oversight

The City of Kansas City, Kansas, Did Not Comply with the Home Investment Partnerships Program Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-06-29.

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

                                                                Issue Date
                                                                         June 29, 2009
                                                                Audit Report Number
                                                                         2009-KC-1006




TO:        Theresa M. Porter, Director, Office of Community Planning and Development,
             Kansas City, Kansas, 7AD

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 7AGA

SUBJECT: The City of Kansas City, Kansas, Did Not Comply with the Home Investment
           Partnerships Program Regulations


                                   HIGHLIGHTS

 What We Audited and Why

             We audited the HOME Investment Partnerships (HOME) program of the City of
             Kansas City, Kansas (City). We conducted the audit based on our risk assessment
             of U.S. Department of Housing and Urban Development (HUD) HOME
             recipients in Region VII. Also, HUD’s 2005 review identified problems with the
             City’s monitoring of HOME projects and concerns about its community housing
             development organizations (CHDO) that help to administer its HOME program.

             The objective of this audit was to determine whether the City followed HUD
             requirements when establishing and managing HOME projects.

 What We Found
             The City did not obtain adequate environmental reviews, improperly awarded
             HOME construction projects, improperly charged employee costs to the HOME
             program, and allowed contracts that did not include required provisions. In
             addition, the City did not verify the eligibility of CHDOs before awarding them
             HOME funds, nor did it spend program income and recaptured funds before
             drawing down additional funds.



                                             1
What We Recommend

           We recommend that HUD require the City to properly support or repay to its
           HOME program more than $400,000 in unsupported costs; repay more than
           $17,500 in ineligible costs; and obtain environmental review, procurement,
           contract content, and CHDO eligibility training.

Auditee’s Response

           The City generally disagreed with most of our findings, particularly regarding the
           causes of the reported deficiencies. We provided the draft report to the City on
           June 3, 2009, and requested a response by June 8, 2009. It provided written
           comments on June 8, 2009.

           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




                                            2
                           TABLE OF CONTENTS

Background and Objective                                                            4

Results of Audit
      Finding 1: The City Did Not Obtain Adequate Environmental Reviews              5
      Finding 2: The City Improperly Awarded HOME Construction Projects              7
      Finding 3: The City Improperly Charged Employee Costs to the HOME             10
                 Program
      Finding 4: The City Allowed Contracts That Did Not Include Required           13
                 Provisions
      Finding 5: The City Did Not Verify the Eligibility of CHDOs before Awarding   15
                 Them Home Funds
      Finding 6: The City Did Not Spend Its Program Income and Recaptured Funds     17
                 before Drawing Down Additional HOME Funds

Scope and Methodology                                                               19

Internal Controls                                                                   20

Appendixes
   A. Schedule of Questioned Costs                                                  22
   B. Auditee Comments and OIG’s Evaluation                                         23
   C. Criteria                                                                      35




                                            3
                      BACKGROUND AND OBJECTIVE

The U.S. Department of Housing and Urban Development’s (HUD) HOME Investment
Partnerships (HOME) program is authorized under Title II of the Cranston-Gonzales National
Affordable Housing Act, as amended, and is funded for the exclusive purpose of creating
affordable housing for low-income households.

The Unified Government of Wyandotte County is the government for Wyandotte County and the
City of Kansas City, Kansas (City). HUD designated the City as a participating jurisdiction,
defined by the HOME regulations as a unit of general local government eligible to participate in
the HOME program. One of the departments in the Unified Government is the Department of
Community Development. It administers the HOME funds for the City. HUD allocated more
than $1.75 million in HOME funds to the City during fiscal years 2007 and 2008.

The City’s HOME program funds the following programs:

       •   Community housing development organizations (CHDO). A CHDO is a private,
           nonprofit community service organization that develops affordable housing for the
           community it serves. The City has three active CHDOs. One of the CHDOs serves
           as a pass-through for a local nonprofit organization’s HOME projects. The other two
           CHDOs directly develop HOME projects.
       •   Housing rehabilitation. Housing rehabilitation allows HOME funds to be used to
           assist existing homeowners with the repair, rehabilitation, and reconstruction of
           owner-occupied units.
       •   Community housing investment program. This program helps homebuyers by
           providing a second mortgage, which can be forgiven after a period of time if the
           homebuyer meets certain stipulations.
       •   New construction projects. This program involves using HOME funds for new
           construction of single-family homes.

