U.S. Department of Housing and Urban Development Office of Inspector General for Audit, Region I Thomas P. O’Neill, Jr. Federal Building 10 Causeway Street, Room 370 Boston, Massachusetts 02222-1092 Phone (617) 994-8380 Fax (617) 565-6878 Internet http://www.hud.gov/offices/oig/ Issue Date September 28, 2009 Audit Memorandum Number 2009 BO 1803 MEMORANDUM FOR: Robert L. Paquin, Director of Community Planning and Development, 1AD FROM: John A. Dvorak, Regional Inspector General for Audit, Boston Region, 1AGA SUBJECT: The City of Brockton, Massachusetts, Recipient, Building a Better Brockton, Inc., Lacked Sufficient Capacity to Effectively Administer Its Neighborhood Stabilization Program INTRODUCTION In accordance with our goal to review and ensure the proper administration of Neighborhood Stabilization Program (NSP) funds provided under the Housing and Economic Recovery Act of 2008 (HERA) and/or the American Recovery and Reinvestment Act of 2009 (ARRA), we conducted a capacity review of the operations of the City of Brockton’s (City) grantee, Building a Better Brockton, Inc. (recipient), which has responsibility for administering the City’s NSP. Our objective was to determine whether the City and/or recipient had the capacity to effectively and efficiently administer its NSP under the provisions of the Housing and Economic Recovery Act of 2008 (HERA) and the American Recovery and Reinvestment Act of 2009 (Recovery Act). 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 review. If you or your staff has any questions, please contact Kevin Smullen, Assistant Regional Inspector General for Audit, at 617- 994-8380. METHODOLOGY AND SCOPE Our review of the recipient was limited to gaining an understanding of internal controls over the administration of NSP funds and related activities. To meet our objective, we reviewed HERA and ARRA documentation and the approved funding agreement between the City and the recipient. We also interviewed the recipient’s management and staff members and reviewed the recipient’s documentation such as policies and procedures, organizational charts, and job descriptions to obtain an understanding of the recipient’s internal controls. Our review of this documentation was limited to our stated objective and should not be considered a detailed analysis of all of the recipient’s internal controls or operations but only those controls or operations that would affect the administration of the NSP funding provided under HERA and ARRA. We obtained assistance from the U.S. Department of Housing and Urban Development’s (HUD) Office of General Council (OGC) and Office of Community Planning and Development (CPD) for Region 1 to determine whether conflicts of interest existed among board members of the recipient, the nonprofit Brockton 21st Century Corporation (B21), and its subrecipients, and if so, what actions could be taken to address any conflicts. We performed our audit fieldwork from July through August 2009 at the recipient’s office in Brockton, Massachusetts. For this report, our work was not conducted in accordance with generally accepted government auditing standards; however, this had no effect on the significance of the conditions identified in this report. Under ARRA, inspectors general are expected to be proactive and focus on prevention; thus, this report was significantly reduced in scope to the items and conditions discussed in this report. BACKGROUND The City disbanded its Planning Department and Redevelopment Authority in May of 2008, and the city council approved the mayor’s decision to transfer development activities to a newly established nonprofit corporation, Building a Better Brockton, Inc. (recipient).1 On July 1, 2008, by means of an administrative amendment, the City also transferred its Community Development Block Grant (CDBG) program operational responsibility to the recipient. However, the operational responsibility for the administration of the City’s HOME Investment Partnerships Program was assigned to the Brockton Housing Authority. The City also established another nonprofit corporation, B21.2 This entity was established to aggressively seek jobs and bring new businesses to the City. Both the recipient and B21 are co located in the same building and share the same staff. The chief executive officer (CEO) of the recipient is also the CEO of B21. The recipient’s overall mission is to engage in development activities within the city. The recipient has responsibility for oversight of $6.7 million, of which more than $2.1 million is NSP funds under HERA (NSP-1).3 The recipient has also received $1 million in NSP funding from the State of Massachusetts. In addition, the recipient has submitted an application for $21 million in NSP-2 funding under ARRA. The following is a list of federal and state grant programs that the recipient plans to administer: Program Federal/state funding Neighborhood Stabilization Fund (NSP-1) $2,152,979 1 The recipient was organized within Massachusetts as a nonprofit corporation on May 5, 2008, as an Internal Revenue Service 503(c)(3) nonprofit. 2 B21 was organized within Massachusetts as a nonprofit corporation on March 24, 1994. 3 The NSP-1 grant agreement between HUD and the City was issued to the City in March 2009. 