oversight

The City of New Orleans, Louisiana, Did Not Contribute Approximately $3.6 Million in HOME Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-04-08.

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

                                                                         Issue Date
                                                                                  April 8, 2005
                                                                         Audit Report Number
                                                                                  2005-FW-1008




TO:            Gregory Hamilton
               Director, Community Planning and Development, 6HD

               //Signed by Jerry R. Thompson for//
FROM:          Frank E. Baca
               Regional Inspector General for Audit, 6AGA

SUBJECT: The City of New Orleans, Louisiana, Did Not Contribute Approximately $3.6
           Million in HOME Funds


                                         HIGHLIGHTS

    What We Audited and Why

                         We reviewed the City of New Orleans’ (City) matching contributions to
                         its HOME Investment Partnerships program (HOME) funds because
                         during our audit of a subrecipient,1 we noted the City may not have met its
                         HOME matching requirements.

                         Accordingly, we expanded our original audit objectives to include
                         determining whether the City documented and matched its disbursed
                         HOME funds in accordance with U.S. Department of Housing and Urban
                         Development (HUD) regulations.

    What We Found


                         Between fiscal years 2000 and 2003, the City did not provide $3.6 million
                         in matching HOME funds as required by HUD. In addition, the City


1
     Audit Report Number 2004-FW-1007, “Audit of City of New Orleans Desire Community Housing Corporation
     New Orleans, Louisiana,” issued June 22, 2004.
                     failed to maintain a system that identified the type and amount of each
                     matching contribution.

What We Recommend


                     We recommend that the Director of Community Planning and
                     Development require the City to: (1) submit matching contributions in the
                     amount of $3.6 million; (2) update its policies, ensuring that the policies
                     are in compliance with HUD and other federal rules and regulations; and
                     (3) provide documentation of its matching contributions as it draws funds
                     until it has a plan to ensure continued compliance with HUD requirements.
                     Further, HUD should review and monitor the City's plan to ensure the
                     matching deficiency is corrected.

                     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 HUD and the City a draft report on March 10, 2005, and held
                     an exit conference on March 16, 2005. In its April 1, 2005 response, the
                     City agreed with the finding and provided a plan to correct the match
                     deficiency. The complete text of the auditee’s response, along with our
                     evaluation of that response, can be found in Appendix B of this report.




                                              2
                            TABLE OF CONTENTS

Background and Objectives                                                        4

Results of Audit
      Finding 1: The City of New Orleans Did Not Contribute Approximately $3.6   5
      Million in HOME Funds

Scope and Methodology                                                            9

Internal Controls                                                                10

Follow up on Prior Audits                                                        11

Appendixes
   A. Schedule of Questioned Costs                                               12
   B. Auditee Comments and OIG’s Evaluation                                      13




                                           3
                      BACKGROUND AND OBJECTIVES

The City of New Orleans, Louisiana (City), is the largest recipient of the Department of Housing
and Urban Development’s (HUD) Community and Planning Division funds in the State of
Louisiana. The City receives the following formula grants from HUD: Community
Development Block Grant, Emergency Shelter Grant, HOME Investment Partnerships program
(HOME), and Housing Opportunities for Persons with AIDS. In addition, the City has pledged
Community Development Block Grant funds in excess of $35 million under the Section 108 loan
guarantee program.

Between 2000 and 2004, HUD awarded the City more than $36.6 million in HOME funds. The
purpose of the HOME funds is to “strengthen public/private partnerships to expand the supply of
decent, safe, sanitary, and affordable housing to low- and very low-income families.” As
discussed in previous reports,2 the City did not adequately monitor its HUD funds.

While performing our audit of Desire Community Housing Corporation, we identified a potential
issue with the City’s matching of its HOME program funds. We noted the City may not have
met its HOME matching fund requirement. Accordingly, we expanded our original audit
objectives to include determining whether the City documented and matched its disbursed
HOME funds in accordance with HUD regulations.




2
    Audit Report Numbers 2005-FW 1005, 2005-FW-1001, 2004-FW-1007, and 2004-FW-1003.


                                                 4
                                     RESULTS OF AUDIT

Finding 1: The City of New Orleans Did Not Contribute Approximately
$3.6 Million in HOME Funds

Between fiscal years 2000 and 2003, the City did not provide $3,591,209 in matching HOME
funds as required by HUD.3 The City did not maintain a system identifying the type and amount
of each matching contribution. As a result, the City did not provide its required contribution for
its HOME funds, thereby compelling HUD grants to fund the entire cost of the activities. The
City should document and submit matching contributions of $3,591,209 in addition to matching
its current HOME expenditures. Further, the City should implement a plan to document its
matching of HOME funds.

