oversight

The City of West Palm Beach, FL, Did Not Properly Administer Its Community Development Block Grant Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-01-09.

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

                                                                Issue Date
                                                                 January 9, 2008
                                                                Audit Report Number
                                                                 2008-AT-1004




TO:        Maria R. Ortiz, Director of Community Planning and Development, Miami Field
             Office, 4DD



FROM:      James D. McKay, Regional Inspector General for Audit, 4AGA

SUBJECT: The City of West Palm Beach, FL, Did Not Properly Administer Its Community
         Development Block Grant Program


                                   HIGHLIGHTS

 What We Audited and Why

             We audited the Community Development Block Grant (CDBG) program
             administered by the City of West Palm Beach, Florida (City). The objective of
             the audit was to determine whether the City administered its CDBG program in
             accordance with applicable U.S. Department of Housing and Urban Development
             (HUD) requirements. We selected the City for review because the Miami HUD
             Office of Community Planning and Development ranked the City as high risk in
             its fiscal years 2006 and 2007 risk assessments. In addition, a previous HUD on-
             site monitoring review identified concerns with the City’s administration of the
             CDBG program.

 What We Found


             The City failed to properly administer its CDBG program in accordance with
             HUD requirements. Specifically, the City was deficient in (1) contract
             administration, (2) monitoring, (3) maintaining supporting documentation, and (4)
             reporting program income. These deficiencies occurred because the City
             disregarded HUD requirements and had ineffective policies and procedures. The


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           City failed to ensure that CDBG funds were used in compliance with program
           requirements and used to meet national objectives. As a result, we consider more
           than $2.7 million to be unsupported costs because the City failed to demonstrate
           that national objectives and other program requirements were met.

           The City did not adequately award four contracts in accordance with federal
           procurement requirements. It awarded contracts without full and open
           competition; did not prepare a cost analysis before awarding the contracts; and did
           not maintain documentation supporting that contractors were not debarred,
           suspended, or ineligible. These deficiencies occurred because of inadequate
           supervision of the procurement process and disregard for federal procurement
           requirements. As a result, the City could not ensure that more than $1.2 million in
           contracts it awarded provided full and open competition and that the costs were
           reasonable.

What We Recommend


           We recommend that the Director of the Miami Office of Community Planning
           and Development require the City to (1) provide documentation supporting that
           HUD requirements were followed and national objectives were met for 27 CDBG
           activities or reimburse the CDBG program more than $2.7 million from
           nonfederal funds for not properly administering the program, and (2) develop,
           implement, and enforce more comprehensive written policies and procedures that
           comply with HUD requirements.

           In addition, the Director should require the City to (1) provide supporting
           documentation to justify the eligibility and reasonableness of $624,631 disbursed
           for the four contracts, or reimburse the CDBG program from nonfederal funds;
           and (2) ensure that federal procurement requirements are incorporated into the
           City policies and procedures, implemented, and enforced.

           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 findings with the City during the audit. We provided a copy of
           the draft report to City officials on November 21, 2007, for their comments and
           discussed the report with the officials at the exit conference on December 5, 2007.
           The City provided its written comments to our draft report on December 7, 2007.
           In its response, the City generally agreed with the findings.


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                                            2
          The complete text of the City’s response, along with our evaluation of the
          response, can be found in appendix B of this report.




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                                           3
                             TABLE OF CONTENTS

Background and Objectives                                                            5

Results of Audit
        Finding 1: The City Failed to Properly Administer Its CDBG Program           6
        Finding 2: The City Did Not Adequately Award Contracts in Accordance with   13
                   Federal Requirements

Scope and Methodology                                                               16

Internal Controls                                                                   18

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use              19
   B.   Auditee Comments and OIG’s Evaluation                                       20
   C.   Criteria                                                                    25
   D.   Table of Deficiencies for the 28 Activities                                 29
   E.   Schedule of Questioned Costs for Finding 1                                  30




                                              4
                         BACKGROUND AND OBJECTIVES

The City of West Palm Beach, Florida (City) receives annual Community Development Block
Grant (CDBG) program funds from the U.S. Department of Housing and Urban Development
(HUD). HUD awards annual grants to entitlement cities to develop viable urban communities by
providing decent housing and a suitable living environment and by expanding economic
opportunities, principally for low- and moderate-income persons. An activity that receives
CDBG funds must meet one of three national objectives:

     •       Benefit low- and moderate-income families,
     •       Aid in the prevention or elimination of slums or blight, or
     •       Meet community development needs having a particular urgency because existing
             conditions pose a serious and immediate threat to the health or welfare of the
             community and when other financial resources are not available.

The City’s Economic and Community Development Department administers the CDBG
program. 1

The HUD Integrated Disbursement and Information System reported that the City expended
more than $3 million in CDBG funds for fiscal years 2005 (October 1, 2004, to September 30,
2005) and 2006 (October 1, 2005, to September 30, 2006). 2

We selected the City for review because the Miami HUD Office of Community Planning and
Development ranked the City as high risk in its fiscal years 2006 and 2007 risk assessments. In
addition, the 2005 Miami HUD monitoring review identified six findings and three concerns.
For example, the review found that the City did not maintain adequate supporting documentation
for CDBG disbursements and did not properly monitor its subrecipients.

Our audit objective was to determine whether the City administered its CDBG program in
accordance with applicable HUD requirements.




