oversight

The City of St. Louis, Missouri, Used HOME Program Funds to Provide Excessive Development Subsidies

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-09-30.

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

                                                                 Issue Date
                                                                    September 30, 2008
                                                                 Audit Report Number
                                                                     2008-KC-1007




TO:        Dee Ann Ducote, Director, Community Planning and Development, 7ED

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 7AGA


SUBJECT: The City of St. Louis, Missouri, Used HOME Program Funds to Provide
           Excessive Development Subsidies


                                   HIGHLIGHTS

 What We Audited and Why

             We audited the City of St. Louis (City) because it received more than $4 million
             in HOME Investment Partnerships Program (HOME) funding in 2007, making it
             the highest funded city in our region. Our audit objective was to determine
             whether the City used HOME funds for reasonable and necessary development
             costs.

 What We Found
             The City used HOME funds for costs that were not reasonable and necessary to
             produce housing for low-income families. It did not establish adequate controls
             to ensure that it determined the proper amount of subsidy for HOME-funded
             development activities. As a result, it was unable to assist additional low-income
             families.




                                              1
What We Recommend
           We recommend that the U.S. Department of Housing and Urban Development
           (HUD) require the City to design and implement a process to ensure that HOME-
           funded project costs are reasonable and necessary.

           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 September 12, 2008, and requested a
           response by September 26, 2008. It provided written comments on September 26,
           2008.

           The City generally disagreed with our audit conclusions. The complete text of the
           auditee’s response, along with our evaluation of that response, can be found in
           appendix A of this report.




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                          TABLE OF CONTENTS

Background and Objective                                                        4

Results of Audit
      Finding 1: The City Used HOME Funds for Excessive Development Subsidies   5

Scope and Methodology                                                           8

Internal Controls                                                               9

Appendixes
   A. Auditee Comments and OIG’s Evaluation                                     10




                                          3
                      BACKGROUND AND OBJECTIVE

HOME Program
The HOME Investment Partnerships Program (HOME) is authorized under Title II of the Cranston-
Gonzales National Affordable Housing Act, as amended, and is funded for the exclusive purpose of
creating affordable housing for low-income households. HOME funds can be used to provide home
purchase or rehabilitation financing assistance to eligible homeowners and new homebuyers, build
or rehabilitate housing for rental or ownership, or for other reasonable and necessary expenses
related to the development of nonluxury housing. Program funds are allocated to units of general
local government on the basis of a formula that considers the relative inadequacy of each
jurisdiction’s housing supply, its incidence of poverty, its fiscal distress, and other factors.

City of St. Louis
The Community Development Administration (CDA) was created by the mayor of St. Louis in
1974 and is now responsible for administering federal funds for housing, community, and economic
development programs that strengthen the City of St. Louis and its neighborhoods. The CDA
manages the HOME program and also contracts with local government agencies, nonprofits, and
private firms to carry out its housing development, home repair, homebuyer assistance, business and
economic development, public facility improvement, historic preservation, and social service
programs.

In 2006 and 2007, the City’s HOME program provided funding for home repairs ($2.7 million) and
housing production ($4.7 million). In its housing production program, the City used HOME funds
for development subsidies (“construction gap”), which represents the difference between the cost
to develop housing and the market price. Additionally, the City used HOME funds to provide
downpayment assistance to eligible families.

We audited the City of St. Louis (City) because it received more than $4 million in HOME
funding in 2007, making it the highest funded city in our region.

Our audit objective was to determine whether the City used HOME funds for reasonable and
necessary development costs.




                                                4
                                RESULTS OF AUDIT

Finding 1: The City Used HOME Funds for Excessive Development
Subsidies
The City used HOME funds for costs that were not reasonable and necessary to produce housing
for low-income families. It did not establish adequate controls to ensure that it determined the
proper amount of subsidy for HOME-funded development activities. As a result, it was unable
to assist additional low-income families.



 Excessive Subsidies


              The City used HOME funds for costs that were not reasonable and necessary to
              produce housing for low-income families. Regulations at 24 CFR [Code of
              Federal Regulations] 92.505 require the City to meet the requirements of Office
              of Management and Budget Circular No. A-87. The circular requires that costs be
              necessary and reasonable for proper and efficient performance and administration
              of federal awards. A cost is reasonable if, in its nature and amount, it does not
              exceed that which would be incurred by a prudent person under the circumstances
              prevailing at the time the decision was made to incur the cost.

              We reviewed the construction costs for the City’s two HOME projects with the
              highest per unit subsidy. For each project, the City approved higher than
              necessary hard costs (site preparation, construction materials and labor). This
              resulted in higher than necessary HOME-funded development subsidies (the
              difference between the total costs and the market price of the finished units).

