oversight

The City of Cincinnati, Ohio, Did Not Adequately Manage Its HOME Investment Partnerships Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-09-26.

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

                                                                 Issue Date
                                                                          September 26, 2008
                                                                 Audit Report Number
                                                                              2008-CH-1014




TO:        Jorgelle Lawson, Director of Community Planning and Development, 5ED


FROM:      Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: The City of Cincinnati, Ohio, Did Not Adequately Manage Its HOME
           Investment Partnerships Program

                                   HIGHLIGHTS

 What We Audited and Why

             We audited the City of Cincinnati’s (City) HOME Investment Partnerships
             Program (Program). The audit was part of the activities in our fiscal year 2007
             annual audit plan. We selected the City based upon a request from the U.S.
             Department of Housing and Urban Development’s (HUD) Columbus Office of
             Community Planning and Development and our analysis of risk factors relating to
             Program grantees in Region V’s jurisdiction. Our audit objectives were to
             determine whether the City effectively administered its Program, appropriately
             provided match contributions (contributions) for its Program, and followed
             HUD’s requirements. This is the third of three audit reports on the City’s
             Program.

 What We Found

             The City did not adequately manage its Program. It incorrectly reported Program
             contributions in its consolidated annual performance and evaluation reports
             (consolidated reports), lacked sufficient documentation to support Program
             contributions reported in its consolidated reports, inappropriately used Program
             and American Dream Downpayment Initiative (Initiative) funds, failed to ensure
             that it sufficiently protected Program funds, and lacked documentation to support
           its use of Program and Initiative funds. These deficiencies have existed with the
           City’s Program for at least three years.

           The City did not comply with HUD’s requirements in determining and reporting
           contributions for its Program. It incorrectly reported in its consolidated reports to
           HUD nearly $2.6 million in Program contributions from 31 Cincinnati Habitat for
           Humanity (Habitat) projects that did not qualify as affordable housing and was
           unable to support more than $1.8 million that it reported as Program contributions
           in its consolidated reports to HUD. In addition, the City inappropriately provided
           more than $220,000 in Program funds for the 31 Habitat projects in which it did
           not sufficiently protect the Program funds.

           We informed the director of the City’s Department of Community Development
           and Planning (Department) and the Director of HUD’s Columbus Office of
           Community Planning and Development of minor deficiencies through a
           memorandum, dated September 25, 2008.


What We Recommend

           We recommend that the Director of HUD’s Columbus Office of Community
           Planning and Development require the City to implement a detailed
           comprehensive written action plan to improve its procedures and controls to
           ensure that the City operates its Program in accordance with HUD’s and its own
           requirements, remove incorrectly reported Program contributions of nearly $2.6
           million from its consolidated reports to HUD, provide support for more than $1.8
           million or remove Program contributions from its consolidated reports to HUD
           and obtain Program contributions from nonfederal funds for housing that qualifies
           as affordable housing under the Program, reimburse its Program from nonfederal
           funds and decommit Program funds for the insufficiently protected Habitat
           projects, and implement adequate procedures and controls to address the finding 2
           cited in this audit report.

           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 our discussion draft audit report and supporting schedule to the director
           of the City’s Department, the City’s mayor, and HUD’s staff during the audit. We
           held an exit conference with the City’s director on September 12, 2008.




                                             2
We asked the City’s director to provide comments on our discussion draft audit
report by September 22, 2008. The director provided written comments, dated
September 22, 2008. The director generally agreed with finding 1, but only
partially agreed with finding 2. The complete text of the written comments, along
with our evaluation of that response, can be found in appendix B of this report.




                                3
                            TABLE OF CONTENTS

Background and Objectives                                                         5

Results of Audit
      Finding 1: The City Did Not Operate Its Program in Accordance with HUD’s
                 and Its Own Requirements                                         7

      Finding 2: Controls over the City’s Program Match Contributions Were
                 Inadequate                                                      11

Scope and Methodology                                                            16

Internal Controls                                                                17

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use             19
   B. Auditee Comments and OIG’s Evaluation                                      20
   C. Federal Requirements                                                       27




                                            4
                     BACKGROUND AND OBJECTIVES

The Program. Authorized under Title II of the Cranston-Gonzales National Affordable Housing
Act, as amended, the HOME Investment Partnerships Program (Program) is funded for the purpose
of increasing the supply of affordable standard rental housing; improving substandard housing for
existing homeowners; assisting new homebuyers through acquisition, construction, and
rehabilitation of housing; and providing tenant-based rental assistance. The American Dream
Downpayment Assistance Act established a separate funding formula for the American Dream
Downpayment Initiative (Initiative) under the Program to provide downpayment assistance, closing
costs, and rehabilitation assistance to eligible first-time homebuyers.

