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.
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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.
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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.
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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.
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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:
• 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).
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• 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).
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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
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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
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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.
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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;
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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.
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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.”
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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.
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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)