    HUD Required the City to
    Match HOME Funds


                 Section 220 of the Cranston-Gonzales National Affordable Housing Act
                 established the general requirement that each HOME participating jurisdiction
                 make contributions to its HOME-assisted projects equal to 25 percent of the
                 HOME funds drawn down during each fiscal year. HUD allows4 a participating
                 jurisdiction to receive a 100 percent reduction if both its poverty rate and per
                 capita income falls below a set level. If a participating jurisdiction’s poverty rate
                 or per capita income falls below a set level, HUD allows a 50 percent reduction in
                 its matching requirement. Because the City’s poverty rate fell below the set level,
                 it received a 50-percent reduction in its matching requirement. Therefore, the
                 City had to match only 12.5 percent of HOME funds disbursed.

                 HUD required the City to maintain records, including individual project records
                 and a running log, demonstrating compliance with the matching requirements,
                 including the type and amount of contributions by project. Further, HUD required
                 the City to document and support the matching contributions as part of its
                 Consolidated Annual Performance Evaluation Report (Annual Report). HUD
                 regulations allow for the suspension of HOME drawdowns if the City fails to
                 submit the HOME matching reports.




3
     24 CFR [Code of Federal Regulations] 92.218.
4
     24 CFR [Code of Federal Regulations] 92.222.


                                                    5
     The City’s Annual Report Only
     Showed $156,014 in Matching
     Contributions

                 For fiscal years 2000 through 2003, the City’s Annual Report only showed
                 $156,014 in matched HOME funds, $3,591,209 short of the required $3,747,223
                 match. As listed below, the City had the following disbursements that required
                 matched funds.5

                     Computation of the City’s Required Matching Funds
                 Fiscal Year       Disbursements       Match       Match
                                 Requiring Match        Rate      Liability
                       2000      $13,017,605         0.125        $1,627,201
                       2001      $ 8,213,996         0.125        $1,026,749
                       2002      $ 5,694,762         0.125         $ 711,845
                       2003      $ 3,051,424         0.125         $ 381,428
                      Totals     $29,977,787                      $3,747,223

                 Although its 2000 Consolidated Plan committed $1,260,000 in Neighborhood
                 Housing Improvement Fund funds as HOME matching contributions, the City
                 documented no matching contributions for the 2000 program year in its Annual
                 Report. The City’s 2001 Annual Report showed $156,014 in matching HOME
                 contributions, far less than the required match of $1,026,749. Neither the City’s
                 2002 nor the 2003 Annual Report documented HOME matching funds.


    The City Has Not Met Its
    Matching Obligation since 1993


                 According to the City, it has not met its matching obligation since 1993, the year
                 the matching requirement was established. The City attempted to require
                 subrecipients to assist in matching HOME funds through grant agreements. This
                 was never accomplished, and the City eventually agreed that the burden to match
                 should not fall on the subrecipients.

                 The City failed to submit matching documentation to HUD. For example, in June
                 2004 during the review of the City’s 2003 Annual Report, HUD noted that the
                 City did not submit the required form and supporting documentation for fiscal
                 years 2002 and 2003. HUD threatened to suspend the City’s drawdowns if it did
                 not submit the reporting forms.




5
     Information obtained from HUD’s Integrated Disbursement and Information System HOME Match Liability
     Report, dated August 13, 2004.


                                                     6
            The City’s management controls did not adequately ensure the City complied
            with HOME matching requirements. The City’s HOME policy and procedure
            manual has not been updated or implemented. Further, the City’s HOME manual
            did not specify the process the City uses to allocate and administer HOME funds
            or a plan for matching HOME funds. A City official stated that policies and
            procedures would be updated and finalized based upon input from our audits.


The City Acknowledged the
Matching Deficiency


            In an August 12, 2004, meeting between the City and HUD, the City
            acknowledged its failure to match the HOME funds. On November 10, 2004, the
            City submitted a plan to address the HOME matching deficiency.