              2730-32 Miami
              The cost for these two single-family new construction houses on Miami was
              unreasonably high. While the City approved this project with hard costs budgeted
              at approximately $462,000, our cost analyst estimated that these houses could
              have been developed for approximately $343,000. In addition, during the city
              engineering technician’s review of this project’s cost, he indicated that it was 24
              percent higher than other affordable housing, which cost about $100 per square
              foot. This assessment equates to total hard costs of $360,000. Because the
              approved hard costs were too high, the development subsidy was higher than
              necessary.




                                               5
                                        2730-32 Miami
              Total development cost $751,637, including $309,437 in HOME funds
               Two houses, each with 3 bedrooms, 2 ½ baths, and 1,800 square feet


3522-24 California
The cost of converting this four-family building to two town houses was also
unreasonably high. While the City approved this project with hard costs budgeted
at approximately $422,000, our cost analyst estimated that these units could have
been converted for approximately $296,000. In addition, during the city
engineering technician’s review of this project’s cost, he indicated that he was
approving it under protest, duress, and against his better judgment. The approved
costs were approximately $126,000 too high; therefore, the development subsidy
was higher than necessary.




                                      3522-24 California
              Total development cost $640,602, including $258,350 in HOME funds
             Two town houses, each with 2 bedrooms, 2 ½ baths, and 1,473 square feet



                                      6
Inadequate Controls


           The City did not establish adequate controls to ensure that it determined the
           proper amount of subsidy for HOME-funded development activities. It did not
           make a meaningful effort to control development costs or adequately verify that
           costs were reasonable and necessary. Instead, its development process
           discouraged competition by not

               •   Placing requests for proposal in widely circulated daily newspapers,
               •   Identifying the general design of the structure in the requests for proposal,
                   and
               •   Obtaining, before the request for proposal, alderman approval of the
                   development or blighting of the parcel for tax purposes.



Effect on Low-Income Families

           As a result of its inadequate controls, the City was unable to assist additional low-
           income families. For the two projects reviewed, the City would have had
           approximately $245,000 available for other developments.


Recommendation

           We recommend that the Director of the St. Louis Office of Community Planning
           and Development require the City to

           1A. Design and implement a process to ensure that HOME-funded project costs
               are reasonable and necessary. (This procedure should include selecting
               projects through a competitive process and evaluating proposed project costs
               for reasonableness).




                                             7
                        SCOPE AND METHODOLOGY

To accomplish our objectives, we reviewed the Code of Federal Regulations pertaining to the
HOME program; the City’s policies and agreements; and the results of prior certified public
accountant, U.S. Department of Housing and Urban Development (HUD), and Office of
Inspector General (OIG) reviews. We interviewed City and HUD staff.

We obtained the City’s list of 35 projects, which were either open or completed between January
1, 2006, and December 31, 2007. The City allocated $12 million in HOME funding for 148
units at these projects. We determined that five projects met the following parameters:

           •   HOME investment greater than $100,000 per unit and
           •   Total development cost greater than $300,000 per unit.

We then selected for review the two projects with the highest per unit HOME funding. We
performed site inspections, reviewed disbursing agent files for expense eligibility and drawdown
support, and contracted with a cost analyst, who estimated the hard costs associated with these
projects. We also reviewed the City’s project development files for a history of project
administration, eligibility of project and individuals assisted, and method of advertisement and
selection.

We performed audit work from February through September 2008. The on-site audit work was
performed at the City’s Community Development Administration’s office located at 1015 Locust
Street, St. Louis, Missouri.

We conducted the 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
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                               8
                             INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, 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 total development costs of HOME-assisted projects.

              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 item is a significant weakness:

                  •   The City did not have adequate controls to ensure that HOME funds were
                      used for costs that were reasonable and necessary to produce housing for
                      low-income families.




                                                9
                         APPENDIXES

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         10
Comment 2



Comment 3




Comment 4


Comment 5




            11
Comment 6




Comment 7




Comment 8




            12
Comment 9




Comment 10




             13
Comment 11




             14
Comment 11




             15
Comment 12




Comment 13




             16
17
18
                         OIG Evaluation of Auditee Comments

Comment 1   We consider our site-specific cost estimate to be more reliable and accurate than a
            comparison of average hard costs for other completed structures assisted by the
            City. Since the City has not been making a meaningful effort to control costs or
            competitively select developers we consider the average square foot hard costs
            discussed in the City’s response to be inflated

Comment 2   The City has not been making a meaningful effort to control costs or
            competitively select developers. As a result, we consider the average square foot
            hard costs discussed in the City’s response to be inflated. Further, the only other
            new construction development of the same size on the City’s chart has a square
            foot hard cost of $111. Miami’s hard costs exceed this amount by 16 percent.

