oversight

HUD 's Interest in More Than $220,000 in Economic Development Initiative � Special Purpose Grant Funds Awarded to the City of St. Ignace, Michigan Was Not Secured

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-11-10.

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

             AUDIT REPORT




           CITY OF ST. IGNACE
ECONOMIC DEVELOPMENT INITIATIVE – SPECIAL
     PURPOSE GRANT (B-03-SP-MI-0352)

             ST. IGNACE, MICHIGAN

 HUD’s Interest in More Than $220,000 in Grant Funds
        Awarded to the City Was Not Secured

                   2006-CH-1001

               NOVEMBER 10, 2005

              OFFICE OF AUDIT, REGION V
                  CHICAGO, ILLINOIS
                                                                  Issue Date
                                                                           November 10, 2005
                                                                  Audit Report Number
                                                                           2006-CH-1001




TO:         Francis P. McNally, Director of Congressional Grants, DECC


FROM:       Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: HUD’s Interest in More Than $220,000 in Economic Development Initiative –
           Special Purpose Grant Funds Awarded to the City of St. Ignace, Michigan
           Was Not Secured

                                    HIGHLIGHTS

 What We Audited and Why

             We audited the City of St. Ignace, Michigan’s (City) Economic Development
             Initiative - Special Purpose Grant (Grant). We initiated the audit in conjunction
             with our internal review of the U.S. Department of Housing and Urban
             Development’s (HUD) oversight of Economic Development Initiative – Special
             Purpose Grants. The review is part of our fiscal year 2005 annual audit plan. We
             chose the City’s Grant based upon a statistical sample of fiscal years 2002 and
             2003 Economic Development Initiative – Special Purpose Grants, in which 90
             percent or more in funds were disbursed. Our objectives were to determine
             whether the City used its Grant funds in accordance with HUD’s requirements
             and recorded HUD’s interest on the assisted property.

 What We Found


             The City used the Grant funds in accordance with HUD’s requirements. It used
             $223,537 in Grant funds to pay for the construction of the St. Ignace Public
             Library (Library). However, it did not place a covenant on the property title for
             the Library assuring nondiscrimination based on race, color, national origin, or
             handicap.
What We Recommend

           We recommend that HUD’s director of congressional grants assure the covenant
           executed on October 18, 2005, on the Library’s property title ensuring
           nondiscrimination based on race, color, national origin, or handicap includes
           HUD's remedies in the event that discrimination does occur. The appropriately
           executed covenant with HUD’s remedies should help ensure that the City protects
           HUD’s interest in the $223,537 in Grant funds for the Library.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response

           We provided our discussion draft audit report to the city manager and HUD’s staff
           during the audit. The City’s library director declined our invitation for an exit
           conference.

           We asked the city manager to provide comments on our discussion draft audit report
           by November 3, 2005. The city manager provided written comments dated
           November 4, 2005. The City executed a covenant dated October 18, 2005, on its
           Library. However, the covenant did not include HUD’s remedies in the event that
           discrimination does occur. The complete text of the written 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: HUD’s Interest in More Than $220,000 in Grant Funds Awarded to the   5
               City Was Not Secured

Scope and Methodology                                                               7

Internal Controls                                                                   8

Appendixes
   A. Schedule of Funds to Be Put to Better Use                                     10
   B. Auditee Comments and OIG’s Evaluation                                         11
   C. Federal Requirements                                                          15




                                            3
                     BACKGROUND AND OBJECTIVES

The Economic Development Initiative program. The U.S. Department of Housing and Urban
Development’s (HUD) Economic Development Initiative program includes noncompetitive
Economic Development Initiative – Special Purpose Grants. HUD awards Economic
Development Initiative – Special Purpose Grants to entities included in the U.S. House of
Representatives’ conference reports.

The City of St. Ignace, Michigan. Organized under the laws of the state of Michigan, the City
of St. Ignace (City) is governed by a mayor and six-member council. The U.S. House of
Representatives’ Conference Report 108-10 set aside $225,000 in Economic Development
Initiative – Special Purpose Grant (Grant) funds to the City for the construction of a public
library. In November 2003, HUD awarded the City a $223,537 Grant to pay for the construction
of a new 7,200-square-foot public library. The city clerk administered the City’s Grant. The
City’s records for the Grant are maintained at St. Ignace City Hall, located at 396 North State
Street, St. Ignace, Michigan.

We initiated this audit in conjunction with our internal review of HUD’s oversight of Economic
Development Initiative – Special Purpose Grants. The review is part of our fiscal year 2005
annual audit plan. We chose the City’s Grant based upon a statistical sample of fiscal years 2002
and 2003 Economic Development Initiative – Special Purpose Grants, in which 90 percent or
more in funds were disbursed.

Our objectives were to determine whether the City used its Grant funds in accordance with
HUD’s requirements and recorded HUD’s interest on the assisted property.




                                               4
                                RESULTS OF AUDIT


Finding: HUD’s Interest in More Than $220,000 in Grant Funds
               Awarded to the City Was Not Secured
The City used $223,537 in Grant funds to pay for construction of the St. Ignace Public Library
(Library); however, the City did not place a covenant on the property title for the Library
assuring nondiscrimination based on race, color, national origin, or handicap. The City did not
record the covenant on the title because it lacked effective oversight of applicable Grant
requirements. As a result, HUD’s interest in the Library is not protected.



