oversight

HUD Lacked Adequate Controls to Ensure the Timely Commitment and Expenditure of HOME funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-28.

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

                                                               Issue Date
                                                                     September 28, 2009
                                                               Audit Report Number
                                                                     2009-AT-0001




TO:        Mercedes M. Márquez, Assistant Secretary for Community Planning and
              Development, D

           //signed//
FROM:      James D. McKay, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT:   HUD Lacked Adequate Controls to Ensure the Timely Commitment and
            Expenditure of HOME funds

                                 HIGHLIGHTS

What We Audited and Why


           We audited the U.S. Department of Housing and Urban Development’s (HUD)
           HOME Investment Partnerships Program (HOME) as part of our fiscal year 2009
           annual audit plan. Our audit objectives were to assess the adequacy of HUD’s
           monitoring and implementation of requirements to recapture HOME funds not
           committed within two years and spent within five years, assess the adequacy of
           HUD’s monitoring and use of its Integrated Disbursement and Information
           System (information system), and assess whether it was appropriate for HUD to
           apply the cumulative technique for assessing deadline compliance and the first-in
           first-out method for committing and disbursing HOME funds to participating
           jurisdictions.

What We Found

           HUD needs to improve efforts to require participating jurisdictions to cancel more
           than $62 million in HOME fund balances for open activities that were committed
           more than five years ago. The prolonged delay or failure to cancel the fund
         balances caused an overstatement of commitments in HUD’s information system
         which prevented the accurate identification of funds that were subject to recapture
         by HUD or the United States Treasury. In addition to the excessive fund
         balances, we question the eligibility of more than $11.6 million disbursed to
         participating jurisdictions for activities that were more than five years old, showed
         evidence of stalled performance, and may have warranted their classification as
         terminated activities.

         Participating jurisdictions made more than $20.9 million in incorrect commitment
         entries to the information system. The inaccuracies undermined the integrity of
         the information system and reports generated from the system. HUD did not
         routinely monitor the accuracy of commitments that participating jurisdictions
         entered into the information system, nor did it require participating jurisdictions to
         implement adequate internal controls over commitments they entered into the
         system. HUD missed the opportunity to identify and require correction of the
         types of deficiencies discussed in this report because it did not routinely monitor
         this area. The significant inaccuracies bring into question the reliability of
         commitments that other participating jurisdictions entered into the information
         system.

         HUD used a cumulative technique for assessing deadline compliance and a first-
         in first-out method for HOME commitments and expenditures that conflicted with
         statutory requirements that require the identification of HOME commitments and
         expenditures by the program funding year to which they relate. The statutes make
         no mention of the cumulative technique and the first-in first-out method as
         acceptable alternatives. The two HUD practices contributed to the more than $62
         million in old activities remaining open as discussed above. HUD would have
         recaptured the funds due to the missed five-year disbursement requirement were it
         not for the cumulative technique. The first-in first-out method, as described by
         HUD, contributed to misclassification of funds in HUD’s financial system that are
         subject to recapture by HUD or by the United States Treasury pursuant to a
         separate statutory deadline that will be in place starting September 30, 2009.

What We Recommend


         We recommend that HUD identify which of the old open activities have been
         completed or terminated, cancel those balances, recapture shortfalls generated by
         the cancellations, and require repayments for HOME expenditures on terminated
         activities. We further recommend that HUD implement procedures to ensure that
         field offices monitor the accuracy of future commitments that participating
         jurisdictions enter into HUD’s information system, and provide technical
         assistance to participating jurisdictions regarding what constitutes acceptable
         documentation for commitments. HUD should also require participating
                                           2
           jurisdictions to close out old HOME activities as appropriate, reallocate remaining
           balances for future HOME projects in a timely manner, and establish and
           implement adequate internal controls over commitments they enter into the
           information system. Furthermore, HUD should obtain a formal legal opinion
           from the Office of General Counsel and revise its regulations to ensure its
           procedures for assessing compliance with commitment and expenditure
           requirements are consistent with statutory 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 our discussion draft audit report to HUD on August 11, 2009, and
           held an exit conference on August 20, 2009. HUD provided written comments on
           September 15, 2009. HUD disagreed with findings 1 and 3 but agreed with
           finding 2. Also, HUD generally agreed with our recommendations.

           The complete text of HUD’s written response, along with our evaluation of that
           response, can be found in appendix B of this report. We excluded the attachment
           containing the Federal Register, dated May 28, 1997, which is available on the
           Government Printing Office website.




                                            3
                             TABLE OF CONTENTS

Background and Objectives                                                              5

Results of Audit
        Finding 1: Fund Balances for Open Activities More Than Five Years Old Were     7
                   Not Closed Out in a Timely Manner and Could Trigger Recapture by
                   the United States Treasury
        Finding 2: Inadequate HUD Monitoring of and Internal Controls over            15
                   Commitments Entered into the Information System Resulted in
                   Questionable Data Reliability
        Finding 3: HUD’s Regulatory Requirements for Assessing Compliance with        20
                   Commitment and Expenditure Requirements Conflicted with
                   Statutory Requirements

Scope and Methodology                                                                 25

Internal Controls                                                                     27

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use                29
   B.   Auditee Comments and OIG’s Evaluation                                         30
   C.   Schedule of Stalled or Potentially Terminated Activities                      43
   D.   Other Matter for Consideration Involving Accounting for HOME Draws            46




                                              4
                     BACKGROUND AND OBJECTIVES

The HOME program is authorized under Title II of the Cranston-Gonzales National Affordable
Housing Act as amended. HOME is funded for the purpose of increasing the supply of
affordable rental housing; improving substandard housing for existing homeowners; assisting
new home buyers through acquisition, construction, and rehabilitation of housing; and providing
tenant-based rental assistance. HOME funding is allocated to eligible state and local
governments to strengthen public-private partnerships and to supply decent, safe, and sanitary
affordable housing to very low-income families. State and local governments that become
participating jurisdictions may use HOME funds to carry out multiyear housing strategies
through acquisition, rehabilitation, new construction, and tenant-based rental assistance.
Participating jurisdictions are required to reserve a portion of their HOME funds for community
housing development organizations. Private nonprofit community-based service organizations
receive their certification and designation as community housing development organizations
from participating jurisdictions based on criteria specified in HUD’s regulations.

HUD makes formula allocations of HOME funds to participating jurisdictions on an annual
basis. HUD makes the allocations without regard to the participating jurisdictions’ timely
commitment and expenditure of prior year HOME allocations. HUD officials stated that the
department does not have the statutory authority to deny annual formula allocations to
participating jurisdictions that fail to timely commit and spend HOME funds. HUD has a system
to monitor participating jurisdictions’ compliance with program deadlines for commitments,
reservations to community housing development organizations, and expenditures. HUD
provided information that showed since inception of the program in 1992 it has recaptured more
than $41 million from participating jurisdictions for failure to meet those deadlines. HUD’s
national production report as of December 31, 2008, shows that since inception of the HOME
program, HUD has allocated HOME funds totaling more than $26.5 billion, of which more than
$24.1 billion has been committed and more than $21.7 billion has been expended by
participating jurisdictions.

Title II of the Cranston-Gonzalez National Affordable Housing Act provides that a participating
jurisdiction’s right to draw funds from its HOME Investment Trust Fund shall expire if the funds
are not placed under binding commitment to affordable housing within 24 months after the last
day of the month in which such funds are deposited into the participating jurisdiction’s HOME
Investment Trust Fund. Regulations for the HOME program have similar language and require
that HOME funds be committed by the participating jurisdictions within 24 months, and
expended within five years. However, for purposes of determining the amount by which the
HOME Investment Trust Fund will be reduced or recaptured, HUD considers the sum of
commitments to community housing development organizations, commitments, or expenditures,
as applicable, from the fiscal year allocation being examined and from subsequent allocations.
This interpretation of the 24-month commitment requirement (referred to by HUD as the
“cumulative” technique) is set forth in HUD’s regulations, but is not contained in the statute.
HUD also used a first-in first-out method to commit and disburse funds to activities in its
                                                  5
information system. This means that funds are committed and disbursed from the “oldest”
available funds first.

In 1996, HUD established and implemented the information system to accumulate and provide
data to monitor, among other requirements, compliance with HOME requirements for
committing and expending funds. HUD also uses the information system to generate reports
used within and outside HUD, including the public, participating jurisdictions, and the Congress.
The information system is the disbursement and reporting system for the HOME and other HUD
community development programs. The information system is a real-time mainframe-based
computer application that is undergoing reengineering to a Web-based system.

