Issue Date
May 14, 2009
Audit Report Number
2009-BO-1008
TO: Robert Paquin, Director, Office of Community Planning and Development,
Boston Regional Office, 1AD
FROM: John A. Dvorak, Regional Inspector General for Audit, Boston Region, 1AGA
SUBJECT: The Office of Community Development, City of Holyoke, Massachusetts, Did
Not Award HOME Set-Aside Funds to a Qualified Community Housing
Development Organization
HIGHLIGHTS
What We Audited and Why
We initiated an audit of the City of Holyoke, Massachusetts, Office of
Community Development’s (City) award and use of HOME Investment
Partnerships (HOME) program set-aside funds as part of our annual audit plan.
Our objective was to determine whether the City ensured that Contemporary
Apartments, Inc. (Contemporary Apartments), met community development
housing organization (CHDO) qualification requirements and whether the related
CHDO project activities carried out by Contemporary Apartments and Olde
Holyoke Development Corporation1 met the HUD eligibility requirements for
CHDOs.
This is the first of two planned audit reports on the City’s HOME program and
other housing-related activities.
1
Olde Holyoke Development Corporation is related to Contemporary Apartments through a commonality of
directors.
What We Found
The City awarded more than $1.7 million in HOME program CHDO set-aside
funds to Contemporary Apartments, which was not eligible to receive set-aside
funds.2 This occurred because the City did not ensure that Contemporary
Apartments was qualified to be designated as a CHDO or that the related CHDO
projects met key requirements for this designation and project eligibility. Despite
these deficiencies, the City certified Contemporary Apartments as a CHDO, and
provided set-aside funds for three homeownership projects.
As a result, the City significantly overstated the HOME set-aside funds recorded
in HUD’s financial reporting systems for fiscal years 2006, 2007, and 2008.
Also, due to the overstatement of reserved and expended set-aside funds, the City
(through its partnership in a Regional Consortium) will not meet the statutory 15
percent spending requirement, totaling $501,000, for set-aside funds3 unless other
qualifying projects can be identified and funded.
What We Recommend
We recommend that the Director of the Office of Community Planning and
Development in Boston require the City to (1) deobligate the $1,768,071 in
HOME set-aside funds awarded to Contemporary Apartments for the three
ineligible projects, and reduce the amount of set-aside funds reported in HUD
financial systems accordingly, (2) ensure that the Consortium, of which the City
of Holyoke is a member, has designated development projects for fiscal years
2006 through 2008 sufficient to meet the statutory requirement of $500,754 in
HOME set-aside funds for CHDOs, and (3) develop and implement controls to
ensure that only eligible entities as certified as CHDOs and related HOME set-aside
spending amounts are appropriately awarded and reported in the future.
For each recommendations 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.
2
CHDO set-aside funds are a subcategory of HOME funds. Although the use of the CHDO set-aside funds was not
in accordance with HUD requirements for such use, in these specific instances, the planned activities, by definition
may be “eligible activities” under regular HOME funding. As part of our second audit of the City of Holyoke, we
are examining these activities and the related expenditures for these activities further.
3
Based on the total Holyoke HOME Consortium allocations for 2006, 2007, and 2008, annual 15 percent minimum
amounts totaled $169,611, $168,362, and $162,781, respectively (total $500,754).
2
Auditee’s Response
We provided City officials with a draft audit report on April 23, 2009, and
requested a response by May 4, 2009. We held an exit conference with City
officials on April 28, 2009, to discuss the draft report, and we received their
written comments on May 1, 2009. The City took exception to some of the
wording used in the report but generally agreed with the facts and conclusions.
The City disagreed with amounts in recommendations 1A and 1B and agreed with
recommendation 1C and 1D.
The complete text of the auditee’s response, along with our evaluation of that
response, can be found in appendix B of this report.
3
TABLE OF CONTENTS
Background and Objectives 5
Results of Audit
Finding 1: The City Awarded HOME Set-Aside Funds to an Unqualified 7
Organization
Scope and Methodology 11
Internal Controls 12
Appendixes
A. Schedule of Questioned Costs and Funds to Be Put to Better Use 14
B. Auditee Comments and OIG’s Evaluation 15
4
BACKGROUND AND OBJECTIVES
The City of Holyoke, Massachusetts (City) is the lead partner in a regional consortium4
(participating jurisdiction) that receives funds from the U.S. Department of Housing and Urban
Development (HUD) each year under the HOME Investment Partnerships (HOME) program.5
Under HOME program rules, at least 15 percent of the regional consortium’s annual HOME
allocation must be reserved for community housing development organization (CHDO) activities
in eligible housing. These funds are called set-aside funds. This requirement applies to the
entire consortium and not solely the City. During our audit period, the consortium was required
to set aside (reserve) a minimum amount of $500,754 for investment in housing to be developed,
sponsored, or owned by CHDOs. As of December 2, 2008, the consortium showed more than
$1.6 million as reserved for set-aside activities in HUD’s Integrated Disbursements Information
System (IDIS) for program years 2006, 2007, and 2008.
