oversight

The Municipality of Humacao, Puerto Rico, Did Not Administer Its Community Development Block Grant in Accordance with HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-07-28.

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

                                                                  Issue Date
                                                                          July 28, 2006
                                                                  Audit Report Number
                                                                           2006-AT-1016




TO:           Jose R. Rivera, Director, Community Planning and Development, San Juan
               Field Office, 4ND


FROM:         James D. McKay
              Regional Inspector General for Audit, 4AGA

SUBJECT:      The Municipality of Humacao, Puerto Rico, Did Not Administer Its
              Community Development Block Grant in Accordance with HUD Requirements

                                    HIGHLIGHTS


 What We Audited and Why

              We audited the Municipality of Humacao’s (Municipality) Community
              Development Block Grant (Block Grant) program. We selected the Municipality
              for review because the U.S. Department of Housing and Urban Development
              (HUD) classified it as a high-risk recipient in the 2004 and 2005 annual
              assessments. The objective of the audit was to determine whether the
              Municipality complied with HUD regulations, procedures, and instructions related
              to the administration of the Block Grant program.

 What We Found


              The Municipality’s financial management system did not fully comply with
              applicable HUD requirements. The system did not properly identify the
              application of more than $1.2 million in program income, did not properly
              allocate more than $315,500 in administrative salaries, allowed the use of more
              than $66,500 for ineligible expenditures, and could not account for more than
              $79,900 in Block Grant receipts.



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           The Municipality awarded 12 contracts totaling more than $2.2 million without
           following HUD procurement requirements. As a result, it cannot ensure that
           quality goods and services were obtained at the most advantageous terms. In
           addition, the Municipality did not support the reasonableness of $1.9 million in
           Block Grant contracts and paid more than $102,500 for excessive or unnecessary
           expenditures.

           The Municipality did not maintain adequate records to demonstrate that activities
           met at least one of the three Block Grant national objectives. Therefore, the
           intended benefits and compliance with the Block Grant national objectives and
           related expenditures totaling $211,860 are unsupported.

What We Recommend
           We recommend that the director of the San Juan Office of Community Planning and
           Development require the Municipality to repay $102,533 in excessive costs and
           $66,593 in ineligible operating expenditures. The director should also require the
           Municipality to provide all supporting documentation showing the appropriateness
           and eligibility of $3.8 million in Block Grant disbursements. We also recommend
           that the director require the Municipality to develop and implement an internal
           control plan to ensure the Block Grant program has (1) a financial management
           system that complies with HUD requirements, (2) procurement procedures that
           ensure goods and services are obtained at the most advantageous terms and in a
           manner providing full and open competition, and (3) procedures that ensure funded
           activities meet at least one of the Block Grant national objectives. In addition, we
           recommend that the director require the Municipality to ensure Block Grant
           expenditures are properly accounted for, reconciled with HUD’s disbursement
           system, and in compliance with HUD requirements.

           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 directive issued because of the
           audit.

Auditee’s Response


           We discussed the findings with the Municipality during the audit and at the exit
           conference on June 27, 2006. The Municipality provided its written comments to
           our draft report on July 6, 2006. In its response, the Municipality generally
           agreed with the findings, except for recommendation 1D. The Municipality did
           not address Recommendation 2B.

           The complete text of the Municipality’s response, along with our evaluation of
           that response, can be found in appendix B of this report.



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                             TABLE OF CONTENTS

Background and Objectives                                                          4

Results of Audit
        Finding 1: The Municipality’s Financial Management System Did Not Fully    5
                   Comply with HUD Requirements

        Finding 2: The Municipality Did Not Comply with Procurement Requirements   9

        Finding 3: The Municipality Did Not Demonstrate Compliance with National   14
                   Objectives

Scope and Methodology                                                              18

Internal Controls                                                                  20

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use             22
   B.   Auditee Comments and OIG’s Evaluation                                      24
   C.   Criteria                                                                   30
   D.   Schedule of Procurement Deficiencies                                       31