            According to the plan, the City has:

            •   A matching obligation of $8 million, dating back to 1993.
            •   Accumulated and documented since 1993, matching contributions of $4.2
                million.
            •   Accumulated and documented $1.1 million in matching contributions in fiscal
                year 2005.

            If the City’s information is accurate, it has acknowledged a net matching
            deficiency of $3.8 million. The City agreed to submit monthly reports to HUD to
            document its progress in implementing the plan. Further, the City forecast a
            $7,549,395 match for fiscal year 2005. According to the City’s calculations, it
            should exceed its matching requirement by the end of fiscal year 2005. As of
            February 18, 2005, the City could not provide documentation to support the
            implementation or progress of the plan.

            The City should implement its plan to ensure it matches its HOME funds, both
            past and future.

 Recommendations



            We recommend that the HUD New Orleans Community Planning Development
            Director:

            1A. Require the City to submit documentation of its matching deficiency of
                $3,591,209 for the fiscal years 2000-2003.

            1B. Require the City to update its policies, ensuring that the policies comply
                with HUD and other federal rules and regulations, including submitting
                required reports demonstrating appropriate matching of HOME funds.


                                             7
                1C. Require the City to provide documentation of its matching contributions as
                    it draws funds until it has a plan to ensure continued compliance with HUD
                    requirements.6

                1D. Review the City's plan to ensure it complies with the requirements and will
                    correct the past matching deficiency while still meeting its current matching
                    obligation.

                1E. Monitor the implementation of the City's plan including obtaining and
                    reviewing the required monthly reports.




6
    24 CFR [Code of Federal Regulations] 92.551c(1)(vii).


                                                       8
                         SCOPE AND METHODOLOGY

To achieve our audit objectives we performed the following:

       Analyzed files, financial documents, records, monitoring reports, audit reports, manuals,
       and other reports maintained by the City and HUD;
       Reviewed applicable regulations; and
       Interviewed appropriate staff from the City and HUD.

Throughout the audit, we obtained and reviewed computer-generated data from the City. We did
not test the reliability of computer-generated data. As discussed in previous reports,7 the City
lacked controls over its subrecipients and failed to adequately monitor them. The lack of
controls limited our reliance upon the data.

We performed our fieldwork from January 2003 to January 2005. The audit generally covered
the City’s operations from January 1, 2000, to December 31, 2003. We expanded the scope as
necessary.

We conducted the audit in accordance with generally accepted government auditing standards.




7
    Audit Report Numbers 2005-FW 1005, 2005-FW-1001, 2004-FW-1007, and 2004-FW-1003.


                                                 9
                             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; and
   •   Compliance with applicable laws and regulations.

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:

              •   Controls over and compliance with program policies and procedures,
              •   Management philosophy and operating style, and
              •   Monitoring performance to ensure program goals are met.

              We assessed the relevant controls identified above.

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

 Significant Weaknesses


              Based on our review, we believe the following items are significant weaknesses:

              •   Fiscal management and
              •   Ensuring program goals and objectives are met.




                                               10
                        FOLLOW UP ON PRIOR AUDITS

The Office of Inspector General (OIG) has not performed an audit of the City’s HOME program
since 1995.8 The audit disclosed significant problems in the program. The findings were closed
before our current audit.

Bruno & Tervalon completed the most recent audit of the City’s financial statements for the 12-
month period ending December 31, 2003. Bruno & Tervalon issued an unqualified opinion on
the financial statements and a qualified opinion on compliance for major programs. The report
contained findings that required reporting under section 510(a) of Office of Management and
Budget Circular A-133. The audit report contained 11 audit findings that affected our audit
objectives. The findings were in the areas of cost allocation, the Davis-Bacon Act, eligibility,
equipment and real property management, matching, earmarking, suspension and debarment
certifications, program income, financial reporting, monitoring, and special tests and provisions-
on-site inspections.

From 2000 through 2003, Bruno & Tervalon cited the City for not matching its HOME funds in
its audit reports.




8
    Audit Report Number 95-FW-255-1007.


                                                11
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS




                           Recommendation
                               Number            Unsupported 1

                                  1A                 $3,591,209
                                 Total               $3,591,209




1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of audit. 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.




                                            12
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         13
14
                        OIG Evaluation of Auditee Comments

Comment 1   We commend the City for its efforts to identify and correct the HOME matching
            deficiency. The City should continue working with HUD to implement the
            necessary controls to track and document HOME matching funds.




                                           15