oversight

The City of St. Louis, Missouri, Did Not Meet HUD�s Requirements for Creating and Retaining Jobs

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-10-11.

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

                                                                  Issue Date
                                                                           October 11, 2006
                                                                  Audit Report Number
                                                                               2007-KC-1001




TO:         Dee Ann Ducote, Director, Community Planning and Development, 7ED

            //signed//
FROM:       Ronald J. Hosking, Regional Inspector General for Audit, 7AGA


SUBJECT: The City of St. Louis, Missouri, Did Not Meet HUD’s Requirements for
           Creating and Retaining Jobs

                                    HIGHLIGHTS

 What We Audited and Why

             We audited the City of St. Louis (City) because it received approximately 30
             percent of the Community Development Block Grant (Block Grant) funds
             allocated thoughout the state of Missouri in 2003 and 2004 and because we had
             not audited the City’s Block Grant program since 1999. Our audit objectives
             were to determine whether the City used its funds to create or retain the required
             number of jobs and properly allocated administrative costs to the Block Grant.


 What We Found
             The City provided loans to 52 of 66 economic development projects totaling nearly
             $4.5 million that did not meet the U.S. Department of Housing and Urban
             Development’s (HUD) requirements for creating and retaining jobs. These Block
             Grant funds were used to benefit businesses without demonstrating that they also
             benefited low- and moderate-income people.

             The City did not require the St. Louis Development Corporation (development
             corporation) to properly report the number of jobs it created with the HUD funds it
             loaned to projects. The City placed more emphasis on attracting new businesses or
             retaining existing businesses than on demonstrating that it met HUD’s national


                                           1
           objective of benefiting low- and moderate-income persons. Without obtaining
           documentary evidence, the City has no assurance that nearly $5.1 million in Block
           Grant funds will meet HUD’s national objective.

           We did not find any material deficiencies in the City’s allocation of administrative
           costs to the Block Grant program.

What We Recommend


           We recommend that HUD require the City to provide sufficient documentation to
           show that the 52 projects created or retained at least the minimum number of jobs.
           In the absence of such documentation, we recommend that HUD require the City
           to:
               • Repay $1.7 million in forgivable loans provided to projects that did not
                   properly create or retain jobs, and
               • Create additional jobs above the normal public benefit standards with next
                   year’s funding to offset the $2.8 million in repayable loans that did not
                   properly create or retain jobs.

           We recommend that HUD require the City to improve its control structure to
           ensure that the development corporation properly reports job creation data to
           ensure that nearly $1.7 million in underway projects creates the appropriate
           number of jobs and to impose sanctions against its development corporation if
           poor performance continues.

           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
           The City generally agreed with our findings. We provided the draft report to the
           City on September 18, 2006, and requested a response by October 2, 2006. The
           City provided written comments on October 2, 2006.

           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report. The attachments have not
           been included since they are not required to understand the response. We
           provided a complete copy of the City’s response to the Action Official addressed
           in this report.




                                         2
                             TABLE OF CONTENTS

Background and Objectives                                                             4

Results of Audit
        Finding 1: The City Used Block Grant Funds on Projects That Did Not Create    6
                   or Retain Jobs

        Finding 2: The City Did Not Require the Development Corporation to Report    10
                   the Number of Jobs It Created with Its HUD Funding

Scope and Methodology                                                                13

Internal Controls                                                                    15

Followup on Prior Audits                                                             16

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use               17
   B.   Auditee Comments and OIG’s Evaluation                                        18
   C.   Schedule of Economic Development Projects                                    28
   D.   Criteria                                                                     31




                                          3
                                         BACKGROUND AND OBJECTIVES

The purpose of the Community Development Block Grant (Block Grant) program is to provide
assistance to grantees to ensure decent affordable housing, provide community services, create jobs,
and expand business opportunities. Block Grant funds can only be used to meet one of HUD's
national objectives, which are:
    • Activities benefiting low- and moderate-income persons,
    • Activities that aid in the prevention or elimination of slums or blight, and
    • Activities designed to meet community development needs having a particular urgency.
The City is required to ensure, and maintain evidence, that each of its activities assisted with
Block Grant funds meets one of these three national objectives.

The U.S. Department of Housing and Urban Development (HUD) has provided Block Grant
funds to the City of St. Louis (City) since the inception of the program in 1974. At that time, the
City created a division called the Community Development Agency (now called Community
Development Administration). One of this division’s responsibilities is to administer federal
funds for community and economic development programs that strengthen the City and its
neighborhoods. This division contracts with the St. Louis Development Corporation
(development corporation) to carry out some of these programs under HUD’s Block Grant
program.

The development corporation’s business development support division provides below market
rate loans and grants to businesses located within the City. Certain loans and grants are forgiven
based on the attainment of stipulated goals, while other loans are repaid. These Block Grant-
funded loans and grants are given to help expand and retain businesses, create and retain jobs for
the low and moderate income residents of the city of St. Louis, and expand the City’s revenue
base. As a condition of accepting these loans and grants, the assisted businesses must agree to
submit quarterly job creation information. The City requires the development corporation to
obtain sufficient information to show that jobs are created or retained.

From 1998 through 2005, the City provided the development corporation almost $11 million to
fund economic development projects.

