11, 2001. Funding for
                     the program was from the August 2002 supplemental Federal
                     appropriation, which provided $33 million to assist those firms
                     located in New York City at the time of the terrorist attacks, which
                     suffered a disproportionate loss of their workforce and which
                     intend to re-establish their operations in New York City.

                     To receive grant assistance under the DLW Program, a business
                     must have (1) operated in Lower Manhattan on or south of Canal
                     Street on and before September 11, 2001, and continued or
                     resumed business operations within New York City; (2) as a result
                     of the September 11, 2001 attacks, the business must have suffered
                     a loss of (a) at least six permanent New York City employees
                     representing at least 20 percent of its New York City permanent
                     workforce or (b) at least 50 permanent New York City employees;
                     and (3) the business must also currently employ at least 50 percent
                     of its pre-September 11, 2001 New York City workforce (exclusive
                     of those employees that lost their lives on September 11, 2001).
                     The deadline for application for a DLW grant was October 15,
                     2003.

                     The DLW program administrator (ESDC) together with New York
                     City Economic Development Corporation, established a formula
                     for calculating the amount to be awarded to each eligible business

2004-NY-1004                     Page   4
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                                                                       Introduction


                      by taking into account the number of businesses submitting
                      applications, the number of New York City based employees each
                      business lost, and the percentage of each business’ New York City
                      based workforce lost as a result of the attacks. DLW grant awards
                      contain a recapture provision that the business will repay the full
                      amount of the grant funds it received if it fails to maintain at least
                      50 percent of its New York City employment level for three years
                      from the time of grant award. DLW grant payments are disbursed
                      in two installments by wire transfer; the first installment (95
                      percent of the grant award) is made in accordance with the
                      calculation by the formula, and the other 5 percent is made
                      approximately 160 days after the first disbursement.

                      As of March 31, 2004, a total of $30,491,810 in DLW grant awards
                      was disbursed to nine of the ten companies that applied to
                      participate in the program.

                      Utility Restoration and Infrastructure Rebuilding Program

                      The Utility Restoration and Infrastructure Rebuilding (URIR)
Utility Restoration   Program approved by HUD on September 15, 2003, was developed
and Infrastructure    to provide financial assistance directly to energy and
Rebuilding Program    telecommunications service providers for the reimbursement of
                      qualified emergency and temporary restoration costs, as well as, for
                      the costs associated with the permanent restoration of the utility
                      infrastructure damaged in the aftermath of the September 11
                      terrorist attacks. Additionally, the program seeks to prevent costs
                      borne by the utility service providers from being passed through to
                      the customers.

                      The HUD-approved Action Plan for the URIR Program proposes
                      the expenditure of $735 million under six different categories, with
                      $250 million allocated for Category One - Emergency and
                      Temporary Service Response - the category having the highest
                      priority. The utility providers are eligible for 100 percent
                      reimbursement of all actual, incurred uncompensated costs that are
                      documented and properly classifiable as Category One costs. Costs
                      that are reimbursed or reimbursable under insurance claims are not
                      eligible for reimbursement under the URIR Program. If the $250
                      million allocated for Category One is insufficient to cover the
                      utility providers’ documented incurred costs, available funds from
                      the other categories will be reallocated in reverse priority order to
                      pay for eligible Category One costs.




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Introduction


                       To be eligible for the URIR Program, the utility service provider
                       must be investor-owned, and the company must be under the
                       jurisdiction of the New York Public Service Commission
                       (NYSPC), the Federal Energy Regulatory Commission (FERC), or
                       the Federal Communications Commission (FCC) with service
                       territory in the affected area in Lower Manhattan. The affected area
                       is defined as the area on and south of Canal Street from the East
                       River to the Hudson River.

                       The Partial Action Plan established October 31, 2003, as the
                       application deadline for reimbursement of Category One costs not
                       covered by settled or pending insurance claims and March 31,
                       2004, as the application deadline for costs that may or may not be
                       partially covered by pending or settled insurance claims.