1
  On June 18, 2007, the City reorganized the Economic and Community Development Department to create two
separate offices: (1) the Housing and Community Development Department and (2) the Economic Development
and Small Business Division.
2
 Fiscal year 2004 and 2005 grant funds are reported in the periods of October 1, 2004, to September 30, 2005, and
October 1, 2005, to September 30, 2006, respectively.

                                                        5
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                                RESULTS OF AUDIT

Finding 1: The City Failed to Properly Administer Its CDBG Program
The City failed to properly administer its CDBG program in accordance with HUD requirements.
Specifically, the City was deficient in (1) contract administration, (2) monitoring, (3)
maintaining supporting documentation, and (4) reporting program income. These deficiencies
occurred because the City disregarded HUD requirements and had ineffective policies and
procedures. As a result, it failed to ensure that more than $2.7 million in CDBG expenditures was
used in compliance with program requirements and used to meet national objectives.



 Deficiencies in the
 Administration of the CDBG
 Program


              We reviewed 30 activities, 27 of which used fiscal years 2004 to 2006 CDBG funds
              and three of which used fiscal years 2001 to 2003 CDBG funds.

              The City failed to properly administer its CDBG program in accordance with
              HUD requirements. Our review of the 30 CDBG activities found problems with
              28 activities in (1) contract administration, (2) monitoring, (3) maintaining
              supporting documentation, and (4) reporting program income.

              (1) Poor contract administration. Regulations at 24 CFR [Code of Federal
                  Regulations] 570.503 require the recipient to sign a written agreement with
                  the subrecipient before disbursing any CDBG funds. One of the provisions
                  included in the agreement is a statement of work which should include
                  sufficient detail of the work to be performed and a schedule for completing
                  the work to provide a sound basis for monitoring the subrecipient’s
                  performance.

                  The City did not execute written agreements for six activities administered by
                  other City departments. Also, it did not amend a contract for one activity to
                  include a change in the scope of work. In addition, it executed contracts for
                  five activities without sufficient detail of the scope of work to be performed.
                  For example, the contract for one activity did not indicate the frequency of the
                  services or how long they would be provided, and the contract for another
                  activity did not indicate what rehabilitation work would be performed. As a
                  result, the City was unable to monitor performance because it did not have
                  sufficient detail of the work to be performed.


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                                                6
       (2) Poor monitoring. Regulations at 24 CFR 85.40(a) require recipients to
           monitor grant - and subgrant - supported activities to assure compliance with
           applicable federal requirements and that performance goals are being
           achieved. Monitoring must cover each program, function, or activity.

          The City failed to conduct monitoring reviews of 22 activities. City officials
          informed us that they did not know they had to conduct reviews of activities
          administered by other City departments or had to conduct reviews of
          economic development and fair housing activities. In addition, the City
          inadequately conducted monitoring reviews of three other activities. For
          example, it conducted a monitoring review of one activity, but did not
          maintain documentation supporting that the subrecipient took any actions to
          correct the finding. For the other two monitoring reviews, the City did not
          verify the beneficiary data to ensure that low- and moderate-income persons
          were served and that contract goals were achieved. By not monitoring or
          inadequately monitoring subrecipients, the City could not ensure that
          subrecipients complied with program requirements and met national
          objectives.

          In addition, 24 CFR 570.902(a) requires that 60 days before the end of the
          recipient’s program year, grant funds available and not drawn down be no
          more than 1.5 times the current year’s grant amount.

          In March 2006, the City realized that it was at risk of violating this
          requirement and reallocated almost $1 million in CDBG funds to a housing
          rehabilitation activity in April 2006. The City was unsure of who was
          responsible for monitoring total available grant funds. Staff from the City’s
          Economic and Community Development Department was unsure whether this
          monitoring was their responsibility or the responsibility of the City’s Finance
          Department.

       (3) Inadequate supporting documentation. Regulations at 24 CFR 570.506(b)
           require the recipient to maintain sufficient records to demonstrate that each
           activity undertaken meets one of the national objectives.

          The contracts/written agreements required submission of a monthly
          beneficiary report. This report provides information on the number of low-
          and moderate-income persons served by the activity and serves as a tool with
          which the City can monitor the activity and assess its performance. However,
          the City failed to ensure that this report was submitted monthly and the data
          were verified for 18 activities. For those reports that were submitted, it failed
          to maintain documentation supporting that it verified the number of low- and
          moderate-income persons served and their income. By not ensuring the
          receipt of this monthly report and verifying the accuracy of the data
          submitted, the City could not ensure that the activities met the national
          objective of serving low- and moderate-income persons.


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             In addition, 24 CFR 570.501(b) and 570.506(h) require the recipient to
             maintain financial records to support how the CDBG funds provided are
             expended and to ensure that CDBG funds are used in accordance with all
             program requirements.

             The City failed to maintain supporting documentation for CDBG expenditures
             for 15 activities. For example, the invoices attached to the payment requests
             for one activity indicated that construction work was conducted for a location
             other than the subrecipient location. The City maintained no supporting
             documentation to clarify this discrepancy before disbursing CDBG funds to
             the subrecipient.

