oversight

Review of the Community Development Block Grant (CDBG) Program for the City of McKeesport, McKeesport, Pennsylvania

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-05-28.

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

                                                          Issue Date
                                                               May 28, 2004
                                                          Audit Case Number
                                                                2004-PH-1007




TO:    Lynn Daniels, Director, Office of Community Planning and Development,
        Pittsburgh Area Office, 3ED


FROM: Daniel G. Temme, Regional Inspector General for Audit, Mid-Atlantic, 3AGA

SUBJECT: Review of the Community Development Block Grant (CDBG) Program for
         the City of McKeesport
         McKeesport, Pennsylvania


                                  INTRODUCTION

In response to a request from the U.S. Department of Housing and Urban Development's
(HUD's) Pittsburgh Office of Community Planning and Development, we completed a
review of the Community Development Block Grant (CDBG) Program for the City of
McKeesport. Specifically, our review concentrated on the City’s oversight of the Home
Improvement Loan Program by its sub-recipient, the McKeesport Housing Corporation, for
Fiscal Years 2000 through 2002.

The primary objective of our review was to determine if the City of McKeesport
established adequate management controls to ensure its sub-recipient administered its
Home Improvement Loan Program in compliance with HUD regulations and
requirements. More specifically, we wanted to determine if (1) the City adequately
monitored its sub-recipient’s use of the Program income generated under the Home
Improvement Loan Program, and (2) the Program income received by the sub-recipient
was disbursed in accordance with HUD regulations.

To achieve our objectives, we reviewed the appropriate Federal requirements, the City of
McKeesport’s Fiscal Year 2000 and 2001 Consolidated Action Plan and their
Consolidated Annual Evaluation and Performance Report. We also reviewed the
agreement between the City of McKeesport and the McKeesport Housing Corporation
concerning the implementation of the CDBG Programs which related to homeowners and
owners of residential rental properties. In addition, we reviewed the related accounting
records of the sub-recipient including source documentation to determine the eligibility
of $696,134 of CDBG Program income that was disbursed from 2000 through 2002. The
disbursements included $351,812 in payments to five rehabilitation contractors, $179,398
to five consultants, and $164,924 for indirect costs charged to the Program.

The audit covered the period January 2000 through December 2002. We performed the
majority of our fieldwork at the City of McKeesport’s main office located at 201 Lysle
Boulevard, McKeesport, Pennsylvania and at the McKeesport Housing Corporation’s
office located at 502 Fifth Avenue, McKeesport, Pennsylvania. We conducted the audit
in accordance with Generally Accepted Government Auditing Standards. We held an
exit conference with the mayor of the City of McKeesport on April 16, 2004.

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 110
days after report issuance for any recommendation without a management decision. Also,
please furnish us copies of any correspondence or directives issued because of the audit.

We appreciate the courtesies and assistance extended by the personnel of the City of
McKeesport, the McKeesport Housing Corporation and the local Pittsburgh Field Office
during our review. Should you or your staff have any questions, please contact Ms.
Christine Begola, Assistant Regional Inspector General for Audit, at (410) 962-2520.

                                         SUMMARY

We found the City of McKeesport did not adequately monitor the performance of its sub-
recipient, the McKeesport Housing Corporation, to ensure it administered its Home
Improvement Loan Program in compliance with HUD requirements. Specifically, the City of
McKeesport did not review quarterly status reports submitted by the McKeesport Housing
Corporation to ensure Program income it generated through its Home Improvement Loan
Program was used to fund eligible activities in accordance with HUD and OMB requirements.
These problems occurred because the City of McKeesport did not have adequate policies and
procedures in place to ensure that its sub-recipients were being monitored on a yearly basis, nor
did they ensure that appropriate action was taken when performance standards were not met.

As a result of the City of McKeesport’s failure to adequately monitor the McKeesport Housing
Corporation, it did not identify a number of significant deficiencies in the sub-recipient’s
administration of its Home Improvement Loan Program. Specifically, the McKeesport
Housing Corporation violated Federal procurement regulations and requirements when it
procured consultants for accounting, legal, computer, financial audit and loan underwriting
services; and rehabilitation contractors. We also found the sub-recipient did not establish a cost
allocation plan to ensure indirect costs were equitably distributed to the Home Improvement
Loan Program and other CDBG Programs. Because of these deficiencies, the McKeesport
Housing Corporation spent $694,573 of expenditures it could not support.