                                              3
                    BACKGROUND AND OBJECTIVES

The Municipality of Humacao (Municipality) is an entitlement recipient administering more than
$7.3 million in Community Development Block Grant (Block Grant) funds approved by the U.S.
Department of Housing and Urban Development (HUD) during the past four years. HUD’s
Integrated Disbursement and Information System reflected Block Grant expenditures exceeding
$5.2 million during fiscal years 2004 and 2005 for the following activities:

        Block Grant activity                  Fiscal year 2004    Fiscal year 2005
        Public facilities and improvements          $2,282,660          $1,317,215
        Planning and administration                    376,769             469,443
        Public service                                 233,115             279,604
        Housing rehabilitation                         144,798            $176,146
        Total                                       $3,037,342          $2,242,408

The Municipality’s Federal Programs Office was responsible for administering the Block Grant
program. The Municipality’s books and records for the Block Grant program are maintained at
155 Miguel Casillas Street, Humacao, Puerto Rico.

We audited the Municipality’s Block Grant program as part of the HUD Office of the Inspector
General’s (OIG) strategic plan. The Municipality was selected for review because HUD
classified it as a high-risk recipient in the 2004 and 2005 annual community assessments. The
objective of the audit was to determine whether the Municipality complied with HUD
regulations, procedures, and instructions related to the administration of the Block Grant
program.




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                                              4
                                RESULTS OF AUDIT


Finding 1: The Municipality’s Financial Management System Did Not
           Fully Comply with HUD Requirements

The Municipality’s financial management system did not properly identify the application of
more than $1.2 million in program income, did not properly allocate more than $315,500 in
administrative salaries, allowed the use of more than $66,500 for ineligible expenditures, and
could not account for more than $79,900 in Block Grant receipts. Consequently, the
Municipality’s internal controls were not sufficient to safeguard assets or assure their use for
authorized purposes and in accordance with HUD requirements. This noncompliance occurred
because the Municipality did not develop and implement policies and procedures to ensure
compliance with the financial requirements of HUD programs.




 Unsupported Program Income


               HUD requires that receipts and expenditures of program income be recorded as
               part of the financial transactions of the grant program and be subject to all
               applicable requirements governing the use of Block Grant funds. The
               Municipality’s records reflect that between July 2001 and September 2005 the
               Block Grant program received more than $1.2 million in program income related
               to the lease of a public facility. However, the accounting records do not reflect
               the disposition of these receipts. The Municipality also improperly deposited to
               its general fund $2,400 in program income. Consequently, HUD has no assurance
               that program income was used in accordance with program requirements. The
               Municipality expects to receive an additional $318,853 in program income
               between October 2005 and September 2006, for which it has not established a
               proper accounting system.


 Unsupported Administrative
 Salaries


               The Block Grant program only allows disbursements for reasonable expenditures
               associated with the planning and execution of community development activities
               that are supported by source documentation. The Municipality did not track its
               employees’ time by program activity or implement an indirect cost allocation plan
               to allocate its administrative salary expenses among HUD programs. It charged
               the full salary of at least five employees to the Block Grant program although they

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          performed additional functions not related to the program. The Municipality did
          not allocate the salaries based on the time spent by these employees on each of the
          programs. HUD has no assurance of the reasonableness, allowability, and
          allocability of the $315,515 in administrative salaries charged to the Block Grant
          program between July 2003 and January 2006. A similar deficiency was
          identified in a prior HUD monitoring report; however, the deficiency continues to
          exist. A Municipality official attributed the improper allocation to the lack of
          funds of its Section 8 program, which could not pay its share of the administrative
          salaries.


Unrelated Program
Disbursements


          The Municipality improperly used Block Grant monies for general
          operating/maintenance expenditures of a public facility. It withdrew from HUD
          more than $66,500 in Block grant funds, charging $11,643 to program
          administration and $54,950 to its housing rehabilitation activity. The funds
          requested were used instead for repairs of the Municipality’s North Terminal
          public facility. As a result, Block Grant funds totaling $66,593 were improperly
          used for expenditures not related to program administration or housing
          rehabilitation efforts. HUD regulations prohibit the use of Block Grant funds for
          any expense associated with repairing, operating, or maintaining public facilities.

