oversight

The County of Essex, Verona, New Jersey, Did Not Always Administer Its Community Block Grant Program in Accordance With HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-05-29.

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

                                                                Issue Date
                                                                     May 29, 2008
                                                                Audit Report Number
                                                                     2008-NY-1007




TO:        Kathleen Naymola, Director, Community Planning and Development, 2FD


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

SUBJECT: The County of Essex, Verona, N.J, Did Not Always Administer Its Community
         Development Block Grant Program in Accordance with HUD Requirements

                                   HIGHLIGHTS

 What We Audited and Why

             We audited the County of Essex’s (County) Community Development Block
             Grant (CDBG) program, which was administered by its Division of Housing and
             Community Development. We selected the County for review because of the size
             of its program, a high U.S. Department of Housing and Urban Development
             (HUD) risk analysis score, and indicators of unreported program income, Our
             audit objectives were to determine whether the County (1) disbursed CDBG funds
             efficiently and effectively in accordance with its submission to HUD and
             applicable rules and regulations and (2) had a financial management system in
             place to adequately safeguard the funds.

 What We Found


             The County did not always follow applicable regulations and its submission to HUD
             while disbursing CDBG funds. Specifically, (1) CDBG funds were disbursed for
             ineligible and defaulted float loans, (2) the County and its subgrantees did not
             always comply with procurement requirements, (3) grant agreements did not contain
             the required provisions to ensure compliance with HUD requirements, and (4)
             substantial changes to program activities were not amended appropriately.
           Consequently, more than $1.2 million was disbursed for ineligible or defaulted float
           loans, $517,125 was spent without adequate procurement processes, inadequate
           agreements with its subgrantees could hinder the County’s efforts to monitor and
           enforce CDBG requirements, and neither HUD nor the citizens of Essex County
           were provided current and accurate information on the County’s CDBG program
           activities.

           In addition, there were control weaknesses in the County’s financial management
           system used to safeguard funds. Specifically, the County’s financial management
           system did not ensure that CDBG funds were disbursed in a timely manner and
           properly safeguarded.


What We Recommend

           We recommend that the Director of HUD’s New Jersey Office of Community
           Planning and Development instruct the County to (1) reimburse to the CDBG
           program from nonfederal funds more than $1.2 million for ineligible and
           defaulted float loans; (2) provide supporting documentation for the two
           procurements totaling $517,125; (3) reimburse more than $2.6 million in excess
           checking account funds to the CDBG program if the County does not immediately
           disburse the funds; (4) remit $280,108 in bank interest; (5) reimburse to the
           CDBG program $179,091 for the unnecessary drawdowns of funds; and (6)
           establish procedures to ensure that CDBG funds will be disbursed in a timely
           manner and in accordance with program requirements.

           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 a draft report to County officials on April 15, 2008 and requested
           their responses by May 6, 2008. We discussed the results of our review during
           the audit and at an exit conference on May 6, 2008. County officials provided
           their written comments on May 6, 2008. They generally concurred with the draft
           report findings. 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 County Did Not Always Comply with HUD Regulations While   5
                 Disbursing CDBG Funds

      Finding 2: There Were Control Weaknesses in the County’s Financial       10
                 Management System


Scope and Methodology                                                          15

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




                                            3
                      BACKGROUND AND OBJECTIVES

The Community Development Block Grant (CDBG) program was established by Title I of the
Housing and Community Development Act of 1974 (Public Law 93-383). The program provides
grants to state and local governments to aid in the development of viable urban communities.
Governments are to use grant funds to provide decent housing and suitable living environments
and to expand economic opportunities, principally for persons of low and moderate income. To
be eligible for funding, every CDBG-funded activity must meet one of the program’s three
national objectives. Specifically, every activity, except for program administration and planning,
must

   •   Benefit low-and moderate-income persons,
   •   Aid in preventing or eliminating slums or blight, or
   •   Address a need with a particular urgency because existing conditions pose a serious and
       immediate threat to the health or welfare of the community.