                                                2
                                    BACKGROUND

Title I of the Housing and Community Act of 1974 established the Community
Development Block Grant (CDBG) Program, which provides annual grants on a formula
basis to many different types of grantees through various programs including Entitlement
Communities, State Administered CDBG, Section 108 Loan Guarantee Program, and
HUD-administered Small Cities to name a few. The annual appropriation for CDBG is
split between states and local jurisdictions called “entitlement communities”. The funds
used under any of the CDBG Programs’ activities must meet one of the following
national objectives for the Program: benefit low- and moderate-income persons, prevent
or eliminate slums or blight, or meet community development needs.

Since 1985, the City of McKeesport has participated in the Entitlement Grant Program
and the Section 108 Loan Guarantee Program. In order to accomplish the objectives of
these Programs, the City has entered into sub-recipient agreements with the McKeesport
Housing Corporation and other sub-recipients. Our review concentrates on the City of
McKeesport and its relationship with the McKeesport Housing Corporation.

From 1985 to 1990, HUD provided the City of McKeesport over $500,000 to establish a
revolving loan fund. This fund was established for the purpose of carrying out specific
CDBG activities, which in turn generate payment to the same fund to be used in carrying
out similar activities in the future. One of the programs the City used the revolving loan
fund for was the Home Improvement Loan Program (Loan Program.) The Home
Improvement Loan Program is used to help finance loans for low-income homeowners to
rehabilitate their home or obtain affordable housing. In addition to the Loan Program, a
homeowner may use other financing sources including private financing to finance the
rehabilitation of their homes. When a homeowner starts to pay back the principal and
interest on the home improvement loan, it generates Program income. The Loan Program
income is deposited into the revolving fund and then disbursed as new loans for other
low-income homeowners. The City managed this Program until 1995, when it then turned
the Loan Program over to the McKeesport Housing Corporation to manage. When the
McKeesport Housing Corporation received the Loan Program, HUD worked with them to
set up a similar revolving fund system to implement the Home Improvement Loan
Program.

From Fiscal Year 2000 through 2002, the City of McKeesport received $4,866,000 in
CDBG funding from HUD to implement several programs including public
improvement, housing, economic development, and for the administration fees associated
with these and other programs. The City then used these funds as leverage to obtain
matching funds from banks and private entities to continue their programs. In addition,
the City provided approximately $800,000 of entitlement and Program income for
McKeesport Housing Corporation from 2000 to 2002. The City and the sub-recipient’s
funding from 2000 to 2002 are shown below.




                                            3
                      Block Grant Funding for 2000 through 2002


    Program   City of
      Year  McKeesport                    McKeesport Housing Corporation
                                                                             Total CDBG
                                   Home                                      and HOME
                                Improvement                                   Funds for
                                    Loan      Other                          McKeesport
                                  Program    CDBG               HOME           Housing
                   CDBG           Income1   Programs2           Program      Corporation
      2000       $1,599,000       $312,2853       $146,000    $ 760,510      $1,218,795
      2001       $1,653,000       $234,113        $ 49,200    $ 298,964      $ 582,277
      2002       $1,614,000       $184,0934       $ 87,035    $ 308,257      $ 579,385
      Total      $4,866,000       $730,491        $282,235    $1,367,731     $2,380,457

                                         FINDING

    The City Did Not Adequately Monitor the McKeesport Housing Corporation’s
                        Home Improvement Loan Program

The City of McKeesport did not adequately monitor the performance of its sub-recipient,
the McKeesport Housing Corporation, to ensure it administered its Home Improvement
Loan Program in compliance with HUD’s Program regulations and requirements.
Specifically, the City’s Community Development Department did not monitor the
Program income that the Corporation deposited into and disbursed from its revolving
loan fund to ensure Program income was disbursed in accordance with Federal
regulations and guidelines. We found the City did not have adequate policies and
procedures in place to ensure it properly monitored its sub-recipient, or that responsible
City officials would take appropriate action when the Corporation did not meet its
performance standards. As a result, the City failed to identify its sub-recipient was not
spending CDBG funds in accordance with Federal regulations and guidelines. In total, its
sub-recipient paid $694,573 of expenses that were not properly supported.

Title 24 Code of Federal Regulations (CFR) 570.501 requires that a recipient of CDBG
funds be responsible for ensuring the use of those funds is in accordance with all Program
requirements. The City’s use of the McKeesport Housing Corporation as a sub-recipient
does not relieve them from this oversight responsibility.

1
  HILP Program income is considered CDBG Program income.
2
   Other CDBG programs include: Community Development (Entitlement Program), McKeesport Aging
Program, and Paint and Sidewalk Program. None of these programs were audited during our review.
3
  Includes $125,687 in the funds from the prior fiscal year.
4
  Excludes $11,817 in the fund at the end of the fiscal year.