 Inaccurate Accounting Records

          HUD requires recipients of Block Grant funds to maintain financial records that
          are accurate and current and that adequately identify the source and application of
          funds provided for assisted activities. The Municipality’s accounting records
          were not accurate, current, or complete.
          The Municipality uses Microsoft Excel spreadsheets to track program receipts and
          expenditures. However, these records do not reflect complete financial information
          on program activities and do not reflect budgeted and disbursed amounts by activity.
          In addition, the expenditures shown in the Municipality’s general ledger
          (spreadsheets) for the fiscal year ending June 30, 2005, did not agree with amounts
          reflected in HUD’s Integrated Disbursement and Information System.

                      Activity              General ledger IDIS*         Difference
           Administration                     $487,113     $469,443       $17,670
           Public and neighborhood            $579,870     $470,869      $109,001
           facilities
           Housing rehabilitation              $170,169      $176,146    <$5,977>
           Public service                      $205,675      $279,604    <$73,929>
          * Integrated Disbursement and Information System

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          The Municipality did not explain the discrepancies between the accounting
          records and could not account for $79,906 drawn from HUD for its housing
          rehabilitation and public service activities.

          The Municipality’s Block Grant program accounting records are incomplete since
          the accounting record maintained is basically a check register that does not reflect
          budgeted and disbursed amounts by activity. As a result, HUD has no assurance
          that funds were used only for eligible purposes.

Recommendations


          We recommend that the director of the San Juan Office of Community Planning
          and Development

          1A.     Require the Municipality to submit all supporting documentation showing
                  the eligibility and propriety of nearly $1.26 million in program income
                  disbursed. Any amounts determined ineligible must be reimbursed to the
                  Block Grant program from nonfederal funds.

          1B.     Require the Municipality to determine the correct allocation of the
                  $315,515 in administrative salaries, make the related accounting
                  adjustments to its books and records, and transfer the funds to correct the
                  allocation.

          1C.     Require the Municipality to develop and implement a system to track its
                  administrative employees’ time spent on various HUD programs.

          1D.     Require the Municipality to reimburse the Block Grant program from
                  nonfederal funds $66,593 paid for ineligible general operating
                  expenditures.

          1E.     Take appropriate monitoring measures to ensure the Block Grant program
                  has in place a financial management system that complies with HUD
                  requirements. At a minimum, the system should ensure that fiscal controls
                  and accounting procedures are sufficient to permit the tracing of funds,
                  including future program income of $318,853, to a level that ensures such
                  funds have not been used in violation of the restrictions and prohibitions
                  of applicable statutes.

          1F.     Require the Municipality to submit all supporting documentation showing
                  the eligibility and propriety of $79,906 drawn from HUD for its housing
                  rehabilitation and public service activities. Any amounts determined
                  ineligible must be reimbursed to the Block Grant program from nonfederal
                  funds.


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       1G.   Require the Municipality to ensure that grant expenditures from July 2003
             through March 2006 are properly accounted for, reconciled with HUD’s
             Integrated Disbursement and Information System, and in compliance with
             HUD requirements.




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                                      8
Finding 2: The Municipality Did Not Comply with Procurement
           Requirements
The Municipality awarded 12 contracts totaling more than $2.2 million without following HUD
procurement requirements. This occurred because the Municipality did not have in place
adequate internal controls and procedures and was not familiar with applicable Block Grant
requirement standards. As a result, it cannot ensure that quality goods and services were
obtained at the most advantageous terms. In addition, the Municipality did not support the
reasonableness of $1.9 million in Block Grant contracts and paid more than $102,500 for
excessive or unnecessary expenditures.1



    Procurement Standards Not
    Followed


                   Program regulations provide that recipients shall comply with HUD procurement
                   standards contained in 24 CFR [Code of Federal Regulations] 85.36. The
                   standards include conducting procurements using full and open competition, fully
                   documenting all procurement activities, and performing price or cost analyses.
                   We analyzed 12 contracts awarded between February 2004 and February 2005.
                   There was at least one procurement deficiency in all 12 contracts reviewed. For
                   example, the Municipality did not

