oversight

Snohomish County's Office of Housing and Community Development, Everett, Washington, Charged Ineligible Administrative Expenses to its Community Development Block Grant

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-05-31.

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

                                                              Issue Date
                                                               May 31, 2006
                                                              Audit Report Number
                                                                2006-SE-1003




TO:        Jack Peters, Director, Region X Office of Community Planning and
              Development, 0AD




FROM:      Joan Hobbs, Regional Inspector General for Audit, Region X, 0AGA

SUBJECT: Snohomish County's Office of Housing and Community Development, Everett,
           Washington, Charged Ineligible Administrative Expenses to its Community
           Development Block Grant


                                  HIGHLIGHTS

 What We Audited and Why

             We audited the Snohomish County (County) Office of Housing and Community
             Development in response to a request from the U.S. Department of Housing and
             Urban Development's (HUD) Seattle Office of Community Planning and
             Development.

             Our audit objective was to determine whether the County administered its
             Community Development Block Grant and HOME Investment Partnership
             Program in accordance with HUD requirements. More specifically, our
             objectives were to determine whether (1) only eligible administrative expenses
             were charged to the County’s Community Development Block Grant and HOME
             Investment Partnership Program funds and (2) the County followed HUD’s
             guidelines relating to its float-funded Community Development Block Grant
             programs.
What We Found


           Snohomish County generally administers its Community Development Block
           Grant and HOME Investment Partnership Program grants in accordance with
           HUD requirements. However, the County charged $67,339 of ineligible
           administrative expenses to its Community Development Block Grant. The
           County also extended the pay-off date for two Community Development Block
           Grant float-funded activities without properly identifying the loan extensions as a
           new activity, as required.

What We Recommend


           We recommend that HUD require the County to (1) reimburse its Community
           Development Block Grant and/or repay HUD from nonfederal funds for the
           $67,339 in expenses related to ineligible administrative activities; (2) establish
           and implement adequate procedures for charging administrative costs that meet
           federal requirements; and (3) establish and implement adequate procedures for its
           float loan program.

           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 County a draft report on May 4, 2006. The County provided
           written comments on May 19, 2006. It agreed to establish and implement
           adequate procedures that comply with HUD regulations. However, it disagreed
           that the administrative expenses should be repaid.

           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 1: The County Charged Ineligible Administrative Expenses to Its   6
      Community Development Block Grant
      Finding 2: Snohomish County Extended Float Loan Payoff Dates Without      8
      Identifying a New Activity

Scope and Methodology                                                           10

Internal Controls                                                               11

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use            12
   B. Auditee Comments and OIG’s Evaluation                                     13
   C. Criteria                                                                  17




                                            3
                     BACKGROUND AND OBJECTIVES


Snohomish County (County) is in Washington State, north of Seattle on Puget Sound. The
County offices are located on 3000 Rockefeller Ave, Everett, Washington. The County’s Office
of Housing and Community Development is responsible for administering, monitoring, and
supporting various U.S. Department of Housing and Urban Development (HUD) programs for
the County, including:

   •   Community Development Block Grant
   •   Emergency Shelter Grant
   •   HOME Investment Partnership Program
   •   American Dream Downpayment Initiative
   •   Supportive Housing Program

Together, these grants provide approximately $7 million annually in HUD funds to benefit the
homeless and low-to moderate-income people in the County. The County awards the HUD
funds to nonprofit and local Government subrecipients to carry out eligible activities and
receives 20 percent of the total Community Development Block Grant and 10 percent of HOME
Investment Partnership Program funds for administering these activities.

Besides its HUD programs, the Office of Housing and Community Development also
administers the County’s State-funded Affordable Housing Trust Fund, which is used for the
development of affordable housing, and the County’s $1.3 million Hotel/Motel Tax program.

The Community Development Block Grant Entitlement 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. The
Entitlement Grants are allocated to designated jurisdictions including metropolitan cities or
urban counties.

The County annually receives approximately $3.3 million in Community Development Block
Grant funds. These funds 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 County has a fund balance with the U.S. Department of the Treasury,
awaiting draw requests from the County to pay invoices submitted by organizations carrying out
Community Development Block Grant activities.