The County of Essex (County) is a CDBG entitlement recipient that has administered approximately
$7 million in CDBG funds annually during the past 10 years. Theses funds are available to support
a variety of activities directed at improving the physical condition of neighborhoods by providing
housing or public improvements/facilities, fostering economic development by providing technical
and financial assistance to local businesses, creating employment, or improving services for low-
and/or moderate-income households.

The County is a diverse consortium of urban and suburban communities. Eighteen municipalities
participate in the County’s CDBG program. Several nonprofit organizations also receive CDBG
funds from the County to help carry out activities. The Division of Housing and Community
Development (Division) is designated by the county executive to administer the County’s CDBG
funds programmatically and financially, including overseeing and monitoring subgrantees as well as
directly delivering CDBG-funded activities. In addition, the Office of Accounts and Control and
the Treasury Office are responsible for handling financial transactions and the accounting records of
the County’s CDBG program upon authorization from the Division. The files and records related to
the County’s CDBG programs are maintained at 20 Crestmont Road, Verona, New Jersey, and 465
Dr. Martin Luther King, Jr., Boulevard, Newark, New Jersey.

We audited the County’s CDBG program because of the size of its program, a high risk score based
on the U.S. Department of Housing and Urban Development’s (HUD) 2006 annual risk assessment,
and indicators of unreported program income. Our audit objectives were to determine whether the
County (1) disbursed CDBG funds efficiently and effectively in accordance with its submission
to HUD and with applicable rules and regulations and (2) had a financial management system in
place to adequately safeguard the funds.




                                                 4
                                 RESULTS OF AUDIT


Finding 1: The County Did Not Always Comply with HUD Regulations
           While Disbursing CDBG Funds
The County did not always comply with applicable regulations and its submission to HUD while
disbursing CDBG funds. Specifically, (1) CDBG funds were disbursed for ineligible and defaulted
float loans, (2) the County and its subgrantees did not always comply with procurement
requirements, (3) grant agreements did not contain the required provisions to ensure compliance
with HUD requirements, and (4) substantial changes to program activities were not amended
appropriately. This noncompliance occurred because the County did not develop and implement
adequate program and financial controls over its CDBG activities. As a result, more than $1.2
million was disbursed for ineligible or defaulted float loans, $517,125 was spent without adequate
procurement processes, inadequate grant agreements with its subgrantees could hinder the County’s
efforts to monitor and enforce CDBG requirements, and neither HUD nor the citizens of Essex
County were provided current and accurate information on the County’s CDBG program activities.


 Ineligible and Defaulted Float
 Loans


       Regulations at 24 CFR (Code of Federal Regulations) 570.301(b) permit a grantee to use
       CDBG funds that are budgeted for activities that will not immediately use the funds to
       finance additional activities that would otherwise not receive CDBG assistance through
       the grantee’s regular budget process. Such funds are referred to as “float,” and the float-
       funded activities are expected to produce program income to repay the amount of the
       float funds used. Under this guideline, the County established the Community
       Development Float Loan Program to provide short-term zero- and low-interest loans for
       commercial revitalization, housing projects, and economic development. However, the
       County did not fully comply with the regulations.

       The County had disbursed $731,111 for five ineligible float loans to various County
       municipalities since 2002. Regulations at 24 CFR 570.301(b)(2) and (3) specify that
       float loans should be repaid from program income within 2.5 years, and the grantee must
       include in its action plan the float-assisted activities as well as the full amount of
       expected program income from these activities. However, the loan agreements indicated
       that the County improperly committed future CDBG grant funds that were not guaranteed
       by HUD or awarded to these municipalities as the source of repayments instead of
       mandating the municipalities to generate and use program income from these activities
       for repayment. In addition, the annual action plan submitted to HUD by the County did
       not properly provide information on the float-assisted activities and the associated
       program income. This deficiency occurred because the prior director of the Division of
       Housing and Community Development (Division) incorrectly interpreted the regulations,


                                                5
    and County staff carried out the float loan program under the wrong guidance. As a
    result, funds were expended for loans that did not meet requirements and, therefore,
    imposed an increased risk of loss to the HUD CDBG program.

