oversight

The Municipality of Toa Baja, Puerto Rico, Did Not Administer Its Section 108 Loan Guarantee Assistance Program in Accordance with HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-09-06.

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

                                                                 Issue Date:
                                                                          September 6, 2006
                                                                 Audit Report Number:
                                                                          2006-AT-1019




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 Toa Baja, Puerto Rico, Did Not Administer Its Section 108
         Loan Guarantee Assistance Program in Accordance with HUD Requirements

                                   HIGHLIGHTS

 What We Audited and Why

             We audited the Municipality of Toa Baja’s (Municipality) Section 108 Loan
             Guarantee Assistance (Loan Guarantee) 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 2005 and 2006 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 Loan Guarantee program.

 What We Found

             The Municipality did not manage two Loan Guarantee program activities in an
             economical, efficient, and effective manner. It paid more than $4.8 million for
             two activities in which the intended benefits and compliance with Community
             Development Block Grant (Block Grant) national objectives were not met and
             paid $70,369 for unreasonable/unnecessary expenditures.



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             Further, the Municipality did not maintain adequate records to demonstrate that it
             complied with environmental review procedures associated with the construction
             of the Toa Baja public library. As a result, HUD has no assurance that
             requirements were met or whether potential findings or concerns were properly
             addressed.

What We Recommend

             We recommend that the director of the San Juan Office of Community Planning
             and Development require the Municipality to develop and implement a corrective
             action plan to eliminate safety hazards and ensure that the public library meets a
             national objective or repay $3.8 million used for its construction. The director
             should also require the Municipality to provide all supporting documentation
             showing that it obtained HUD approval to change the purpose and scope of the
             Candelaria multipurpose center or repay $1 million used for its construction. We
             also recommend that the director require the Municipality to repay $70,369 in
             unreasonable/unnecessary cost for repairs at the public library. In addition, we
             recommend that the director require the Municipality to develop and implement
             an internal control plan to ensure that the Loan Guarantee program has (1)
             procedures that ensure funded activities provide the intended benefits to the
             community and meet at least one of the Block Grant national objectives and (2)
             environmental review procedures that ensure funded activities are properly
             assessed and supported.

             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 discussed the findings with the Municipality during the audit and at the exit
             conference on August 18, 2006. The Municipality provided its written comments
             to our draft report on August 24, 2006. In its response, the Municipality generally
             agreed with finding 1, but it disagreed with finding 2.

             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 Mismanaged Loan Guarantee Activities   5

      Finding 2: The Municipality Did Not Demonstrate Compliance with    12
                 Environmental Review Procedures

Scope and Methodology                                                    14

Internal Controls                                                        16

Appendixes
   A. Schedule of Questioned Costs                                       18
   B. Auditee Comments and OIG’s Evaluation                              19
   C. Criteria                                                           25




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                           BACKGROUND AND OBJECTIVES

The Municipality of Toa Baja (Municipality) is an entitlement recipient administering more than
$10.7 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
$4 million during fiscal years 2004 and 2005. In 1995, HUD approved $9.55 million in Section
108 Loan Guarantee Assistance (Loan Guarantee) funds for the following activities:

                    Loan Guarantee activity                Amount             Program objective
                 Rehabilitation of recreational                             Low- and moderate-
                                                            $4,350,000
                 facilities at various sites                                income persons
                 Construction and reconstruction
                                                                            Low- and moderate-
                 of streets, sidewalks, drainage,              2,000,000
                                                                            income persons
                 etc. at various sites
                                                                            Low- and moderate-
                 Toa Baja public library                       1,700,0001
                                                                            income persons
                 Candelaria community service                               Low- and moderate-
                                                               1,000,000
                 center                                                     income persons
                                                                            Low- and moderate-
                 Museum                                          500,000
                                                                            income persons
                                Total                       $9,550,000

The Municipality’s housing department was responsible for administering the Loan Guarantee
program. The Municipality’s books and records for the Loan Guarantee and Block Grant
programs are maintained at Road #867, Sábana Seca Avenue, Toa Baja, Puerto Rico.

