oversight

The State of Maryland Did Not Always Administer Its HOME-Assisted Single-Family Owner-Occupied Rehabilitation Program in Accordance with Federal Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-04-30.

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

                                                              Issue Date
                                                                   April 30, 2008
                                                              Audit Report Number
                                                                   2008-PH-1008




TO:        Charles E. Halm, Director, Office of Community Planning and Development,
            Baltimore Field Office, 3BD



FROM:      John P. Buck, Regional Inspector General for Audit, Philadelphia Regional
            Office, 3AGA

SUBJECT:   The State of Maryland Did Not Always Administer Its HOME-Assisted Single-
            Family Owner-Occupied Rehabilitation Program in Accordance with Federal
            Regulations


                                 HIGHLIGHTS

 What We Audited and Why

           We audited the State of Maryland’s (State) HOME Investment Partnerships
           program (HOME) as part of our annual audit plan. We chose to audit the State’s
           single-family owner-occupied rehabilitation assistance program based on
           deficiencies identified in a sample of work write-ups reviewed during a previous
           review of the State’s HOME program. This audit is the second phase of our
           review of the State’s HOME program. Our overall audit objective was to
           determine whether the State administered its HOME-assisted single-family
           owner-occupied rehabilitation program (program) in accordance with U.S.
           Department of Housing and Urban Development (HUD) regulations and its own
           requirements.
What We Found


           The State did not ensure that its single-family owner-occupied rehabilitation
           projects (projects) met HUD regulations and/or the State’s property standards. As
           a result, it used $42,290 in program funds for a project that did not meet federal
           regulations and was unable to support its use of $2.3 million in program funds for
           projects.

What We Recommend


           We recommend that the Director of HUD’s Baltimore Office of Community
           Planning and Development require the State to reimburse its program $42,290
           from nonfederal funds for the ineligible project, provide documentation to support
           its use of $2,071,462 or reimburse its program from nonfederal funds, ensure that
           housing rehabilitation work and required repairs are completed in accordance with
           HUD’s or the State’s standards or reimburse its program $205,372 from
           nonfederal funds, and implement adequate procedures and controls to address the
           findings cited in this audit report. These procedures and controls should help
           ensure that $74,648 in program funds is appropriately used over the next year for
           projects that comply with HUD’s regulations and the State’s standards.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.6, REV-3. Please
           furnish us copies of any correspondence or directives issued because of the audit.

Auditee’s Response


           We discussed the findings with the State during the audit. We provided the draft
           report to the State on March 21, 2008. We discussed the report with the State at
           the exit conference on April 3, 2008. The State provided its written comments to
           the draft report on April 7, 2008. The State generally agreed with the audit and
           stated that it was actively addressing the audit recommendations that it had not
           already implemented. The State also stated that it anticipates being able to
           provide documentation to support the unsupported costs identified in the audit
           report. The complete text of the State’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: Controls over the State’s Program Projects Were Inadequate                 5
Finding 2: The State’s Rehabilitated Projects Did Not Meet HUD’s and/or the State’s   9
           Standards

Scope and Methodology                                                                 16

Internal Controls                                                                     18

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                  20
   B. Auditee Comments and OIG’s Evaluation                                           21
   C. Federal Regulations, Guidance, and the State’s Written Policies                 28




                                              3
                      BACKGROUND AND OBJECTIVES

The HOME Investment Partnerships program (HOME) is authorized under Title II of the
Cranston-Gonzalez National Affordable Housing Act, as amended, and is regulated by 24 CFR
[Code of Federal Regulations] Part 92. HOME is the largest federal block grant provided to
state and local governments and is designed to create affordable housing for low-income
households. HOME funds are awarded annually as formula grants to participating jurisdictions.
States are automatically eligible for HOME funds and receive either their formula allocation or
$3 million, whichever is greater. Participating jurisdictions may choose among a broad range of
eligible activities using HOME funds. These activities may include providing home purchases or
rehabilitation financing assistance to eligible homebuyers, building or rehabilitating housing for
rent or ownership, or obtaining property to make way for HOME-assisted developments.

