Issue Date September 7, 2006 Audit Report Number 2006-LA-1019 TO: Steven B. Sachs, Director, San Francisco Office of Community Planning and Development, 9AD FROM: Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA SUBJECT: The City of Modesto (City) Modesto, California, Did Not Always Administer Its Community Development Block Grant in Compliance with Government Regulations HIGHLIGHTS What We Audited and Why We audited the City of Modesto’s (City) Park Recreation and Neighborhood Services Division (Neighborhood Division) in response to a request from the City’s internal auditor, whose independence was challenged by the Neighborhood Division because his wife transferred into the Division in April 2002. The City Clerk and Auditor’s Office withdrew from the audit, even though he was the only internal auditor to do the work. The City’s Audit Committee (which consisted of the Mayor and two council members) agreed that the internal auditor could seek an outside source for the audit. We responded to the request and our audit results are contained herein. Our overall audit objective was to determine whether the City administered its Community Development Block Grant (block grant) in accordance with the U.S. Department of Housing and Urban Development (HUD) requirements. More specifically, our objectives were to determine (1) whether the Neighborhood Division’s procurement and bidding processes are in compliance with HUD and City requirements and (2) the eligibility of applicants in the City’s rehabilitation program. What We Found The City did not adequately administer its block grant programs for its Housing Maintenance and Emergency Home Repair/Disabled Access Assistance Rehabilitation programs. It failed to comply with both federal, and its own, contracting requirements for the block grant-funded programs. As a result, loan recipients were charged $64,938 in unnecessary and unreasonable rehabilitation costs. Additionally, the City did not follow its underwriting requirements for determining applicant income and eligibility and paid $3,441 in ineligible relocation costs for one applicant. (We brought the ineligible relocation costs to HUD’s attention during the audit, HUD required the monies be repaid, and $3,441was wired to the U.S. Treasury in May 2006). What We Recommend We recommend that HUD require the City to reduce the loan balances for loan recipients who were charged $64,938 for unreasonable and unnecessary rehabilitation costs identified during our audit, review all additional loan related rehabilitation work carried out after June 2005 to determine the reasonableness of costs charged for the work, and reduce the recipient loan balances for any identified overcharges. We also recommend that HUD require the City to implement a procurement system that meets federal requirements and develop an adequate quality control system to ensure that City staff properly monitor contractor charges, rehabilitation progress, and work quality. In addition, we recommend the City provide evidence that it now complies with its own underwriting requirements regarding verification of income and assistance eligibility for loan applicants. 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 the City a draft report on July 19, 2006. The City provided written comments on August 4, 2006. It generally disagreed with our report. The complete text of the auditee’s response, along with our evaluation of that response, can be found in appendix B of this report. Due to the volume of the exhibits to the auditee’s response, the exhibits will be made available upon request. 2 TABLE OF CONTENTS Background and Objectives 4 Results of Audit Finding 1: The City Did Not Properly Administer and Procure Rehabilitation 6 Work, Resulting in Loan Recipients Being Overcharged at Least $64,938 Finding 2: The City approved $3,441 in Ineligible Relocation Expenses 11 Scope and Methodology 13 Internal Controls 14 Appendixes A. Schedule of Questioned Costs and Funds to Be Put to Better Use 16 B. Auditee Comments and OIG’s Evaluation 17 C. Criteria 48 D. OIG Inspector’s Property Analysis 51 3 BACKGROUND AND OBJECTIVES The Community Development Block Grant (block grant) program was established by Title I of the Housing and Community Development Act of 1974 (1974 Act), Public Law 93-383. The act grants states and units of general local government aid in the development of viable urban communities. This is done by providing decent housing and a suitable living environment and expanding economic opportunities, principally for persons of low and moderate income. Block grants are allocated to designated jurisdictions, including metropolitan cities or urban counties. Annually, the City of Modesto, California (City) receives approximately $4.3 million in block grant funds. These funds are available to support a variety of activities directed at improving the physical condition of neighborhoods through the provision of housing, public improvements and facilities, creating employment, or improving services for low and/or moderate-income households. Generally, the City has a fund balance with the U.S. Treasury, awaiting draw requests from the City to pay invoices submitted by organizations carrying out block grant activities. The City initiated its Housing Maintenance Program (also known as the Housing Rehabilitation Program) in 1976. Under this program, the City revitalizes blighted neighborhoods and preserves existing homes in selected low-income areas known as target areas. In January 1994, the City Council designated Highway Village as one of the three target areas. The program