2 Community Development Block Grant (CDBG) $1,517,955 Neighborhood Stabilization Fund (NSP-State) $1,000,000 Energy Efficiency Conservation Block Grant ( EECBG) $ 865,000 Homelessness Prevention & Rapid Re-Housing Program (HPRP) $ 610,110 Community Development Block Grant - Recovery (CDBG-R) $ 398,596 Economic Development Initiative (EDI – Special Purpose) $ 190,000 Total $6,734,640 The recipient proposed to use the NSP funds for the full range of allowable activities such as establishing financing mechanisms for purchase and redevelopment of foreclosed homes and residential properties, purchasing and rehabilitating homes and residential properties that are abandoned or foreclosed, establishing a land bank for foreclosed homes, demolishing blighted structures, and/or redeveloping demolished or vacant properties. RESULTS OF REVIEW Our review determined that the recipient did not have the capacity to effectively and efficiently administer its NSP. Specifically, the recipient lacked adequate internal controls over the areas of financial reporting and procurement and adequate staffing to administer the program effectively. In addition, we found potential conflict-of-interest issues among the recipient, its board members, and several of the subrecipients that would receive NSP funding. We are concerned about the recipient’s ability to administer potential NSP-2 funding4 until such time as it can satisfactorily address and demonstrate adequate controls over the areas of financial reporting, procurement, and staffing and the conflicts of interest described below. Financial Reporting The recipient needs to improve its internal controls over financial reporting in the areas of (1) financial management and record keeping and (2) direct and indirect cost allocations. The recipient’s treasurer, who was also an outside contractor, maintained the books, records, and accounting system used to manage and track the recipient’s financial activities. None of the applicable detailed financial records were maintained at the recipient’s office location; they were kept at the treasurer’s office, located elsewhere in the City. The treasurer also had the sole responsibility for maintaining the recipient’s general ledger. In addition, our reviews of the recipient’s financial activities disclosed that the recipient had no formal process for reporting, reviewing, and reconciling the NSP-funded activities in the general ledger to subsidiary ledgers/records and other supporting documents. The recipient’s allocation of direct and indirect costs between the CDBG entitlement program and the NSP-1 grant did not always ensure an equitable allocation of the costs.5 By direction of the CEO, the recipient’s direct costs (salaries) were allocated based on the number of hours worked on each activity, and indirect costs were allocated based on a formula of 75 and 25 percent for NSP and CDBG, respectively. However, the recipient could not provide documented 4 The recipient has filed an application for $21 million in additional funding under NSP-2. 5 Allocation of costs is subject to the requirements of Office of Management and Budget Circular No. A-122, attachments A and B. 3 justification that supported the allocation of direct and indirect costs and thoroughly described the methodology for these allocations. In addition, if and when the recipient receives additional grants and awards of NSP funding under ARRA, the cost allocations for this new NSP funding may need to be adjusted accordingly to an acceptable allocation of cost for these funds. The justification for these adjustments will also need to be adequately supported with documentation. Any documented justification in support of the allocation of direct and indirect costs needs to be approved by the recipient’s board. Procurement The recipient did not have the capacity to administer its own procurement actions. For procurement actions already taken, the recipient failed to properly document the source selection process and maintain a detailed history of its procurements. These conditions occurred because of its inexperience in administering HUD programs and, more specifically, the newly approved NSP. In December 2008, the City, through the recipient, issued requests for proposals (RFP) to various local organizations and nonprofit entities for implementation of the City’s NSP. In January 2009, the recipient received proposals from 10 respondents and ultimately approved seven of the proposals it received from subrecipients. However, for the RFPs identified above, the recipient could not provide documentation supporting the evaluation of the proposals received. Recipient management indicated that the evaluations of the subrecipient proposals were later discarded. Management insisted, however, that evaluations of the subrecipient proposals performed were based on the evaluation factors outlined in the RFPs, state procurement laws,6 federal procurement regulations as defined by 24 CFR (Code of Federal Regulations) 85.36, and the recipient’s own procurement policies. The records of these evaluations should have been retained, and typically these records would have included the rationale and justification for the method of procurement, the type of contract, the selection of the subrecipient, and the basis for the contract price. The recipient must implement effective management controls over its process for procurement and contracting to ensure compliance with HUD requirements and regulations for the administration of its NSP funds. Based on our review, the recipient agreed to improve and strengthen its procurement policies and procedures. Staffing The recipient’s financial management responsibilities were divided among the CDBG program manager, the CEO, and the treasurer. This arrangement did not allow a