The City. Organized under the laws of the state of Ohio, the City of Cincinnati (City) is
governed by a mayor and a nine-member council, elected to two-year terms. The City’s
Department of Community Development and Planning (Department) administers the City’s
Program. The Department’s overall mission is to serve as an innovative, proactive partner in
supporting comprehensive economic and workforce development, quality housing development,
historic conservation, land use management, arts and cultural amenities, and social services for
all of the City’s citizens. The City’s Program records are located at 805 Central Avenue,
Cincinnati, Ohio.

The following table shows the amount of Program and Initiative funds the U.S. Department of
Housing and Urban Development (HUD) awarded the City for Program years 2003 through
2008.

                           Program         Program          Initiative
                             year            funds            funds
                             2003           $4,434,528         $228,566
                             2004            4,428,285          269,714
                             2005            4,219,448          153,797
                             2006            3,977,487            76,743
                             2007            3,942,313            76,743
                             2008            3,806,660            31,007
                            Totals         $24,808,721         $836,570

The City awarded Program funds to Cincinnati Habitat for Humanity (Habitat), a nonprofit
Christian housing ministry that seeks to eliminate substandard housing by building decent,
affordable homes for low-income households in need, to provide utility tap and permit fee
assistance for Habitat projects during Program years 2004 through 2007. Habitat sells the homes
to the households at cost through non-interest-bearing loans. Habitat was the applicant for
Program assistance and the owner of and mortgage holder for each project.

HUD’s monitoring review. HUD assessed the City’s Program through a May 2005 monitoring
review. The monitoring review covered the City’s compliance with regulations, statutes, and
reporting requirements; monitoring of Program rental rehabilitation projects (rental projects) and
owner-occupied single-family rehabilitation projects (owner-occupied projects); income


                                                5
determinations; Initiative activities, and Program match contributions (contributions). HUD
identified five findings and two concerns. As of August 2008, HUD had not performed
monitoring reviews of the City’s Program since its May 2005 review.

Effective June 2007, the City executed an agreement with HUD and the U.S. Department of
Justice to settle all outstanding issues regarding the City’s improper use of Program funds for the
Huntington Meadows apartment project. The settlement agreement requires the City to
reimburse its Program $3.95 million. The final payment under the agreement is due by January
31, 2009.

Our audit objectives were to determine whether the City effectively administered its Program,
appropriately provided contributions for its Program, and followed HUD’s requirements. This is
the third of three audit reports on the City’s Program.




                                                 6
                                RESULTS OF AUDIT

Finding 1: The City Did Not Operate Its Program in Accordance with
                  HUD’s and Its Own Requirements
The City did not adequately manage its Program. It incorrectly reported Program contributions
in its consolidated annual performance and evaluation reports (consolidated reports) to HUD,
lacked sufficient documentation to support Program contributions it reported in its consolidated
reports to HUD, inappropriately used Program and Initiative funds, failed to ensure that it
sufficiently protected Program funds, and lacked documentation to support its use of Program
and Initiative funds because the City’s management did not implement adequate procedures and
controls to ensure that its Program was operated according to HUD’s and its own requirements.
These deficiencies had existed with the City’s Program for at least three years. As a result, HUD
and the City lacked assurance that Program funds were used efficiently and effectively and for
eligible activities.


 Controls over Program
 Contributions Were Inadequate

              The City did not comply with HUD’s requirements in determining and reporting
              contributions for its Program. It incorrectly reported Program contributions in its
              consolidated reports to HUD, lacked sufficient documentation to support Program
              contributions reported in its consolidated reports to HUD, and failed to ensure that
              it sufficiently protected Program funds because it lacked adequate procedures and
              controls to ensure that HUD’s requirements were appropriately followed. As a
              result, it inappropriately reported in its consolidated reports to HUD nearly $2.6
              million in Program contributions from 31 Habitat projects that did not qualify as
              affordable housing and was unable to support more than $1.8 million that it
              reported as Program contributions in its consolidated reports to HUD. In addition,
              the City inappropriately provided more than $220,000 in Program funds for the 31
              Habitat projects in which it did not sufficiently protect the Program funds (see
              finding 2 of this audit report).

              HUD’s May 2005 on-site monitoring review determined that the City could not
              provide adequate supporting documentation for its Program contributions. In
              addition, the City did not use a Program contributions log.