Requirements of the National Defense Authorization Act of 1991 (Public Law 101-510, dated
November 5, 1990) state that on September 30 of the fifth fiscal year after the period of
availability for obligation of a fixed appropriation account ends, the account shall be closed and
any remaining balance (whether obligated or unobligated) in the account shall be canceled and
thereafter shall not be available for obligation or expenditure for any purpose. The HOME fiscal
year 2002 appropriation was the first time HOME funds had an identified three-year period of
availability subject to Public Law 101-510 and its five-year expenditure deadline. Prior to fiscal
year 2002, HOME funds were appropriated for an indefinite period and were available until
expended. Fiscal year 2002 HOME funds that are not spent by September 30, 2009 (five years
after the period of availability ended on September 30, 2004), will be subject to recapture by the
United States Treasury. Unexpended HOME funds for grant years 1992 through 2001 are not
subject to Public Law 101-510.

The objectives of the audit were to (1) assess the adequacy of HUD’s monitoring and
implementation of requirements to recapture HOME funds not committed within two years and
spent within five years, (2) assess the adequacy of HUD’s monitoring and use of its information
system, and (3) assess whether it was appropriate for HUD to use the cumulative technique for
assessing deadline compliance and the first-in first-out method to commit and disburse HOME
funds to participating jurisdictions.




                                                6
                                 RESULTS OF AUDIT

Finding 1: Fund Balances for Open Activities More Than Five Years
           Old Were Not Closed Out in a Timely Manner and Could
           Trigger Recapture by the United States Treasury
HUD needs to improve efforts to require participating jurisdictions to deobligate more than $62
million in HOME fund balances in a timely manner for open activities that were more than five
years old. We also question the eligibility of more than $11.6 million disbursed to participating
jurisdictions for open activities that were more than five years old and showed evidence of
stalled performance that may have warranted their classification as terminated activities. The
balances associated with the old activities restricted participating jurisdictions from committing
and spending the funds on other eligible HOME activities in a timely manner or for reimbursing
the program for ineligible costs. The delay or failure to deobligate amounts when due caused an
overstatement of commitments in HUD’s information system and contributed to masking or
understating shortfalls that were subject to recapture by HUD. These situations occurred because
HUD had not adequately enforced efforts to require participating jurisdictions to close out old
fund balances in a timely manner and to support whether inactive or slow-moving activities
were, in effect, terminated activities. The balances indicated excessive delays by participating
jurisdictions in the completion of projects and/or closeout of funded activities. The portion of
the fund balances that are associated with old open subgranted activities would make it more
difficult for participating jurisdictions and HUD to avoid losing HOME funds subject to
recapture by the United States Treasury under provisions of Public Law 101-510 (see finding 3).


The $62 million for open activities and the $11.6 million in questioned costs consisted of:

       $7 million for 77 open activities with no fund draws since the activities were funded;

       $20.4 million for 436 open activities with no fund draws since 2006, plus more than $3.9
       million in questioned costs; and

       $34.6 million for 243 open activities with fund draws from 2007 to April 2009, plus more
       than $7.7 million in questioned costs, but the activities were not completed despite
       having been funded beyond HUD’s five-year regulatory disbursement requirement.

HUD officials acknowledged the problem with closing out open activities and commented that
they had efforts underway to address the matter. They said that the headquarters Office of
Community Planning and Development had emphasized to field offices the importance of
closing out open activities. They further stated that they provided field offices with reports that


                                                 7
identified the open activities. Moreover, the closeout of such activities is an element of field
office staff’s performance standards.


 HUD Had Made Progress in
 Closing Open Activities

               We started the audit in November 2008 and initially assessed activities shown in
               HUD’s open activities report as of December 31, 2008. We only assessed open
               activities that were five years old or older because that period parallels HUD’s
               regulatory requirement that participating jurisdictions spend HOME funds within
               five years of the date of their HOME agreements. The December report identified
               more than $83.1 million in open activities funded between 1992 and 2003.

               During the audit, we contacted 11 field offices concerning 18 of the open
               activities with fund balances that totaled more than $19 million. We made the
               contacts to obtain information and support to explain what action the offices had
               taken to require participating jurisdictions to close out the activities and to
               deobligate the fund balances. Based on the responses, we determined that HUD
               closed some of the old activities shown in the December report during the course
               of our audit. Therefore, we updated our assessment using HUD’s open activities
               report as of April 30, 2009. The April report showed more than $62 million in
               open activities compared to the $83.1 million shown in the December 31, 2008,
               report. The difference indicates that HUD made considerable progress in closing
               out old open activities after we started the audit in November 2008.

 There Were Five-Year-Old Activities
 with No Funds Disbursed to
 Participating Jurisdictions

               HUD’s open activities report as of April 30, 2009, showed more than $7 million
               for 77 open activities that were more than five years old, for which the
               participating jurisdictions had not drawn down any funds under their letter of
               credit. HUD regulations provide that a project, which has been committed in the
               information system for 12 months without an initial disbursement of funds, may
               be canceled. The activities were funded between 1993 and 2003 and were at least
               four years past the 12-month date that should have triggered a system cancellation
               but did not do so.




                                                 8
                                         Number of          Funds
                     Funding year         activities        drawn         Fund balance
                     1993 to 1999                  8        $   0             $ 1,342,451
                        2000                       3            0                  308,470
                        2001                       9            0                  193,355
                        2002                      17            0                2,175,006
                        2003                      40            0                3,066,706
             Total                                77            0               $7,085,988

           Based on HUD’s December 2008 open activities report, we requested information
           from five field offices for six activities that totaled more than $3.8 million. Two
           field offices provided various explanations about two activities funded for $1.2
           million, but they did not explain why they had not required the participating
           jurisdictions to cancel the activities and deobligate the funds. The activities were
           still open in HUD’s information system. One field office (New Orleans) did not
           respond to our request for an activity funded for $555,560, but we determined that
           the participating jurisdiction later drew more than $480,000 against the activity.
           Two field offices responded with information showing that the participating
           jurisdictions had since deobligated fund balances and/or closed three activities
           funded for more than $2 million. Our assessment and follow-up showed that
           HUD had made progress in closing out activities that had no fund draws but that
           more timely action is needed to require participating jurisdictions to close out all
           such activities and deobligate the fund balances.


There Were Five-Year-Old
Activities with No Fund Draws
Since 2006

           HUD’s open activities report as of April 30, 2009, showed more than $20.4
           million for 436 open activities that were more than five years old, for which the
           participating jurisdictions had not drawn down any funds under their letter of
           credit since 2006. The activities were funded between 1992 and 2003. HUD
           regulations state that a HOME-assisted project that is terminated before
           completion, either voluntarily or otherwise, constitutes an ineligible project. The
           absence of fund draws within the last two years raised questions as to whether the
           activities had been completed with residual fund balances or whether they
           represented terminated activities. In either instance, the fund balances should
           have been deobligated. If the activities were terminated, the amounts drawn
           represented ineligible HOME expenditures.




                                            9
               Total fund                    Distribution by funding year
              balances for
                activities
   Year of    funded more
  last fund     than five
    draw        years ago     1992-1999      2000       2001         2002         2003
 1997-1999       $1,638,780   $1,637,441     $1,340            -            -            -
 2000               219,375      157,157     62,218            -            -            -
 2001             1,107,345      177,441    252,918    $676,986             -            -
 2002             1,356,460      189,428    532,128      160,474    $474,431             -
 2003             1,171,893        2,126     15,489      297,071      500,364    $356,842
 2004             4,884,233      232,914     23,250      270,673      635,678    3,721,719
 2005             2,804,476      391,099     29,753       19,815      624,328    1,739,480
 2006             7,309,430    2,223,189     49,080      853,574    2,193,768    1,989,817
 Total         $20,491,992    $5,010,795   $966,176   $2,278,592   $4,428,570   $7,807,859

The fund balances associated with these activities should be deobligated in
HUD’s information system unless the participating jurisdictions can specifically
support that the activities have not been terminated (voluntarily or involuntarily)
and are progressing in a timely manner toward producing affordable housing for
eligible recipients.

Based on data included in HUD’s information system, we question more than
$3.9 million that participating jurisdictions drew down for 76 activities (see
appendix C) included in the above table. In each case, the activities were more
than five years old (some dating back to the 1990s), but the participating
jurisdictions had drawn down less than 50 percent of the funded amounts coupled
with no fund draws in the last two years. These conditions were not indicative of
activities making reasonable progress toward producing affordable housing but
were, instead, indicative of stalled or possibly terminated activities. HUD will
need to determine whether the activities had been terminated and whether the
funds drawn for them were eligible under the HOME program.