The objective of our review was to determine whether the City followed HUD requirements
when establishing and managing HOME projects.




                                               4
                               RESULTS OF AUDIT

Finding 1: The City Did Not Obtain Adequate Environmental Reviews
The City did not obtain adequate environmental reviews. This condition occurred because City
staff did not understand all HUD environmental review requirements and managers did not
provide sufficient oversight of the environmental review process. As a result, HUD lacked
assurance that the City spent nearly $172,000 in HOME funds on projects that met HUD
environmental requirements. Further, HUD and the City could not ensure that the persons living
in the homes were reasonably protected against environmental hazards.


 Environmental Reviews Not
 Adequate


              The City did not obtain adequate environmental reviews on two HOME-funded
              properties in our audit sample. According to 24 CFR [Code of Federal
              Regulations] 58.38, the responsible entity must maintain a written record of the
              environmental review undertaken for each project. In addition, 24 CFR 58.5 and
              58.6 outline the 14 statutory requirements (checklist) that the City must address
              and certify in the environmental review record. See appendix C for details of
              applicable environmental rules and regulations.

              The City spent about $42,500 in HOME funds on one property for which it could
              not provide a complete statutory checklist. The checklist contained only 5 of the
              14 required items and was missing determinations and supporting documentation
              in key environmental areas such as historic preservation, water and air quality,
              and environmental justice decisions for minority populations and low-income
              populations.

              For another property, the City spent about $129,300 in HOME funds but could
              not provide the statutory checklist or overall environmental determinations. It
              was able to provide only a few supporting documents for individual items
              required by the checklist.

 Staff Unsure of All HUD
 Requirements and Insufficient
 Management Oversight

              City staff did not understand all HUD environmental review requirements. One
              staff member stated that the City’s interpretations of the environmental
              regulations were different from HUD’s. In addition, a City manager stated that



                                               5
           HUD took a more conservative approach to the regulations than the City believed
           was necessary.

           In addition, managers did not provide sufficient oversight of the environmental
           review process. The housing department director told us that he monitored
           environmental reviews only on a random basis. Although the director may have
           performed some monitoring, the project records did not indicate a secondary
           evaluation of environmental reviews to ensure that the reviews were accurate and
           met HUD requirements.

No Assurance Funds Spent on
Environmentally Safe Homes

           The City spent nearly $172,000 in HOME funds on projects that HUD could not
           be assured met HUD environmental requirements, and neither entity could ensure
           that the persons living in the homes were reasonably protected against
           environmental hazards.

           HUD requires environmental reviews as a means to provide decision makers with
           sufficient information to make wise choices about federally funded HOME
           projects. HUD has strict environmental requirements and emphasizes
           environmental responsibility so that participating jurisdictions do not use federal
           funds on projects that will adversely affect the project site or the persons who will
           live at the site. Therefore, it is very important that HOME projects receive
           adequate environmental reviews.

Recommendations


           We recommend that the Director of the Kansas City, Kansas, Office of
           Community Planning and Development

           1A.    Require the City to provide documentation supporting that $171,779 was
                  spent on HOME projects that met environmental requirements or repay
                  any unsupported costs from nonfederal funds.

           1B.    Conduct a review of the City’s HOME program to ensure that projects
                  underway and planned meet HUD’s environmental requirements.

           1C.    Ensure that City staff receive training, technical assistance, and sufficient
                  oversight (or secondary reviews) to ensure that the City complies with
                  environmental review requirements.




                                             6
Finding 2: The City Improperly Awarded HOME Construction Projects
The City improperly awarded HOME construction projects. This condition occurred because
City staff did not sufficiently understand noncompetitive procurement requirements. As a result,
HUD lacked assurance that it received the best value for the nearly $230,000 in HOME funds
spent on the projects.