                                                7
The City Needs to Improve Its
Controls over Reporting in
HUD’s System

            The City did not comply with HUD’s requirements in its reporting of Program
            activity (activity) data in HUD’s Integrated Disbursement and Information
            System (System). It inappropriately drew down, decommitted, obligated, and
            disbursed Program funds because it lacked adequate procedures and controls to
            ensure that HUD’s requirements were followed. As a result, it did not decommit
            more than $114,000 in Program funds accurately and in a timely manner and
            obligated more than $816,000 and drew down and disbursed nearly $442,000 in
            Program funds for an activity without entering into a written agreement or
            contract with the owner or developer of the property or having a current specified
            plan for how the property would be used to provide affordable housing to low-
            and moderate-income individuals. In addition, the City could not provide
            documentation to show whether activities with remaining balances of Program
            funds were active or that the City had recently reviewed the status of the activities
            (see finding 1 in Office of Inspector General (OIG) Audit Report # 2008-CH-
            1010, issued June 11, 2008).

            HUD’s May 2005 monitoring review determined that the City did not report
            activity data in HUD’s System in a timely manner. Further, the City had open
            activities from 1994 through 2000 with remaining balances totaling more than
            $400,000 in Program funds. HUD recommended that the City review its activities
            and expend funds for appropriate activities in a timely manner and/or close out or
            cancel activities and decommit and reprogram the remaining Program funds.

Controls over the City’s
Program Rental and Owner-
Occupied Projects and
Initiative Activities Were
Inadequate

            The City did not comply with HUD’s regulations and its rental rehabilitation
            program manual (manual) in providing housing rehabilitation assistance for rental
            projects. It provided assistance for rental projects with improper units, lacked
            documentation to support that units were eligible, and failed to ensure that it
            sufficiently protected Program funds because it lacked adequate procedures and
            controls to ensure that HUD’s regulations and its manual were appropriately
            followed. As a result, it provided more than $397,000 in Program funds to assist
            11 units in three projects that did not qualify as affordable housing, was unable to
            support its use of more than $590,000 in Program funds, and did not ensure that it
            sufficiently protected more than $561,000 in Program funds used for housing
            rehabilitation assistance (see finding 2 in OIG Audit Report # 2008-CH-1010).



                                              8
             The City did not comply with HUD’s regulations in providing housing
             rehabilitation assistance for owner-occupied projects. It provided assistance for
             improper owner-occupied projects and lacked documentation to support that
             owner-occupied projects were eligible because it lacked adequate procedures and
             controls to ensure that HUD’s regulations were appropriately followed. As a
             result, it inappropriately provided more than $225,000 in Program funds to assist
             three owner-occupied projects that did not qualify as affordable housing or in
             which the household was not income eligible and was unable to support its use of
             more than $1.1 million in Program funds (see finding 1 in OIG Audit Report #
             2007-CH-1017, issued September 30, 2007).

             The City did not comply with HUD’s regulations in providing downpayments,
             closing costs, homebuyer counseling, and home inspections for Initiative
             activities. It provided assistance for inappropriate Initiative activities and did not
             have documentation to support that activities were eligible because it lacked
             adequate procedures and controls to ensure that HUD’s regulations were
             appropriately followed. As a result, it inappropriately provided $41,000 in
             Initiative funds to assist five Initiative activities in which the households were not
             income eligible and was unable to support its use of more than $266,000 in
             Initiative funds (see finding 2 in OIG Audit Report # 2007-CH-1017).

             HUD’s May 2005 monitoring review determined that the City was not consistent
             as to which definition of “annual income” it used to determine whether assisted
             households were income eligible. The City also did not consider appropriate
             inclusions and exclusions of income. In addition, it did not project household
             income in accordance with HUD’s regulations.

Conclusion

             The previously mentioned deficiencies occurred because the City lacked adequate
             procedures and controls to ensure that it properly managed the day-to-day
             operations of its Program and appropriately followed HUD’s and its own
             requirements. The City did not ensure that it fully implemented HUD’s and its
             own requirements. The deficiencies in the City’s Program are significant and
             demonstrate a lack of effective Program management. These deficiencies had
             existed with the City’s Program for at least three years. As a result, HUD and the
             City lacked assurance that Program funds were used efficiently and effectively
             and for eligible activities.

Recommendation

             We recommend that the Director of HUD’s Columbus Office of Community
             Planning and Development require the City to




                                               9
1A.   Implement a detailed comprehensive written action plan (plan) to improve
      its procedures and controls to ensure that the City operates its Program in
      accordance with HUD’s and its own requirements. The plan should
      include the submission of quarterly reports to HUD’s Columbus Office of
      Community Planning and Development detailing the City’s progress in
      improving its procedures and controls regarding its Program in accordance
      with its plan. The quarterly reports should address but not be limited to
      the issues cited in this finding. If the City is unable to implement the plan,
      HUD should take appropriate action.




