Issue Date January 30, 2008 Audit Report Number: 2008-AO-1002 TO: Nelson Bregon, General Deputy Assistant Secretary, D for FROM: Rose Capalungan, Regional Inspector General for Audit, GAH SUBJECT: State of Louisiana, Baton Rouge, Louisiana, Road Home Program, Funded 418 Grants Coded Ineligible or Lacking an Eligibility Determination HIGHLIGHTS What We Audited and Why We audited the State of Louisiana’s (State) additional compensation grant (grant) component of the Road Home homeowner assistance program, managed by the State’s contractor, ICF Emergency Management Services, LLC (ICF). We initiated the audit in conjunction with the Office of Inspector General (OIG) Gulf Coast Region’s audit plan and examination of relief efforts provided by the federal government in the aftermath of Hurricanes Katrina and Rita. During our audit to determine grant eligibility, we identified possible eligibility issues through a review of the electronic data. To immediately address the issues, we developed an additional objective to determine eligibility for those grants coded ineligible or lacking an eligibility determination. What We Found Of 22,135 1 grants, the State funded 418 (2 percent) grants, totaling $15.8 million, coded ineligible or lacking an eligibility determination. This condition occurred because the State’s contractor, ICF, did not have system controls in place to prevent these improper disbursements. File reviews of 26 (6 percent) of the 418 grants determined that as of October 13, 2007, the State had misspent federal funds for 17 ineligible and 2 unsupported grants. The remaining seven grants 1 Total grants disbursed as of October 13, 2007. were eligible or had input or coding errors. As a result, the State will need to review the remaining 392 grants, which total more than $14.6 million, as the disbursements are questionable. What We Recommend We recommend the U.S. Department of Housing and Urban Development’s (HUD) General Deputy Assistant Secretary for Community Planning and Development require the State to repay amounts disbursed for ineligible grants to its Road Home program, either support or repay amounts disbursed for unsupported grants, review all of the remaining 392 grants coded ineligible or lacking an eligibility determination and either support or repay the $14.6 million disbursed for them, and implement system controls to prevent future improper disbursements. 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 During the audit, we provided the results of our review to the State’s management staff. We also provided our discussion draft audit report to HUD’s staff during the audit. We conducted an exit conference with the State on January 11, 2008. We asked the executive director of the State’s Office of Community Development, Disaster Recovery Unit, to provide comments on our discussion draft audit report by January 14, 2008. We gave the State an extension until January 15, 2008, to respond, and the executive director provided written comments dated that day. The State agreed at the exit conference that these grants were coded ineligible or lacked an eligibility determination and performed its own review of the 418 grants. The complete text of the written response, along with our evaluation of that response, can be found in appendix B of this report. However, we did not attach a spreadsheet and legend provided with the response as it included information that could be used to identify individual grant recipients. 2 TABLE OF CONTENTS Background and Objectives 4 Results of Audit Finding 1: The State Funded Additional Compensation Grants Coded Ineligible or 5 Lacking an Eligibility Determination Scope and Methodology 8 Internal Controls 9 Appendixes A. Schedule of Questioned Costs 11 B. Auditee Comments and OIG’s Evaluation 12 3 BACKGROUND AND OBJECTIVES Between December 2005 and June 2006, Congress approved a total of $16.7 billion in supplemental Community Development Block Grant (CDBG) Disaster Recovery Assistance funds for Gulf Coast hurricane relief. Of that amount, the U.S. Department of Housing and Urban Development (HUD) awarded $10.4 billion to the State of Louisiana (State) for its recovery efforts. The Disaster Recovery Unit within the State’s Division of Administration’s Office of Community Development administers the use of the supplemental CDBG funds. The Louisiana Recovery Authority (LRA) plans and coordinates for the recovery and rebuilding of the State. The Disaster Recovery Unit, in conjunction with the LRA, develops action plans outlining the programs and methods used to administer the supplemental CDBG funds. With approval from the Louisiana legislature, the governor, the LRA, and the Disaster Recovery Unit created the Louisiana Road Home program. The State allocated more than $6.3 billion of the $10.4 billion to the homeowner assistance program, 2 which provides grants to eligible homeowners. ICF Emergency Management Services, LLC (ICF), the State’s contractor, manages the Road Home. The State required ICF to verify applicants’ eligibility and develop a management information system 3 meeting State