As discussed below, even if the above activities are now progressing toward
completion, amounts associated with subgranted activities may prevent
participating jurisdictions from meeting the eight-year expenditure deadline under
Public Law 101-510, applicable to activities funded with appropriations from
fiscal year 2002 and later.

Based on HUD’s December 2008 open activities report, we requested information
from eight field offices on 12 activities with fund balances of more than $15.1
million. Three field offices provided no clear explanations for why they had not
required participating jurisdictions to cancel and deobligate HOME funds for six
activities with fund balances of more than $7.4 million. One field office (Los
Angeles) did not respond to our request for an activity with a fund balance of
more than $1.2 million. Five field offices responded with information showing
                                   10
           that the participating jurisdictions had since drawn, deobligated, or canceled five
           activities, which reduced their $6.3 million fund balance to about $1.5 million.
           The follow-up indicated that HUD had made progress in closing out the old
           activities in this category. However, more timely action is needed to require
           participating jurisdictions to close out and deobligate funds for such activities and,
           when applicable, reimburse the program for expenditures made for terminated
           activities.

There Were Five-Year-Old Activities
with Fund Draws from 2007 to April
2009

           HUD’s open activities report as of April 30, 2009, showed more than $34.6
           million in fund balances for 243 activities that were funded between 1994 and
           2003 but which had fund draws from 2007 to April 2009 that should be evaluated
           to determine why the activities had not been completed. The amount included
           more than $13 million in fund balances for 32 activities for which the
           participating jurisdictions had drawn only $7.7 million or 50 percent or less of the
           HOME funds committed to them. The fund balance included more than $1.2
           million for a 1996 Florida new construction activity (number 310), for which the
           participating jurisdiction had only drawn about 19 percent of the allocated funds,
           and a $1.2 million fund balance for a 1994 Puerto Rico new construction activity
           (number 15), for which the participating jurisdiction had only drawn about 45
           percent of the allocated funds. HUD regulations state that HOME-assisted
           projects that are terminated before completion, either voluntarily or otherwise,
           constitute an ineligible project.

                         Total fund                     Distribution by funding year
                        balances for
                          activities
            Year of     funded more
            last fund     than five
            draw          years ago     1992-1999      2000       2001          2002         2003
            2007           $4,541,513   $1,616,152    $20,367      $53,560    $776,556     $2,074,878
            2008           21,210,265      541,384    429,898    1,970,363    4,315,435    13,953,185
            2009            8,871,729    1,836,813     70,665    1,381,245    2,956,083     2,626,923
            Total        $34,623,507    $3,994,349   $520,929   $3,405,168   $8,048,075   $18,654,986

           HUD should ensure that participating jurisdictions close and deobligate fund
           balances for completed activities and disallow any expenditure for activities that
           are effectively terminated. This requirement includes but is not limited to a
           failure to produce affordable housing occupied by HOME-eligible recipients in a
           reasonable period.


                                              11
            For instance, we question more than $7.7 million in disbursements to participating
            jurisdictions for 32 activities (see appendix C), which appear to have been stalled
            or possibly terminated. In each case, the activities were more than five years old
            (some dating back to the 1990s), but the participating jurisdictions had drawn
            down less than 50 percent of the funded amounts. These conditions were not
            indicative of activities making reasonable progress toward producing affordable
            housing but were, instead, indicative of stalled or possibly terminated activities.
            HUD will need to determine whether the activities had been terminated and were
            eligible under the HOME program.

Inadequate Action to Close Old
Open Activities Increased the
Potential for Recapture by the U.S.
Treasury

            The existence of subgranted fund balances for the above old open activities would
            make it more difficult for participating jurisdictions and HUD to avoid losing
            HOME funds to recapture by the United States Treasury under the statutory
            requirements of Public Law 101-510. For instance, HUD’s expiring funds report
            showed more than $12 million in open subgranted activities in Region IV that are
            included in the $62 million discussed above. HUD’s guidance provides the
            following concerning this law’s application to the HOME program. It states that:

                   HOME funds appropriated in fiscal year 2002 will not be available for
                   participating jurisdictions to expend after September 30, 2009. HOME
                   funds remaining in a participating jurisdiction’s fiscal year 2002 grant
                   after this date will be recaptured by the United States Treasury.
                   Unexpended HOME funds in grants from 1992 through 2001 are not
                   subject to these rules. However, beginning with the fiscal year 2002
                   appropriation, each annual HOME grant is subject to the expenditure rule.
                   So, for example, fiscal year 2003 HOME funds will no longer be available
                   to participating jurisdictions after September 30, 2010.

                   In order for a participating jurisdiction to be able to draw down all 2002
                   funds, all prior-year funding must first have been drawn down for those
                   recipients and fund types having fiscal year 2002 funds committed to
                   them. As a result, HUD’s guidance states that participating jurisdictions
                   may not even be aware that some of their pre-2002 HOME commitments
                   are “parked” with specific recipients or within certain fund types, thus
                   effectively blocking off their access to the fiscal year 2002 HOME funds.

            The capability of 2001 and earlier year HOME funds (particularly funds
            associated with subgranted activities) to block participating jurisdictions’ ability
                                              12
             to draw 2002 and later year funds (subject to statutory recapture) underscores the
             urgency for HUD to close out and cancel fund balances for old open activities.


Conclusion


             HUD had made progress in closing out open activities, but it needs further
             improvements to ensure that field offices require participating jurisdictions to
             close out old open activities expeditiously to avoid losing HOME funds to
             recapture by the United States Treasury pursuant to Public Law 101-510 that
             becomes effective for the HOME program on September 30, 2009. Fund balances
             that should have been closed out contributed to understating and/or masking what
             would otherwise have been commitment shortfalls in HUD’s deadline compliance
             status report that were subject to recapture by HUD for redistribution to
             participating jurisdictions. Also, fund disbursements associated with open
             activities that were or should have been terminated represented ineligible HOME
             expenditures. These situations occurred because HUD had not adequately
             enforced efforts to require participating jurisdictions to close out old fund
             balances in a timely manner and to support whether inactive or slow-moving
             activities were, in effect, terminated activities.

Recommendations


             We recommend that the Assistant Secretary for Community Planning and
             Development:

             1A.    Ensure that field offices require participating jurisdictions to close out in a
                    timely manner $62,201,487 in activities reflected in its open activities
                    report that are more than five years old and cancel the fund balances.

             1B.    Require participating jurisdictions to reimburse HUD from nonfederal
                    sources any portion of the $11,634,558 for activities listed in appendix C
                    that HUD determines had been terminated, voluntarily or involuntarily.
                    When making this determination, HUD should consider the participating
                    jurisdictions’ lack of timely physical completion and/or production of
                    affordable housing occupied by HOME income-eligible individuals.

             1C.    Recapture any shortfalls generated by the closure and deobligation of fund
                    balances associated with the open activities.

             1D.    Establish and implement controls to ensure that field offices require
                    participating jurisdictions to close out future HOME activities within a
                                              13
timeframe that will permit reallocation and use of the funds for eligible
activities in time to avoid losing them to recapture by the United States
Treasury under provisions of Public Law 101-510.




                         14
Finding 2: Inadequate HUD Monitoring of and Internal Controls over
           Commitments Entered into the Information System Resulted
           in Questionable Data Reliability
HUD did not routinely monitor the accuracy of commitments that participating jurisdictions
entered into the information system. HUD also did not require participating jurisdictions to
institute basic internal controls over their commitment entries. The audit identified more than
$20.9 million in incorrect commitment entries made by seven participating jurisdictions. HUD
missed the opportunity to identify and require correction of the types of inaccuracies found
during the audit because it did not routinely monitor this area. The inaccuracies undermined the
integrity of system data and of reports generated from the information system. For example, the
incorrect entries impacted the deadline compliance status report, which HUD uses to determine
recapture amounts for participating jurisdictions that miss their 24-month statutory commitment
deadline. The significant inaccuracies by such a small number of participating jurisdictions
reviewed bring into question the reliability of commitments other participating jurisdictions
entered into the information system.




Field Offices Were Not Required to
Monitor and Enforce Requirements
for Commitment Data Entries


              HUD’s procedures for conducting risk assessments do not include criteria for
              field offices to assign risk factors for commitments entered into the information
              system. Further, HUD had not developed an appropriate checklist for monitoring
              the accuracy and support for commitments that participating jurisdictions entered
              into the information system. We examined HUD’s 2008 monitoring of 12
              participating jurisdictions by four Region IV field offices (Jacksonville and
              Miami, Florida; Atlanta, Georgia; and Columbia, South Carolina). The four field
              offices did not monitor whether the participating jurisdictions only made properly
              supported commitment entries and adjustments to the information system. Two
              of the field offices examined written agreements (three for Jacksonville and three
              for Miami) for proper content but not for accuracy of input to the information
              system. Thus, HUD missed the opportunity to identify and require correction of
              the types of inaccuracies found during the audit.