                       Advance payments amounting to one-third of the requested eligible
                       Category One costs are disbursed to the utility providers within 30
                       days of receipt of a completed application with full documentation.
                       The balance of the grant award will be made upon the program
                       administrator’s (ESDC) completion of a full audit and verification
                       of the submitted costs. At the end of our audit period, March 31,
                       2004, a total of $45,489,325 in advanced payments had been
                       disbursed to three utility providers.

                       We performed our on-site work between March 2004 and July
     Audit Scope and   2004. The current review generally covered CDBG funds disbursed
     Methodology       from October l, 2003 through March 31, 2004, and when
                       appropriate, was extended to cover periods before and after 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.




2004-NY-1004                       Page   6
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                                                                                     Finding


Processing Deficiencies in the Employment Training
     Assistance Program Need to be Resolved
Our review of payments made to businesses under the WTC Employment Training Assistance
Program (ETAP) disclosed processing deficiencies that need to be resolved. We found that
contrary to the ETAP guidelines LMDC's program administrator, the Empire State Development
Corporation (ESDC), disbursed grant payments as reimbursements for training costs to
businesses without obtaining appropriate supporting documentation. We believe this occurred
because the grant processor failed to follow program guidelines and application and
reimbursement instructions. As a consequence, supporting documentation that training costs
reimbursed with HUD CDBG Disaster Assistance Funds were necessary, reasonable, and
consistent with the stated goals of participating businesses’ approved training projects was not
available for review. Thus, we consider the training costs reviewed, totaling $87,394,
unsupported pending an eligibility determination by HUD.


                                    We selected a sample of five ETAP grant recipients, who
 Scope and Methodology              received grant payments totaling $87,394 during our audit
                                    period of October 1, 2003 through March 31, 2004. These
                                    five recipients were selected from a universe of 10
                                    businesses, representing approximately $208,273 in ETAP
                                    grant disbursements that were made during the period
                                    between March 12, 2003 and March 31, 2004.

                                    We reviewed the contents of the ETAP files to determine
                                    whether the grant recipients’ submissions were consistent
                                    with the established guidelines. In addition, we evaluated
                                    the adequacy of the documentation supporting the
                                    recipients’ eligibility, and the total ETAP training costs
                                    reimbursed with CDBG Disaster Assistance Funds.

                                    Office of Management and Budget (OMB) Circular A-87,
          Criteria                  Section C (1)(j), provides that to be allowable under
                                    Federal awards, costs must be adequately documented. The
                                    ETAP Reimbursement Instructions provides a list of the
                                    supporting documents that grant recipients must submit
                                    with their reimbursement requests. The ETAP Guidelines
                                    provides that eligible training costs are those costs incurred
                                    after the applicant receives written approval for its training
                                    project(s). The ETAP Application Instructions provide that
                                    employees being trained must be on the business payroll as
                                    of the date of the application. Title 24 Code of Federal
                                    Regulations (CFR) Section 570.490 provides that the State
                                    must establish and maintain the necessary records to

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Finding


                             facilitate the review and audit by HUD of the State's
                             administration of CDBG funds.

                             We were informed that all application and post-training
  Appropriate supporting     reimbursement documents are reviewed to ensure that all
  documentation not          supporting documents have been received before disbursing
  obtained                   grant funds. However, our review of the files relating to our
                             testing of five ETAP recipients disclosed that the program
                             administrator did not always obtain or retain the appropriate
                             post-training reimbursement documentation to support the
                             costs associated with approved training projects. We noted
                             that copies of cancelled checks were not attached to the
                             reimbursement documentation, and invoices were not
                             marked “paid,” indicating the check number used to pay for
                             the training costs as required. Several invoices were
                             ambiguous in that the goods or services offered and their
                             correlation to the approved training projects were not readily
                             apparent. We also noted that the supporting documentation
                             to validate on-the-job training expenses, such as wages paid
                             to trainees for time spent in training and wages paid for in-
                             house trainers, was not available. In the absence of this
                             documentation, there is inadequate assurance that the costs
                             incurred by these businesses were necessary and reasonable
                             to the approved training projects and were paid before the
                             requests for reimbursement were received. Consequently,
                             $87,394 in training project costs that were reimbursed with
                             HUD CDBG Disaster Assistance Funds could not be fully
                             substantiated.