We audited the Municipality’s Loan Guarantee 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 2005 and 2006 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 Loan Guarantee
program.




1
    The Municipality later increased this amount to more than $1.8 million. The Library was a multi-year project. The
    Municipality used $677,226 from its 1991 Loan Guarantee, and more than $1.4 million from Block Grant funds.
    The total amount in HUD funds used for the construction of the library was $3.9 million as of May 2006.


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                                        RESULTS OF AUDIT


Finding 1: The Municipality Mismanaged Loan Guarantee Activities
The Municipality did not manage two Loan Guarantee program activities in an economical,
efficient, and effective manner. It paid for activities or services that (a) did not meet national
program objectives, (b) did not generate the intended benefits, or (c) were
unreasonable/unnecessary. This occurred because the Municipality did not develop and
implement adequate procedures to ensure compliance with HUD requirements. As a result,
HUD has no assurance that funds were used solely for authorized purposes and that program
objectives were met. The Municipality paid more than $4.8 million for two activities in which
the intended benefits were not provided and Block Grant national objectives were not met and
paid $70,369 for unreasonable/unnecessary expenditures.



    National Objectives Not Met

                    For the Toa Baja public library activity, the Municipality did not take adequate
                    steps to ensure that it met at least one of the three Block Grant national objectives
                    required by 24 CFR [Code of Federal Regulations] 570.200(a)(2). About 13
                    years have elapsed since construction started, but the library is not open to the
                    public. Further, the steel structure above the library has significantly deteriorated,
                    making the public facility unsafe. This occurred because the Municipality did not
                    have adequate controls to ensure that program objectives were met. As a result,
                    the community of Toa Baja has not received the intended benefits described in the
                    Loan Guarantee application.

                    HUD approved the Municipality’s application to use $1.7 million in 1994 Loan
                    Guarantee funds to construct the Toa Baja public library.2 According to the
                    application, public and private school students would use the library, and the
                    activity would meet the national objective of benefiting low- and moderate-
                    income persons.

                    In March 1993, the Municipality initiated the construction of the Toa Baja public
                    library at the base of an existing water tower that was no longer in use. The
                    library, a three-story building with no parking facilities, was constructed within
                    the support structure of the water tower and under the water tank. According to
                    Municipality records, the public library was substantially completed in April
                    2005.


2
    The Municipality increased this amount to more than $1.8 million. It also used $677,226 from the 1991 Loan
    Guarantee, and more than $1.4 million from Block Grant funds. The total amount in HUD funds used for the
    construction of the library was $3.9 million.


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      In March 2006, the library was not operational, and it did not contain furnishings
      or equipment associated with a functioning library. Therefore, the intended
      benefits and compliance with Block Grant national objectives were not in
      evidence.




      Picture of the front of the public library.   Pictures of the interior of the library. There were
      The library is beneath the water tower and    no furnishings associated with a functioning
      has no parking facility.                      library.

      The steel structure above the library had significantly deteriorated due to neglect.
      There was an advanced stage of deterioration associated with corrosion to the
      steel frame and water tank. A significant amount of steel debris had fallen to the
      ground and onto the library roof.




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         We requested the assistance of a licensed engineer from the San Juan Office of
         Public Housing to advise us on the condition of the water tower and potential
         safety issues. HUD’s engineer concluded that the deterioration of the steel
         structure and water tank has made the public facility unsafe and recommended
         that it not to be used until the steel structure is rehabilitated or removed.



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                     The local community also had concerns regarding the slow progress of the public
                     library and the potential hazard of the water tower. In April 2004, HUD referred
                     two citizens’ complaints to the Municipality and urged officials to promptly
                     resolve the issues. The Municipality was not diligent in taking corrective
                     measures. Two years after HUD referred the complaints, the library was not open
                     to the public, and the hazardous conditions still existed.

                     A Municipality official informed us that the poor condition of the water tower
                     was the principal reason for not opening the library. Although the library was not
                     open to the public, the Municipality used the facility for meetings, lectures, and
                     training sessions. The Municipality is currently providing computer workshops
                     for elementary school students at this facility. The Municipality did not provide
                     us with an occupancy permit for the public library. Its planning director informed
                     us that he believes an occupancy permit was obtained, but it was lost or
                     misplaced. We were informed that a new occupancy permit was requested from
                     local authorities.