                                              4
Monitoring Efforts by the City Are Not Adequate

During our review, we reviewed the City’s monitoring files for the contract years 2000
through 2002. We found the City used a checklist to perform a cursory monitoring
review of the McKeesport Housing Corporation in 2001. However, this limited review
did not include a review of the sub-recipient’s Program income. The City also did not
monitor the sub-recipient’s Program income in 2000 and 2002. When we asked why the
City was not conducting reviews of the sub-recipient, the City official stated that they
were working on more immediate issues concerning the City and were not aware that
they were required to monitor the same recipients every year. They also attributed the
lack of monitoring in 2002 to the fact that HUD Program staff had conducted a
monitoring review of the City’s sub-recipient, so there was no need for the City to also
complete one.

We also reviewed the City’s monitoring files to determine whether City officials ensured
the sub-recipient submitted the required performance reports. The McKeesport Housing
Corporation was required to submit Quarterly Demographic Reports, which summarize
all the loans issued by the sub-recipient. Although the Corporation submitted a report on
a quarterly basis summarizing the funding sources for applicants financing a new home
or rehabilitating existing homes, the monitoring file contained no evidence that the City
actually reviewed the submitted reports. These deficiencies occurred because the City did
not establish and implement written policies and procedures to ensure City officials
adequately monitor its sub-recipient’s reported activities and take appropriate action
when performance standards are not met.

In addition, we noted the sub-recipient agreements established between the City and the
McKeesport Housing Corporation were not adequate. The agreements did not provide
for a description of services to be performed, a work schedule or a budget. The
agreements also did not clearly establish how the Program income is to be treated. Title
24 CFR 570.503 establishes requirements for a written agreement to include a statement
of work, which should include a defined scope of services and a performance schedule.
It also requires an agreement to describe how Program incomes should be handled.

HUD Also Expressed Monitoring Concerns

HUD’s local Program office conducted a monitoring review of the City in May 2002 and
expressed concern that costs paid out of the revolving fund by the McKeesport Housing
Corporation may not have been appropriate, specifically citing that the McKeesport
Housing Corporation used its revolving fund to renew accounting and legal contracts
without following Federal procurement rules. Subsequently, HUD could not determine
how the revolving funds were used. HUD gave the McKeesport Housing Corporation 90
days to initiate and complete a new procurement process for these services or to repay
HUD the related costs with non-Federal funds. To date, HUD has not taken any action.




                                           5
City’s Sub-recipient Awarded Contracts Contrary to Its Grant Agreement and
HUD Regulations

We found the McKeesport Housing Corporation did not follow Federal procurement
regulations when awarding consultant and rehabilitation contracts. The Corporation did
not prepare a required cost or price analysis prior to awarding the contracts, awarded
contracts without competition, and did not issue written contracts on these awards. In
addition, the McKeesport Housing Corporation did not prepare a cost allocation plan to
properly allocate indirect costs to the CDBG Program. These deficiencies occurred
because the Corporation did not follow the applicable provisions of its sub-recipient
agreement, and HUD statutes and regulations. As a result, the McKeesport Housing
Corporation used Program income to pay $694,573 for expenditures that were not supported.

Required Cost Estimates and Cost or Price Analysis Were Not Performed for All
Procurements

The McKeesport Housing Corporation did not perform the required cost or price analysis
for all procurements from 2000 through 2002. This included contracts for accounting,
computer, legal, loan underwriting, financial audit services and rehabilitation
construction. Title 24 CFR 84.45 requires the sub-recipient to perform some form of cost
or price analysis in connection with every procurement action. A sub-recipient is also
responsible for preparing accurate cost estimates prior to receiving bids or proposals to
ensure contracts prices are fair and reasonable. Without the required cost estimates, the
sub-recipient has no assurances that it obtained the best available services at the most
advantageous prices for its procurement.

When we presented this finding to the McKeesport Housing Corporation, they agreed
that cost or price analyses were not performed. They also indicated they had no
knowledge of the requirements to complete a cost or price analysis.

Procurements Completed Without Competition

Contrary to procurement requirements, McKeesport Housing Corporation did not
competitively award contracts it obtained from 2000 through 2002. This included
contracts it awarded to vendors to complete rehabilitation construction work and
consulting contracts for various administrative services. Rather than use the competitive
bid process and properly advertise the bid information, the McKeesport Housing
Corporation would pass the bid information onto prospective bidders by word of mouth
via City officials or other vendors. By conducting the bidding process in this way, the
McKeesport Housing Corporation was directly violating the City’s procurement policy it
had stated it was following. In addition they violated Federal regulations. Title 24 CFR
84.43 states all procurement actions are to be performed to provide for free and open
competition.