             We also reviewed eight other CDBG expenditures. The City paid four of
             these eight expenditures without ensuring that the (1) cost of the equipment
             was reasonable and the purchase followed applicable procurement procedures,
             (2) work performed was adequate and complied with local codes, and (3)
             income verification services rendered for the City were adequately performed
             and that the City was being correctly charged for the work. The four
             expenditures totaling $37,390 were paid from fiscal year 1999, 2001, and
             2004 grant funds that were not part of the 30 activities reviewed. By not
             ensuring that payments were properly reviewed and adequately supported
             before disbursing CDBG funds, the City could not ensure that CDBG funds
             were used in accordance with all program requirements.

          (4) Program income not recorded. Regulations at 24 CFR 570.504(a) require
              the receipt of program income to be recorded as part of the financial
              transactions of the grant program.

             Beginning in fiscal year 2002, the City generated receipts from code
             violations cited in the CDBG target areas by code enforcement officers who
             were paid with CDBG funds. However, the City failed to calculate and report
             program income generated in fiscal year 2002 and did not calculate and report
             program income generated in fiscal years 2003 through 2006 until November
             2006. The City also did not calculate and report program income for the first
             six months of fiscal year 2007 until May and July 2007, respectively, although
             it had executed a written agreement on October 30, 2006, that required
             program income to be reported monthly. The City also failed to calculate
             interest on the program income that resulted from the delay in reporting the
             program income to the CDBG program. In addition, the City calculated
             $106,193 in lien receipts collected from code violations cited in the CDBG
             target areas but did not report this as income to the CDBG program because
             the code enforcement officers could not be identified. Failure to record
             program income to the CDBG program in a timely manner reduces the
             availability of these funds to serve the intended beneficiaries.


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                                          8
           Because of these deficiencies, the City could not assure HUD that CDBG funds
           were used in compliance with program requirements and to meet the national
           objective of serving low- and moderate-income persons. We consider $2.7
           million disbursed to 27 of 28 CDBG activities and $37,390 disbursed for four
           expenditures to be unsupported costs until the City can show that these activities
           met the national objective and that disbursements were eligible. We also consider
           (1) $50,929 not disbursed for a CDBG activity until the City executes an
           amendment to a contract for a change in the scope of work, and (2) $106,193 in
           possible CDBG program income to be funds that could be put to better use if the
           City takes corrective action on these deficiencies. Appendix D provides a list of
           the 28 CDBG activities and their deficiencies. Appendix E provides a breakdown
           by CDBG activity of the questioned costs.

Two Examples of Poor
Administration


           The following two examples illustrate the City’s poor administration of CDBG
           activities.

           Code Enforcement (Activity ID Nos. 377, 413, 468, 504, 541, and 573)
           Regulations at 24 CFR 570.202(c) state that code enforcement is an eligible
           activity when such enforcement, together with public or private improvements,
           rehabilitation, or services to be provided, may be expected to arrest the decline of
           the area. Regulations at 24 CFR 570.207(a)(2) state that CDBG funds are not
           eligible to be used to carry out the regular responsibilities of the local
           government. In addition, a memorandum of understanding required that special
           efforts be undertaken to make available to eligible and affected property owners
           the provision of economic and community development assistance and services
           through City programs.

           The City Code Compliance Division enforces property standards within the City
           limits by sending code enforcement officers to designated zones to ensure that
           substandard conditions are addressed. The City used CDBG funds to pay the
           salaries of code enforcement officers to inspect for code violations and enforce
           code compliance within the CDBG target areas. As of July 2007, the City had
           disbursed more than $1.3 million in CDBG funds for this activity between fiscal
           years 2002 and 2007.

           The City provided no evidence to demonstrate that the objectives of arresting the
           decline of the area or serving low- and moderate-income property owners were
           met. The City provided no documentation supporting that the CDBG-funded
           code enforcement officers were partnered with some improvement, rehabilitation,
           or service projects to arrest the decline of the target area. In addition, no
           documentation was provided to support that special efforts were undertaken to
           help the eligible and affected property owners.


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     The Code Compliance Division did not maintain supporting documentation of the
     property owners or the addresses referred to the Economic and Community
     Development Department. In addition, the Economic and Community
     Development Department had no policies and procedures in place to maintain
     information provided by property owners in the CDBG target area who received
     violation citations. Staff from the Economic and Community Development
     Department said that they had not received many phone calls from affected
     property owners and it is unclear whether it was because the Code Compliance
     Division had not informed the property owners about the assistance available to
     them or whether the property owners did not wish to participate. Further, the
     Economic and Community Development Department had not conducted any
     monitoring reviews of the activity to assess whether code enforcement met the
     scope of services defined in the memorandum of understanding and the CDBG
     national objective.

     While the City used CDBG funds for this activity beginning in fiscal year 2002, a
     memorandum of understanding between the Code Compliance Division and the
     Economic and Community Development Department was not executed until
     January 30, 2006. In addition, the City did not report program income timely
     from this activity.

     Consequently, the City lacked assurance the CDBG funds spent for code
     enforcement activities met HUD requirements and were not used to carry out the
     regular responsibilities of the local government.

     Housing Rehabilitation (Activity ID No. 548 and 549)
     The City housing rehabilitation program provides funds to repair and rehabilitate
     properties owned and occupied by low- and moderate-income residents. In April
     2006, the City reallocated approximately $1 million in CDBG funds to construct
     new roofs on hurricane-damaged structures.

