oversight

The City of Long Beach, Long Beach, California, Did Not Administer Its Continuum of Care Supportive Housing Program in Compliance of HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-12-12.

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

                                                              Issue Date
                                                                   December 12, 2006
                                                              Audit Report Number
                                                                   2007-LA-1003




TO:        William Vasquez, Director, Los Angeles Office of Community Planning and
             Development, 9DD



FROM:    Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA
SUBJECT: The City of Long Beach, Long Beach, California, Did Not Administer Its
            Continuum of Care Supportive Housing Program in Compliance with HUD
            Requirements


                                  HIGHLIGHTS

 What We Audited and Why

            We audited the City of Long Beach (City) in response to a recommendation from
            the Los Angeles Office of Community Planning and Development, which was
            prompted by concerns about inadequate operating procedures identified during
            on-site monitoring. In addition, we and the Los Angeles Office of Community
            Planning and Development received complaints from project sponsors, alleging
            the City failed to make grant reimbursements in a timely manner.

            The City was awarded more than $24 million in U.S. Department of Housing and
            Urban Development (HUD) Supportive Housing Program grant funds that it
            passed through to its nonprofit project sponsors to administer the program. Our
            audit objectives were to determine whether the City administered its Continuum
            of Care Supportive Housing Program in compliance with HUD requirements and
            to determine whether the complainants’ allegations had merit. More specifically,
            our objectives were to determine whether the City (1) monitored its project
            sponsors adequately to ensure compliance with HUD regulations, (2) closed out
            expired grants in compliance with HUD regulations, (3) provided the proper
            amount of administrative fees to its project sponsors, and (4) made timely
            reimbursements to its project sponsors.
What We Found


           The City did not administer its Continuum of Care Supportive Housing Program
           in compliance with HUD requirements and/or its own procedures. It failed to (1)
           monitor its project sponsors in accordance with HUD requirements or its own
           procedures, which resulted in project sponsors being unable to support $315,320
           in required cash match; (2) close out $636,916 in expired grants in accordance
           with HUD requirements or its own procedures; (3) provide at least 50 percent of
           the administrative fees to the project sponsors as Congress intended; and (4) make
           timely reimbursement payments to its project sponsors in accordance with its own
           procedures. We attribute these deficiencies to the City’s not placing sufficient
           emphasis on ensuring that it and its project sponsors were knowledgeable of and
           implemented pertinent HUD requirements regarding its administration of its
           program. As a result, the City failed to ensure that HUD funds were spent in the
           most effective and efficient manner to maximize its program, unnecessarily
           overburdened project sponsors with paying for operations from nonfederal
           funding, and put HUD funds at risk of being misspent. Additionally, the City
           unnecessarily delayed nearly $2 million in expired grant funds from being
           deobligated and put to better use.


What We Recommend


           We recommend that HUD require the City to comply with HUD’s and its own
           policies and procedures regarding on-site monitoring of its project sponsors;
           provide support for $315,320 in funds used as cash match or repay HUD from
           nonfederal funds for more than $1.1 million in expended grant funds; immediately
           close out $636,916 in expired grants so these funds can be put to better use; and
           reevaluate its payment process, establish and implement procedures to streamline
           invoice reviews, and ultimately reduce the time it takes to reimburse its project
           sponsors.

Auditee’s Response

           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. We provided the City the draft report on November 2, 2006, and held an
           exit conference with officials on November 9, 2006. Based on our discussion




                                            2
with the City at the exit conference, we made revisions to the report and provided
a revised draft report to the City on November 21, 2006. The City provided
written comments on November 30, 2006. The City disagreed with our report.

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




                                 3
                             TABLE OF CONTENTS

Background and Objectives                                                         5

Results of Audit
        Finding 1: The City Did Not Administer Its Continuum of Care Supportive   7
        Housing Program in Compliance with HUD Requirements

Scope and Methodology                                                             15

Internal Controls                                                                 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.   Criteria                                                                  32
   D.   Schedule of Unsupported Cash Match                                        34
   E.   Schedule of Expired Grants (Funds to Be Put to Better Use)                35




                                              4
                     BACKGROUND AND OBJECTIVES

The Supportive Housing Program is authorized under Title IV of the McKinney-Vento Homeless
Assistance Act (United States Code 11381-11389). The program is designed to promote the
development of supportive housing and services, including innovative approaches to assist
homeless persons in the transition from homelessness, and to promote the provision of
supportive housing for homeless persons to enable them to live as independently as possible.
Eligible activities include transitional housing, permanent housing for homeless persons with
disabilities, innovative housing that meets the intermediate and long-term needs of homeless
persons, and supportive services for homeless persons not provided in conjunction with
supportive housing.

The City of Long Beach (City) Department of Health and Human Services is a local government
agency that addresses the public health and human service needs in the city of Long Beach.
This department is structured around five bureaus (Public Health, Preventive Health,
Environmental Health, Human and Social Services, and Support Services) and two divisions
(Physician Services and Animal Control). The Bureau of Human and Social Services is
responsible for administering the Continuum of Care Supportive Housing Program.

According to the U.S. Department of Housing and Urban Development’s (HUD) Line of Credit
Control System, since June 2001, the City has been awarded 84 grants valued at more than $24
million for the Supportive Housing Program. The majority of these grants were subcontracted
out to community nonprofit agencies called project sponsors.

