oversight

HUD's Interest in $1 Million in Economic Development Initiative - Special Purpose Grant Funds Awarded to Mount Union College Was Not Secured; Alliance, Ohio

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-09-28.

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

               AUDIT REPORT




          MOUNT UNION COLLEGE
 ECONOMIC DEVELOPMENT INITIATIVE – SPECIAL
      PURPOSE GRANT (B-02-SP-OH-0555)

                    ALLIANCE, OH

HUD’s Interest in $1 Million in Grant Funds Awarded to The
                 College Was Not Secured

                     2005-CH-1018

                 SEPTEMBER 28, 2005

                OFFICE OF AUDIT, REGION V
                    CHICAGO, ILLINOIS
                                                                 Issue Date
                                                                          September 28, 2005
                                                                 Audit Report Number
                                                                          2005-CH-1018




TO:         Francis P. McNally, Director of Congressional Grants, DECC


FROM:       Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: HUD’s Interest in $1 Million in Economic Development Initiative - Special
           Purpose Grant Funds Awarded to Mount Union College Was Not Secured;
           Alliance, Ohio

                                   HIGHLIGHTS

 What We Audited and Why

             We audited Mount Union College’s (College) Economic Development Initiative -
             Special Purpose Grant (Grant). We initiated the audit in conjunction with our
             internal review of the U.S. Department of Housing and Urban Development’s
             (HUD) oversight of Economic Development Initiative – Special Purpose Grants.
             The review is part of our fiscal year 2005 annual audit plan. We chose the
             College’s Grant based upon a statistical sample of fiscal years 2002 and 2003
             Economic Development Initiative – Special Purpose Grants, in which 90 percent
             or more in funds were disbursed. Our objectives were to determine whether the
             College used its Grant funds in accordance with HUD’s requirements and
             recorded HUD’s interest on the assisted property.

 What We Found


             The College used the Grant funds in accordance with HUD’s requirements. The
             College used $1 million in Grant funds to pay for architectural fees for the
             construction of Bracy Hall, a science facility. However, the College did not place
             a covenant on the property title for Bracy Hall assuring nondiscrimination based
           on race, color, national origin, or handicap. Further, HUD did not request the
           College to record HUD’s interest on the property title for Bracy Hall.


What We Recommend

           We recommend that HUD’s director of congressional grants require the College
           to record a covenant on the title assuring nondiscrimination based on race, color,
           national origin, or handicap and record a lien on the property title for Bracy Hall
           showing HUD’s interest in the assisted property. If the covenant and lien are not
           recorded, the College should reimburse HUD $1 million from nonfederal funds
           for the Grant funds used to pay for Bracy Hall’s architectural fees.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response

           We provided our discussion draft audit report to the College’s vice president for
           business affairs and treasurer and HUD’s staff during the audit. We held an exit
           conference with the vice president for business affairs and treasurer on September
           14, 2005.

           We asked the vice president for business affairs and treasurer to provide comments
           on our discussion draft audit report by September 16, 2005. The vice president for
           business affairs and treasurer provided written comments dated September 16, 2005.
           The vice president for business affairs and treasurer agreed to implement corrective
           action to address our finding. The complete text of the written comments can be
           found in appendix B of this report.




                                             2
                            TABLE OF CONTENTS

Background and Objectives                                                           4

Results of Audit

      Finding: HUD’s Interest in $1 Million in Grant Funds Awarded to the College   5
               Was Not Secured

Scope and Methodology                                                               7

Internal Controls                                                                   8

Appendixes
   A. Schedule of Funds to Be Put to Better Use                                     10
   B. Auditee Comments                                                              11
   C. Federal Requirements                                                          13




                                            3
                      BACKGROUND AND OBJECTIVES

The Economic Development Initiative program. The U.S. Department of Housing and Urban
Development’s (HUD) Economic Development Initiative program includes noncompetitive
Economic Development Initiative – Special Purpose Grants. HUD awards Economic
Development Initiative – Special Purpose Grants to entities included in the U.S. House of
Representatives’ conference reports.

Mount Union College. Incorporated in 1878 as a nonprofit corporation under the laws of the
State of Ohio, Mount Union College (College) is governed by a 55-member board of trustees,
which includes the College’s president. As of July 2005, the College’s endowment was $121
million. The U.S. House of Representatives’ Conference Report 107-272 set aside $1 million in
Economic Development Initiative – Special Purpose Grant (Grant) funds to the College for a
new science facility. In June 2002, HUD awarded the College the $1 million Grant to pay for
architectural fees for the construction of Bracy Hall. Bracy Hall is a four-floor science facility
housing the College’s Departments of Biology, Chemistry, Geology, Physics, and Astronomy.
The facility contains 21 faculty offices, 20 laboratories, three lecture halls, and two classrooms.
The College’s Department of Business Affairs administers the Grant. The College’s records for
the Grant are at Beeghly Hall, located at 1972 Clark Avenue, Alliance, Ohio.