                                                     Funds allocated for loans

                                 $1,800,000
           Block Grant funding




                                 $1,600,000
                                 $1,400,000
                                 $1,200,000
                                 $1,000,000
                                   $800,000
                                   $600,000
                                   $400,000
                                   $200,000
                                         $0
                                              1998   1999   2000       2001   2002   2003   2004   2005
          Contract year




                                                                   4
We chose the City for audit because it received approximately 30 percent of the Block Grant
funds allocated within the state of Missouri in 2003 and 2004. Also, we had not audited the
City’s Block Grant program since 1999.

Our audit objectives were to determine whether the City used its funds to create or retain the
required number of jobs and properly allocated administrative costs to the Block Grant.




                                             5
                                 RESULTS OF AUDIT

Finding 1: The City Used Block Grant Funds on Projects that Did Not
Create or Retain Jobs
The City provided Block Grant funded loans to 52 economic development projects totaling nearly
$4.5 million that did not meet HUD’s requirements for creating and retaining jobs. The City did not
have adequate controls to ensure that its projects met the requirements before marking the projects
as complete and reporting the number of jobs to HUD. As a result, these loans were used to benefit
businesses without demonstrating that they also provided the intended benefits to low- and
moderate-income people.


 Job Creation or Retention

               Of 66 economic development projects, the City provided loans to nine projects
               that did not create any jobs for low- and moderate-income people and 43 projects
               that it cannot demonstrate created jobs. HUD requires that each economic
               development project create or retain at least one permanent full-time job for every
               $50,000 in funding. HUD also requires that at least 51 percent of these jobs be
               held by or made available to low- and moderate-income persons. HUD’s
               regulations specify how the City should document jobs created and retained and
               state that failure to maintain required records may result in a finding that the
               recipient has failed to meet the applicable requirement to which the record
               pertains.

               The City provided loans to nine projects totaling $972,637 that did not create any
               jobs for low- and moderate-income people. The City reported that six of these
               projects created zero jobs and the remaining three projects created a total 19 jobs.
               However, the documentation showed that the number of jobs decreased or
               remained the same. For example, the City reported that one project created eight
               jobs. The file showed that the recipient hired employees but that its overall
               number of employees had decreased from 13 at the beginning of the project to 12
               at the end of the loan term.

               The City provided loans to 43 projects totaling more than $3.5 million that it
               cannot demonstrate created or retained jobs. Some projects provided information
               on the people they hired, and others only provided summary numbers without
               detail. The City did not obtain the HUD-required documentation to evaluate a net
               gain in jobs. New employees do not necessarily equate to a net gain in the
               number of full-time permanent employees because the project may have had
               turnover in existing jobs. Since the projects did not provide the required listing of
               jobs to be created, as well as the number of full-time equivalent employees before
               and after the loan, the City could not determine whether the projects created jobs.


                                             6
      Those projects expected to retain jobs did not meet HUD’s requirement to provide
      evidence that jobs would have been lost.

      The City did not maintain sufficient records to demonstrate the number of jobs
      created by its projects (see table below).

            Description of deficiencies             Number        Loan        Minimum
                                                       of        amount       # of jobs
                                                    projects                  required
   Provided information that shows jobs were           9        $972,637         22
   not created
   Unsupported - Provided information on               22      $1,919,726        44
   persons hired, but no indication of low- and
   moderate-income status, or did not provide
   information to show jobs were new
   Unsupported - Did not provide details on            21      $1,596,910        40
   jobs filled and information to show jobs were
   new
   Total unsupported                                   43       3,516,636         84
   Total                                               52      $4,489,273        106

      See appendix C for more details on each of the 52 projects represented in the
      table.

Inadequate Controls


      The City did not have adequate controls to ensure that its projects met the
      requirements before marking the projects as complete and reporting the number of
      jobs to HUD. The City’s staff did not verify the accuracy of the summary level
      information it used to report job creation. In the Integrated Disbursement and
      Information System, projects are shown as underway until the City changes their
      status to complete to indicate they have met their job creation requirements and
      job creation will no longer be tracked. The City reported the number of jobs
      created and retained to HUD through this system based on a summary sheet
      listing the number of employees for each project with no supporting
      documentation showing who was hired and that the position was new.

      The City’s contracts and agreements did not explicitly require the development
      corporation to submit job creation documentation according to requirements of 24
      CFR [Code of Federal Regulations] 570.506. Instead, the City required the
      development corporation to maintain adequate documentation to verify the low-
      and moderate-income benefit and submit quarterly reports reflecting the status of
      all open projects and an annual report detailing the cumulative loans’ funds
      expended as well as the number of jobs created or retained. These report
      templates did not contain all of the HUD-required information.


                                   7
  Did Not Show Low- and
  Moderate-Income Benefit


      As a result, these Block Grant funded loans were used to benefit businesses
      without demonstrating that they also provided the intended benefits to low- and
      moderate-income people. Of the three national objectives, the City chose the
      objective of benefiting low-and moderate-income people by creating jobs. HUD
      has no assurance that these projects generated the 106 jobs required.

      Of the nearly $4.5 million loaned to projects that did not meet HUD’s
      requirements for creating and retaining jobs, $1.7 million were forgivable
      loans/grants, and nearly $2.8 million were to be repaid. The City spent $1.7
      million of Block Grant funds on forgivable loans that it could not demonstrate
      met HUD’s national objective. The City also cannot demonstrate that the $2.8
      million in repayable loans created or retained jobs, but because in many cases
      these loans were repaid, we cannot monetize the loss to HUD. HUD’s regulations
      allow HUD to require the City to meet more stringent standards in future years if
      its projects fail the public benefit standards.