                                              4
If the County has a fund balance available, it can provide interim financing (not to exceed 30
months) to public, private nonprofit and private for-profit organizations for projects in the
County that meet Federal guidelines. The purpose for this program is to support projects that
will assist the County in accomplishing specific Community Development Block Grant-eligible
housing, community and economic development goals through the availability of short-term,
lower-rate financing. An activity that uses such funds is referred to as a float-funded or float
loan activity. Each activity using a float loan must meet all of the same requirements applying to
Community Development Block Grant-assisted activities and must be repaid in a timely manner.
When the County proposes to fund such an activity, it must include the activity in its action plan
or amend the action plan for the current program year.

Our audit objective was to determine whether the County administered the Community
Development Block Grant and HOME Investment Partnership Program in accordance with HUD
requirements. We wanted to determine whether (1) only eligible administrative expenses were
charged to the County’s Community Development Block Grant and HOME Investment
Partnership Program funds, and (2) the County followed HUD’s guidelines relating to its float-
funded Community Development Block Grant programs.




                                                5
                               RESULTS OF AUDIT

Finding 1: The County Charged Ineligible Administrative Expenses to
Its Community Development Block Grant

The County used Community Development Block Grant funds to pay a portion of the
administrative expenses for its Emergency Shelter Grant, Supportive Housing Program, and
Washington State Affordable Housing Trust Fund. This occurred because the County did not fully
understand HUD and Office of Management and Budget requirements that prohibit using
Community Development Block Grant administrative funds for the administration of these
programs. As a result, $67,339 was not available for eligible Community Development Block
Grant activities.



 Federal Regulations Specify
 What Activities Can Be
 Charged to a Community
 Development Block Grant for
 Administration


              HUD regulations allow the County to charge up to 20 percent of its total
              Community Development Block Grant funds for payment of reasonable
              administrative costs and carrying charges related to the planning and execution of
              community development activities. Eligible activities include:
                 • General management, oversight and coordination of Community
                     Development Block Grant activities;
                 • Public information activities;
                 • Fair housing activities;
                 • Indirect costs associated with these activities;
                 • Submission of applications for federal programs;
                 • Administrative expenses to facilitate housing; and
                 • Reasonable costs for overall management of the HOME program.

              Office of Management and Budget Circular A-87, “Cost Principles for State and
              Local Governments,” states that amounts not recoverable as administrative costs
              on one federal award may not be shifted to another federal award unless
              specifically authorized by federal regulation. HUD allows planning, grant
              application, and other general administrative costs of other federal awards to be
              paid for with Community Development Block Grant administration funds.




                                               6
            However, costs directly associated with the management, oversight and
            coordination of Emergency Shelter Grant and Supportive Housing Program funds
            cannot be paid for with Community Development Block Grant administration
            funds. In addition, these funds cannot be used to pay administrative costs of any
            nonfederal activities.

The County Charged $67,339 in
Ineligible Administrative Costs
to its Community Development
Block Grant


            Generally, the County's procedures for charging expenditures to Community
            Development Block Grant administration were compliant with federal regulations
            and the County's timekeeping procedures properly collect labor costs by grant
            activity. However, County officials did not fully understand what activities were
            eligible.

            Consequently, from January 1, 2004 through December 31, 2005, the County
            shifted $47,304 and $13,327 in labor costs respectively for management of its
            Supportive Housing Program and Emergency Shelter Grant to its Community
            Development Block Grant. These ineligible charges were made to the
            Community Development Block Grant at times when the other programs did not
            have funds available to meet all their programs’ costs. Further, contrary to Office
            of Management and Budget requirements, the County charged its Community
            Development Block Grant $6,547 in labor costs for planning activities relating to
            its Affordable Housing Trust fund, a nonfederal program. As a result, $67,339 of
            Community Development Block Grant funds was unavailable for eligible
            activities.

Recommendations

            We recommend that the director of the Region X Office of Community Planning
            and Development require the County to

            1A. Reimburse the grant and/or repay HUD, from nonfederal funds, $67,339 for
            ineligible administrative costs charged to its Community Development Block
            Grant.

            1B. Require the County to establish and implement adequate procedures for
            charging administrative costs that meet Federal requirements so that $67,339 in
            Community Development Block Grant funds will be available for eligible
            activities.