                        •   Maintain adequate records providing a full description of the activity
                            including its location; the amount of funds budgeted, obligated, and
                            expended; and the provisions under which it was determined to be an
                            eligible activity (24 CFR [Code of Federal Regulations] 570.506a);

                        •   Maintain adequate support showing that price or cost analyses were
                            performed and the basis used to determine the reasonableness of the
                            contracted amount;

                        •   Provide complete and adequate specifications of the scope of work to be
                            performed to contractors before the submission of bids;

                        •   Perform public solicitation in one procurement;

                        •   Award to the lowest bidder (but instead split contracts among seven
                            vendors); or

                        •   Ensure that contracts included all provisions required by 24 CFR [Code of
                            Federal Regulations] 85.36(i). For example, it did not include provisions
1
    Total disbursements of $2.1 million were adjusted to consider $211,860 questioned in recommendation 3A.

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                  related to (1) compliance with the “Antikickback” Act and with Sections
                  103 and 107 of the Contract Work Hours and Safety Standards Act as
                  supplemented in U.S. Department of Labor regulations; (2) notice of
                  awarding agency requirements and regulations pertaining to reporting; and
                  (3) the retention of all required records for three years after the final
                  payment and all other matters are closed.

           Thus, the Municipality did not provide evidence that it created an environment
           that permitted full and open competition as required by HUD. Appendix D has a
           list of the procurement deficiencies found during the review.

           The Municipality’s bid board president informed us that he was not familiar with
           HUD procurement standards and acknowledged that the procurement process
           followed was deficient. The president also attributed the deficiencies of the
           February 2004 street resurfacing procurement to the urgency of spending Block
           Grant funds to avoid a reduction to the Municipality’s entitlement allocation by
           HUD.

Other Procurement Deficiencies


           Other significant procurement deficiencies resulted in the payment of excessive
           and/or unnecessary Block Grant monies exceeding $102,500.

           Contracts not awarded to lowest bidder - The Municipality awarded three
           contracts and paid $641,847 for street resurfacing work at various sites within
           Humacao. Although the services were procured through formal bidding, the
           Municipality did not award the procurements to the lowest bidder. It did not
           provide documentation explaining why the lowest bidder was not selected or the
           basis used to determine the reasonableness of the contracted amounts. As a result,
           the Block Grant program was charged $100,143 for excessive expenditures.

              Location of street      Amount paid        Lowest       Excessive amount
              resurfacing work                             bid
            Cataño suburb                 $287,360       $259,743               $27,617
            Buena Vista suburb             146,980        130,076                16,904
            Boulevard Del Rio              207,507        151,885                55,622
                     Total                $641,847       $541,704              $100,143


           Contract amendments with excessive charges - The Municipality executed a
           contract amendment to the street resurfacing work at Collores suburb. The
           contract amendment included additional street resurfacing work, requiring 478
           tons of asphalt. However, the contract amendment contained a higher cost per ton
           than what was originally contracted. The Municipality paid the contractor at $70
           per ton, although the original contract/bid was awarded at $65 per ton. The files


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      did not contain support explaining the increase or its reasonableness. Therefore,
      the $ 2,390 is considered an excessive expenditure.

      Work at private properties - On March 1, 2006, we performed site inspections of
      various street resurfacing projects funded with Block Grant monies. The
      Municipality paid contractors for resurfacing work at private properties. During
      our visit, the Municipality project supervisor showed us at least eight private
      properties that were paved with HUD monies.




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                                      11
              The above pictures show paved driveways. The contractor indicated that these properties were
              resurfaced as instructed by the Municipality.

              The project supervisor and the contractor informed us that the paving of private
              properties was outside the original scope of the contracted work. The additional
              work affected the completion of the project since other areas scheduled for paving
              were postponed or cancelled. The Municipality could not explain why the work
              on private properties was done, who authorized it, or how this met Block Grant
              program objectives. In addition, Municipality records did not show how this
              work represented reasonable or necessary program expenditures.

              The acting federal programs director informed us that the Municipality was not
              aware of the situation and the contractor was not authorized to do this type of
              work. Although the Municipality claims it was not aware of the improper work,
              the 2005 Consolidated Annual Performance and Evaluation Report submitted to
              HUD included pictures showing the work done at private properties.