uses block grant funds to provide low-interest loans to qualifying property owners to rehabilitate homes declared substandard. The program serves to eliminate health and safety hazards within the home and to promote the beautification of the neighborhood environment. The Community Development Program office administered the program until 1999 reorganization moved management of the program to the Neighborhood Division. The City’s Neighborhood Division offers a variety of housing rehabilitation programs. Housing rehabilitation includes programs for emergency housing repairs, housing maintenance programs, disabled access assistance, and property enhancement. The Neighborhood Division has the following types of loan interest rates and terms available for participants in its housing rehabilitation programs: • Deferred Payment Loan - These loans are deferred for up to 20 year terms and have a 3 percent, fixed interest rate. This type of loan is due and payable immediately upon sale or transfer of legal title to the property to another titleholder or if the beneficiary no longer resides in the house. To qualify for this loan the applicant's total gross annual household income shall be at or below 50 percent of the Median Area Income. The City places a mortgage lien on each property for the amount of the loan provided. • Payment Required Loan – These loans are amortized for up to 15 years with a fixed interest rate at 3 percent. This type of loan is due and payable immediately upon sale or transfer of the legal title to the property to another titleholder or if the beneficiary no 4 longer resides in the house. To qualify for this level of financial assistance, the applicant's total gross annual household income must be 50 to 80 percent of the Median Area Income or, the loan must be a Disabled Access Assistance Program loan for rehabilitation of a non-owner occupied residence. The City places a mortgage lien on each property for the amount of the loan provided. In addition to the block grant program, the Neighborhood Division is responsible for administering, monitoring, and supporting other public and affordable housing service programs funded by the U.S. Department of Housing and Urban Development (HUD) through the following grant programs: • Emergency Shelter Grant • HOME Investment Partnerships Program • Economic Development Initiative Grants The Neighborhood Division also administers the Affordable Housing Program, which is used for the development of affordable housing. Altogether, these grants (including the block grant program) provide approximately $6 million annually in HUD funds to benefit the homeless and low- and moderate-income people in the community. Our audit objective was to determine whether the City administered the block grant in accordance with HUD requirements. We wanted to determine (1) whether the Neighborhood Division’s procurement and bidding processes were in compliance with HUD and City regulations and (2) the eligibility of applicants participating in the City’s rehabilitation program. 5 RESULTS OF AUDIT Finding 1: The City Did Not Properly Administer and Procure Rehabilitation Work, Resulting in Loan Recipients Being Overcharged at Least $64,938 The City’s procurement and bidding processes for rehabilitation contracts did not comply with HUD requirements or its own policies and did not foster full and open competition. Contrary to HUD’s requirements and the City’s procedures, rehabilitation work write-ups were not properly prepared; cost estimates were inadequate to ensure that rehabilitation costs were reasonable; important nonwinner bid documents were not retained; and required contract bidding procedures were not followed. We attribute many of the problems to poor contracting procedures and practices, inadequate contractor monitoring by the City rehabilitation specialists, inadequate supervision of the rehabilitation specialists, and disregard for HUD’s and the City’s own procurement requirements. As a result, at least $64,938 in block grant funds used for the Housing Maintenance Program and Emergency Home Repair Program/Disabled Access Assistance Program Rehabilitation Programs were improperly spent for contractor overcharges on rehabilitation work for low- and moderate-income loan recipients. Procurement Practices Did Not Comply with Requirements And Foster Open Competition The City did not comply with HUD’s and its own requirements for the procurement and bidding processes. It did not prepare detailed independent cost estimates before requesting bids for each property to be rehabilitated as is required. The work write-up forms were sometimes insufficient for contractors to properly bid on certain line items, such as heating and cooling units. Cost estimates used to ensure that rehabilitation costs were reasonable were not supported thereby limiting their usefulness in ensuring that rehabilitation costs were reasonable. Further, we believe more contractors would have participated in the program if the Neighborhood Division’s bidding process was not limited to a noncurrent approved bidders list that hindered full and open competition, and had the rehabilitation work been advertised in the newspaper as called for by the City’s policy. During our audit period, July 1, 2000, through December 31, 2005, the City made 71 rehabilitation loans totaling $1.9 million. Excluding loans made to housing authorities and nonprofits, there were a total of 58 loans to individual homeowners totaling $1.1 million. We reviewed 28 of these loans totaling $826,686 and found the following: 6 • 42 percent (12 of 28) of the