Issue Date July 28, 2005 Audit Report Number 2005-LA-1006 TO: Steven Sachs, Regional Office Director, Community Planning and Development, 9AD FROM: Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA SUBJECT: Maricopa HOME Consortium/City of Mesa HOME Program Maricopa Revitalization HIGHLIGHTS What We Audited and Why We conducted a limited review of the Maricopa HOME Consortium (Consortium)/City of Mesa’s (City) use of $570,000 in HOME grant funds to assist in the rehabilitation of 35 single-family scattered site public housing units, located within the jurisdiction of the City and Maricopa County. Our objective was to determine whether the use of HOME funds to rehabilitate these public housing units was an eligible HOME activity. What We Found We determined that this Consortium/City grant activity was not an eligible use of HOME funds. Although title to the housing units rehabilitated was transferred to a new entity, they remain under an annual contributions contract between the U.S. Department of Housing and Urban Development (HUD) and the Housing Authority of Maricopa County (Authority) and are receiving operating subsidy (including capital grant funding). This is an ineligible activity, according to the HOME regulations set out in 24 CFR [Code of Federal Regulations] 92.214, which prohibits the use of HOME funds to assist housing units receiving assistance under section 9 of the 1937 Housing Act (public housing capital and operating funds). The parties involved, including the nonprofit developer, Community Services of Arizona, which was the managing entity for the activity, failed to adequately review the conditions agreed to by HUD in allowing the Authority to dispose of these units. These conditions significantly and adversely affected the eligibility of this project to receive HOME funds. Additionally, we noted deficiencies in record keeping by the developer involved in this activity. What We Recommend We recommend that the Consortium be required to reimburse the $570,000 in HOME funds to its local HOME investment trust fund. Additionally, we recommend that the Consortium establish sufficient controls/procedures to ensure HUD program requirements are followed by each Consortium member and documentation and records supporting key decisions are maintained by each Consortium member and its subrecipients/developers for all HOME program activities. 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 The auditee provided us with a written response to our draft report on July 12, 2005. They generally disagreed with our conclusions relating to the eligibility of subject HOME activity. 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: Inadequate Procedures and Controls over Grant Activities by the 5 Consortium/City Resulted in the Ineligible Use of $570,000 in HOME Funds Scope and Methodology 8 Internal Controls 9 Followup on Prior Audits 10 Appendixes A. Schedule of Questioned Costs and Funds to Be Put to Better Use 11 B. Auditee Comments and OIG’s Evaluation 12 3 BACKGROUND AND OBJECTIVES The $570,000 in HOME funds was used to assist in the rehabilitation of a 35-unit scattered site project called Maricopa Revitalization. This project originally consisted of 56 single-family scattered site public housing units owned by the Housing Authority of Maricopa County (Authority) that were sold (transferred) to a new ownership entity (Maricopa Revitalization Partnership, LLC (Partnership)), which obtained tax credit financing to assist in the rehabilitation of the units. All 56 units were under an annual contributions contract (contributions contract) and receiving operating subsidy at the time the U.S. Department of Housing and Urban Development (HUD) approved the disposition of the 56 units in May 2002. In accordance with HUD’s disposition approval, the units were to be removed from the Authority’s contributions contract when sold and then brought back in under a new contributions contract after project completion (after rehabilitation). This disposition approval was subject to the Authority obtaining HUD’s approval of a mixed-finance application for the rehabilitation and management of the units. An application/proposal was submitted in July 2002. However, before HUD initiated its review, the Authority informed HUD that the proposal would be changing and that a new application would be submitted. This new application was never submitted, and thus the project never received required HUD final approval. Although all 56 units were sold (ownership transferred), only 35 units were ultimately included in the new ownership entity that received tax credit and HOME financing. The HOME funds involved in the project were used as “gap” financing. This was necessary as the tax credit funds were not sufficient to pay for the total rehabilitation and administrative costs of the project. The City of Mesa (City), an equal partner of the Maricopa HOME Consortium (Consortium), entered into a HOME agreement with and loaned the $570,000 in HOME funds to Community Services of Arizona, Inc. (Community Services), the nonprofit developer of the project. Community Services in turn loaned the HOME funds to the Partnership, the owner of the project to assist in the rehabilitation of 22 of the units. The rehabilitation of the 35 units was completed around October 2003. The lead agency in the Consortium is Maricopa County (County) through its Community Development Department. As the lead agency, the County has been designated the participating jurisdiction by HUD and as such, is responsible for overall administration of the Consortium’s HOME programs. According to County staff and the Consortium agreement, the Consortium members administer and are individually responsible for their subrecipient agreements, including monitoring and processing all financial reimbursements, project setups, revisions, and completion reports through the lead agency. Community Services, the managing partner of the Partnership, was responsible for carrying out and managing the HOME-assisted housing activity. Our objective was to determine whether the use of HOME funds to rehabilitate public housing units was an eligible HOME activity. 