Conclusions

              The Municipality did not provide evidence that it created an environment that
              permitted full and open competition as required by HUD. In addition, it did not
              provide adequate support showing the reasonableness of $1.9 million in Block
              Grant contracts and paid $102,533 in excessive or unnecessary expenditures. As
              a result, HUD has no assurance that services were obtained at the most
              advantageous terms and in a manner providing full and open competition or in
              accordance with HUD requirements.




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                                                   12
      Recommendations


                   We recommend that the director of the San Juan Office of Community Planning
                   and Development

                   2A.      Require the Municipality to provide support showing the eligibility and
                            reasonableness of more than $1.9 million spent on public facilities,
                            summer camp activities, and consulting services. Any amounts
                            determined ineligible must be reimbursed to the Block Grant program
                            from nonfederal funds.2

                   2B.      Require the Municipality to reimburse the Block Grant program from
                            nonfederal funds $102,533 paid for excessive street resurfacing
                            expenditures.

                   2C.      Require the Municipality to develop and implement procurement
                            procedures and controls that comply with HUD requirements to ensure
                            goods and services are obtained at the most advantageous terms and in a
                            manner providing full and open competition.

                   2D.      Require the Municipality to determine the amount expended for the
                            resurfacing of all private properties, and reimburse the Block Grant
                            program from nonfederal funds.




2
    Total disbursements of $2.1 million were adjusted to consider $211,860 questioned in recommendation 3A.

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Finding 3: The Municipality Did Not Demonstrate Compliance with
           National Objectives

The Municipality did not maintain adequate records to demonstrate that activities met at least
one of the three Block Grant national objectives. This occurred because the Municipality had
inadequate management controls and was not familiar with applicable Block Grant regulations.
Therefore, the related expenditures of two activities totaling $211,860 are unsupported pending
an eligibility determination by HUD.3



    Inadequate Documents


                   Our examination of two Block Grant activities disclosed that the Municipality did
                   not take adequate steps to ensure it met at least one of the three Block Grant
                   national objectives required by 24 CFR [Code of Federal Regulations]
                   570.200(a). Grantees and subgrantees must carry out activities that benefit low-
                   and moderate-income persons, aid in the prevention or elimination of slum and
                   blight, or meet community development needs having a particular urgency. In
                   addition, grantees and subgrantees are required to maintain sufficient records to
                   enable HUD to determine whether the recipient has met all applicable
                   requirements of the Block Grant program.

                   The Municipality informed us that both activities met the national objective of
                   benefiting low- and moderate-income persons based on the 1990 census. Further,
                   one of the activities was classified as “area benefit” and the other as “limited
                   clientele.” Although Municipality officials stated they properly evaluated each
                   activity to ensure compliance with HUD’s national objectives, we did not find
                   adequate support in the files.

                              Activity                 Amount                National objective
                    Boulevard Del Rio-street                         Low- and moderate-income, area
                                                      $207,507
                    resurfacing                                      benefit activity
                                                                     Low- and moderate-income,
                    Summer camp activities            $59,975
                                                                     limited clientele activity

                   Specific examples of poor efforts to support national objectives compliance
                   include

                   Boulevard Del Rio street resurfacing - The Municipality disbursed $207,507 in
                   Block Grant funds for street resurfacing in an area know as Boulevard Del Rio. A
                   Municipality official informed us that the street resurfacing of this project

3
    Total disbursements of $267,482 were adjusted to consider $55,622 questioned in recommendation 2B.

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      benefited low- and moderate-income persons and met Block Grant requirements
      as an area benefit activity. However, the Municipality did not

          •   Maintain records providing a full description of the activity including its
              location; the amount of funds budgeted, obligated, and expended; and the
              provisions under which it was determined to be an eligible activity;

          •   Maintain records showing the boundaries of the service area; and

          •   Maintain records showing the income characteristics of families and
              unrelated individuals in the service area.