As a participating jurisdiction, the State of Maryland (State) administers its HOME program
through its Department of Housing and Community Development. The State received more than
$23 million in HOME grants from the U.S. Department of Housing and Urban Development
(HUD) over a three-year period.

                             Grant year              Grant amount
                               2004                    $8,177,261
                               2005                    $7,814,492
                               2006                    $7,357,097
                               Total                  $23,348,850

The State primarily administers its HOME-funded single-family owner-occupied rehabilitation
assistance program through the use of subrecipients. During our audit period, the State executed
written agreements for the administration of HOME funds to at least 19 subrecipients to facilitate
its rehabilitation assistance program. The written agreements specify that the subrecipients are to
comply with federal and state regulations and with the State’s own policies and procedures.

Our audit objective was to determine whether the State administered its HOME-assisted single-
family owner-occupied rehabilitation program (program) in accordance with HUD regulations
and its own requirements. To answer this audit objective, we determined whether the State (1)
determined the cost reasonableness of rehabilitation projects, (2) ensured that the assisted
properties were appropriately safeguarded against loss, (3) accurately and appropriately
determined the after-rehabilitation values of assisted properties, (4) accurately determined the
rehabilitation necessary to bring assisted properties up to applicable codes, (5) accurately
determined the income eligibility of recipients, and (6) accurately determined the ownership of
assisted properties.




                                                4
                                       RESULTS OF AUDIT


Finding 1: Controls over the State’s Program Projects Were Inadequate
The State did not comply with federal regulations and with its own policies in providing housing
rehabilitation assistance. It provided assistance for an ineligible project and did not have
documentation to support that projects were eligible because it lacked procedures and controls to
ensure that HUD regulations and its own policies were appropriately followed. As a result, it
inappropriately provided more than $42,000 in program funds to assist one project that did not
qualify as affordable housing. Also, the State was unable to support its use of more than $2
million in program funds. Therefore, HUD has no assurance that program funds were expended
on eligible projects.



    The State Provided $42,290 in
    Program Funds for an
    Ineligible Project


                  We selected for review 67 projects that the State completed between July 2004
                  and July 2007. The State provided $42,290 in program funds to assist one project
                  in which the unit was not affordable. An affordability requirement of the program
                  specifies that assisted units’ after-rehabilitation values are not to exceed 95
                  percent of the median purchase price for the area, and program guidance allows
                  the use of appraisals and tax assessments of comparable properties to determine
                  compliance with this requirement. The following table shows the project number,
                  appraisal date, pre-rehabilitation appraised value, affordability limit, the
                  percentage by which the after-rehabilitation value of the unit exceeded the
                  affordability limit, and the housing assistance amount.

                    Project       Appraisal       Appraised       Affordability       Percentage        Assistance
                    number          date            value             limit            over limit        amount
                      3800         Dec. 29,       $275,000          $172,632 1            59.3           $42,290
                                    2004




1
  To be conservative, we selected the limit effective January 1, 2005. Had we used the $160,176 affordability limit
effective January 1, 2004, the percentage by which the after-rehabilitation value of the unit would have exceeded the
limit would have been 71.7 percent.




                                                         5
The State Lacked
Documentation to Support Its
Use of More Than $2 Million in
Program Funds


            The State lacked sufficient documentation for 41 (61 percent) of the 67 projects
            selected for review to support that it used more than $2 million in program funds
            for appropriate projects. The following shows where the State was missing and/or
            lacked sufficient documentation to demonstrate that the projects were qualified to
            receive assistance. The State did not

                 ¾ Demonstrate that costs for 33 projects were reasonable,
                 ¾ Safeguard program funds in accordance with its own requirements by
                   ensuring that hazard insurance polices and/or deeds of trusts were in
                   place for 11 projects,
                 ¾ Appropriately determine that after-rehabilitation values did not exceed
                   affordability limits in 10 projects,
                 ¾ Ensure that work write-ups detailing the scopes of rehabilitation were
                   maintained in five projects to demonstrate that they were conducted
                   appropriately,
                 ¾ Include income from additional household members and/or have
                   sufficient documentation to support the income eligibility in four
                   projects, and
                 ¾ Ensure that an applicant owned the assisted unit in one project.


