oversight

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)

                                                                  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.




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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;




                                                 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.”




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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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