 The City Used More Than
 $220,000 in Grant Funds
 without Placing a Covenant on
 the Library’s Title to Ensure
 Nondiscrimination

               Contrary to federal requirements, the City did not secure HUD’s interest in
               $223,537 in Grant funds used to pay for the construction of the City’s new
               Library. The funds were disbursed from July through September 2004. The City
               failed to place a covenant on the Library’s property title to assure
               nondiscrimination based on race, color, national origin, or handicap. The purpose
               of the covenant is to ensure nondiscrimination during the period in which the
               Library is used as outlined in the City’s application for the Grant or for another
               purpose involving similar services or benefits. The recording of the covenant will
               provide HUD recourse if discrimination based on race, color, national origin, or
               handicap occurs in relation to the Library.

               HUD also awarded the City $175,000 in fiscal year 2001 Grant funds to pay for
               the construction of Library.

 HUD’s Interest in the Library
 Is at Risk


               The City’s library director said the City did not secure HUD’s interest in the
               Library because the City’s grant agreement with HUD did not specifically state
               the City was required to secure HUD’s interest in the Library. However, the
               City’s grant agreement requires the City to use the Grant funds in accordance with
               24 CFR [Code of Federal Regulations] Parts 1 and 8, which require the City to
               place a covenant on the Library’s property title to assure nondiscrimination based
               on race, color, national origin, or handicap. The city manager said the City is


                                                5
          willing to place a covenant on the Library’s title to assure nondiscrimination
          during the useful life of the project. The recording of the covenant will provide
          HUD recourse if discrimination based on race, color, national origin, or handicap
          occurs in relation to the Library.

Recommendations

          We recommend that HUD’s director of congressional grants

          1A. A assure the covenant executed on October 18, 2005, on the Library’s
              property title ensuring nondiscrimination based on race, color, national
              origin, or handicap includes HUD's remedies in the event that discrimination
              does occur. The appropriately executed covenant with HUD’s remedies
              should help ensure that the City protects HUD’s interest in the $223,537 in
              Grant funds for the Library.

          1B. Reimburse HUD from nonfederal funds for the Grant funds used to pay for the
              construction of the Library if the appropriately executed covenant with HUD’s
              remedies is not recorded.




                                           6
                        SCOPE AND METHODOLOGY

We performed the audit at the Library in September 2005. To accomplish our objectives, we
interviewed HUD’s staff, the City’s employees, and the Library’s director.

To determine whether the City used Grant funds in accordance with HUD’s requirements and
recorded HUD’s interest on the assisted property, we reviewed

   •   U.S. House of Representatives’ Conference Report 108-10,
   •   HUD’s file related to the Grant,
   •   The City’s financial records, and
   •   The Michigan secretary of state’s Website for organizational information on the City.

We also reviewed 24 CFR [Code of Federal Regulations] Parts 1, 8 and 85; HUD Directives 1.5,
8.50, and 85.31; Office of Management and Budget Circulars A-21, A-87, A-110, and A-122;
and HUD Handbook 2000.06, REV-3.

The audit covered the period from November 15, 2003, through August 31, 2005. This period
was adjusted as necessary. We performed our audit in accordance with generally accepted
government auditing standards.




                                               7
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding resources.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


              We determined the following internal controls were relevant to our audit objectives:

                  •   Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

                  •   Validity and reliability of data – Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

                  •   Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

                  •   Safeguarding resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

              We assessed all of the relevant controls identified above.

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




                                                8
Significant Weaknesses

            Based on our audit, we believe the following item is a significant weakness:

               •   The City did not record the covenant on the title because it lacked
                   effective oversight of applicable Grant requirements.




                                             9
                                    APPENDIXES

Appendix A

     SCHEDULE OF FUNDS TO BE PUT TO BETTER USE

                                                    Funds to be
                             Recommendation
                                                    put to better
                                 number
                                                       use 1/
                                     1A              $223,537
                                    Total            $223,537


1/   “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
     Office of Inspector General (OIG) recommendation is implemented, resulting in reduced
     expenditures at a later time for the activities in question. This includes costs not incurred,
     deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of
     unnecessary expenditures, loans and guarantees not made, and other savings.




                                              10
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         11
Ref to OIG Evaluation   Auditee Comments




                         12
Ref to OIG Evaluation   Auditee Comments




                         13
                        OIG Evaluation of Auditee Comments

Comment 1   The City executed a covenant dated October 18, 2005, on its Library’s property
            title. However, the covenant did not include HUD’s remedies in the event that
            discrimination does occur. We adjusted the recommendations to address the lack
            of HUD’s remedies in this audit report.




                                           14
Appendix C

                           FEDERAL REQUIREMENTS

The City’s grant agreement with HUD, article I, section B, states the grant funds must be made
available in accordance with 24 CFR [Code of Federal Regulations] parts 1 and 8. Section E of
article I states the City will comply with 24 CFR [Code of Federal Regulations] Part 85.

According to 24 CFR [Code of Federal Regulations] 1.5(a)(2), in the case of real property,
structures, improvements thereon, or interests therein, acquired through a program of federal
financial assistance, the instrument effecting any disposition by the recipient of such real
property, structures, improvements thereon, or interests therein shall contain a covenant running
with the land assuring nondiscrimination based on race, color, or national origin for the period
during which the real property is used for a purpose for which the federal financial assistance is
extended or for another purpose involving the provision of similar services or benefits.

According to 24 CFR [Code of Federal Regulations] 8.50(c)(2), when no transfer of property is
involved but property is purchased or improved with federal financial assistance, the recipient
shall agree to include a covenant in the instrument effecting or recording any later transfer of the
property for the period during which it retains ownership or possession of the property to assure
nondiscrimination based on a handicap.

The City submitted Form HUD-424-B, Applicant Assurances and Certifications, with its Grant
application to HUD. Sections 2 and 3 of Form HUD-424-B state that the City will administer the
Grant in compliance with 24 CFR [Code of Federal Regulations] Parts 1 and 8. However, the
form was not signed by a City official.




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