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.
13
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)