oversight

Lower Manhattan Development Corporation, Community Development Block Grant, Disaster Recovery Assistance Funds, New York New York

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-09-27.

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

                                                               Issue Date
                                                                   September 27, 2006
                                                               Audit Report Number
                                                                    2006-NY-1013




TO:        Nelson R. Bregon, General Deputy Assistant Secretary for Community Planning
                               and Development, D


FROM:      Edgar Moore, Regional Inspector General for Audit, 2AGA

SUBJECT: Lower Manhattan Development Corporation, New York, New York,
         Community Development Block Grant Disaster Recovery Assistance Funds


                                  HIGHLIGHTS

 What We Audited and Why

            Pursuant to congressional mandate, we performed the seventh of our ongoing
            audits of the Lower Manhattan Development Corporation’s (the auditee)
            administration of the $2.783 billion in Community Development Block Grant
            (Block Grant) Disaster Recovery Assistance funds provided to the State of New
            York following the September 11, 2001, terrorist attacks on the World Trade
            Center in New York City. The auditee disbursed approximately $129.7 million of
            these funds during our audit period from October 1, 2005, through March 31,
            2006.

            Our audit objectives were to determine whether the auditee (1) disbursed Block
            Grant Disaster Recovery Assistance funds in accordance with the guidelines
            established under U.S. Department of Housing and Urban Development (HUD) -
            approved partial action plans, (2) expended Block Grant Disaster Recovery
            Assistance funds for eligible planning and administrative expenses in accordance
            with applicable laws and regulations, and (3) had a financial management system
            in place that adequately safeguards funds.
What We Found

           The auditee generally disbursed the $129.7 million in Disaster Recovery Assistance
           funds in accordance with HUD-approved action plans, expended Disaster Recovery
           Assistance funds for eligible planning and administrative expenses in accordance
           with applicable laws and regulations, and maintained a financial management
           system that adequately safeguarded the funds. However, expenditures were
           misclassified in HUD’s Line of Credit Control System and a consultant’s fees were
           overpaid. This occurred because of weaknesses in the auditee’s procedures for
           classifying funds drawn down from the Line of Credit Control System and
           reimbursing a consultant’s fee. Consequently, funds may not be available to
           drawdown from the correct budget line items and could be used for other than their
           intended purposes.


What We Recommend

           We recommend that HUD’s general deputy assistant secretary for community
           planning and development require the auditee to (1) reclassify costs totaling
           $186,749 to the appropriate HUD Line of Credit Control System program budget
           line item, (2) reimburse $3,053 to the World Trade Center Memorial and Cultural
           program, and (3) strengthen controls over the invoice approval process to ensure
           consultants are reimbursed in accordance with the terms of agreements and other
           applicable requirements.

           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 discussed the contents of the report with the auditee during the audit and at an
           exit conference on September 21, 2006, and the auditee provided written
           comments on September 22, 2006. Auditee officials generally agreed with our
           findings, and advised that they are taking corrective action to address the
           recommendations.

           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




                                            2
                           TABLE OF CONTENTS

Background and Objectives                                                  4

Results of Audit

Finding: Weaknesses Exist in Classifying and Reimbursing Costs             6

Scope and Methodology                                                      8

Internal Controls                                                          9

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use       11
   B. Auditee Comments and OIG’s Evaluation                                12
   C. Schedule of Program Funding and Disbursements as of March 31, 2006   14




                                           3
                         BACKGROUND AND OBJECTIVES

In the aftermath of the September 11, 2001 terrorist attacks on the World Trade Center in lower
Manhattan, Congress authorized $3.483 billion in Community Development Block Grant (Block
Grant) Disaster Recovery Assistance funds to assist with recovery and revitalization. On
November 5, 2001, the Office of Management and Budget designated $700 million in Block
Grant funding for New York City out of the Emergency Response Fund that Congress had
appropriated. 1 On January 10, 2002, Congress appropriated an additional $2 billion for Block
Grant funding, earmarking at least $500 million to compensate small businesses, nonprofit
organizations, and individuals for their economic losses. 2 On August 2, 2002, Congress
appropriated an additional $783 million in Block Grant funding. 3

The Lower Manhattan Development Corporation (auditee), created in December 2001 as a
subsidiary of the Empire State Development Corporation to function as a joint city-state
development corporation, was designated by the State of New York to administer the $2.783
billion appropriated in the January and August 2002 Emergency Supplemental Acts. The Empire
State Development Corporation, the parent company of the auditee, administers the remaining
$700 million. A 16-member board of directors, appointed equally by the governor of New York
and the mayor of New York City, manages the affairs of the auditee. The Empire State
Development Corporation performs all accounting functions for the auditee, including payroll,
payments to the auditee’s vendors, and drawing down funds from the U.S. Department of
Housing and Urban Development (HUD).