                                10
Finding 2: Controls over the City’s Program Contributions Were
                              Inadequate
The City did not comply with HUD’s requirements (see appendix C of this report) in
determining and reporting contributions for its Program. It incorrectly reported Program
contributions in its consolidated reports to HUD, lacked sufficient documentation to support
Program contributions reported in its consolidated reports to HUD, and failed to ensure that it
sufficiently protected Program funds because it lacked adequate procedures and controls to
ensure that HUD’s requirements were appropriately followed. As a result, it inappropriately
reported in its consolidated reports to HUD nearly $2.6 million in Program contributions from 31
Habitat projects that did not qualify as affordable housing and was unable to support more than
$1.8 million that it reported as Program contributions in its consolidated reports to HUD. In
addition, the City inappropriately provided more than $220,000 in Program funds for the 31
Habitat projects in which it did not sufficiently protect the Program funds.



 The City Lacked Controls over
 Program Contributions

              The City did not comply with HUD’s requirements in providing contributions for its
              Program. It drew down more than $25.8 million in Program funds from its HOME
              investment trust fund treasury account (treasury account) for Program years 2002
              through 2007. It was required to provide contributions for at least 12.5 percent of
              the Program funds it drew down from its treasury account during the period.
              Therefore, it was required to provide more than $3.2 million in contributions for its
              Program for the period. The City reported in its consolidated reports to HUD nearly
              $4.5 million in contributions for its Program during the period, for an excess in
              contributions totaling more than $1.2 million. The following table shows the
              amounts of Program contributions the City was required to provide, Program
              contributions that the City reported in its consolidated reports to HUD, and
              excessive contributions for Program years 2002 through 2007.

                             Program                      Program contributions
                               year              Required       Reported        Excessive
                               2002                $708,282      $1,061,402        $353,120
                               2003                  508,538        408,475       (100,063)
                               2004                  493,274        823,953         330,679
                               2005                  583,816        463,050       (120,766)
                               2006                  495,700        708,962         213,262
                               2007                  439,965        984,196         544,231
                              Totals              $3,229,575     $4,450,038      $1,220,463
                           *Note that the City actually reported $1,081,402 in Program contributions for
                           Program year 2002. However, due to a calculation error, the City only counted
                           $353,120 as excessive Program contributions for the Program year. Therefore, we
                           limited the amount of Program contributions reported for Program year 2002 to
                           $1,061,402.



                                                       11
            In addition, the City had more than $1.3 million in excessive Program
            contributions carried over from Program year 2001. Therefore, the City’s
            excessive Program contributions at the end of Program year 2007 totaled more
            than $2.6 million. The City failed to ensure that it determined and reported its
            Program contributions in accordance with HUD’s requirements. Of the nearly
            $4.5 million in contributions that the City reported in its consolidated reports to
            HUD for Program years 2002 through 2007, only slightly more than $69,000 in
            contributions was eligible for its Program. The following table shows the
            amounts of Program contributions that the City reported in its consolidated
            reports to HUD and the amounts of Program contributions that were eligible,
            ineligible, and unsupported for Program years 2002 through 2007.

                   Program                                    Program contributions
                     year             Reported               Eligible       Ineligible                Unsupported
                     2002              $1,061,402               $11,275                                 $1,050,127
                     2003                 408,475                                                          408,475
                     2004                 823,953                  57,821            $402,632              363,500
                     2005                 463,050                                      463,050
                     2006                 708,962                                      708,962
                     2007                 984,196                                      984,196
                    Totals             $4,450,038                $69,096            $2,558,840            $1,822,102
                 *Note that we only included $1,050,127 as unsupported contributions due to the City not including
                 $20,000 in reported Program contributions as excessive Program contributions for Program year 2002.



The City Incorrectly Reported
Nearly $2.6 Million in Program
Contributions from Habitat
Projects

            The City inappropriately reported in its consolidated reports to HUD more than
            $2.5 million in Program contributions from 31 Habitat projects during Program
            years 2004 through 2007. The contributions included cash donations, gifts-in-
            kind, volunteer labor, and/or sweat equity. Contrary to HUD’s requirements, the
            City did not ensure that it implemented sufficient resale or recapture requirements
            in its restrictive covenants with Habitat or its consolidated plans. Therefore, it
            could not ensure that the projects would continue to qualify as affordable housing
            during the projects’ affordability periods, and the nearly $2.6 million from the
            Habitat projects was not eligible for the City to use to meet its Program
            contribution requirements.




