oversight

The City of Durham, North Carolina Did Not Comply with HOME Investment Partnerships Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-08-07.

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

                                                               Issue Date
                                                                        August 7, 2008
                                                               Audit Report Number
                                                                       2008-AT-1011




TO:        Gary Dimmick, Director, Office of Community Planning and Development, 4FD



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

SUBJECT: The City of Durham, North Carolina Did Not Comply with HOME Investment
          Partnerships Requirements

                                  HIGHLIGHTS

What We Audited and Why

            We audited the City of Durham (City), North Carolina’s HOME Investment
            Partnerships (HOME) program as part of our annual audit plan. Our audit
            objectives were to determine whether the City complied with U.S. Department of
            Housing and Urban Development (HUD) requirements for monitoring HOME
            subrecipients and recording and using HOME program income.

 What We Found


            The City did not always perform required monitoring reviews or provide adequate
            evidence that monitoring reviews were performed. This condition occurred
            because the City lacked sufficient written procedures to ensure that monitoring
            was performed and adequately documented. As a result, the City and HUD
            lacked assurance that HOME activities were conducted in accordance with the
            requirements or that the intended program benefits were realized.

            The City incorrectly used HOME entitlement funds when program income funds
            were available for use. Also, it did not always make the required program income
            entries in HUD’s Integrated Disbursement and Information System. This
           condition occurred because the City had not implemented policies and procedures
           adequate to ensure that program income was recorded and used as required by
           HUD. As a result, the City’s reporting to HUD was incorrect, and it
           unnecessarily drew down $158,223 to its local HOME Investment Trust Fund
           account.


What We Recommend


           We recommend that HUD require the City to establish and implement effective
           written policies and procedures for monitoring HOME activities and reporting and
           using program income. We also recommend that HUD require the City to repay
           interest earned on program income that was not reported in a timely manner and
           used for HOME activities. In addition, we recommend that HUD require the City
           to establish the eligibility of funds disbursed for tenant-based rental activities,
           recalculate tenant rents and refund any overcharged tenants, and reimburse the
           HOME program for any payments determined to be ineligible.

           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 provided the draft report to the City on June 19, 2008, and discussed the
           findings with City officials at an exit conference on July 1, 2008. The City
           provided its written comments on July 2, 2008. The City agreed with the findings
           and recommendations.

           The complete text of the City’s response can be found in appendix B of this
           report.




                                            2
                            TABLE OF CONTENTS

Background and Objectives                                                 4

Results of Audit
      Finding 1: The City Did Not Properly Monitor HOME Subrecipients     5
      Finding 2: The City Did Not Properly Record or Use Program Income   8

Scope and Methodology                                                     10

Internal Controls                                                         11

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use      12
   B. Auditee Comments                                                    13




                                            3
                     BACKGROUND AND OBJECTIVES

HUD has designated the City of Durham (City) a participating jurisdiction eligible to receive
annual Office of Community Planning and Development funding. HUD awarded the City $1.3
million in HOME Investment Partnerships (HOME) funding for fiscal year 2006 and $1.2
million for fiscal year 2007. The City is governed by a mayor and a seven-member city council.
A City Manager appointed by the City Council oversees the day-to-day functions of the city.
The City administers the HOME program through its Department of Community Development.
A director manages the daily operations of the department, which maintains its records at 401
Lakewood Avenue, Durham, North Carolina.

The HOME program was created by Title II of the Cranston-Gonzalez National Affordable
Housing Act, as amended, and is regulated by 24 CFR [Code of Federal Regulations] Part 92.
HOME funds are awarded annually as formula grants to participating jurisdictions. Eligible uses
of these funds include homeownership downpayment, tenant-based assistance, housing
rehabilitation, assistance to homebuyers, and new construction of housing. HOME funding may
also be used for site acquisition, site improvements, demolition, relocation, and other necessary
and reasonable activities related to the development of nonluxury housing. All housing
developed with HOME funds must serve low and very low-income families.