Conclusion

      The City did not adequately demonstrate that 52 of 66 economic development
      projects met the national objective of benefiting low- and moderate-income
      persons. While the City spent nearly $1 million on loans that did not meet the
      national objectives of creating or retaining jobs, HUD has no assurance that an
      additional $3.5 million in loans was used to create jobs as originally intended. In
      a 1999 audit, the Office of Inspector General (OIG) also found that the City did
      not adequately demonstrate that 10 of 16 economic development activities funded
      with more than $2.4 million in Block Grant loans met the national objective.
      HUD has the option of taking corrective and remedial action against the City to
      prevent a continuation of a performance deficiency, mitigate the adverse effects of
      a deficiency, and prevent a recurrence of a deficiency. Since this is a recurring
      problem, HUD should consider sanctions against the City (see Appendix D for a
      complete list of available sanctions at 24 CFR [Code of Federal Regulations]
      570.910).


Recommendations


      We recommend that the director of the St. Louis Office of Community Planning
      and Development require the City to




                                   8
1A. Provide sufficient documentation to show each project with a forgivable
    loan/grant created or retained at least the minimum number of jobs, and in
    the absence of such documentation, repay the $1,716,840 in Block Grant
    funds expended for forgivable loans/grants that did not demonstrate job
    creation.

1B. Provide sufficient documentation to show that each project assisted with
    repayable loans created or retained at least the minimum number of jobs,
    and in the absence of such documentation, use future funds to create at least
    that number of jobs above the normal public benefit standards.

1C. Include the job creation documentation requirements of 24 CFR [Code of
    Federal Regulations] 570.506 in its future contracts and agreements with the
    development corporation.

1D. Improve its control structure to ensure that it only reports accurate and
    updated job creation information, as supported by adequate documentation,
    in the Integrated Disbursement and Information System.

1E. Correct the inaccurately reported number of jobs in the Integrated
    Disbursement and Information System for the 52 projects discussed in this
    finding.

In addition, we recommend that the director of the St. Louis Office of Community
Planning and Development

IF.   Take appropriate corrective and remedial action against the City, ranging
      from a letter of warning to a reduction of the City’s annual grant.




                             9
Finding 2: The City Did Not Require the Development Corporation to
Properly Report the Number of Jobs It Created with Its HUD Funding
The City did not require the development corporation to properly report the number of jobs it
created with the HUD funds it loaned to projects. The City placed more emphasis on attracting new
businesses or retaining existing businesses than on demonstrating that it met HUD’s national
objective of benefiting low- and moderate-income persons. Without obtaining documentary
evidence, the City has no assurance that the development corporation will meet HUD’s national
objective with the use of nearly $5.1 million in Block Grant funds.


 The City Did Not Require the
 Development Corporation to
 Ensure Proper Reporting


              The City did not ensure that the development corporation properly reported the
              number of jobs it created with the HUD funds it loaned to projects. Regulations
              at 24 CFR [Code of Federal Regulations] 570.501 state that the City is
              responsible for determining whether its subrecipients are performing adequately
              and for taking appropriate action when performance problems arise.

              According to its agreement with the City, the development corporation is required
              to

                  •    Meet HUD’s public benefit standard to create or retain a minimum of one
                       job per $50,000 for each economic development project,
                  •    Meet the higher contract provisions for the number of jobs created or
                       retained, and
                  •    Provide quarterly and annual reports of job creation for open activities.

              The City continually had monitoring findings that showed the development
              corporation was not properly reporting job creation accomplishments.

                              Failure to submit:                2003 2004 2005
              Reports in a timely manner                          X   X    X
              Complete and accurate reports                       X   X    X
              Job creation/retention data & low- to moderate-
              income benefit on all open activities back to 1998 X    X    X
              Although the 2001 report had no findings, it said that previously noted problems or findings on job
              creation activities had not been corrected or eliminated. The 2002 report was not available.

              In addition, an OIG audit report in 1999 found these same issues.



                                                10
           However, the City continued to fund the development corporation and did not
           impose any of the following sanctions available to it. The subrecipient agreement
           allows for:
               • Withholding of contract award,
               • Suspension of contract,
               • Withholding of reimbursement of payment,
               • Rescission of contract, and
               • Disqualification of operating agency from eligibility to receive Block
                  Grant funds.

The City’s Documentation
Priority Differed from HUD’s

           The City placed more emphasis on attracting new businesses or retaining existing
           businesses than on demonstrating that it met HUD’s national objective of
           benefiting low- and moderate-income persons. City staff said that the City
           continues to fund the development corporation because it is trying to encourage
           more companies to establish themselves in the city to generate tax funds. The
           City’s staff feels that it cannot overlook all of the good that the development
           corporation does despite its inaccurate reporting of job creation information.


The City Has No Assurance of
Meeting National Objectives

           Without obtaining documentary evidence, the City has no assurance that the
           development corporation will meet HUD’s national objective of benefiting low-
           and moderate-income persons for 47 underway projects totaling nearly $5.1
           million. Economic development projects can benefit low- and moderate-income
           persons by either creating and retaining jobs or providing goods or services to
           residents of an area. The City chose job creation and retention as its method of
           demonstrating its low- and moderate-income benefit.