contracts went to only two contractors, • 70 percent (20 of 28) were let with only one, City defined, valid bidder, Based upon the above, it is apparent that the City’s policies and procedures rather than maximizing competition, actually limited competition. Additionally, the City’s policy was to destroy the bids of the nonwinning bidders for each rehabilitation contract solicitation. This occurred for all of the solicitations related to the 28 rehabilitation loans we reviewed. This policy was a major component in compromising the bidding process, generally administered by inadequately supervised rehabilitation specialists. As a result, there was no assurance that successful bidders’ costs were reasonable or that nonwinning bids were properly and comparatively reviewed. We brought this weakness to the attention of management while on site, and the policy was immediately changed. Monitoring and Supervision Were Inadequate For the loans reviewed, rehabilitation specialists were responsible for • Preparing work write-up forms and cost estimates, • Conducting many of the bid openings, and • Monitoring the rehabilitation work progress. However, we did not find sufficient evidence of regular on-site monitoring of the work of the City-selected contractors, nor was there evidence that the rehabilitation specialists routinely prepared on-site monitoring reports (site-visits) documenting the reviews they did make. Based on the performance of the rehabilitation specialists, including insufficient monitoring of contractors and poor work write-ups, we concluded that the City’s management staff did not provide adequate supervision of its rehabilitation specialists to ensure that they were effectively carrying out their job responsibilities. As a result, contracting processes were vulnerable to abuse and cost overcharges to loan recipients. 7 The City Required Loan Recipients to Select Contractors from Its Preapproved List as a Condition for Loan Approval The City required loan applicants to use contractors from its approved bidders list. If a loan applicant wanted to select a licensed contractor of his or her own choosing rather than using the successful City’s bidder, City staff stated the applicant would be denied a loan. During the audit, City staff initially told us that the borrowers selected their own contractors for the rehabilitation work; however, based on interviews with the City’s management staff and our review of the procurement process, we concluded that the City, not the loan applicants, selected the contractors. The only choice the loan applicants had was to choose a City selected single bidder or from a City selected short list of bidders it determined to be the successful bidders. It should be noted that this was a loan not a grant program and although the loan applicants could not select their own contractors, mortgage liens were placed on the borrowers’ homes for the cost of work done by the City-selected contractors. Loan Recipients Were Overcharged at Least $64,938 for Contracted Rehabilitation Costs With the assistance of an Office of Inspector General (OIG) appraiser/analyst, we reviewed 12 of the 28 rehabilitation loan files included in our review and determined that borrowers were often overcharged by the City-selected contractors for items such as heating and cooling, roofing, and bathroom remodels. For the 12 files reviewed, loan recipients were charged at least $64,938 in excessive/unreasonable costs for rehabilitation work (see appendix D). Two examples of these overcharges are as follows: • Borrowers for the property on Sparks were overcharged at least $8,705 for various work items and materials according to our appraiser. The majority of the $20,240 in contract costs was for roofing removal and replacement and exterior painting at a cost of $10,800 for the 1,044-square-foot home. Our 8 appraiser determined that a reasonable cost estimate for this portion of the work should have been no more than $4,900, and that the homeowners were charged more than double that amount. 1 • Borrowers for the property on Rose Avenue were overcharged at least $11,570 for various work items and materials according to our appraiser. One item included in the $34,341 contract was $8,000 for a new two and one-half ton heating and cooling unit for the 1,269-square-foot home. Our appraiser determined that a more reasonable charge would have been between $5,860 and $6,500 for labor and material, depending on the seasonal energy efficiency ratio rating. For heating and cooling units, the higher the seasonal energy efficiency ratio rating (12 versus 13, etc.), the higher the cost for the unit. For this contract, the City’s staff did not specify a seasonal energy efficiency ratio rating for the bidders which led us to question their claimed estimate of cost and how a proper bid could have been submitted. The issue of overcharging for heating and cooling surfaced in a number of the loan files we reviewed, as well as the issue of no seasonal energy efficiency ratio rating being specified by City staff. Conclusion The failure of the City to implement adequate procurement and bidding processes for its rehabilitation programs limited competition and resulted in significant overcharges for the work completed under the programs. In this regard, for the 12 rehabilitation jobs we reviewed, the loan recipients were overcharged almost $65,000 – 30 percent more than the amount determined reasonable by OIG’s appraiser/analyst. The extent of the overcharges identified brings into question the other rehabilitation work done under these programs. Accordingly, the City should conduct independent cost reviews of all work done under the programs since July 1, 2005 to ensure that loan recipients were not charged excessive amounts for the work done to their properties. 