      We performed a site inspection in March 2006 because Municipality files did not
      show the funds were spent for services in low- and moderate-income areas. The
      street resurfacing work was done in an area that was not predominantly
      residential; it was mainly composed of commercial spaces and government
      offices.




      The above pictures show the area was predominantly commercial, including shopping centers,
      automobile dealerships, and grocery stores. There were also local government offices in the area.

      Although the Municipality claims that this activity benefits low- and moderate-
      income persons, no support was provided. Further, 24 CFR [Code of Federal

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                                            15
                   Regulations] 570.208(a)(1) provides that an activity that serves an area that is not
                   primarily residential in character shall not qualify as an area benefit activity.

                   Summer camp activities - The Municipality disbursed $59,975 in Block Grant
                   monies for services related to organizing and providing summer camp activities
                   for 100 children between the ages of 6 and 13. The length of the summer camp
                   was three weeks, July 12-30, 2004. Among the activities to be presented to the
                   children were excursions, computer training (Word, Excel, and PowerPoint), sport
                   workshops, and others. A Municipality official informed us that the summer
                   camp activity benefited low- and moderate-income persons and met Block Grant
                   requirements as a limited clientele activity. However, the Municipality did not

                         •   Maintain records providing a full description of the activity including its
                             location; the amount of funds budgeted, obligated, and expended; and the
                             provisions under which it was determined to be an eligible activity;

                         •   Maintain documentation describing the nature of the services and how
                             they were used predominantly by low- and moderate-income persons;

                         •   Maintain documentation showing the income limits applied and the point
                             in time when the benefit was determined, and

                         •   Maintain documentation showing the size and annual income of the
                             children’s families.

                   The file deficiencies demonstrate that the Municipality lacked adequate
                   management controls and its unfamiliarity with Block Grant regulations.
                   Therefore, the intended benefits and compliance with the Block Grant national
                   objectives were not supported.

    Recommendations

                   We recommend that the director of the San Juan Office of Community Planning
                   and Development

                   3A.       Require the Municipality to provide all supporting documentation showing
                             the eligibility and compliance with national objectives of the $211,860
                             disbursed for the two activities. Any amounts determined ineligible must
                             be reimbursed to the Block Grant program from nonfederal funds.4




4
    Total disbursements of $267,482 were adjusted to consider $55,622 disallowed in recommendation 2B.

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      3B.   Take appropriate monitoring measures and require the Municipality to
            establish and implement policies and procedures to ensure funded
            activities meet a Block Grant national objective and that they are properly
            supported.




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                                     17
                               SCOPE AND METHODOLOGY

The audit objective was to determine whether the Municipality complied with HUD regulations,
procedures, and instructions related to the administration of the Block Grant program. The
compliance requirements included the expenditures of HUD funds for eligible, necessary, and
reasonable project costs; maintaining adequate procurement and financial controls over funded
activities; and maintaining adequate documentation showing compliance with national
objectives. To accomplish our objectives, we

      •    Obtained and reviewed relevant HUD regulations and Municipality guidelines;

      •    Interviewed HUD, Municipality, and contractor officials;

      •    Reviewed monitoring and independent accountant reports;

      •    Reviewed the Municipality’s files and records, including financial statements and general
           ledgers;

      •    Performed site inspections of Block Grant activities; and

      •    Reviewed the Municipality’s controls related to the administration of its Block Grant
           program.

The Municipality’s check register reflected $2.9 million in Block Grant disbursements between
July 1, 2004, and September 30, 2006. We selected disbursements from the Municipality’s
check register with a value greater than $50,000, resulting in a sample of eight disbursements
totaling $926,164. We also selected the two highest payroll disbursements charged to the Block
Grant program totaling $33,492. The expenditures and related supporting documents were
reviewed to determine whether the payments met Block Grant requirements, including
compliance with national objectives and reasonableness of the costs. Our review also included
the examination of program income receipts recorded in the Municipality’s accounting records
between July 2001 and September 2005.

We obtained a list of the Municipality’s Block Grant procurement efforts performed between
July 1, 2004, and September 30, 2005. The Municipality conducted 17 procurements totaling
$1.1 million. We selected and reviewed a sample of four procurements totaling $941,612.5 At
HUD’s request, we reviewed three additional procurements awarded before our audit period
totaling $1.3 million. In total, we reviewed seven procurement efforts amounting to $2.2
million. We reviewed each file to determine whether the procurement process followed by the
Municipality met HUD standards.