Our audit objectives were to determine whether the City complied with U.S. Department of
Housing and Urban Development (HUD) requirements for monitoring HOME subrecipients and
recording and using HOME program income.




                                                4
                                RESULTS OF AUDIT

Finding 1: The City Did Not Properly Monitor HOME Subrecipients
The City did not always perform required monitoring reviews or provide adequate evidence that
monitoring reviews were performed. This condition occurred because the City lacked sufficient
written procedures to ensure that the required monitoring was performed and adequately
documented. As a result, the City and HUD lacked assurance that HOME activities were
conducted in accordance with the requirements or that intended program benefits were realized.



 Monitoring Not Performed or
 Adequately Documented

              The City contracted with subrecipients to establish and administer some of its
              HOME activities. We reviewed five activities performed by four subrecipients
              and found that the City had not performed the required monitoring for three
              subrecipients performing four activities on behalf of the City. The regulations at
              24 CFR 92.504(a) hold the City responsible for managing the day-to-day
              operation of its HOME program, ensuring that HOME funds are used in
              accordance with all program requirements and written agreements, and taking
              appropriate action when performance problems arise. The use of subrecipients
              does not relieve the City of this responsibility. In addition, the City must monitor
              the performance of each subrecipient annually.

              The following sections describe the monitoring deficiencies associated with the
              different types of HOME activities performed by subrecipients on behalf of the
              City.

              Tenant Based-Rental Assistance
              Although the City had contracted with The Durham Center to provide tenant-
              based rental assistance since 2004, the City’s files provided no evidence that the
              City had performed monitoring. When we brought this to the attention of City
              staff, they provided a copy of a review checklist, which was largely blank. It did
              not show the entity reviewed, the date, or other necessary information. In
              addition, the conclusions reached were inadequate or illegible.

              The project had been allocated a total of $200,000 since 2004. As of April 2008,
              the City had disbursed $99,831 and was withholding the remaining funds until the
              subrecipient could provide support for funds it had requested. We reviewed all 17
              tenant files for this project and detected a number of deficiencies, which could
              have been detected and corrected if the City had monitored the project as
              required. For example, file documentation did not in some cases contain adequate
              evidence that the tenant’s


                                                5
   •   Family composition had been considered in calculating the tenant’s
       income, rent, and the housing assistance payments;
   •   Disability status was adequately supported;
   •   Disability status had been considered in calculating the tenant’s income,
       rent, and housing assistance payments; and
   •   Zero-income status was adequately supported

and that

   •   Rents were not excessive,
   •   Utility allowances were supported, and
   •   Housing quality control inspections were performed as required.

In addition, there were indications in 10 of 17 files reviewed suggesting that
tenants were charged excessive rents. This condition occurred because the
subrecipient appeared not to have made the mandatory deductions (24 CFR 5.611)
from incomes for disabled tenants, elderly tenants, or tenants with dependents.
The City’s lack of written procedures for providing guidance to staff responsible
for monitoring subrecipients likely resulted in its inability to detect these
deficiencies.

Substantial Rehabilitation and New Construction
The Triangle Residential Options for Substance Abusers received HOME funding
in the form of two loans for $54,780 each during March and April of 2006. The
loans provided permanent financing for the substantial rehabilitation of two
duplexes. Our review of the projects’ files showed no evidence of monitoring,
although the projects had been complete since November 2006, about 17 months
before our review. City staff confirmed that they had not monitored the project,
and the City employee responsible for monitoring the project was unaware that
the project was complete and was overdue for monitoring.

Housing for New Hope received a $140,155 HOME grant to finance 25 percent of
the costs for construction of a 10-unit special needs rental housing project in
January of 2006. As with the substantial rehabilitation project, the City had not
performed monitoring, although the building had been certified for occupancy
since December 13, 2006, about 16 months before our review. Again, the City
employee responsible for monitoring was unaware that the project had been
completed and was overdue for monitoring.