Planned expenditures of Disaster Recovery Assistance funds are documented in action plans that
receive public comment and are approved by HUD. HUD approved 13 partial action plans as of
March 31, 2006 that provided for the allocation of approximately $2.556 billion, or 92 percent of
the $2.783 billion appropriated, to specific programs and activities (see appendix C for amounts
by program). As of March 31, 2006, the auditee had disbursed more than $1.07 billion, or 42
percent of the $2.556 billion allocated.

After our audit period, the auditee announced that it will begin transitioning its grant
responsibilities to other entities in the fall of 2006; however, HUD and the auditee have not
finalized a formal transition plan for the commitment of the undisbursed funds and the
monitoring of on-going activity.

1
 2001 Emergency Supplemental Appropriations Act for Recovery from and Response to Terrorist Attacks on the
United States, Pub. L. 107-38, 115 Stat. 220 (2001).
2
 The Department of Defense and Emergency Supplemental Appropriations for Recovery from and Response to
Terrorist Attacks on the United States Act 2002 (Emergency Supplemental Act 2002), Pub. L. 107-117, 115 Stat.
2336 (2002).
3
 The 2002 Supplemental Appropriations Act for Recovery from and Response to Terrorist Attacks on the United
States, Pub. L. 107-206.




                                                       4
We reviewed the auditee’s planning and administrative expenses, monitoring procedures, and
disbursements made during the period October 1, 2005 through March 31, 2006 in the following
programs:

World Trade Center (WTC) Memorial and Cultural: As of March 31, 2006, HUD approved more
than $494 million for this program to fund the planning, selection, coordination and construction
of a memorial, memorial center, and museum and cultural uses on the World Trade Center site
and adjacent areas to complement certain commercial redevelopment and infrastructure
improvements to be made by the Port Authority, the owner of the World Trade Center site. For
our audit period, HUD’s Line of Credit Control System reported $95 million disbursed for this
program.

New York Stock Exchange Area Security and Aesthetic Improvements: As of March 31, 2006,
HUD had approved more than $25 million for this program for installing security barriers and
guard facilities on critical streets, developing a more effective street treatment, and providing
more attractive street furniture to facilitate secure pedestrian and vehicular circulation within
lower Manhattan. During our audit period, $5.4 million was reported disbursed for this program.

Small Firm Attraction and Retention Grant: As of March 31, 2006, HUD had approved $50
million for this program to help retain and create jobs at assisted firms. During our audit period,
$7.6 million was reported disbursed for this program.

Lower Manhattan Tourism: As of March 31, 2006, HUD had approved more than $4.1 4 million
for this program. The purpose of the program is to provide funding to aid the travel and tourism
industry in New York City. The program consists of three subprograms: (1) Tribeca Film
Festival, (2) Splendor of Florence Festival, and (3) River to River Festival. For our audit period,
HUD’s Line of Credit Control System reported $1.6 million disbursed for this program.

Neighborhood Parks and Open Space: As of March 31, 2006, HUD had approved more than $27
million for this program, which is intended to enhance existing parks and create new green
spaces across residential communities in lower Manhattan. During our audit period, $4.4 million
was reported disbursed for this program.

Public Service Activities: As of March 31, 2006, HUD had approved almost $7.3 million for this
program, which consists of four subprograms: (1) Tribute in Light, (2) Story Corps World Trade
Center Story Booth Project, (3) Living Memorial Project, and (4) Tribute Visitor Center. During
our audit period, $1.09 million was reported disbursed for this program.

Our audit objectives were to determine whether the auditee (1) disbursed Block Grant Disaster
Recovery Assistance funds in accordance with the guidelines established under HUD-approved
partial action plans, (2) expended Block Grant Disaster Recovery Assistance funds for eligible
planning and administrative expenses in accordance with applicable laws and regulations, and
(3) had a financial management system in place that adequately safeguards funds.

4
 An additional $5.9 was allocated to the Chinatown Tourism and History and Heritage Downtown Marketing
Initiative programs, thus complying with the legislative requirement to allocate $10 million to Tourism.


