oversight

Lower Manhattan Development Corporation, Community Development Block Grant, Disaster Recovery Assistance Funds, New York, New York

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-03-31.

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

                                                               Issue Date
                                                                        March 31, 2008
                                                               Audit Report Number
                                                                            2008-NY-1004




TO:        Nelson R. Bregon, General Deputy Assistant Secretary for Community Planning
                                  and Development, D


FROM:      Edgar Moore, Regional Inspector General for Audit, 2AGA

SUBJECT: Lower Manhattan Development Corporation, New York, New York,
         Community Development Block Grant Disaster Recovery Assistance Funds


                                  HIGHLIGHTS

 What We Audited and Why

            This is the tenth in our series of congressionally mandated audits of the Lower
            Manhattan Development Corporation’s (auditee) administration of the
            Community Development Block Grant Disaster Recovery Assistance funds
            awarded to the State of New York in the aftermath of the September 11, 2001,
            terrorist attacks on the World Trade Center in New York City. During the audit
            period, April 1 through September 30, 2007, the auditee disbursed $132.7 million
            of the approximatley $2.8 billion administered.

            Our audit objectives were to determine whether the auditee (1) disbursed Disaster
            Recovery Assistance funds in accordance with the guidelines established under
            U.S. Department of Housing and Urban Development (HUD)-approved partial
            action plans, (2) expended Disaster Recovery Assistance funds for eligible
            administration and planning expenses in accordance with applicable laws and
            regulations, and (3) had a financial management system in place that adequately
            safeguarded funds and prevented misuse.
What We Found


           The auditee generally disbursed the $132.7 million in Disaster Recovery
           Assistance funds in accordance with HUD-approved action plans, expended funds
           for eligible administration and planning expenses in accordance with applicable
           laws and regulations, and maintained a financial management system that
           adequately safeguarded funds and prevented misuse. However, an internal
           control weakness existed in the management of grant repayments in one program.
           The subrecipient that administered the Employment Training Assistance Program
           credited 10 grant recipient repayments to the wrong HUD grant and did not return
           recovered funds to HUD’s Line of Credit Control System in a timely manner.
           Consequently, there was no assurance that funds were properly recorded and
           promptly returned.


What We Recommend


           We recommend that HUD’s General Deputy Assistant Secretary for Community
           Planning and Development require the auditee to strengthen controls to ensure
           that future grant repayments to the Employment Training and Assistance Program
           are properly recorded and credited to the correct HUD grant.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response
           We discussed the results of our review during the audit and provided a draft report
           to the auditee on March 18, 2008. We held an exit conference on March 25,
           2008, and requested that any written comments be provided by that date. We
           received a written response on March 27, 2008. Auditee officials generally
           agreed with our finding, advising that they had reminded the subrecipient to post
           future recoveries to the appropriate grant and program budget line items and to
           continue to return recovered funds to HUD in an efficient manner.

           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 Auditee Generally Administered Grant Funds in Accordance   6
                 with HUD Regulations

Scope and Methodology                                                           8

Internal Controls                                                               9

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use            11
   B. Auditee Comments and OIG’s Evaluation                                     12
   C. Schedule of Program Funding and Disbursements as of September 30, 2007    15




                                           3
                           BACKGROUND AND OBJECTIVES


The Lower Manhattan Development Corporation (auditee) was created in December 2001 as a
subsidiary of the Empire State Development Corporation to function as a joint city-state
development corporation. A 16-member board of directors, appointed equally by the governor
of New York State and the mayor of New York City, oversees the auditee’s affairs. The Empire
State Development Corporation performs all accounting functions for the auditee, including
payroll, payments to the auditee’s vendors, and drawing down funds from the U.S. Department
of Housing and Urban Development (HUD).

The State of New York designated the auditee to administer $2.783 billion 1 of the $3.483 billion
in Community Development Block Grant Disaster Recovery Assistance funds appropriated by
Congress following the September 11, 2001, terrorist attacks on the World Trade Center to assist
with the recovery and revitalization of lower Manhattan. Planned expenditures of Disaster
Recovery Assistance funds are documented in action plans that receive public comment and are
approved by HUD. HUD had approved 15 partial action plans as of September 30, 2007, that
allocated the $2.783 billion to various programs and activities (see appendix C for amounts by
program). As of September 30, 2007, the auditee had disbursed approximately $1.38 billion, or
50 percent, of the $2.783 billion allocated.