              We visited five Region IV participating jurisdictions that HUD monitored in 2008
              and examined support for commitments and/or commitment adjustments entered
              into the information system. We focused on entries made during the month of the
              participating jurisdictions’ commitment deadlines and three months before the
                                               15
                  deadlines. We examined commitments totaling more than $6.9 million and
                  identified more than $2.3 million (33 percent of $6.9 million) in questionable
                  commitments that the participating jurisdictions entered into the information
                  system.

                                                                         Types of commitment violations and errors
                                                                            Past                         Other
                                Commitments             Total             deadline    Exceeded       inadequately
      Participating             and activities       questionable          or no     agreement         supported
       jurisdiction               examined             entries           agreement     amount            entries
   Polk County, FL              $ 692,499/ 8           $ 691,320          $ 354,482   $ 158,122     $ 178,716 *
   Richland County, SC             503,989/ 15            295,210           252,240       3,650           39,320 *
   Tampa, FL                     2,170,837/ 5           1,213,265                                       1,213,265 **
   Macon, GA                       608,372/ 11            106,295                         3,528           102,767***
   Miami-Dade
   County, FL                    3,000,000/ 3                     -                -                -                -
   Total                        $6,975,697/ 42          $ 2,306,090        $ 606,722        $ 165,300   $1,534,068
 *Entries made before the agreements were executed but executed before the commitment deadline date.
 ** No execution date shown on the agreement.
 *** Amount not reconcilable to the written agreement.


                  HUD headquarters Office of Community Planning and Development staff stated
                  that their limited staff and added responsibilities associated with the economic
                  recovery effort would limit their ability to monitor the accuracy of commitments
                  participating jurisdictions entered into the information system.

HUD Did Not Require Adequate
Internal Controls over
Commitment Data Entries

                  HUD did not require participating jurisdictions to establish and implement
                  adequate internal controls over commitments and related adjustments that they
                  entered into the information system. This deficiency was significant considering
                  that HUD, as discussed above, did not monitor participating jurisdictions to
                  determine the accuracy of commitment entries entered into the information
                  system. HUD regulations define commitment to mean that the participating
                  jurisdiction has executed a legally binding agreement with a state recipient, a
                  subrecipient, or a contractor to use a specific amount of HOME funds to produce
                  affordable housing or provide tenant-based rental assistance; has executed a
                  written agreement reserving a specific amount of funds to a community housing
                  development organization; or has met the requirement to commit funds to a
                  specific local project. The information system reference manual provides that
                  HOME funds are “committed” to an activity and recorded in the information


                                                                16
system when there is a written, legally binding agreement and the activity is set
up and funded in the information system.

We identified instances in which participating jurisdictions committed (funded)
funds in the system when they had no legally binding agreements, the agreements
were not dated, or the agreement amount did not match the commitment amount.
Upon learning of our visit, one of the participating jurisdictions adjusted the prior
entries made to the information system to reduce inflated commitments to the
amounts supported by its executed written agreements. In addition, we noted
similar conditions in OIG external audits in which participating jurisdictions
entered commitments into the information system that were not supported by
written agreements.

For example, the following OIG audits at participating jurisdictions identified
more than $18.6 million in commitments that participating jurisdictions recorded
in the information system without being supported by properly executed written
agreements:

                                                               Inadequately
  Audit report                              Participating        supported
    number        Report issue date          Jurisdiction      commitments
 2009-LA-1004      Nov. 26, 2008       California                  $15,000,000
 2008-AT-1006      Mar. 7, 2008        Fulton County, GA             2,700,000
 2008-AT-1009      June 9, 2008        Augusta, GA                     983,000

 Total                                                             $18,683,000

The problem with participating jurisdictions incorrectly entering commitments
into the information system was significant and was not isolated. The incorrect
and unsupported commitment entries underscore the need for HUD to require
participating jurisdictions to establish, implement, and enforce internal controls
over data entries and adjustments. This problem is significant considering that
HUD recaptures commitments that are not made by the program’s 24-month
statutory deadline based on commitment shortfalls identified in its deadline
compliance status report. The report is generated from cumulative commitments
that participating jurisdictions have entered into the information system over the
life of their respective HOME programs. HUD’s inadequate monitoring of and
poor internal controls over commitments entered into the information system
compromised the accuracy and reliability of commitments that participating
jurisdictions entered into the system.




                                  17
HUD Provided Incorrect Information
or Accepted Inadequately Supported
Commitment Entries


             HUD provides instructions to participating jurisdictions on what constitutes
             unacceptable and acceptable documentation for commitments. Unacceptable
             commitment documentation includes approved budgets, signed letters of intent,
             award letters, and council minutes. Acceptable commitment documentation
             includes a written agreement or contract between the participating jurisdiction and
             a state recipient, subrecipient, program recipient, or contractor signed by both
             parties, dated on or before the deadline date, committing a specific amount of
             HOME funds to a specific HOME project. Further, signatures of all parties
             signing the agreement or contract must be dated to show the execution date.

             We identified two instances in which HUD field office staff caused or did not
             require participating jurisdictions to change incorrect commitment entries in the
             information system. In one case, two different HUD staff members told a
             participating jurisdiction that it was acceptable to enter commitments into the
             information system based on the participating jurisdiction’s in-house committee
             approval of projects for funding versus the executed written agreements. Our
             sample included five instances, which totaled more than $131,000, in which the
             agreements were executed 49 to 85 days after the committee’s approval and were
             dated after the participating jurisdiction’s commitment deadline. In the other
             case, a HUD field office official stated that it was considered acceptable to allow
             commitments supported by written agreements in which the parties that signed the
             agreements did not provide the dates on which they executed the agreement.

             These instances indicate a need for HUD to better ensure that its staff understand
             and enforce HUD’s documentation requirements for commitments when
             conducting monitoring reviews and when providing technical assistance to
             participating jurisdictions.

Conclusion


             This audit and past OIG audits at participating jurisdictions identified more than
             $20.9 million in incorrect commitment entries, for seven participating
             jurisdictions, that overstated cumulative commitments in HUD’s information
             system. Such overstatements could mask amounts that would otherwise be
             identified as shortfalls or understate shortfall amounts subject to recapture that
             should be reflected in the deadline compliance status reports. The significant
             inaccuracies by the seven participating jurisdictions bring into question the
             reliability of commitments that participating jurisdictions entered into the
                                              18
          information system. We attribute these conditions to HUD not requiring its staff
          to monitor the accuracy of commitments entered into the information system and
          not requiring participating jurisdictions to establish adequate internal controls
          over their commitment entries.


Recommendations


          We recommend that the Assistant Secretary for Community Planning and
          Development

          2A.     Establish and implement procedures to monitor the accuracy of
                  commitments that participating jurisdictions enter into the information
                  system. These procedures should include expanding HUD’s risk rating
                  system to include risk factors for this review area and development of an
                  appropriate monitoring checklist to ensure consistency and thoroughness
                  of coverage among field offices.

          2B.     Ensure that its field office staff are aware of and enforce the
                  documentation requirements for entering commitments into the
                  information system and that they provide accurate technical assistance and
                  advice to participating jurisdictions regarding this matter.

          2C.     Require participating jurisdictions to establish and implement internal
                  controls over commitments that they enter into the information system to
                  help reduce the potential for incorrect and improper entry of commitments
                  into the information system.

          2D.     Add an electronic certification to the funding activity screen of the
                  information system so that participating jurisdictions will be required to
                  certify that the commitment data entries (activity funding) and/or
                  adjustments comply with requirements for commitments and are supported
                  by required documentation.




                                           19
Finding 3: HUD’s Regulatory Requirements for Assessing Compliance
           with Commitment and Expenditure Requirements Conflicted
           with Statutory Requirements
HUD used a cumulative technique to track compliance with HOME commitment and
expenditure deadlines and a first-in first-out method to account for commitments and
disbursements which we believe conflicted with requirements in the Cranston-Gonzalez National
Affordable Housing Act and Public Law 101-510. Both laws require the identification of
HOME commitments and/or expenditures by program year. The cumulative technique for
tracking deadline compliance and the first-in first-out method to account for commitments and
expenditures contributed to more than $62 million in old open activities discussed in finding 1.
The first-in first-out method also contributed to the incorrect classification and reporting of
HOME expenditures. HUD would have recaptured the $62 million for missing the five-year
disbursement requirement were it not for the cumulative and first-in first-out practices. The
cumulative technique and the first-in first-out method enabled participating jurisdictions to offset
older year commitment and expenditure requirements with commitments and expenditures that
actually pertained to more recent years’ activities. As a result, HUD allowed the participating
jurisdictions more time to complete activities than the five-year expenditure requirement
contained in HUD’s regulations and additional expenditure deadlines in Public Law 101-510 that
will become effective on September 30, 2009.