We initiated this audit in conjunction with our internal review of HUD’s oversight of Economic
Development Initiative – Special Purpose Grants. The review is part of our fiscal year 2005
annual audit plan. We chose the College’s Grant based upon a statistical sample of fiscal years
2002 and 2003 Economic Development Initiative – Special Purpose Grants, in which 90 percent
or more in funds were disbursed.

Our objectives were to determine whether the College used its Grant funds in accordance with
HUD’s requirements and recorded HUD’s interest on the assisted property.




                                                 4
                                 RESULTS OF AUDIT

 Finding: HUD’s Interest in $1 Million in Grant Funds Awarded to the
                     College Was Not Secured
The College used $1 million in Grant funds to pay for architectural fees for the construction of
Bracy Hall; however, it did not place a covenant on the property title for Bracy Hall, a science
facility constructed using Grant funds, assuring nondiscrimination based on race, color, national
origin, or handicap. The College used $1 million in Grant funds to pay for architectural fees for
the construction of Bracy Hall. Further, HUD did not request the College to record HUD’s
interest on the property title for Bracy Hall. The College did not record the covenant on the title
because it lacked effective oversight over applicable Grant requirements. As a result, HUD’s
interest in Bracy Hall is not protected.


 The College Used $1 Million in
 Grant Funds without Placing a
 Covenant on the Facility’s Title
 to Ensure Nondiscrimination


               Contary to federal requirements, the College did not secure HUD’s interest in $1
               million in Grant funds used to pay for architectural fees for the construction of
               Bracy Hall. Bracy Hall is a science facility housing the College’s Departments of
               Biology, Chemistry, Geology, Physics, and Astronomy. The funds were
               disbursed from November 2002 through November 2003. The College failed to
               place a covenant on Bracy Hall’s property title to assure nondiscrimination based
               on race, color, national origin, or handicap. The purpose of the covenant is to
               ensure nondiscrimination for the period that Bracy Hall is used for a science
               facility as outlined in the College’s application for the Grant or for another
               purpose involving similar services or benefits. The recording of the covenant will
               provide HUD recourse if discrimination based on race, color, national origin, or
               handicap occurs in relation to Bracy Hall.

 HUD’s Interest in Bracy Hall Is
 at Risk


               The College’s vice president for business affairs and treasurer said HUD did not
               provide the College any directives or guidance regarding the securing of HUD’s
               interest in Bracy Hall. Additionally, the vice president said the College lacked
               experience regarding HUD grants. However, the College assured it would place a
               covenant on the real property’s title to assure nondiscrimination during the useful
               life of the project. The recording of the covenant will provide HUD recourse if



                                                 5
            discrimination based on race, color, national origin, or handicap occurs in relation
            to Bracy Hall.

HUD Did Not Request the
College to Record HUD’s
Interest on Bracy Hall’s Title


            HUD did not request the College to record HUD’s interest on the property title for
            Bracy Hall. The recording of HUD’s interest in the facility will help protect HUD
            in case the facility is sold or is no longer used for its intended purpose. The
            College’s vice president for business affairs and treasurer certified in Standard
            Form 424D, Assurances – Construction Programs, section 3, that the College
            would record the federal interest in the title of real property in accordance with
            awarding agency directives.

            HUD’s Office of Congressional Grants’ position is that the Standard Form only
            requires the College to record HUD’s interest in Bracy Hall, if HUD issued a
            directive that requires applicants to record HUD’s interest in real property or
            HUD specifically directs the College to record HUD’s interest in Bracy Hall.
            HUD did not issue any directives requiring grant recipients to record HUD’s
            interest in real property or specifically direct the College to record HUD’s
            interest. However, HUD clearly has the authority to require a grantee to record
            HUD’s interest in an assisted property. Therefore, HUD’s interest in Bracy Hall
            is not protected in case the facility is sold or is no longer used for its intended
            purpose.


Recommendations


            We recommend that HUD’s director of congressional grants require the College to

            1A. Record a covenant on the title assuring nondiscrimination based on race,
                color, national origin, or handicap and record a lien on the property title for
                Bracy Hall showing HUD’s interest in the assisted property. The covenant
                and lien should help ensure that the College protects HUD’s interest in the $1
                million in Grant funds for Bracy Hall.

            1B. Reimburse HUD from nonfederal funds for the Grant funds used to pay for
                Bracy Hall’s architectural fees if the covenant and lien are not recorded.