During this audit, we reviewed administration and planning expenses, auditee monitoring
procedures, and disbursements related to the following programs:

World Trade Center Memorial and Cultural: As of September 30, 2007, HUD had approved
approximately $622.5 million for this program to fund the planning, selection, coordination, and
construction of a memorial and memorial center. In addition, funds were earmarked for planning
and possible construction of memorial-related improvements and museum and cultural uses on
the World Trade Center site and adjacent areas, complementing the commercial redevelopment
and infrastructure improvements by the Port Authority of New York and New Jersey, the owner
of the World Trade Center Site. Of the $622.5 million, HUD approved $237.1 million for the
acquisition and deconstruction of 130 Liberty Street, the Deutsche Bank building.

Lower Manhattan Community and Cultural Enhancement Funds: As of September 30, 2007,
HUD had approved $88.95 million for this program to provide grants through a competitive
selection process to not-for-profit organizations for projects that address cultural and community
needs in lower Manhattan and demonstrate the ability to spur long-term revitalization of the area,
benefiting area residents, workers, businesses, and visitors.

Hudson River Park Improvement
As of September 30, 2007, HUD had approved $72.6 million for this program to complete
extensive renovations to the Hudson River waterfront in lower Manhattan, including public
recreational piers (Piers 25 and 26), an ecological pier, and an adjacent upland park. The public

1
    The Empire State Development Corporation administers the remaining $700 million.



                                                         4
facilities to be created include habitat planting areas, a boathouse, a restaurant, a children’s
playground, volleyball courts, basketball courts, an open lawn, boat docking, mini golf, an
informal athletic field, and a skate park. The proposed activities are to be linked by pathways,
planted areas, and a riverside pedestrian esplanade.

Small Firm Attraction and Retention Grant: As of September 30, 2007, HUD had approved $29
million for this program to help retain and create jobs at assisted firms.

Our audit objectives were to determine whether the auditee (1) disbursed Disaster Recovery
Assistance funds in accordance with the guidelines established under HUD-approved partial
action plans, (2) expended Disaster Recovery Assistance funds for eligible administration and
planning expenses in accordance with applicable laws and regulations, and (3) had a financial
management system in place that adequately safeguarded funds and prevented misuse.




                                                5
                                              RESULTS OF AUDIT

Finding 1: The Auditee Generally Administered Grant Funds in
           Accordance with HUD Regulations
The auditee generally disbursed the $132.7 million in Disaster Recovery Assistance funds in
accordance with HUD-approved action plans, expended funds for eligible administration and
planning expenses in accordance with applicable laws and regulations, and maintained a
financial management system that adequately safeguarded funds and prevented misuse.
However, an internal control weakness existed in the management of grant repayments in one
program. The subrecipient that administered the Employment Training Assistance Program
credited 10 grant recipient repayments to the wrong HUD grant and did not return recovered
funds to HUD’s Line of Credit Control System in a timely manner. Consequently, there was no
assurance that funds were properly recorded and promptly returned.



    Weaknesses in the Management
    of Repayments in One Program

                     Internal control weaknesses in the management of grant repayments under the
                     Employment Training Assistance Program resulted in the subrecipient’s not
                     properly crediting repayments to the correct HUD grant and not remitting the
                     repayments to HUD’s Line of Credit Control System in a timely manner. On
                     August 1, 2002, the auditee executed a subrecipient agreement with the Empire
                     State Development Corporation, its parent corporation, to administer the
                     Employment Training Assistance Program. Although all grants had been
                     awarded, the subrecipient managed the recapture of funds from two recipients.
                     On September 29, 2006, a settlement was made with one recipient 2 for the
                     repayment of $8,138 in 12 monthly installments of $678 beginning October 1,
                     2006, and continuing until September 1, 2007. The recipient made six
                     installments but failed to make the April 2007 payment. Rather than requiring the
                     immediate repayment of the $4,069 unpaid balance plus $2,563 in interest as
                     stipulated in the settlement agreement, the subrecipient allowed the recipient to
                     skip the April 2007 payment and resume monthly payments in May 2007. A
                     subrecipient official explained that deferring collection was a standard practice
                     because a number of grant recipients had experienced financial problems and had
                     difficulty in repaying the grant. While such action may be more practical in
                     certain situations than enforcing the provision for immediate repayment, there
                     was no documentation as to why there was a deviation from the settlement
                     agreement. However, we noted that the debt had been satisfied, and subrecipient
                     officials noted that if repayment had not resumed in the next month, additional
                     collection efforts would have been initiated.
2
    The other recapture is being litigated.