We reviewed 11 of the 84 grants administered by the City with project start dates between
January 1, 2001, and December 31, 2005.

         Grant number                   Grant term              Amount awarded
         CA16B006004       November 01, 2001 – October 31, 2005        $140,995
         CA16B006007       June 01, 2002 – May 31, 2007                $341,593
         CA16B006009       February 01, 2002 – May 31, 2006             $61,300
         CA16B206003       March 01, 2003 – May 31, 2006               $126,000
         CA16B206004       September 01, 2003 – August 31, 2006        $161,070
         CA16B206005       September 01, 2003 – August 31, 2006        $668,169
         CA16B206006       September 01, 2003 – August 31, 2006        $237,582
         CA16B206007       August 01, 2004 – July 31, 2007             $168,684
         CA16B306014       June 01, 2005 – May 31, 2007                $113,685
         CA16B906003       January 01, 2002 – December 31, 2005        $307,088
         CA16B906010       February 01, 2002 – January 31, 2007        $122,574
         Totals                                                      $2,448,740

Our audit objective was to determine whether the City administered its Continuum of Care
Supportive Housing Program in accordance with HUD requirements and whether the
complainants’ allegations had merit. More specifically, our audit objectives were to determine


                                               5
whether the City (1) monitored its project sponsors adequately to ensure compliance with HUD
regulations, (2) closed out expired grants in compliance with HUD regulations, (3) provided the
proper amount of administrative fees to its project sponsors, and (4) made timely reimbursements
to its project sponsors.




                                               6
                                RESULTS OF AUDIT

Finding 1: The City Did Not Administer Its Continuum of Care
Supportive Housing Program in Compliance with HUD Requirements
The City did not administer its Continuum of Care Supportive Housing Program in compliance
with HUD requirements and/or its own policies and procedures. It failed to

   •   Monitor its project sponsors in accordance with HUD requirements or its own policies
       and procedures,
   •   Close out expired grants in accordance with HUD requirements or its own policies and
       procedures,
   •   Provide at least 50 percent of the administrative fees to its project sponsors in accordance
       with HUD requirements and Congress’ intent, and
   •   Make timely reimbursements to its project sponsors in accordance with its policies and
       procedures.

We attribute these deficiencies to the City’s not placing sufficient emphasis on ensuring that it
and its project sponsors had knowledge of and implemented pertinent HUD requirements
regarding the administration of its Continuum of Care Supportive Housing Program. As a result,
the City failed to ensure that HUD funds were spent in the most effective and efficient manner to
maximize its program, unnecessarily overburdened project sponsors with paying for operations
from nonfederal funding, and put HUD funds at risk of being misspent. Additionally, the City
unnecessarily delayed nearly $2 million in expired grant funds from being deobligated so HUD
could put the funds to better use.



 The City Did Not Monitor Its
 Project Sponsors as Required


              Office of Management and Budget Circular A-133, subpart D (see appendix C),
              requires pass-through entities to monitor the activities of subrecipients as
              necessary to ensure that federal awards are used for authorized purposes and to
              advise subrecipients of those requirements. Additionally, 24, CFR [Code of
              Federal Regulations] Part 85 requires Grantees to monitor the day-to-day
              activities associated with grant and sub-grant supported activities and that the
              monitoring must cover each program, function or activity (see appendix C).

              The City did not monitor its project sponsors in accordance with HUD
              requirements or its own policies and procedures. It did not monitor its project
              sponsors’ fiscal records to ensure that cost centers were established to support the



                                                7
source and application of funds used for cash match, nor did it have adequate
support for salary expenses.

According to the City’s monitoring log, it did not conduct any fiscal on-site
monitoring of its project sponsors between August 2002 and July 2006. Further,
all project sponsors contacted told us that the City had not conducted any on-site
fiscal monitoring. The City stated that it conducted annual site visits to all
programs located within its Multi Service Center, as well as annual site visits to
two of its project sponsors not located within the Multi Service Center. However,
14 of the City’s 15 project sponsors conducted their fiscal operations at separate
locations outside of the Multi Service Center. The project sponsor that conducted
fiscal operations at the Multi Service Center stated that it had not received fiscal
monitoring within the last two years. Overall, we found that no fiscal monitoring
had been conducted at any of the City’s project sponsors.

As a result, the City failed to ensure that the grant funds were administered in the
most effective and efficient manner to fulfill the intent for which the funding was
provided. Details of the deficiencies caused by the lack of monitoring are
discussed separately below.

Cash Match Was Unsupported

Regulations at 24, CFR [Code of Federal Regulations] Part 85 (see appendix C)
requires grantees and subgrantees to maintain records that are verifiable and
adequately identify the source and application of funds used for cash match.

The documentation contained in the City’s grant files provided no evidence to
adequately support that cash match was being provided. The City used project
sponsors’ invoices and copies of checks to verify that the cash match requirement
was being met. It believed it was complying with the requirement by reimbursing
a portion of the project sponsors’ expenses. However, invoices and copies of
checks did not ensure that the 25 percent match requirement was met and properly
accounted for.