    Further, two float loans provided to local businesses before 2002 had defaulted with
    unrecovered principal balances of $500,111. The County did not follow 24 CFR
    570.301(b) (4) in committing to undertake a proper remedy when the float loans
    defaulted. Instead, it used its CDBG contingency funds, which were part of its budget for
    general administrative costs, to cover the funding shortfalls caused by the defaults. It
    also redistributed CDBG fund allocations from other projects to replenish those projects
    for which original funding was used to finance the float loans. In addition, the Division
    cancelled certain projects or reduced their funding without adequately involving citizens
    and notifying HUD about the amendments to these activities. As a result, HUD lost
    $500,111 for the two defaulted loans, and several other projects were negatively impacted
    because of funding shortages that resulted from the defaults. We attribute this deficiency
    to inadequate program controls over float loans.


Inadequate Procurement
Processes

    The County did not ensure that its subgrantees always followed the procurement policies
    and procedures of 24 CFR 85.36 and the relevant laws of the state of New Jersey. For
    example,

    The Township of Belleville, a subgrantee of the County, purchased a fire truck for
    $277,125. The Township of Maplewood, another subgrantee of the County, awarded a
    contract for $240,000 to a construction company for the Springfield Avenue
    Improvement project. However, both Townships failed to re-advertise the bid and
    improperly awarded the contract to the vendor that was the single bidder on the first
    occasion. Thus, it violated section 40A:11-5(3) of New Jersey Local Public Contracts
    Law, which requires that the local government advertise the bids on two occasions.

    These instances indicated that the County did not have adequate controls over
    procurements by its subgrantees. Accordingly, it did not ensure that quality goods and
    services were obtained at the most advantageous terms for CDBG activities.

Inadequate Grant Agreements


    The grant agreements between the County and its CDBG subgrantees did not contain the
    provisions required by 24 CFR 570.503. Specifically, the agreements did not contain
    sections regarding the statement of work, records and reports, program income, uniform
    administrative requirements, other program requirements, suspension and termination, and
    reversion of assets. As a result, the County might be subject to an unnecessary risk as it
    could be difficult to monitor and enforce HUD requirements without properly executed



                                             6
    grant agreements. We attribute these conditions to the lack of controls to ensure compliance
    with program requirements. County officials informed us that they were taking immediate
    steps to redesign the grant agreements.


Inadequate Program
Amendment Policy

    The County did not adequately amend its CDBG program plan when activities were
    significantly changed. Regulations at 24 CFR 91.505 state that grantees shall request prior
    HUD approval for all program amendments involving new activities or alteration of existing
    activities that will significantly change the scope, location, or objectives of the approved
    activities or beneficiaries. In addition, 24 CFR 91.105 and 505 state that the grantee must
    identify in its citizen participation plan the criteria it will use for determining what
    constitutes a substantial amendment, and any substantial amendments must be subject to a
    citizen participation process.

    Contrary to the regulations, the County did not develop the proper citizen participation plan
    and, therefore, did not make any amendment public or notify HUD when it significantly
    changed its action plan and reprogrammed already allotted CDBG funds to fund different
    activities. For instance,

       •   The County originally awarded $125,000 to its Office of Culture Diversity on
           December 4, 2003, for the Culture Disparity Study project. However, this activity
           was not included in the County’s action plan for program year 2003, and no
           amendments were submitted to HUD, nor were the citizens informed. In addition,
           the consolidated annual performance and evaluation report for program year 2005
           showed that the total disbursement for this project was $300,000. Although the
           additional funding of $175,000 was approved by the County freeholders, no
           addendum was added to the original grant agreement. Thus, HUD and the citizens
           of the County were not aware of this change.

       •   The County awarded and disbursed more than $1 million for the Countywide Road
           Surfacing project during 2005 and 2006. However, the activity was not included in
           the action plans, and no amendment was submitted to HUD or made public. In
           addition, the County only recorded $236,517 in HUD’s Integrated Disbursement and
           Information System. The remaining $830,000 was not set up in HUD’s system and
           was disbursed directly from the County’s general CDBG bank account without a
           proper budgeting and recording process. Due to the high balance in the County’s
           general CDBG account (see finding 2), the County was not aware of this issue until
           we identified it.