     The City paid the contractor without documentation to justify the payment.
     Invoices for four properties did not provide sufficient detail of the work
     performed. Also, the City paid the contractor for these four properties before the
     work was approved as having been satisfactorily completed. In addition, the City
     paid the contractor for 16 properties for which the recipients were not income
     eligible under the CDBG program. The City recognized this error and reclassified
     the roof costs from the CDBG program to the state program, for which the
     recipients are income eligible.

     The City provided us with a list of 12 recipients who complained of leaking,
     rotten wood or work not completed. Because of these complaints, the City
     initiated an internal audit of this activity in October 2006. These deficiencies
     illustrate that the City paid CDBG funds for roof work that may not have been
     adequate or benefited low- and moderate-income persons.


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                                      10
Ineffective Policies and
Procedures

             These deficiencies occurred because the City disregarded HUD requirements and
             had ineffective policies and procedures. In 2005, HUD conducted a review of the
             CDBG program and reported that the City had failed to conduct monitoring
             reviews of its subrecipients. In its response, the City concurred and stated that it
             had a system in place to monitor each subrecipient on an annual basis. However,
             our review disclosed that the existing City policies and procedures did not satisfy
             HUD requirements to properly administer the CDBG program. Specifically, City
             policies and procedures did not contain guidance to

             (1) Ensure that subrecipient contracts have clear and measurable performance
                 goals,
             (2) Plan for monitoring of all CDBG activities to include developing a monitoring
                 plan for the program year,
             (3) Conduct monitoring to include what supporting documentation and reports to
                 review and verify,
             (4) Report monitoring results to the subrecipient and City management,
             (5) Review monitoring results to ensure corrective actions are taken and enforce
                 sanctions against noncompliant subrecipients or contractors,
             (6) Identify adequate supporting documentation for payment requests by the
                 subrecipient and contractor,
             (7) Determine how CDBG program income is to be calculated (i.e., from the code
                 enforcement activity) and when to recognize it, and
             (8) Ensure that City management develops a systematic process to assign and
                 hold staff accountable to monitor the programmatic and financial progress of
                 all CDBG activities.

             The ineffective policies and procedures and disregard for HUD requirements
             indicated that the City lacked the capacity to adequately administer the CDBG
             program in accordance with HUD requirements.

Conclusion


             As a result of not adequately administering its CDBG program, the City failed to
             ensure that CDBG funds were used in compliance with program requirements and
             were used to meet the national objective of serving low- and moderate-income
             persons. Therefore, more than $2.7 million expended for 27 CDBG activities and
             $37,390 for four expenditures are unsupported. We also consider $50,929 and
             $106,193 to be funds that would be put to better use if the City executes an
             amendment to a contract for a change in the scope of work and properly identifies
             CDBG program income, respectively.


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Recommendations


          We recommend that the Director of the Miami Office of Community Planning
          and Development require the City to

          1A.     Provide documentation supporting that HUD requirements were followed
                  and national objectives were met for 27 CDBG activities or reimburse the
                  CDBG program $2,735,149 from nonfederal funds for not properly
                  administering the program.

          1B.     Execute an amendment to the contract for activity No. 589 for the change
                  in the scope of work to ensure that the remaining $50,929 is expended in
                  accordance with the terms of the contract.

          1C.     Provide supporting documentation to justify that the disbursed amount of
                  $37,390 from activities that used fiscal year 1999, 2001, and 2004 grant
                  funds was reasonable and allowable or reimburse the CDBG program
                  from nonfederal funds.

          1D.     Calculate and recognize interest on the CDBG program income from the
                  code enforcement activities for not recognizing the program income in a
                  timely manner.

          1E.     Provide documentation supporting whether $106,193 in collected liens
                  should be recognized as CDBG program income. The amount recognized
                  as CDBG program income plus any interest incurred must be transferred
                  to the CDBG program.

          1F.     Develop, implement, and enforce more comprehensive written policies
                  and procedures that comply with HUD requirements.




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                                          12
Finding 2: The City Did Not Adequately Award Contracts in
           Accordance with Federal Requirements
The City did not adequately award four contracts in accordance with federal procurement
requirements. It awarded contracts without full and open competition; did not prepare a cost
analysis before awarding the contracts; and did not maintain documentation supporting that
contractors were not debarred, suspended, or ineligible. These deficiencies occurred because of
inadequate supervision of the procurement process and disregard for federal procurement
requirements. As a result, the City could not ensure that more than $1.2 million in contracts it
awarded provided full and open competition and that the costs were reasonable.



 Federal Procurement
 Requirements Not Followed


               Regulations at 24 CFR [Code of Federal Regulations] 85.35 and 85.36 require a
               grantee to (1) conduct procurements using full and open competition; (2) maintain
               records on the rationale for the procurement method used and contractor selected;
               (3) perform a cost analysis of every procurement action; and (4) ensure that
               contracts are not awarded to any debarred, suspended, or ineligible party.

               The City awarded 10 CDBG contracts between January 2005 and December
               2006. We selected four contracts to review totaling more than $1.2 million,
               representing 96 percent of the total contracted amount for the two-year period.
               The City did not adequately award four contracts in accordance with federal
               procurement requirements or its own policies.

               The City awarded three contracts without full and open competition.

                  •       Regulations at 24 CFR 85.36(d)(4) allow the use of a single source
                          procurement only when the grantee can show that the award of the
                          contract is infeasible under another procurement method and one of
                          the following applies: (1) the item is available only from a single
                          source; (2) public emergency will not permit a delay which would
                          result from using a competitive method; (3) HUD authorizes its use; or
                          (4) after solicitation from a number of sources, competition is
                          determined inadequate.