Seven of the eight project sponsors visited did not have cost centers established in
their accounting systems, or another mechanism in place, to show the source and
application of funds used as cash match. Specifically, $315,320 in funds claimed
as match for the seven project sponsors, which corresponded to more than $1.1
million in expended grant funds, was unsupported (see appendix D).
Additionally, the financial staff at each of the eight project sponsors stated that the
City did not advise them of this requirement, nor did the City conduct on-site
fiscal monitoring to ensure that the requirement was being met.

We attribute the deficiency to the City’s lack of understanding of its
responsibilities as a pass-through entity. It did not understand that the project
sponsors were required to establish and maintain cost centers to track the source



                                  8
and application of the cash match. As a result, the City did not adequately ensure
that cash match requirements were met for more than $1.1 million in expended
grant funds. Had the City conducted on-site fiscal monitoring, it may have
detected the problem.

Salary Expenses Were Not Adequately Supported

Regulations at 24 CFR [Code of Federal Regulations] Part 85 require accounting
records to be supported by adequate source documentation. In addition, Office of
Management and Budget Circular A-122 states that charges to awards for salaries
and wages will be based on documented payrolls, supported by personnel activity
reports (see appendix C).

The City’s written fiscal monitoring policies and procedures required its project
sponsors to submit payroll registers, subagent invoices, and detailed summary
invoices (see appendix C). The payroll registers and other documentation
submitted to the City from its project sponsors did not contain the required time
and attendance records. We visited eight project sponsors, all of whom had the
required time and attendance records to support that salaries paid to their
employees were eligible to receive reimbursement from the City under HUD’s
Continuum of Care Supportive Housing Program. Although the project sponsors
had the required documentation on site, they stated that they were unaware of the
HUD requirements. Before our site visits, the City did not have adequate
assurance that salary expenses reimbursed to its project sponsors were eligible.
Had the City conducted on-site fiscal monitoring, it could have assured itself and
HUD that the salary expenses were eligible and adequately supported.

The City stated that it believed the documents requested from its project sponsors
provided adequate support to reimburse its project sponsors for salaries expended.
The City stated that it had developed a staff cost worksheet to be used in
conjunction with the subagent invoices and detailed summary invoices, in lieu of
requiring the project sponsors to submit the time and attendance reports. We
agree that such a worksheet is acceptable, but only if it is supplemented with a
process to sample the project sponsors’ records to assure itself and HUD that
salary expenses are accurate and adequately supported. Thus, the City did not
completely comply with the requirements associated with its responsibilities of
administering grants to subgrantees. As a result, it did not adequately ensure that
more than $1.2 million used to reimburse salary expenses was spent appropriately
and unnecessarily put grant funds at risk of being misspent. However, since we
were able to confirm the eligibility of the expenses during our on-site visits to the
project sponsors, we are not questioning the expenses. There is, however, a risk
that salary expenses may not be adequately supported for those project sponsors
not visited.




                                  9
The City Did Not Close Out
Expired Grants Totaling Nearly
$2 Million

          Regulations at 24, CFR [Code of Federal Regulations] Part 583 (see appendix C)
          state that the recipient of awarded funds is expected to carry out the supportive
          housing or supportive services activities as proposed in the application and that
          HUD may deobligate the amounts for supportive services in any year if the actual
          costs are less than the total cost anticipated in the application. Additionally,
          regulations at 24, CFR [Code of Federal Regulations] Part 84 (see appendix C)
          require grant recipients to close out expired grants no later than 90 calendar days
          after the funding period. The City’s written procedures complied with HUD
          requirements.

          Of the 84 supportive housing grants that the City was awarded, 34 had expired with
          a balance of nearly $2 million in unspent funds as of March 2006. We reviewed the
          grants again in July 2006 and found that several grants had been accessed and more
          than $1.2 million in grant funds had been drawn down after the funding period
          expired. We reviewed the grants again, one last time at the end of our audit
          fieldwork on July 31, 2006, and found that the City still had not closed out 23
          expired grants, which held a balance of $636,916 in unspent funds. At the exit
          conference, the City informed us that it has now submitted all of the overdue grant
          close out certifications to HUD for review and processing, however HUD’s review
          was still pending.

          The City agreed that the grants had not been closed out timely; however it stated
          that it started closing out expired grants in March 2005 after it received a bulletin
          from the Los Angeles Office of Community Planning and Development, which
          clarified the grantees responsibilities for closing out expired grants timely.
          Although the City’s written procedures complied with HUD requirements, it was
          not complying with those requirements before or after the March 2005 bulletin was
          issued, nearly two years after it had developed its written procedures. The City’s
          failure to comply with HUD requirements unnecessarily delayed HUD from
          deobligating nearly $2 million in grant funds that could have been put to better use.


The City Failed to Provide at
Least 50 Percent of
Administrative Funds to the
Project Sponsors as Intended by
Congress


          The 2000 Super Notice of Funding Availability IV, section A (see appendix C),
          requires local governments that use nonprofit sponsors to administer homeless



                                             10
assistance projects to pass on at least 50 percent of the administrative funds made
available under the grant. In addition, the Congressional Conference Report H.106-
379 regarding homeless assistance grants states “The conferees agree with report
language proposed by the Senate and not included by the House directing HUD to
ensure that State and local jurisdictions pass on at least 50% of all administrative
funds to the nonprofit organizations administering the homeless assistance
programs” (see appendix C).