The HOME program establishes requirements for the organizational structure of CHDOs to ensure
that the governing body of the organization is controlled by the community it serves. These
requirements are designed to ensure that the CHDO is capable of making decisions and performing
actions that address the community’s needs without undue influence from external agendas and
must include:
• Specific requirements related to the organization’s board, which must be evidenced in the
organization’s by-laws, charter, or articles of incorporation, including that at least one-third
of the organization’s board must be made up of representatives of the low-income
community served by the CHDO.
• Requirements that CHDOs also provide a formal process for low-income beneficiaries to
provide input, which must be described in writing and must be included in the
organization’s by-laws or a resolution.
• Requirements that organizations, to be certified as CHDO must demonstrate sufficient
capacity and the CHDO must demonstrate that their staff has the relevant experience
necessary to perform planned HOME-assisted activities.
Only nonprofit organizations that have been certified as CHDOs by HOME participating
jurisdictions can receive funds from the minimum 15 percent set-aside. The City certified
Contemporary Apartments, a nonprofit organization, as a CHDO organization in 2004.
4
Holyoke/Chicopee/Westfield Consortium.
5
Under the HOME program, HUD allocates funds by formula among eligible state and local governments to
strengthen public-private partnerships and to expand the supply of decent, safe, sanitary, and affordable housing,
with primary attention to rental housing, for very low-and low-income families.
5
Our objective was to determine whether the City ensured that Contemporary Apartments met the
CHDO qualification requirements. We also evaluated whether the related CHDO project
activities, totaling $1.7 million, carried out by Contemporary Apartments and Olde Holyoke
Development Corporation met HUD’s CHDO project eligibility requirements
6
RESULTS OF AUDIT
Finding 1: The City Awarded HOME Set-Aside Funds to an
Unqualified Organization
The City awarded more than $1.7 million in HOME program CHDO set-aside funds to
Contemporary Apartments who was not qualified to receive set-aside funds. The City had not
ensured that Contemporary Apartments was qualified to be designated as a CHDO or that the
related CHDO projects met key requirements for this designation and project eligibility. Despite
these deficiencies, the City certified Contemporary Apartments as a CHDO, and provided set-
aside funds for three homeownership projects. This condition occurred because the City had not
(1) properly interpreted the regulations governing CHDO and set-aside eligibility, or (2)
developed and implemented procedures that would ensure compliance with eligibility
requirements for CHDOs. As a result, the City significantly overstated the HOME set-aside
reservations and expenditures recorded in HUD’s financial reporting systems for fiscal years
2006, 2007, and 2008. Also, due to the overstatement of reserved and expended set-aside funds,
the City and the Consortium (a participating jurisdiction) will not meet the statutory 15 percent
spending requirement, totaling $501,000, for set-aside funds unless other qualifying projects can
be identified and funded.
City Certified Contemporary
Apartments and Awarded
HOME Set-Aside Funds
On October 15, 2004, Contemporary Apartments, Inc. applied to the City for
certification and designation as a CHDO. On October 25, 2004, the City informed
HUD that it had reviewed Contemporary Apartments’ documentation for
qualifications and requested that Contemporary Apartments be recognized as a
CHDO in HUD’s IDIS financial reporting system. From 2006 to 2008, the City
awarded more than $1.7 million in HOME program CHDO set-aside funding to
Contemporary Apartments for three homeownership activities as follows: 2
HOME Status at
Project name Awarded allocation December 31, 2008
Hebert Homes 2006 $397,071 Completed
Dwight Street Homes 2007 $657,000 Completed
Allyn/Dwight Homes 2008 $714,000 Not started
Total $1,768,071
As of December 2, 2008, of the $714,000 awarded for Allyn/Dwight Homes, only
$476,000 had been reported in IDIS. As of February 2009, the City had begun
taking action in response to our audit to remove the 2008 reservations and
commitments ($476,000) attributed to the 2008 project.