                                             7
Finding 2: Snohomish County Extended Float Loan Pay-off Dates
Without Identifying a New Activity

The County extended the pay-off date for two Community Development Block Grant float-funded
activities without properly identifying the loan extensions as a new activity, as required. This
occurred because the County did not fully understand the extension requirements. As a result, HUD
was not fully aware of how the County was utilizing its Community Development Block Grant
funds.

 HUD Allows Community
 Development Block Grant
 Funds to Be Used for Interim
 Financing


              HUD allows grant recipients to use Community Development Block Grant funds to
              provide interim financing (not to exceed 30 months) to public, private nonprofit and
              private for-profit organizations, if the grant recipient has a fund balance available.
              The purpose of the interim financing, or float loan, program is to provide lower rate
              financing support to projects that will assist the grantee in accomplishing specific
              Community Development Block Grant housing, community, and economic
              development goals.

              Each activity carried out using a float loan must meet all of the same requirements
              that apply to other grant-assisted activities, and must be repaid in a timely manner.
              When a grantee, such as Snohomish County, proposes to fund such an activity, it
              must include the activity in its action plan or amend the action plan for the current
              program year. HUD regulations state that any extension of the float loan repayment
              period shall be considered a new float-funded activity with the same limitations and
              requirements as a new activity. New activities require identification of how the loan
              funds will be used to meet a Community Development Block Grant national
              objective. The objective cannot be the same as the original float-funded activity.


 The County Did Not Comply
 With Extension Regulations



              The County extended the term of two Community Development Block Grant float
              loans beyond their originally scheduled payoff dates without identifying new
              purposes for the funds, as required. The loans provided Housing Hope, a nonprofit
              subrecipient, with interim funds to acquire property for housing. The County



                                                8
           extended the due date for repayment of a $210,000 float loan to purchase the
           Avondale Project from March 13 to September 13, 2005. The County also extended
           the final $608,000 repayment of a $808,000 float loan for the Stanwood Expansion
           purchase from February 20 to June 19, 2005. Housing Hope needed the float loan
           extensions due to problems securing permanent financing. In both cases, County
           management determined that the delays encountered were legitimate. The decisions
           to extend the loans were made only after assuring that no other projects would be
           jeopardized by granting the extensions.


The County Did Not Fully
Understand the Extension
Requirements


           The County did not fully understand the requirement to identify the float loan
           extensions as a new purpose for their Community Development Block Grant funds.
           The County believed all that was needed was to ensure that (1) a request was
           generated by legitimate and unanticipated complicating developments, (2) no
           pending projects would be compromised by extending the terms of a loan, and (3)
           the letter of credit guaranteeing the loan was extended beyond the revised term of
           the loan. All three of these conditions were met for both loan extensions.

Recommendations

           We recommend that the director of the Region X Office of Community Planning
           and Development require the County to

           2A. Establish and implement adequate procedures for its float loan program.




                                            9
                         SCOPE AND METHODOLOGY

We performed the audit between December 2005 and April 2006. The audit generally covered
the period from January 2004 through June 2005. We expanded the scope as necessary. We
reviewed applicable guidance and discussed operations with management and staff personnel
from the County and key officials from HUD's Seattle Office of Community Planning and
Development. Our primary methodologies included

   •   Reviewing the Proposal Plan and Consolidated Annual Performance and Evaluation
       Report, to determine whether the activities are eligible, the types of activities being
       funded, amount of funding, and progress in completing the activities.

   •   Reviewing the latest audited financial report.

   •   Analyzing the grantee’s financial information from its accounting records.

   •   Reviewing the minutes of meetings and resolutions enacted by the grantee’s governing
       board.

   •   Reviewing the grantee’s organizational, functional, and staffing charts.

   •   Reviewing the County’s monitoring of subrecipients.

   •   Analyzing Community Development Block Grant float loan documentation for
       compliance with HUD requirements.

   •   Analyzing select County administrative costs for compliance with Office of Management
       and Budget cost principles.

   •   Reviewing select claims from subrecipients to determine whether they are adequately
       documented and contain any costs that are not compliant with the cost principles.

We conducted our audit in accordance with generally accepted government auditing standards
and included tests of management controls that we considered necessary under the
circumstances.




                                                10
                             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 grant expenditures were eligible and
                  adequately supported.
              •   Policies and procedures to ensure adequate financial management and record-
                  keeping systems.