 HUD’s Cumulative Technique
 Conflicted with Statutory
 Requirements


               HUD has used the cumulative technique since at least 1996 when it implemented
               the information system. Statutory expenditure deadlines link compliance with
               specific dates associated with HUD’s funding of a participating jurisdiction’s
               HOME Investment Trust Fund or to specific HOME year appropriations. We
               believe that HUD’s cumulative technique conflicts with relevant statutory
               requirements. Specifically,

                       Title II of the Cranston-Gonzalez National Affordable Housing Act,
                       provides that a participating jurisdiction’s right to draw funds from its
                       HOME Investment Trust Fund shall expire if the funds are not placed
                       under binding commitment to affordable housing within 24 months after
                       the last day of the month in which such funds are deposited into the
                       participating jurisdiction’s HOME Investment Trust Fund. HUD shall
                       reduce the line of credit in the participating jurisdiction’s HOME

                                                20
       Investment Trust Fund by the expiring amount and reallocate the funds.

       Public Law 101-510, dated November 5, 1990 states that on September 30
       of the fifth fiscal year after the period of availability for obligation of a
       fixed appropriation account ends, the account shall be closed and any
       remaining balance (whether obligated or unobligated) in the account shall
       be canceled and thereafter shall not be available for obligation or
       expenditure for any purpose. This went into effect for the HOME
       program starting with the fiscal year 2002 appropriation when Congress
       started HOME funding fixed term (three years) appropriations.

HUD has implemented and continues to use the cumulative technique to track
deadline compliance for commitments and expenditures through its deadline
compliance status report. We question the regulatory basis for the cumulative
technique because our legal assessment indicates a conflict with the statutory
requirement for tracking compliance with the 24-month commitment requirement.
A representative for HUD’s Office of General Counsel stated that the cumulative
technique was consistent with the National Affordable Housing Act requirements,
but the Office of General Counsel did not issue a formal legal opinion to address
the matter. We requested a legal opinion on whether the cumulative technique
was consistent with both Title II of the Cranston-Gonzalez National Affordable
Housing Act and Public Law 101-510 when it becomes effective for the HOME
program. We also requested an opinion regarding the impact Public Law 101-510
will have on HUD’s cumulative technique for recapturing commitments in the
HOME program. The Office of General Counsel did not provide a written
response to our initial and follow-up requests for the opinion.

HUD said it implemented the cumulative technique for assessing compliance with
commitment and expenditure requirements because the Office of General Counsel
reviewed and approved the regulations. A 1997 notice to participating
jurisdictions stated that HUD considers later year commitments because it would
be unfair to a participating jurisdiction, for which, because of cancellation of a
1995-funded project, its fiscal year 1995 funds remained uncommitted and subject
to recapture when the participating jurisdiction had already committed later years’
funds.

The cumulative technique allowed participating jurisdictions to exceed the
statutory 24-month commitment deadline and possibly understate HOME funds
that may have been subject to recapture. The technique overstated participating
jurisdictions’ commitments, compared to what the statute requires, as of the
deadline dates. The overstatements caused a corresponding understatement of
commitment shortfalls that could be subject to recapture based on HUD’s
deadline compliance status report.

                                21
Classification and Reporting of
Expenditures


            HUD’s first-in first-out method resulted in incorrect classification and reporting
            of HOME expenditures and their related unliquidated obligations. HUD’s
            guidance to participating jurisdictions provides an explanation of the first-in first-
            out method. It states that HUD’s information system uses the method for both
            committing funds to activities and for recording disbursements made to
            participating jurisdictions. Under this method, funds are first committed and
            disbursed from the “oldest” available funds. When a commitment or
            disbursement request is entered in the information system, the system searches for
            the “oldest” funds first by grant program, then by source year of funds, recipient
            of funds, and type of funds. In this way, HOME funds are committed and
            disbursed to the participating jurisdictions from the oldest grant year to the newest
            grant year by recipient and fund type.

                   Expenditures and the related unliquidated obligations. The first-in first-
                   out method, as described in HUD guidance, prevents the direct association
                   that should exist between fixed-year appropriations, expenditures, and
                   unliquidated obligations (difference between obligated amounts and
                   expenditures). The technique distorts reporting of expenditures against
                   fixed appropriations and could make it erroneously appear that HUD was
                   in compliance with Public Law 101-510’s eight-year recapture deadline
                   and thus mask funds that should be recaptured by the United States
                   Treasury. The technique, as described by HUD, could also result in
                   incorrect reporting by HUD to outside parties of HOME program
                   expenditures and unliquidated obligations for fixed appropriations
                   included in its reports to the Congress, the United States Treasury, and the
                   public.

                   The first-in first-out method also allowed participating jurisdictions to
                   delay activity completion and avoid or delay recapture under the HUD
                   regulatory requirement to disburse HOME funds within five years. For
                   instance, the $62 million in old open activities (five years old or older)
                   discussed in finding 1 were a result of HUD’s first-in first-out technique.
                   If not for that technique, HUD would have been required to recapture the
                   funds based on its regulatory requirement to recapture HOME funds that
                   participating jurisdictions did not disburse within five years of their
                   HOME agreements.

            HUD officials stated that they planned to continue using, with some possible
            modification, the first-in first-out method for commitments and expenditures
                                             22
             under both laws. They further commented that they used the first-in first-out
             method for all community development programs and not just the HOME
             program.

Conclusion


             We believe that HUD’s cumulative technique for assessing deadline compliance
             and its first-in first-out method to account for expenditures conflicted with
             statutory requirements for commitments and expenditures. The statutes make no
             mention of HUD’s cumulative technique and first-in first-out method as
             acceptable alternatives and the two practices did not ensure compliance with
             statutory requirements for the commitment and disbursement of HOME funds.
             The cumulative technique and the first-in first-out method contributed to more
             than $62 million in old open activities discussed in finding 1. The first-in first-out
             method also caused the misclassification of funds otherwise subject to recapture
             by HUD for not meeting the regulatory expenditure requirements and could mask
             funds that will be subject to recapture by the United States Treasury, beginning
             October 1, 2009. This condition occurred because the practices gave participating
             jurisdictions credit for recent-year commitments and expenditures to offset older
             year commitment and expenditure requirements.


Recommendations


             We recommend that the Assistant Secretary for Community Planning and
             Development

             3A.    Obtain a formal legal opinion from the Office of General Counsel on
                    whether HUD’s cumulative technique for assessing compliance with
                    commitment deadlines is consistent with and is an allowable alternative to
                    the 24-month commitment requirement stipulated at Title II of the
                    Cranston-Gonzalez National Affordable Housing Act.

             3B.    Obtain a formal legal opinion from the Office of General Counsel on
                    whether HUD’s first-in first-out method for assessing compliance with
                    HOME expenditure requirements is consistent with and is an allowable
                    alternative to the eight-year recapture deadline pursuant to Public Law
                    101-510.

             3C.    Revise the regulations to ensure the procedures for assessing compliance
                    with commitment and expenditure requirements are consistent with
                    statutory requirements and discontinue use of the cumulative technique for
                                              23
assessing deadline compliance and the first- in first-out method to account
for the commitment and expenditure of HOME funds.




                         24
                        SCOPE AND METHODOLOGY

We performed the review from November 2008 to May 2009 at HUD headquarters in
Washington, DC, and at HUD field offices and participating jurisdictions in Atlanta and Macon,
Georgia; Columbia, South Carolina; and Jacksonville, Miami, Tampa, and Polk County, Florida.
The review generally covered the period January 1, 1992, through April 30, 2009. We adjusted
the period when necessary

We did not review and assess general and application controls over computer-processed data for
HUD’s information system. We conducted other tests and procedures to ensure the integrity of
computer-processed data that were relevant to the audit objectives. The tests included but were
not limited to comparison of computer-processed data to supporting commitment documents
such as written agreements, contracts, loan agreements, and other supporting documentation.
We also conducted on-site reviews at selected HUD field offices and participating jurisdictions
to review records and interview HUD staff and program participants. The tests disclosed that
participating jurisdictions entered incorrect commitments into the information system. The
incorrect entries did not impact our report because we obtained correct information from source
documentation for the activities reviewed and determined that incorrect entries by participating
jurisdictions had compromised the reliability and integrity of HUD’s information system (see
finding 2).