           The underway projects totaling $5.1 million include $2.4 million in forgivable
           loans/grants. To make a non-statistical estimate of the amount of underway loans
           that the City might improperly forgive, we are applying the percentage of
           improperly forgiven loans to the ongoing activities. Sixty-eight percent ($1.7
           million/$2.5 million) of the forgivable loans/grants to projects completed in the
           last year did not meet HUD’s requirement to create or retain jobs (see Finding 1).
           Based on the results of the completed projects, we expect the City to forgive
           nearly $1.7 million ($2.4 million X 68 percent) in loans that do not meet HUD’s
           requirement to create or retain jobs. If the City makes changes to its monitoring
           process by obtaining the HUD required documentation showing whether jobs
           were actually created, the City will only forgive loans that meet HUD’s national
           objective.


                                       11
Recommendations

          We recommend that the director of the St. Louis Office of Community Planning
          and Development require the City to

          2A. Improve its control structure to ensure that the development corporation
              properly reports job creation data and takes appropriate action when
              performance problems arise to ensure that nearly $1.7 million in underway
              projects are forgiven only if they create the appropriate number of jobs.

          2B. Impose sanctions against the development corporation, ranging from
              withholding of reimbursement to disqualification of eligibility to receive
              Block Grant funds, if poor performance continues.




                                      12
                           SCOPE AND METHODOLOGY

To accomplish our objectives, we reviewed the Code of Federal Regulations pertaining to the Block
Grant; the City’s policies and agreements with the development corporation; the City’s monitoring
reports of the development corporation; and the results of prior certified public accountant, HUD,
and Office of Inspector General (OIG) reviews. We interviewed City, HUD, and development
corporation personnel.

We reviewed the Integrated Disbursement and Information System Summary of Activities report
as of March 31, 2006, and prepared the following summary.

        Economic development funding to local development corporation from 1998 to 2005
                   Projects underway                  471               $5,062,179
                                                        1
        Projects completed (since March 1, 2005)      75                $6,780,760
                            Total                               122                 $11,842,939
   1
   We reclassified two projects from underway to complete because their job creation term expired between
   March 31 and June 30, 2006.

We reviewed 66 of the 75 completed economic development projects to determine whether their
job creation documentation met HUD’s requirements and supported the information that the City
reported. We reviewed all projects that were supposed to directly create or retain jobs, except for
one project for which the City was unable to locate the file. We did not review the eight projects
that were to pass the funds on to further subrecipients to create or retain jobs.

We determined that none of the projects met HUD’s documentation requirements contained in
24 CFR [Code of Federal Regulations] 570.506. We further reviewed each project’s loan file to
determine whether it created or retained the required and reported number of jobs. We made this
determination based on whether the City obtained

    •   Information showing whether new employees were low- and moderate-income, either by
        income and family size or through the employee or business being in an empowerment
        zone or enterprise community;
    •   Documentation to show that for job retention, jobs would have been lost without Block
        Grant assistance; and
    •   Documentation to show that new permanent full-time positions were created, resulting in
        a net gain in employees.

We defined net gain as an increase in the total number of full-time permanent employees since
the company received the loan. A company met HUD’s requirements for job creation if it
increased by one full-time permanent employee for each $50,000 in funding received.

After reviewing each project’s file, we selected a sample of 11 projects for site visits. We chose
the projects with the highest dollar amounts from the following three categories:




                                                 13
    •   Claimed that they met job creation goal and were documented,
    •   Claimed that they met job creation goal and were not documented, or
    •   Did not claim that they met the job creation goal and were not documented.

We performed site visits at eight of the projects to confirm the job creation information reported
by the City. During the site visits, we requested the records of all employees who were hired and
retained, as well as those who had departed, within the time the project received the loan through
the current quarter year. We requested an employee listing containing the names, addresses, start
dates, and end dates of these employees.

In response to our audit, the City obtained additional documentation from many of the projects.
We used the information available as of July 18, 2006, as well as the information obtained during
our site visits, to determine whether the project created or retained the required number of jobs.

We relied upon data from the Integrated Disbursement and Information System Summary of
Activities report (C04PR03). We used the data to identify completed and underway economic
development projects and to determine the number of jobs the City claimed it created. We
performed a preliminary assessment based upon a control interview, prior audit report, and
comparison to hard copy information. We found the data were sufficiently reliable to meet our
audit objectives.

We performed audit work from February through July 2006 at the City’s Community
Development Administration’s office located at 1015 Locust Street, St. Louis, Missouri. We
conducted our audit in accordance with generally accepted government auditing standards.




                                            14
                             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:

              •       Controls over the tracking of program accomplishments.
              •       Controls over charging administrative costs to the grant.

              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 item is a significant weakness:

                  •   The City did not have adequate controls to ensure it demonstrated that its
                      projects correctly created the appropriate number of jobs and the
                      subrecipient properly reported the number of jobs created or retained (see
                      findings 1 and 2).

 Separate Communication of
 Minor deficiencies

              Minor internal control and compliance issues were reported to the auditee by a
              separate letter, dated September 21, 2006.



                                           15
                       FOLLOWUP ON PRIOR AUDITS


 Audit Report # 99-KC-244-1022
 City of St. Louis Community
 Development Block Grant
 Program

We audited the City’s Block Grant program in 1999. The audit covered the period from January
1997 through December 1998. The audit identified one finding, which is related to the
objectives of our current review.