The State Did Not Adequately
Manage Its Program


            The deficiencies identified regarding the State’s providing assistance for an
            ineligible project and lacking documentation to support that projects were
            appropriate occurred because the State did not adequately manage its program to
            ensure compliance with and full implementation of HUD regulations and its own
            requirements.

            The State did not adequately manage its program, which was primarily facilitated
            by subrecipients through executed written agreements. Depending on their
            designation level, the subrecipients either had authority to approve program funds
            up to a certain amount without prior approval from the State or were primarily
            responsible for gathering documentation for the State to qualify applicants for
            program funds. The State did not fully enforce the executed written agreements
            with its subrecipients to ensure compliance with HUD regulations or with its own
            policies. Discussions with the subrecipients disclosed that they were not fully
            knowledgeable of federal program requirements. Interviews with 14


                                             6
             subrecipients regarding how they determined after-rehabilitation values revealed
             that at least eight subrecipients inappropriately used tax assessments of the
             projects to establish after-rehabilitation values and to determine the maximum
             amount of program funds the homeowners were qualified to receive. However, at
             least four subrecipients stated that the State now requires the use of appraisals,
             which is an approved method.

             Further, the State’s level of monitoring of its subrecipients was inadequate to
             ensure compliance with either HUD requirements or its own policies. The State
             performed on-site monitoring reviews of some of its subrecipients and required
             others to complete a procedural monitoring questionnaire. The monitoring reports
             supported the State reviews for certain documents but did not support its
             verification of eligibility determinations and income calculations. Further, the
             State could not document that it followed up on procedural corrective actions
             noted on the monitoring reports.


Conclusion


             The State did not properly use its program funds when it failed to comply with
             federal regulations and its own polices in providing housing rehabilitation
             assistance. As previously mentioned, the State provided $42,290 in HOME funds
             to assist an ineligible project. Further, the State was unable to support its use of
             more than $2 million in HOME funds for 41 additional projects.


Recommendations


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

             1A.    Reimburse its program from nonfederal funds $42,290 expended on an
                    ineligible project in which the unit was not affordable since the after-
                    rehabilitation value of the assisted unit exceeded applicable affordability
                    limits.

             1B.    Provide adequate supporting documentation or reimburse its program from
                    nonfederal funds, as appropriate, for the $2,071,462 in HOME funds used
                    for the 41 projects cited in this finding for which the State lacked
                    sufficient documentation to support that program funds were expended on
                    reasonable costs, units were adequately safeguarded, assisted units’ after-
                    rehabilitation values complied with affordability limits, records were
                    maintained to demonstrate the rehabilitation required, recipients and
                    households were income eligible, and ownership was properly verified.


                                              7
1C.   Establish and implement adequate procedures to ensure that adequate
      source documents are used to determine income eligibility so that only
      income-eligible applicants are approved for program assistance.

1D.   Establish and implement procedures to ensure that appropriate methods
      are used to determine the after-rehabilitation values before approving
      program funds.

1E.   Establish and implement adequate procedures to ensure that independent
      cost estimates are performed and provided for each project to ensure that
      program funds are expended on reasonable rehabilitation costs.

1F.   Establish and implement adequate procedures to ensure that hazard
      insurance policies are retained in the project files for approved applicants.

1G.   Establish and implement adequate procedures to ensure that scopes of
      work detailing the rehabilitation to be completed are required and
      documented for all assisted projects.

1H.   Establish and implement adequate procedures to ensure that adequate and
      appropriate homeownership evidence is acquired and maintained in the
      project files.