7
HOME Set-Aside Funds Were
Awarded to an Unqualified
Organization
However, Contemporary Apartments did not qualify as a CHDO because it did not
have (1) all the legal and organizational characteristics of a CHDO, or (2) the
required capacity to perform as a CHDO. Additionally, the City did not ensure
that Contemporary Apartments held ownership (title) to all the parcels of land for
the associated HOME projects, which affected the projects’ eligibility for CHDO
set-aside funding.
The City certified Contemporary Apartments, a nonprofit organization, as a
CHDO despite the fact that Contemporary Apartments did not meet all of the
legal and organizational requirements to be designated as a CHDO. The audit
found that the City could not show that Contemporary Apartments met CHDO
low-income accountability or staff capacity requirements. Specifically, the by-
laws for Contemporary Apartments did not contain the required terms and
stipulations with regard to low-income board representation, and Contemporary
Apartments did not provide for, nor did the City require or approve, input plans
from low-income beneficiaries. These plans are required under 24 CFR 92.2.
Lastly, Contemporary Apartments could not demonstrate that it had the required
capacity to fulfill its functions as a CHDO because it had no staff.
Despite these deficiencies, the City certified to HUD in October 2004 that
Contemporary Apartments met the CHDO qualification requirements. We found
that the City had not properly interpreted the regulations at 24 CFR 92.2 regarding
CHDO eligibility, and failed to develop and implement adequate procedures that
would have ensured compliance with CHDO eligibility requirements.
Projects Did Not Meet HOME
Set-Aside Fund Requirements
Contemporary Apartments proceeded with the three CHDO designated projects by
creating sponsorship agreements between itself and a related entity, Olde Holyoke
Development Corporation. According to these agreements, approved by the City,
Contemporary Apartments was the CHDO sponsor, and Olde Holyoke Development
Corporation was the developer of each project.
Regulations at 24 CFR 92.300 and Community Planning and Development Notice
97-116 require that project sponsors have site control and ownership for the HUD-
funded HOME projects. However, the procedures developed and implemented by
6
Guidance on Community Housing Development Organizations (CHDOs) under the HOME Program
8
the City did not ensure compliance with eligibility requirements for CHDO
projects. Specifically, the City’s procedures provided that the developer, Olde
Holyoke Development Corporation, could have ownership of the project, which
they did for these projects. For these projects, the “sponsorship” eligibility
category did not apply since sponsorship only applies when the CHDO sponsor has
ownership of the project before the development phase. Contemporary Apartments
did not own all of the parcels of land associated with the three projects.
Reservations and Expenditures
of HOME Set-Aside Funds
Were Overstated
As of December 2, 2008, the City had $1.7 million in HOME funds obligated
under contract. These funds were classified as CHDO set-aside funds and reported
in HUD’s financial reporting systems, which significantly overstated the set-aside
funded projects for fiscal years 2006, 2007, and 2008. This overstatement occurred
because Contemporary Apartments, the designated CHDO for the three
development projects, was not eligible to receive set-aside funds, and the projects
themselves did not meet CHDO eligibility requirements. In addition, the City
(through its partnership in a Regional Consortium) will not meet the statutory 15
percent spending requirement totaling $501,000 applicable to set-aside funds7
unless other qualified projects have already been or can be funded.
Conclusion
The City awarded $1.7 million in HOME set-aside funds to an ineligible entity
because the City did not ensure that Contemporary Apartments had all of the legal
and organizational characteristics for designation as a CHDO, or the required
capacity to carry out its responsibilities as a CHDO. Also, the City had not properly
interpreted HUD regulations regarding CHDO and set-aside eligibility and, as a
result, it developed and implemented procedures that did not correctly identify the
eligibility requirements for CHDOs. Therefore, the contract award of $1.7 million
to Contemporary Apartments did not meet HUD requirements regarding the use of
set-aside funds for CHDOs. In addition, the Consortium, of which the City of
Holyoke is a partner, will not meet the 15 percent set-aside requirement totaling
$501,000 for 2006, 2007, and 2008, for eligible CHDO activities if other qualified
projects cannot be or have not been already funded.
7
Based on the total Holyoke HOME Consortium allocations for 2006, 2007, and 2008, annual 15 percent minimum
amounts totaled $169,611, $168,362, and $162,781, respectively (total $500,754).
9
Recommendations
We recommend that the Director of the Office of Community Planning and
Development in Boston direct the City to:
1A. Deobligate the $1,768,071 in HOME set-aside funds awarded to
Contemporary Apartments for the three designated CDHO projects
identified.