1 Our appraiser’s estimates were based on information gathered from RS Means cost estimation data, home improvement store information, and contractors who perform like services. 9 Recommendations We recommend that the director of the Office of Community Planning and Development require the City to 1A. Comply with HUD procurement requirements in 24 CFR [Code of Federal Regulations] 85.36 and its own policy and procedures manual by ensuring that work write-up forms are clearly written, procurement records are maintained, awards are made to the lowest priced responsible bidder, two or more responsible bids are received to avoid sole-source contracts, and procurements are publicly advertised and bids solicited from an adequate number of contractors. 1B. Design and implement appropriate quality control systems to ensure that City staff properly monitors contractor charges and document rehabilitation progress and work quality, including conducting and documenting site visits to evaluate the progress and quality of the rehabilitation work performed by the contractors. 1C. Immediately reduce loan amounts by at least $64,938, plus interest, for the loan recipients listed in Appendix D who were charged unreasonable and unnecessary amounts for rehabilitation work. If loan amounts are not reduced for the individual loan recipients, the City must provide documentation supporting the original contract charges. Additionally, all overcharges agreed to must be refunded back to the City’s block grant account from nonfederal funds. 1D. Change its policy of requiring loan recipients to select only contractors from the City’s approved bidders list and allow them the option to seek out their own licensed and bonded contractors to perform the work. 1E. Conduct independent cost reviews of all work done under the programs since July 1, 2005, to ensure that loan recipients were not charged excessive amounts for the work done to their properties, and if overcharges are identified, reduce the lien amounts and refund the overcharges back to its block grant account from non-federal funds. 10 Finding 2: The City Approved $3,441 in Ineligible Relocation Expenses The City did not follow its established policies and procedures in determining eligibility of loan applicants. As a result, the City approved a $104,606 rehabilitation loan and spent $3,441 in relocation expenses for an ineligible applicant. The City later rescinded the loan approval based on a Housing Rehabilitation Loan Committee meeting report. However, the City still owed HUD $3,441, which it repaid to the U.S. Treasury during our audit. The City Did Not Follow Established Policies and Procedures The City is required to review loan applications in accordance with the underwriting criteria set out in its policies and procedures manual. The manual states that a review should include verification of information regarding personal income, credit, employment, assets, assistance benefits, and other facts required to verify income and assistance eligibility. In one case we reviewed, the applicant was not able to provide the required documents for verification of income and declared zero income on his loan application. The City failed to follow its policies and procedures for income and credit verification and as a result, did not uncover the applicant’s double identity and dual Social Security numbers before loan approval. With the approved rehabilitation loan, the ineligible applicant became eligible for temporary relocation. In a March 29, 2001, memorandum, City staff recommended that the loan be rescinded and stated that the applicant could reapply if the applicant could provide proof that tax liens, which exceeded $100,000, had been released. The City was concerned that the tax liens would subordinate the applicant’s rehabilitation loan. The City incurred relocation expenses for the applicant before the rescission of the rehabilitation loan that should not have been approved. Although funds were not expended for the $104,606 rehabilitation loan, the City’s block grant program incurred relocation expenses in the amount of $3,441, which included payments on behalf of the applicant for a deposit, first and last month’s rent in the amount, and rental payments for March, April, May, and June 2001. Generally, we found that the City’s procedures for determining an applicant’s eligibility were compliant with its own and federal regulations. However, in this instance the City did not follow its own policies and procedures manual and did not fully research the application and resolve the applicant’s questionable claim of zero income. In fact the City did not become aware of the problems until it 11 received an anonymous complaint that the applicant had tax liens under another name. As a result, $3,441 in block grant funds was expended for ineligible activities. HUD’s Office of Community Planning and Development staff worked jointly with us in an effort to recover the ineligible funds, and after completion of our fieldwork, we received a letter from HUD’s community planning and development director, evidencing that the City had wired the $3,441 to the U.S. Treasury. Recommendations We recommend that the director of the Office of Community Planning and Development require the City to 2A. Comply with the underwriting requirements in its policies and procedures manual relating to verification of income and credit when determining the eligibility of all loan applicants before relocation expenses are incurred, such as the $3,441 identified in this report. 