oversight

The State of Colorado Did Not Comply with Community Development Block Grant Program Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-09-23.

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

                                                               Issue Date
                                                                     September 23, 2008
                                                               Audit Report Number
                                                                            2008-DE-1003




TO:        Sharon Jewell, Acting Director, Office of Community Planning and
             Development, 8AD

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 8AGA


SUBJECT: The State of Colorado Did Not Comply with Community Development Block
           Grant Program Requirements


                                  HIGHLIGHTS

 What We Audited and Why

            We audited the State of Colorado (State), Division of Housing’s (Division)
            Community Development Block Grant (CDBG) program. We selected the State’s
            CDBG program because it received almost $22 million in CDBG funds in 2006
            and 2007 and we had not previously performed an audit of its program.

            Our objective was to determine whether the Division (1) awarded CDBG funds to
            ineligible projects and (2) properly identified and reported program income data.

 What We Found
            The Division used CDBG funds for ineligible and questionable projects. This
            condition occurred because management’s main focus was on selecting projects
            that were for the greater good of the state, even if some projects did not fully
            comply with the U.S. Department of Housing and Urban Development’s (HUD)
            requirements. As a result, the Division awarded more than $4.6 million in grants
            that did not effectively meet the needs of the intended nonentitlement low- and
            moderate-income beneficiaries.
           The Division also did not effectively identify, report, or classify program income
           generated by its subrecipients. This condition occurred because the Division did
           not have adequate controls. As a result, neither the Division nor HUD could be
           assured that subrecipients used program income for its intended purpose. In
           addition, the Division did not realize the full benefits of the allowable amounts for
           planning and administrative costs and for public service activities.

What We Recommend


           We recommend that HUD require the Division to repay from nonfederal funds the
           $1.7 million in ineligible grants. HUD should require the Division to develop and
           implement effective controls over establishing and administering projects and
           identifying and recording program income. We also recommend that HUD
           determine the eligibility of the questioned costs and require the Division to repay
           from nonfederal funds the amounts determined to be unsupported or unnecessary.

           For each recommendation in the body of the report 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 Division officials on August 26, 2008, and
           received their written response on September 9, 2008. The Division officials
           concurred with the recommendations.

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




                                             2
                            TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit
      Finding 1: The Division Improperly Awarded Grants from CDBG Funds           5
      Finding 2: The Division Did Not Effectively Identify, Report, or Classify   8
                 Program Income

Scope and Methodology                                                             11

Internal Controls                                                                 12

Appendixes
   A. Schedule of Questioned Costs                                                13
   B. Auditee Comments and OIG’s Evaluation                                       14




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                      BACKGROUND AND OBJECTIVES

Title I of the Housing and Community Development Act of 1974 (Public Law 93-383)
established the Community Development Block Grant (CDBG) program. The U. S. Department
of Housing and Urban Development (HUD) distributes CDBG funds to metropolitan cities or
counties as entitlements for use in urban areas. It also distributes funding to states to provide to
local governments in nonentitlement areas. The State of Colorado (State) and HUD signed a
funding approval/agreement each year that established the funding and terms for the CDBG
program.

                               Grant year       Grant amount
                                 2006             11,120,921
                                 2007             10,768,763
                                 Total            21,889,684

All CDBG activities must meet one of the following national objectives:

       (1) Benefit low- and moderate-income persons,
       (2) Aid in the prevention or elimination of slums and blight, or
       (3) Meet certain community development needs having a particular urgency.

The State equally divided its CDBG funds among three State offices: the Division of Housing,
the Division of Local Government, and the Governor’s Office of Economic Development and
International Trade. The Office of Local Affairs governs the CDBG functions of these offices.
The Division of Housing (Division) was the focus of our audit.

Our objective was to determine whether the Division (1) awarded CDBG funds to ineligible
projects and (2) properly identified and reported program income data.




                                                  4
                                RESULTS OF AUDIT


Finding 1: The Division Improperly Awarded Grants from CDBG
            Funds
The Division used CDBG funds for ineligible and questionable projects. This condition occurred
because management’s main focus was on selecting projects that were for the greater good of the
state, even if some projects did not fully comply with HUD’s requirements. As a result, the
Division awarded more than $4.6 million in grants that did not effectively meet the needs of the
intended nonentitlement low- and moderate-income beneficiaries.




 Ineligible Grants Were
 Awarded to Entitlement
 Entities


              The Division inappropriately awarded grants to entitlement entities. An entitlement
              entity is an urban city or county that receives annual CDBG allocations from HUD.
              As explained in 24 CFR [Code of Federal Regulations] 570.480, states that elect to
              receive CDBG funds are to use the funds for units of general local government in the
              state’s nonentitlement areas. The Division inappropriately awarded eight grants to
              three entitlements in the state. The eight ineligible CDBG grants totaled more than
              $1.7 million.


 Unsupported Grants Might Not
 Have Met National Objectives


              The Division awarded grants to activities without proof that they met the required
              national objective to benefit low- and moderate-income persons in nonentitlement
              areas. Regulations at 24 CFR 570.483 require the state to ensure that at least 51
              percent of the persons receiving benefits from an activity under the low- and
              moderate-income national objective meet the income requirements.