              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 County did not have

              •   Policies and procedures in place to ensure that only eligible administrative
                  expenditures were charged to the Community Development Block Grant
                  (finding 1) and
              •   Policies and procedures in place to ensure that float loans were administered
                  according to HUD requirements (finding 2).




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                                     APPENDIXES

Appendix A

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

                 Recommendation             Ineligible 1/    Funds to be put
                        number                                to better use 2/
                                1A              $67,339
                                1B                                   $67,339


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 quantifiable savings that are anticipated to occur if an
     Office of Inspector General (OIG) recommendation is implemented, resulting in reduced
     expenditures at a later time for the activities in question. This includes costs not incurred,
     deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of
     unnecessary expenditures, loans and guarantees not made, and other savings. The
     amount shown represents funds that, if recommendation 1B is implemented, will be
     available to the County’s Community Development Block Grant program for eligible
     activities over the next two years.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                 Auditee Comments




Comment 1


Comment 2




                        Names have been redacted for privacy




                                        13
Comment 3




Comment 4
Comment 5




Comment 3



Comment 6




            14
Comment 7




            15
                         OIG Evaluation of Auditee Comments


Comment 1   The County only cited part of the regulation. The regulation states "CDBG funds
            may be used for necessary administrative expenses in planning or obtaining
            financing for housing as follows: for entitlement recipients, assistance authorized
            by this paragraph is limited to units which are identified in the recipient's HUD
            approved housing assistance plan; ..." (emphasis added). As noted in the finding,
            costs for management of its Supportive Housing Program and Emergency Shelter
            Grant are not eligible Community Development Block Grant expenses.

Comment 2   The funding approval/agreement signed by the County states “The funding
            assistance specified in the Funding Approval may be used to pay costs …
            provided the activities to which such costs are related are carried out in
            compliance with all applicable requirements.” Therefore, the County is
            responsible for ensuring that the costs are compliant with the requirements,
            including 24 CFR 570 and OMB Circular A-87.

Comment 3   The repayment of funds is not based on a retroactive requirement. It is
            enforcement of an existing regulation. The costs are ineligible, therefore must be
            repaid.

Comment 4   The issue wasn't with the cost allocation system, but the labor hours that were
            input into the system. The staff charged their time to the activities worked on,
            however they were shifted to the Community Development Block Grant when
            funds weren't available on the grant charged.

Comment 5   We agree. The new management has already made significant changes that
            reflect positively on the organization. We limited our audit scope due to the
            changes that we observed.

Comment 6   We modified the finding and removed the reference regarding the timeliness of
            the repayment of Community Development Block Grant funds to HUD. The
            finding is that the County violated the regulations when it extended the float loans
            without identifying a new activity as required by 24 CFR 570.301, not whether or
            not HUD was repaid timely. We are not recommending that the County repay any
            of the loan funds, only that they revise their procedures to comply with the
            regulations.

Comment 7   The procedures also need to be revised to ensure that if a float loan is extended, a
            new activity is identified.




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Appendix C

                                        CRITERIA


A. Title I of the Housing and Community Development Act of 1974 Act, Public Law 93-383, as
   amended, authorizes the Community Development Block Grant program. Entitlement grants
   authorized by the Act 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. Office of Management and Budget Circular A-87, Cost Principles for State, Local and Indian
   Tribe Governments, 2004, Attachment A, section F, paragraph 3, subparagraph b,
   “Limitation on Administrative Costs,” states, “Amounts not recoverable as indirect costs or
   administrative costs under one Federal award may not be shifted to another Federal award,
   unless specifically authorized by Federal legislation or regulation.”

C. 24 CFR [Code of Federal Regulations] 570.206(f) states, “…CDBG funds may be used to
   prepare applications for other Federal programs where the recipient determines that such
   activities are necessary or appropriate to achieve its community development activities.”

D. 24 CFR 570.206(g) states, “Administrative expenses to facilitate housing. CDBG funds may
   be used for necessary administrative expenses in planning or obtaining financing for housing
   as follows: for entitlement recipients, assistance authorized by this paragraph is limited to
   units which are identified in the recipient's HUD approved housing assistance plan;”

E. 24 CFR 570.301(b)(2)(ii) states, “Any extension of the repayment period for a float-funded
   activity shall be considered to be a new float-funded activity for these purposes and may be
   implemented by the grantee only if the extension is made subject to the same limitations and
   requirements as apply to a new float-funded activity.”




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