Contrary to congressional intent, the City’s documentation showed that it was not
passing on at least 50 percent of the administrative fees awarded by HUD. The
City’s contracts with the project sponsors were boilerplate contracts, which stated
that project sponsors were to receive 20 percent of the administrative fee and the
City was to receive the remaining 80 percent. In total, $903,826 was withdrawn
from HUD’s Line of Credit Control System by the City to be used as administrative
fees. The City passed on $180,765 to its 15 project sponsors but kept and
subsequently spent $723,061 for its own administrative purposes. Therefore, there
was $271,148 that was utilized by the City instead of the project sponsors for
supportive housing administrative costs.

Our discussions with the project sponsors revealed that the administrative fee was
never negotiated. Several project sponsors stated that they thought they had to take
the 20 percent or they would not receive any funding from the City. Several others
stated that they could use the additional funds to administer their programs. One
project sponsor stated that it almost had to send administrative staff home because
of a lack of sufficient administrative funds. All project sponsors were unnecessarily
burdened to pay administrative expenses with non-HUD funding that could have
been used to further their program activities.

We attributed this deficiency to the City’s different interpretation of the
requirement. The City explained that it was entitled to the amount of administrative
fees in proportion to the administrative burden borne by it and that even 80 percent
of the fee did not fully cover its administrative burden. Although the administrative
responsibilities of the City’s Continuum of Care Supportive Housing Program are
vast, the City should have been more sensitive to the administrative burden placed
on its project sponsors and considered giving a greater percentage to the project
sponsors. While we acknowledge that the City adequately supported that it
expended those funds on supportive housing administrative costs, we believe that in
the future the City should be compelled to provide at least half of the administrative
fees to its project sponsors to fulfill Congress’ intent. The failure to do so caused an
unnecessary burden on the project sponsors.




                                   11
The City Failed to Make Timely
Reimbursements to Its Project
Sponsors as Required


          The City’s written policies and procedures (see appendix C) state that the City is to
          reimburse its project sponsors within 45 days. Prior to the issuance of this report,
          the City revised its policy to state that it will reimburse its project sponsors within
          90 days.

          The Los Angeles Office of Community Planning and Development received several
          complaints that the City was failing to make timely reimbursements to its project
          sponsors. Therefore, we conducted an analysis to determine whether
          reimbursement payments from the City were unreasonably late. We found that the
          average time for the City to reimburse its project sponsors was 95 calendar days
          (three months). The three-month timeframe did not comply with the City’s 45-day
          payment policy, so we did an analysis of the payment process. The average time it
          took the City to draw down funds from HUD’s Line Of Credit Control System after
          receiving invoices from its project sponsors was 74 calendar days. Further, it took
          an additional 21 calendar days for the City Treasurer to remit a check to the City to
          use for payment to its project sponsors. Overall, we found that a 30-day delay in
          reviewing the invoices combined with several reviews of the same invoice (an
          additional 18 days) was a significant cause of the delayed reimbursements.

          Several project sponsors complained about extremely late reimbursements. One
          project sponsor told us that it had been a year since its last reimbursement. Several
          other project sponsors said that it took the City an average of six months to
          reimburse them. One project sponsor stated that it had opened a line of credit
          because it was concerned that it would be unable to pay its staff. Additionally, we
          found several instances where the City did not draw down grant funds from HUD’s
          Line of Credit Control System until after the grant terms had expired, which
          correlated with the project sponsors’ complaints regarding unreasonably late
          reimbursement. Specifically, the City did not request drawdown of funds for seven
          grants (five project sponsors) before their term expiration dates; i.e., $974,845 in
          grant funds were drawn down after the grant expirations, which caused five of the
          City’s project sponsors to go an entire grant term without any funds being
          reimbursed from the City.

          The City acknowledged that reimbursements to the project sponsors were slow.
          The City attributed part of the problem to deficient documentation submitted by the
          project sponsors, which required additional follow-up before reimbursements could
          be made. In addition, the City cited external delays with the contracting process as
          a contributing factor. The City’s difficulty with adhering to its written policies and
          procedures caused its project sponsors to struggle financially and reduced the




                                             12
         project sponsors’ ability to maximize the effectiveness of their Supportive Housing
         Program activities as intended by HUD.

Conclusion

         Collectively, we attribute the deficiencies to the City’s and the project sponsors’
         insufficient knowledge and implementation of pertinent HUD requirements and its
         own policies and procedures relating to the administration of its Continuum of Care
         Supportive Housing Program. As a result, the City failed to ensure that HUD funds
         were spent in the most effective and efficient manner to maximize its program. It
         unnecessarily put HUD grant funds at risk, failed to ensure that cash match was
         supplied with non-HUD funds, needlessly delayed nearly $2 million in expired
         grant funds from being deobligated and put to better use, and overburdened project
         sponsors with having to provide $271,148 in non-HUD funds to administer their
         programs. Further, project sponsors were not reimbursed for their expenses in a
         timely manner.

Recommendations



         We recommend that the director of the Los Angeles Office of Community Planning
         and Development require the City to

         1A.      Comply with HUD’s and its own HUD-approved policies and procedures
         regarding on-site monitoring of its project sponsors.

         1B.       Establish and implement a process to sample project sponsors financial
         data so the City and HUD will have adequate assurance that salary expenses are
         supported with proper documentation in compliance with HUD requirements.