To achieve our audit objectives, we did not rely on computer-processed data contained in the
Municipality’s database. Since the financial records were incomplete, alternate testing methods

5
    The procurement activities reviewed were those with a value greater than $50,000.

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were used to verify the accuracy of the questioned Block Grant expenditures. The results of the
audit apply only to the items selected and cannot be projected to the universe or population.

The audit generally covered the period July 1, 2004, through September 30, 2005, and we
extended the period as needed to accomplish our objectives. Due to the nature of some of the
deficiencies, we extended the period back to July 2001. We conducted our fieldwork from
November 2005 through April 2006 at the Municipality’s offices in Humacao, Puerto Rico. We
performed our review in accordance with generally accepted government auditing standards.




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                                               19
                             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:

                  •   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 of 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 items are significant weaknesses:

                  •   The Municipality’s financial management system did not fully comply
                      with applicable HUD requirements (see finding 1).

                  •   The Municipality did not follow HUD procurement requirements when
                      awarding 12 contracts totaling more than $2.2 million (see finding 2).

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           •   The Municipality did not maintain adequate records to demonstrate that
               activities met at least one of the three Block Grant national objectives (see
               finding 3).




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                                        21
                                        APPENDIXES

Appendix A

                  SCHEDULE OF QUESTIONED COSTS
                 AND FUNDS TO BE PUT TO BETTER USE

                                                           Unreasonable or    Funds to be put to
     Recommendation     Ineligible 1/   Unsupported 2/     unnecessary 3/       better use 4/
          1A                                $ 1,259,392
          1B                                    315,515
          1D              $ 66,593
          1E                                                                           $ 318,853
          1F                                     79,906
          2A                                  1,934,272
          2B                                                      $102,533
          3A                                   211,860
                          _______          __________            ________              ________
         Total            $ 66,593         $ 3,800,945            $102,533             $ 318,853


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 estimates of amounts that could be used more
        efficiently if an Office of Inspector General (OIG) recommendation is implemented.
        This includes reductions in outlays, deobligation of funds, withdrawal of interest subsidy
        costs, costs not incurred by implementing recommended improvements, avoidance of
        unnecessary expenditures noted in preaward reviews, and any other savings which are
        specifically identified. In this instance, if the Municipality implements our
        recommendation, it will ensure that fiscal controls are sufficient to permit the tracing of
        future program income, to a level that ensures funds have not been used in violation of

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 the applicable statutes. Once the Municipality successfully improves its controls, this
 will be a recurring benefit. Our estimate reflects only the initial year of these recurring
 benefits




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                                          23
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




   Table of Contents     24
Table of Contents   25
Table of Contents   26
Comment 1




Comment 2




Comment 3




  Table of Contents   27
Comment 4




Comment 5




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                           OIG Evaluation of Auditee Comments

The Municipality generally agreed with our recommendations, except for recommendation 1D.
The Municipality believes the $66,592 was used for eligible activities under the Block Grant
program. Recommendation 2B was not addressed by the Municipality.

Comment 1     The Municipality withdrew from HUD $7,842 in Block Grant funds in May 2004,
              and charged it as administrative program costs. (These are not part of the $30,000
              included in comment 2.) According to the supporting documentation the
              Municipality provided us, these disbursements were related to rehabilitation work
              at the North Terminal public facility. The North Terminal rehabilitation was not
              among the HUD approved activities, and the expenditures were not associated
              with the administration of the Block Grant program.

Comment 2     The Municipality states that the $30,000 was used for rehabilitation work at the
              North Terminal public facility. Although the rehabilitation of public facilities is
              an eligible activity under the Block Grant program, the North Terminal
              rehabilitation was not among HUD approved activities. In November 2004 the
              Municipality withdrew from HUD $30,000 in Block Grant funds, and charged it
              to the Municipality’s housing rehabilitation activity. Block Grant funds were
              used for an activity not approved by HUD, and were not part of the housing
              rehabilitation efforts.

