oversight

The City of Amsterdam, New York, Needs to Make Improvements in Administering Its Section 108 Loan Guarantee Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-12-20.

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

                                                                 Issue Date
                                                                  December 20, 2006
                                                                 Audit Report Number
                                                                  2007-NY-1002




TO:        Nancy Peacock, Director, Community Planning and Development, 2CD


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

SUBJECT: The City of Amsterdam, New York, Needs to Make Improvements in
         Administering Its Section 108 Loan Guarantee Program


                               HIGHLIGHTS

 What We Audited and Why

            We audited the operations of the City of Amsterdam, New York (grantee),
            regarding its administration of a Section 108 loan obtained in May 2002
            under the U.S. Department of Housing and Urban Development’s (HUD)
            Canal Corridor Initiative. The purpose of the examination was to
            determine whether the grantee ensured that (1) Section 108 loan proceeds
            were disbursed in accordance with Community Development Block Grant
            (Block Grant) and Section 108 loan rules and regulations and (2) its Section
            108 loan project properly complied with Block Grant program objectives.

 What We Found


            The grantee did not disburse Section 108 loan proceeds in accordance with
            Block Grant and Section 108 loan rules and regulations. Specifically, (a)
            some loan proceeds were not disbursed in accordance with the loan
            application while other funds were disbursed without adequate support,
            and (b) there is no evidence of compliance with labor standards. As a
            result, the grantee could not demonstrate that loan proceeds totaling
            $535,000 were used for proper, reasonable, and eligible costs.
What We Recommend


           We recommend that the director of HUD’s Buffalo Office of Community
           Planning and Development instruct the grantee to submit supporting
           documentation to justify all unsupported costs, so that HUD can make an
           eligibility determination, and reimburse the program from nonfederal
           funds all amounts determined to be ineligible. We also recommend that
           the grantee develop administrative controls that will ensure compliance
           with all Section 108 loan guarantee regulations and requirements for all
           future Block Grant-related funding.

           For each recommendation without a management decision, please respond
           and provide status reports in accordance with HUD Handbook 2000.06,
           REV-3. Please furnish us copies of any correspondence or directives
           issued because of the audit.

Auditee’s Response
           We discussed the results of our review during the audit and at an exit
           conference held on November 28, 2006. Grantee officials generally
           agreed with our findings and provided their written comments during the
           exit conference. The complete text of the auditee’s response, along with
           our evaluation of that response, can be found in appendix B of this report.




                                        2
                        TABLE OF CONTENTS

Background and Objectives                                                       4

Results of Audit
      Finding 1: There Were Weaknesses in the Grantee’s Administration of Its
                Section 108 Loan Guarantee Program                              5

Scope and Methodology                                                           9

Internal Controls                                                               10


Appendixes
   A. Schedule of Questioned Costs                                              12
   B. Auditee Comments and OIG’s Evaluation                                     13
   C. Section 108 Loan Application Sources and Uses Table                       19




                                         3
                   BACKGROUND AND OBJECTIVES

The City of Amsterdam, New York (grantee), incorporated in 1804, was established within
the County of Montgomery and is governed by its charter, various local laws, and other
general laws of the State of New York. The mayor is responsible for overall operations and
serves as the chief executive officer, and the controller serves as the chief fiscal officer. All
legislative power of the grantee is vested in the common council whose powers are specified
in the city charter. The books and records for the Section 108 Loan Guarantee program are
located at City Hall, Amsterdam, New York.

In December 1996, the U.S. Department of Housing Urban Development (HUD) was the
administrator for the State of New York’s Small Cities Community Development Block
Grant (Block Grant) Program and, therefore, became the sponsor of the Canal Corridor
Initiative, which was introduced to revitalize communities along the Erie Canal and related
waterways in upstate New York. In September 2000, the State of New York agreed to
administer the Small Cities Block Grant Program, while HUD continues to administer the
Canal Corridor Initiative. The Canal Corridor Initiative sought to promote tourism that
would spark economic development across upstate New York with emphasis on job
creation. The Canal Corridor Initiative was authorized by the Housing and Community
Development Act of 1974 and was designed to provide grants and loan guarantees to
communities along the waterways for economic development projects. As part of the Canal
Corridor Initiative, the grantee applied for a Section 108 loan guarantee in the amount of
$535,000 for a restaurant/banquet facility renovation project.