1B. Reduce the amount of set-aside funds reported in HUD financial systems as
reserved and expended for fiscal years 2006 through 2008, in conjunction
with the deobligation of funds awarded under contract to Contemporary
Apartments.
1C. Ensure that the Consortium, of which the City of Holyoke is a partner, has
designated development projects for fiscal years 2006 through 2008
sufficient to meet the statutory requirement of $500,754 in HOME set-aside
funds for CHDOs.
1D. Develop and implement controls to ensure that (1) only eligible entities as
certified as CHDO, (2) projects funded with set-aside funds are controlled by
an eligible entity, and (3) related HOME set-aside spending amounts are
appropriately awarded and reported in the future.
10
SCOPE AND METHODOLOGY
We conducted our audit between December 2008 and March 2009. We completed our fieldwork
at the City of Holyoke, Massachusetts’ Office of Community Development, located at Korean
Veterans Plaza in Holyoke, Masschusetts. Our audit covered the period July 1, 2006 to
December 31, 2008, and was extended when necessary to meet our audit objectives.
• We examined public records available at the Office of the Secretary of State and through
Lexis/Nexis.
• We reviewed the Dwight Street Homes project files maintained by the City’s Office of
Community Development.
• We held discussions with City and HUD officials and officials of the nonprofit organizations
Contemporary Apartments and Olde Holyoke.
• We reviewed HUD community housing development organization requirements, including
those found at 24 CFR (Code of Federal Regulations) Part 92 and notices as well as
information relating to community housing development organization requirements as
described on HUD’s Web site.
• We reviewed Contemporary Apartments’ initial community housing development
organization application and materials submitted in October 2004 to the City and the 2008
recertification.
• We reviewed IDIS reports to identify set-aside spending reservations, obligations, and
disbursements as reported to HUD.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.
11
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:
• Designating an entity as a CHDO when it does not meet the eligibility
requirements of a CHDO (see finding 1).
• Controls over ensuring eligibility of set-aside projects (see finding 1).
We assessed the relevant controls identified above.
A significant weakness exists if management controls do not provide reasonable
assurance that the process for planning, organizing, directing, and controlling
program operations will meet the organization’s objectives.
Significant Weaknesses
Based on our review, we believe that the following items are significant weaknesses:
• The City designated an entity, Contemporary Apartments, as a CHDO when that
entity did not meet the requirements for low-income representation and staff
capacity (see finding 1).
12
• The City approved funding for projects for which the eligibility requirements for
CHDOs were not met (see finding 1).
13
APPENDIXES
Appendix A
SCHEDULE OF FUNDS TO BE PUT TO BETTER USE
The audit identified ineligible costs and funds to be put to better use totaling $2,268,825 as
follows:
Recommendation number Ineligible 1/ Funds to be put to
better use 2/
1A $1,768,071
1C $500,754
1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
that the auditor believes are not allowable by law; contract; or federal, state, or local
policies or regulations. In this case, the City should deobligate the set-aside funds
awarded to Contemporary Apartments for the three community housing development
projects because Contemporary Apartments was not an eligible CHDO organization and
the projects did not meet all of the CHDO eligibility requirements.
2/ Recommendations that funds be put to better use are estimates of amounts that could be
used more efficiently if an Office of Inspector General (OIG) recommendation is
implemented. 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 case, when the City can ensure that the
Consortium, to which it belongs, has designated development projects (2006 through 2008)
sufficient to meet the statutory requirement of $500,754 in HOME set-aside funds for
CHDOs, it will ensure the proper use of the available set-aside funds provided through the
HOME program.
14
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
Comment 2
15
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 3
Comment 4
Comment 5
Comment 6
16
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 7
Comment 8
17
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
18
OIG Evaluation of Auditee Comments
Comment 1 The $1.7 million stated is correct (see below). However, we clarified the wording
as applying to only the CHDO set-aside funds by adding a statement found under
footnote 2 to indicate that the funds were not in accordance with HUD
requirements for the use of HOME program set-aside funds but may be eligible
activities under the regular HOME funding. As explained during the exit
conference, because we are examining these activities further in a subsequent
audit, we are not expressing an opinion as to overall HOME program "eligibility"
at this time.
The audit report's use of the words "deobligate," "ineligible" and "project
eligibility" are to describe the $1.7 million in CHDO set-aside funding of the
HOME program that was obligated (i.e. under contract) as of December 2, 2008,
for three homeownership projects that were improperly designated as CHDO
projects. The use of CHDO set-aside funding, in these instances, was an
ineligible use of the CHDO set-aside funds as discussed in the report.