                             The ETAP application Training Project Budget requires
    Wages charged to         that the grantee provide the average hourly trainee wages;
    grant not corroborated   however, the ETAP guidelines do not offer specific
    by payroll records       instructions concerning the support for on-the-job training
                             wages. Nevertheless, we believe prudent business practice
                             dictates that charges to grant awards for salaries and wages
                             should be corroborated by actual payroll documentation.
                             Accordingly, because neither payroll time distribution
                             records nor documents reflecting the time spent in or
                             providing training were accessible, we could not determine
                             the actual wage rates per hour or the number of training
                             hours. Therefore, we were unable to verify the amount of
                             wages charged to the grants for trainees and/or in-house
                             training providers.




2004-NY-1004                     Page   8
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                                                                             Finding


                           It should be noted that only one of the five ETAP grant
 Wages charged to          recipients tested attached payroll documentation to its
 grant appeared to be      reimbursement request. In this case our examination of the
 overstated                recipient’s payroll records disclosed that the entire amount
                           reflected on the payroll for each individual trainee was
                           charged to the grant. However, based on an evaluation of
                           the documentation provided regarding the time spent in
                           training, it appeared that the hours used in the calculation of
                           the trainee wages were inflated; therefore, the wages
                           charged to the grant were overstated. We also noted that
                           two of the five ETAP grant recipients tested did not furnish
                           adequate documentation to support the expenses charged to
                           the grant for the on-the-job and in-house trainer.
                           Accordingly, adequate supporting documentation was not
                           obtained.

                           In addition, in two instances, we noted that the program
 Documentation             administrator deviated from the program guidelines without
 justifying deviations     documenting its determinations. In one case, contrary to
 from the guidelines       the ETAP guidelines, which provide that training costs
 was not maintained        should be incurred after the program administrator provides
                           written approval of the businesses training program, we
                           noted that two businesses began incurring training costs
                           before receiving written approval of their training projects.
                           An official of the program administrator acknowledged that
                           this was allowed as long as the training project started after
                           the date of application. Furthermore, the official asserted
                           that the training projects had already been approved, but
                           there was a delay in providing the businesses with formal
                           approval. Although the guidelines reflect that the program
                           administrator may amend the requirements, we believe that
                           the program administrator should have documented and
                           maintained in the files its acknowledgement that due to
                           unique circumstances, businesses would be permitted to
                           incur training costs before receiving written approval of
                           their training projects.

                           In another instance, although the guidelines and instructions
Program administrator      for the ETAP application clearly state that to be eligible for
approved an application    the training grant, new full-time permanent employees must
that did not comply with   be on the business’ payroll at the eligible premises as of the
application instructions   date of the application, our review disclosed that the
                           program administrator approved a business’ application for
                           training assistance for 20 employees when it was evident
                           that as of the date of the application, there were only six

                                Page   9                                    2004-NY-1004

                                                                              TOC
Finding


                               full-time permanent employees at the eligible premises.
                               An official of the program administrator informed us that
                               the ETAP Program allows for the approval of training
                               budgets that include employees who are expected to be
                               hired by the training date. This allowance encourages job
                               growth and is confirmed through reviews of the businesses’
                               NYS-45 unemployment insurance forms at the time of
                               reimbursement to ensure that all employees are eligible by
                               the time the training takes place. Nevertheless,
                               documentation supporting this claim, such as an official
                               waiver of the established guidelines, etc. was not made
                               available to us.