In February 2001, the grantee received notice from HUD that its request for loan guarantee
assistance under the Section 108 Loan guarantee program had been approved (Project No:
B-00-DC-36-0001-B). The loan proceeds, provided to a local development corporation in
July 2002, were to be used for a Canal Corridor Initiative, which involved funding for
interior and exterior renovations of a restaurant/banquet facility. The grantee used the
creation of 34 jobs as criteria for meeting a national objective as required by section 570.208
of the Block Grant regulations. The restaurant/banquet facility closed before the beginning
of our audit, and the Section 108 loan is currently in default.

We selected the grantee for audit based on indicators from monitoring reports, local media
coverage, and an analysis of the most recent single audit report on the City of Amsterdam,
New York. In addition, our review of the Canal Corridor Initiative in 2001 identified issues
relating to other funded grantees’ ability to carry out Section 108 Loan Guarantee program
activities and noted that program objectives, such as job creation, had not been fully
realized.

The objectives of our audit were to determine whether the grantee ensured that (1) loan
proceeds were disbursed in accordance with Block Grant and Section 108 loan rules and
regulations and (2) its Section 108 loan project complied with Block Grant program
objectives, including the intended benefit of job creation.



                                               4
                             RESULTS OF AUDIT

Finding 1: There Were Weaknesses in the Grantee’s
           Administration of Its Section 108 Loan Guarantee
           Program
Contrary to HUD requirements, the grantee did not implement adequate program controls
and procedures to ensure that a Section 108 loan to a local development corporation
complied with applicable HUD regulations. Specifically, (a) some loan proceeds were
not disbursed in compliance with the loan application while the remaining funds were not
adequately supported, and (b) there is no evidence of compliance with labor standards.
As a result, the grantee could not demonstrate that loan proceeds totaling $535,000 were
used for proper, reasonable, and eligible costs. These deficiencies can be attributed to the
grantee’s inadequate system of controls over its Section 108 Loan Guarantee program.


   Loan Proceeds Were Not in
   Compliance with the Loan
   Application and/or Not
   Adequately Supported


               Section 108 loan proceeds amounting to $24,069 were used to pay various
               closing costs associated with the loan, including title insurance, attorney
               fees, interest, and delinquent property taxes; however, although these costs
               may not have violated a HUD regulation, they were not in accordance
               with the approved Section 108 loan application between HUD and the
               grantee. The approved Section 108 loan application documents the
               sources and uses of project funds as described in Appendix C of this
               report.

               Moreover, an examination of the loan files showed that the grantee did not
               maintain adequate documentation, such as contracts, invoices, or cancelled
               checks, to support the actual renovation costs. At the loan closing, the
               grantee disbursed the remaining loan proceeds of $510,931 to the
               development corporation without any evidence supporting the propriety of
               the renovation costs or that the funds were used in accordance with the loan
               agreement. Title 24, Code of Federal Regulations (CFR) Part 570.506(h)
               provides that the grantee shall maintain evidence to support how the Block
               Grant funds provided to an entity are expended. However, the grantee
               provided the loan funds without ensuring that the use of such funds was in
               accordance with the approved Section 108 loan application, or with
               regulations.



                                             5
For example, the approved Section 108 loan application included $40,000
for landscaping and $34,000 for demolition. According to documentation
maintained by the grantee, the project called for the demolition of the motel
units located adjacent to the restaurant/banquet facility on the property.
Once demolished, the area was to be relandscaped.

In August 2006, we toured the restaurant/banquet facility and grounds and
noticed that the motel units were still intact, contrary to the approved Section
108 loan application. Moreover, since the motel units were not demolished,
the area had not been relandscaped as planned.

The following photographs illustrate our concern regarding the use of the
Section 108 loan proceeds.




Motel units adjacent to restaurant/banquet facility that should
have been demolished

In addition, $46,000 was allocated for resurfacing the parking facilities on
the property; however, during our visit, we found that only a small area had
been resurfaced and the majority of the parking area and entrance way were
in general disrepair.