12 SCOPE AND METHODOLOGY The audit generally covered the period from July 1, 2000, through December 31, 2005. We expanded the scope as necessary. We reviewed applicable guidance and discussed operations with management and staff personnel at the City and key officials from HUD’s San Francisco Office of Community Planning and Development. Our primary methodologies included • Reviewing applicable HUD regulations at 24 CFR [Code of Federal Regulations] 85.36 and 24 CFR 570.202, as well as Office of Management and Budget Circular A-87. • Interviewing appropriate HUD personnel and relevant grant files to obtain an understanding of block grant program requirements and identify HUD’s concerns with the grantee’s operations. • Reviewing the grantee’s policies, procedures, and practices and interviewing key Park Recreation and Neighborhood Services personnel. • Analyzing loan documentation for compliance with HUD and City requirements. • Reviewing select rehabilitation files/projects to determine whether they were adequately documented and contained any costs that were not compliant with applicable cost principles. We performed our audit fieldwork from November 2005 through April 2006. We conducted our audit in accordance with generally accepted government auditing standards. 13 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: • Policies and procedures to ensure that grant expenditures were eligible and adequately supported. • Policies and procedures to ensure adequate procurement processes, which conform to HUD’s and the City’s requirements. 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 City’s Neighborhood Division’s written policies and procedures did not conform to federal regulations in 24 CFR [Code of Federal Regulations] 85.36 and Office of Management and Budget Circular A-87. The City did not maintain documentation to support the bidding process (finding 1). 14 • The City does not have written program policies and procedures, which define the roles and responsibilities of housing rehabilitation specialists in monitoring the rehabilitation projects (finding 1). • The City’s policies and procedures do not ensure field supervision and spot check inspections of rehabilitation specialists (finding 1). • The City’s policies and procedures do not ensure that only eligible expenditures were charged to the block grant (finding 2). 15 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation number Ineligible 1/ Unreasonable or unnecessary 2/ 1C $64,938 2A $3,441 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/ 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. 16 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 17 18 19 Comment 1 20 Comment 2 Comment 3 21 Comment 4 22 Comment 5 Comment 6 23 24 Comment 7 25 Comment 8 26 Comment 9 Comment 10 27 Comment 11 Comment 12 28 Comment 13 29 Comment 14 30 Comment 15 31 32 Comment 15 Comment 16 33 34 Comment 17 Comment 18 Comment 19 35 36 37 38 39 40 41 42 OIG Evaluation of Auditee Comments Comment 1 We revised the reason for the audit to include “whose independence was challenged by the Neighborhood Division because his wife transferred into the Division in April 2002. The City Clerk and Auditor’s Office withdrew from the audit, even though he was the only internal auditor available to do the work. The City’s Audit Committee (which consisted of the Mayor and two council members) agreed that the internal auditor could seek an outside source for the audit. We responded to the request and our audit results are contained herein.” Comment 2 This information was obtained from the City of Modesto’s webpage. However, we have removed the statement from the report. Comment 3 We corrected the number in the report to show $8,000. Comment 4 24 CFR 85.36 (f) (1), which states: “Grantees and subgrantees must perform a cost or price analysis in connection with every procurement action including contract modifications. The method and degree of analysis is dependent on the facts surrounding the particular procurement situation, but as a starting point, grantees must make independent estimates before receiving bids or proposals. The audit report does not suggest the City hire a third party to prepare or substantiate individual cost estimates. We were addressing the fact that during our review of the files we did not find an individual itemized cost estimates prepared by the Neighborhood Division's rehabilitation specialists in all of its project files. This response further illustrates that City staff may not understand the federal procurement requirements. We found instances where there were itemized in-house cost estimates in three of the 28 files we reviewed, however there was no information on how the rehabilitation specialist arrived at their costs. The only independent cost estimates which detailed the individual cost for each item of repair were the ones completed by the contractor the City selected. The documents provided by the City in its draft report response were copies of the contractor’s itemized cost estimates and grand total cost estimates which we had previously reviewed during the audit. Comment 5 In interviews with Neighborhood Division management and staff we showed them a specific item listed on their work write-up form (form) for installation of heating and cooling (HVAC). Each person who viewed this particular form stated that they could not bid on the item because the form did not provide sufficient information. Two of