oversight

The City of Flint, Michigan, Lacked Adequate Controls over Its Commitment and Disbursement of HOME Investment Partnerships Program Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-30.

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

                                                                  Issue Date
                                                                           September 30, 2009
                                                                  Audit Report Number
                                                                           2009-CH-1020




TO:         Jeanette Harris, Director of Community Planning and Development, 5FD


FROM:       Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: The City of Flint, Michigan, Lacked Adequate Controls over Its Commitment
            and Disbursement of HOME Investment Partnerships Program Funds

                                    HIGHLIGHTS

 What We Audited and Why

             We audited the City of Flint’s (City) HOME Investment Partnerships Program
             (Program). The audit was part of the activities in our fiscal year 2009 annual
             audit plan. We selected the City based upon our analysis of risk factors relating to
             Program grantees in Region V’s jurisdiction and a citizen complaint to our office.
             Our audit objectives were to determine whether the City effectively committed
             and disbursed Program funds and followed the U.S. Department of Housing and
             Urban Development’s (HUD) requirements.

 What We Found

             The City did not effectively commit and disburse Program funds. It
             inappropriately reported in HUD’s Integrated Disbursement and Information
             System (System) at least $2.5 million in Program funds as subgrants, did not
             cancel subgrants in HUD’s System totaling $400,000 in Program funds, did not
             reduce a subgrant in HUD’s System by nearly $1,000 in Program funds, and
             could not provide written agreements supporting nearly $141,000 of subgrants in
             HUD’s System. As a result, the City must commit nearly $870,000 in Program
             funds for eligible subgrants and/or activities by September 30, 2009.
           The City also inappropriately drew down and disbursed more than $1 million in
           Program funds that were not used for eligible Program costs for more than 15
           days after the City drew down the Program funds from its HOME trust fund
           treasury account (treasury account) and/or HUD’s five-year disbursement
           deadlines as of July 31, 2007, and June 30, 2008. As a result of the inappropriate
           draw downs and disbursements, the City avoided not meeting HUD’s five-year
           disbursement deadlines and losing more than $499,000 in Program funds.

What We Recommend

           We recommend that the Director of HUD’s Detroit Office of Community
           Planning and Development reduce the City’s line of credit in its treasury account
           by nearly $680,000 for the Program funds that the City did not appropriately
           commit by HUD’s 24-month commitment deadline and drawdown and disburse
           by HUD’s five-year disbursement deadlines. We also recommend that the
           Director require the City to cancel incorrect subgrants in HUD’s System totaling
           more than $1.5 million in Program funds, provide written agreements supporting
           subgrants or decommit nearly $141,000 of Program funds in HUD’s System,
           reduce subgrants by more than $30,000 in Program funds, and implement
           adequate procedures and controls to address the findings cited in this audit report.
           These procedures and controls should help ensure that Program funds are
           committed and disbursed in accordance with federal requirements and the City
           does not lose more than $730,000 in Program funds over the next month.

           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 the superintendent of the City’s
           Department, the City’s mayor, and HUD’s staff during the audit. We held an exit
           conference with the City’s superintendent on September 18, 2009.

           We asked the City’s superintendent to provide comments on our discussion draft
           audit report by September 24, 2009. The superintendent provided written
           comments, dated September 22, 2009. The superintendent partially agreed with
           finding 1 and agreed with finding 2. The complete text of the written comments,
           except for a name on the enclosure, along with our evaluation of that response, can
           be found in appendix B of this audit report.




                                             2
                            TABLE OF CONTENTS

Background and Objectives                                                        4

Results of Audit
      Finding 1: Controls over the City’s Program Commitments Were Inadequate    5

      Finding 2: Controls over the City’s Disbursement of Program Funds Were
                 Inadequate                                                     12

Scope and Methodology                                                           15

Internal Controls                                                               16

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use            18
   B. Auditee Comments and OIG’s Evaluation                                     19
   C. Federal Requirements                                                      25




                                            3
                      BACKGROUND AND OBJECTIVES

The Program. Authorized under Title II of the Cranston-Gonzalez National Affordable Housing
Act (Act), as amended, the HOME Investment Partnerships Program (Program) is funded for the
purpose of increasing the supply of affordable standard 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.

The City. Organized under the laws of the State of Michigan, the City of Flint (City) is governed by
a mayor and a nine-member council, elected to four-year terms. The City designated its Department
of Community and Economic Development (Department) as the lead agency to administer its
Program. The overall mission of the Department is to strengthen the economic well-being of the
City by promoting affordable housing, neighborhood revitalization, business development, and job
growth. The City did not renew its contract with the former director of the Department and hired
the superintendent of the Department on May 1, 2009, to replace the former director. The City’s
Program records are located at 1101 South Saginaw Road, Flint, Michigan.