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                                               13
                                The City awarded a roofing and an architect contract amounting to $1
                                million 3 and $40,000, respectively, using single source procurement.
                                However, it did not maintain adequate supporting documentation to
                                justify its use of the single source procurement to select the
                                contractors.

                       •        Regulations at 24 CFR 85.36(c)(4) state that grantees are to ensure that
                                all prequalified lists of persons, firms, or products include enough
                                qualified sources to ensure maximum open and free competition.

                                The City awarded a contract amounting to $19,295 to rehabilitate a
                                residential property using sealed bid procurement. It solicited sealed
                                bids from an internal list of contractors to inquire about their interest.
                                However, it did not maintain this list to include the contractors who
                                were contacted or picked up the bid package. As a result, it could not
                                ensure that enough qualified sources were used.

                  The City did not prepare a cost analysis before awarding a $125,000 contract for
                  the rehabilitation of a public facility and the $40,000 architect contract. Without
                  the required cost analysis, the City had no assurances that it obtained the best
                  available services at the most advantageous prices for the procurement.

                  For the four contracts, the City did not maintain documentation supporting that
                  the contractors were not debarred, suspended, or ineligible. While we found no
                  evidence that the four contractors and their officers were excluded from
                  participation in federal assistance programs, the City should incorporate and
                  document this process to ensure that excluded parties are not awarded federal
                  funds.

                  The City attributed the deficiencies to lack of oversight due to not having a
                  permanent director for 18 months. While this may have been a contributing
                  factor, we also found that the City’s policies and procedures did not require (1)
                  maintaining supporting documentation for a single source procurement to select a
                  contractor even if the contractor was approved by the City commissioners; (2) a
                  cost analysis of every procurement action to ensure that the cost was reasonable;
                  and (3) maintaining documentation supporting that contractors were not debarred,
                  suspended, or ineligible.




3
 Since the roofing contract did not specify a total cost, we used the amount disbursed to the contractor as of
December 31, 2006.

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    Conclusion


                   Federal procurement requirements stipulate that contracts be awarded with full
                   and open competition and that the cost of the contract be reasonable. The City
                   failed to maintain supporting documentation for four contracts to comply with
                   these requirements. The City disregarded federal procurement requirements
                   because its policies and procedures did not include all requirements. As a result,
                   we consider $624,631 4 to be unsupported costs because the City could not show
                   that quality goods and services were obtained equitably and at the most
                   advantageous terms. The total amount of CDBG disbursements for the four
                   contracts was $1.1 million.

    Recommendations

                   We recommend that the Director of the Miami Office of Community Planning
                   and Development require the City to

                   2A.      Provide supporting documentation to justify the eligibility and
                            reasonableness of $624,631 disbursed for the four contracts or reimburse
                            the CDBG program from nonfederal funds.

                   2B.      Ensure that federal procurement requirements are incorporated into the
                            City’s policies and procedures, implemented, and enforced.




4
    Total disbursements were adjusted to consider the $556,890 questioned in recommendation 1A.

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                               SCOPE AND METHODOLOGY

Our audit objective was to determine whether the City administered its CDBG program in
accordance with applicable HUD requirements. To accomplish our objectives, we

   •   Reviewed relevant HUD regulations and guidebooks;

   •   Reviewed HUD files to include annual action plans, monitoring reports, and independent
       public accountant reports;

   •   Interviewed HUD, City, contractor, and subrecipient officials;

   •   Reviewed relevant City ordinances, policies and procedures manuals, and internal audit
       reports;

   •   Reviewed City files and records to include contracts, memorandums of understanding,
       monitoring review reports, reimbursement packages, and other financial data; and

   •   Conducted site inspections of CDBG activities.

As of April 2, 2007, the City had allocated fiscal years 2004, 2005, and 2006 CDBG funds to 43
activities. Two activities were later cancelled. We numbered each activity based on its fiscal
year source funding. For example, an activity that used fiscal years 2004 and 2005 CDBG funds
was counted as two separate activities. The City expended funds for 27 of the 41 CDBG
activities, and we reviewed the files for the 27 activities. We included in our review an
additional three CDBG activities for which the City expended fiscal years 2001 to 2003 funds.

We interviewed City staff and reviewed activity files to determine whether the City administered
the CDBG program properly. We reviewed activity files for monitoring reports and whether the
City verified the accuracy of status reports submitted by subrecipients and contractors for
meeting contractual obligations and national objectives. We also reviewed activity files for
invoices, checks, bank statements, and other supporting documentation as evidence of
monitoring efforts. We conducted site visits to two CDBG activities.

We reviewed CDBG disbursements for eligibility and reasonableness. We obtained the general
ledger for CDBG disbursements between January 1, 2005, and December 31, 2006. The general
ledger listed 1,446 disbursements totaling more than $3.1 million. We selected eight
expenditures amounting to $222,348 (7 percent) for review based on activities noted in the
minutes from the City commission meetings, largest dollar amount, and HUD concerns. We
reviewed reimbursement packages and other supporting documentation to determine whether the
activity met one of the national objectives, the activity was an eligible activity, the contractors or
participants involved were eligible, and costs were eligible and reasonable.