    Activity Amended without HUD
    Approval

                     For the Candelaria multipurpose center activity, the Municipality did not take
                     adequate steps to ensure that citizens received the intended benefits for which
                     HUD funds were approved. More than five years have elapsed since completion
                     of the facility, but the daycare and emergency health facilities have not been
                     established at the site as proposed in the Municipality’s 1994 Loan Guarantee
                     application. This occurred because the Municipality has not developed and
                     implemented adequate procedures to ensure compliance with HUD requirements.
                     As a result, HUD has no assurance that funds are solely used for authorized
                     purposes and that program objectives are met.

                     In August 1995, HUD approved the Municipality’s application to use $1 million
                     in 1994 Loan Guarantee funds to construct the Candelaria multipurpose center.3
                     According to the application, the center would accommodate a daycare center and
                     an emergency health facility. The Municipality characterized this activity as an
                     urgent project and suitable for senior citizens who did not have a means of
                     transportation. According to Municipality records, the center was substantially
                     completed in December 2000.

                     In May 2006, the center housed a municipal police station and a room for
                     activities/gatherings of the local community.4 The daycare and emergency health
                     facilities had never operated at the site. Therefore, the Municipality substantially
                     changed the purpose and scope of the Candelaria multipurpose center, and the
                     intended benefits were not provided.

3
    The Municipality increased the budget amount to $1,046,281.
4
    A police official informed us that the police station has been at the Candelaria center for about three years.


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       Picture of front of the police station.       Gathering room used by the community.

       HUD’s regulations (24 CFR [Code of Federal Regulations] 570.704(c)(5))
       provide that if the public entity wishes to carry out an activity not previously
       described in its application or to substantially change the purpose, scope, location,
       or beneficiaries of an activity, HUD must approve the amendment. The
       Municipality did not provide us with an explanation of why the scope of the
       project was changed or whether it obtained HUD approval. HUD officials
       informed us that the Municipality did not request approval to amend this activity.

       The structure was significantly deteriorated due to structural defects and poor
       workmanship. One of the three main rooms in the structure is currently unusable
       because of serious water leaks. During our site visit, we found inoperable
       bathrooms, missing or damaged ceiling panels, mold, and water accumulated on
       the floor (inside the building).




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           The Municipality informed us that the water leak problems have existed since the
           completion of the center in December 2000. The rest of the structure, used by the
           municipal police and the community, also suffers from water leakage and mold.
           Although the Municipality is aware of the structural deficiencies, it has not taken
           proper actions to address the problem.


Unnecessary Expenditures


           The Municipality charged the Block Grant program $70,369 for unnecessary or
           unreasonable expenditures associated with the repair of construction work that
           was completed, paid for, and later vandalized. This occurred because the
           Municipality did not have adequate controls to properly safeguard HUD-funded
           assets. As a result, HUD funds were used to pay for duplicate costs associated
           with previous construction phases of the public library.

           On April 21, 2004, the Municipality awarded a $499,000 contract to a private
           entity to complete the fourth and final phase of the construction of the Toa Baja
           public library. Municipality records showed that the scope of the construction
           work included the repair of items that were completed as of March 2001 and later
           vandalized. This included the replacement of doors, light fixtures, fire detection
           equipment, acoustic ceiling, and other items. We estimate that the cost associated
           with this repair work was at least $70,369.

           According to Municipality records, the third phase of construction of the library
           was finished in March 2001, and the fourth phase began in April 2004. This
           reflects a gap of about three years between the two construction phases. During
           this period, the construction site was abandoned, and the project became prey to
           vandalism. The Municipality was aware that the repairs to correct the vandalism
           could not be charged to HUD programs. During a prebid meeting, the
           Municipality’s consultant explained that a separate quote was requested
           (vandalized items) because repairs were not part of the scope of the project, and


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             the Municipality would have to fund it with other sources (nonfederal). The
             Municipality did not explain why the repairs were charged to the Block Grant
             program. Therefore, the $70,369 is considered an unreasonable/unnecessary
             program expenditure.