       •   The County canceled or changed the funding amounts for several HUD-approved
           projects without adequately notifying HUD or the citizens. For example, the
           Township of Belleville canceled the purchase of an ambulance and used the $93,750
           to procure a fire truck.


                                              7
     We attribute this deficiency to the County’s weak management controls over compliance
     with HUD regulations. As a result, the County could not ensure that it administered its
     CDBG activities as planned and determine whether activities were accurately reported to
     HUD. Further, the citizens of the County were not provided an opportunity to comment on
     substantial changes to the CDBG program.

Conclusions

     The County did not always comply with applicable regulations and its submission to HUD
     while disbursing CDBG funds. Consequently, more than $1.2 million was disbursed for
     ineligible float loans, $517,125 in procurement-related disbursements was not adequately
     supported, inadequate grant agreements between the County and its subgrantees could
     hinder the County’s efforts to monitor and enforce CDBG requirements, and neither HUD
     nor the citizens of the County were provided current and accurate information on the
     County’s CDBG program. We attribute these deficiencies to the lack of adequate program
     and financial controls over CDBG activities.

Recommendations

     We recommend that the Director of HUD’s New Jersey Office of Community Planning and
     Development instruct the County to

              1A.   Develop and implement adequate procedures pursuant to 24 CFR 570.301
                    before issuing new float loans.

              1B.   Reimburse the CDBG program from nonfederal funds the $1,231,222
                    related to ineligble float loan disbursements ($731,111 for ineligible
                    commitments for five float loans and $500,111 in unrecovered principals
                    related to the two defaulted float loans).

              1C.   Provide supporting documentation for the $517,125 related to the purchase
                    of the Township of Belleville fire truck ($277,125) and the Maplewood
                    Springfield Avenue Improvement project ($240,000) so that HUD can
                    determine whether proper procurement procedures were followed. Any
                    purchase that did not comply with procurement standards at 24 CFR Part
                    85.36 should be considered ineligible and must be reimbursed from non-
                    federal funds to CDBG funds.

              1D.   Amend its grant agreements to include all applicable sections in
                    accordance with 24 CFR 570.503




                                             8
1E.   Develop and implement procedures to properly amend program activities,
      including providing a citizen participation plan, and incorporate them in
      the County’s action plan in accordance with HUD regulations.




                               9
Finding 2: There Were Control Weaknesses in the County’s Financial
           Management System
Weaknesses in the County’s financial management system caused it to not always comply with
HUD requirements. Specifically, the County (1) inappropriately maintained a high cash balance
and did not disburse funds in a timely manner, (2) did not properly record and report program
income from its Home Improvement Program, (3) did not remit bank interest income to the U.S.
Treasury, (4) made unnecessary drawdowns of CDBG funds, (5) made improper transfers
between the HOME and CDBG programs, and (6) did not establish adequate communication
among County offices when making financial transactions. As a result, approximately $3
million in CDBG funds was not used in a timely manner, $720,060 in program income was not
properly recorded and reported to HUD, $280,108 in interest income was not remitted to the U.S.
Treasury, $179,091 was unnecessarily drawn down from HUD, and CDBG funds may not have
been properly safeguarded due to improper funds transfers between programs and
miscommunication among the County offices.


 High Cash Balance and
 Untimely Disbursement of
 Funds

       The County inappropriately maintained an excessive cash balance with an average of $3
       million in its general CDBG checking account for several years. Regulations at 24 CFR
       85.20(b)(7) state that the grantee must make drawdowns as close as possible to the time
       of making disbursements. However, as of the end of program year 2006, the general
       CDBG checking account had a balance of more than $2.9 million. The County also
       maintained another general CDBG bank account with a different bank, and this account
       had a $140,572 ($140,351 principle plus $221 accumulated interest) cash balance that had
       not been used for any CDBG activities since July 2006.