The City lacked sufficient written procedures for ensuring that completed projects
were monitored as required. After a project was complete and certified for
occupancy, the responsible project manager was supposed to alert the employee
responsible for monitoring, who would then add the project to the monitoring
schedule. For these projects, the informal procedures did not work, and there
were no controls to detect or correct the oversight. The breakdown in
communication between the project manager and the employee responsible for

                                 6
             monitoring eliminated the only method by which monitoring would have been
             scheduled and performed.

             Since these projects had not been monitored, the City could not assure HUD that
             program requirements such as eligibility of tenants, accurate rent calculations, and
             compliance with housing quality standards had been met. After our review, the
             City monitored the subrecipients. For the substantial rehabilitation project, the
             City found that the tenants were within income limits, and the units passed
             inspection. For the new construction project, the City found that four present or
             former tenants were not within income limits.

Conclusion



             The City did not conduct the required monitoring of some HOME subrecipients
             because it did not have effective written policies and procedures. Without such
             monitoring, the City and HUD lacked assurance that all HOME projects were
             established and completed in compliance with the requirements and that the
             intended program benefits were realized.

Recommendations



             We recommend that the Director of Community Planning and Development,
             HUD North Carolina State Office, require the City to

             1A.    Establish and implement effective written monitoring policies and
                    procedures to ensure that it effectively performs and documents required
                    HOME program monitoring to ensure that the remaining $100,169 for the
                    tenant-based rental assistance project will be put to better use.

             1B.    Provide the HUD field office with adequate supporting documentation
                    relating to the $99,831 in HOME funds disbursed for tenant-based rental
                    assistance. Any amounts determined to be ineligible should be reimbursed
                    to the HOME program from nonfederal funds.

             1C.    Recalculate tenant rents and return any overcharges to the appropriate
                    tenants participating in the tenant-based rental assistance project.




                                              7
Finding 2: The City Did Not Properly Record or Use Program Income
The City did not make the required program income entries in HUD’s Integrated Disbursement
and Information System (system) and incorrectly used HOME entitlement funds when program
income funds were available for use. This condition occurred because the City had not
implemented policies and procedures adequate to ensure that program income was recorded and
used as required by HUD. As a result, the City’s reporting to HUD was incorrect, and it
unnecessarily drew down $158,223 to its local HOME Investment Trust Fund account.



 Program Income Was Not
 Correctly Used or Properly
 Reported


              The City generated program income from homeowners making payments on their
              homebuyer mortgage assistance loans. The loan servicing company provided a
              monthly report of loan activity to support the electronic transfer of payments to
              the City. The City’s accounting department analyzed the data provided by the
              servicing company and recorded the payments in the appropriate program’s
              account. The information was communicated to a Department of Community
              Development employee, who then entered the program income into HUD’s
              system.

              Timely and accurate recognition of program income is important because the
              regulations require that program income be deposited in the participating
              jurisdiction’s local account (24 CFR 92.503(a)) and disbursed before additional
              funds are drawn from the U.S. Treasury account (24 CFR 92.502(c)).

              During our audit period, with one exception, the City generally properly recorded
              program income in its accounting system. However, the City did not record
              $49,695 in program income for July, August, and September of 2006 in its
              accounting system or HUD’s system until October of 2006. The City earned $328
              in interest on these funds due to the delay. The regulations (24 CFR 92.502(c))
              require that interest on funds in the local account not expended within 15 days be
              remitted to the U.S. Treasury. In addition, HUD Notice 97-09 provides that
              program income should be reported in HUD’s system at reasonable periodic
              intervals not to exceed 30 days.

              For the months of May and June of 2006, the City properly recorded $158,223 in
              program income in its accounting system but did not enter the amount into HUD’s
              system. Since these funds were not used for HOME activities as the regulations
              require, they have continued to earn interest for the City. As of April 2008, the
              City had earned $12,944 in interest on these funds.