         1C.     Provide support for $315,320 in funds used as cash match or repay HUD
         from nonfederal funds $1,185,740 in expended grant funds and implement written
         procedures to monitor its project sponsors to ensure compliance with HUD
         requirements for cash match and supporting documentation for salaries.

         1D.       Close out $636,916 in expired grants immediately so that these funds can
         be put to better use and to comply with HUD requirements regarding the proper
         procedures for timely closeout of expired grants.

         1E.      Amend its current contracts with its project sponsors to allow for 50
         percent of the administrative fees to the sponsors, unless it can provide
         documentation supporting that its administrative burden warrants a higher
         percentage.




                                           13
1F.      Establish and implement procedures to streamline invoice reviews and
ultimately reduce the time it takes to reimburse project sponsors.




                                 14
                        SCOPE AND METHODOLOGY

We performed our audit work at the City of Long Beach and selected project sponsors under its
jurisdiction between March and September 2006. Our audit generally covered the period
January 2001 through July 2006. We expanded the scope when necessary.

To accomplish our audit objective, we

   •   Reviewed relevant HUD regulations and Office of Management and Budget circulars.

   •   Reviewed HUD’s Los Angeles Office of Community Planning and Development
       monitoring report and grant files associated with Supportive Housing Program grants
       received by the City and interviewed appropriate personnel.

   •   Nonstatistically selected and reviewed a sample of 11 supportive-services-only grants due
       to the high number and dollar amounts of the grants associated with the City’s program.
       The total authorized amount for these grants was $2,448,740, and the total disbursed was
       $1,754,597 as of July 31, 2006.

   •   Reviewed the City’s policies and procedures associated with its Continuum of Care
       Supportive Housing Program.

   •   Interviewed appropriate City personnel to obtain an understanding of its operations and
       internal controls.

   •   Reviewed documentation contained in the City’s supportive housing grant files and
       revenue and expense reports and supporting documentation for the $1,754,597 drawn
       down from HUD’s Line of Credit Control System.

   •   Interviewed appropriate project sponsor personnel to determine whether there had been a
       pattern of late payments from the City and why the project sponsors received only 20
       percent of the administrative fees associated with administering the Supportive Housing
       Program.

   •   Reviewed project sponsors’ payroll data, cost allocation plans, and cash match accounts.

   •   Reviewed project sponsors’ client files to verify eligibility (homelessness) and to
       determine the nature and extent of supportive services provided.

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




                                               15
                             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 that management has implemented to ensure
                      accurate, current, and complete disclosure of financial results.

                  •   Policies and procedures that management has implemented to reasonably
                      ensure that its Supportive Housing Program grants are carried out in
                      accordance with applicable laws and regulations.

              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.

 Significant Weaknesses


              Based on our review, we believe the following items are significant weaknesses:

                  •   The City did not have sufficient controls in place to ensure that it was
                      knowledgeable of and implemented pertinent HUD requirements and its
                      own written procedures related to its program administration.




                                               16
                                   APPENDIXES

Appendix A

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

                   Recommendation       Unsupported 1/    Funds to be put
                       number                              to better use 2/
                          1C                $1,185,740
                          1D                                    $636,916




1/   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. In this instance, if the City implements our
     recommendations, it will ensure compliance with HUD requirements for cash match and
     supporting documentation for salaries.

2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. This includes reductions in outlays, deobligation of funds, withdrawal of
     interest subsidy costs 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
     recommendations, it will ensure compliance with HUD requirements to liquidate all
     obligations incurred under the award not later than 90 calendar days so that $636,916 in
     grant funds will be expended or immediately closed out and those funds put to better use.




                                            17
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         18
Comment 2




            19
Comment 3




Comment 4




Comment 6




Comment 5

Comment 3



Comment 4




            20
Comment 5




Comment 6




            21
Comment 2




Comment 3




            22
Comment 4




Comment 7




            23
Comment 8




            24
Comment 2




Comment 6




            25
Comment 3




Comment 4




            26
Comment 5




            27
                         OIG Evaluation of Auditee Comments

Comment 1   The City misstated the discussion at the exit conference and the report is accurate
            as written. During the exit conference the City requested documentation
            supporting the basis for the audit. We explained that auditing Community
            Development Program activities is a priority mandated by Congress. However,
            we did not elect to audit the City solely based on this mandate. We consulted
            with the Los Angeles Office of Community Planning and Development about
            grantees it recommended for possible audit. The Office of Community Planning
            and Development recommended that we conduct an audit of the City because of
            concerns it had about inadequate operating procedures identified during on-site
            monitoring. In addition, we, and the Office of Community Planning and
            Development received complaints from sponsors about the City’s failure to make
            grant reimbursements in a timely manner. We advised the City that there was no
            written request for audit from the Los Angeles Office of Community Planning and
            Development, nor any formal written complaints.