Comment 2 The $1,768,071 represents the CHDO set-aside funding of the HOME program
that was obligated (i.e. under contract) as of December 2, 2008, for three
homeownership projects that were improperly designated as CHDO projects and
funded using HOME set-aside funding. The report accurately states the condition
we found, not the $714,000 recorded in HUD’s system (IDIS) and subsequently
reclassified after we presented the ineligible use of the $1,768,071 in HOME set-
aside funding. Therefore we do not agree that the $1.7 million figure overstates
the questioned set-asides by $714,000.
We revised the report to include a section on the IDIS reporting. This section read
as follows:
“As of December 2, 2008, of the $714,000 awarded, only $476,000 had been
reported in IDIS. As of February 2009, the City had begun taking action in
response to our audit to remove the 2008 reservations and commitments
($476,000) attributed to the 2008 project.”
Comment 3 The report does not address nor provide any opinion on whether Contemporary
Apartment’s Board of Directors, in fact meets the HUD CHDO low-income
representation requirements. Whether the current Board of Directors meets these
requirements should be evaluated by HUD during their review of the proposed
changes to the bylaws.
We acknowledge that Contemporary Apartments is willing to make the required
bylaw changes and written resolutions in order to meet CHDO legal and
organization requirements.
19
Comment 4 The report was revised to identify this requirement is found under number 8 of the
CHDO definition at 24 CFR 92.2. Whether or not Contemporary Apartments
needs a tenant participation plan in order to be a CHDO should be determined by
HUD. HUD CHDO guidance provides that CHDOs must provide for a formal
process for low-income beneficiaries to provide input and that this plan must be
described in writing and must be in by-laws or resolutions.
Comment 5 All CHDO capacity examples, including those found at 24 CFR 92.2 make
references to the notion that in order to have capacity that the CHDO must also
have staff. In this instance, the Contemporary Apartments organization does not
employ any staff whatsoever. According to the organizations’ official and staff,
all staff are employees of Olde Holyoke Development Corporation and/or
Riverside Development Corporation (another related organization). It is our
understanding that neither Olde Holyoke Development Corporation nor Riverside
Development Corporation (the organizations that by definition may meet the
capacity requirements) are interested in the CHDO designation.
Comment 6 The projects, as structured, did not meet CHDO requirements that provide that the
CHDO sponsor must have ownership of the site prior to development.
Contemporary, the designated CHDO, did not always have ownership of the
parcels because in some instances the parcels were acquired by Olde Holyoke, the
designated developer. The City's procedures allowed this noncompliance by
providing that initial ownership should be with the Olde Holyoke, the developer,
and not Contemporary, the sponsor.
Comment 7 The comment made “that the auditors cannot equivocally state …” is not accurate.
The report notes that unless other qualified projects have already been or can be
funded that the Consortium will not meet the statutory 15 percent spending
requirement. As of December 2, 2008, the consortium showed $1,684,852 as
reserved for set-aside activities in HUD’s Integrated Disbursements Information
System (IDIS) for program years 2006, 2007, and 2008. Of the $1,768,071 in
set-asides that were obligated under contract, $1,530,071 was reported as CHDO
set-aside reservations in IDIS as of December 2, 2008.
Since the majority of the reported CHDO reservations were attributed to
Contemporary ($1,530,071 of the $1,684,852) the recommendation was and is
meant to provide that HUD ensures that the Consortium, of which the City of
Holyoke is a partner, has designated development projects for fiscal years 2006
through 2008 sufficient to meet the statutory requirement of $500,754 in HOME
set-aside funds for CHDOs.
During the exit conference the City advised that it had found, and reported in
IDIS, enough other projects (within the consortium) so that the minimum
statutory 15 percent spending requirement will be met. This would represent
partial corrective action. Once HUD reviews the related CHDO organizations and
20
projects and is satisfied that the organizations and projects count as CHDO
projects then the recommendation's intent will be met.
Comment 8 The comment made implying the report contained extravagant exaggerations is
totally inaccurate and unjustified. The report is factually worded and prepared
according to prescribed auditing standards for reporting, and therefore, only
contains truthful and accurate statements supported by the evidence found
regarding the conditions and discrepancies that were found. This comment is
counter to the City’s acknowledgement that the recommendations are designed to
assist the City to improve oversight.
21
The Office of Community Development, City of Holyoke, Massachusetts, Did Not Award HOME Set-Aside Funds to a Qualified Community Housing Development Organization
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-05-14.
Below is a raw (and likely hideous) rendition of the original report. (PDF)