       It appeared that one of the reasons for the high cash balance was that the County drew
       down funds several months before making payments to the vendors. For instance,
       $181,850 was drawn down on March 29, 2005, for the Lafayette Park Renovation project;
       however, the payments were not made to the vendor until December 2005. In addition,
       for the purchase of a fire truck at the Township of Belleville, $170,000 was drawn down
       on March 28, 2006, three weeks before the public bidding date, but was not paid out until
       June 30, 2006. These pre-drawdowns were made so that the County could meet its
       timeliness requirement since HUD conducts timeliness tests at the beginning of April.

       The County should have disbursed all drawdowns of CDBG funds and should not have
       maintained such high cash balances; therefore, these funds should either be used before
       any additional drawdowns from HUD or returned to the CDBG program. Accordingly,




                                              10
          approximately $3 million 1 or the current balance of the two CDBG bank accounts should
          be returned to the CDBG program if the County cannot make immediate disbursements
          for eligible CDBG activities.

          Further, the County did not comply with HUD’s timeliness requirements for the
          disbursing of funds. Regulations at 24 CFR 570.902 state that, before the funding of the
          next annual grant and absent contrary evidence satisfactory to HUD, HUD will consider
          an entitlement recipient to be failing to carry out its CDBG activities in a timely manner
          if 60 days before the end of the grantee’s program year, the sum of the balance of its line-
          of-credit (the amount of entitlement grant funds available to the recipient under grant
          agreements but undisbursed by the U.S. Treasury) and the program income on hand
          exceeds 1.5 times of the annual entitlement grant. If the County’s excess cash balance of
          approximately $3 million were added back to the balance of its CDBG line-of-credit, its
          available funds would exceed 1.5 times the amount of the annual grant. As a result, the
          County did not obligate and disburse its available program funds in a timely manner.

    Unreported Program Income

          The County did not adequately record or report the receipts and expenditures of program
          income as required by 24 CFR 570.504. Section 570.500(a)(1)(v) further states that
          payments of principal and interest on loans made using CDBG funds are considered to be
          program income. The County’s Home Improvement Program (HIP) provides loans to the
          residents for the repairs of their primary homes. The bank statements showed that the
          County received HIP loan repayment amounts of $349,266 and $370,795 during program
          years 2005 and 2006, respectively. However, the receipts and associated disbursements
          of the program income of these two years were not recorded in HUD’s Integrated
          Disbursement and Information System or accurately reported in the consolidated annual
          performance reports. The reports showed program income of $25,808 and $255,412 for
          program years 2005 and 2006. This noncompliance was due to the lack of
          communication among the program staff and inadequate management controls. As a
          result, there was no assurance that the County reported accurate CDBG financial
          information to HUD in accordance with HUD regulations. Further, HUD could not
          determine the amount of income that had been generated from the loan repayments or
          how this income had been used.


    Unremitted Bank Interest

          The County did not adequately remit bank interest earned from its CDBG interest-bearing
          accounts. Regulations at 24 CFR 570.500(a)(2) prescribe that the interest earned on grant
          advances must be remitted to HUD for transmittal to the U.S. Treasury. The total amount
          of bank interest earned from the County’s two general CDBG bank accounts during

1
    The $3 million includes $260,952 in unremitted bank interests earned from the two CDBG bank accounts and
    $179,091 in unnecessary drawdowns. Since we make separate recommendations (see 2D and 2E) for these two
    issues, the total reimbursement amount would be $2,614,434 for recommendation 2B.


                                                       11
    program years 2004 through 2006 was $260,952. In addition, the County earned $19,156
    in interest from one of its repayable loan programs during these three program years.
    Therefore, the total amount of interest income of $280,108 ($260,952 + $19,156) should
    be remitted to HUD for transmittal to the U.S. Treasury. We attribute this deficiency to
    inadequate financial controls.