                               We noted that the program administrator did not obtain
                               sufficient evidence to provide assurance that one of the five
    Insufficient evidence to
                               businesses was operating at the eligible premises reported
    support business
                               on the application. We noted that the leaseholder of the
    operations at eligible
                               reported address was not the grant recipient, but rather its
    premises
                               parent company. Further, the address reflected on the
                               business’ voided check and stationery was outside the
                               eligible area. An official of the program administrator
                               acknowledged that documentation indicating that the grant
                               recipient operated its business at a property location leased
                               by its parent company should have been obtained and
                               maintained in the files.

                               Because the program administrator was unable to provide
                               appropriate supporting documentation to confirm that
      Site visits conducted
                               recipients’ training projects were completed in accordance
      to obtain
                               with the application instructions, we conducted on-site visits
      documentation
                               to four of the five ETAP recipients in our sample to verify
                               the existence of the necessary documentation. As a result of
                               our visits, we were able to review a substantial portion of the
                               documentation that was unavailable in the program
                               administrator’s files, such as copies of cancelled checks, paid
                               invoices, payroll records for the period covering the ETAP
                               training, and a brief description of the ambiguous invoices
                               and their relationship to the approved training projects.

                               However, our site visit to one recipient revealed that contrary
      Recipient relocates      to the program guidelines, which provide that training
      business operations      supplies purchased should be used exclusively for training,
      days after receiving     software purchased using ETAP funds was being used in the
      the grant payment        course of the recipient’s normal business operation and that
                               the software was being resold to its business clients. Also,

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                                                                        Finding


                     the business offered several training courses that lead to
                     trainees receiving professional certifications, which is also
                     not allowed under the program. Despite the guidelines
                     prohibiting a business from relocating its operations from the
                     eligible area within two years of disbursement of the grant,
                     this business relocated its operations outside the eligible area
                     within days of receiving its ETAP grant payment. We
                     learned that this may have occurred because the program
                     administrator’s compliance letter to businesses to ensure that
                     their operations remain within the eligible program area had
                     not been mailed to the businesses. Accordingly, we question
                     whether this business has broken its commitment to stay in
                     the eligible area.

                     LMDC advised its Program Administrator to take
 Auditee comments    corrective actions to address the processing deficiencies
                     cited in the finding. The Program Administrator began
                     taking corrective actions and has obtained some additional
                     documentation from grant recipients to fully substantiate
                     their eligibility and is continuing to seek additional
                     documentation.      The Program Administrator is also
                     evaluating the additional documentation for the grant
                     recipient who relocated its business outside of the eligible
                     area to determine whether grant payments should be
                     recaptured.


 OIG evaluation of   The actions undertaken by LMDC are responsive to our
 auditee comments    recommendations.



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

                     1A.     Determine the eligibility of the unsupported costs of
                             $87,394 that pertain to the five ETAP grants in our
                             sample. This should be done by obtaining and
                             evaluating the documentation that supports the
                             training costs reported by grant recipients. If the
                             supporting documentation cannot be obtained, then
                             LMDC and/or its program administrator should
                             request that these businesses reimburse the program
                             the grant amounts related to the unsupported items.

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Finding


                       Also, LMDC should review and evaluate the
                       adequacy of the documentation of the five cases we
                       did not review.

               1B.     Continue to obtain documentation that fully supports
                       the eligibility and the training costs of all grant
                       recipients (including wages) and maintain the
                       documentation in the program administrator’s files.

               1C      Obtain documentation from grant recipients to
                       substantiate whether the grant recipients calculated
                       and charged to the grants the correct amount of
                       trainee wages. If the amounts are incorrect, the
                       appropriate corrective action should be taken.

               1D      Document all changes to the program guidelines
                       and maintain the documentation in the program
                       files.

               1E      Determine whether to recapture the grant from the
                       recipient who relocated its business operations
                       outside the eligible area within days of receiving the
                       ETAP grant payment.