Comment 3   As stated above, the City has not been making a meaningful effort to control costs
            or competitively select developers. As a result, we consider the average square
            foot hard costs discussed in the City’s response to be inflated. Further, the City’s
            chart contains six other rehabilitation developments of the same size, including
            one by the same developer. These developments reflect a square foot hard cost of
            $72 to $104, plus the developer’s other project at $126. These costs average $93
            per square foot. Using the City’s figures, California is 32 percent higher than the
            average. Using our square footage amount of 1,473 per unit, California is 54
            percent above the average. [See Comment 9]

Comment 4   The City believes that unusual site conditions add to a development’s hard costs.
            We believe that this condition does not explain or justify the hard costs on the
            Miami development. This condition was taken into account by our contract cost
            analyst in arriving at his competitive cost estimate. This estimate was based on an
            inspection of the completed structures, a review of the plans and specifications
            and discussions with local contractors.

Comment 5   The City believes that encouraging new construction design which is compatible
            with the neighborhood’s architecture adds to a development’s hard costs. We
            believe that this condition does not explain or justify the hard costs on the Miami
            development. This condition was taken into account by our contract cost analyst
            in arriving at his competitive cost estimate. This estimate was based on an
            inspection of the completed structures, a review of the plans and specifications
            and discussions with local contractors.

Comment 6   The City believes that the very poor condition of an existing structure adds to a
            development’s hard costs. We believe that this condition does not explain or
            justify the hard costs on the California development. This condition was taken
            into account by our contract cost analyst in arriving at his competitive cost
            estimate. This estimate was based on an inspection of the completed structures, a
            review of the plans and specifications and discussions with local contractors.



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Comment 7      The City believes that environmental concerns add to a rehabilitation
               development’s hard costs. We believe that this condition does not explain or
               justify the hard costs on the California development. This condition was taken
               into account by our contract cost analyst in arriving at his competitive cost
               estimate. This estimate was based on an inspection of the completed structures, a
               review of the plans and specifications and discussions with local contractors.

Comment 8      The City believes that use of federal funds in a development adds to a
               development’s hard costs by adding requirements to follow Section 106, lead
               abatement and section 3 regulations. We believe that this issue does not explain
               or justify the hard costs on either the Miami or California development

               For example, the City prepared a chart showing hard cost comparisons which
               were used to justify high costs found on the Miami and California developments.
               We reviewed this chart and found that for other developer’s Section 106 two unit
               developments the square foot hard costs ranged from $72 to $104. We conclude
               that Section 106 requirements did not contribute to high hard costs to the extent
               claimed by the City.

Comment 9      The City noted a discrepancy in the square foot total used on the California
               development. They believe that the square footage is 1,710 per unit, not the 1,410
               shown on the construction budget. We checked with our cost analyst who
               indicated that he determined the actual interior living space using a standard
               industry method. The cost analyst measured the floor joists and found that each
               unit contained 1,473 square feet. We have changed the photo caption to reflect
               this higher number.

               The City did not address this discrepancy until our audit. We found nothing in the
               files to indicate that the engineering technician’s concerns were addressed. The
               technician’s words “under protest and duress” were unusual words to use when
               signing the California construction budget. As to the final budget approval which
               was not annotated with these words, the technician signed both budgets on the
               same day and each shows the same square footage cost.

Comment 10 The City’s construction manager evaluates the development’s hard costs by
           comparing them to costs on previous projects. As previously stated, the City’s
           chart shows that prior developments’ costs are lower than the developments
           addressed in our finding. This situation evidences the City’s evaluation process is
           not effective. [See Comments 2, 3, 9 and 13]

Comment 11 The City indicates that it has a process to ensure, to the extent possible, that effort
           to advertise is made, but that advertising in the daily newspaper is not cost
           effective. Instead, they inform developers through listings on their website. We
           believe changes can be made which will make the process more competitive and,
           as such, more cost effective. For example the City could use a small ad in the



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              daily newspaper directing the reader to the website. They do indicate a
              willingness to review the process and make improvements that address our
              concerns.

Comment 12 The City indicates that it has a process to ensure that the request for proposal
           states that the structure must be compatible with the neighborhood. They have
           not considered stipulating any further design requirements. They believe the
           developer should be allowed to use his design. We believe changes can be made
           which will make the process more competitive and, as such, more cost effective.
           For example, the City could indicate the square foot size, the number of stories
           and the number of bedrooms. The City has indicated a willingness to review the
           process and make improvements that address our concerns.

Comment 13 The City does not indicate that aldermanic approval or tax abatement will be
           provided in their request for proposals. Instead, it states that these may be
           obtainable. We believe changes can be made which will make the process more
           competitive and, as such, more cost effective. By obtaining the aldermanic
           approval and the tax abatement prior to the request for proposals, any potential
           developers would be able to submit proposals based on this additional
           information. The City has indicated a willingness to review the process and make
           improvements that address our concerns.




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