oversight

HUD 's Interest in $47,668 in Economic Development Initiative � Special Purpose Grant Funds Awarded to the City of Rhinelander, Wisconsin Was Not Secured

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-12-05.

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

                AUDIT REPORT




         CITY OF ST. RHINELANDER
 ECONOMIC DEVELOPMENT INITIATIVE – SPECIAL
      PURPOSE GRANT (B-02-SP-WI-0779)

              RHINELANDER, WISCONSIN

HUD’s Interest in $47,668 in Grant Funds Awarded to the City
                      Was Not Secured

                      2006-CH-1003

                   DECEMBER 5, 2005

                 OFFICE OF AUDIT, REGION V
                     CHICAGO, ILLINOIS
                                                                 Issue Date
                                                                          December 5, 2005
                                                                 Audit Report Number
                                                                          2006-CH-1003




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


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

SUBJECT: HUD’s Interest in $47,668 in Economic Development Initiative – Special
           Purpose Grant Funds Awarded to the City of Rhinelander, Wisconsin Was
           Not Secured

                                   HIGHLIGHTS

 What We Audited and Why

             We audited the City of Rhinelander, Wisconsin’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
             $120,000 in Grant funds to pay for the reconstruction of U.S. Highway 8, which
             included the construction of a rail spur crossing ($72,332) and access road
             ($47,668). However, it did not place a covenant on the property title for the
             access road assuring nondiscrimination based on race, color, national origin, or
           handicap. Further, HUD did not request the City to record HUD’s interest on the
           access road’s property title.

           Although the rail spur crossing is also real property based on HUD’s
           requirements, we believe it is not practical to place a covenant on the rail spur
           crossing’s property title since the crossing is not a building or land where
           discrimination could occur. Further, we believe that it is highly unlikely that the
           land where the rail spur crossing is located would be sold or change its purpose
           since the crossing is located on U.S. Highway 8. Therefore, we did not
           recommend the placing of a covenant or the securing of HUD’s interest on the rail
           spur crossing’s property title.


What We Recommend

           We recommend that HUD’s director of congressional grants require the City to
           record a covenant on the title assuring nondiscrimination based on race, color,
           national origin, or handicap and record a lien on the property titles for the access
           road showing HUD’s interest in the assisted property. If the covenant and lien are
           not recorded, the City should reimburse HUD $47,668 from nonfederal funds for
           the Grant funds used to pay for the construction of the access road.

           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 Response Not Provided

           We provided our discussion draft audit report to the City’s attorney/administrator
           and HUD’s staff during the audit. We attempted to schedule an exit conference with
           the City’s attorney/administrator but were not successful since the
           attorney/administrator did not respond to our offers as of December 4, 2005.

           We asked the City’s attorney/administrator to provide comments on our discussion
           draft audit report by December 2, 2005. As of December 4, 2005, the City had not
           provided any comments on the discussion draft audit report.




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                            TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit

      Finding: HUD’s Interest in $47,668 in Grant Funds Awarded to the City Was   5
               Not Secured

Scope and Methodology                                                             7

Internal Controls                                                                 8

Appendixes
   A. Schedule of Funds to Be Put to Better Use                                   10
   B. Federal Requirements                                                        11




                                            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 Rhinelander, Wisconsin. Organized under the laws of the State of Wisconsin, the
City of Rhinelander (City) is governed by a mayor and an eight-member council. The U.S.
House of Representatives’ Conference Report 107-272 set aside $120,000 in Economic
Development Initiative – Special Purpose Grant (Grant) funds to the City for the construction of
a rail spur. In June 2004, HUD awarded the City a $120,000 Grant to pay for the reconstruction
of United States Highway 8, which included the construction of a rail spur crossing and an
access road. The City’s attorney/administrator administered the Grant. The City’s records for
the Grant are maintained at Rhinelander City Hall, located at 135 South Stevens Street,
Rhinelander, Wisconsin.

We initiated the 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 $47,668 in Grant Funds Awarded to the
                       City Was Not Secured
The City used $120,000 in Grant funds to pay for the reconstruction of U.S. Highway 8, which
included the construction of a rail spur crossing ($72,332) and access road ($47,668); however,
the City did not place a covenant on the property title for the access road assuring
nondiscrimination based on race, color, national origin, or handicap. Further, HUD did not
request the City to record HUD’s interest on the property title for the access road. 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 access road is not protected.