               1F      Ensure that grantee compliance letters, which are
                       designed to provide assurance that recipients
                       maintain their business operations at the eligible
                       premises for two years following the disbursement
                       of the grant, are immediately mailed to recipients.




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Management Controls
In planning and performing our audit, we considered the management controls of the Lower
Manhattan Development Corporation 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; the processes for planning,
organizing, directing, and controlling program operations; and 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 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.

                              Based on our review, we found weaknesses in the processing
    Weaknesses                controls of the Employment Training Assistance Program (ETAP),
                              in regards to the documentation required from grant recipients to
                              support the propriety of grant payments (see Finding).




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Follow Up On Prior Audits
We issued Audit Report number 2004-NY-1002 on March 25, 2004. The report contained three
audit findings with recommendations for corrective action. The findings involved processing
deficiencies in the Residential Grant Program (RGP), duplicate payments made to grant recipients,
and a request that LMDC establish a formal receivable account in its accounting records to track
collectible funds owed to the RGP. All recommendations related to these audit findings have been
sustained, and LMDC has implemented corrective actions to close all recommendations.




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Follow UP On Prior Audits




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                                                                          Appendix A
Schedule of Questioned Costs


                             Type of Questioned Costs

            Finding              Unsupported 1/
               1                     $87,394

                   Totals              $87,394


1/   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 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
Auditee Comments




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Appendix B


          LMDC Response to HUD OIG Draft Report for September 2004

LMDC has reviewed the draft audit report from the HUD Office of the Inspector General (IG)
covering the period from October 2003 through March 2004 with its Subrecipient/Program
Administrator. Since this review did not disclose any exceptions or findings related to the
Disproportionate Loss of Workforce or the Utility Restoration and Infrastructure Rebuilding
Programs the response only addresses the finding related to the Employee Training and
Assistance Program (ETAP). These programs are administered by our parent company, ESDC.

LMDC instructed the Program Administrator to take corrective actions on the items identified in
this report as processing deficiencies. The Program Administrator began taking corrective action
as soon as the issues pertaining to the reported finding were communicated to them. Please find
below explanations of the corrective actions taken or planned.

HUD IG Recommendation 1A: Determine the eligibility of the unsupported costs of $87,394
that pertain to the five ETAP grants whose training cost have been questioned.

Date Started: August 2004
Target date complete: October 2004
ESDC has reviewed the initial applications and supporting documentation for the five businesses
identified in the HUD IG report and has determined that at the time of grant award all five
businesses were eligible. This eligibility determination was based on ESDC’s compliance with
the guidelines or the changes to the guidelines discussed later in this response.

As a result of this review, ESDC has requested additional documentation from the five grant
recipients cited in this report to determine if violations of the ETAP guidelines were committed
after the awards were granted. If such a determination is made, efforts to recapture these funds
would be made. To date, ESDC has received, and is currently reviewing, documentation
requested from three of the grant recipients (#’s 30597, 30598 and 30769). Additional
documentation requests have been made for further examination.

HUD IG Recommendation 1B: Obtain documentation that fully supports the eligibility and the
training cost of all grant recipients (including wages) and maintain the documentation in the
program administrator’s files.

Date Started: August 2004
Target date complete: October 2004
ESDC has requested missing documentation from the five cited grant recipients and has begun
reviewing what has been received from three of them to insure documentation received supports
grantee eligibility and training costs (including wages). ESDC has received and reviewed
documentation from three of the five grant recipients. The following should be noted:

•       One of the ETAP grant recipients (ID #30597) provided ESDC with updated copies of all
    cancelled checks and corresponding invoices. Both LMDC and HUD IG staff concurred that
    effective corrective action was taken.