specifications and internal control requirements. The homeowner assistance program includes four forms of available funding assistance, dependent upon the option selected, and provides compensation to applicants who select one of the following options: • Option 1 - retain their homes; • Option 2 - sell the home, occupied as of the date of the storms, but remain a homeowner in Louisiana; or • Option 3 - sell the home, occupied as of the date of the storms, and either move from Louisiana or remain in Louisiana as a renter. The four forms of available funding assistance include the (1) compensation grant, (2) elevation grant, (3) additional compensation grant (grant), and (4) additional mitigation grant. During our audit to determine grant eligibility, we identified possible eligibility issues through a review of the electronic data. To immediately address the issues, we developed an additional objective to determine eligibility for those grants coded ineligible or lacking an eligibility determination. Since ICF coded more than $15 million in grants ineligible or did not indicate an eligibility determination, we issued this report to address and correct the system flaw that allowed such disbursements. We plan to issue the results of our audit regarding applicant eligibility in a separate report. 2 The homeowner assistance program is one of four Road Home programs. 3 The management information system principally supports the Road Home program. 4 RESULTS OF AUDIT Finding 1: The State Funded Additional Compensation Grants Coded Ineligible or Lacking an Eligibility Determination Of 22,135 grants, the State funded 418 (2 percent) grants, totaling $15.8 million, coded ineligible or lacking an eligibility determination. This condition occurred because the State’s contractor, ICF, did not have system controls in place to prevent these improper disbursements. File reviews of 26 (6 percent) of the 418 grants determined that as of October 13, 2007, the State had misspent federal funds for 17 ineligible and 2 unsupported grants. The remaining seven grants were eligible or had coding or input errors. As a result, the State will need to review the remaining 392 grants, which total more than $14.6 million, as the disbursements are questionable. Eligibility Requirements To be eligible for the grant, which cannot exceed $50,000, lower income applicants 4 must, among other requirements, • Document their total household income. Upon receipt, ICF enters the high and low amounts of the income range into the management information system. If eligible, ICF enters “Yes” for the grant eligibility question, and the management information system calculates the appropriate grant amount. If not eligible, ICF enters “No” for the grant eligibility question, and the management information system calculates the grant amount as zero. • Choose options 1 or 2. The amount of the grant is based upon the option selected and the elevation grant amount. ICF also enters the option selected into the management information system. 418 Grants Coded Ineligible or Lacking an Eligibility Determination ICF coded 418 (2 percent) of 22,135 grants, totaling $15,842,207, ineligible or did not indicate an eligibility determination. The following table summarizes the issues identified for the 418 grants. 4 Includes homeowners with household income less than or equal to 80 percent of the area median income adjusted for household size. 5 Number of Total Issues instances disbursed 1. Eligibility column “No” 220 $7,966,947 2. Eligibility column blank 137 5,572,505 3. Option column blank 33 1,240,495 4. Option 3 (sell home) 3 127,800 5. Option 4 (decline assistance) 1 22,523 6. Option 5 (unable to decide) 4 200,000 7. Option 6 (cannot process) 11 465,070 8. Grant amount greater than $50,000 5 9 246,867 Total issues identified 418 $15,842,207 More Than $15 Million in Ineligible and Unsupported Costs File reviews of 26 6 (6 percent) of the 418 grants determined that seven (27 percent) grants were eligible or had input or coding errors, consisting of three eligible and four data input errors, and 19 (73 percent) grants were either ineligible or unsupported because • 14 had household income that exceeded HUD’s income limits, • One homeowner signed the “Income Waiver Acknowledgement” 7 form, • One homeowner chose Option 3, • ICF chose Option 6 for one homeowner, 8 and • ICF did not verify household income for two, making the grants unsupported. As a result, as of October 13, 2007, the State misspent $743,344 in federal funds for 17 ineligible grants and $87,222 for 2 unsupported grants. The remaining seven grants, totaling $263,829, were eligible or had input or coding errors, thereby reducing the questioned costs to $14,747,812 and questioned grants to 392. In addition, the file review for one ineligible grant included a $50,000 data input error, further reducing questioned costs to $14,697,812. System Controls Not in Place before August 2007 Before August 23, 2007, ICF had not implemented system controls to prevent payment for grants coded ineligible or lacking an eligibility determination in its 5 The total disbursed amount reported is only the amount that exceeded $50,000 for each of the nine grants. 