                                                        12
The City Lacked Sufficient
Documentation to Support
More Than $1.8 Million in
Program Contributions

            The City could not provide sufficient documentation to support an additional $1.8
            million that it reported as Program contributions in its consolidated reports to
            HUD during Program years 2002 through 2004. The City reported nearly $1.1
            million in Program contributions for project number 02.01.NON in Program year
            2002. However, it could only provide sufficient documentation to support
            $11,275 in City capital funds used for the project. It was unable to provide
            sufficient documentation to support more than $1 million in Program
            contributions. For $982,364 (reduced by the $20,000 previously mentioned) in
            present discounted value of the yield forgone on taxes, it could not provide
            documentation supporting the value of the property and that the taxes were
            actually foregone. The City based the remaining $67,763 on budget estimates
            rather than the actual amount of City capital funds used for the project.

            The City reported more than $400,000 in Program contributions for project
            number 03.01.NON in Program year 2003. However, it was unable to provide
            sufficient documentation to support the $408,475 in Program contributions. The
            City based $172,597 on budget estimates rather than the actual amount of City
            capital funds used for the project. It also could not provide source documentation
            for the remaining $235,878 ($408,475 minus $172,597) in Program contributions.

            The City reported more than $400,000 in Program contributions for the North
            Fairmount Community Center project in Program year 2004. However, it could
            only provide sufficient documentation to support $57,821 in donated property. It
            was unable to provide sufficient documentation to support $363,500 in Program
            contributions for the project. For $333,500 in donated soil, the City could not
            provide documentation supporting the value of the soil. The remaining $30,000
            was based on yield forgone from easement improvements, for which it could not
            provide documentation to support the value of the improvements.

The City Did Not Sufficiently
Protect More Than $220,000 in
Program Funds Used for the
Habitat Projects

            The City provided $220,026 in Program funds from January 2004 through August
            2008 for the 31 Habitat projects. As previously mentioned, the City did not
            ensure that it implemented sufficient resale or recapture requirements in its
            restrictive covenants with Habitat or its consolidated plans. As a result, it could
            not ensure that the projects would continue to qualify as affordable housing



                                            13
             during the projects’ affordability periods. Six of the projects had remaining
             balances in HUD’s System totaling $12,146 in Program funds.


The City Lacked Adequate
Procedures and Controls

             The weaknesses regarding the City’s contributions for its Program from and using
             Program funds for the improper Habitat projects and its lack of sufficient
             documentation to support Program contributions reported in its consolidated reports
             to HUD occurred because the City lacked adequate procedures and controls to
             ensure that it appropriately followed HUD’s requirements. It did not ensure that it
             fully implemented HUD’s requirements.

             The housing division manager stated that the City’s Department worked with the
             City’s Law Department to develop the language in the City’s restrictive covenants
             for the Habitat projects and that both Departments believed that the language in the
             restrictive covenants was sufficient to meet HUD’s requirements.


Conclusion

             The City did not comply with HUD’s requirements in determining and reporting
             contributions for its Program. As previously mentioned, the City inappropriately
             reported in its consolidated reports to HUD nearly $2.6 million in Program
             contributions from 31 Habitat projects that did not qualify as affordable housing
             and was unable to support more than $1.8 million that it reported as Program
             contributions in its consolidated reports to HUD. In addition, the City provided
             more than $220,000 in Program funds for the 31 Habitat projects.

Recommendations

             We recommend that the Director of HUD’s Columbus Office of Community
             Planning and Development require the City to

             2A.    Remove the $2,558,840 in Program contributions from its consolidated
                    reports to HUD for the contributions that it incorrectly reported in its
                    consolidated reports to HUD for Program years 2004 through 2007.

             2B.    Provide supporting documentation or remove $43,240 in Program
                    contributions ($2,602,080 in excess contributions less $2,558,840 for
                    incorrectly reported contributions) from its consolidated reports to HUD
                    for the more than $40,000 in excess contributions for which the City could
                    not provide sufficient supporting documentation.




                                              14
2C.   Provide supporting documentation or remove $1,778,862 in Program
      contributions ($1,822,102 in unsupported contributions less $43,240 in
      unsupported excess contributions) from its consolidated reports to HUD
      for the nearly $1.8 million in required contributions in which the City
      could not provide sufficient supporting documentation. If the City cannot
      provide sufficient supporting documentation, it should obtain $1,778,862
      in Program contributions from nonfederal funds for housing that qualifies
      as affordable housing under the Program.