 Improper Awarding of HOME
 Construction Projects


              The City improperly awarded two HOME construction projects. According to 24
              CFR 85.36, procurement by noncompetitive proposals may be used, but only under
              certain circumstances, such as when the item is only available from a single source,
              a public emergency exists, or there was not sufficient competition. See appendix C
              for detailed federal procurement requirements.

              In addition, the City’s procurement policies require its staff to use the City’s
              formal bid process for construction projects in excess of $50,000. The policies
              also require the City’s purchasing director to review and authorize
              recommendations for award for all construction bids and competitive proposals
              exceeding $50,000. The policies allow for noncompetitive contracts, but only the
              purchasing director may award these types of contracts, and staff must properly
              document noncompetitive awards. See appendix C for details of the City’s
              policies.

              For one project, the City hired a nonprofit to construct a new home using HOME
              funds. However, the City did not seek other bids or competitive proposals. The City
              hired the nonprofit as the contractor and the City remained the project owner. The
              City ultimately spent more than $100,000 on the project. After completion, the City
              deeded the property to the nonprofit and the nonprofit subsequently sold the house.
              Therefore, the City remained the owner and the nonprofit remained a contractor for
              the entire construction process, making the project subject to federal and City
              bidding requirements.

              The City told us that it had used noncompetitive procurement for the nonprofit
              project because it believed that the nonprofit would have offered the best possible
              price because it would incur no labor costs. Also, the City had successfully worked
              with the entity in the past. However, the City could not support that it had
              documented its determinations to justify the contract at the time of selection.

              For another project, the City hired a for-profit construction company to build a house
              without obtaining bids from other contractors. The City ultimately spent nearly
              $130,000 on the project. It stated that it had used the company to build other houses
              in the same subdivision and the company had done good work. The City also


                                                7
            believed that it would be difficult to get other contractors to work in the subdivision
            and it was more efficient to use a proven contractor. In addition, a City manager
            stated that he had met with other contractors on this project and received no interest.
            However, the City could not support that it had documented its conclusions to justify
            the contract at the time of selection.

            Further, the City’s housing department could not support that it followed the City’s
            procurement policies when it awarded the two contracts for more than $50,000. The
            purchasing staff confirmed to us that although the housing department had delegated
            authority to conduct its own procurement processes, it was required to process
            contracts for more than $50,000 or noncompetitive award selections through the
            purchasing director. The City stated that the former purchasing director had
            approved the noncompetititve awards; however, the City could not provide
            documentation of the approval.

Insufficient Understanding of
Procurement Requirements

            City staff did not sufficiently understand procurement requirements governing
            noncompetitive solicitations and awards. HUD’s and the City’s procurement
            regulations allow procurement by noncompetitive proposals. However, the City
            did not understand that it needed to adequately document its justifications for
            noncompetitive contract awards and related approvals from the City’s purchasing
            director.

Best Value for HOME Projects
Not Ensured

            Although the City believed that it completed the two construction projects by the
            most economical and efficient means, this may not have been the case. As a
            result of the City’s actions, HUD may not have received the best value for the
            nearly $230,000 in HOME funds spent on the projects.

Recommendations


            We recommend that the Director of the Kansas City, Kansas, Office of
            Community Planning and Development

            2A.    Require the City to adequately support that it spent $229,475 on HOME
                   projects that met noncompetitive procurement requirements or repay
                   unsupported costs from nonfederal funds. (One property and its related
                   questioned costs of $129,279 were also questioned in finding 1. While the
                   City should repay or support these costs, we did not include $129,279 in




                                              8
      appendix A for this recommendation. We questioned only the remainder
      of $100,196.)

2B.   Ensure that City staff receive procurement training and implement proper
      procurement policies and procedures.




                               9
Finding 3: The City Improperly Charged Employee Costs to the HOME
Program
The City improperly charged employee costs to the HOME program. This condition occurred
because the City did not believe that incorrect data in the payroll system were significant enough
to warrant making corrections and it did not use employee timesheets to allocate payroll and
benefits costs. As a result, the City overcharged its HOME fund by more than $17,500 and,
therefore, did not have those funds available for other HOME program efforts.