4 RESULTS OF AUDIT Finding 1: Inadequate Procedures and Controls over Grant Activities by the Consortium/City Resulted in the Ineligible Use of $570,000 in HOME Funds The Consortium/City inappropriately used $570,000 in HOME funds to assist in the rehabilitation of 35 scattered site public housing units, which were under a contributions contract and receiving operating subsidy. HOME regulations set out in 24 CFR [Code of Federal Regulations] 92.214 state that HOME funds may not be used to provide assistance authorized under section 9 of the 1937 Housing Act (public housing capital and operating funds). Accordingly, this activity was not eligible for assistance under the HOME program. In our opinion, the County, the lead agency in the Consortium; the City, a member of the Consortium; and Community Services, the developer, did not apply sufficient oversight and control to ensure that the HOME funds were used in accordance with HUD’s requirements. They did not obtain sufficient information relating to HUD’s approval of the transfer of the public housing units involved in the project from the Authority to the Partnership and how this affected the units’ continued eligibility for capital grant and operating subsidy funding. Community Services Received $570,000 in HOME Funds to Assist in the Rehabilitation of 35 Public Housing Units Community Services originally executed a subrecipient 1agreement with the City in February 2002. This agreement called for the City to provide Community Services $380,000 in HOME funds to be used for the acquisition of a small (8 unit) to medium (20 unit) apartment complex. In November 2002, the agreement was amended to increase HOME funding to $570,000 for project activities that were to include acquisition and rehabilitation of an unidentified building(s). An agreement for the purchase of an apartment complex was never finalized, and in March of 2003, Community Services requested that the City allow it to use its $570,000 HOME fund allocation as additional (gap) financing needed to finalize another project it was involved in; i.e., the rehabilitation of the 35 scattered site housing units known as Maricopa Revitalization. This was a tax credit project involving Community Services, the Authority, and a tax credit investor. The units were public housing units, title to which was to be transferred by the Authority to the Partnership. The Partnership (comprised of Community Services, the 1 Although the agreement was referred to by all parties as Subreciepitent Agreement # 8335, Community Services was acting as a developer not a subrecipient for this activity. 5 Authority, and the tax credit investor) was to use the tax credit funds and the HOME funds for the rehabilitation of the units. The City approved Community Services’ request under the terms of its existing subrecipient agreement. The HOME assistance was provided to Community Services as a loan. Community Services in turn loaned the funds to the Partnership, which is to make annual loan repayments only if surplus funds from operations are available. Community Services and the City accounted for the use of the HOME funds by allocating $570,000 in direct rehabilitation costs attributable to 22 of the 35 units to the HOME activity. Involved Parties Did Not Obtain a Copy of HUD’s Disposition Approval for the Units Since these were public housing units under a contributions contract between HUD and the Authority, HUD had to approve the Authority’s disposition of the units. This approval was granted subject to certain requirements, including the Authority’s submission and HUD’s approval of a mixed-finance development proposal, setting out the terms of the disposition and the subsequent use of the units. This was never done, and although title has been transferred to the Partnership, the units continue to receive operating subsidy and capital grant funding from HUD. Community Services and City representatives stated that the former director of the Authority verbally informed them that with title transfer to the Partnership, the public housing units would no longer be under the contributions contract and thus would stop receiving the operating subsidy. However, these parties did not obtain a copy of the documentation related to HUD’s disposition approval to determine what the Authority had to do to meet the stipulations agreed to by HUD. Had they done so, they would have known that the Authority’s plans were to continue obtaining the operating subsidy for these units and, accordingly, HOME funds could not be used for rehabilitation. The County, the lead agency for the Consortium, stated it had never seen the subject agreement between the City and Community Services as each member of the Consortium draws up its own agreements with subrecipients without review or approval by the County. Additionally, the County stated that each Consortium member is responsible for ensuring that activities it funds meet the requirements of the HOME program. However, it should be noted that as the lead agency for the Consortium, the County is responsible for all activities carried out under the Consortium’s HOME program, regardless of which member makes the final funding decisions. We also noted that Community Services did not maintain many of the source documents/project files related to the HOME activity. These documents, 6 including the rehabilitation contract, change orders, consultant contract, inspector’s contract, and cost certifications, were maintained by its tax credit consultant. The documents should have been maintained by Community Services to assist it in its management of the HOME activity and for review by the Consortium, HUD, and its independent auditor. Conclusion In our opinion, the use of HOME funds for the rehabilitation of these public