proper segregation of duties. The treasurer was an outside contractor who used commercial software (QuickBooks) to record payments and print checks. The City has access to HUD’s Integrated Disbursement and Information System and Disaster Recovery Grant Reporting System to prepare financial reports for NSP and other HUD funds. The recipient was seeking a full-time accounting/compliance officer to consolidate all financial and accounting activities and responsibilities into one position. The accounting/compliance officer would direct, manage, and coordinate the administrative components of the recipient and B21 and ensure that budgets would be prepared and monitored, 6 Massachusetts General Law, c 30B 4 expenditures would be consistent with budget authorization, and financial/accounting controls would function properly. The recipient did not have a position designated to fulfill HUD’s requirements for financial reporting. Conflicts of Interest During our review, we obtained information indicating that certain recipient board members may have had interests in organizations and/or companies contracting with the recipient as subrecipients. Through the RFP process, as noted above, the recipient had solicited and received 10 proposals from local entities, seven of which were approved to receive NSP funding as subrecipients of the City. The subrecipient selection was determined by a three person panel that included the CEO who represented the recipient, a representative of the Brockton Housing Partnership (Partnership), and the mayor’s office. The panel’s recommendations were then presented to the mayor for final selection. The Partnership is a membership organization made up of officials from several local banks and community organizations in the City and surrounding areas. NSP funding was awarded for two contracts to subrecipients that were Partnership members. Additionally, one member bank’s vice-president was on the recipient’s board, which could result in a conflict of interest if any of properties held by the bank were selected for redevelopment under NSP. In addition, two other recipient board members held management positions with two other subrecipients that were granted contracts. However, we did not find evidence that any board members had personally benefited from the contracts. During the audit, we requested that HUD OGC for Region 1 review the various conflicts of interest. We also met with HUD OGC to discuss and present details of the conflicts of interest we identified. Based on the OGC review, we later discussed the conflicts of interest with Region 1’s CPD Director and his staff. According to CPD officials, neither the recipient nor its board had requested an exception from HUD requirements regarding the conflicts of interest, nor had the recipient provided full disclosure to HUD, as defined by 24 CFR (Code of Federal Regulations) 570.611, of these conflicts of interest. On August 11, 2009, the CPD Director sent a letter to the mayor of Brockton stating that there were serious conflicts of interest between the recipient and its subrecipients and requested a review and clarification by the City concerning the conflicts of interest (see appendix A). RECOMMENDATIONS We recommend that the Director of HUD’s Office of Community Planning and Development for Region 1 require the City to 1A. Implement adequate policies, procedures, and controls to ensure that NSP funds are used effectively and efficiently and in accordance with applicable requirements. 1B. Hire additional staff, as needed, to assist in administrating NSP to ensure that the City has sufficient capacity to effectively and efficiently administer program funds. We also recommend that the Director of HUD’s Office of Community Planning and Development for Region 1 5 2A. Perform additional monitoring and provide technical assistance to the City, as needed, to ensure that the City properly administers the NSP funding in accordance with federal requirements. 6 APPENDIXES Appendix A CPD LETTER TO THE CITY OF BROCKTON CPD LETTER TO THE CITY OF BROCKTON 7 8 CPD LETTER TO THE CITY OF BROCKTON 9 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments Comment 1 10 AUDITEE COMMENTS AND OIG’S EVALUATION Comment 1 Comment 2 11 AUDITEE COMMENTS AND OIG’S EVALUATION 12 OIG Evaluation of Auditee Comments Comment 1 The auditee provided additional attachments (documents in support of their response), and we reviewed this additional material in preparing our comments. We acknowledge that the auditee has agreed with our recommendations and will work with HUD’s Office of Community Planning and Development to implement the required corrective action for all the recommendations in the report. HUD’s Office of Community Planning and Development will make the management decisions regarding the corrective action for these recommendations. Comment 2 HUD’s Office of Community Planning and Development will make the management decision regarding the corrective action that Building a Better Brockton, Inc.’s implements to resolve the conflict of interest. BBB will need to work with HUD on resolving this and the other recommendations in this report. HUD has the oversight responsibility for the administration of the program and for ensuring that it’s administered according the federal requirements. 13
The City of Brockton, Massachusetts, Recipient, Building a Better Brockton, Inc., Lacked Sufficient Capacity to Effectively Administer Its Neighborhood Stabilization Program
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)