The following table shows the amount of Program funds the U.S. Department of Housing and
Urban Development (HUD) awarded the City for Program years 2005 through 2008.

                                    Program          Program
                                      year            funds
                                      2005           $1,299,639
                                      2006                    0
                                      2007            1,027,094
                                      2008            1,173,131
                                     Total           $3,499,864

HUD did not award the City Program funds in Program year 2006 and reduced the City’s award
of Program funds for Program year 2007 by more than $100,000 due to the City’s failure to
commit nearly $156,000 in Program funds by June 30, 2005, to comply with HUD’s 24-month
commitment deadline and to disburse more than $1.2 million in Program funds by October 31,
2005, to comply with HUD’s five-year disbursement deadline.

Our audit objectives were to determine whether the City effectively committed and disbursed
Program funds and followed HUD’s requirements.




                                                 4
                               RESULTS OF AUDIT

Finding 1: Controls over the City’s Program Commitments Were
                              Inadequate
The City did not maintain an adequate system of controls over its commitment of Program funds.
It inappropriately reported in HUD’s Integrated Disbursement and Information System (System)
at least $2.5 million in Program funds as subgrants, did not cancel subgrants in HUD’s System
totaling $400,000 in Program funds, did not reduce a subgrant in HUD’s System by nearly
$1,000 in Program funds, and could not provide written agreements supporting nearly $141,000
of subgrants in HUD’s System because it lacked adequate procedures and controls to ensure that
it committed Program funds in accordance with federal requirements. As a result, the City must
commit nearly $870,000 in Program funds for eligible subgrants and/or activities by September
30, 2009, to avoid losing the funds.



 The City Inappropriately
 Reported More Than $2.5
 Million in Commitments in
 HUD’s System

              We reviewed all of the commitments the City had reported in HUD’s System for
              its Program as of July 31, 2009. The commitments totaled more than $24.5
              million in Program funds. The City inappropriately reported in HUD’s System at
              least $2.5 million in Program funds as subgrants and commitments.

              Title II of the Act, as amended, section 218(g), states that if any funds become
              available to a participating jurisdiction under this title that 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 in a participating jurisdiction’s
              HOME trust fund treasury account (treasury account), the participating
              jurisdiction’s right to draw such funds from its treasury account shall expire.
              HUD’s Secretary shall reduce the line of credit in the participating jurisdiction’s
              treasury account by the expiring amount and shall reallocate the funds by formula.

              HUD’s regulations at 24 CFR [Code of Regulations] 92.2 state that a commitment
              of Program funds occurs when a participating jurisdiction has executed a legally
              binding agreement with a state recipient, subrecipient, or contractor to use a
              specific amount of Program funds to produce affordable housing or provide
              tenant-based rental assistance, has executed a written agreement reserving a
              specific amount of Program funds to a community housing development
              organization, or has met the requirements to commit Program funds to a specific
              local project. If the project consists of rehabilitation or new construction, a



                                               5
commitment of Program funds to a specific local project occurs when the
participating jurisdiction and project owner have executed a written legally
binding agreement under which Program assistance will be provided to the project
owner for an identifiable project under which construction can reasonably be
expected to start within 12 months of the agreement date. If the project is owned
by the participating jurisdiction, the project has been set up in HUD’s System, and
construction can reasonably be expected to start within 12 months of the project
setup date.

Chapter VII, paragraph B.2, of HUD’s Office of Community Planning and
Development Notice 07-06 states that if a participating jurisdiction owns the
property and/or is the developer, acceptable commitment documentation to
support that construction is to be expected to start within 12 months includes
architectural plans and if required, the construction permit, along with an
executed contract for construction of the project or a schedule for construction
work.

 The City reported in HUD’s System at least $2.5 million in Program funds as
subgrants to the City – Flint Area Enterprise Community, Incorporated
(Community). The subgrants also counted as commitments to assist the City in
complying with HUD’s 24-month commitment deadlines. The Community is a
nonprofit corporation created by the City and the Township of Mount Morris to
alleviate and prevent conditions of long-term unemployment and economic
distress and accompanying social ills, stimulate the creation of new jobs for the
disadvantaged and long-term unemployed, and promote the revitalization of
economically distressed areas. The City did not enter into written agreements
with the Community for the more than $2.5 million in subgrants the City reported
in HUD’s System. The Program manager of the Department said that the City
never intended to subgrant the Program funds to the Community. The Program
funds were to be used by the City for its homeownership zone project to provide
affordable housing. However, paragraph 6.1.1 of HUD’s reference manual for its
System, updated June 28, 2002, states that a subgrant is a portion of a grant that is
given to other organizations such as community housing development
organizations and subrecipients. Further, the City did not have architectural
plans, construction permits, executed contracts for construction, or schedules for
construction work. Therefore, the $2.5 million in Program funds also did not
qualify as a commitment to a specific local project.