The audit finding was that low- and moderate-income jobs were not adequately documented
because the City did not

                  •   Adequately monitor the economic development activities to ensure that
                      the activities created/retained jobs and made them available to low- and
                      moderate-income persons and

                  •   Adequately demonstrate that 10 of 16 economic development activities
                      funded with more than $2.4 million in Block Grant funds met the national
                      objective.

We made three job creation recommendations. We recommended that the Community
Development Administration verify that all community development participants have
documentation of their progress in job creation/retention for low- and moderate-income persons
according to their agreements. Second, we recommended that the Community Development
Administration repay HUD the amount of the grants/loans for which the economic development
participants cannot support the jobs that should have been created/retained. Finally, we
recommended that the Community Development Administration’s actions to hire additional
personnel result in effective monitoring of subrecipients.

HUD closed all three recommendations.




                                           16
                                           APPENDIXES

Appendix A

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

                 Recommendation            Ineligible 1/   Unsupported 2/       Funds to be put
                        number                                                   to better use 3/
                        1A                                      $1,716,840

                        2A                                                          $1,662,210



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/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of audit. Unsupported costs
     require a decision by HUD program officials. This decision, in addition to obtaining
     supporting documentation, might involve a legal interpretation or clarification of
     departmental policies and procedures.

3/   “Funds to be put to better use” are estimates of amounts that could be used more
     efficiently if an 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 City implements our recommendation, it will no longer forgive
     loans/grants to projects that did not create or retain jobs, and instead, will require
     repayment from projects which did not meet HUD’s public benefit standards. Once the
     City successfully improves its controls, this will be a recurring benefit. Our non-
     statistical estimate, based on the best data available for projects completed last year,
     reflects only the amount for projects currently underway.




                                          17
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments
Comment 1




                        18
Ref to OIG Evaluation    Auditee Comments




Comment 1




                        19
Ref to OIG Evaluation    Auditee Comments




                        20
Ref to OIG Evaluation    Auditee Comments




Comment 2




Comment 3




                        21
Ref to OIG Evaluation    Auditee Comments




Comment 4




                        22
Ref to OIG Evaluation    Auditee Comments




Comment 5




Comment 6




                        23
Ref to OIG Evaluation    Auditee Comments




Comment 7


Comment 6




                        24
Ref to OIG Evaluation    Auditee Comments




                        25
Ref to OIG Evaluation    Auditee Comments




                        26
                         OIG Evaluation of Auditee Comments

Comment 1   We commend the City for promptly taking the following actions in response to
            our audit:
                • working closely with the development corporation to resolve the audit
                   findings,
                • making significant personnel changes,
                • having the new Economic Development Compliance Specialist report
                   exclusively to the City,
                • developing a new record keeping system, and
                • redrafting the loan agreements.

Comment 2   We agree that the City should compile documentation on each existing project in
            accordance with the new system. We disagree with the reclassification of projects
            to national objectives that were not initially chosen by the City. The City chose
            the benefit to low- and moderate-income persons through job creation as its
            objective, and the regulations do not state that one can change objectives upon
            unsuccessfully reaching its original objective. In addition, a sound internal
            control structure would demand that the City only use funds to achieve the
            purposes and benefits it decided upon before it disbursed the money.

Comment 3   We commend the City for taking the steps to address the oversight and control
            issues identified in finding 2. We believe that the monthly reviews by the
            Monitoring Manager, and monitoring the process until the project is complete,
            will help to improve the control structure.

Comment 4   We understand the relationship between the City and the development corporation
            and appreciate the City’s optimism in this regard, but the City needs to be able to
            consider all options if the new procedures and controls do not correct the issues.
            The City recognizes many benefits of doing business through the Development
            Corporation. But, it should be aware that if the cost of doing business with the
            Development Corporation, in terms of inefficiencies and regulatory violations,
            becomes greater than those benefits, it will be necessary to enforce more stringent
            penalties.

Comment 5   In the case of businesses that fail, or fail to produce the required number of jobs,
            the City should do whatever it can, within the restraints of the regulations, to
            satisfy their commitment to HUD in exchange for the use of Block Grant funds.

Comment 6   The City should review any issues and possibilities with the local HUD office to
            resolve the findings contained in this report.

Comment 7   We believe the City should assess its program on an individual and an overall
            basis. HUD regulations establish an individual as well as an aggregate public
            benefit standard, and the City must follow the regulations and document the
            measurement of each of these goals.


                                          27
                Appendix C

    SCHEDULE OF ECONOMIC DEVELOPMENT PROJECTS

Table 1 – No jobs created or retained




                                                                                                                     of jobs3 (total / low-
                                                                             Minimum number
         Disbursement and




                                                                                                                     Reported number
                                                                                                 Expected number
         Activity Number




                                                                             of jobs1 required
                                                            Number of jobs




                                                                                                 of jobs2 (total /
                                                                                                 low-moderate)
         in Integrated

         Information




                                                            documented
                                             Forgivable
                               Repayable




                                                                                                                     moderate)
                               amount



                                             amount
         System




     1        33054          $35,000                         0                    1                 3/3                  2/2
     2        38554          $60,000                         0                    2                 8/5                  0/0

     3        3500            $90,000                        0                   2                 9/9                   8/8
     4        5055           $150,000                        0                   3               33 / 16                 0/0
     5        5045           $132,637                        0                   3                15 / 8                 9/9
     6        36084          $150,000                        0                   3                15 / 8                 0/0
     7        28574                        $80,000           0                   2               50 / 50                 0/0
     8        31274          $250,000                        0                   5               41 / 21                 0/0
     9        18954          $25,000                         0                   1                 7/4                   0/0
                             $892,637      $80,000           0                  22




     1
       A job is defined as one permanent full-time equivalent. HUD requires each project to create or retain at
     least one job for each $50,000 in Block Grant funding.
     2
       The number of jobs expected is the number that the City indicated in its approval letter to the development
     corporation for each project.
     3
       The number of jobs reported is the number reported in the Integrated Disbursement and Information System
     (Report C04PR03) as of March 31, 2006.
     4
       The City reports that these businesses are no longer in business.