                                           6
Prospective Bids Were Not Considered During the Procurement Process

During our review of the 2000 through 2002 Home Improvement Loan Program
rehabilitation construction files, we found the McKeesport Housing Corporation did not
give fair consideration to all prospective bids at the time bids were selected. For
example, prior to obtaining a contractor, the McKeesport Housing Corporation develops
a specification for a bid based on a cost estimate and a visitation to the property. Based
upon that estimate the two bidders that come within the 10% range of the overall cost
estimate would be selected and provided to the homeowner. The homeowner would then
select the contractor they would want to complete the work. However, the McKeesport
Housing Corporation did not include all the bids it had received in their overall
tabulation. A review of the procurement files showed that the McKeesport Housing
Corporation did not include 4 of 40 bids or (10%) in the tabulation process. As a result,
homeowners did not have access to bids that were within the 10% range for the cost
estimates. When we discussed this issue with the sub-recipient, they agreed that the bids
we noted should have been included in the tabulation and they did not have an
explanation as to why they were not.

We also noted that the McKeesport Housing Corporation continually used the same
rehabilitation construction contractors year after year. For example, for the time period
2000 through 2002, the Corporation contracted out with five construction contractors,
three of which received continual work each of the three years, while the other two
received work in only one of the years reviewed. Upon further review of these
contractor’s files, we could not locate any documentation reflecting the basis for the cost
estimates for these contracts, which is a violation of 24 CFR 84.46, which requires
procurement records and files to include a basis for the award and cost or price. Due to
the deficiencies in the McKeesport Housing Corporation’s procurement of these
construction contracts, we consider $350,251 of these contracts issued from 2000 through
2002 to be expenditures that were not supported.

Consultants Obtained Without Formal Contracts

In addition to the issues we noted during our review of the construction contractors, we
found the McKeesport Housing Corporation contracted with five consultants to provide
various types of services. For the time period 2000 through 2002, the McKeesport
Housing Corporation obtained the services for all five of these consultants without ever
issuing a formal written contract. Instead, both the consultant and the Corporation relied
solely on their verbal agreements with each other for $179,398 in services. This is a
direct violation of Federal requirements which state, under 24 CFR 84.48, that sub-
recipients are to maintain a sound and complete agreement. Further, a system must be
maintained to ensure contractor compliance with terms, conditions and specifications.
Since the McKeesport Housing Corporation did not have a written agreement with these
five entities and violated the Federal procurement procedures, we consider $179,398
unsupported.




                                            7
City’s Sub-recipient Did Not Properly Allocate Indirect Costs Between Programs

The McKeesport Housing Corporation also allocated certain costs to the Home
Improvement Loan Program that included salaries, travel, training, telephone, rent,
insurance, and consumable supplies when they should have been allocated between the
various Programs. OMB Circular A-122 Attachment A, provides guidance on the basic
considerations for the allocation of indirect costs. The guidance provides that the sub-
recipient must support a cost allocation that takes into account all activities of the
organization. Unless different arrangements are agreed to by the agencies concerned, the
Federal agency with the largest dollar value of awards with an organization will be
designated as the cognizant agency for the negotiation and approval of the indirect cost
rates. A non-profit organization that does not have an approved cost allocation plan must
submit an initial cost allocation plan within three months of receiving the award.

When we requested a copy of the cost allocation plan, the McKeesport Housing
Corporation official said they did not submit an allocation plan to the cognizant Federal
agency. Instead we found the McKeesport Housing Corporation spent $164,924 on
indirect costs from 2000 through 2002 and charged the entire amount to the Home
Improvement Loan Program. Since the McKeesport Housing Corporation also
participates in the HOME Program and other CDBG programs, these indirect costs
should have been allocated between these other programs and the CDBG revolving fund.
Instead, it placed a tremendous burden on the revolving fund, which resulted in a 50%
increase in indirect costs paid out of the revolving fund from 2000 to 2002. As the chart
below shows, the indirect costs that were charged against the revolving fund have been
steadily rising.