As a result, the City inappropriately reported in HUD’s System at least $2.5
million in Program funds as subgrants and commitments. As of July 31, 2009, the
subgrants to the City – Community totaled nearly $1.9 million in HUD’s System.
The following table shows the date that the City initially set up the subgrants in
HUD’s System, the fiscal year in which HUD awarded the Program funds, and
the amount of Program funds subgranted on the date the City set up the subgrants
and as of April 2 and July 31, 2009.




                                  6
      Date subgrants set    Fiscal            Program funds subgranted as of
     up in HUD’s System      year        Setup date   April 2, 2009 July 31, 2009
         July 25, 2001      2000            $250,000      $216,858        $200,000
        April 29, 2004      1996             338,450        414,973        414,973
        April 29, 2004      1997             164,521        164,521        164,521
        April 29, 2004      1998              15,932         15,932          15,932
        April 29, 2004      1999             147,989        185,142        185,142
          May 7, 2004       2001             137,879        603,763        428,763
      September 27, 2006    2003             172,375        355,204        355,204
         June 28, 2007      2005              11,000         11,000          11,000
         July 11, 2007      1992               2,744           2,744          2,744
      September 28, 2007    2004              53,277        108,115        108,115
      November 29, 2007     2002             571,106        436,375               0
                   Totals                 $1,865,273     $2,514,627     $1,886,394


In addition, as of July 31, 2009, the City committed more than $753,000, as well
as drew down and disbursed nearly $712,000, of the nearly $1.9 million in
Program funds that it had inappropriately reported in HUD’s System as subgrants
to the City – Community for Program activities that were not related to the
homeownership zone project. The City did not fund the new activities until after
August 2, 2006. The following table shows the fiscal year in which HUD
awarded the Program funds for the subgrants, the amount of Program funds
subgranted as of July 31, 2009, and the amount of the subgranted Program funds
that the City committed and drew down and disbursed as of July 31, 2009.

                                Program funds as of July 31, 2009
                 Fiscal                                    Drawn and
                  year      Subgranted    Committed         disbursed
                  2000         $200,000             $0               $0
                  1996          414,973       414,973           414,973
                  1997          164,521       164,521           164,521
                  1998           15,932         15,932           15,932
                  1999          185,142       155,094           113,380
                  2001          428,763              0                0
                  2003          355,204              0                0
                  2005           11,000              0                0
                  1992            2,744          2,744            2,744
                  2004          108,115              0                0
                  2002                0              0                0
                 Totals      $1,886,394      $753,264          $711,550

As previously stated, HUD did not award the City Program funds in Program year
2006 and reduced the City’s award of Program funds for Program year 2007 due
in part to the City’s failure to commit nearly $156,000 in Program funds by
HUD’s 24-month commitment deadline as of June 30, 2005. Therefore, had the
City not inappropriately reported in HUD’s System the $180,453 in Program
funds awarded in fiscal years 1997 ($164,521) and 1998 ($15,932) as subgrants



                                     7
           on April 29, 2004, the City would have failed to commit an additional $180,453
           in Program funds by HUD’s 24-month commitment deadline as of June 30, 2005.

           After the City set up the subgrants in HUD’s System for the Program funds
           awarded in fiscal years 1992, 1996, and 1999 through 2004, it revised the
           amounts subgranted. HUD’s System did not sufficiently track revisions to the
           amount of Program funds subgranted, and contrary to HUD’s regulations at 24
           CFR 92.508(a), the City could not provide documentation to support the history
           of its subgrants in HUD’s System. Therefore, we were unable to determine
           whether the City failed to comply with HUD’s prior 24-month commitment
           deadlines regarding the subgrants for the Program funds awarded in fiscal years
           1992, 1996, and 1999 through 2005.

The City Did Not Cancel or
Reduce Subgrants in HUD’s
System Totaling Nearly
$401,000 in Program Funds

           As of July 31, 2009, the City had subgrants in HUD’s System to Career Alliance,
           Inc. and Salem Housing Task Force Corporation with remaining balances of
           $400,000 and $954 in Program funds, respectively. However, the City’s written
           agreement with Career Alliance, Inc. expired on August 14, 2008, and the City
           had not drawn down or disbursed any of the Program funds. Further, the City’s
           written agreement with Salem Housing Task Force Corporation was not dated and
           did not contain an expiration date. However, the City’s Program manager stated
           that the subgrant to Salem Housing Task Force Corporation had been completed
           and needed to be closed out in HUD’s System. Therefore, the City should have
           cancelled the subgrants to Career Alliance, Inc. totaling $400,000 in Program
           funds and reduced the subgrant to Salem Housing Task Force Corporation by the
           nearly $1,000 in Program funds.