                                8
Finding 2: The State’s Rehabilitated Projects Did Not Meet HUD’s
and/or the State’s Standards
The State did not ensure that its projects met HUD’s and the State’s standards. Of 24 State
projects inspected, 17 did not meet HUD’s and the State’s standards and had material
deficiencies that existed at the completion of the housing rehabilitation work. The State used
program funds to pay for rehabilitation work that was improperly performed or not provided. It
also did not include all necessary housing rehabilitation work in the scopes of work for the 17
projects. The deficiencies occurred because the State did not adequately manage its program to
ensure and require compliance with federal regulations and written agreements. Further, its
inadequate management allowed for the use of insufficiently detailed work write-ups to guide the
scope of the rehabilitation. As a result, the State used more than $780,000 2 in program funds for
projects that did not meet HUD’s and/or the State’s standards. Based on our project sample, we
estimate that over the next year, the State will use program funds for projects that, after the
completion of the housing rehabilitation work, will need more than $74,000 in required repairs to
meet HUD’s and the State’s standards.



    The State Used Program Funds
    That Did Not Meet HUD’s and
    the State’s Standards

                  We selected 24 assistance projects that the State indicated were completed
                  between September 2006 and July 2007. Our appraiser inspected the 24 projects
                  from September 25 through October 19, 2007, to determine whether the State
                  ensured that the projects met HUD’s and the State’s standards at the completion
                  of the housing rehabilitation work.

                  Of the 24 projects inspected, 17 (71 percent) had 180 deficiencies, indicating that
                  the projects did not meet HUD’s and the State’s standards at the completion of the
                  housing rehabilitation work. Seventeen projects were considered to be in material
                  noncompliance since they had multiple preexisting deficiencies and/or the
                  deficiencies were noted in the scopes of work but not corrected. The State
                  provided $780,199 3 in housing rehabilitation assistance for the 17 projects. Our
                  appraiser estimated that it would cost $42,674 to correct the deficiencies
                  identified. The State also recorded property liens against the 17 projects for the
                  amount of program funds it provided for housing rehabilitation assistance. The
                  following table categorizes the 180 deficiencies in the 17 projects.


2
  Ten of the projects cited in this finding were also cited in finding 1. Therefore, to avoid double-counting, we
reduced the questioned costs reported in finding 2 by $574,827 for the 10 projects. The seven remaining projects
(not included in finding 1) total $205,372 and are addressed in the recommendations for finding 2. To comply with
the recommendations, the State needs to correct all of the deficiencies related to the 10 projects as reported in both
finding 1 and finding 2.
3
  See footnote 2.

                                                          9
                                                         Number of
                          Types of deficiencies          deficiencies
                    Electrical                                43
                    Roofs, gutters, fascias, and              32
                    soffits
                    Stairs, rails, porches                   22
                    Windows                                  12
                    Doors                                    11
                    Plumbing, sewer, and water                9
                    supply
                    Floors                                    8
                    Bathrooms                                 7
                    Exterior surfaces and                     6
                    foundations
                    Lead-based paint                          6
                    Ceilings                                  5
                    Water heaters, heating, air               5
                    conditioning
                    Walls                                     4
                    Security and ventilation                  4
                    Insulation                                4
                    Fire exit                                 1
                    Counter top                               1
                                    Total                    180

           We provided our inspection results to the manager of the State’s HOME program
           on December 20, 2007, and to the Director of HUD’s Baltimore Office of
           Community Planning and Development on February 13, 2008.

Standards Deficiencies Were
Present

           The following are pictures of some of the violations we noted from the 17 projects
           that were cited with material noncompliance while conducting inspections.




                                           10
Project #4106: One of
two junction boxes for a
future lamp has exposed
live wires.




Project #3836: The 2nd floor
left/rear bedroom ceiling fan
was improperly connected
and has a short in it.




Project #3869: The junction
box on the basement ceiling
is open and has exposed
wires and connections.




                                11
 Project #3836: The new
 shower stall does not meet
 handicapped accessibility
 requirements as required
 by the scope of work.




 Project #3849: The
 stairway from the rear
 porch to the basement
 needs a handrail and a
 guardrail on the open side
 of the stairway pit.




Project #3869: There is
rotten sheathing along
the lower roof edge
above the first floor
bathroom.