 Payroll Expenses Improperly
 Charged to HOME Program


               The City improperly charged employee costs to the HOME program. Regulations at
               24 CFR 92.207 state that reasonable administrative and planning costs include
               salaries, wages, and related costs of the participating jurisdiction’s staff. In charging
               costs to this category, the participating jurisdiction may either include (1) the entire
               salary, wages, and related costs allocable to the program of each person whose
               primary responsibilities with regard to the program involve program administration
               assignments or (2) the prorated share of the salary, wages, and related costs of each
               person whose job includes any program administration assignments. The
               participating jurisdiction may use only one of these methods. In addition, 2 CFR
               225 states that when employees work on multiple activities, the employer must
               support salary distributions with personnel activity reports or equivalent
               documentation.

               The City allocated payroll and benefits expenses to the HOME administrative fund
               for an employee (employee 1) who did not perform duties related to the HOME
               program. Conversely, the City did not allocate payroll and benefits expenses to the
               program for an employee (employee 2) who did perform HOME-related duties.
               City staff stated that they had inadvertently switched the employees’ personnel
               numbers in the payroll system.

               According to her timesheets, employee 2 spent the majority of her time on the
               HOME program in 2007. The two employees had similar salaries in 2007. If the
               City had charged employee 2’s costs to the program instead of employee 1’s costs,
               the overall effect on the HOME program funds would have been insignificant.
               However, this was not the case in 2008. Employee 2’s timesheets showed that from
               January through September 2008 (the end of our audit period), she spent only 56
               percent of her time on HOME activities. Therefore, the City could not justify that
               her primary responsibilities involved administration of the HOME program. In
               addition, employee 2’s salary increased by more than employee 1’s in 2008 and was,
               therefore, no longer equivalent to that of employee 1.




                                                  10
            If the City had correctly charged employee 2’s costs to the HOME program, it could
            have justified only about $24,800, excluding benefits. However, it instead charged
            the program about $42,300 (excluding benefits) for employee 1. As a result, it
            overcharged the HOME program by more than $17,500 (excluding benefits) for the
            nine-month period.

Payroll Data Not Corrected and
Timesheets Not Used to Allocate
Payroll Costs

            The City did not believe that incorrect data in the payroll system were significant
            enough to warrant making corrections. City staff stated that the payroll error had
            not been fixed because it would be difficult to correct. Staff also told us that the
            employees earned about the same salary; therefore, the incorrect payroll data were
            insignificant. However, as previously noted, employee 2’s salary increased by
            more than employee 1’s in 2008, and, therefore, the employees’ costs were not
            equivalent in 2008. Further, although City employees completed timesheets that
            identified the programs that they worked on daily, the City did not use the
            timesheets to allocate payroll and benefits costs.

            The City also stated that several other employees worked on HOME activities but
            did not charge the HOME program. Therefore, the City believes that staff costs
            not charged would have offset the overcharges. However, the City did not
            provide sufficient evidence of its claim. It provided total staff hours of other
            employees identified as having worked on HOME activities but did not provide
            adequate documentation, such as detailed activity reports or timesheets, to support
            its claim of offsetting staff costs.

            In February 2009, the City changed its timekeeping and cost allocation
            procedures. If followed, these procedures should help the City to more accurately
            record costs against the appropriate federal grants.

HOME Program Overcharged

            The City overcharged its HOME program by more than $17,500 and, therefore,
            did not have those funds available for other HOME program efforts.

Recommendations

            We recommend that the Director of the Kansas City, Kansas, Office of
            Community Planning and Development require the City to




                                             11
3A.   Reimburse its HOME funds account $17,517, plus any related benefits
      costs, from nonfederal funds for improper employee costs charged to the
      HOME program.

3B.   Correct all payroll errors involving HOME funds and implement an
      acceptable method for allocating future salary and benefit costs.




                              12
Finding 4: The City Allowed Contracts That Did Not Include Required
Provisions
The City allowed contracts that did not include required provisions. This condition occurred
because the City did not fully understand what provisions were required in HOME contracts or
its responsibilities to monitor and ensure contract compliance for all HOME contracts. As a
result, HUD lacked assurance that the City’s contracts adequately protected HUD’s investment
in HOME activities.