The City Could Not Provide
Written Agreements
Supporting Nearly $141,000 of
Commitments in HUD’s System

           As of July 31, 2009, the City had subgrants in HUD’s System to Flint
           Neighborhood Improvement and Preservation Project (Flint Project), Flint
           Community Development Corporation, and Metro Housing Partnership with
           remaining balances of $87,099, $47,450, and $6,124 in Program funds,
           respectively. However, the City could not provide written agreements with the
           organizations that covered the remaining balances. Therefore, it lacked
           documentation to support that the remaining $140,673 of Program funds in the
           subgrants were eligible commitments.



                                           8
The City Must Commit More
Than $1 Million in Program
Funds by September 30, 2009

           HUD’s 24-month commitment deadline requirement for the City as of September
           30, 2009, is more than $23.8 million in Program funds. As of July 31, 2009,
           HUD’s Program deadline compliance status report (report) showed that the City
           had committed more than $24.5 million in Program funds, which exceeded
           HUD’s 24-month commitment deadline amount by $664,154. However, as of
           July 31, 2009, the more than $24.5 million in commitments included $1,133,130
           of inappropriately reported subgrants to the City – Community ($1,886,394) not
           committed to Program activities that were not related to the homeownership zone
           project ($753,264), $400,000 in subgrants to Career Alliance, Inc. that the City
           had not cancelled, and $954 in a subgrant to Salem Housing Task Force
           Corporation that the City had not reduced. Therefore, the City must commit
           $869,930 in Program funds ($1,133,130 in inappropriately reported subgrants to
           the City – Community not committed to Program activities that were not related
           to the homeownership zone project minus the $664,154 in excess commitments
           plus the $400,000 in subgrants to Career Alliance, Inc. that the City should have
           cancelled plus the $954 in a subgrant to Salem Housing Task Force Corporation
           that the City should have reduced) for eligible activities by September 30, 2009.

           The City had committed $5,367,760 in Program funds since September 1, 2006.
           However, it inappropriately subgranted at least $474,319 of that amount. The
           more than $474,000 in inappropriate commitments was the amount of Program
           funds subgranted to the City – Community as of July 31, 2009, not committed to
           Program activities. Therefore, the City had only appropriately committed
           $4,893,441 in Program funds since September 1, 2006, for an average of
           $1,677,751 ($4,893,441 divided by 35 months time 12 months) per year or
           $139,813 ($1,677,751 divided by 12 months times one month remaining to
           commit Program funds) over a one-month period.

           As of August 20, 2009, the City planned to subgrant more than $1.2 million in
           Program funds to three nonprofit organizations by September 30, 2009. However,
           as of August 31, 2009, it had yet to enter into contracts with the nonprofit
           organizations and had not reported the subgrants in HUD’s System.

The City Lacked Adequate
Procedures and Controls


           The weaknesses regarding the City’s commitments for its Program occurred
           because the City lacked adequate procedures and controls to ensure that it
           committed Program funds in accordance with federal requirements.




                                            9
             The Department’s Program manager stated that the City reported the Program
             funds in HUD’s System as subgrants to the City – Community after discussions
             with and a recommendation from HUD’s Detroit Office of Community Planning
             and Development to comply with HUD’s 24-month commitment deadlines and
             avoid losing Program funds. However, the Department’s superintendent could
             not provide documentation to support this statement and a community planning
             and development representative in HUD’s Detroit Office of Community Planning
             and Development said that the office did not direct the City to subgrant the
             Program funds to comply with HUD’s 24-month commitment deadline and avoid
             losing Program funds.

             The Program manager stated that although the City’s written agreement with
             Career Alliance, Inc. had expired, there were third-party agreements that the City
             and Career Alliance, Inc. had to honor. The Program manager also stated that the
             written agreement included that the City could reimburse for expenses incurred,
             provided there was a commitment or obligation to pay for services rendered.
             However, the written agreement stated all payment requests had to be submitted
             to the City within 30 days and the City was not obligated to reimburse any
             expenses after the expiration date of the written agreement. Career Alliance, Inc.
             had not submitted any payment requests and the written agreement expired more
             than one year ago. The Program manager said that the City’s failure to close out
             the subgrant to Salem Housing Task Force Corporation and decommit the
             outstanding Program funds was an oversight.

Conclusion

             As previously mentioned, the City lacked adequate procedures and controls to
             ensure that it committed Program funds in accordance with federal requirements.
             The City inappropriately reported in HUD’s System more than $2.5 million in
             Program funds as subgrants to City – Community. If the City had not incorrectly
             reported the subgrants, it would have lost at least $180,000 in Program funds due
             to not meeting HUD’s 24-month commitment deadline. In addition, the City did
             not decommit nearly $401,000 in Program funds for subgrants in HUD’s System
             associated with expired written agreements and could not provide written
             agreements to support nearly $141,000 in Program funds remaining in subgrants
             in HUD’s System. As a result, HUD and the City lacked assurance that Program
             funds were used effectively and efficiently.