We interviewed City staff and reviewed supporting documentation of select CDBG contracts for
their procurement history. The City provided us with the Invoice Distribution Summary Report

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   for the period January 1, 2005, to December 31, 2006. According to this report, the City
   awarded 10 contracts totaling $1,293,064. We selected four contracts amounting to $1,240,450
   (96 percent) based on the largest contract amount and to include a sealed bid, request for
   proposal, and single source procurement methods. We reviewed the procurement of the four
   contracts to determine whether they were carried out in accordance with City policies and
   procedures and federal requirements.

   During our review of the housing rehabilitation activity, we reviewed recipient files to determine
   whether the files contained documentation supporting that the work was adequately completed
   and disbursements to contractors were properly supported. For our scope period, there were 79
   recipients who benefited from CDBG funds expended on this activity. One recipient received
   general repairs and 78 recipients received roof repairs. We selected for review the one recipient
   who received general repairs, and used random number generator software to select four
   recipients (5 percent) who received roof repairs.

   To achieve our audit objective, we relied in part on computer-processed data from the City’s
   financial system. We performed limited testing of CDBG budget and expenditure information
   and found it to be complete, accurate, and reliable.

   The audit generally covered the period October 1, 2004, through September 30, 2006, and we
   extended the period as needed to accomplish our objective. We conducted our fieldwork from
   February through July 2007 at the City offices located at 200 2nd Street, West Palm Beach,
   Florida.

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




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                             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 objective:

              •   Controls over program operations as they relate to the monitoring of CDBG
                  activities, management of CDBG funds, and procurement of contracts.
              •   Controls over compliance with laws and regulations.
              •   Controls over the safeguarding of resources as they relate to the disbursement of
                  CDBG funds.
              •   Controls over the validity and reliability of data.

              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 failed to properly administer its CDBG program (see finding 1).

              •   The City did not adequately award four contracts in accordance with federal
                  requirements (see finding 2).


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                                         APPENDIXES

Appendix A

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


                Recommendation                             Funds to be put
                    number            Unsupported 1/        to better use 2/
                      1A                 $2,735,149
                      1B                                           $50,929
                      1C                      37,390
                      1E                                            106,193
                      2A                     624,631               _______

                       Total              $3,397,170              $157,122

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.

2/   Funds to 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
     costs not incurred, deobligation of funds, withdrawal of interest, reductions in outlays,
     avoidance of unnecessary expenditures, loans and guarantees not made, and other savings
     that are specifically identified. For recommendation 1B, the $50,929 represents funds
     that would violate contract terms if the City does not execute a contract amendment. For
     recommendation 1E, the $106,193 represents potential CDBG program income since
     these liens may be cited by CDBG-funded code enforcement officers.




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                                             19
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




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                         20
Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




Comment 3




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                         21
Ref to OIG Evaluation   Auditee Comments




Comment 4




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                         22
Ref to OIG Evaluation   Auditee Comments




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                         23
                         OIG Evaluation of Auditee Comments

Comment 1   The City agreed with the finding but requested reconsideration that the City
            lacked subrecipient agreements with Code Enforcement and Youth and Family
            Services. Contained in the City Commission action to formalize the transfer of
            funds was a detailed description of the purpose of the transfer which the City
            believes constitutes a scope of services. This action does not constitute a
            subrecipient agreement with other City departments. We maintain that the City
            should execute written agreements for activities administered by other City
            departments in accordance with regulations at 24 CFR 570.503.

Comment 2   The City agreed with the finding that it failed to comply with federal single source
            procurement requirements. The City stated that their procurement office routinely
            maintains a list of contractors who are contacted and/or who picked up bid
            packages. For the $19,295 contract, the City indicated that five contractors are
            documented on a list. During our review, we identified five contractors that
            replied to this sealed bid, but we were not provided with a prequalified contractor
            list, who was contacted, or which contractors picked up bid packages. HUD
            regulations at 24 CFR 85.36(c)(4) require that grantees ensure that all prequalified
            lists of persons, firms, or products which are used in acquiring goods and services
            are current and include enough qualified sources to ensure maximum open and
            free competition.

Comment 3   The City stated that a cost analysis was prepared by City engineering staff before
            awarding a $125,000 contract. During our review, we repeatedly attempted to
            obtain the cost analysis from the City but it was never provided to us.

Comment 4   The City agreed with five recommendations and disagreed in part with three
            recommendations. The City agreed to provide supporting documentation.
            However, the City disagreed with the amounts to be reimbursed from nonfederal
            funds and stated that they will schedule a grant program review to determine that
            procedures and policies are in place to address concerns going forward. The City
            stated that if the review reveals improper program administration, then they would
            reimburse HUD from nonfederal funds. The City did not provide us with
            supporting documentation that could demonstrate that HUD requirements were
            followed and national objectives were met for 27 CDBG activities; disbursements
            made with fiscal year 1999, 2001, and 2004 grant funds were reasonable and
            allowable; and four contracts were awarded using full and open competition and
            that the costs were reasonable.




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                                             24
Appendix C

                                          CRITERIA


Federal (HUD) regulations at 24 CFR [Code of Federal Regulations]

   85.20(b) requires the grantee’s financial management system to have a budget control
   through which actual expenditures or outlays must be compared with budgeted amounts for
   each grant or subgrant.