                                                    28
Table 2 – No evidence that jobs were created or retained.
         Provided information on employees hired, but no evidence that they were hired in new positions rather than
         vacated positions. For retained jobs, provided no evidence that jobs would have been lost without
         assistance.




                                                                                                                          Reported number
                                                                                                      Expected number
               Activity Number


               and Information




                                                                                    number of jobs1
                                                                   Number of jobs




                                                                                                      of jobs2 (total /




                                                                                                                          of jobs3 (total /
                                                                                                      low-moderate)




                                                                                                                          low-moderate)
               Disbursement
               in Integrated




                                                                   documented
                                                    Forgivable
                                     Repayable




                                                                                    Minimum

                                                                                    required
                                     amount




                                                    amount
               System



     1             3025           $69,480                           0                    2              6/6                 8/8
     2             3492           $50,206                           0                    1              6/4                13 / 7
     3             2972           $28,500                           0                    1            12 / 12              14 / 14
     4             3659                           $50,000           0                    1            25 / 15              63 / 63
     5             3905                           $13,340           0                    1              4/3                 5/3
     6             4324           $65,000         $10,000           0                    2              7/4                55 / 55
     7             5046            $90,000                          0                    2              9/5                 1/1
     8             3501            $95,000                          0                    2              10 / 6             21 / 17
     9             3467           $93,000                           0                    2             10 / 6              17 /17
    10             3645           $142,500                          0                    3             15 / 8              24 / 24
    11             4299                           $36,000           0                    1               3/2                3/2
    12             3498                          $100,000           0                    2             10 / 10             18 / 18
    13             4155                           $13,000           0                    1               1/1                1/1
    14             5136                          $350,000           0                    7              10 / 6              7/7
    15             3635                          $63,500            0                    2            125 / 80            157 / 157
    16             3203           $150,000                          0                    3              15 / 8              1/1
    17             5095                           $50,000           0                    1               1/1                1/1
    18             5057                          $21,000            0                    1            85 / 14              28 / 28
    19             3952                          $150,000           0                    3             23 / 12             28 / 28
    20             4325                           $50,000           0                    1               5/3               20 / 20
    21             3510           $90,000                           0                    2               5/3                8/8
    22             3512           $139,200                          0                    3              15 / 8              9/9
                                 $1,012,886        $906,840         0                   44
           1
             A job is defined as one permanent full-time equivalent. HUD requires
           each project to create or retain at least one job for each $50,000 in Block
           Grant funding.
           2
             The number of jobs expected is the number that the City indicated in its
           approval letter to the development corporation for each project.
           3
             The number of jobs reported is the number reported in the Integrated
           Disbursement
           and Information System (Report C04PR03) as of March 31, 2006.




                                                     29
Table 3 - No evidence that jobs were created or retained.
          Did not provide details on jobs filled. Did not verify that existing
          businesses created new jobs or that jobs would have been lost without
          assistance.




                                                                                              Minimum number of




                                                                                                                                        Reported number of
                                                                                                                  Expected number of
          Information System
          Activity Number in




                                                         Forgivable amount
                                  Repayable amount
          Disbursement and




                                                                                                                  jobs2 (total / low-




                                                                                                                                        jobs3 (total / low-
                                                                             Number of jobs



                                                                                              jobs1 required
                                                                             documented
          Integrated




                                                                                                                  moderate)




                                                                                                                                        moderate)
  1          3487                                    $75,000                 0                     2               10 / 6                19 / 19
  2          4129              $90,000                                       0                     2                5/3                    6/4
  3          4154                                     $70,000                0                     2                7/4                  30 / 23
  4          3175                                    $250,000                0                     5               20 / 20               37 / 37
  5          5241              $130,000                                      0                     3               13 / 7                15 / 15
  6          5116               $28,360                                      0                     1                5/3                  20 / 20
  7          5114                                    $12,000                 0                     1                1/1                    2/2
  8          5120                                    $50,000                 0                     1               40 / 21              128 / 128
  9          5074              $12,550                                       0                     1                5 /3                  12/ 12
 10          38584             $51,000                                       0                     2                5/3                    2/2
 11          28144             $30,000               $10,000                 0                     1                 5/5                   7/7
 12          5206              $130,000              $20,000                 0                     3                10 / 6                 3/3
 13          5240               $50,000                                      0                     1                5/3                  15 / 15
 14          5048              $150,000               $8,000                 0                     4                5/3                   15 / 7
 15          5043              $175,000                                      0                     4                 7/4                   7/7
 16          5269                                    $50,000                 0                     1                2/1                    2/2

 17          2697              $20,000                                       0                    1                 2/2                    2/2
 18         39034                                     $20,000                0                    1                 1/1                    1/1
 19       No number4                                  $50,000                0                    1                 3/2                    N/A
 20          5047                                     $15,000                0                    1                 1/1                    1/0
 21          5053                                    $100,000                0                    2                 10 / 5                 2/2
                               $866,910              $730,000                0                   40

      1
        A job is defined as one permanent full-time equivalent. HUD requires each project to
      create or retain at least one job for each $50,000 in Block Grant funding.
      2
        The number of jobs expected is the number that the City indicated in its approval letter to
      the development corporation for each project.
      3
        The number of jobs reported is the number reported in the Integrated Disbursement and
      Information System (Report C04PR03) as of March 31, 2006.
      4
        The City reports that these businesses are no longer in business.




