oversight

HUD �s Interest in $1 Million in Economic Development Initiative � Special Purpose Grant Funds Awarded to the City of Carmel Was Not Secured; Carmel, Indiana

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




            CITY OF CARMEL
ECONOMIC DEVELOPMENT INITIATIVE – SPECIAL
     PURPOSE GRANT (B-02-SP-IN-0220)

                  CARMEL, INDIANA

HUD’s Interest in $1 Million in Grant Funds Awarded to the
                   City Was Not Secured

                     2005-CH-1019

                 SEPTEMBER 28, 2005

                OFFICE OF AUDIT, REGION V
                    CHICAGO, ILLINOIS
                                                                 Issue Date
                                                                          September 28, 2005
                                                                  Audit Report Number
                                                                          2005-CH-1019




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 the City of Carmel Was Not Secured;
           Carmel, Indiana

                                   HIGHLIGHTS

 What We Audited and Why

             We audited the City of Carmel, Indiana’s (City) 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 City’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 City used its
             Grant funds in accordance with HUD’s requirements and recorded HUD’s interest
             on the assisted property.

 What We Found


             The City used the Grant funds in accordance with HUD’s requirements. It used
             $1 million in Grant funds to pay for the area wide subterranean detention system
             and reflecting pool design of Veterans Plaza and the Reflecting Pond. However,
             it did not place a covenant on the property title for Veterans Plaza and the
             Reflecting Pond, assuring nondiscrimination based on race, color, national origin,
           or handicap. Further, HUD did not request the City to record HUD’s interest on
           the property title for Veterans Plaza and the Reflecting Pond.


What We Recommend

           We recommend that HUD’s director of congressional grants require the City 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 Veterans
           Plaza and the Reflecting Pond showing HUD’s interest in the assisted property. If
           the covenant and lien are not recorded, the City should reimburse HUD $1 million
           from nonfederal funds for the Grant funds used to pay for the area-wide
           subterranean detention system and reflecting pool design of Veterans Plaza and
           the Reflecting Pond.

           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 City’s director of administration
           and HUD’s staff during the audit. The director of administration declined our offer
           for an exit conference.

           We asked the director of administration to provide comments on our discussion draft
           audit report by September 17, 2005. The director of administration provided written
           comments dated September 16, 2005. The director of administration 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 City Was   5
               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.

The City of Carmel, Indiana. Organized under the laws of the State of Indiana, the City is
governed by a mayor and seven-member council. 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 City for its Indiana parks development. In August 2002,
HUD awarded the City the $1 million Grant to pay for the first two phases of the park effort,
including the establishment of a reflecting pool feature and an area-wide subterranean detention
system, respectively. The City’s Department of Administration administers the Grant. The
City’s records for the Grant are maintained at Carmel City Hall, located at One Civic Square,
Carmel, Indiana.

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 City’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 City 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
                       City Was Not Secured
The City used $1 million in Grant funds to pay for the area-wide subterranean detention system
and reflecting pool design of Veterans Plaza and the Reflecting Pond; however, the City did not
place a covenant on the property title for Veterans Plaza and the Reflecting Pond assuring
nondiscrimination based on race, color, national origin, or handicap. Further, HUD did not
request the City to record HUD’s interest on the property title for Veterans Plaza and the
Reflecting Pond. The City did not record the covenant on the title because it lacked effective
oversight over applicable Grant requirements. As a result, HUD’s interest in Veterans Plaza and
the Reflecting Pond are not protected.



 The City Used $1 Million in
 Grant Funds without Placing a
 Covenant on the Title to Ensure
 Nondiscrimination

              Contrary to federal requirements, the City did not secure HUD’s interest in $1
              million in Grant funds used to pay for the area-wide subterranean detention
              system and reflecting pool design of Veterans Plaza and the Reflecting Pond. The
              funds were disbursed from September 2002 through December 2003. The City
              failed to place a covenant on Veterans Plaza and the Reflecting Pond’s property
              title to assure nondiscrimination based on race, color, national origin, or handicap.
              The purpose of the covenant is to ensure nondiscrimination during the period in
              which Veterans Plaza and the Reflecting Pond are used as outlined in the City’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 Veterans Plaza and/or the Reflecting Pond.

 HUD’s Interest in Veterans
 Plaza and the Reflecting Pond
 Is at Risk

              The City’s director of administration said he did not believe that costs for
              developing the area-wide subterranean detention system and the reflecting pool
              design qualified as acquiring real property. However, funds used to develop land
              and design structures does fall within the regulatory meaning of real property as
              outlined in 24 CFR [Code of Federal Regulations] 1.5 and 8.50. The recording of



                                                5
            the covenant will provide HUD recourse if discrimination based on race, color,
            national origin, or handicap occurs in relation to Veterans Plaza and/or the
            Reflecting Pond.

HUD Did Not Request the City
to Record HUD’s Interest on
the Title for Veterans Plaza and
the Reflecting Pond

            HUD did not request the City to record HUD’s interest on the property title for
            Veterans Plaza and the Reflecting Pond. The recording of HUD’s interest in the
            assisted property will help protect HUD in case the property is sold or is no longer
            used for its intended purpose. The City’s director of administration certified in
            Standard Form 424D, Assurances – Construction Programs, section 3, that the
            City 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 Standard Form 424D only
            requires the City to record HUD’s interest in Veterans Plaza and the Reflecting
            Pond if HUD issued a directive that requires applicants to record HUD’s interest
            in real property or HUD specifically directs the City to record HUD’s interest in
            Veterans Plaza and the Reflecting Pond. HUD did not issue any directives
            requiring grant recipients to record HUD’s interest in real property or specifically
            direct the City 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 Veterans Plaza and the Reflecting Pond is not protected in case
            the property is sold or is no longer used for its intended purpose.

Recommendations

            We recommend that HUD’s director of congressional grants require the City 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
                Veterans Plaza and the Reflecting Pond showing HUD’s interest in the assisted
                property. The covenant and lien should help ensure that the City protects
                HUD’s interest in the $1 million in Grant funds for Veterans Plaza and the
                Reflecting Pond.

            1B. Reimburse HUD from nonfederal funds for the Grant funds used to pay for
                the area wide subterranean detention system and reflecting pool design if the
                covenant and lien are not recorded.




                                             6
                        SCOPE AND METHODOLOGY

We performed the audit at the City’s administrative offices and its City Center in July 2005. To
accomplish our objectives, we interviewed HUD’s staff and the City’s employees.

To determine whether the City 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 City’s financial records, and
   •   The City’s website for organizational information on the City.

We also reviewed 24 CFR [Code of Federal Regulations] parts 1, 8, and 85; 56 Federal Register
16337; 70 Federal Register 35967; HUD Directives 1.5, 8.50, and 85.31; 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 August 1, 2002, 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 City 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 City’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 City will comply with 24 CFR [Code of Federal Regulations] part 85.

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 85.31 and 24 CFR [Code of Federal Regulations] 85.31 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. Section 85.31(c)
states when the real property is no longer needed for the authorized purpose, 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 City’s director of administration certified in Standard Form 424D, Assurances –
Construction Programs, section 3, that the City 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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