2D.   Reimburse its Program from nonfederal funds for the $220,026 in
      Program funds used during Program years 2004 through 2007 for the 31
      Habitat projects in which the City did not sufficiently protect the Program
      funds.

2E.   Decommit the Program funds inappropriately committed to the six Habitat
      projects, which have remaining balances in HUD’s System totaling
      $12,146.

2F.   Implement adequate procedures and controls to ensure that the City
      obtains sufficient Program contributions from nonfederal funds for
      housing that qualifies as affordable housing under the Program.

2G.   Implement adequate procedures and controls to ensure that housing
      assistance is provided in accordance with HUD’s requirements.




                               15
                         SCOPE AND METHODOLOGY

To accomplish our objectives, we reviewed

            •   Applicable laws; HUD’s regulations at 24 CFR [Code of Federal Regulations] Part
                92; HUD’s Office of Community Planning and Development Notice 97-03; Office
                of Management and Budget Circulars A-87 and A-122; HUD’s “Building HOME: A
                Program Primer”; Title 42, section 12750, of the United States Code; and Ohio
                Revised Code.

            •   The City’s accounting records; annual audited financial statements for 2005 and
                2006; most recent internal audit report, dated October 2004; data from HUD’s
                System; Program and project files; computerized databases; by-laws; policies and
                procedures; organizational chart; consolidated annual plans; and consolidated
                reports.

            •   The Habitat’s accounting records, annual audited financial statements for 2006
                and 2007, project files, and policies and procedures.

            •   HUD’s files for the City.

We also interviewed the City’s employees, Habitat’s employees, and HUD staff.

Finding 2

We reviewed all of the nearly $4.5 million in Program contributions that the City reported in its
consolidated reports to HUD for Program years 2002 through 2007. The Program contributions
were selected to determine whether the City effectively administered its Program, appropriately
provided contributions for its Program, and followed HUD’s requirements.

We performed our on-site audit work from April through August 2008 at the City’s office located at
805 Central Avenue, Cincinnati, Ohio. The audit covered the period January 2006 through March
2008 and was expanded as determined necessary.

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




                                                16
                             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 objectives:

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

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

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

              •       Safeguarding 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.




                                               17
Significant Weakness

           Based on our review, we believe the following item is a significant weakness:

           •   The City lacked adequate procedures and controls to ensure that it complied
               with HUD’s and/or its own requirements in regard to managing the day-to-day
               operations of its Program, providing contributions for its Program from and
               using Program funds for eligible Habitat projects, and maintaining sufficient
               documentation to support Program contributions reported in its consolidated
               reports to HUD (see findings 1 and 2).

Separate Communication of
Minor Deficiencies

           We informed the director of the City’s Department and the Director of HUD’s
           Columbus Office of Community Planning and Development of minor deficiencies
           through a memorandum, dated September 25, 2008.




                                            18
                                   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/
                2A                 $2,558,840
                2B                                          $43,240
                2C                                        1,778,862
                2D                    220,026
                2E                                                            $12,146
               Totals              $2,778,866            $1,822,102           $12,146


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 OIG recommendation is implemented. This includes
     reductions in outlays, deobligation of funds, withdrawal of interest subsidy costs not
     incurred by implementing recommended improvements, avoidance of unnecessary
     expenditures noted in preaward reviews, and any other savings which are specifically
     identified. In these instances, if the City implements our recommendation, it will cease
     using Program funds for improper projects.




                                                19
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




                         20
Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




Comment 2


Comment 2

Comment 2




                         21
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 2




Comment 2




                         22
Ref to OIG Evaluation   Auditee Comments




Comment 2


Comment 2




Comment 2




                         23
Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 1




                         24
Ref to OIG Evaluation   Auditee Comments




Comment 1




                         25
                         OIG Evaluation of Auditee Comments

Comment 1   The City’s commitment to resolve all outstanding issues from our prior audit
            reports and implement a detailed comprehensive written action plan should
            improve its procedures and controls to ensure that the City operates its Program in
            accordance with HUD’s and its own requirements.

Comment 2   Contrary to HUD’s requirements, the City did not ensure that it implemented
            sufficient resale or recapture requirements in its restrictive covenants with Habitat
            or its consolidated plans. Therefore, it could not ensure that the projects would
            continue to qualify as affordable housing during the projects’ affordability
            periods.