To accomplish our objectives, we

       Interviewed officials of the Office of Community Planning and Development, Office of
       Affordable Housing Programs, and Office of General Counsel at HUD headquarters.

       Requested but did not receive a legal opinion from the HUD Office of General Counsel
       concerning HUD’s first-in first-out technique for assessing commitments and the impact
       of Public Law 101-510 on the technique.

       Researched HUD handbooks, the Code of Federal Regulations, legislative history of the
       commitment requirement, Federal Registers, and other requirements and directives that
       govern the HOME program.

       Reviewed HUD’s procedures and controls used to administer the HOME program.

       Interviewed officials and staff of the HUD Offices of Community Planning and
       Development in Atlanta, Georgia; Columbia, South Carolina; and Jacksonville and
       Miami, Florida.

       Reviewed HUD’s monitoring reports and files for the HOME program during on-site
       visits at selected HUD field offices and reviewed prior OIG external audit reports that

                                               25
        dealt with HOME commitments.

        Obtained and reviewed HUD information system reports from HUD headquarters and
        field offices.

        Interviewed officials and staff and reviewed activity records and files of selected
        participating jurisdictions in Macon, Georgia; Richland County, South Carolina; and
        Miami, Tampa, and Polk County, Florida.

        Contacted nine HUD field offices by telephone and e-mail and obtained information
        related to activities open for prolonged periods. The field offices contacted were Puerto
        Rico; Milwaukee, Wisconsin; Detroit, Michigan; Newark, New Jersey; Houston, Texas;
        Greensboro, North Carolina; Chicago, Illinois; Miami, Florida; and New York, New
        York.

        Conducted tests to determine HUD field offices’ compliance with HOME program
        commitment requirements. HUD’s open activities report, provided by the headquarters
        Office of Community Planning and Development, showed more than $83 million1 in fund
        balances for open activities at December 31, 2008, that were more than five years old, of
        which we tested more than $19 million to determine what action HUD had taken to
        address closing out the activities. The amount tested included all activities (18 activities
        at 15 participating jurisdictions) that had fund balances equal to or greater than $500,000.
        The results of the audit only apply to the tested activities and cannot be projected to the
        universe or total population.

        Conducted tests to determine participating jurisdictions’ compliance with the HOME
        program commitment requirements. We visited 5 of 28 participating jurisdictions
        monitored by HUD Region IV field offices in 2008. During the site visits we reviewed
        42 HOME activities with commitments that totaled more than $6.9 million. We selected
        the activities considering factors such as large commitments close to the deadline date,
        significant dollar amounts in HUD’s open activities report, funds five years old or older
        not spent, and participating jurisdictions monitored by HUD in fiscal year 2008. The
        results of the audit only apply to the tested activities and cannot be projected to the
        universe or total population.

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


1
 This amount excludes the City of New Orleans’ participating jurisdiction that was covered by a HUD waiver,
program income, and administration including community housing development organization operating funds.
                                                       26
                              INTERNAL CONTROLS

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

       Program operations,
       Relevance and reliability of information,
       Compliance with applicable laws and regulations, and
       Safeguarding of assets and resources.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. They include the processes and procedures for planning,
organizing, directing, and controlling program operations as well as the systems for measuring,
reporting, and monitoring program performance.




 Relevant Internal Controls

              We determined that 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.

                  Relevance and reliability of data - Policies, procedures, and practices that
                  management has implemented to provide reasonable assurance that
                  operational and financial information used for decision making and reporting
                  externally is relevant, reliable, and fairly disclosed in reports.

                  Compliance with laws and regulations - Policies and procedures that
                  management has implemented to provide reasonable assurance that program
                  implementation is in accordance with laws, regulations, and provisions of
                  contracts or grant 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.


                                               27
Significant Weaknesses


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

               Fund balances for open activities more than five years old were not closed out
               in a timely manner and could trigger recapture by the United States Treasury
               (see finding 1).

               Inadequate HUD monitoring of and internal controls over commitments
               entered into the information system resulted in questionable data reliability
               (see finding 2).

               HUD’s regulatory requirement for assessing compliance with commitment and
               expenditure requirements conflicted with statutory requirements (see finding
               3).




                                            28
                                    APPENDIXES

Appendix A

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

               Recommendation          Unsupported 1/       Funds to be put to
                      number                                     better use 2/

                      1A                                          $62,201,487
                      1B                  $11,634,558

1/   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 the 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.

2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an OIG recommendation is implemented. These amounts include
     reductions in outlays, deobligation of funds, withdrawal of interest, costs not incurred by
     implementing recommended improvements, avoidance of unnecessary expenditures
     noted in preaward reviews, and any other savings that are specifically identified. In this
     instance, if HUD reviews and cancels the funds in a timely manner, it can reallocate the
     funds for eligible activities and possibly avoid recapture by the United States Treasury of
     2002 and later year funds that participating jurisdictions may be blocked from drawing
     due to open fund balances for old open subgranted activities.




                                             29
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1


Comment 2



Comment 1




                         30
Comment 3




            31
Comment 4




            32
Comment 4




Comment 5




Comment 6




            33
Comment 7




Comment 8




            34
35
Comment 9




            36
37
Comment 10




Comment 11




Comment 12




             38
                         OIG Evaluation of Auditee Comments

Comment 1   HUD commented that the report inaccurately characterized first-in first-out as the
            method by which deadline compliance is determined and that the auditors'
            confusion on this point led to erroneous conclusions in finding 1.

            We were aware that HUD used a cumulative method to determine deadline
            compliance. We revised the report to clarify reference to first-in first-out as the
            method HUD employed to commit and draw funds within its information system
            versus the method HUD used to determine deadline compliance. The report does
            not mention the first-in first-out or cumulative methods in finding 1

Comment 2   HUD stated that the first-in first-out method is a standard accounting rule used in
            HUD’s information system to ensure that the oldest grant money available are
            used first. HUD also commented that the first-in first-out method of drawing the
            oldest money first is necessary because participating jurisdictions cannot specify
            in the information system the grant year(s) from which funds are to be committed
            and drawn.

            We contend the method, based on HUD’s description, distorts the association of
            expenditure in HUD’s financial records against the specific appropriations they
            relate to and caused inaccurate reporting to users within and outside the
            department, e.g. Congress. The first-in first-out method for committing funds in
            the information system complicates the process for participating jurisdictions to
            reconcile their general ledger to what the information system shows. The
            regulations at 24 CFR 85.20 provide that grantees and subgrantees must maintain
            records which adequately identify the source and application of funds provided
            for financially-assisted activities. These records must contain information
            pertaining to grant or subgrant awards and authorizations, obligations,
            unobligated balances, assets, liabilities, outlays or expenditures, and income. The
            information system, as commented on by HUD, prevents participating
            jurisdictions from specifying in the system the grant year(s) [sources of funds]
            from which funds are to be committed and drawn [uses of funds]. We discuss the
            accounting implication of this practice in appendix D of the report.


Comment 3   HUD disagreed with the implications of a statement in the background section of
            the report that HUD makes formula allocations of HOME funds to participating
            jurisdictions on an annual basis without regards to the participating jurisdictions
            timely commitment and expenditure of prior year funds for eligible activities.
            HUD commented that the statement implies that it has the authority to deny
            funding to participating jurisdictions that fail to timely commit, reserve, or expend
            HOME funds but that it declines to exercise that authority for poor performers.
            HUD commented that it has no statutory authority to deny the formula funding to
                                             39
            participating jurisdictions for failure to comply with the cited requirements. HUD
            also commented that the statement ignores CPD’s established system for tracking
            deadline compliance and the deobligation of funds when deadlines are not met.

            We revised the background section of the report to recognize HUD’s comment
            that it had no statutory authority to deny the funding and to recognize HUD’s
            enforcement of the compliance deadlines by deobligating funds allocated to
            noncompliant participating jurisdictions. Contrary to HUD’s claim, finding 2
            recognized HUD’s tracking of compliance with commitment and expenditure
            deadlines.

Comment 4   HUD did not agree with finding 1. HUD stated that it was not true that “the
            balances associated with the old activities restricted participating jurisdictions
            from committing and spending the funds on other eligible HOME activities in a
            timely manner or for reimbursing the program for ineligible costs.” HUD further
            stated that participating jurisdictions can commit and expend funds on any
            eligible HOME activities in the information system based on fund availability
            without regard to other activities funded in the system.