             Further, the City must commit $730,117 ($869,930 that it must commit minus the
             $139,813 average over a one-month period) in Program funds by September 30,
             2009, above the one-month average of Program funds the City had appropriately
             committed since September 1, 2006, to avoid losing the funds.




                                             10
Recommendations

          We recommend that the Director of HUD’s Detroit Office of Community
          Planning and Development

          1A.     Reduce the City’s line of credit in its treasury account by $180,453 for the
                  Program funds the City had not appropriately committed by HUD’s 24-
                  month commitment deadline as of June 30, 2005.

          We also recommend that the Director of HUD’s Detroit Office of Community
          Planning and Development require the City to

          1B.     Cancel the subgrants in HUD’s System totaling $1,503,082 in Program
                  funds to City – Community in which none of the Program funds were ever
                  committed to Program activities that were not related to the
                  homeownership zone project ($1,103,082) and Career Alliance, Inc.
                  ($400,000).

          1C.     Reduce the subgrants in HUD’s System to City – Community for fiscal
                  year 1999 ($30,048) and Salem Housing Task Force Corporation ($954)
                  by the remaining $30,102 in Program funds.

          1D.     Provide legally binding written agreements to support that the remaining
                  $140,673 of Program funds in the subgrants in HUD’s System to Flint
                  Project, Flint Community Development Corporation, and Metro Housing
                  Partnership are eligible commitments. If the City cannot provide legally
                  binding written agreements, it must close-out and decommit the remaining
                  $140,673 of Program funds in the subgrants and commit the funds for
                  eligible subgrants and/or activities by September 30, 2009, to avoid losing
                  the funds.

          1E.     Implement adequate procedures and controls to commit Program funds for
                  eligible subgrants and/or activities by September 30, 2009, to help ensure
                  that the City does not lose $730,117 of Program funds in September 2009.

          1F.     Implement adequate procedures and controls to maintain documentation to
                  sufficiently support its commitments, including subgrants reported in
                  HUD’s System.




                                           11
Finding 2: Controls over the City’s Disbursement of Program Funds
                           Were Inadequate
The City did not comply with HUD’s regulations in its drawing down and disbursement of
Program funds from its treasury account. It inappropriately drew down and disbursed more than
$1 million in Program funds that were not used for eligible Program costs for more than 15 days
after the City drew down the Program funds from its treasury account and/or HUD’s five-year
disbursement deadlines as of July 31, 2007, and June 30, 2008, because it lacked adequate
procedures and controls to ensure that it drew down and disbursed Program funds in accordance
with HUD’s regulations. As a result of the inappropriate draw-downs and disbursements, the
City avoided not meeting HUD’s five-year disbursement deadlines and losing more than
$499,000 in Program funds.



 The City Inappropriately Drew
 Down Nearly $1.1 Million in
 Program Funds

              We reviewed the nearly $4.3 million in Program funds that the City drew down
              from its treasury account for non-administrative activities in the month before and
              month of HUD’s five-year disbursement deadlines as of September 30, 2006, July
              31, 2007, and June 30, 2008. The City inappropriately drew down and disbursed
              more than $1 million of the Program funds to Flint Project.

              HUD’s regulations at 24 CFR 92.502(c)(2) state that Program funds drawn down
              from a participating jurisdiction’s treasury account must be expended for eligible
              costs within 15 days. Further, HUD’s regulations at 24 CFR 92.500(d)(1) state
              that HUD will reduce or recapture Program funds in a participating jurisdiction’s
              treasury account by the amount of Program funds in the treasury account that are
              not expended within five years after the last day of the month in which HUD
              notifies the participating jurisdiction of HUD’s execution of a Program
              agreement.

              Contrary to HUD’s regulations, more than $1 million of the Program funds were
              not used for eligible Program costs for more than 15 days after the City drew
              down the Program funds from its treasury account and/or HUD’s five-year
              disbursement deadlines as of July 31, 2007, and June 30, 2008. The following
              table shows the voucher number, date Program funds were drawn down, date of
              HUD’s five-year disbursement deadline, date on which the inappropriately drawn
              down Program funds were first used, and amount of Program funds
              inappropriately drawn down.