            HUD’s regulations at 24 CFR 92.254(a) state that Program housing that is for
            acquisition by a household must meet the affordability requirements of 24 CFR
            92.254(a). Section 92.254(a)(5) states that to ensure affordability, a participating
            jurisdiction must impose either resale or recapture requirements that comply with
            the standards of section 92.254(a)(5) and set forth the requirements in its
            consolidated plan. Section 92.254(a)(5)(i) states that a participating jurisdiction’s
            resale requirements must ensure, if the housing does not continue to be the
            principal residence of the household for the duration of the period of affordability,
            that the housing will remain affordable to a reasonable range of low-income
            homebuyers. Deed restrictions, covenants running with the land, or other similar
            mechanisms must be used to impose the resale requirements. Section
            92.254(a)(5)(ii) states that a participating jurisdiction’s recapture requirements
            must ensure that the participating jurisdiction recoups all or a portion of the
            Program assistance to the homebuyers if the housing does not continue to be the
            principal residence of the household for the duration of the period of affordability.

Comment 3   We provided the City and HUD a supporting schedule on August 18, 2008,
            showing the six projects that had remaining balances in HUD’s System totaling
            more than $12,146 in Program funds.




                                             26
Appendix C

                           FEDERAL REQUIREMENTS

Finding 1
HUD’s regulations at 24 CFR 92.504(a) state that a participating jurisdiction is responsible for
managing the day-to-day operations of its Program, ensuring that Program funds are used in
accordance with all Program requirements and written agreements, and taking appropriate action
when performance problems arise. The use of subrecipients or contractors does not relieve the
participating jurisdiction of this responsibility.

HUD’s regulations at 24 CFR 92.550(a) state that HUD will review the performance of each
participating jurisdiction in carrying out its responsibilities under 24 CFR Part 92 whenever
determined necessary by HUD but at least annually. HUD may also consider relevant
information pertaining to a participating jurisdiction’s performance gained from other sources.

HUD’s regulations at 24 CFR 92.551(c) state that corrective or remedial actions for a
participating jurisdiction’s performance deficiency or a failure to meet a provision of 24 CFR
Part 92 will be designed to prevent its continuation; mitigate, to the extent possible, its adverse
effects or consequences; and prevent its recurrence. Section 92.551(c)(1) states that HUD may
instruct the participating jurisdiction to submit and comply with proposals for action to correct,
mitigate, and prevent a performance deficiency to include the following:

   ™   Preparing and following a schedule of actions for carrying out the affected activities,
       consisting of schedules, timetables, and milestones necessary to implement the affected
       activities;
   ™   Establishing and following a management plan that assigns responsibilities for carrying
       out remedial actions;
   ™   Canceling or revising activities likely to be affected by the performance deficiency before
       expending Program funds for the activities;
   ™   Reprogramming Program funds that have not yet been expended for affected activities to
       other eligible activities;
   ™   Reimbursing its HOME investment trust fund local account (local account) in any
       amount not used in accordance with the requirements of 24 CFR Part 92;
   ™   Suspending the disbursement of Program funds for affected activities; and
   ™   Making matching contributions as draws are made from its treasury account.

HUD’s regulations at 24 CFR 92.551(c)(2) state that HUD may also change the method of
payment to a participating jurisdiction from an advance to a reimbursement basis and take other
remedies that may be legally available.




                                                 27
Finding 2
Title II of the Cranston-Gonzalez National Affordable Housing Act (Act), as amended, section
220(a), and HUD’s regulations at 24 CFR 92.218(a) state that each participating jurisdiction
must make contributions to housing that qualifies as affordable housing under the Program
during a fiscal year. The contributions must total not less than 25 percent of the Program funds
drawn from the participating jurisdiction’s treasury account during a fiscal year.

Title II of the Act, as amended, section 223, states that if the HUD finds after reasonable notice
and opportunity for hearing that a participating jurisdiction has failed to comply substantially
with any provision of the Act and until HUD is satisfied that there is no longer any such failure
to comply, HUD shall reduce the Program funds in the participating jurisdiction’s treasury
account by the amount of any expenditures that were not in accordance with the requirements of
the Act.

HUD’s regulations at 24 CFR 92.552(a) state that if HUD finds after reasonable notice and
opportunity for hearing that a participating jurisdiction has failed to comply with any provision
of 24 CFR Part 92 and until HUD is satisfied that there is no longer any such failure to comply,
HUD shall reduce the Program funds in the participating jurisdiction’s treasury account by the
amount of any expenditures that were not in accordance with the requirements of 24 CFR Part
92.

HUD’s regulations at 24 CFR 92.218(a) state that each participating jurisdiction must make
contributions to housing that qualifies as affordable housing under the Program during a fiscal
year. The contributions must total not less than 25 percent of the Program funds drawn from the
participating jurisdiction’s treasury account during a fiscal year.