Unnecessary Drawdowns

    Although the program income of $179,091 was used to pay the expenses of several
    projects according to 24 CFR 570.504(b)(2)(ii), the County unnecessarily drew down
    $179,091 from its entitlement grant for the same project expenses in program year 2005.
    This problem was due to the lack of communication among the program staff and
    inadequate management controls. Therefore, this duplicate amount drawn down from
    HUD is ineligible and should be repaid to its CDBG line-of-credit.

Improper Fund Transfers
between CDBG and HOME
Programs


    The County improperly transferred funds between the CDBG and HOME programs. This
    conduct may violate regulations at 24 CFR 570.200, which require that an activity may be
    assisted with CDBG funds only if it meets one of the CDBG national objectives. The
    County explained that these fund transfers were to borrow funds from HOME to make
    payments for CDBG activities while CDBG funds were not available and vice versa and
    because top management of the County thought that federal funds could be transferred
    between federal programs. As a result, CDBG funds were not properly safeguarded.


Inadequate Communications
among the County Offices

    The County’s Division of Housing and Community Development (the Division) relied on
    the Office of Accounts and Controls for financial transactions including issuing payment
    checks to vendors and subgrantees, maintaining accounting records of the cash receipts
    and disbursements, managing bank accounts, etc. In addition, all of the cashed checks
    were maintained and reconciled with the bank statements by the Treasury Office.
    Therefore, any inadequate communication among these three offices could jeopardize
    CDBG funds.

    For example, without notifying to the Division, the Office of Accounts and Controls
    transferred $3.3 million from the general CDBG checking account at Wachovia Bank to
    the County’s trust account at PNC Bank in June 2006 when the County had a dispute
    with Wachovia Bank. Later, approximately $1.1 million was disbursed from the PNC
    account for CDBG activities, and $2.2 million was transferred to a new CDBG account at



                                           12
     Commerce Bank. In July 2006, when the dispute was resolved, the Office of Accounts
     and Controls transferred $2 million back to the CDBG account at Wachovia and left a
     balance of $140,351 at Commerce Bank. Although the County’s Treasury Office and the
     Office of Accounts and Control knew about these transactions, the Division was not
     informed of the transactions and was not fully aware of the new account at Commerce
     Bank until we noted the issue.



                                                                        Disbursed $1.1 mil
                                                 County’s
                 General                       trust account
                                                                             General CDBG
                 CDBG          $3.3 mil           at PNC         $2.2 mil
                                                                                account at
                 account                           Bank
                                                                             Commerce Bank
              at Wachovia                                                       (remaining
                  Bank                    Transfer back $2 mil                  balance of
                                                                              $140,351 as of
                                                                                July 2006)




     In addition, the County did not reconcile HUD’s Integrated Disbursement and
     Information System drawdowns with its accounting records of expenditures. The
     Division only reconciled its drawdowns with deposits into the general CDBG account at
     Wachovia Bank. The Office of Accounts and Control and the Treasury Office only
     reconciled their accounting records of CDBG expenses with the withdrawals from the
     bank account. However, there is no reconciliation of CDBG cash transactions among the
     Office of Accounts and Control, the Treasury Office, and the Division. As a result,
     accurate financial information may not have been reported to HUD, and excessive cash
     balances and unneeded drawdowns may have resulted as noted in this finding.

     Accordingly, the lack of communication among the County offices jeopardized the
     proper administration of the CDBG funds by the Division.


Conclusions


     The County had control weaknesses in its financial management system that caused it to
     (1) inappropriately maintain a high cash balance and not disburse CDBG funds in a
     timely manner, (2) not accurately record and report the program income from its Home
     Improvement Program, (3) not remit bank interest income to the U.S. Treasury, (4) make
     unnecessary or unsupported drawdowns and disbursements, (5) make improper transfers
     of funds between the HOME and CDBG programs, and (6) not ensure adequate




                                             13
    communication between the County offices to properly safeguard cash. We attribute
    these deficiencies to the control weaknesses in its financial management system.


Recommendations


    We recommend that the Director of HUD’s New Jersey Office of Community Planning and
    Development instruct the County to

           2A.    Develop and implement procedures to ensure that CDBG funds are drawn
                  down as expenses are incurred and disbursed in a timely manner.