   85.32(d) states that property records must be maintained which include a description of the
   property, a serial number or other identification number, the source of property, who holds
   title, the acquisition date, and the cost of the property, percentage of Federal participation in
   the cost of the property, the location, use and condition of the property, and any ultimate
   disposition data including the date of disposal and sale price of the property. In addition, a
   physical inventory of the property must be taken and the results reconciled with the property
   records at least once every two years.

   85.35 states that grantees and subgrantees must not make any award or permit any award at
   any tier to any party which is debarred or suspended or is otherwise excluded from or
   ineligible for participation in federal assistance programs.

   85.36(b)(9) states that the grantee and subgrantee will maintain records sufficient to detail
   the significant history of a procurement. These records will include but not be limited to the
   following: rationale for the method of procurement, selection of contract type, contractor
   selection or rejection, and basis for the contract price.

   85.36(c)(1) states that all procurement transactions will be conducted in a manner providing
   full and open competition consistent with this Part.

   85.36(c)(4) states that grantees will ensure that all prequalified lists of persons, firms, or
   products, which are used in acquiring goods and services, are current and include enough
   qualified sources to ensure maximum open and free competition.

   85.36(d)(2)(ii) states that if sealed bids are used, the invitation for bids will be publicly
   advertised, and bids shall be solicited from an adequate number of known suppliers,
   providing them sufficient time before the date set for opening the bids.

   85.36(d)(4) states that procurement by noncompetitive proposals method may be used only
   when the award of a contract is infeasible under small purchase procedures, sealed bids, or
   competitive proposals and one of the following circumstances applies:

       (A) The item is available from a single source;


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   (B) The public exigency or emergency for the requirement will not permit a delay
       resulting from competitive solicitation;
   (C) The awarding agency authorizes noncompetitive proposals; or
   (D) After solicitation of a number of sources, competition is determined inadequate.

Cost analysis (i.e., verifying the proposed cost data, the projections of the data, and the
evaluation of the specific elements of costs and profits) is required.

85.36(f)(1) requires the grantee and subgrantee to perform a cost or price analysis in
connection with every procurement action including contract modifications. At a minimum,
the City must make independent estimates before receiving bids or proposals. A cost
analysis must be performed when the vendor is required to submit the elements of his/her
estimated cost.

85.40(a) 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
activity.

570.200(a) states that an activity may be assisted in whole or in part with CDBG funds only
if it meets certain requirements. One requirement stipulates the grant recipient to certify that
their projected use of funds has been developed so as to give maximum feasible priority to
activities which will carry out one of the national objectives of benefit to: low- and
moderate-income families, aid in the prevention or elimination of slums or blight, or meet
other community development needs having a particular urgency because existing conditions
pose a serious and immediate threat to the health or welfare of the community when other
financial resources are not available to meet such needs. Consistent with the foregoing, each
recipient must ensure and maintain evidence that each of its activities assisted with CDBG
funds meets one of the three national objectives as contained in its certification.

570.202(c) states that code enforcement is an eligible rehabilitation and preservation activity
in that costs incurred for inspection for code violations and enforcement of codes (i.e.,
salaries and related expenses of code enforcement inspectors and legal proceedings but not
including the cost of correcting the violations) in deteriorating or deteriorated areas when
such enforcement, together with public or private improvements, rehabilitation, or services to
be provided, may be expected to arrest the decline of the area.

570.207(a)(2) states that expenses required to carry out the regular responsibilities of the unit
of general local government are not eligible for assistance except as otherwise specifically
authorized.

570.501(b) states that the recipient is responsible for ensuring that CDBG funds are used in
accordance with all program requirements. The use of designated public agencies,
subrecipients, or contractors does not relieve the recipient of this responsibility. The
recipient is also responsible for determining the adequacy of performance under subrecipient

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   agreements and procurement contracts and for taking appropriate actions when performance
   problems arise. Where a unit of general local government is participating with or as part of
   an urban county or as part of a metropolitan city, the recipient is responsible for applying to
   the unit of general local government the same requirements as are applicable to subrecipients.

   570.503 states that before disbursing any CDBG funds to a subrecipient, the recipient shall
   sign a written agreement with the subrecipient. At a minimum, the written agreement with
   the subrecipient shall include the following provisions: (1) statement of work, (2) records and
   reports, (3) program income, (4) uniform administrative requirements, (5) other program
   requirements, (6) suspension and termination, and (7) reversion of assets. For the statement
   of work, the agreement shall include a description of the work to be performed, a schedule
   for completing the work, and a budget. These items shall be in sufficient detail to provide a
   sound basis for the recipient effectively to monitor performance under the agreement.

   570.504(a) requires the grantee to record receipt and expenditure of program income as part
   of the financial transactions of the grant program.

   570.506 requires each recipient to establish and maintain sufficient records to enable the
   Secretary to determine whether the recipient has met the requirements of this part.

   (a) The recipient shall maintain records which provide a full description of each activity
       assisted with CDBG funds, including its location, the amount of CDBG funds budgeted,
       obligated, and expended for the activity.

   (b) The recipient shall maintain records which demonstrate that each activity undertaken
       meets one of the criteria used to determine whether a CDBG-assisted activity complies
       with one of more of the national objectives.

   (h) Recipients shall maintain evidence to support how the CDBG funds provided to such
       entities are expended. Such documentation must include, to the extent applicable,
       invoices, schedules containing comparisons of budgeted amounts and actual
       expenditures, construction progress schedules signed by appropriate parties, and/or other
       documentation appropriate to the nature of the activity.