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                                                                                          Appendix B
•   Two other grant recipients (#’s 30598 and 30769) provided ESDC with updated copies of all
    cancelled checks and corresponding invoices but further information has been requested.
    Grant recipient # 30598 needs to provide a legible version of the cancelled check associated
    with an April 29, 2004 invoice. Grant recipient # 30769 needs to provide further
    documentation to explain the connection between one cancelled check and its corresponding
    invoice. This grant recipient needs to provide additional evidence that it operated from the
    eligible premise reported on it application because the lease provided was for its parent
    company not the grant recipient.

•   Two of the ETAP grant recipients (ID # 30800 and # 30591) to date have not provided ESDC
    with the requested documentation. ESDC sent both businesses certified letters on August 27,
    2004 requesting the documentation and informing the grant recipients that if the requested
    documentation is not received by September 8, 2004 ESDC may begin the process to
    recapture all grants monies issued.

HUD IG Recommendation 1C: Determine whether the grant recipients calculated and charged
to the grants the correct amount of trainee wages. If the amounts are incorrect the appropriate
corrective action should be taken.

Date Started: August 2004
Target date complete: October 2004
ESDC has requested documentation from the four cited grant recipients and has begun reviewing
what has been received from three of them to insure training wages were properly calculated and
charged. The following should be noted:

    •   One of the grant recipients (ID #30598) provided ESDC with a listing of employees who
        attended training documenting hours in training, rate of pay, and wages paid for the on the
        job training that was reviewed and found to be appropriate by LMDC and HUD IG staff.

    •   Another grant recipient (ID # 30597) provided ESDC with a listing of employees who
        attended training documenting hours in training, rate of pay, and wages paid for the on the
        job training but additional payroll records have been requested to verify information
        recorded on the training listing calculation submitted to ESDC.

    •   One of the grant recipients (ID # 30769) provided ESDC with documentation of total training
        cost combining the total of both outsourced and in-house training cost. ESDC has requested
        that the business provide further documentation that separates costs associated with
        outsourced versus in-house training cost.

    •   Grant recipients # 30591 has not provided ESDC with the requested documentation to date.
        ESDC sent them a certified letter on August 27, 2004 requesting the documentation and
        informing the business that if the requested documentation is not received by September 8,
        2004 ESDC begin the process of recapturing grants monies issued to that business.




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Appendix B


       HUD IG Recommendation 1D: Document all changes to the Program guidelines and
       maintain the documentation in the Program files.

       Date Started: August 2004
       Target date complete: COMPLETED
       LMDC believes that as a new program is implemented changes to the Program Guidelines
       are expected in order to administer the Program as fairly and consistently as possible for the
       benefit of applicants. LMDC agrees with the policy decisions ESDC made related to grant
       recipients 30769 and 30591. HUD IG also indicated their agreement with the rationale but
       recommended it be documented. LMDC agrees that the rationale for allowing these
       deviations from the original guidelines resulting in policy changes should be documented and
       included in the appropriate files. Consequently, upon LMDC instructions, ESDC has
       appropriately documented and filed the rationale for the waivers or policy changes in the
       Program Files thereby resolving this matter.

       HUD IG Recommendation 1E: Determine whether to recapture the grant from the recipient
       who relocated its business operations outside the eligible area within days of receiving the
       ETAP grant payments. Document all changes to the Program guidelines and maintain the
       documentation in he Program files.

       Date Started: August 2004
       Target date complete: October 2004
       ESDC is currently reviewing the requested additional documentation recently received from
       the grant recipient (#30598) to determine whether grant payments can be fully substantiated
       or if recapture procedures in whole or part should begin.

       HUD IG Recommendation 1F: Develop procedures to ensure that grantee compliance
       letters, which are designed to provide assurance that recipients maintain their business
       operations at the eligible premises for two years following the disbursement of the grant, are
       immediately mailed to recipients.

       Date Started: August 2004
       Target date complete: October 2004
       ESDC will send letters to a representative sample of the ETAP grant recipients to request
       information from the grant recipients needed to determine if they are in compliance with
       grant agreement terms including maintaining their business operations at the eligible
       premises for two years following the grant disbursement.




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