6 See Scope and Methodology section for an explanation of the selection methodology for the 26 grants. 7 The form allowed the homeowner to decline providing household income documentation. Upon signing the form, the homeowner acknowledged that he/she would not be eligible for the grant. 8 This grant also included a $50,000 data input error. 6 management information system. The majority of the 418 grants that were coded ineligible or lacked an eligibility determination were disbursed before August 2007. On August 23, 2007, ICF placed into production a new version of the management information system, which incorporated system controls intended to prevent disbursement for such grants. The control changes greatly reduced the number of grants with issues. However, improper disbursements could continue since the State disbursed funds for one grant coded ineligible and one lacking an eligibility determination after August 23, 2007. Thus, ICF’s and the system’s ability to catch all of these errors appears to be questionable. Therefore, the State must ensure that ICF implements the necessary system controls to prevent future improper disbursements. Recommendations We recommend that HUD’s General Deputy Assistant Secretary for Community Planning and Development require the State to 1A. Repay $743,344 disbursed for the 17 ineligible grants to its Road Home program. 1B. Either support or repay $87,222 disbursed for two unsupported grants. 1C. Review all of the remaining 392 grants coded ineligible or lacking an eligibility determination and either support or repay $14,697,812 disbursed for them. 1D. Implement system controls to prevent future improper disbursements and to ensure that its management information system accurately reflects only those grants that have been closed and disbursed. 7 SCOPE AND METHODOLOGY We conducted our audit at the State’s Office of Community Development, Disaster Recovery Unit; ICF’s offices in Baton Rouge, Louisiana; and the HUD Office of Inspector General (OIG) office in New Orleans, Louisiana. We performed our audit work between September and December 2007. To accomplish our objective, we performed analyses of the electronic data within ICF’s management information system to identify potentially ineligible grants. Comprised of different databases combined into a central data warehouse, the management information system, developed and maintained by ICF, principally supports the Road Home homeowner assistance program. Based on the data, a total universe of 22,135 additional compensation grants was funded between June 12, 2006, and October 13, 2007. We sorted the data for the 22,135 grants to identify indicators that clearly documented that the grant was either ineligible, lacked an eligibility determination, or exceeded the established funding limits. 9 Those indicators included “No” or blank answers in the eligibility column, option numbers other than the eligible 1 or 2 or blanks in the option column, and grant disbursement amounts greater than $50,000. We identified a total of 418 potentially ineligible grants or grants that lacked an eligibility determination. To confirm the reliability of the data used to identify the 418 grants, we selected a nonstatistical representative sample of 26 grants for file review. We reviewed the documentation for each file to determine whether the grant was eligible based on HUD’s and the State’s eligibility criteria and whether grant and funding information was accurate. Through our file review, we determined that the grant data were generally reliable, but there were data input and coding errors (4 of 26). However, we relied on the entire universe rather than the sample to determine total questioned costs. In addition to data analyses and file reviews, we • Interviewed State officials and key personnel of the Louisiana Recovery Authority and ICF; • Reviewed the HUD-approved action plan and amendments, the Road Home written policies and procedures, the contract executed between the State and ICF and amendments, the Code of Federal Regulations, waivers, and other applicable legal authorities relevant to the CDBG Disaster Recovery Assistance grants; and • Reviewed reports issued by the Louisiana legislative auditor’s office. Our audit period covered June 12, 2006, through October 13, 2007. We expanded this period as necessary. We conducted the audit in accordance with generally accepted government auditing standards. 9 Those grants with more than one indicator were only counted once. 8 INTERNAL CONTROLS Internal control is an integral component of an organization’s management that provides reasonable assurance that the following objectives are being achieved: • Effectiveness and efficiency of operations, • Reliability of financial reporting, • Compliance with applicable laws and regulations, and • Safeguarding resources. 