                                                       30
Appendix D
                                         CRITERIA

Regulations at 24 CFR [Code of Federal Regulations] 570.200(a) state that an activity may be
assisted in whole or in part with CDBG funds only if all of the following requirements are met:
(2) Compliance with national objectives. Grant recipients under the Entitlement and HUD-
administered Small Cities programs must certify that their projected use of funds has been
developed so as to give maximum feasible priority to activities which will carry out one of the
national objectives of benefit to low and moderate income families or aid in the prevention or
elimination of slums or blight; the projected use of funds may also include activities which the
recipient certifies are designed to meet other community development needs having a particular
urgency because existing conditions pose a serious and immediate threat to the health or welfare
of the community where other financial resources are not available to meet such needs.
Consistent with the foregoing, each recipient under the Entitlement and HUD-administered
Small Cities programs must ensure, and maintain evidence, that each of its activities assisted
with CDBG funds meets one of the three national objectives as contained in its certification.
Criteria for determining whether an activity addresses one or more of these objectives are
contained at Sec. 570.208.

Regulations at 24 CFR [Code of Federal Regulations] 570.209(b)(3) specify the standards for
individual activities. Any activity subject to these guidelines which falls into one or more of the
following categories will be considered by HUD to provide insufficient public benefit, and
therefore may under no circumstances be assisted with CDBG funds (i) The amount of CDBG
assistance exceeds either of the following, as applicable: (A) $50,000 per full-time equivalent,
permanent job created or retained. 570.209(d) states that the grantee must maintain sufficient
records to demonstrate the level of public benefit, based on parts (a) and (b) of this regulation,
that is actually achieved upon completion of the Block Grant-assisted economic development
activity(ies) and how that compares to the level of such benefit anticipated when the Block Grant
assistance was obligated. If the grantee’s actual results show a pattern of substantial variation
from anticipated results, the grantee is expected to take all actions reasonably within its control
to improve the accuracy of its projections. If the actual results demonstrate that the recipient has
failed the public benefit standards, HUD may require the recipient to meet more stringent
standards in future years as appropriate.

Regulations at 24 CFR [Code of Federal Regulations] 570.501(b) state that the recipient is
responsible for ensuring that Block Grant funds are used in accordance with all program
requirements. The use of subrecipients does not relieve the recipient of this responsibility. The
recipient is also responsible for determining the adequacy of performance under subrecipient
agreements and for taking appropriate action when performance problems arise.

Regulations at 24 CFR [Code of Federal Regulations] 570.506(b)(5) state that for each activity
determined to benefit low- and moderate-income persons based on the creation of jobs, the
recipient shall provide the documentation described in either paragraph (b)(5)(i) or (ii) of this
section.



                                             31
(i) Where the recipient chooses to document that at least 51 percent of the jobs will be available
to low- and moderate-income persons, documentation for each assisted business shall include
     (A) A copy of a written agreement containing
         (1) A commitment by the business that it will make at least 51 percent of the jobs
         available to low- and moderate-income persons and will provide training for any of those
         jobs requiring special skills or education;
         (2) A listing by job title of the permanent jobs to be created indicating which jobs will be
         available to low- and moderate-income persons, which jobs require special skills or
         education, and which jobs are part-time, if any; and
         (3) A description of actions to be taken by the recipient and business to ensure that low-
         and moderate-income persons receive first consideration for those jobs; and
     (B) A listing by job title of the permanent jobs filled and which jobs of those were available
     to low- and moderate-income persons and a description of how first consideration was given
     to such persons for those jobs. The description shall include what hiring process was used,
     which low- and moderate-income persons were interviewed for a particular job, and which
     low- and moderate-income persons were hired.
(ii) Where the recipient chooses to document that at least 51 percent of the jobs will be held by
low- and moderate-income persons, documentation for each assisted business shall include
     (A) A copy of a written agreement containing
         (1) A commitment by the business that at least 51 percent of the jobs, on a full-time
         equivalent basis, will be held by low- and moderate-income persons and
         (2) A listing by job title of the permanent jobs to be created, identifying which are part-
         time, if any;
     (B) A listing by job title of the permanent jobs filled and which jobs were initially held by
     low- and moderate-income persons; and
     (C) For each such low- and moderate-income person hired, the size and annual income of the
     person’s family prior to the person being hired for the job.