the rehabilitation specialists working for the City stated that they were also general contractors and they could not adequately bid on the particular item that was shown to them in the interviews. We do not 43 concur with City management staff’s change of opinion and new contention that contractors can viably bid using information provided in its current work write-up format. The frequent overcharges for heating and cooling identified by the OIG appraiser/analyst attests to this being a problem the City needs to address. Comment 6 In its response the City makes an assumption that additional contractors would not bid because of perceived market conditions; however, it did not address the fact that the City did not provide required opportunities for contractors and the public to become aware of available jobs. Instead it remained steadfast with its non current list of approved contractors and did not advertise the jobs in the official newspaper as was required by the City’s procurement policies. We do not concur with its statements and it should comply with published procurement requirements. Comment 7 No provisions exist for the owner-occupant type homeowners to obtain rehabilitation loans who do not go through the City’s bid procedures. However, the City allows for owner-builders (who appear to be investor/landlords) to receive rehabilitation loan funds obtained through HUD. We believe every loan recipient, not only owner-builders, should be afforded the option of selecting qualified licensed and bonded contractors to perform the rehabilitation work on his/her home. We also believe the City may open itself up to charges of unfair practices if it treats its low and moderate income borrowers in such manner. Comment 8 In an interview on December 21, 2005, City staff told us that their department follows the City of Modesto's guidelines as outlined in the City's purchasing manual for bidding procedures. These bidding procedures state “purchases subject to sealed bidding are subject to public advertising. The notice inviting bids that are publicly advertised must be published in the official newspaper by one or more insertions, the first of which must be for at least seven days before the time of the bid opening.” In addition, contrary to the claim in its response, the City’s practices did not comply with 24 CFR 85.36(d)(2)(ii)(A) which states the invitation for bids will be publicly advertised. Comment 9 24 CFR 85.36(d)(2)(i) states “Two or more responsible bidders are willing and able to compete effectively and for the business”. The fact that the City sent the bid packages to bidders on their approved bidders list does not satisfy this requirement. As mentioned in our review 70% of the projects reviewed showed only one responsible bidder willing and able to compete effectively for the business. Since there was only one responsible bid the City should have re-posted the bid. It appears that the City either disregarded federal requirements or City Management does not understand the requirements (24 CFR (d) (2)). 44 Comment 10 The files that we researched did not show that the rehabilitation specialist conducted on-site monitoring of the contractors and prepared site-visit reports. The logs submitted by the City in Appendix 8 in support of their statement do not show that the rehabilitation specialists did ongoing on-site monitoring of the rehabilitation work for each project. These logs were primarily a chronology of ongoing contacts but they are not site-visit reports. Based upon the documents subsequently provided by the City in their response it appears that they may not be familiar with what a site-visit report should show. Comment 11 No provisions and options exist for owner-occupant homeowners to select contractors who do not go through the City’s bid procedures. On the forms submitted as support for this comment in eight of the twelve documents submitted there was only one bid presented to the homeowner and there was no choice to be made by the homeowner. The process is flawed since there is no selection process when there is only one contractor’s bid presented. In these instances the City staff shows up with the bid certification document and the one bid and the homeowner is asked to sign. Based on our review of the files and various interviews, we concluded that the City was the procurer of the contractors and not the owner-occupant borrowers. The Contractor Selection Certification statement the City had the homeowners sign is misleading and an inaccurate statement of what actually occurred. Comment 12 The Senior Rehabilitation Specialist duties included supervising the rehabilitation specialists. During his interview with us he told us that “the rehabilitation specialists were self supervising and that he did not conduct any on-site spot checks of the rehabilitation specialist”. The City provided us with a one year sampling of weekly staff meetings and spreadsheets which show ongoing project information. We believe staff meetings are not valid substitutions for monitoring the actual work of the rehabilitation specialists including their work write-ups, cost estimating procedures and preparation of on-site monitoring reports. Comment 13 We reviewed the requirement in Chapter 6 of the City’s Administrative Procedures for Bidding on Housing Rehabilitation Projects and spoke with City staff and learned that the practice is that if the owner-occupant wants a licensed contractor of their choosing then that contractor must go through the City’s bidding process. Again, the City has missed the point made in our audit report. Each