housing units was not an eligible HOME Activity as the units were receiving assistance provided under section 9 of the United States Housing Act. The County and the City disagreed, claiming that with the transfer of the units to Maricopa Revitalization the units became eligible for HOME funding. The County said the City was responsible for this project, including any potential required payback for ineligible uses of the HOME grant funds. The City stated that if the activity is determined ineligible it would pursue repayment from Community Services in accordance with the terms of its subrecipient agreement. However, it should be noted that regardless of whether the County is reimbursed by the City or Community Services, HUD holds the County, as the lead agency, responsible for return of ineligible expenditures of HOME funds. Recommendations We recommend that the Consortium be required to 1A. Reimburse its local HOME investment trust fund the $570,000 improperly expended on the Maricopa Revitalization project and 1B. Establish sufficient controls/procedures to ensure HUD program requirements are followed by each Consortium member and that documentation and records of key decisions are maintained by each Consortium member and its subrecipients for all HOME program activities. 7 SCOPE AND METHODOLOGY To achieve our audit objective, our review was limited to • Review of applicable laws, regulations, and other HUD program requirements; • Review of accounting records, contract documents, development documents, and correspondence maintained by HUD, the County, the City, and Community Services and its tax credit consultant that related to the rehabilitation activity financed by the $570,00 in HOME grant funds; and • Interviews with appropriate HUD, County, City, and Community Services staff. We performed our review between February and April 2005. The audit period covered the period January 2002 through December 2004. We performed our review in accordance with generally accepted government auditing standards. 8 INTERNAL CONTROLS Internal controls are 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 objective: • Compliance with applicable laws and regulations – Policies and procedures that management has implemented to reasonably ensure that resources used are 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 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 item is a significant weakness: • The Consortium’s and the City’s procedures and controls were inadequate to ensure that HOME program grant funds were expended only on eligible activities (see finding 1). 9 FOLLOWUP ON PRIOR AUDITS Prior Report Title and Number An Office of Inspector General (OIG) audit report related to the Housing Authority of Maricopa County’s management of its mixed finance development activities was issued on March 14, 2005. This report included a review of the Authority’s involvement in the HOME-funded activity discussed in this report (Report #2005- LA-1002). 10 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Ineligible 1/ Unsupported Unreasonable or Funds to be put number 2/ unnecessary 3/ to better use 4/ 1A $570,000 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 polices or regulations. 2/ 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. 3/ Unreasonable/unnecessary costs are those costs not generally recognized as ordinary, prudent, relevant, and/or necessary within established practices. Unreasonable costs exceed the costs that would be incurred by a prudent person in conducting a competitive business. 4/ “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an 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. 11 Appendix B AUDITEE COMMENTS2 AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments Comment 1 2 The City of Mesa also provided a written response to the draft report. Its response was similar in substance to that provided by Maricopa County, the lead agency for the Consortium. However, where deemed appropriate, OIG has provided additional evaluation of the City’s response as footnotes in OIG’s Evaluation of Auditee’s Response section of this report. 12 Comment 2 13 Comment 3 Comment 4 14 Comment 5 15 16 OIG Evaluation of Auditee Comments We agree that the Consortium Agreement states that each Member, including the City of Mesa, is responsible to the Consortium for administration of Comment 1 subrecipeint3 agreements and contracts. However, this is an agreement between the individual Consortium members, not HUD. As set out in 24 CFR 92.504(a), HUD holds the Participating Jurisdiction/lead entity (Maricopa County) responsible for ensuring that all Consortium members carry out HOME funded activities in accordance with program requirements. Accordingly, HUD looks to Maricopa County for the resolution of any deficiencies identified in any Consortium member’s HOME program, including reimbursement of any funds spent on ineligible activities, regardless of which member incurred the ineligible costs. It would then be up to Maricopa County to enforce the requirements of the Consortium, Agreement, including obtaining reimbursement from any members for ineligible activities they may have carried out. We concur that the Housing Authority of Maricopa County (Authority) was Comment 2 responsible for ensuring that the requirements stipulated by HUD for the disposition of the 56 units4 discussed in the report were met. The Authority failed to meet these requirements, and accordingly violated the terms of HUD’s disposition approval agreement, effectively invalidating the agreement. This failure of the Authority does not negate the responsibility of Maricopa County or the Consortium to ensure that all legal matters are appropriately resolved prior to the commitment and expenditure of any HOME funds. This would have included identifying the circumstances involving the Authority’s disposition of the units; requiring the Authority to demonstrate and document that HUD imposed requirements for the disposition of these units had been met; and denying the use of HOME funds for the project if this could not be accomplished. This was not done, and none of the parties involved identified the significant unresolved problems related to the transfer/sale of these units or the fact that (in all practical effects) they continued to be public housing units receiving operating and capital grant subsidies. Had appropriate investigation of these matters been completed, it would have become clear that HOME funds could not be used for this project. 