                                                     6
             Ten successive grant repayments, totaling $6,782, were credited to the wrong
             HUD grant and program budget line item when returned. While HUD’s Line of
             Credit and Control System disclosed that the subrecipient properly credited the
             initial $1,356 repayment to the auditee’s grant under the Employment Training
             Assistance Program, the 10 subsequent payments were erroneously credited to the
             subrecipient’s grant under the Small Firm Attraction and Retention Grant
             program. After HUD’s Office of Inspector General (OIG) notified the
             subrecipient of the error on December 4, 2007, it requested that HUD transfer the
             $6,782 to the auditee’s grant under the Employment Training Assistance Program.
             The Line of Credit and Control System reflects that the error was corrected on
             December 21, 2007.

             Further, the repayments collected did not appear to have been returned to HUD’s
             Line of Credit Control System within a reasonable timeframe. The time that
             elapsed between the subrecipient’s receipt of the repayments and their return to
             HUD’s Line of Credit Control System averaged 53 days, with a range of 17 to
             105 days. While no specific criteria exist on timeframes for when repayments
             should be returned to HUD’s Line of Credit Control System, prudent business
             practice would dictate that it be done as soon as practical and that any interest
             earned also be returned to HUD’s Line of Credit Control System.



Conclusion

             A weakness in management controls caused a subrecipient to transfer repayments
             to the wrong HUD grant and program budget line item and to not promptly return
             repayments to HUD’s Line of Credit Control System. Although the amount is
             immaterial, the breakdown in controls is significant because it permitted 10
             consecutive repayments to be returned to the wrong grant without detection.

Recommendations

             We recommend that HUD’s General Deputy Assistant Secretary for Community
             Planning and Development direct the auditee to strengthen controls by developing
             procedures to

             1A. Ensure that the $6,782 recovered and any future grant repayments to the
                 Employment Training and Assistance Program are accurately recorded and
                 remitted to HUD’s Line of Credit Control System in a timely manner.




                                              7
                         SCOPE AND METHODOLOGY

To achieve our audit objectives, we reviewed applicable laws, regulations, and program
requirements; HUD-approved partial action plans; and the auditee’s accounting books and
records. We documented disbursements made during the audit period and reconciled
disbursements recorded in HUD’s Line of Credit and Control System to the auditee’s records.

During the audit period, April 1 through September 30, 2007, the auditee disbursed $132.7
million of the $2.783 billion in Disaster Recovery Assistance funds for activities related to the
rebuilding and revitalization of lower Manhattan. We tested $23 million, representing 17.3
percent of the amount disbursed for the period. The following areas were tested:

                                      Amount disbursed Apr. 1,
                                     2007, through Sept. 30, 2007             Amount tested
              Area                           (in millions)                     (in millions)

World Trade Center Memorial
and Cultural Program                            $ 37.1                            $ 19.2

Hudson River Park
Improvement Program                              $ 3.2                            $   3.1

Lower Manhattan Community
and Cultural Enhancement
Program                                          $ 2.9                            $   0.4

Administration and planning
expenses                                         $ 2.6                            $   0.3

                            Total               $ 45.8                            $ 23.0


We also tested the auditee’s policies and procedures for monitoring the above programs. In
addition, we analyzed the subrecipient’s implementation of actions taken to recapture funds from
noncompliant Small Firm Attraction and Retention Grant recipients.

We performed our on-site work at the auditee’s office in lower Manhattan and at the auditee’s
parent company, the Empire State Development Corporation, in midtown Manhattan from
October 2007 through March 2008.

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




                                                 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:

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

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

              •       Safeguarding resources - Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

              •       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.

              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.




                                                9
Significant Weaknesses


           Based on our review, we did not identify any significant weaknesses. Nevertheless,
           the following item is a reportable weakness:

           •      Safeguarding resources - The auditee’s subrecipient did not adequately
                  safeguard resources when it did not properly credit 10 repayments to the
                  correct HUD grant and remit the funds to HUD’s Line of Credit Control
                  System in a timely manner.