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 objective: • Program operations - Policies and procedures that management has implemented to reasonably ensure that persons are eligible to participate in the additional compensation grant program. • Validity and reliability of data - Policies and procedures that management has implemented to reasonably ensure that valid and reliable data within the management information system are obtained, maintained, and fairly disclosed in reports. • Compliance with laws and regulations - Policies and procedures that management has implemented to reasonably ensure that CDBG disaster fund use is consistent with HUD’s laws and regulations. • Safeguarding resources - Policies and procedures that management has implemented to reasonably ensure that CDBG disaster funds are safeguarded against waste, loss, and misuse. We assessed the relevant controls identified above. 9 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 Weakness Based on our review, we believe the following item is a significant weakness: • Because the State’s contractor, ICF, did not have adequate system controls, the State funded 418 grants coded ineligible or lacking an eligibility determination (finding 1). 10 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS Recommendation Ineligible Unsupported number 1/ 2/ 1A $743,344 1B $87,222 1C $14,697,812 Totals $743,344 $14,785,034 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 policies 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 the 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. 11 Appendix B AUDITEE COMMENTS AND OIG'S EVALUATION Ref to OIG Evaluation Auditee Comments 12 Comment 1 Comment 3 Comment 2 Comment 3 13 Comment 2 Comment 2 Comment 3 14 15 Comment 4 16 Comment 4 Comment 4 Comment 4 17 Comment 4 Comment 5 18 Comment 2 19 OIG Evaluation of Auditee Comments Comment 1 The State agreed at the exit conference that these grants were coded ineligible or lacked an eligibility determination and stated in its response that it performed its own review of the 418 grants. We commend the State for taking prompt action. Comment 2 The State’s response included various totals as to which grants were and were not eligible. However, we were unable to verify the totals in the text or match the totals to the information provided in the summary and detail spreadsheet format. For example, in the text on pages 2 and 3, the State stated that the total number of ineligible grants was 130 with overpayments totaling $5,050,574.60. However, the table on page 3 indicated a total of 149 ineligible grants totaling $4,685,114.60, and the detail spreadsheet had a total of 127 ineligible grants which totaled $4,980,934.60. Further, the State reported the 418 grants in the summary totaled $14,772,362.22, whereas we reported a summary total of $15,842,207. Additionally, when we attempted to summarize the ineligible grants in the detail spreadsheet, we noted that the State used grant amounts for a few grants that differed from what was reported in the management information system data. Comment 3 The State also indicated that some grants (40 in its written response, 41 in the summary spreadsheet, or 42 in the detail spreadsheet) were not disbursed. We find this information disconcerting as we requested that ICF provide data for testing for all grants that had been closed and awarded funds. Further, 39 of the 42 grants were still listed as disbursed in the management information system as of January 24, 2008, and 36 of the 39 had a closed grant value. Based on this information, the management information system does not accurately reflect the number or amount of grants disbursed, which impacts the accuracy of State’s reporting. HUD will need to ensure that the State and ICF include system controls to update the management information system when a loan goes to closing but does not disburse. We have modified the report to include this requirement in recommendation 1D. Comment 4 The State indicated that only 8 of the 17 grants we reviewed were ineligible; 2 unsupported grants were unsupported and being researched; and the remaining 392 grants had been reviewed, and recovery and verification actions were underway. However, we stand by our original conclusions and recommendations as we are unable to reconcile our results to the conflicting information provided by the State. Comment 5 The State stated that ICF had implemented additional checks to reduce the number of files with improper income documentation. In addition, the State stated that ICF will prudently modify its controls and procedures as necessary. However, the State did not address how it would ensure that ICF would stop funding loans coded ineligible or lacking an eligibility determination. System controls are still needed as the two loans funded after the new controls were implemented in August 2007 were both ineligible at closing according to the State’s response, although one may be eligible with additional corrective action. 20
State of Louisiana, Baton Rouge, Louisiana, Road Home Program, Funded 418 Grants Coded Ineligible or Lacking an Eligibility Determination
Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-01-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)