                                                      5
                                RESULTS OF AUDIT

Finding: Weaknesses Exist in Classifying and Reimbursing Costs
Expenditures were misclassified in HUD’s Line of Credit Control System and a consultant’s fees
were overpaid. This occurred because of weaknesses in the auditee’s procedures for classifying
funds drawn down from the Line of Credit Control System and reimbursing a consultant’s fees.
Consequently, funds may not be available to drawdown from the correct budget line items and
could be used for other than their intended purposes.


 Misclassification of Costs


              On February 11, 2006, $156,650 in costs were classified to the Lower Manhattan
              Tourism budget line item in HUD’s Line of Credit Control System; however, these
              costs should have been classified as World Trade Center Memorial and Cultural
              program costs. While the auditee was diligent in making adjustments to the Line of
              Credit Control System to correct prior errors, an adjustment was inadvertently
              charged to the wrong program. The alternative procedures published in the Federal
              Register require the auditee to annually include a financial reconciliation of funds
              budgeted and expended in its Disaster Recovery Grant Report, which should include
              ensuring that information in the Line of Credit Control System is correct.

              On February 17, 2006, the auditee classified $30,099 in costs to the World Trade
              Center Memorial and Cultural program budget line in HUD’s Line of Credit
              Control System; however, documentation disclosed that these costs were related
              to other programs. Specifically, $2,910 was related to the Hudson River Park
              Improvements program and $27,189 was related to planning and administrative
              costs. These costs were incorrectly charged to the World Trade Center Memorial
              and Cultural program because the approved drawdown and transfer request form
              was missing the HUD grant number and the auditee’s parent corporation
              incorrectly charged them to the Memorial and Cultural program. Auditee officials
              were unaware of this error and agreed to coordinate with their parent corporation
              to correctly charge the costs to the Hudson River Park Improvements program and
              to planning and administration.

 Weakness in Reimbursing Costs

              The auditee reimbursed a consultant at rates different than that prescribed in the
              consultant agreement under the World Trade Center Memorial and Cultural
              program. The consultant billed professional fees at rates different than those
              established in the existing agreement, resulting in excess reimbursement of $3,053.



                                                6
Conclusion

             Weaknesses in the auditee’s internal controls resulted in incorrect classification of
             costs in HUD’s Line of Credit Control System and noncompliance with
             provisions of a consultant agreement. Correction of these errors and weaknesses
             will ensure that costs are properly classified and charged to the HUD grant.


Recommendations

             We recommend that HUD’s general deputy assistant secretary for community
             planning and development require the auditee to

             1A. Reclassify $156,650 in costs within HUD’s Line of Credit Control System
                 from the Lower Manhattan Tourism program to the World Trade Center
                 Memorial and Cultural program.

             1B. Reclassify $2,910 in costs within HUD’s Line of Credit Control System
                 from the World Trade Center Memorial and Cultural program to the Hudson
                 River Park Improvements program.

             1C. Reclassify $27,189 in costs within HUD’s Line of Credit Control System
                 from the World Trade Center Memorial and Cultural program to planning
                 and administration.

             1D. Reimburse the World Trade Center Memorial and Cultural program $3,053
                 for overpaid consultant fees.

             1E. Strengthen controls over the invoice approval process to ensure that
                 consultants are reimbursed in accordance with the terms of agreements and
                 other applicable requirements.




                                               7
                         SCOPE AND METHODOLOGY

During the audit period, October 1, 2005, through March 31, 2006, the auditee disbursed $129.7
million of the $2.783 billion in Disaster Recovery Assistance funds for activities related to the
rebuilding and revitalization of lower Manhattan. We tested $89.4 million, representing
approximately 69 percent of the amount disbursed for the period.

To achieve our audit objectives, we reviewed applicable laws, regulations, and program
requirements; HUD-approved partial action plans; and the auditee’s accounting books and
records. We examined and tested the documentation supporting disbursements related to the
following:

   - World Trade Center Memorial and Cultural program
   - New York Stock Exchange Area Security and Aesthetic Improvements program
   - Small Firm Attraction and Retention Grant program
   - Lower Manhattan Tourism program
   - Neighborhood Parks and Open Spaces program
   - Public Service Activities program

We also reviewed the auditee’s planning and administrative expenses and policies and
procedures for monitoring the above programs.

The audit covered the period from October 1, 2005, through March 31, 2006, and was expanded
when necessary. We performed our on-site work at the auditee’s office and the office of the
auditee’s parent company, the Empire State Development Corporation, from May 2006 through
August 2006.