owner- occupant should be given the option to select a licensed and bonded contractor to do the work on their home. The City selected contractor should not be the only choice available. In addition, after reviewing numerous files and talking with homeowners, we concluded that the “Contractor Selection Certification” that the 45 owner-occupants were told to sign misrepresented what actually occurred in the procurement process. The owner-occupant had to sign the certification and go along with the City’s procurement process or else the loan would be denied. Comment 14 The opinion obtained by the City-paid architect indicates he used the RS Means cost estimating book 2006 addition, his experience, and known local area sub- contractor costs. The OIG appraiser/analyst used RS Means cost estimating books for 2003 and 2004 editions which more appropriately reflected the time period for the rehabilitation costs in our report. The appraiser/analyst was also fortunate to obtain copies of three actual local bids for heating and cooling systems for a similar size home (1058 sq ft) with a 2 ½ ton size unit. In addition, the OIG appraiser/analyst did site visits and inspections for each of the twelve properties in our report. As a result, we believe substantive due diligence was performed by the OIG appraiser/analyst but do not believe the same can be attested to for the architect’s opinion on the four files the City referenced in its response. Comment 15 We concur with the City’s response in which it provided documentation that the City’s rehabilitation program is exempt from and not subject to Section 504 of the Rehabilitation Act of 1973 and this paragraph has been removed. Comment 16 The City’s response indicates the staff may have missed our point, which is the fact that homeowners were overcharged for the 2 ½ ton heating and cooling unit. The homeowner was charged $8,000 instead of the $5,860 to $6,500 which should have included labor and materials. The City now contends that it specified a heavy duty heating and cooling unit with a larger volume but we found no such evidence in this file nor in any other files reviewed. Comment 17 Our audit work revealed a wide price variation for the same types of heating and cooling units installed at several different properties. Our focus on the heating and cooling units was primarily on the substantial difference in the cost estimations for each unit when the type and capacity were similar. The City’s response that the California state law in 2001 required a minimum 10 SEER unit, in no way responds to the fact that the higher the SEER rating the higher the cost. Nor did it address the fact that without a specified SEER rating there is more room to question their claimed estimate of cost and how a proper bid could have been submitted. Comment 18 We concur and changed the report to read “ the City of Modesto later rescinded the loan approval based on a Housing Rehabilitation Loan Committee meeting report.” Comment 19 Chapter 7.6 of the City’s CDBG Policies and Procedures Manual, Credit Report and Title Search, states … “within 2 days of signed authorization to verify information an in-file credit report will be obtained on the applicant.” Our review 46 of the files on this applicant did not show evidence that the City obtained a credit report prior to loan approval. The chronology of events provided by the City with this response shows the City received loan applications on May 13, 1998, June 22, 1999, and August 16, 2000, but does not show a credit report was obtained. The loan was approved on January 4, 2001. 47 Appendix C CRITERIA A. Title I of the 1974 Act, as amended, authorizes the Community Development Block Grant entitlement program. Entitlement grants are allocated to designated metropolitan cities or urban counties (almost 900 nationwide). The entitlement amount is determined by applying either one of two formulas. One formula considers the grantee’s population, extent of poverty, and housing overcrowding. The other formula considers the grantee’s extent of growth lag, extent of poverty, and age of housing. B. 24 CFR [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.” C. 24 CFR [Code of Federal Regulations] 85.36(d)(2): “Procurement by sealed bids (formal advertising). Bids are publicly solicited and a firm-fixed-price contract (lump sum or unit price) is awarded to the responsible bidder whose bid, conforming with all the material terms and conditions of the invitation for bids, is the lowest in price. The sealed bid method is the preferred method for procuring construction, if the conditions in §85.36(d)(2)(i) apply. In order for sealed bidding to be feasible, the following conditions should be present: 1. A complete, adequate, and realistic specification or purchase description is available; 2. Two or more responsible bidders are willing and able to compete effectively and for the business; and 3. The procurement lends itself to a firm fixed price contract and the selection of the successful bidder can be made principally on the basis of price.” D. 24 CFR [Code of Federal Regulations] 85.36(d)(2)(ii): “If sealed bids are used, the following requirements apply: 1. The invitation for bids will be publicly advertised and bids shall be solicited from an adequate number of known suppliers, providing them sufficient time prior to the date set for opening the bids; 2. The invitation for bids, which will include any specifications and pertinent attachments, shall define the items or services in order for the bidder to properly respond; 48 3. All bids will be publicly opened at the time