   570.902(a) states that before the funding of the next annual grant and absent contrary
   evidence satisfactory to HUD, HUD will consider an entitlement recipient to be failing to
   carry out its CDBG activities in a timely manner if 60 days before the end of the grantee’s
   current program year, the amount of entitlement grant funds available to the recipient under
   grant agreements but undisbursed by the U.S. Treasury is more than 1.5 times the entitlement
   grant amount for its current program year.

Attachment A of OMB Circular A-87 states that to be allowable under federal awards, costs
must be necessary and reasonable for proper and efficient performance and administration of
federal awards. A cost is reasonable if, in its nature and amount, it does not exceed what a
prudent person would incur under the circumstances prevailing at the time the decision was
made. In determining reasonableness of a given cost, consideration shall be given to:

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   a. Whether the cost is of a type generally recognized as ordinary and necessary for the
      operation of the governmental unit or the performance of the federal award.
   b. The restraints or requirements imposed by such factors as: sound business practices; arms
      length bargaining; federal, state, and other laws and regulations; and terms and conditions
      of the federal award.
   c. Market prices for comparable goods or services.
   d. Whether the individuals concerned acted with prudence in the circumstances considering
      their responsibilities to the governmental unit, its employees, the public at large, and the
      federal government.
   e. Significant deviations from the established practices of the governmental unit which may
      unjustifiably increase the Federal award's cost.

Managing CDBG: A Guidebook for Grantees on Subrecipient Oversight states that because
local governments are subject to the same requirements as subrecipients, inter-agency or inter-
departmental agreements should include the same provisions as required in a subrecipient
agreement.

City Policies and Procedures

Article IV of section 66-62 of the City Procurement Code, Invitation to Bid, provides specific
requirements. Section 66-62(d) states that public notice of the invitation to bid and of selection
committee meetings, if applicable, shall be given in accordance with applicable state statutes.

Procurement Division: Policy and Procedures manual states that the notice of bid shall be
advertised in a newspaper of countywide circulation or as otherwise authorized by law.

Economic and Community Development Department: Administrative Policies and
Procedures states that federal requirements set forth at 24 CFR Part 5 prohibit the provision of
federal funds to debarred, suspended, or ineligible contractors, subcontractors, or subrecipients.
Grantees are required to check the HUD listings for this purpose.




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                                                28
Appendix D

       TABLE OF DEFICIENCIES FOR THE 28 ACTIVITIES


      No. Fiscal Activity                             Deficiencies
           year   ID *
          grant
                             Poor contract    Poor            Inadequate    Unrecorded
                             administration monitoring        supporting     program
                                                            documentation    income
       1   2001      377           X              X               X            X
       2   2002      413           X              X               X            X
       3   2003      468           X              X               X            X
       4   2004      506           X              X               X
       5   2004      507           X              X               X
       6   2004      508           X              X               X**
       7   2004      509                          X               X
       8   2004      510                          X               X
       9   2004      511                          X               X
      10   2004      512                          X               X
      11   2004      513                          X               X**
      12   2004      504           X              X               X             X
      13   2004      515                          X               X
      14   2004      589           X                              X
      15   2004      521           X              X               X**
      16   2004    548/549                                        X
      17   2005      541           X              X               X             X
      18   2005      542                          X               X**
      19   2005      552                          X               X
      20   2005      553                          X               X**
      21   2005      570           X              X               X
      22   2005      551                          X               X
      23   2005      547                          X               X
      24   2005    548/549                                        X
      25   2006      573           X              X               X             X
      26   2006      584                          X               X
      27   2006      583                          X               X
      28   2006      571                          X               X

       *  The activity identification (ID) numbers were obtained from the HUD Integrated
          Disbursement and Information System.
       ** This denotes an activity for which the City failed to obtain and verify the
          required monthly beneficiary data or progress reports and failed to maintain
          adequate supporting documentation on the disbursements for the activity.


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                                            29
Appendix E

                SCHEDULE OF QUESTIONED COSTS
                       FOR FINDING 1

                         No.      FY       Activity Unsupported
                                 grant      ID (a)    costs (b)
                           1     2001        377         $164,252
                           2     2002        413          254,161
                           3     2003        468          195,307
                           4     2004        506            40,368
                           5     2004        507            50,174
                           6     2004        508            17,250
                           7     2004        509            25,000
                           8     2004        510             7,387
                           9     2004        511            18,000
                          10     2004        512            15,000
                          11     2004        513             8,000
                          12     2004        504          227,806
                          13     2004        515            90,000
                          14     2004        521            25,000
                          15     2004      548 / 549      537,122
                          16     2005        541          268,371
                          17     2005        542            90,414
                          18     2005        552            41,171
                          19     2005        553            37,617
                          20     2005        570            10,000
                          21     2005        551            12,520
                          22     2005        547          127,480
                          23     2005      548 / 549      154,242
                          24     2006        573          231,678
                          25     2006        584            20,702
                          26     2006        583            26,005
                          27     2006        571            40,122

                                             Total          $2,735,149

        (a) The activity identification (ID) numbers were obtained from the HUD Integrated
           Disbursement and Information System.
        (b) The amounts represent the disbursed amounts for the activity as of April 2, 2007,
            except for activity ID Nos. 377, 413, 468, 504, 541, and 573, the disbursed
            amounts of which were as of July 12, 2007.


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