Conclusion


             The Municipality did not manage Loan Guarantee-funded activities in an
             economical, efficient, and effective manner. It paid more than $4.8 million for
             two activities in which the intended benefits were not provided and Block Grant
             national objectives were not met. This occurred because the Municipality had
             inadequate management controls.

Recommendations

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

             1A.    Require the Municipality to develop and implement a corrective action
                    plan to eliminate the safety hazards and ensure that the public library
                    meets a national objective or reimburse the Block Grant program from
                    nonfederal funds more than $3.8 million used for its construction.

             1B.    Require the Municipality to provide all supporting documentation
                    evidencing that it complied with HUD requirements when it changed the
                    purpose and scope of the Candelaria multipurpose center or reimburse the
                    Block Grant program from nonfederal funds more than $1 million used for
                    its construction.

             1C.    Require the Municipality to reimburse the Block Grant program from
                    nonfederal funds the $70,369 paid for unreasonable/unnecessary library
                    repair expenditures.

             1D.    Take appropriate monitoring measures and require the Municipality to
                    establish and implement policies and procedures to ensure that activities
                    meet a Block Grant national objective and are used for the approved
                    purposes.




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Finding 2: The Municipality Did Not Demonstrate Compliance with
           Environmental Review Procedures

The Municipality did not maintain adequate records to demonstrate that it complied with
environmental review procedures associated with the construction of the Toa Baja public library.
This occurred because the Municipality had inadequate management controls. As a result, HUD
has no assurance that requirements were met or whether potential findings/concerns were
properly addressed.



    Inadequate Environmental
    Documents


                     The Municipality did not take adequate steps to ensure that it followed
                     environmental review procedures required by 24 CFR [Code of Federal
                     Regulations] Part 58. The regulations provide that recipients must fully document
                     environmental reviews and assessment reevaluations, written determinations, or
                     environmental findings associated to all stages of a particular project or activity.

                     On September 21, 1992, the Municipality submitted an environmental assessment
                     on the construction of the Toa Baja public library. According to the assessment,
                     the preliminary cost for the project was $350,000, funded with its 1991 Loan
                     Guarantee. Municipality records showed that the construction of the library
                     included three additional stages, funded with Block Grant and 1994 Loan
                     Guarantee funds totaling more than $3.9 million. However, the files did not
                     contain adequate support that the three additional stages were properly assessed or
                     reevaluated.

                     Program regulations require recipients to reevaluate their environmental
                     assessments when there are substantial changes in the nature, magnitude, or extent
                     of the project. HUD’s environmental specialist informed us that the Municipality
                     was required to reevaluate its 1992 environmental assessment of the library as the
                     magnitude and extent of the project increased. Had the Municipality properly
                     completed the reevaluations as required, the lack of parking facilities at the site
                     could have been properly addressed.5 Although a Municipality official stated that
                     environment assessment reevaluations were performed, we did not find adequate
                     support in the files.

                     As a result, HUD has no assurance that the Municipality complied with applicable
                     environmental requirements or whether potential findings and concerns were


5
    No parking facilities were constructed at the site, and there were no other alternate facilities (private or public)
    within its vicinity.


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          properly addressed. The file deficiencies demonstrate that the Municipality
          lacked adequate management controls.


Recommendations


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

          2A.     Require the Municipality to provide all supporting documentation showing
                  that it complied with environmental review procedures, including
                  assessment reevaluations, associated with the construction of the Toa Baja
                  public library.

          2B.     Take appropriate monitoring measures and require the Municipality to
                  establish and implement policies and procedures to ensure that activities
                  meet environmental review procedures.




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                               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 Loan Guarantee program. The
compliance requirements included the expenditure of HUD funds for eligible, necessary, and
reasonable project costs; compliance with national objectives; and compliance with
environmental review procedures. To accomplish our objectives, we

      •    Obtained and reviewed relevant HUD regulations and Municipality guidelines;

      •    Interviewed HUD and Municipality officials;

      •    Reviewed monitoring and independent accountant reports;

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

      •    Performed site inspections of Loan Guarantee activities; and

      •    Reviewed the Municipality’s controls related to the administration of its Loan Guarantee
           program.