and place prescribed in the invitation for bids; 4. A firm fixed-price contract award will be made in writing to the lowest responsive and responsible bidder. Where specified in bidding documents, factors such as discounts, transportation cost, and life cycle costs shall be considered in determining which bid is lowest. Payment discounts will only be used to determine the low bid when prior experience indicates that such discounts are usually taken advantage of; and 5. Any or all bids may be rejected if there is a sound documented reason.” E. 24 CFR [Code of Federal Regulations] 570.202(a)(1): “Community Development Block Grant funds may be used to finance the rehabilitation of privately owned buildings and improvements for residential purposes; improvements to a single-family residential property which is also used as a place of business, which are required in order to operate the business, need not be considered to be rehabilitation of a commercial or industrial building, if the improvements also provide general benefit to the residential occupants of the building.” F. 24 CFR [Code of Federal Regulations] 570.202(b)(2)(3): “Community Development Block Grant funds may be used to finance the following types of rehabilitation activities, and related costs, either singly, or in combination, through the use of grants, loans, loan guarantees, interest supplements, or other means for buildings and improvements described in paragraph (a) of this section, except that rehabilitation of commercial or industrial buildings is limited as described in paragraph (a)(3) of this section. 1. Labor, materials, and other costs of rehabilitation of properties, including repair directed toward an accumulation of deferred maintenance, replacement of principal fixtures and components of existing structures, installation of security devices, including smoke detectors and dead bolt locks, and renovation through alterations, additions to, or enhancement of existing structures, which may be undertaken singly, or in combination; 2. Loans for refinancing existing indebtedness secured by a property being rehabilitated with Community Development Block Grant funds if such financing is determined by the recipient to be necessary or appropriate to achieve the locality’s community development objectives.” G. Office of Management and Budget Circular A-87, C 2, Reasonable costs. A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost. The question of reasonableness is particularly important when governmental units or components are predominantly federally funded. In determining reasonableness of a given cost, consideration shall be given to 1. Whether the cost is of a type generally recognized as ordinary and necessary for the operation of the government unit or the performance of the federal award. 49 2. The restraints or requirements imposed by such factors as sound business practices; arms length bargaining; federal, state, and other laws and regulations; and terms and conditions of the federal award 3. Market prices for comparable goods or services. 4. Whether the individuals concerned acted with prudence in the circumstances considering their responsibilities to the governmental unit, its employees, the public at large, and the federal government. 5. Significant deviations from the established practices of the governmental unit, which may unjustifiably increase the federal award’s cost. H. City of Modesto Purchasing Manual, Section I, Procurement Regulations Procedure Number 3, Bidding Procedures Item Number B, Formal Bids states: “All purchases in excess of $50,000 are subject to formal sealed bid procedures and must be publicly advertised. All purchases between $5,000 and $50,000 may, in the discretion of the Purchasing Officer, be subject to sealed bid procedures and subject to public advertising. The notice inviting bids that are publicly advertised, must be published in the official newspaper by one or more insertions, the first of which must be at least seven days before the time of the bid opening.” 50 Appendix D OIG INSPECTOR’S PROPERTY ANALYSIS The OIG appraiser/inspector reviewed the rehabilitation work on 12 properties. His review consisted of work completed by the contractors and cost estimates of work performed and material used to determine whether the costs were reasonable. The OIG inspections disclosed work that did not meet or exceed industry standards in the majority of the projects reviewed. The cost determination difference was $64,938 as shown in the schedule below. (a) (b) Approved High-end Loan bid amount 2 evaluation Difference Property address type amount column (a) – (b) 2524 Garvey HMP 14,784 11,103 3,681 423 Pine HMP 41,959 32,355 9,604 2517 Striven HMP 69,500 61,360 8,140 416 Maple HMP 19,900 15,300 4,600 2720 Sparks Way HMP 20,240 11,535 8,705 1613 Galvez EHRP 10,335 4,775 5,560 1517 Victor Way EHRP 14,780 12,030 2,750 613 Rose Ave. EHRP 29,300 17,730 11,570 1412 Del Monte EHRP 17,725 14,710 3,015 3229 Para Drive EHRP 16,125 11,600 4,525 2220 Jeanine Drive EHRP 16,029 15,391 638 305 Longfellow EHRP 9,780. 7,630 2,150 Totals 280,457 215,519 64,938 HMP = Housing Maintenance Program EHRP = Emergency Home Repair Program 2 Actual loan amounts may differ from approved bid amounts because of other non-contract events involved in the transaction. 51
The City of Modesto (City) Modesto, California, Did Not Always Administer Its Community Development Block Grant in Compliance with Government Regulations
Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-09-07.
Below is a raw (and likely hideous) rendition of the original report. (PDF)