3 As the City of Mesa pointed out in its response to our draft report, this activity was carried out by Community Services of Arizona as a developer, not as a subrecipient. However, the City in its correspondence with Community Services, refers to the agreement as “Subrecipient Agreement #8335”. We have made changes to our report to show that the activity was carried out by a developer, but continue to refer to the “subrecipient agreement”. 4 The final project consisted of only 35 units of which HOME funds were arbitrarily allocated for the physical rehabilitation of 22 units. The City of Mesa contends that only 31 of the units were part of the HOME funded project. 17 There is a direct relationship between assistance (operating and capital grant Comment 3 subsidies) provided to the Authority for Maricopa Revitalization Partnership, LLC, and the HOME funding provided to Community Services of Arizona for rehabilitation purposes. Both sources provided funding for the same units and, as mentioned previously, this should have been resolved during the approval process. It is clear from documentation found in the City of Mesa and Community Service of Arizona files that all parties involved were, or should have been, aware that the final plan called for the project units to be under an Annual Contributions Contract with the continuation of funding under section 9 of the United States Housing Act. The units were not properly and legally transferred to Maricopa Comment 4 Revitalization or removed from public housing stock. Legal and program requirements necessary to finalize removal of these units from public housing stock have not yet been completed, and may never be finalized. OIG’s previous report relating to the Authority’s implementation of this (and another project) did not address the eligibility of the HOME assistance and Consortium involvement in the project. Rather the report dealt with public housing program requirements and the legalities relating to the Authority’s attempted transfer of ownership; the failure to adhere to the HUD imposed disposition requirements; and the resultant lack of safeguards to protect the authority’s and HUD’s interest5 in the projects. The report does not imply that the Maricopa HOME Consortium was responsible for ensuring that the Authority complied with HUD’s public housing regulations and requirements. However, as previously stated, Maricopa County and the Consortium had the responsibility to determine whether HOME requirements were met (which would have included the unresolved issues relating to the Authority’s disposition/transfer of the affected units to Maricopa Revitalization) and the failure to do so directly affected the subject activity’s eligibility for funding under the HOME program. The previous OIG report does bring into question the continuing validity of the Annual Contribution Contract as it affects the project and the eligibility of the project units for operating and capital subsidies until the questions are resolved. This public housing matter does not negate the fact that HOME 5 This investment by the Authority and HUD included the $2,170,000 value of the properties transferred to the project, a $120,000 advance of capital funds, and over $413,000 of operating subsidy and capital grant funding provided for the units after their transfer to Maricopa Revitalization. 18 funds cannot be used to fund activities authorized under section 9 of the United States Housing Act, applicable to these properties. Specifically, HOME funds cannot be used to provide rehabilitation funds for public housing units eligible for modernization/rehabilitation funding provided through the public housing program. At the time this project was initiated, these units were eligible for (and continue to receive) funding provided through section 9 of the U.S. Housing Act of 1937. The housing units comprising this project, through its management agent and Comment 5 member, the Housing Authority of Maricopa County, have received operating and capital grant subsidy (section 9 funding) prior to and during the time of the project’s existence6. The eligibility of this continued subsidy is currently under review. Notwithstanding, HOME funds were provided for units that were concurrently authorized for and receiving assistance under section 9 of the United States Housing Act. Accordingly, in our opinion, the $570,000 used for the rehabilitation of these units was an ineligible use of HOME funds. 6 The City of Mesa in its response claimed that the provision of the regulations cited was not applicable for this project, as the amended language was not added until October 2002. However, this amended language did not change project eligibility, but simply reflected 1998 Congressional amendments to the Housing Act, moving Section 14, Public Housing Modernization to a revised Section 9, Public Housing Capital and Operating Funds. These changes were effective October 1, 1999. Prior to the cited changes to the HOME regulations, activities eligible under the Modernization program were not eligible for HOME funding. After the change activities eligible for Capital Grant funding, which replaced the Modernization program, were not eligible for HOME funding. 19
Maricopa HOME Consortium/City of Mesa HOME Program Maricopa Revitalization
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-07-28.
Below is a raw (and likely hideous) rendition of the original report. (PDF)