Comment 3     The Municipality states that the $3,800 was used for repairs and maintenance of
              the air conditioning system at the North Terminal public facility, and that program
              income was used. However, the support provided by the Municipality during the
              audit shows it withdrew from HUD $3,800 in Block Grant funds in January 2005,
              and charged it as administrative costs. The North Terminal rehabilitation was not
              among the HUD approved activities, and the expenditures were not associated
              with the administration of the Block Grant program.

Comment 4     The Municipality states the $24,950 was used for the acquisition and installation
              of a water tank at the North Terminal public facility, and that it was an eligible
              activity. Although the rehabilitation of public facilities is an eligible activity
              under the Block Grant program, the North Terminal rehabilitation was not among
              the HUD approved activities. On January 24, 2005, the Municipality withdrew
              from HUD $24,950 in Block Grant funds, and charged it to the Municipality’s
              housing rehabilitation activity. The Municipality used Block Grant funds for an
              activity not approved by HUD, and was not part of the housing rehabilitation
              efforts.

Comment 5     The Municipality states that the $79,906 was used for housing rehabilitation and
              public service activities. However, the Municipality did not explain the
              discrepancies between HUD’s IDIS and the Municipality’s accounting records or
              how funds were disbursed.



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Appendix C
                                         CRITERIA


Federal Regulations at 24 [Code of Federal Regulations] 85.20

Standards for financial management systems require recipients’ financial management systems to
provide for the following:

   •   Accurate, current, and complete disclosure of the financial results of financially assisted
       activities.

   •   Records which adequately identify the source and application of funds provided for
       financially assisted activities. These records must contain information pertaining to grant
       or subgrant awards and authorizations, obligations, unobligated balances, assets,
       liabilities, outlays or expenditures, and income.

   •   Effective control and accountability for all grant and subgrant cash, real and personal
       property, and other assets. Grantees and subgrantees must adequately safeguard all such
       property and must assure that it is used solely for authorized purposes.

   •   Following applicable Office of Management and Budget cost principles, agency program
       regulations, and the terms of grant and subgrant agreements in determining the
       reasonableness, allowability, and allocability of costs.

Federal Regulations at 24 [Code of Federal Regulations] 85.36(b)(9)

Grantees and subgrantees will maintain records sufficient to detail the significant history of
procurement. These records will include but are not necessarily limited to the following:
rationale for the method of procurement, selection of contract type, contractor selection or
rejection, and the basis for the contract price.

Federal Regulations at 24 [Code of Federal Regulations] 570.200(a)(2)

Each recipient under the Entitlement and HUD-administered Small Cities programs must ensure
and maintain evidence that each of its activities assisted with Block Grant funds meets one of the
three national objectives as contained in its certification.

Federal Regulations at 24 [Code of Federal Regulations] 570.504

The receipt and expenditure of program income as defined in section 570.500(a) shall be
recorded as part of the financial transactions of the grant program. Program income shall be
disbursed for eligible activities before additional cash withdrawals are made from the U.S.
Treasury.


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  Appendix D

                  SCHEDULE OF PROCUREMENT DIFFICIENCIES


                                                            Missing or
                                                            inadequate        No cost      Lowest      Missing     Inadequate
                                           No public     specifications of    or price   bidder not    contract    number of
  Contracted services        Amount       solicitation   services solicited   analysis    selected    provisions    proposals
Street resurfacing
February 2004               $1,176,553                          X               X           X            X
Street resurfacing
                               757,637                          X               X           X            X
August 2004
Ciudad Cristiana
                               100,000                                          X                        X
basketball court
Block Grant-technical
assistance                      80,500          X               X               X                        X             X
April-December 2004
Summer camp activities          59,975          X               X               X                         X            X
Block Grant-technical
assistance                       50,000                         X            X                      X            X
February-May 2004
Block Grant-technical
assistance                       24,000                         X            X                      X
February-December 2005
          Total             $2,248,665          2               6            7          2           7            3
** The schedule does not indicate all violations noted during the review. We only included most frequent and serious
violations.




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