                               Indirect Costs for MHC
                                 2000 through 2002

                                            Indirect Costs
                                             Charged to
                          Calendar Year         HILP
                               2000            $ 15,528
                               2001            $ 51,584
                               2002            $ 97,812
                               Total           $ 164,924

Since the sub-recipient’s Home Improvement Loan Program accounted for only
$730,491, or 31%, of the $2,380,457 in CDBG funds they received during the period, it
was not reasonable to charge the Home Improvement Loan Program the entire indirect
costs. Thus, we consider the entire amount unsupported.




                                           8
                               AUDITEE COMMENTS

The City’s response to our audit memorandum is included in Appendix B. Overall, the City
agreed with our assessment and is prepared to work with HUD’s Community Planning and
Development staff to implement our recommendations.

                              RECOMMENDATIONS

We recommend the Director of Pittsburgh’s Office of Community Development require
the City of McKeesport to:

1A.    Establish an adequate agreement with their sub-recipients that would be in line
       with HUD guidelines.

1B.    Establish and implement a comprehensive monitoring system of their sub-
       recipients that would include:

       a.     Documenting and implementing written policies and procedures for
              oversight of their sub-recipients before the next funding cycle. The
              policies should:

              i.     Be based upon HUD guidance.

              ii.    Include the actions that are to be taken when a sub-recipient fails to
                     meet its performance standards.

              iii.   Include specific guidance on validating reported progress through
                     on-site reviews.

       b.     Reviewing Program income to ensure that the sub-recipient is disbursing
              Program income in accordance with HUD guidelines.

1C.    Provide proper support documentation for $179,398 in consultant contract costs
       that the Corporation charged to the Loan Program. If these funds cannot be
       supported they should be paid back to HUD with non-Federal funds.

1D.    Provide proper support documentation for $350,251 in rehabilitation contract
       costs the Corporation charged to the Loan Program. If these funds cannot be
       supported they should be paid back to HUD with non-Federal funds.

1E.    Provide proper support documentation for $164,924 in indirect costs the
       Corporation charged to the Loan Program. If these funds cannot be supported
       they should be paid back to HUD with non-Federal funds.

1F.    Develop and implement adequate procurement policies and procedures.
       Specifically, the procurement polices and procedures should include:



                                           9
      a. Procedures to ensure adequate controls are implemented in accordance with
         HUD rules and regulations.

      b. Procedures for preparing cost estimates prior to receiving bids or proposals.

      c. Procedures for performing cost or price analysis for every procurement action.

1G.   Develop and implement a cost allocation system that would provide for proper
      allocation of the indirect costs between the various programs.




                                          10
                            MANAGEMENT CONTROLS

In planning and performing our audit, we obtained an understanding of the management
controls that were relevant to the CDBG Program to determine our audit procedures, not to
provide assurance on the controls. Management controls, in the broadest sense, include the
plan of organization, methods and procedures adopted by management to ensure that its
goals are met. Management controls include the processes for planning, organizing,
directing, and controlling program operations. They include the systems for measuring,
reporting, and monitoring program performance.

Relevant Management Controls

We determined that the following management controls were relevant to our audit
objectives:

   •   Policies and procedures over reporting of activities and associated costs, and

   •   Documentation to support activity and cost eligibility.

We assessed all of the relevant control categories identified above, to the extent they
impacted our audit objective.

Significant Weaknesses

A significant weakness exists if management controls do not give reasonable assurance
that resource use is consistent with laws, regulations, and policies; that resources are
safeguarded against waste, loss, and misuse; and that reliable data are obtained,
maintained, and fairly disclosed in reports. Based on our review we believe the following
items are significant weaknesses:

   •   The City did not have a sub-recipient monitoring system to ensure that Program
       income expended from a revolving fund was for eligible activities, properly
       supported by appropriate source documentation, and allocable as a grant
       expenditure.

   •   The sub-recipient did not have a system in place to ensure proper procurement
       and cost allocation processes were implemented.




                                           11
                        FOLLOW-UP ON PRIOR AUDITS

This is the first audit of the City of McKeesport's Community Development Block Grant
Program by HUD's Office of Inspector General.




                                         12
                                                                            Appendix A

                     SCHEDULE OF QUESTIONED COSTS




             Recommendation            Ineligible Costs    Unsupported
                 Number                       1/             Costs 2/
                     1C                                       $179,398
                     1D                                       $350,251
                     1E                                       $164,924


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 charged to a HUD-financed or HUD-insured program or
     activity and eligibility cannot be determined at the time of the audit. The costs are
     not supported by adequate documentation or there is a need for a legal or
     administrative determination on the eligibility of the 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.




                                          13
                   Appendix B

AUDITEE COMMENTS




       14