                                              8
Procedures Need Improvement


          The City’s existing written procedures, dated May 2006, were insufficient to
          ensure program income was accurately and timely reported and expended. The
          City should evaluate these procedures and make modifications as necessary to
          provide for better internal control and compliance with HUD’s requirements.


Recommendations


          We recommend that the Director of Community Planning and Development,
          HUD North Carolina State Office, require the City to

          2A.     Submit for HUD review and approval a plan for improving controls so that
                  program income will be more consistently recorded, reported, and
                  expended in accordance with HUD’s requirements.

          2B.     Repay HUD $13,272 or the current balance for interest the City earned on
                  program income, which was either not recorded in HUD’s system or not
                  recorded in a timely manner.

          2C.     Record $158,223 in program income in HUD’s system and expend the
                  funds for eligible HOME activities before drawing down additional funds.




                                          9
                         SCOPE AND METHODOLOGY

Our audit objectives were to determine whether the City complied with HUD requirements for
monitoring HOME subrecipients and recording and using HOME program income. To
accomplish our objectives, we

   •   Obtained and reviewed relevant HUD regulations and City guidelines,

   •   Interviewed HUD and City officials,

   •   Reviewed monitoring reports,

   •   Reviewed applicable City files and records including general ledgers, and

   •   Reviewed the City’s internal controls related to the administration of its HOME program.

Data in the City’s information system was relied upon as a basis for the findings and the
reliability of the data was assessed. The data was determined to be sufficiently reliable for the
purposes of this audit.

Finding 1

To achieve our audit objectives with respect to monitoring, we reviewed files for all five
activities initiated by four subrecipients on behalf of the City during the audit period. As
discussed in the finding, we found that the City did not comply with monitoring requirements for
three subrecipients performing four activities. The finding also contains $100,169 in funds to be
put to better use. We calculated the amount by subtracting $99,831 already disbursed from the
$200,000 awarded the subrecipient for tenant-based rental assistance. These funds will be put to
better use if the City establishes effective written monitoring policies and procedures to ensure
that monitoring is properly performed and documented and, thus, better assure HUD that the
funds have been used for eligible tenants.

Finding 2

Since the City’s HOME program income was derived from one source, we reviewed all program
income records for the audit period. We determined that $158,223 in program income will be
put to better use if it is recorded in the system and disbursed for HOME-eligible activities as
required instead of drawing down additional HOME funds.

The audit generally covered the period July 1, 2005, through June 30, 2007, but we extended the
audit period when necessary to accomplish our objectives. We conducted our fieldwork from
October 2007 through April 2008 at the City’s offices in Durham, North Carolina.

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



                                                10
                             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:

       •    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.

  Significant Weaknesses

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

       •    The City did not properly monitor HOME subrecipients. (finding 1).
       •    The City did not properly record or use program income (finding 2).




                                              11
                                   APPENDIXES

Appendix A

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




          Recommendation                                           Funds to be put
              number           Ineligible 1/    Unsupported 2/     to better use 3/
                1A                                                          $100,169
                1B                                    $99,831
                2B                $13,272
                2C                _______             _______              $158,223

                Total              $13,272            $99,831              $258,392


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 audit. Unsupported costs
     require a decision by HUD program officials. This decision, in addition to obtaining
     supporting documentation, might involve a legal interpretation or clarification of
     departmental policies and procedures.

3/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. This includes reduction in outlays, deobligation of funds, withdrawal of
     interest subsidy costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     which are specifically identified. In this instance, if our recommendations are
     implemented, the remaining $100,169 for the tenant-based rental assistance project will
     be spent for eligible tenants, and $158,223 in program income will be used for eligible
     HOME activities before drawing down additional funds.




                                               12
Appendix B
             AUDITEE COMMENTS




                    13
14
15