              The Division awarded 21 CDBG grants, totaling more than $2.8 million, for
              which the grant project files did not document the attainment of the low- and
              moderate-income national objective. Eleven of the grants were for entities to
              perform local needs assessments. The contracts for these 11 grants stated that the
              projects met the national objective in 24 CFR 570.483(b)(5). This requirement
              states that the project is allowable if the state can document that at least 51
              percent of the persons who would benefit from the implementation of the plan are



                                               5
            low- and moderate-income persons. The project files did not contain
            documentation supporting that 51 percent requirement.

            The Division did not ensure that the other 10 grants fully complied with HUD and
            State CDBG requirements. State revolving loan fund guidelines for the
            rehabilitation and the downpayment assistance programs and CDBG contracts
            required that all loans from revolving loan funds be to eligible low- and moderate-
            income persons. HUD required that the State use CDBG funds in nonentitlement
            areas. In addition to not fully documenting the national objective requirements,
            these grants had other deficiencies:

            •   Grantees administering four revolving loan funds awarded loans to
                homeowners living in entitlement areas.

            •   HUD required that the State properly underwrite the grants. Four of the
                projects showed evidence of inadequate underwriting.

            •   Two projects’ files contained evidence of questionable project or
                administrative costs.


Management’s Focus Did Not
Ensure Compliance

            Division management officials stated that their main focus was to select projects
            that were for the greater good of the state, even if some projects did not fully
            comply with HUD’s requirements. The Division did not have procedures to
            ensure that grants were not awarded to entitlement entities. It did not require
            proper documentation of HUD’s requirement that at least 51 percent of
            beneficiaries be low or moderate income. Division management officials stated
            that they considered all CDBG housing projects to be 100 percent compliant with
            the low- and moderate-income national objective. Therefore, they were not
            concerned about documenting evidence of compliance.


Grants Were Ineligible and
Questionable

            Because of the inadequate procedures, the Division awarded more than $4.6
            million in grants that did not effectively meet the needs of the intended
            nonentitlement low- and moderate-income beneficiaries.




                                             6
Recommendations



          We recommend that the Director of HUD’s Denver Office of Community Planning
          and Development

          1A. Require the Division to repay from nonfederal funds the $1,748,041 in
              ineligible CDBG funds awarded to entitlements.

          1B. Determine the eligibility of the more than $2.8 million associated with the
              21 questionable projects.

          1C. Require the Division to repay from nonfederal funds any portion of the more
              than $2.8 million determined to be unsupported or unnecessary.

          1D. Require the Division to establish and implement effective policies and
              procedures to ensure that CDBG funds are not awarded to entitlements.

          1E. Require the Division to establish and implement effective policies and
              procedures to ensure that it obtains adequate documentation to support
              compliance with the CDBG national objective requirements.




                                          7
Finding 2: The Division Did Not Effectively Identify, Report, or
             Classify Program Income

The Division did not effectively identify, report, or classify program income generated by its
subrecipients. This condition occurred because the Division did not have adequate controls. As
a result, neither the Division nor HUD could be assured that subrecipients used program income
for its intended purpose. In addition, the Division did not realize the full benefits of the
allowable amounts for planning and administrative costs and for public service activities.




The Division Did Not
Effectively Identify Program
Income

              The Division did not effectively identify program income data related to the
              grants it awarded for revolving loan funds for home rehabilitation or for
              downpayment assistance loans. The principal and interest payments generated
              from these loans were program income as defined in 24 CFR 570.489(e).

              The Division required subrecipients with revolving loan funds to maintain
              detailed records for each loan, including detailed borrower and program income
              information. However, it did not collect this detailed program income data. It
              required the subrecipients to submit quarterly and annual reports that included
              program income totals, not the detailed information.

              As a result, the Division did not have adequate program income data to ensure
              that all subrecipients with revolving loan funds accurately reported program
              income. For example, one subrecipient notified its local government entity in
              October 2005 that it used about $155,700 in program income for general
              operating expenses. The local government did not provide this information to the
              Division until March 2007. The quarterly and annual reports received by the
              Division did not contain sufficient detail to show the misuse of funds.

   The Division Did Not Properly
   Report Program Income



              The Division did not report program income in HUD’s Integrated Disbursement
              and Information System (IDIS). HUD’s “Guidance for Reporting CDBG
              Accomplishments in IDIS” states, “HUD requires reliable, comprehensive



                                               8
            information regarding program performance in order to comply with the
            Government Performance and Results Act of 1993.”

            During a 2007 monitoring review, HUD required the Division to obtain and enter
            into IDIS the program income for 2006 and 2007. To address this requirement,
            the Division requested that subrecipients with revolving loan funds submit special
            two-year reports that included total program income earned and spent. However,
            it did not obtain the reports for all projects. The Division provided us 32 reports,
            but we identified 12 other revolving loan fund projects for which the Division did
            not provide special reports.

