oversight

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)

                                              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.


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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


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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.




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                   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.




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