HUD’s regulations at 24 CFR 92.220(a)(1) state that for a cash contribution to be eligible as a
Program contribution, nonfederal funds must be contributed permanently to the Program.
Therefore, to receive match credit for the full amount of a loan to a Program project, all
repayment, interest, or other return on investment of the contribution must be deposited in a
participating jurisdiction’s local account to be used for eligible Program activities. HUD’s
regulations at 24 CFR 92.220(a)(1)(iii) state that the grant equivalent of a below-market interest
rate loan, from nonborrowed funds, to a project that is not repayable to a participating
jurisdiction’s local account may be counted as a cash contribution as follows: the present
discounted value of the yield forgone (a rate equal to the 10-year Treasury note rate plus 200
basis points for one- to four-unit housing financed with a fixed interest rate mortgage).

HUD’s regulations at 24 CFR 92.220(a)(3)(ii) state that donated property acquired with federal
assistance specifically for a Program project may provide a partial contribution. The property
must be acquired with federal assistance at demonstrably below the appraised value and
acknowledged by the seller as a donation to affordable housing at the time of the acquisition.
The amount of the contribution is the difference between the acquisition price and the appraised
value at the time of acquisition.




                                                28
HUD’s regulations at 24 CFR 92.220(a)(6) state that the reasonable value of donated site-
preparation and construction materials, not acquired with federal funds, are eligible as Program
contributions.

HUD’s regulations at 24 CFR 92.222(a)(1) state that if a participating jurisdiction meets one of
the two following distress factors, poverty rate or per capita income, the participating
jurisdiction’s Program contribution will be reduced by 50 percent.

HUD’s regulations at 24 CFR 92.254(a) state that Program housing that is for acquisition by a
household must meet the affordability requirements of 24 CFR 92.254(a). Section 92.254(a)(5)
states that to ensure affordability, a participating jurisdiction must impose either resale or
recapture requirements that comply with the standards of section 92.254(a)(5) and set forth the
requirements in its consolidated plan. Section 92.254(a)(5)(i) states that a participating
jurisdiction’s resale requirements must ensure, if the housing does not continue to be the
principal residence of the household for the duration of the period of affordability, that the
housing is made available for subsequent purchase only to a homebuyer whose household
qualifies as a low-income family and will use the property as its principal residence. The resale
requirements must also ensure that the price at resale provides the original Program-assisted
owner a fair return on investment and ensure that the housing will remain affordable to a
reasonable range of low-income homebuyers. Deed restrictions, covenants running with the
land, or other similar mechanisms must be used to impose the resale requirements. Section
92.254(a)(5)(ii) states that a participating jurisdiction’s recapture requirements must ensure that
the participating jurisdiction recoups all or a portion of the Program assistance to the homebuyers
if the housing does not continue to be the principal residence of the household for the duration of
the period of affordability.

HUD’s regulations at 24 CFR 92.508(a) state that a participating jurisdiction must establish and
maintain sufficient records to enable HUD to determine whether the participating jurisdiction has
met the requirements of 24 CFR Part 92. The participating jurisdiction must maintain records
demonstrating compliance with the matching requirements of 24 CFR 92.220, including a
running log and project records documenting the type and amount of Program contributions by
project.

Section V of HUD’s Community Planning and Development Notice 97-03 states that to be
considered eligible as a Program contribution, a contribution must be made from nonfederal
sources and must be a permanent contribution to a Program-assisted project or to Program-
eligible housing. Section V.B states that documentation of Program contributions in the form of
forgiven taxes, fees, or charges must include a letter from the entity granting forgiveness and as
appropriate, establishing the value of the contribution. To calculate the present discounted value
of taxes, fees, or charges that are forgiven in future years, a participating jurisdiction is to use a
property’s full market value as the taxable basis, must document any assumptions and the basis
upon which the assumptions were made, and should be able to demonstrate that the assumptions
are reasonable.

Section VII of HUD’s Community Planning and Development Notice 97-03 states that the value
of forgone taxes is credited at the time a local government officially forgoes the taxes and



                                                  29
notifies the project owner of the forgone taxes. Section XI states that a participating
jurisdiction’s Program contribution log should serve as the basis for reporting its Program
contributions as part of its consolidated report. However, the participating jurisdiction is also
required to maintain documentation in its project files to establish that each contribution is
eligible, made to a Program-assisted or Program-eligible project, and has been valued in
accordance with HUD’s Program regulations and with customary and reasonable means of
establishing value.




                                                 30