                              12
Project #3874: The edge
of the roof on the left side
of the house shows wood
deterioration.




The State Did Not Adequately
Manage Its Program and the
Work Write-Ups Were Not
Sufficiently Detailed


              The inspection deficiencies identified reflect the State’s inadequate management
              of its program. The program requires participating jurisdictions to manage the
              day-to-day operations of the program to ensure compliance with federal
              requirements and written agreements. As mentioned in finding 1, the State’s
              administration of its program was primarily facilitated by subrecipients. Of the
              inspections performed for the 24 sampled projects, the State’s subrecipients
              facilitated 22 of the projects, which included determining the scope of
              rehabilitation needed and inspecting the work completed.

              The State’s executed written agreements with its subrecipients specified their
              obligation to comply with program requirements and those in Office of
              Management and Budget Circular A-87. Further, the written agreements
              specified that subrecipients were to enter into agreements, to be approved by the
              State, if they subcontracted responsibilities and duties of the written agreement.
              Two subrecipients subcontracted responsibilities relating to determining the scope
              of the rehabilitation and inspections to contractors without entering into
              agreements approved by the State, as specified in its policies. As a result, the
              State did not adequately manage its administration of its subrecipients and was
              unable to ensure that parties involved in the program complied with program
              requirements or with its own written agreements.

              Lastly, the work write-ups detailing the scope of the rehabilitation were not
              sufficiently detailed to clearly define the scope of the rehabilitation, solicit quality
              bids, or ensure reasonable costs. The deficient work write-ups contributed to the
              inspection deficiencies identified.

                                                13
    Conclusion



                      The State did not ensure that its projects met HUD’s and its own standards. In
                      addition, the State used HUD funds to pay for housing rehabilitation work that
                      was incomplete and/or improperly performed, and it did not include all of the
                      necessary housing rehabilitation work in the scope of work. The State used
                      $780,199 4 in HUD funds for the 17 projects that materially failed our inspections.

                      If the State implements adequate procedures and controls over program funds to
                      ensure compliance with HUD’s and/or its own standards, we estimate that over
                      the next year, it will not use program funds for projects that, after the completion
                      of the housing rehabilitation work, need at least $74,648 in required repairs to
                      meet HUD’s and the State’s standards. Our methodology for this estimate is
                      explained in the Scope and Methodology section of this audit report.


    Recommendations



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

                      2A.    Certify that the housing rehabilitation work cited in this finding is
                             completed in accordance with HUD’s and the State’s standards and the
                             projects meet HUD’s and the State’s standards or reimburse its program
                             $205,372 5 from nonfederal funds for the housing rehabilitation assistance
                             that was provided for the 17 projects that materially failed to meet HUD’s
                             and the State’s standards and release the applicable liens against the
                             properties.

                      2B.    Implement adequate procedures and controls to ensure that projects meet
                             HUD’s and the State’s standards at the completion of the housing
                             rehabilitation work to prevent projects completed over the next 12 months
                             from needing an additional $74,648 in required repairs to meet HUD’s and
                             the State’s standards.

                      2C.    Establish and implement adequate procedures to ensure that the work
                             write-ups submitted by rehabilitation specialists are sufficient in detail to
                             comply with both federal regulations and with the State’s own policies to
                             ensure that contractors are bidding on consistent work and techniques.


4
    See footnote 2.
5
    See footnote 2.

                                                       14
2D.   Establish and implement adequate procedures to ensure that completed
      rehabilitation properties are inspected to ensure that the work performed
      complies with the scope of the work write-ups.

2E.   Establish and implement adequate procedures to ensure that contractors
      and subcontractors performing any functions of the HOME program for
      the State enter into executed written agreements to ensure their
      compliance with responsibilities and obligations required under the
      program.




                               15
                         SCOPE AND METHODOLOGY

To accomplish our audit objective, we

       ¾ Reviewed applicable federal regulations at 24 CFR [Code of Federal Regulations]
         Part 92, Office of Management and Budget Circular A-87, HUD’s Building HOME:
         A Program Primer, HOMEfires, Technical Guide for Determining Income and
         Allowances for the HOME Program, FHA Mortgage Limits and HUD Income Limits,
         and the State’s policies and written agreements relating to the administration of its
         HOME-assisted single-family owner-occupied rehabilitation program.