Comment 2   We disagree. Although the City asserts that it ensures all sponsors expend funds
            in accordance with HUD regulations, the City could not provide us with the
            required documentation to show that it effectively monitored the fiscal activities
            of its nonprofit project sponsors. At the exit conference, we did acknowledge that
            we did not identify any ineligible expenses. However, the City did not provide us
            with the supporting documentation required by HUD regulations for the cash
            match and salary expenses; thus, they were unsupported. As discussed below in
            Comment 6, the City has been unable to provide adequate supporting
            documentation to show that the project sponsors met the cash match requirements.
            With regard to the salary expenses, the City uses a staff cost worksheet to show
            the salary expenses being claimed for reimbursement. This does not comply with
            the federal requirement that the grantee must obtain the individual timesheets.
            However, we agree that this alternative would meet the requirements, but on its
            own it is insufficient. It needs to be supplemented with a process to sample the
            project sponsors’ records to assure itself and HUD that the salary expenses are
            accurate and supported. Without such procedures in place there is indeed a risk.
            While we agree that we did not find any deficiencies with the project sponsors we
            visited, we cannot draw that same conclusion for the ones not visited. Further, it
            is incumbent upon the grantee (the City) to assure itself and HUD that the grant
            funds are spent in accordance with the grant requirements. Without adequate
            monitoring being done, that assurance level is not met. Therefore, we could not
            confirm that 100 percent of all funds expended were spent on eligible and
            allocable expenses based on the documentation the City maintained.

Comment 3   We acknowledge that the City does not control HUD’s ability or decision to
            deobligate funds, however, HUD regulations require the City to submit closing
            documentation before HUD is allowed to deobligate funds. The City’s
            unnecessary delay in submitting the required closing documents to HUD was
            instrumental in delaying nearly $2 million in grant funds from being deobligated



                                            28
            and put to better use. Further, we noted that the City drew down funds from many
            of the grants after their expiration to reimburse project sponsors for expenditures
            that took place during the grant period. Therefore, it is critical that HUD wait for
            the City to submit the closing documents before deobligating funds to ensure that
            all pending draw downs have been made. HUD can provide documentation
            during the audit resolution process to support that the expired grants in appendix
            E have been closed out.

Comment 4   We have revised the statement to read that the City failed to provide at least 50
            percent of the administrative fees to the project sponsors as intended by Congress.
            As we discussed and agreed at the exit conference, we removed the
            recommendation requiring that the City repay the project sponsors for the
            administrative fees. Nevertheless, we still contend that there is a valid finding.
            We recognize that although HUD approved the technical submissions, HUD does
            not have the authority to overrule a congressional mandate. 2000 Super Notice of
            Funding Availability IV, section (A), subsection (3) states: “Where an applicant
            for Supportive Housing Program funding is a State or unit of general local
            government that utilizes one or more nonprofit organizations to administer the
            homeless assistance project(s), administrative funds must be passed on to the
            nonprofit organization(s) in proportion to the administrative burden borne by
            them for the SHP [Supportive Housing Program] project(s).” The subsection
            further states: “HUD will consider States or units of general local government
            that pass on at least 50 percent of the administrative funds made available under
            the grant as having met this requirement which was contained in the congressional
            committees' report accompanying the FY 2000 HUD Appropriations Act.” Since
            the City did not comply with this intent, we recommended that HUD require the
            City to amend its current contracts with its project sponsors to allow for 50
            percent of the administrative fees to the sponsors, unless it can provide
            documentation supporting that its administrative burden warrants a higher
            percentage. We believe that Congress expressed this intent to ensure that the
            project sponsors, who are actually providing the direct services to the homeless,
            have adequate administrative funding. We noted that during our site visits the
            project sponsors claimed that they were not party to any negotiations of the
            administrative fee and that the City just advised them what percentage they would
            receive. The Inspector General Act of 1978 was implemented with the purpose of
            establishing independent agencies to provide a means for keeping the head of the
            establishment [HUD] and Congress fully and currently informed about problems
            and deficiencies relating to the administration of such programs and operations
            and the necessity for and progress of corrective action. Consequently, we indeed
            have the authority to recommend proposed corrective action to HUD. Once the
            report has been issued there is an audit resolution process in place to determine
            whether the proposed corrective action is appropriate or whether alternative action
            is more appropriate.




                                             29
Comment 5   We do not have enough information on what monitoring procedures the City has
            updated, so we can not make any changes to the report. The only update we are
            aware of related to the City’s reimbursement policy with its project sponsors. In
            this situation, the City merely extended the payment period, which in our opinion
            does not address the root cause of the delays. We found that the City can further
            streamline its process by eliminating some duplicative reviews currently being
            done. Further, our report indicated that the City’s monitoring guide was
            sufficient, but that the City did not implement the procedures contained within the
            guide. Nevertheless, we noted in the report that the City revised its
            reimbursement policy.

Comment 6   We acknowledged at the exit conference that there is no requirement that cost
            centers must be used. The basic requirement is to maintain records which
            adequately identify the source and application of funds being used as match. We
            stated that the application of the funds was not in question, but rather the source
            of the funds claimed as match. We advised the City to submit documentation
            which showed the source of the funds and the receipt of those funds, such as
            cancelled checks and bank statements. We did not ask for audited financial
            statements since those would not adequately support the source of the funds. The
            City has been unable to provide that documentation thus far, but can provide it to
            HUD during the audit resolution process to resolve the recommendation.

Comment 7   We agree there is no federally-set timeframe for reimbursements to project
            sponsors. However, we are sensitive to the fact that project sponsors are
            nonprofit organizations with limited resources that count on grant reimbursements
            to continue their operations. As noted in the finding, one project sponsor even
            opened a line of credit because it was concerned that it would be unable to pay its
            staff. While we acknowledge that the City has reviewed its reimbursement
            processes to make improvements, we identified areas where it can be further
            streamlined. We believe the cause statement was accurate as stated, thus, we did
            not make any changes. We agree that the City cannot reimburse project sponsors
            until there is an executed HUD contract; however, as stated above, we identified
            other areas in which the City can reduce the processing time.