 The City Used $47,668 in Grant
 Funds without Placing a
 Covenant on the Title to Ensure
 Nondiscrimination

               Contrary to federal requirements, the City did not secure HUD’s interest in
               $47,668 in Grant funds used to pay for the construction of an access road for
               Ponnse USA, Inc. (Ponnse). The funds were disbursed in September 2004. The
               City obtained the land for the access road from Laser Pros International
               Corporation (Corporation). The City, in its agreement with the County of Oneida
               and the Corporation for the land, agreed to allow the Corporation to have right of
               first refusal to acquire Ponsse’s land upon cessation of Ponsse’s business.

               The City failed to place a covenant on the access road’s property title to assure
               nondiscrimination based on race, color, national origin, or handicap. The purpose
               of the covenant is to ensure nondiscrimination for the period that the access road
               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 access road.

 HUD’s Interest in the Access
 Road Is at Risk


               The City’s attorney/administrator said HUD did not provide the City any
               directives or guidance regarding the securing of HUD’s interest in the access
               road. Additionally, the attorney/administrator said the City lacked experience
               regarding HUD grants. However, the City assured it would place a covenant on



                                                5
           the real property’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 access road.

HUD Did Not Request the City
to Record HUD’s Interest on
the Access Road


           HUD did not request the City to record HUD’s interest on the property title for
           the access road. The recording of HUD’s interest in the road will help protect
           HUD in case the road is sold or is no longer used for its intended purpose. The
           City’s mayor certified in Standard Form 424D, Assurances – Construction
           Programs, section 3, that the City would record the federal interest in the title of
           real property in accordance with awarding agency directives.

           HUD’s Office of Congressional Grants’ position is that the Standard Form only
           requires the City to record HUD’s interest in the access road, if HUD issued a
           directive that requires applicants to record HUD’s interest in real property or
           HUD specifically directs the City to record HUD’s interest in the road. HUD did
           not issue any directives requiring grant recipients to record HUD’s interest in real
           property or specifically direct the City to record HUD’s interest. However, HUD
           clearly has the authority to require a grantee to record HUD’s interest in an
           assisted property. Therefore, HUD’s interest in the access road is not protected in
           case it is sold or is no longer used for its intended purpose.

Recommendations

           We recommend that HUD’s director of congressional grants require the City to

           1A. Record a covenant on the title assuring nondiscrimination based on race, color,
               national origin, or handicap and record a lien on the property title for the
               access road. The covenant and lien should help ensure that the City protects
               HUD’s interest in the $47,668 in Grant funds for the road.

           1B. Reimburse HUD from nonfederal funds for the Grant funds used to pay for the
               construction of the access road if the covenant and lien are not recorded.




                                             6
                        SCOPE AND METHODOLOGY

We performed the audit at the City’s city hall in September 2005. To accomplish our objectives,
we interviewed HUD’s staff and employees of the City, the Wiconsin Department of
Transportation, and Laser Pros International Corporation.

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 107-272,
       •   HUD’s file related to the Grant,
       •   The City’s financial records, and
       •   The City’s website for organizational information on the City.

We also reviewed 24 CFR [Code of Federal Regulations] Parts 1, 8, and 85; 56 Federal Register
16337; 70 Federal Register 18193; 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 June 16, 2004, 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 Weakness


            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.




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                                    APPENDIXES

Appendix A

     SCHEDULE OF FUNDS TO BE PUT TO BETTER USE

                                                    Funds to Be
                             Recommendation
                                                    Put to Better
                                 number
                                                       Use 1/
                                     1A               $47,668
                                    Total             $47,668


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




                                              10
Appendix B

                            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 or 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 or 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.

HUD Directive 85.31 and 24 CFR [Code of Federal Regulations] 85.31(a) state title to the real
property shall vest in the recipient as long as the recipient uses the real property for its authorized
purpose and does not encumber the real property without HUD’s approval. Section 85.31(c)
states when the real property is no longer needed for the authorized purpose, the recipient shall
request disposition instructions from HUD. HUD shall require the recipient to do the following:
(1) retain title to the real property without further obligation to the federal government after it
compensates the federal government the percentage of the current fair market value of the real
property attributable to the federal participation in the project; (2) sell the real property and
compensate the federal government for the percentage of the current fair market value of the real
property attributable to the federal participation in the project; or (3) transfer title to the real
property to the federal government or to an eligible third party and be entitled to compensation
for its percentage of the current fair market value of the real property.

According to 56 Federal Register 16337, “directive” means a handbook (including a change or
supplement), notice, interim notice, special directive, and any other issuance that the department
may classify as a directive.

The City’s mayor certified in Standard Form 424D, Assurances – Construction Programs, section
3, that the City would record the federal interest in the title of real property in accordance with
awarding agency directives and would include a covenant in the title of real property acquired in
whole or in part with federal assistance to assure nondiscrimination during the useful life of the
project.




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