                                              6
                        SCOPE AND METHODOLOGY

We performed the audit at the College’s Department of Business Affairs’ offices and Bracy Hall
in July 2005. To accomplish our objectives, we interviewed HUD’s staff and the College’s
employees.

To determine whether the College used Grant funds in accordance with HUD’s requirements and
recorded HUD’s interest on the assisted property, we reviewed:

   •   U.S. House of Representatives’ Conference Report 107-272,
   •   HUD’s file related to the Grant,
   •   The College’s financial records, and
   •   The College’s and the State of Ohio Secretary of State’s websites for organizational
       information on the College.

We also reviewed 24 CFR [Code of Federal Regulations] parts 1, 8, and 84; 56 Federal Register
16337; 70 Federal Register 35967; HUD Directives 1.5, 8.50, and 84.32; Office of Management
and Budget Circulars A-21, A-87, A-110, and A-122; and HUD Handbook 2000.06, REV-3.

The audit covered the period from July 1, 2992, through June 10, 2005. This period was
adjusted as necessary. We performed our audit in accordance with generally accepted
government auditing standards.




                                               7
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding resources.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


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

                  •   Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

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

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

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

              We assessed all of the relevant controls identified above.

              A significant weakness exists if internal controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.




                                                8
Significant Weakness


            Based on our audit, we believe the following item is a significant weakness:

               •   The College did not record the covenant on the title because it lacked
                   effective oversight over applicable Grant requirements.




                                             9
                                    APPENDIXES

Appendix A

     SCHEDULE OF FUNDS TO BE PUT TO BETTER USE

                                                    Funds to be
                             Recommendation
                                                    put to better
                                 number
                                                       use 1/
                                     1A             $1,000,000
                                    Total           $1,000,000


1/   “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
     Office of Inspector General (OIG) recommendation is implemented, resulting in reduced
     expenditures at a later time for the activities in question. This includes costs not incurred,
     deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of
     unnecessary expenditures, loans and guarantees not made, and other savings.




                                              10
Appendix B

             AUDITEE COMMENTS




                    11
12
Appendix C

                            FEDERAL REQUIREMENTS

The College’s grant agreement with HUD, article I, section B, states the grants funds must be
made available in accordance with 24 CFR [Code of Federal Regulations] parts 1 and 8. Section
E of article I states the College will comply with 24 CFR [Code of Federal Regulations] part 84.

According to 24 CFR [Code of Federal Regulations] 1.5(a)(2), in the case of real property,
structures, improvements thereon, or interests therein, acquired through a program of federal
financial assistance, the instrument effecting any disposition by the recipient of such real
property, structures, improvements thereon, or interests therein shall contain a covenant running
with the land assuring nondiscrimination based on race, color, or national origin for the period
during which the real property is used for a purpose for which the federal financial assistance is
extended or for another purpose involving the provision of similar services or benefits.

According to 24 CFR [Code of Federal Regulations] 8.50(c)(2), when no transfer of property is
involved, but property is purchased or improved with federal financial assistance, the recipient
shall agree to include a covenant in the instrument effecting or recording any later transfer of the
property for the period during which it retains ownership or possession of the property to assure
nondiscrimination based on a handicap.

HUD Directive 84.32 and 24 CFR [Code of Federal Regulations] 84.32(a) state title to the real
property shall vest in the recipient as long as the recipient uses the real property for its authorized
purpose and does not encumber the real property without HUD’s approval. Part 84.32(c) states
when the real property is no longer needed for the authorized purpose or cannot be used in other
HUD-approved federally sponsored projects or programs with purposes consistent with the
authorized purpose of the original project, the recipient shall request disposition instructions
from HUD. HUD shall require the recipient to do the following: (1) retain title to the real
property without further obligation to the federal government after it compensates the federal
government the percentage of the current fair market value of the real property attributable to the
federal participation in the project; (2) sell the real property and compensate the federal
government for the percentage of the current fair market value of the real property attributable to
the federal participation in the project; or (3) transfer title to the real property to the federal
government or to an eligible third party and be entitled to compensation for its percentage of the
current fair market value of the real property.

According to 56 Federal Register 16337, directive means a handbook (including a change or
supplement), notice, interim notice, special directive, and any other issuance that the department
may classify as a directive.

The College’s vice president for business affairs and treasurer certified in Standard Form 424D,
Assurances – Construction Programs, section 3, that the College would record the federal interest
in the title of real property in accordance with awarding agency directives and would include a
covenant in the title of real property acquired in whole or in part with federal assistance to assure
nondiscrimination during the useful life of the project.



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