Comment 8   We disagree. In addition to our statements in Comment 2, we also note that in
            Title 24 Code of Federal Regulations Part 85.40 (a), it states that “grantees are
            responsible for managing the day-to-day operations of grant and subgrant
            supported activities. Grantees must monitor grant and subgrant supported
            activities to assure compliance with applicable Federal requirements and that
            performance goals are being achieved. Grantee monitoring must cover each
            program, function or activities”. Our finding showed that the City did not
            monitor every function or activity of its project sponsors. In other words, the City
            monitored programmatic activities, but neglected its responsibility to adequately
            monitor fiscal activities. As a result, the City was not in compliance with HUD
            regulations.




                                             30
Comment 9   We disagree. Although the City is confident that current monitoring procedures
            are adequate to ensure itself and HUD that salary expenses are supported with
            proper documentation, the documentation maintained at the City level does not
            disclose time and attendance reports as required in the regulations. We advised
            the City that had it conducted on-site monitoring, it could have reviewed the
            source documentation to determine whether the information was supported by
            time and attendance records. We acknowledge that the City does not wish to
            request all documents from it project sponsors due to the Paper Reduction Act,
            however that does not relinquish its responsibility to review the source
            documentation required by regulation.




                                            31
Appendix C

                                       CRITERIA


  A. Office of Management and Budget Circular A-133, Audits of States, Local Governments,
     and Nonprofit Organizations, subpart D, section 400 (d), states: “A pass-through entity
     shall perform the following for the Federal awards it makes: (2) Advise subrecipients of
     requirements imposed on them by the Federal laws, regulations, and the provisions of
     contracts or grant agreements as well as any supplemental requirements imposed by the
     pass-through entity; (3) Monitor the activities of subrecipients as necessary to ensure that
     Federal awards are used for authorized purposes in compliance with laws, regulations,
     and the provisions of contracts or grant agreements, and that performance goals are
     achieved.”

  B. 24 CFR [Code of Federal Regulations] 85.40(a) states Grantees are responsible for
     managing the day-to-day operations of grant and subgrant supported activities. Grantees
     must monitor grant and subgrant supported activities to assure compliance with
     applicable Federal requirements and that performance goals are being achieved. Grantee
     monitoring must cover each program, function or activity.

  C. Office of Management and Budget Circular A-122, Cost Principles for Nonprofit
     Organizations, attachment B, Compensation for Personal Services, section m (support of
     salaries and wages), subparagraph (1), states that charges to awards for salaries and
     wages will be based on documented payrolls, supported by personnel activity reports.

  D. 24 CFR [Code of Federal Regulations] 85.20(a)(2) states that fiscal control and
     accounting procedures of the state, as well as its subgrantees and cost-type contractors,
     must be sufficient to permit the tracing of funds to a level of expenditures adequate to
     establish that such funds have not been used in violation of the restrictions and
     prohibitions of applicable statutes. Paragraph (b)(2) states that financial management
     systems of grantees and subgrantees must meet the following standards: grantees and
     subgrantees must maintain records which adequately identify the source and application
     of funds provided for financially assisted activities; and paragraph and (b)(6) states that
     accounting records must be supported by such source documentation as cancelled checks,
     paid bills, payrolls, time and attendance records, contract and subgrant award documents,
     etc.

  E. 24 CFR [Code of Federal Regulations] 85.24(b)(6) states that costs counting toward
     satisfying a cost sharing or matching requirement must be verifiable from the records of
     grantees and subgrantees.

  F. 24 CFR [Code of Federal Regulations] 84.71(a) states: “Recipients shall submit, within
     90 calendar days after the date of completion of the award, all financial, performance,
     and other reports as required by the terms and conditions of the award.” Paragraph (b)


                                              32
   states: “Unless HUD authorizes an extension, a recipient shall liquidate all obligations
   incurred under the award not later than 90 calendar days after the funding period or the
   date of completion as specified in the terms and conditions of the award or in HUD
   instructions.”

G. 24 CFR [Code of Federal Regulations] 583.410(a) states when HUD and the applicant
   execute a grant agreement, funds are obligated to cover the amount of the approved
   assistance under subpart B of this part. The recipient will be expected to carry out the
   supportive housing or supportive services activities as proposed in the application.
   Paragraph (c)(ii)(2) states that HUD may deobligate the amounts for annual leasing costs,
   operating costs or supportive services in any year if (i) the actual leasing costs, operating
   costs or supportive services for that year are less than the total cost anticipated in the
   application.

H. 2000 Super Notice of Funding Availability IV, section (A), subsection (3) states: “Where
   an applicant for Supportive Housing Program funding is a State or unit of general local
   government that utilizes one or more nonprofit organizations to administer the homeless
   assistance project(s), administrative funds must be passed on to the nonprofit
   organization(s) in proportion to the administrative burden borne by them (the nonprofits)
   for the SHP [Supportive Housing Program] project(s).” The subsection further states:
   “HUD will consider States or units of general local government that pass on at least 50
   percent of the administrative funds made available under the grant as having met this
   requirement which was contained in the congressional committees' report accompanying
   the FY 2000 HUD Appropriations Act.”