                                           10
                                         APPENDIXES

Appendix A

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

    Recommendation         Funds to be put to
           number               better use 1/
                    1A                $6,782 3


1/        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 this instance, the auditee took
          corrective action when notified of the error, thus ensuring that the Employment
          Training Assistance Program funds repaid were available to be reallocated to
          other programs.




3
    As of December 21, 2007, the correct posting of the $6,782 repayment was reflected in HUD’s Line of
    Credit and Control System.




                                                    11
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




                        12
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 1




                        13
                     OIG Evaluation of Auditee Comments

Comment 1   While the auditee generally agreed with our finding, it did not address the
            development of additional procedures to strengthen the existing controls
            over the management of grant repayments. Enhancing such procedures
            will ensure that future grant repayments are credited to the correct HUD
            grant and program budget line item and that funds are promptly returned
            to HUD.




                                         14
     Appendix C

                             SCHEDULE OF PROGRAM FUNDING AND
                             DISBURSEMENTS AS OF SEPTEMBER 30, 2007
                                                                         Audit period
                                                                                             Cumulative           Balance
                                                     Budget as of       disbursements
                   Program                                                                 disbursed as of     remaining as of
                                                    Sept. 30, 2007      Apr. 1, 2007 -
                                                                                           Sept. 30, 2007       Sept. 30, 2007
                                                                        Sept. 30, 2007
Business Recovery Grant Program                          218,946,000                             218,940,531               5,469
Job Creation and Retention                               150,000,000            582,500           98,538,447          51,461,553
Small Firm Attraction                                     29,000,000          2,056,750           22,178,750           6,821,250
Residential Grant (Housing Assistance Program)           237,500,000              11,182         236,142,567           1,357,433
Employment Training Assistance                               346,000             (1,356)             344,553               1,447
Memorial Design & Installation                               315,000                                 309,969               5,031
Columbus Park Renovation                                     998,571                                                     998,571
Marketing History and Heritage Museums                     4,664,000            451,477            4,290,311             373,689
Downtown Alliance Streetscape                              4,000,000                               4,000,000                   0
New York Stock Exchange Area Improvements                 25,160,000              1,613            5,476,256          19,683,744
Parks and Open Space                                      46,981,689            100,298           17,735,005          29,246,684
Hudson River Park Improvements                            72,600,000          3,188,960            7,731,232          64,868,768
West Street Pedestrian Connection                         22,955,811          5,484,631           18,327,501           4,628,310
Lower Manhattan Communications Outreach                    1,000,000                               1,001,583              (1,583)
Green Roof Project                                           100,000                                                     100,000
Chinatown Tourism & Marketing                              1,160,000                                 999,835             160,165
Lower Manhattan Information Program                        2,570,000                               1,752,391             817,609
WTC Memorial and Cultural Program                        622,517,180         37,144,260          343,801,352         278,715,828
Lower Manhattan Tourism                                    4,176,000            135,000            4,106,650              69,350
East River Waterfront Project                            150,000,000            314,047            1,018,896         148,981,104
Local Trans and Ferry Service                              9,000,000            560,185              567,138           8,432,862
East Side K-8 School                                      23,000,000                                  28,703          22,971,297
Filterman Hall Reconstruction                             15,000,000                                   1,784          14,998,216
Chinatown Local Development Corporation                    7,000,000            160,000              164,123           6,835,877
Affordable Housing                                        54,000,000                                   7,153          53,992,847
Public Services Activities                                 6,796,900            380,840            5,984,019             812,881
Administration & Planning                                112,262,000          2,606,457           75,921,151          36,340,849
Disproportionate Loss of Workforce                        33,000,000                              32,999,997                     3
Utility Restoration and Infrastructure Rebuilding        735,000,000         76,582,522          269,427,643         465,572,357
Lower Manhattan Enhancement Fund                          88,950,849          2,883,681            7,686,661          81,264,188
Drawing Center                                             2,000,000                                                   2,000,000
Fulton Corridor Revitalization                            38,000,000             78,255               89,039          37,910,961
Economic Development – Other                              30,000,000                                                  30,000,000
Transportation Improvements                               31,000,000                                                  31,000,000
Education – Other                                          3,000,000                                                   3,000,000
                     Total                              2,783,000,000       132,721,302        1,379,573,240       1,403,426,760




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