                                              12
              Voucher                            Disbursement                         Program
              number      Drawdown date          deadline date     First use date       funds
              1422257      June 22, 2007         July 31, 2007     October 3, 2007       $25,764
              1423251      June 26, 2007         July 31, 2007     March 18, 2008         92,095
              1423292      June 26, 2007         July 31, 2007   September 26, 2007      464,025
              1431273      July 19, 2007         July 31, 2007     October 3, 2007         2,575
              1432392      July 20, 2007         July 31, 2007   September 26, 2007       56,704
              1544743      May 29, 2008          June 30, 2008      July 24, 2008         42,972
              1544749      May 29, 2008          June 30, 2008      July 24, 2008         35,451
              1556592      June 30, 2008         June 30, 2008      July 31, 2008        131,892
              1556598      June 30, 2008         June 30, 2008      July 31, 2008        172,008
                         Total                                                        $1,023,486

           HUD’s five-year disbursement deadline amount for the City as of July 31, 2007,
           was nearly $17.3 million in Program funds. The City had disbursed more than
           $17.4 million as of the deadline date, which exceeded HUD’s five-year
           disbursement deadline amount by $152,786. However, the more than $17.4
           million in disbursements included $641,163 in inappropriate disbursements.
           Therefore, had the City not inappropriately disbursed the Program funds in June
           and July of 2007, it would have failed to disburse $488,377 in Program funds by
           HUD’s five-year disbursement deadline as of July 31, 2007.

           HUD’s five-year disbursement deadline amount for the City as of June 30, 2008,
           was more than $18.6 million in Program funds. The City had disbursed more than
           $19 million as of the deadline date, which exceeded HUD’s five-year
           disbursement deadline amount by $371,251. However, the more than $19 million
           in disbursements included $382,323 in inappropriate disbursements. Therefore,
           had the City not inappropriately disbursed the Program funds in May and June of
           2008, it would have failed to disburse $11,072 in Program funds by HUD’s five-
           year disbursement deadline as of June 30, 2008.

The City’s Procedures and
Controls Had Weaknesses

           The weaknesses regarding the City’s inappropriate disbursements of Program funds
           occurred because the City lacked adequate procedures and controls to ensure that it
           drew down and disbursed Program funds in accordance with HUD’s regulations.

           The Department’s Program manager stated that the City advanced Program funds to
           subrecipients to provide capital to contractors so they could complete work and to
           alleviate delays in the City’s reimbursement of subrecipients’ costs. The Program
           manager also stated that Office of Management and Budget Circular A-110 allows
           advances to be made when funds are needed for cash requirements. However, the
           Program manager would not explain why the City disbursed Program funds contrary
           to HUD’s regulations.




                                            13
Conclusion

             As previously mentioned, the City lacked adequate procedures and controls to
             ensure that it drew down and disbursed Program funds in accordance with HUD’s
             regulations. The City drew down and disbursed more than $1 million in Program
             funds that were not used for eligible Program costs for more than 15 days after the
             City drew down the Program funds from its treasury account and/or HUD’s five-
             year disbursement deadlines as of July 31, 2007, and June 30, 2008. If the City
             had not incorrectly drawn down and disbursed the Program funds, it would have
             lost more than $499,000 in Program funds due to not meeting HUD’s five-year
             disbursement deadlines as of July 31, 2007 (more than $488,000), and June 30,
             2008 (more than $11,000).

Recommendations

             We recommend that the Director of HUD’s Detroit Office of Community
             Planning and Development

             2A.    Reduce the City’s line of credit in its treasury account by $499,449 for the
                    Program funds the City did not appropriately draw down and disburse by
                    HUD’s five-year disbursement deadlines as of July 31, 2007 ($488,377),
                    and June 30, 2008 ($11,072).

             We also recommend that the Director of HUD’s Detroit Office of Community
             Planning and Development require the City to

             2B.    Implement adequate procedures and controls to ensure that it appropriately
                    disburses Program funds for eligible Program costs within 15 days of
                    drawing down the Program funds from its treasury account and HUD’s
                    five-year disbursement deadline.




                                             14
                         SCOPE AND METHODOLOGY

To accomplish our objectives, we reviewed

            •   Applicable laws, Office of Management and Budget Circular A-110, HUD’s
                regulations at 24 CFR Part 92, HUD’s Office of Community Planning and
                Development Notice 07-06, and HUD’s “Building HOME: A Program Primer.”

            •   The City’s accounting records, annual audited financial statements for 2007, data
                from HUD’s System, Program and activity files, computerized databases,
                policies, procedures, organizational chart, consolidated community development
                and annual plans, and consolidated annual performance and evaluation reports.

            •   HUD’s files for the City.

We also interviewed the City’s employees, Flint Project’s employees, and HUD’s staff.

Finding 1

We reviewed all of the more than $24.5 million in Program commitments that the City reported
in HUD’s System. The Program commitments were selected to determine whether the City
effectively administered its Program, appropriately committed Program funds, and followed
federal requirements.