I. The 106th Congress Conference Report H. 106-379, Homeless Assistance Grants section,
   states, “The conferees agree with report language proposed by the Senate and not
   included by the House directing HUD to ensure that State and local jurisdictions pass on
   at least 50% of all administrative funds to the nonprofit organizations administering the
   homeless assistance program”.

J. City of Long Beach Monitoring Guidelines (policies and procedures) (revised October
   27, 2003)
   • Section 3.5 states that the City is to identify grants ready for closeout, conduct a
       thorough administrative review, notify the project sponsors at least 90 days before
       expiration of the grant, and send a letter to the project sponsor confirming closeout of
       the grant.
   • Section 6.3 states that payroll registers are considered sufficient to support salaries
       expended by project sponsors.
   • Section 6.3.1 states: “Department of Health and Human Services processes invoices
       within 30 business days from date of receipt.”
   • Section 6.3.2 states: “The Payment Section of the Financial Management Department
       and City Auditor’s Office processes and cuts (produces) a check within 15 business
       days from date [an invoice is] forwarded by Department of Health and Human
       Services Accountant.”



                                            33
   Appendix D

            SCHEDULE OF UNSUPPORTED CASH MATCH



                                                             Unsupported cash       Grant funds
                                                                  match              disbursed
 Grant number                    Grant term
                                                                   as of                as of
                                                              July 31, 2006*      July 31, 2006**
CA16B006004        November 1, 2001 – October 31, 2005                  $7,849              $21,411
CA16B006007        June 1, 2002 – May 31, 2007                         $55,546            $236,334
CA16B006009        February 1, 2002 – May 31, 2006                     $15,227              $61,276
CA16B206003        March 1, 2003 – May 31, 2006                        $37,965            $125,998
CA16B206004        September 1, 2003 – August 31, 2006                 $26,940            $109,843
CA16B206006        September 1, 2003 – August 31, 2006                 $24,737            $191,921
CA16B206007        August 1, 2004 – July 31, 2007                      $22,011              $96,193
CA16B306014        June 1, 2005 – May 31, 2007                          $6,878              $20,696
CA16B906003        January 1, 2002 – December 31, 2005               $101,055             $252,120
CA16B906010        February 1 2002 – January 31, 2007                  $17,112              $69,948
Totals                                                               $315,320           $1,185,740



Notes:
*We calculated the amount of funds counted towards the cash match requirement by using the
City’s grant expenditure tracking and grant funding spreadsheets for each of the grants shown.
This amount reflects only the actual amount of funds reported as match by the City’s project
sponsors through July 31, 2006.

**We calculated the total amount of disbursed funds for the ten grants administered by the seven
project sponsors which did not provide the required support for cash match by using HUD’s Line
of Credit Control System reports. This amount reflects only those grant funds disbursed through
July 31, 2006.




                                               34
  Appendix E

                      SCHEDULE OF EXPIRED GRANTS
                    (FUNDS TO BE PUT TO BETTER USE)


                                                         Authorized
Grant number   Project start date   Project end date                Disbursed     Balance
                                                         amount

CA16B006002    December 1, 2002     November 30 ,2004     $301,914     $301,464         $450
CA16B006003    November 1, 2002     October 31, 2005      $301,797     $295,010       $6,787
CA16B006006    March 1, 2002        February 28, 2005     $488,507     $402,902      $85,605
CA16B006008    January 1, 2002      December 31, 2004      $88,152      $86,563       $1,589
CA16B006009    February 1, 2002     January 31, 2006       $61,300      $61,276          $24
CA16B006010    April 1, 2002        March 30, 2005        $150,056     $138,717      $11,339
CA16B006011    February 1, 2002     January 31, 2006       $59,162      $59,160           $2
CA16B106005    April 1, 2002        March 31, 2005        $102,396      $70,381      $32,015
CA16B106006    April 1, 2002        March 31, 2005        $150,255     $148,678       $1,577
CA16B106011    May 1, 2003          April 30, 2006        $485,762     $485,760           $2
CA16B206003    March 1, 2003        February 28, 2006     $126,000     $125,998           $2
CA16B306004    June 1, 2004         May 31, 2005          $157,500     $155,837       $1,663
CA16B306011    September 1, 2004    August 31, 2005       $218,336     $186,293      $32,043
CA16B306013    January 1, 2005      December 31, 2005      $29,401      $28,040       $1,361
CA16B406014    April 1, 2005        March 31, 2006        $282,450           $0     $282,450
CA16B406016    April 1, 2005        March 30, 2006         $50,019      $31,449      $18,570
CA16B806002    October 1, 2001      September 30, 2005    $317,612     $310,462       $7,150
CA16B806003    September 1, 2001    August 31, 2004       $655,000     $598,920      $56,080
CA16B906003    January 1, 2002      December 31, 2005     $307,088     $252,120      $54,968
CA16B906005    June 1, 2001         May 31, 2005          $162,960     $153,465       $9,495
CA16B906008    June 1, 2001         October 31, 2005      $245,821     $236,390       $9,431
CA16B906009    July 1, 2001         June 30, 2004          $57,183      $50,121       $7,062
CA16B960303    April 1, 2001        March 30, 2005        $650,000     $632,749      $17,251
Total                                                                               $636,916




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