       ¾ Conducted interviews and discussions with officials and employees of HUD’s Office
         of Community Planning and Development, the State, its subrecipients of the HOME
         rehabilitation assistance program, HOME recipients, and local code officials.

       ¾ Obtained a listing of the State’s HOME awards for its rehabilitation assistance
         activities administered between July 2004 and July 2007, and selected a statistical
         sample of 67 out of a universe of 146 awards to determine whether HOME program
         requirements were met.

       ¾ Reviewed the executed written administration agreements established between the
         State and its subrecipients to determine the authority to administer HOME funds,
         requirements to support compliance with income eligibility, property standards, and
         hazard insurance regarding the administration of the program.

Finding 1

Using the U.S. Army Audit Agency’s statistical software, we initially statistically selected 46 of
the State’s program units to review from a universe of 138 units assisted with HOME funds for
rehabilitation during the period between July 2004 and June 2006. The sampling criteria used a
90 percent confidence level, 10 percent estimated error rate, and precision of plus or minus 10
percent. We selected an additional 21 units for review that were chosen for inspections in which
the completion dates were between September 2006 and July 2007. From the 67 selected units,
the State expended more than $3 million out of more than $6.3 million from the universe of 146
awards. The 67 units were selected to determine whether the State complied with federal
regulations and its own policies in administering its single-family owner-occupied rehabilitation
assistance program.

The 67 assistance activities that were selected were reviewed to determine whether the State
ensured that (1) HOME funds were expended on reasonable rehabilitation costs by using
independent cost estimates, (2) the assisted properties were appropriately safeguarded against
loss, (3) the assisted units complied with after-rehabilitation values, (4) it maintained adequate
records to support compliance with applicable property standards, (5) it accurately determined
the income eligibility of recipients, and (6) recipients owned the assisted units.


                                                 16
Finding 2

We selected for inspection all 24 rehabilitation assistance projects for which the State indicated
that the last HOME draw was made between September 2006 and July 2007. We selected this
timeframe to ensure that we selected the most recently rehabilitated units for inspection. Our
appraiser inspected the 24 properties to determine whether the projects met HUD’s and the
State’s standards. The State provided $1,345,315 in program funds for the 24 projects.

The State did not ensure that the HOME-assisted units were rehabilitated according to the work
write-ups and that conditions relating to the decency, safety, and sanitation of the units were
addressed. Based upon the deficiencies and preexisting conditions identified, our appraiser
provided cost estimates to correct the deficiencies. The appraiser developed the estimates based
on sources such as RS Means Repair and Remodeling Cost Data for labor costs and some
equipment and market prices for materials from stores such as Home Depot and Lowes.

Our results determined that 17 (71 percent) projects out of the 24 projects inspected materially
failed to meet HUD’s and the State’s standards at the completion of the housing rehabilitation
work. A project was considered in material noncompliance when it contained multiple
preexisting deficiencies and/or the deficiencies were noted in the scope of work but not
corrected. Our appraiser estimated that the projects needed $42,674 (5 percent of the program
funds provided) in repairs to meet HUD’s and the State’s standards.

The State will receive more than $1.4 million in program funds on projects for program year
2008 according to its consolidated plan for federal fiscal year 2007 (July 1, 2007 – June 30,
2008). We estimate that the State will annually use program funds for projects that, after
completion of housing rehabilitation work, need at least $74,648 ($1,492,950 times 5 percent) in
required repairs to meet HUD’s and the State’s standards. This estimate is presented solely to
demonstrate the annual amount of program funds that could be put to better use on eligible
projects if the State implements our recommendations. While these benefits could recur, we
were conservative in our approach and only included the initial year in our estimate.