We performed our audit in accordance with generally accepted government auditing standards.




                                                8
                          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:

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

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

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

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

               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.




                                             9
Significant Weaknesses


           Based on our review, we did not find significant weaknesses. However, we
           did identify weaknesses in the auditee’s internal controls which resulted in
           incorrect classification of costs in HUD’s Line of Credit Control System
           and non-compliance with consultant agreements (see finding).




                                        10
                               APPENDIXES

Appendix A

           SCHEDULE OF QUESTIONED COSTS
          AND FUNDS TO BE PUT TO BETTER USE

 Recommendation          Ineligible 1/   Funds to be
        number                           put to better
                                            use 2/

             1A                               $156,650
             1B                                   2,910
             1C                                  27,189
             1D         $ 3,053                _______

           Total         $3,053               $186,749


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/   “Funds to be put to better use” are estimates of amounts that could be used more
     efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. This includes reductions in outlays, deobligation of funds,
     withdrawal of interest subsidy costs, costs not incurred by implementing
     recommended improvements, avoidance of unnecessary expenditures noted in
     preaward reviews, and any other savings which are specifically identified. In this
     instance, if the Auditee implements our recommendation, the misclassification of
     funds will be corrected, thus making available the proper funds in the future for
     each of the affected programs.




                                         11
Appendix B
       AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




                        12
Appendix B
       AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




                        13
Appendix C
                    SCHEDULE OF PROGRAM FUNDING AND
                    DISBURSEMENTS AS OF MARCH 31, 2006

                                                               Audit period
                                                              disbursements         Cumulative         Balance
                                            Budget as of      Oct. 1, 2005 –    disbursements as of remaining as of
                  Program                   Mar. 31, 2006     Mar. 31, 2006        Mar. 31, 2006     Mar. 31, 2006

Business Recovery Grant                        $224,500,000         ($15,811)         $213,878,518       $10,621,482
Job Creation and Retention                      150,000,000         1,371,753            62,566,015       87,433,985
Small Firm Attraction and Retention              50,000,000         7,659,000             7,659,000       42,341,000
Residential Grant                               280,500,000           353,331          235,853,904        44,646,096
Employment Training Assistance                      500,000                                345,909           154,091
Memorial Design and Installation                    350,000                                299,969            50,031
Columbus Park Renovation                            998,571                                                  998,571
Marketing History/Heritage Museums                4,664,000           927,797             2,647,990        2,016,010
Downtown Alliance Streetscape                     4,000,000                               4,000,000                   -
New York Stock Exchange Area Improvements        25,160,000         5,468,467             5,468,467       19,691,533
Neighborhood Parks and Open Space                27,481,689         4,403,164             9,720,492       17,761,197
Hudson River Park Improvements                   72,600,000            15,601             2,482,569       70,117,431
Millennium High School                            3,007,500                                                3,007,500
West Street Pedestrian Connection                22,955,811             1,949            12,842,870       10,112,941
Lower Manhattan Communication Outreach            1,000,000            87,568              887,777           112,223
Pace Green Roof                                     100,000                                                  100,000
Chinatown Tourism and Marketing                   1,160,000           182,426              919,925           240,075
Lower Manhattan Information                       2,570,000           831,319             1,752,391          817,609
World Trade Center Memorial and Cultural        494,017,180        95,503,971          217,401,774       276,615,406
Lower Manhattan Tourism                           4,176,000         1,516,928             3,630,000          546,000
East River Waterfront Project                   150,000,000            30,078               30,078       149,969,922
Local Transportation and Ferry Service            9,000,000                                                9,000,000
East Side K-8 School                             20,000,000                                               20,000,000
Fiterman Hall Reconstruction                     15,000,000                                               15,000,000
Chinatown Local Development Corporation           7,000,000                                                7,000,000
Affordable Housing                               50,000,000                                               50,000,000
Public Service Activities                         7,296,900         1,094,534             4,456,929        2,839,971
Administration and planning                     115,000,000        10,381,678            61,405,423       53,594,577
Disproportionate Loss of Workforce               33,000,000                              32,999,997                   3
Utilities Restoration and Infrastructure        735,000,000                            190,313,178       544,686,822
Cultural Enhancement Fund: Capital               35,000,000                                               35,000,000
The Drawing Center                               10,000,000                                               10,000,000
                     Totals                  $2,556,037,651     $129,813,755         $1,071,563,177   $1,484,474,474




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