           2B.    Immediately disburse the excess checking account balance of $2,614,434 or
                  the current balance on hand for eligible CDBG activities or return these
                  funds to the County’s CDBG line-of-credit if the County cannot use the
                  funds immediately in accordance to federal regulations.

           2C.    Develop and implement a control plan to ensure that $720,060 for program
                  years 2005 and 2006 and any future program income will be properly
                  recorded, reported, and disbursed in accordance with program regulations.

           2D.    Remit $280,108 in bank interest generated in program years 2004 to 2006 to
                  the U.S. Treasury so that these funds can be put to better use.

           2E.    Reimburse the CDBG program $179,091 related to the unnecessary
                  drawdowns for expenses already paid with program income.

           2F.    Develop and implement procedures to ensure that CDBG funds are
                  safeguarded and that interfund transfers of CDBG funds are prohibited.

           2G.    Develop and implement procedures to ensure that all financial transactions
                  of the CDBG program are properly authorized and communicated to the
                  Division; and that all accounting records are properly reconciled between the
                  county’s Office of Accounts and Control, Treasury Office, and the Division
                  of Housing and Community Development.




                                           14
                              SCOPE AND METHODOLOGY

The audit focused on determining whether the County complied with HUD regulations,
procedures, and instructions related to the administration of the CDBG program. To accomplish
our objectives, we

      •   Reviewed relevant federal and New Jersey state regulations.

      •   Interviewed appropriate personnel of HUD’s Office of Community Planning and
          Development Newark field office and reviewed relevant grant files to obtain an
          understanding of CDBG program requirements and identify HUD’s concerns with the
          County’s operations.

      •   Reviewed the County’s policies, procedures, and practices and interviewed key personnel
          to obtain an understanding of the County’s administration of the CDBG program.

      •   Reviewed monitoring and independent accountant audit reports.

      •   Reviewed and tested the County’s files and records of selected projects to test whether (a)
          costs were eligible and adequately supported as required by HUD regulations and (b) the
          County carried out these projects in accordance with HUD requirements and its
          submission to HUD.

The County’s consolidated annual performance and evaluation report reflects that more than
$8.37 million in CDBG funds was disbursed for 364 activities between June 1, 2005, and May
31, 2006 (program year 2005). We grouped these activities into five categories: administration,
economic development, public services, the Home Improvement Program (HIP), and other
public facilities and improvements (non-HIP). We selected the activities with the highest
disbursement amounts from each category, resulting in a sample of 20 2 activities totaling
approximately $3.39 million. We reviewed the disbursements and related supporting documents
for the sampled activities to determine whether the expenditures were reasonable and complied
with CDBG requirements and federal regulations. We also examined all of the 14 float loans
that the County had issued during the past 10 years totaling more than $5.5 million. In addition,
we evaluated whether program income was recorded during our audit period and tested the
County’s internal controls over its administration of the CDBG program.

The audit generally covered the period from June 1, 2005, through May 31, 2006, and was
extended when necessary to accomplish our objectives.




2
    One activity was for administrative costs of $180,000 incurred by the Economic Development Corporation (EDC),
    a subgrantee of the County. We will issue a separate report for the CDBG activities administered by EDC.


                                                        15
We performed our audit fieldwork from August 2007 through February 2008 at the County’s
offices in Verona and Newark, New Jersey. We conducted 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, 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.




                                               17
Significant Weaknesses


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

           •      The County did not have adequate controls over compliance with laws and
                  regulations, as it did not always comply with HUD regulations while
                  disbursing CDBG funds and reporting its financial data to HUD (see
                  findings 1 and 2).

           •      The County did not adequately safeguard resources when it (1)
                  inappropriately maintained a high cash balance and did not disburse funds
                  in a timely manner, (2) did not properly record and report program income
                  from its Home Improvement Program, (3) did not remit bank interest
                  income to the U.S. Treasury, (4) made unnecessary drawdowns of CDBG
                  funds, (5) made improper transfers between the HOME and CDBG
                  programs, and (6) did not establish adequate communication among
                  County offices when making financial transactions (see finding 2).