            We basically agree, however, we maintain that “fund availability” is the operative
            phrase and that funds are not available to be committed if they are tied up in old
            activities that are not making reasonable progress toward completion.

Comment 5   HUD commented that there is no HOME regulatory provision that requires that
            funds be committed to a specific HOME activity and be disbursed within five
            years. HUD further commented that the OIG’s sample failed to take into account
            that activity funding and drawdowns may occur from multiple grant years over a
            several year period of time.

            As cited in finding 1, we choose to assess open activities that were five years old
            or older because that period paralleled HUD’s regulatory requirement that
            participating jurisdictions spend HOME funds within five years of the date of
            their HOME agreements. We used the five year period to identify the type of
            open activities we wanted to assess during the audit. Contrary to HUD’s position,
            the sample did take into account that activity funding and drawdowns may occur
            from multiple grant years over a several year period of time.

Comment 6   HUD took exception to the report comment that “HUD made considerable
            progress in closing out old open activities after we started the audit in November
            2008.” HUD commented that the “considerable progress” was not the result of
            the OIG audit, but rather of HOME participating jurisdictions use of tools
            developed on CPD’s initiative to improve program management functions begun
            years prior to the OIG audit and which CPD had continued to take steps to
            improve each year.
                                            40
              The report did not state or imply that the progress HUD made in closing out open
              activities during the course of the audit was due to the audit. We simply
              recognized that HUD made progress in closing out open activities while the audit
              was in progress

Comment 7     HUD disagreed with the report comment that the fund balances for the old open
              activities would make it more difficult for participating jurisdictions and HUD to
              avoid losing HOME funds subject to recapture by the United States Treasury
              under provisions of Public Law 101-510 (see finding 3). HUD also disagreed
              with the report comment that even if the above activities are now progressing
              toward completion, their old age may prevent participating jurisdictions from
              meeting the eight-year expenditure deadline under Public Law 101-510,
              applicable to activities funded with appropriations from fiscal year 2002 and later.

              We considered HUD’s position and found no support for their contention that the
              report comments were inaccurate. However, we did revise the report to clarify
              that funds tied up in subgrants for 2001 and earlier program years are the fund
              types most likely to bloc participating jurisdictions access to 2002 and later year
              funds that are subject to recapture under Public Law 101-510.

Comment 8     HUD disagreed with the finding 1 but its comments reflected positive action to
              implement each recommendation (1A, 1B, 1C, and 1D) to resolve the issues
              discussed in the finding.

Comment 9     HUD agreed with finding 2 and agreed to implement the recommendations (2A,
              2B, 2C, and 2D).

Comment 10 HUD did not agree with finding 3 and took exception to statements in the finding.
           HUD commented that we declared in absolute terms that the HOME regulations
           that permit HUD to determine compliance with HOME deadlines violate the
           statute. HUD commented that we made the declaration despite the fact that (1)
           we interviewed program counsel who informed us that the interpretation of the
           statute promulgated in the regulations was a reasonable interpretation of the
           statute; and (2) the OIG position would starkly reject and substitute its own
           judgment for the judgment of HUD’s Office of General Counsel, and the OIG
           reviewers at the time the rule was issued (1997) who would not have permitted
           the regulations to be cleared and published if they determined that they were
           inconsistent with the statute.

              Notwithstanding any prior review of the regulations by the Office of General
              Counsel and the OIG, we contend the issues raised by the audit and addressed in
              the recommendations warrant separate legal opinions from the Office of General
              Counsel. We agree with HUD’s comment that during our interviews with Office
                                               41
             of General Counsel staff we were told that the regulations were a reasonable
             interpretation of the statute. However, the issues in this case warrant separate
             legal opinions which we requested but, as stated in the finding, the Office of
             General Counsel did not provide. We believe the formal opinions are needed to
             support whether HUD’s method for assessing commitment and expenditure
             deadline compliance is consistent with provisions of the statutes. In response to
             HUD’s comment, we revised the report to clarify the presentation concerning the
             cumulative technique for assessing deadline compliance and the first-in first-out
             method HUD used to account for commitments and expenditures

Comment 11 HUD disagreed with finding 3 but its comments indicated plans to implement
           recommendations 3A and 3B.

             We clarified the recommendation to address HUD’s previous comment on a lack
             of clarity in the report concerning the cumulative technique for assessing deadline
             compliance and HUD first-in first-out method.

Comment 12 HUD commented that based on the responses to recommendations 3A and 3B a
           response to recommendation 3C would not be required.

             The recommendation, despite HUD comment, is subject to legal opinions yet to
             be obtained.




                                             42
 Appendix C

                         SCHEDULE OF STALLED OR
                    POTENTIALLY TERMINATED ACTIVITIES


                     Participating        Grantee      Activity                           Funded           Drawn         Percentage
 Field office         jurisdiction        number       number      Funding date           amount           amount          drawn


                                            Activities with no draw made since 2006

Anchorage       Anchorage                     13226        548       July 20, 2001    $      767,789   $     353,882           46.1
Atlanta         Atlanta                       37842       1202       Oct. 25, 2002           495,000         235,611           47.6
Atlanta         Macon                         13634       1838       May 14, 2002              5,000           1,891           37.8
Birmingham      Birmingham                    33048       5769       Oct. 21, 2003            82,000           6,260            7.6
Boston          Providence                     6562       1821        Oct. 9, 2003            94,410          23,958           25.4
Boston          Maine                           459       5899      Mar. 13, 2003              7,500           3,375             45
Boston          Maine                           459       5901      Mar. 17, 2003              7,500           3,375             45
Buffalo         Binghamton                     5712        155       Jan. 31, 1997            94,750          15,000           15.8
Buffalo         Buffalo                       16473       4326       Nov. 6, 2002             49,000          17,568           35.9
Buffalo         Buffalo                       16473       3864      Nov. 14, 2001             35,000          13,078           37.4
Puerto Rico     Puerto Rico                     782       6290      Aug. 28, 2003          1,790,000          82,008            4.6
Puerto Rico     Puerto Rico                     782       6295      Aug. 28, 2003          1,625,940         518,031           31.9
Puerto Rico     San Juan                      47787        242       Apr. 15, 1999           874,000         379,641           43.4
Puerto Rico     San Juan                      47787          20       July 1, 1996           622,300          92,709           14.9
Puerto Rico     Carolina                      17357        375       May 22, 2003            375,000          11,000            2.9
Puerto Rico     Ponce                         45016        664      Aug. 28, 2002            228,000          72,246           31.7
Puerto Rico     Ponce                         45016        397        Apr. 6, 1995           140,000          45,040           32.2
Puerto Rico     Puerto Rico                     782       5986       Apr. 16, 2003            73,847          28,500           38.6
Puerto Rico     Carolina                      17357        292       June 12, 2000            30,000           6,750           22.5
Puerto Rico     Bayamon                       13328       1191      Nov. 18, 2003             15,000           1,668           11.1
Puerto Rico     Bayamon                       13328       1163      Aug. 21, 2003             14,423           5,769             40
Detroit         Detroit                       52258       4287        May 6, 2002             60,000          20,659           34.4
Detroit         Detroit                       52258       4282        May 6, 2002             60,000          21,140           35.2
Detroit         Detroit                       52258       4283        May 6, 2002             60,000          21,580             36
Detroit         Detroit                       52258       4281        May 3, 2002             60,000          29,435           49.1
Detroit         Detroit                       52258       4284        May 6, 2002             60,000          29,437           49.1
Detroit         Westland                      52768          96       Dec. 4, 1997             4,341                72          1.7
Fort Worth      Fort Worth                    56984       3721       Oct. 29, 2002           175,000          26,000           14.9
Fort Worth      Longview                      53992        771       June 19, 2001            63,328          16,033           25.3
Fort Worth      Longview                      53992        766       June 19, 2001            58,503           8,017           13.7
Fort Worth      Longview                      53992        773       June 19, 2001            57,448          16,033           27.9
Greensboro      Surry County Consortium       53193          83      July 10, 2002            33,717          11,589           34.4
Houston         Houston                       54859       6400       June 24, 2003             7,696           3,500           45.5
Jackson         Hattiesburg                   19788        696       Jan. 17, 2001            16,425           2,675           16.3

                                                             43
                        Participating        Grantee    Activity                    Funded         Drawn          Percentage
 Field office            jurisdiction        number     number     Funding date     amount         amount           drawn