The Municipality’s check register reflected $9.4 million in Loan Guarantee disbursements
between November 8, 1996, and April 19, 2006. We selected disbursements from the
Municipality’s check register with a value greater than $30,000, resulting in a sample of six
disbursements totaling $454,170.6 The expenditures and related supporting documents were
reviewed to determine whether the payments met Loan Guarantee requirements, including
reasonableness of the costs. Our review also included the examination of environmental review
procedures associated with the construction of the Toa Baja public library.

In addition, we visited a sample of five activities funded with Loan Guarantee funds to determine
whether the intended benefits and compliance with the Block Grant national objectives were met.
The selected activities had $5.1 million in expenditures, representing about 53 percent of the
$9.55 million approved for its 1994 Loan Guarantee.

To achieve our audit objectives, we did not rely on computer-processed data contained in the
Municipality’s database. Alternate testing methods were used to verify the accuracy of the
questioned expenditures. The results of the audit apply only to the items selected and cannot be
projected to the universe.

The audit generally covered the period July 1, 2004, through January 2006, and we extended the
audit period as needed to accomplish our objectives. Due to the nature of some of the
deficiencies, we extended the period back to March 1993. Some of the Loan Guarantee activities

6
    The disbursements reviewed were those incurred after January 1, 2000.


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examined were also financed with Block Grant funds; our review also included those funds. We
conducted our fieldwork from February through June 2006 at the Municipality’s offices in Toa
Baja, Puerto Rico. We performed our review in accordance with generally accepted government
auditing standards.




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                             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 did not manage two Loan Guarantee program activities in
                  an economical, efficient, and effective manner (see finding 1).



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        •   The Municipality did not maintain adequate records to demonstrate that it
            complied with environmental review procedures associated with the
            construction of the Toa Baja public library (see finding 2).




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                                       APPENDIXES

Appendix A

                    SCHEDULE OF QUESTIONED COSTS

                                                              Unreasonable or
                     Recommendation         Unsupported 1/     unnecessary 2/
                            1A                  $3,833,456
                            1B                   1,046,281
                            1C                                         $70,369
                                                _________             _______
                           Total                $4,879,737            $ 70,369


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.

2/       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.




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      Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




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                    20
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                    21
Comment 1




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                    23
                          IG Evaluation of Auditee Comments

Comment 1   The Municipality claims that it is in compliance with environmental requirements,
            and requests the clearance of the finding. However, the certifications and funding
            release authorizations provided did not demonstrate that assessment reevaluations
            were performed. HUD’s environmental specialist informed us that the
            Municipality was required to reevaluate its 1992 environmental assessment of the
            library as the magnitude and extent of the project increased. Although a
            Municipality official stated that environment assessment reevaluations were
            performed, we did not find adequate support in the files.

            HUD regulations provide that recipients must fully document environmental
            reviews and assessment reevaluations, written determinations, or environmental
            findings associated to all stages of a particular project or activity. The
            documentation provided was not sufficient to demonstrate that it complied with
            environmental review procedures, including assessment reevaluations, associated
            with the construction of the Toa Baja public library.




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                                            24
Appendix C

                                          CRITERIA


Federal Regulations at 24 [Code of Federal Regulations] 58.38(a)

The environmental review record shall contain all the environmental review documents, public
notices, and written determinations or environmental findings required as evidence of review,
decision making, and actions pertaining to a particular project.

Federal Regulations at 24 [Code of Federal Regulations] 58.47(a)

The entity must reevaluate its environmental findings when the entity proposes substantial
changes in the nature, magnitude, or extent of the project.

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] 570.704(c)(5)

If the public entity wishes to carry out an activity not previously described in its application or to
substantially change the purpose, scope, location, or beneficiaries of an activity, HUD must
approve the amendment. The public entity shall follow the citizen participation requirements for
amendments in section 570.704(a)(2).




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