We performed our audit work from July 2007 through February 2008 at the State’s office located
at 100 Community Place, Crownsville, Maryland. We performed our inspections at units located
primarily in Western Maryland and the Eastern Shore between September and October 2007.
The audit generally covered the period July 2004 through June 2006 but was expanded to July
2007 to include recently rehabilitated units. To achieve our audit objective, we relied in part on
computer-processed data within the State’s database. Although we did not perform a detailed
assessment of the reliability of the data, we did perform a minimal level of testing and found the
data to be adequate for our purposes.

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




                                                17
                             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 objective:

                  •   Management oversight processes - Policies and controls that management
                      has in place to reasonably ensure that its subrecipients follow HOME
                      program requirements and its written agreements.

                  •   Monitoring of subrecipients’ administration of the HOME program -
                      Policies and procedures to ensure that adequate reviews are performed to
                      detect noncompliance with both federal requirements and written
                      agreements.

              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.

 Significant Weaknesses


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

                  •   Inadequate monitoring reviews of the State’s subrecipients.




                                               18
•   Lack of adequate controls over the State’s administration of its HOME-
    assisted single-family owner-occupied rehabilitation program facilitated
    by subrecipients.




                            19
                                     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/
                  1A                  $42,290
                  1B                                       $2,071,462
                  2A                                         $205,372
                  2B                                                            $74,648
                 Total                $42,290              $2,276,834           $74,648


1/   Ineligible costs are those costs charged to a HUD-financed or HUD-insured program or
     activity that the auditor believes are not allowable by law; contract; or federal, state, or
     local policies or regulations.

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

3/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an OIG recommendation is implemented. This includes
     reductions in outlays, deobligation of funds, withdrawal of interest subsidy costs not
     incurred by implementing recommended improvements, avoidance of unnecessary
     expenditures noted in preaward reviews, and any other savings which are specifically
     identified. In this instance, if the State implements our recommendation, it will cease to
     use program funds for projects that, after completion of the housing rehabilitation work,
     need required repairs to meet HUD’s and the State’s standards. Once the State
     successfully improves its procedures and controls, this will be a recurring benefit. Our
     estimate conservatively reflects only the initial year of this benefit.




                                                  20
Appendix B

       AUDITEE COMMENTS AND OIG’S EVALUATION



                    Auditee Comments




Comment 1

Comment 2




                           21
Comment 2




Comment 1

Comment 3

Comment 2




            22
Comment 2


Comment 2



Comment 2




Comment 2




            23
Comment 2



Comment 2




Comment 2



Comment 2
Comment 1




            24
Comment 2




Comment 2




Comment 2


Comment 2




            25
Comment 2




            26
                         OIG Evaluation of Auditee Comments

Comment 1   We have performed a thorough audit of all of the files the State and/or its local
            agency administrators have provided related to our audit sample and have
            evaluated and factored into our audit conclusions all of the documentation they
            have provided to date. Based on our audit we identified $2.3 million in
            unsupported costs. Unsupported costs require a future decision by HUD officials
            which will take into consideration any additional supporting documentation that
            the State provides.

Comment 2   We are encouraged that the State has expressed that it is initiating corrective
            action or has recently taken some of the steps needed to correct the problems
            discussed in this report.

Comment 3   The audit showed that the State lacked sufficient documentation for 41 (61
            percent) of the 67 projects that we reviewed. As such, we disagree with the
            State’s assertion that its overall documentation compliance level was greater than
            85 percent.




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Appendix C

 FEDERAL REGULATIONS, GUIDANCE, AND THE STATE’S
               WRITTEN POLICIES


  A. Regulations at 24 CFR [Code of Federal Regulations] Part 92, Definitions, state: “Low-
     income families means families whose annual incomes do not exceed 80 percent of the
     median income for the area, as determined by HUD with adjustment for smaller and
     larger families…”

  B. Regulations at 24 CFR [Code of Federal Regulations] 92.203(a)(2) state that a
     participating jurisdiction must determine households’ annual income by examining
     source documentation evidencing households’ annual income. Section 92.203(d)(1)
     states that the participating jurisdiction must calculate the annual income of the family by
     projecting the prevailing rate of income of the family at the time the participating
     jurisdiction determines that the family is income eligible. Annual income shall include
     income from all family members.