Jacksonville    Daytona Beach                   47668       425      June 7, 2000         1,345               5          0.4
Jacksonville    Daytona Beach                   47668       928     Dec. 11, 2003         1,000             57           5.7
Knoxville       Memphis                         51459      1439     Apr. 24, 1997         2,969             700         23.6
Los Angeles     Orange County                   28594      1471     Aug. 28, 2003     1,492,012      196,535            13.2
Los Angeles     Ontario                         32759       391     Apr. 28, 2003       49,469        14,006            28.3
Los Angeles     Oxnard                          44217       664     Mar. 14, 2001       19,575         8,778            44.8
Miami           Miami                           15130      1572     Dec. 18, 2003     1,200,000        8,430             0.7
Miami           Miami-Dade County               14790      3181      Aug. 6, 2002      395,605       115,088            29.1
Miami           Pompano Beach                    9061       196     Feb. 14, 2002      289,603        65,450            22.6
Miami           Palm Beach County               41123      1369     Aug. 29, 2002       20,000         5,000              25
Miami           Fort Lauderdale                  8585      1051      May 1, 2003          5,366        2,031            37.8
Miami           Fort Lauderdale                  8585      1086     Oct. 21, 2003         1,600             578         36.1
New Orleans     Lafayette                       27081       536     Oct. 25, 2000      266,089       115,704            43.5
New York        Nassau County                   28526      1985     Mar. 26, 2002     1,500,000      600,000              40
New York        Nassau County                   28526      2278     Aug. 11, 2003      250,000        50,000              20
New York        Nassau County                   28526      1992     Mar. 27, 2002      100,000        49,381            49.4
New York        Rockland County                 37706      1061     Oct. 17, 2003       75,000        27,859            37.1
New York        Dutchess County Consortium      15708       653      Apr. 8, 2003       14,942              492          3.3
New York        Dutchess County Consortium      15708       664     Apr. 16, 2003       10,212              492          4.8
                Union County
Newark          Consortium                      22287      1406     Aug. 20, 2001      347,800       150,000            43.1
Newark          East Orange                      9877       609      Aug. 8, 2001       32,550         7,875            24.2
Newark          East Orange                      9877       509    Sept. 22, 2000         1,250             250           20
Oklahoma City   Tulsa                           49912      1072     May 27, 1998        77,215        29,215            37.8
Oklahoma City   Tulsa                           49912      1073     May 27, 1998        54,900         8,900            16.2
Oklahoma City   Tulsa                           49912       301     Mar. 24, 1997       10,350         4,250            41.1
Philadelphia    Philadelphia                    41752      6429      Mar. 1, 2001       70,384        24,488            34.8
Philadelphia    Philadelphia                    41752      6432      Mar. 1, 2001       65,384        24,369            37.3
Philadelphia    Philadelphia                    41752      6430      Mar. 1, 2001       60,384        21,505            35.6
Philadelphia    Philadelphia                    41752      6427      Mar. 1, 2001       56,384        23,389            41.5
Philadelphia    Philadelphia                    41752      6428      Mar. 1, 2001       56,384        23,416            41.5
Philadelphia    Philadelphia                    41752      6431      Mar. 1, 2001       55,384        24,075            43.5
Philadelphia    Harrisburg                      22916      1676      Oct. 3, 2002       30,625        15,129            49.4
Philadelphia    Pennsylvania                      765     23761     Oct. 17, 2003       30,000         5,000            16.7
Philadelphia    Pennsylvania                      765     23760     Oct. 17, 2003       25,000         5,000              20
Pittsburgh      Pittsburgh                       3876      3284     Feb. 10, 2003      219,500        46,500            21.2
Richmond        Newport News                    58548       740     Apr. 30, 2002       50,000              824          1.6
Richmond        Newport News                    58548       726      Apr. 1, 2002       50,000        13,500              27
Richmond        Newport News                    58548       744     Apr. 30, 2002       49,899         1,410             2.8
Richmond        Newport News                    58548       644      July 9, 2001       25,000              460          1.8
San Francisco   Phoenix                         10659      1889     June 21, 2002      445,210        92,218            20.7
San Francisco   Phoenix                         10659      1721     Aug. 23, 2001            783            300         38.3
Seattle         Washington                        969      2257    Sept. 20, 2000       22,500              129          0.6
Subtotal                                                                            $15,674,589    $3,906,317
                                                              44
                         Participating            Grantee      Activity                        Funded          Drawn          Percentage
  Field office            jurisdiction            number       number      Funding date        amount          amount           drawn


                                               Activities with draws made from 2007 through 2009
Baltimore        Baltimore                            57885         220       Feb. 4, 1997           39,840          3,453           8.7
Puerto Rico      Guaynabo                             29121          15     Apr. 19, 1994          2,260,641     1,020,391          45.1
Chicago          Evanston                             17816         431     June 26, 2002           200,000        58,600           29.3
Denver           Pueblo Consortium                    41803       2313      Dec. 30, 2003           240,000        93,366           38.9
Fort Worth       Tyler                                56882         680     Sept. 24, 2003          133,000        26,418           19.9
Hartford         Bridgeport                            1547       1096      June 25, 2003           450,000       103,947           23.1
Hartford         Bridgeport                            1547         983      June 6, 2002           288,500        56,937           19.7
Hartford         Bridgeport                            1547         857     Mar. 28, 2001           185,000          4,888           2.6
Hartford         Bridgeport                            1547         984      June 6, 2002           182,507        49,818           27.3
Hartford         Bridgeport                            1547       1073      Aug. 28, 2002           158,077        14,100            8.9
Hartford         Bridgeport                            1547         716       July 1, 1999          114,512        46,460           40.6
Houston          Port Arthur                          55743         318      July 18, 2000          124,488        17,599           14.1
Houston          Houston                              54859       6716      Dec. 30, 2003            31,025          6,035          19.5
Jacksonville     St. Petersburg                       42500         310     Nov. 20, 1996          1,560,600      302,734           19.4
Jacksonville     Jacksonville-Duval                   17952       2486      Dec. 19, 2002           260,020        76,842           29.6
Jacksonville     Florida                                238       3012       Feb. 11, 2002          160,000        20,855             13
Jacksonville     Florida                                238       3368      June 27, 2003            36,819             0*             0
Jacksonville     Florida                                238       3366      June 26, 2003            21,779             844          3.9
Los Angeles      Orange County                        28594       1310        Jan. 3, 2002          624,009       142,640           22.9
Los Angeles      Los Angeles County                   21114         927     Sept. 30, 1998          333,120       141,176           42.4
Miami            Fort Lauderdale                       8585       1127      Dec. 31, 2003            15,328          6,325          41.3
New Orleans      Jefferson Parish Consortium          25908       1873      June 26, 2003           152,000        23,712           15.6
New Orleans      Jefferson Parish Consortium          25908       1727       July 30, 2002           17,152          1,098           6.4
New York         New York City                         5049       1502      Nov. 18, 2003          8,896,224     4,003,301            45
Newark           Jersey City                          12121         846     May 14, 2002            800,000       390,268           48.8
Philadelphia     Luzerne County                       35309       2973       Jan. 23, 2003          194,614        40,395           20.8
Pittsburgh       Pittsburgh                            3876       2902       Feb. 11, 2002          220,250        91,657           41.6
San Francisco    Santa Clara                          37315         408      Sept. 5, 2003          427,514       209,692             49
San Francisco    Phoenix                              10659       1912       Aug. 8, 2002           194,000          3,262           1.7
San Francisco    Phoenix                              10659       2119       Mar. 3, 2003           177,000          1,492           0.8
San Francisco    Phoenix                              10659       1844       May 3, 2002            130,000          2,273           1.7
Washington       District Of Columbia                   204         295      Nov. 2, 2001          2,500,000      767,664           30.7

Subtotal                                                                                       $21,128,019      $7,728,241

Grand totals                                                                                   $36,802,608     $11,634,558
*The fund drawn amount was less than $1.




                                                                     45
Appendix D

             OTHER MATTER FOR CONSIDERATION
          INVOLVING ACCOUNTING FOR HOME DRAWS


The first-in first-out technique for HOME expenditures may affect the accuracy of HUD’s
accounting for HOME program activity based on requirements in Office of Management and
Budget Circular A-127, Financial Management Systems, and other related standards for federal
agency financial management systems and reporting requirements. These requirements include
but are not limited to compliance with the U.S. Government Standard General Ledger. HUD
officials stated that they used the technique for all community planning and development
programs. Thus, the technique could impact HUD’s financial statement for all community
planning and development programs. However, this review was not an audit of HUD’s financial
statements, and the determination of the impact of the technique on HUD financial statements
was beyond the scope of this audit. HUD should consider this issue for review as it addresses
the issues presented in this report.




                                             46