Finding 2

We reviewed all of the nearly $4.3 million in Program funds that the City drew down from its
treasury account for non-administrative activities in the month before and month of HUD’s five-
year disbursement deadlines as of September 30, 2006, July 31, 2007, and June 30, 2008. The
draw downs were selected to determine whether the City effectively administered its Program,
appropriately drew down and disbursed Program funds, and followed HUD’s regulations.

We performed our on-site audit work from February through July 2009 at the City’s offices
located at 1101 South Saginaw Road, Flint, Michigan. The audit covered the period July 2007
through January 2009 and was expanded as determined necessary.

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.




                                                15
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives 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.

              •   Validity and reliability of data – Policies and procedures that management has
                  implemented to reasonably ensure that valid and reliable data are obtained,
                  maintained, and fairly disclosed in reports.

              •   Compliance with laws and regulations – Policies and procedures that
                  management has impleented to reasonably ensure that resource use is
                  consistent with laws and regulations.

              •   Safeguarding resources – Policies and procedures that management has
                  implemented to reasonably ensure that resources are safeguarded against
                  waste, loss, and misuse.

              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.




                                               16
Significant Weakness

           Based on our review, we believe that the following item is a significant weakness:

           •   The City lacked adequate procedures and controls to ensure that it complied
               with federal requirements in regard to committing Program funds and drawing
               down and disbursing Program funds from its treasury account (see findings 1
               and 2).




                                           17
                                    APPENDIXES

Appendix A

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

          Recommendation                                             Funds to be put
              number           Ineligible 1/        Unsupported 2/   to better use 3/
                 1A                                                         $180,453
                 1B                                                        1,503,802
                 1C                                                           30,102
                 1D                                      $140,673
                 2A                 $499,449
                Totals              $499,449             $140,673         $1,714,357


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
     polices or regulations.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of 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.

3/   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 these instances, if the City implements our
     recommendations, it will cease reporting in HUD’s System Program funds for improper
     subgrants.




                                               18
Appendix B

        AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1
Comment 2




                         19
Ref to OIG Evaluation   Auditee Comments




Comment 2



Comment 1


Comment 1




Comment 3



Comment 3



Comment 3

Comment 4




                         20
Ref to OIG Evaluation   Auditee Comments




Comment 5




                         21
Ref to OIG Evaluation   Auditee Comments




Comment 5




                         22
                        OIG’s Evaluation of Auditee Comments

Comment 1   HUD’s regulations at 24 CFR 92.2 state that a commitment of Program funds
            occurs when a participating jurisdiction has executed a legally binding agreement
            with a state recipient, subrecipient, or contractor to use a specific amount of
            Program funds to produce affordable housing or provide tenant-based rental
            assistance, has executed a written agreement reserving a specific amount of
            Program funds to a community housing development organization, or has met the
            requirements to commit Program funds to a specific local project. If the project
            consists of rehabilitation or new construction, a commitment of Program funds to
            a specific local project occurs when the participating jurisdiction and project
            owner have executed a written legally binding agreement under which Program
            assistance will be provided to the project owner for an identifiable project under
            which construction can reasonably be expected to start within 12 months of the
            agreement date. If the project is owned by the participating jurisdiction, the
            project has been set up in HUD’s System, and construction can reasonably be
            expected to start within 12 months of the project setup date.

            Chapter VII, paragraph B.2, of HUD’s Office of Community Planning and
            Development Notice 07-06 states that if a participating jurisdiction owns the
            property and/or is the developer, acceptable commitment documentation to
            support that construction is to be expected to start within 12 months includes
            architectural plans and if required, the construction permit, along with an
            executed contract for construction of the project or a schedule for construction
            work.

            The City did not have architectural plans, construction permits, executed contracts
            for construction, or schedules for construction work.

Comment 2   We revised the report to state that the Department’s Program manager stated that
            the City reported the Program funds in HUD’s System as subgrants to the City –
            Community after discussions with and a recommendation from HUD’s Detroit
            Office of Community Planning and Development to comply with HUD’s 24-
            month commitment deadlines and avoid losing Program funds.

Comment 3   As of July 31, 2009, the City had subgrants in HUD’s System to Career Alliance,
            Inc. with a remaining balance of $400,000 in Program funds. Section II of the
            City’s written agreement with Career Alliance, Inc., dated August 15, 2006, states
            that all payment requests must be submitted to the City within 30 days and the
            City is not obligated to reimburse any expenses after August 14, 2008, the
            expiration date of the written agreement. The City had not drawn down or
            disbursed any of the Program funds. Further, Career Alliance, Inc. had not
            submitted any payment requests and the written agreement expired more than one
            year ago.




                                             23
Comment 4   HUD’s regulations at 24 CFR 92.508(c) state that written agreements must be
            retained for five years after the agreement terminates.