            The special reports did not provide detailed program income information. We
            identified other deficiencies in the report data. For example, one report was not
            mathematically accurate. The report showed a 2006 ending balance of $47,417,
            but the listed numbers totaled $73,774. The 2007 ending balance was $47,520,
            but the numbers totaled $275,669. Using the $73,774 as the beginning balance,
            the 2007 ending balance would be $302,026. However, the quarterly report as of
            December 31, 2007, showed an ending balance of $32,526.


The Division Inappropriately
Classified Program Income


            The Division inappropriately converted program income to miscellaneous
            income. As stated in 24 CFR 570.489(e)(2)(ii), the amounts generated by eligible
            activities carried out by an eligible nonprofit, as defined in section 105(a)(15) of
            Title 1 of the Housing and Community Development Act of 1974, are not
            considered program income. HUD has determined that income generated by an
            eligible nonprofit subrecipient is miscellaneous income and is not federal funds.
            Therefore, the Division did not need to report these amounts to HUD. The
            Division issued a letter to all revolving loan fund subrecipients strongly
            encouraging them to request a conversion to miscellaneous income. It did not
            have adequate records to support the determinations and inappropriately approved
            some program income conversions to miscellaneous income. For example, it
            approved a town government entity to convert amounts generated by its revolving
            loan fund to miscellaneous income.


The Division Did Not Have
Adequate Controls

            The Division did not have adequate controls over program income in place to
            ensure that the information from the subrecipients was accurate and complete. It
            did not have procedures in place to enter the program income into HUD’s system.
            The Division needed procedures to ensure that it obtained complete and detailed



                                             9
            information to support the full amounts of program income generated and to enter
            this information into HUD’s system.


The Division Was Missing
Benefits

            The Division and HUD could not be assured that subrecipients used program
            income for its intended purpose. Additionally, HUD requirements state that
            program income can be added to the CDBG funding allocation to calculate the
            funding limits for the planning and administrative costs and the public service
            activities. The Division missed the benefit of the increased limits by not reporting
            program income in HUD’s system.

 Recommendations

            We recommend that the Director of HUD’s Denver Office of Community Planning
            and Development

            2A. Require the Division to establish and implement policies and procedures to
                ensure that all program income is identified and entered into HUD’s system.

            2B. Require the Division to establish and implement policies and procedures to
                ensure that conversions to miscellaneous income are properly completed.

            2C. Provide technical assistance as needed to assist the Division in identifying
                and recording program income and properly determining miscellaneous
                income.




                                             10
                         SCOPE AND METHODOLOGY

Our review period was from January 1, 2006, to December 31, 2007. We expanded our scope as
necessary. We reviewed HUD and State criteria and contracts, met with HUD and State staff,
and looked at HUD and State records.

We reviewed the State CDBG activities of the three State offices responsible for the
administration of the program. Our review of the Division of Local Government did not identify
problems with its controls. We identified a minor deficiency with the Governor’s Office of
Economic Development and International Trade that we addressed in a separate letter. We
determined that the Division of Housing had indications of significant deficiencies, so we
performed a detailed audit of that office and are reporting the results in this audit report.

We requested a list of all CDBG projects active during our review period. Division staff
provided three lists that were significantly different. We combined the lists and determined that
they contained 86 projects. Division staff told us that 18 of the projects either closed before our
audit period or were not yet under contract. We completed a 100 percent review of the 68
remaining available project files. We reviewed these files to obtain an understanding of the
project documentation and to determine whether the Division properly established and
completed CDBG projects. We used computer-generated lists while determining the active
CDBG projects during our audit period but did not place reliance on the computer data.

We reviewed all program income documentation provided by the Division to determine whether
the records were complete and whether the Division adequately accounted for the program
income earned on CDBG projects. We also reviewed the available information relating to the
conversions of program income to miscellaneous income to determine whether the Division had
properly approved the conversions.

We performed our on-site audit work from February to June 2008 at the State’s offices at 1313
Sherman Street, Denver, Colorado.

We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objectives. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objectives.




                                                11
                             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:

              •       Controls over ensuring that CDBG projects were established in
                      accordance with HUD regulations.

              •       Controls over identifying, reporting, and classifying CDBG program
                      income earned in HUD’s Integrated Disbursement and Information
                      System.

              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 Division did not have adequate controls to ensure that CDBG grants
                      complied with HUD requirements (finding 1).

              •       The Division did not have adequate controls over identifying, reporting, and
                      classifying program income generated by its subrecipients (finding 2).




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                                   APPENDIXES

Appendix A
                SCHEDULE OF QUESTIONED COSTS

                  Recommendation            Ineligible 1/   Unsupported 2/
                        Number
                                1A           $1,748,041
                                1B                             $2,887,423

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. In this instance, the Division awarded grants to entitlement
     entities, which violated HUD’s requirements.

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. In this instance, the Division awarded grants for
     which there was no or insufficient support to show compliance with HUD requirements.




                                            13
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments

Comment 1




                         14
15
                        OIG Evaluation of Auditee Comments

Comment 1   The Division concurs with all the recommendations and plans to work with HUD
            on the corrective actions needed to resolve the recommendations.




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