Subpart (6) states that for each activity determined to benefit low- and moderate- income persons
based on the retention of jobs, the recipient shall provide
(i) Evidence that in the absence of CDBG [Block Grant] assistance jobs would be lost;
(ii) For each business assisted, a listing by job title of permanent jobs retained, indicating which
of those jobs are part-time and (where it is known) which are held by low- and moderate-income
persons at the time the CDBG assistance is provided. Where applicable, identification of any of
the retained jobs (other than those known to be held by low- and moderate-income persons)
which are projected to become available to low- and moderate-income persons through job
turnover within two years of the time CDBG assistance is provided. Information upon which the
job turnover projections were based shall also be included in the record;
(iii) For each retained job claimed to be held by a low- and moderate-income person, information
on the size and annual income of the person’s family;
(iv) For jobs claimed to be available to low- and moderate-income persons based on job
turnover, a description covering the items required for “available to” jobs in paragraph (b)(5) of
this section; and
(v) Where jobs were claimed to be available to low- and moderate-income persons through
turnover, a listing of each job which has turned over to date, indicating which of those jobs were
either taken by, or available to, low- and moderate-income persons. For jobs made available, a



                                             32
description of how first consideration was given to such persons for those jobs shall also be
included in the record.

Subpart (7) states that for purposes of documenting that the person for whom a job was either
filled by or made available to a low- or moderate-income person based upon the census tract
where the person resides or in which the business is located, the recipient, in lieu of maintaining
records showing the person’s family size and income, may substitute records showing either the
person’s address at the time the determination of income status was made or the address of the
business providing the job, as applicable, the census tract in which that address was located, the
percent of persons residing in that tract who either are in poverty or who are low- and moderate-
income, as applicable, the data source used for determining the percentage, and a description of
the pervasive poverty and general distress in the census tract in sufficient detail to demonstrate
how the census tract met the criteria in section 570.208(a)(4)(v), as applicable.

Regulations at 24 CFR [Code of Federal Regulations] 570.900(b)(3) state that in conducting
performance reviews, HUD will primarily rely on information obtained from the recipient’s
performance report, records maintained, findings from monitoring, grantee and subrecipient
audits, audits and surveys conducted by the HUD Inspector General, and financial data regarding
the amount of funds remaining in the line of credit plus program income. HUD may also
consider relevant information pertaining to a recipient’s performance gained from other sources,
including litigation, citizen comments, and other information provided by or concerning the
recipient. A recipient’s failure to maintain records in the prescribed manner may result in a
finding that the recipient has failed to meet the applicable requirement to which the record
pertains.

Regulations at 24 CFR [Code of Federal Regulations] 570.901 state that HUD reviews for
compliance with the primary and national objectives and other program requirements. HUD will
review each entitlement and HUD-administered small cities recipient's program to determine if
the recipient has carried out its activities and certifications in compliance with:
(a) The requirement described at Sec. 570.200(a)(3) that, consistent with the primary objective of
    the Act, not less than 70 percent of the aggregate amount of CDBG funds received by the
    recipient shall be used over the period specified in its certification for activities that benefit
    low and moderate income persons;
(b) The requirement described at Sec. 570.200(a)(2) that each CDBG assisted activity meets the
    criteria for one or more of the national objectives described at Sec. 570.208;
(c) All other activity eligibility requirements defined in subpart C of this part.

Regulations at 24 CFR [Code of Federal Regulations] 570.910 specify corrective and remedial
actions available to HUD.
(a) General. Consistent with the procedures described in Sec. 570.900(b), the Secretary may take
    one or more of the actions described in paragraph (b) of this section. Such actions shall be
    designed to prevent a continuation of the performance deficiency; mitigate, to the extent
    possible, the adverse effects or consequences of the deficiency; and prevent a recurrence of
    the deficiency.
 (b) Actions authorized. The following lists the actions that HUD may take in response to a
    deficiency identified during the review of a recipient's performance:



                                             33
 (1) Issue a letter of warning advising the recipient of the deficiency and putting the recipient
    on notice that additional action will be taken if the deficiency is not corrected or is
    repeated;
(2) Recommend, or request the recipient to submit, proposals for corrective actions,
    including the correction or removal of the causes of the deficiency, through such actions
    as:
    (i) Preparing and following a schedule of actions for carrying out the affected CDBG
         activities, consisting of schedules, timetables and milestones necessary to implement
         the affected CDBG activities;
    (ii) Establishing and following a management plan which assigns responsibilities for
         carrying out the actions identified in paragraph (b)(2)(i) of this section;
    (iii) For entitlement recipients, canceling or revising affected activities which are no
         longer feasible to implement due to the deficiency and reprogramming funds from
         such affected activities to other eligible activities (pursuant to the citizen participation
         requirements in 24 CFR part 91); or
    (iv) Other actions which will serve to prevent a continuation of the deficiency, mitigate
         (to the extent possible) the adverse effects or consequences of the deficiency, and
         prevent a recurrence of the deficiency;
(3) Advise the recipient that a certification will no longer be acceptable and that additional
    assurances will be required;
(4) Advise the recipient to suspend disbursement of funds for the deficient activity;
(5) Advise the recipient to reimburse its program account or letter of credit in any amounts
    improperly expended and reprogram the use of the funds in accordance with applicable
    requirements;
(6) Change the method of payment to the recipient from a letter of credit basis to a
    reimbursement basis;
(7) In the case of claims payable to HUD or the U.S. Treasury, institute collection procedures
    pursuant to subpart B of 24 CFR part 17; and
(8) In the case of an entitlement recipient, condition the use of funds from a succeeding fiscal
    year's allocation upon appropriate corrective action by the recipient pursuant to Sec.
    570.304(d). The failure of the recipient to undertake the actions specified in the condition
    may result in a reduction, pursuant to Sec. 570.911, of the entitlement recipient's annual
    grant by up to the amount conditionally granted.




                                           34