                               6
             Pavement deterioration in the parking facility


The Grantee Could Not
Demonstrate Compliance with
Labor Standards

             Our examination of the project files did not reveal evidence that the
             grantee complied with labor standards for the Section 108 loan program.
             The files did not document that rehabilitation and construction contracts
             associated with the project were monitored as required by HUD Handbook
             1344.1, REV-1, Federal Labor Standards Compliance in Housing and
             Community Development Programs. More specifically, the project files
             did not contain evidence that the grantee (1) obtained the required wage
             determinations, (2) held a preconstruction conference to inform
             contractors and subcontractors of their responsibilities and obligations, (3)
             obtained contractor and subcontractor weekly payrolls, or (4) conducted
             employee interviews as required. As a result, labor standards violations
             may have occurred and remain undetected.

Conclusion

             The above deficiencies show that the grantee did not administer its Section
             108 Loan Guarantee program in an efficient and effective manner. As a
             result, HUD funds were used for costs that may not be necessary or
             reasonable.




                                           7
Recommendations
          We recommend that the director, Buffalo Office of Community Planning
          and Development, instruct the grantee to

          1A.     Provide documentation to justify the $535,000 in unsupported costs,
                  so that HUD can make an eligibility determination, and reimburse
                  from nonfederal funds the amount of any unsupported costs
                  determined to be ineligible.

          1B.     Develop administrative control procedures to ensure compliance
                  with all Section 108 Loan Guarantee program regulations and
                  requirements for all future Block Grant-related funding.




                                        8
                    SCOPE AND METHODOLOGY

Our review focused on the grantee’s administration of a $535,000 Section 108 loan
obtained under HUD’s Canal Corridor Initiative. To accomplish our objectives, we
interviewed HUD officials and grantee staff. In addition, we reviewed applicable laws,
regulations, and other HUD program requirements and the grantee’s program files for the
Section 108 loan program.
Various documents, including board minutes, financial statements, bank statements,
check vouchers, HUD monitoring reports, and the grantee’s audited financial statements,
were also reviewed during the audit.
The review covered the period between January 1, 2002, and April 30, 2006, and was
extended as necessary. We performed audit work from May through August 2006. The
review was conducted in accordance with generally accepted government auditing
standards.




                                           9
                          INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the
systems for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls
               We determined the following internal controls were relevant to our audit
               objectives:

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

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

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

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

               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.




                                             10
Significant Weaknesses


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

               •   The grantee did not establish controls and procedures to ensure that
                   administration of the Section 108 Loan Guarantee program was
                   conducted in compliance with program rules and regulations (see
                   finding).

               •   The grantee did not have an adequate system to ensure that
                   resources were properly safeguarded when costs that were not in
                   accordance with the approved Section 108 loan application were
                   paid and when it did not maintain adequate supporting
                   documentation(see finding).




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                                      APPENDIXES

Appendix A


            SCHEDULE OF QUESTIONED COSTS

              Recommendation        Unsupported 1/
                     number
                            1A               $535,000



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.




                                        12
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 1



Comment 2




                        13
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 3




Comment 4




                        14
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 5




Comment 6




Comment 7




                        15
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments



Comment 7




Comment 8

Comment 9




                        16
                     OIG Evaluation of Auditee Comments

Comment 1   Officials for the Grantee agree with our conclusion that the Grantee had
            inadequate program controls and procedures, and that the Grantee did not
            administer its Section108 Loan Guarantee program in an efficient and
            effective manner.

Comment 2   Officials for the Grantee state that the personnel who were responsible for
            administering the Section 108 Loan Guarantee program are no longer
            employed by the Grantee, and those currently employed by the Grantee
            are not responsible for the lack of oversight that occurred at the time the
            Section 108 loan administered. Our evaluation is based on the records and
            documentation relevant to the Section 108 loan at the time the loan was
            being administered by the Grantee, and although various staff members
            are no longer employed by the Grantee, the Grantee is still responsible for
            the resolution of these issues.