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                                    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/
              1B             $1,231,222
              1C                                       $517,125
              2B                                                             $2,614,434
              2C                                                               $720,060
              2D                                                               $280,108
              2E               $179,091

             Total           $1,410,313                $517,125              $3,614,602


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
     polices or regulations.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of audit. Unsupported costs
     require a decision by HUD program officials. This decision, in addition to obtaining
     supporting documentation, might involve a legal interpretation or clarification of
     departmental policies and procedures.

3/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. This includes reductions in outlays, deobligation of funds, withdrawal of
     interest subsidy costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures, and any other savings which are specifically
     identified. In this instance, if the County disburses the excess checking account balance of
     more than $2.6 million immediately or repays these funds to HUD; develops a plan to
     ensure that $720,060 and any future CDBG program income is properly recorded, reported,
     and disbursed; and remits $280,108 of bank interest income; HUD can be assured that these
     funds (more than $3.6 million) will be put to better use, as it will eliminate unnecessary
     drawdowns of funds, result in the recapture of interest income, help ensure that funds are
     used in a timely manner for eligible activities and enable HUD to determine when funds
     have not been disbursed timely so that appropriate corrective action can be taken.


                                              19
      Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         20
Comment 1




            21
Comment 2




Comment 3




            22
Comment 4




 Comment 5




             23
Comment 5




Comment 5




Comment 5




Comment 5




            24
Comment 5



Comment 5




Comment 5




Comment 1


Comment 1



Comment 3

Comment 4


Comment 5




            25
Comment 5


Comment 5

Comment 5

Comment 5
Comment 5
Comment 5

Comment 5




            26
                         OIG Evaluation of Auditee Comments

Comment 1   The County concurred with our finding that the five float loans used future CDBG
            allocations for repayment. However, the County insisted that no repayment was
            necessary because the projects funded by the five loans were CDBG eligible
            activities and already paid off with CDBG dollars. We disagree with the County
            because the float-financed projects did not generate program income as required
            by HUD regulations. In addition, the County failed to enforce the requirement
            that the loan recipients had to generate program income and use it rather than
            CDBG funds for loan repayments.

Comment 2   The County concurred with our finding that three float loans made to local
            businesses were in default with unrecovered principal balances. County officials
            stated that the prior administration instituted these loans and utilized all legal
            methods available to recapture the funds; however, the borrowers filed for
            bankruptcy and one property went into foreclosure sale. As such, only minimal
            amounts of the loan balances were recovered. Nevertheless for the third loan,
            officials stated that the borrower who was to build six two family homes, built
            several units and made repayments. Thus, officials requested that the project be
            completed and the funds be credited to the amounts due HUD. We
            acknowledged the County’s efforts and their claim that these loans were approved
            under a prior administration; however, the County is still obligated to comply
            with HUD regulations, and should have had a remedy for repayment of the loans
            in case of default. Further, since the third defaulted float loan is now active and
            has begun making repayments we have adjusted the finding and reduced the total
            amount of the unrecovered principal balance to $500,111.

Comment 3   The County stated that the two procurement cases were required to follow the
            provisions of the New Jersey Public Bidding Law instead of the competitive
            contracting provisions of “Local Public Contracts Law” cited by the auditors. As
            such, we have revised the finding based on the auditee’s comments and the
            additional supporting documents provided to us by County officials at the exit
            conference. However, we disagree with the County officials that its sub-grantees
            followed New Jersey Public Bidding Laws since contracts were awarded to
            vendors without advertising a second time when only one bid was received on the
            first occasion. Furthermore, 24 CFR 85.36 (d) (2) states that in order for sealed
            bids to be feasible two or more responsible bidders must be willing and able to
            compete effectively for the business.

Comment 4   The County does not agree with the finding, but concurred that grantees did not
            sign their Scope of Services and that the proposal representing sections of the
            contract were not attached to the agreement. As such, the County will seek
            technical assistance from HUD and will incorporate additional language into its
            contract documents.

Comment 5   The County’s actions are responsive to the finding.



                                            27