  C. Regulations at 24 CFR [Code of Federal Regulations] 92.251(a)(1) require housing that
     is constructed or rehabilitated with HOME funds to meet all applicable local codes,
     rehabilitation standards, ordinances, and zoning ordinances at the time of project
     completion. The participating jurisdiction must have written rehabilitation standards to
     ensure that HOME-assisted housing is decent, safe, and sanitary.

  D. Regulations at 24 CFR [Code of Federal Regulations] 92.254(a)(2)(iii) state that if a
     participating jurisdiction intends to use HOME funds for projects, the participating
     jurisdiction may use the single-family mortgage limits under Section 203(b) of the
     National Housing Act, or it may determine 95 percent of the median purchase price for
     single-family housing in the jurisdiction. Section 92.254(b) and (c) state that in cases of
     rehabilitation not involving acquisition, housing is affordable if the estimated value, after
     rehabilitation, does not exceed 95 percent of the median purchase price and is the
     principal residence of an owner who qualifies as low-income and if the ownership
     interest meets the definition of homeownership.

  E. Regulations at 24 CFR [Code of Federal Regulations] 92.504(a) state that participating
     jurisdictions are responsible for managing the day-to-day operations of their HOME
     program, ensuring that HOME funds are used in accordance with all program
     requirements and written agreements, and taking appropriate action when performance
     problems arise. The use of State recipients, subrecipients, or contractors does not relieve
     the participating jurisdiction of this responsibility.

  F. Regulations at 24 CFR [Code of Federal Regulations] 92.505(a) state that requirements
     of Office of Management and Budget Circular A-87 apply to government entities.


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G. Regulations at 24 CFR [Code of Federal Regulations] 92.508(a) state that a participating
   jurisdiction must establish and maintain sufficient records to enable HUD to determine
   whether the participating jurisdiction has met the requirements of 24 CFR [Code of
   Federal Regulations] Part 92. The participating jurisdiction must maintain records
   demonstrating the following:
       ¾ Each household is income eligible in accordance with 24 CFR [Code of Federal
           Regulations] 92.203.
       ¾ Each project’s estimated value after rehabilitation does not exceed 95 percent of
           the median purchase price for the area in accordance with 24 CFR [Code of
           Federal Regulations] 92.254(a)(2).

H. Regulations at Office of Management and Budget Circular A-87, Attachment A, section
   (C)(2)(a-c) state that a cost is reasonable if 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. In determining the reasonableness of a given cost,
   consideration shall be given to: whether the cost is recognized as ordinary and necessary,
   factors such as sound business practices, and market prices for comparable goods and
   services.

I. The State’s written agreement for administration of HOME funds, section 9B, states that
   if the local administrator desires to subcontract any duties and responsibilities during the
   term of this agreement, the local administrator will submit a proposed agreement and
   information about the subcontractor to the Department of Housing and Community
   Development (DHCD) for DHCD to determine whether the subcontractor and
   subcontracting agreement are acceptable.

J. Building HOME: A HOME Program Primer, chapter 4, states that acceptable methods to
   determine after-rehabilitation values include appraisals, tax assessments of comparable
   properties, and estimates of value.

K. The Technical Guide for Determining Income and Allowances for the HOME Program
   states that the earned income of minors under the age of 18 is not included.

L. Policies in chapter 3 of the State’s Special Loans Program Handbook state that work
   write-ups must clearly define the scope of work, be subdivided in a manner that adds
   clarity or simplifies the itemization of prices, materials and equipment shall be specified
   whenever possible, should indicate how repaired areas are to be finished, trade work shall
   follow a detailed format, should indicate the location of where lead hazards are located,
   and how remediation will take place. Drawings are required when additions, major
   alterations, or façade work are proposed. Upon receipt of a contractor’s proposal, the
   Housing Rehabilitation Officer must evaluate the reasonableness of the cost. The
   contractor’s proposal should be compared to the cost estimate of the job prepared by the
   Housing Rehabilitation Officer. Generally, the lowest responsible bidder should be
   selected for the job.



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