Comment 3   Officials for the Grantee agree that the loan documents called for all
            Section 108 loan proceeds to be utilized for building renovations rather
            than acquisition and soft costs and that the use of Section 108 funds for
            closing costs is inconsistent with the agreements between the Grantee and
            HUD pertaining to the sources and uses of the Section 108 funds. The
            Grantee further states that there is no regulation that prohibits the use of
            Section 108 funds to cover closing costs. We have taken into
            consideration the response provided by the Grantee and have revised
            finding 1 to reflect that the use of Section 108 funds for closing costs,
            although not a violation of HUD regulations, it is not in accordance with
            the approved Section 108 loan application between the Grantee and HUD.
            Accordingly, we have reclassified these costs as unsupported pending a
            HUD review and eliminated the draft recommendation to reimburse
            ineligible costs pertaining to the closing costs associated with the loan.

Comment 4   Officials for the Grantee generally agreed with our conclusion that the
            disbursement of loan proceeds is unsupported. Thus, the grantee will
            contact the developer and assemble cost documentation to support the use
            of 108 funds as well as matching funds.

Comment 5   Officials for the Grantee contend that the provisions of CFR 570.208 (a)
            (4) were met in that the Grantee documented 5 jobs, all of which were
            provided to low and moderate income persons. As such, we have
            eliminated the job creation issue from the finding.




                                         17
Comment 6   Officials for the Grantee concur with our conclusion that there is no
            documentation to support compliance with Federal Labor Standards for
            this project.

Comment 7   Grantee officials state that closing costs are not a violation of HUD
            regulations and request the opportunity to demonstrate that all project
            funds, both Section 108 and developer equity, were duly expended on this
            project. Further, Grantee official request that the sources and uses of
            funds be amended subject to HUD regulations. We have reviewed and
            taken into consideration the alternative recommendation provided by
            Grantee officials. Therefore, as noted in Comment 3, we have revised
            finding 1 to reflect that the use of Section 108 funds for closing costs,
            although not a violation of HUD regulations, it is not in accordance with
            the approved Section 108 loan application; accordingly, we have
            reclassified these costs as unsupported pending a HUD review. We have
            also eliminated the draft recommendation to reimburse ineligible costs
            pertaining to the closing costs.

Comment 8   Officials for the Grantee concur with the recommendation to provide
            documentation to justify the $535,000 in unsupported costs so that HUD
            can make an eligibility determination.

Comment 9   Officials for the Grantee contend that personnel currently employed by the
            Grantee are highly experienced to administer any future HUD programs,
            and those administrative controls procedures have been established to
            ensure compliance with HUD regulations.




                                        18
Appendix C
SECTION 108 LOAN APPLICATION SOURCES AND USES

Estimated Cost
                                            Total         Section 108    Owner Equity
Real Estate Acquisition                      $50,000             -       $50,000
Working Capital & Soft Costs                  17,000             -        17,000
Interior Restoration
               Front Bar Room Section            35,000     35,500          -
               Front Dining Section              15,000     15,000          -
               Cave Section                      16,500     16,500          -
               Kitchen Section                   18,000     18,000          -
               Upstairs Section                  35,000     35,000          -
                                  Total         120,000    120,000          -
Glass Restoration
               Front Bar Room Section            10,250     10,250          -
               Front Dining Section               6,200      6,200          -
               Cave Section                       8,010      8,010          -
               Upstairs Section                   7,500      7,500          -
                                  Total          31,960     31,960          -
Building Services
               Heating/Air Conditioning          45,000     41,200        3,800
               Electrical                        22,000     22,000           -
               Refrigeration                     14,000     14,000           -
               Plumbing                          10,000     10,000           -
                                   Total         91,000     87,200        3,800
Kitchen/Restaurant Equipment
               Hard Appliances                   88,000     68,000       20,000
               Dishes, Glasses & Cutlery         16,000     10,000        6,000
               Cookware                           6,000      6,000           -
               Tables, Chairs & Stools           15,000     10,000        5,000
               Point of Sale System              46,000     46,000           -
               Misc. Furnishings                  5,000        -          5,000
                                   Total        176,000    140,000       36,000
Exterior Restoration
               Painting                       20,000        20,000            -
               Landscaping                    49,455        40,000         9,455
        Demolition                            34,000        34,000            -
               Paving                         46,000        46,000            -
               Roof                           48,340        15,840        32,500
               Carting Fees                    3,600           -           3,600
                                   Total     201,395       155,840        45,555
                       Grand Total          $687,355      $535,000      $152,355


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