            As of July 31, 2009, the City had subgrants in HUD’s System to Flint Project,
            Flint Community Development Corporation, and Metro Housing Partnership with
            remaining balances of $87,099, $47,450, and $6,124 in Program funds,
            respectively. However, the City could not provide written agreements with the
            organizations that covered the remaining balances. Therefore, it lacked
            documentation to support that the remaining $140,673 of Program funds in the
            subgrants were eligible commitments.

Comment 5   The City’s corrective action should assist it in complying with HUD’s regulations
            in its drawing down and disbursement of Program funds from its treasury account.




                                           24
Appendix C

                           FEDERAL REQUIREMENTS

Finding 1
Title II of the Cranston-Gonzalez National Affordable Housing Act, as amended, section 218(g),
states that if any funds becoming available to a participating jurisdiction under this title 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 in a participating jurisdiction’s treasury account, the
participating jurisdiction’s right to draw such funds from its treasury account shall expire.
HUD’s Secretary shall reduce the line of credit in the participating jurisdiction’s treasury account
by the expiring amount and shall reallocate the funds by formula.

HUD’s regulations at 24 CFR 92.2 states that a commitment of Program funds occurs when a
participating jurisdiction has executed a legally binding agreement with a state recipient,
subrecipient, or contractor to use a specific amount of Program funds to produce affordable
housing or provide tenant-based rental assistance, has executed a written agreement reserving a
specific amount of Program funds to a community housing development organization, or has met
the requirements to commit Program funds to a specific local project. If the project consists of
rehabilitation or new construction, a commitment of Program funds to a specific local project
occurs when the participating jurisdiction and project owner have executed a written legally
binding agreement under which Program assistance will be provided to the project owner for an
identifiable project under which construction can reasonably be expected to start within 12
months of the agreement date. If the project is owned by the participating jurisdiction, the
project has been set up in HUD’s System, and construction can reasonably be expected to start
within 12 months of the project setup date.

HUD’s regulations at 24 CFR 92.500(d)(1) state that HUD will reduce or recapture Program
funds in a participating jurisdiction’s treasury account by the amount of Program funds in the
treasury account that are not committed within 24 months after the last day of the month in
which HUD notifies the participating jurisdiction of HUD’s execution of a Program agreement.

HUD’s regulations at 24 CFR 92.508(a) state that a participating jurisdiction must establish and
maintain sufficient records to enable HUD to determine whether the participating jurisdiction has
met the requirements of 24 CFR Part 92. The participating jurisdiction must maintain records
documenting compliance with the 24-month commitment deadline of 24 CFR 92.500(d).

Chapter II, paragraph B.1, of HUD’s Office of Community Planning and Development Notice
07-06 states that the 24-month commitment requirement for Program funds is statutory and
cannot be waived. Paragraph A.2 of chapter VI states that to determine compliance with the
commitment requirement, HUD must compare a participating jurisdiction’s cumulative
allocations from Program inception through the deadline year, minus any deobligations, to its
cumulative commitments to Program activities from Program inception to its commitment
deadline. Paragraph A.3.a states that a participating jurisdiction meets the commitment


                                                25
requirement if its cumulative commitments through its commitment deadline are equal to or
greater than its cumulative allocations, minus any deobligations, through the deadline year.
Paragraph A.3.c states that the amount of any ineligible activities will be subtracted from the
participating jurisdiction’s cumulative commitments since ineligible activities do not count as
Program commitments. Paragraph B.1 of chapter VII states that acceptable commitment
documentation means a written agreement or contract between a participating jurisdiction and
subrecipient, signed by both parties before the deadline date, committing a specific amount of
Program funds for a specific Program project. Paragraph B.2 states that if a participating
jurisdiction owns the property and/or is the developer, acceptable commitment documentation to
support that construction is to be expected to start within 12 months includes architectural plans
and if required, the construction permit, along with an executed contract for construction of the
project or a schedule for construction work.

Paragraph 6.1.1 of HUD’s reference manual for its System, updated June 28, 2002, states that a
subgrant is a portion of a grant that is given to other organizations such as community housing
development organizations and subrecipients.

Section II of the City’s written agreement with Career Alliance, Inc., dated August 15, 2006,
states that all payment requests must be submitted to the City within 30 days and the City is not
obligated to reimburse any expenses after August 14, 2008, the expiration date of the written
agreement.

Finding 2
HUD’s regulations at 24 CFR 92.500(d)(1) state that HUD will reduce or recapture Program
funds in a participating jurisdiction’s treasury account by the amount of Program funds in the
treasury account that are not expended within five years after the last day of the month in which
HUD notifies the participating jurisdiction of HUD’s execution of a Program agreement.

HUD’s regulations at 24 CFR 92.502(c)(2) state that Program funds drawn down from a
participating jurisdiction’s treasury account must be expended for eligible costs within 15 days.




                                                26