 Required Provisions Not
 Included in HOME Contracts

              The City allowed four contracts that did not include provisions required by federal
              regulations. According to 24 CFR 92.504, the agreement between the participating
              jurisdiction and a nonprofit or for-profit owner must provide a detailed description
              of the use of funds. It should also address affordability, property standards,
              enforcement of the agreement, requests for disbursements of funds, duration of the
              agreement, and any record-keeping and reporting requirements.

              For two projects, a CHDO executed contracts with a nonprofit to develop new
              homes using HOME funds. The CHDO acted merely as a pass-through organization
              for the City. Therefore, the federal contract requirements applied to these projects,
              and the City remained responsible for the appropriateness of the contracts.
              However, the contracts between the CHDO and the nonprofit were limited and did
              not include the required provisions. The contracts did not address such things as
              affordability, property standards, enforcement of the agreement, and requests for
              disbursement of funds.

              In addition, 24 CFR 85.36 outlines the provisions required in construction contracts,
              including access to the contractor’s records which are directly pertinent to the
              specific contract, records retention, termination for cause, equal employment
              opportunity, and compliance with the “Anti-Kickback” Act (18 United States Code
              874).

              On a third project, the City directly hired a nonprofit as a contractor to build a new
              home with HOME funds. The contract between the City and the nonprofit did not
              contain many required provisions. On a fourth project, the City executed a contract
              with a for-profit contractor that also lacked required provisions. The two contracts
              did not address such things as access to the contractor’s records, records retention,
              equal employment opportunity, and compliance with the “Anti-Kickback” Act.




                                                13
Contract Requirements and
Monitoring Responsibilities Not
Understood

            The City did not fully understand what provisions were required in HOME
            contracts or its responsibilities to monitor and ensure contract compliance for all
            HOME contracts.

            City staff told us that for contracts between the CHDOs and the CHDO-hired
            nonprofits, the CHDOs drafted the contracts, and the City reviewed them only to
            ensure that there were no ineligible activities or costs. The City did not review
            these contracts to ensure that they included all required federal provisions.

HUD’s Investment Not
Protected

            HUD lacked assurance that the City’s contracts adequately protected HUD’s
            investment in HOME activities. In addition, the City could not ensure that its own
            interests were protected.

            HUD requires properly developed and executed contracts as a method of
            protecting its investment and enforcing program requirements. Contracts also
            serve as a valuable management tool in verifying compliance and monitoring
            performance.

Recommendations

            We recommend that the Director of the Kansas City, Kansas, Office of
            Community Planning and Development

            4A.    Require City staff to receive training to ensure that they understand federal
                   procurement requirements for the HOME program and their
                   responsibilities for HOME contracts.

            4B.    Conduct a review of the City’s HOME program contracts to ensure that
                   they meet HUD’s requirements and require changes to current contracts as
                   needed to meet requirements.




                                             14
Finding 5: The City Did Not Verify the Eligibility of CHDOs before
Awarding Them HOME Funds
The City did not verify the eligibility of CHDOs before awarding them HOME funds. This
condition occurred because the City experienced turnover of staff managing the HOME program
and current staff did not fully understand the eligibility requirements. As a result, HUD and the
City lacked assurance that the CHDOs were financially stable and had the experience and
capacity to use HOME funds effectively.


 CHDO Eligibility Not Verified
 From 2006 Through 2008


               The City did not verify the eligibility of three CHDOs before awarding them
               HOME funds for HUD’s fiscal years 2006 through 2008. Regulations at 24 CFR
               92.2 outline various eligibility requirements for organizations to qualify as
               CHDOs and participate in the HOME program. Also, Community Planning and
               Development (CPD) Notice 97-11, “Guidance on CHDOs under the HOME
               Program,” contains a checklist that describes eligibility criteria and the supporting
               documentation recommended for use by participating jurisdictions to certify or
               recertify CHDOs. The participating jurisdiction should maintain the completed
               checklist to document compliance with the regulations. In addition, a HUD
               HOMEfires notice states that HUD strongly recommends annual recertification.
               However, at a minimum, a participating jurisdiction must requalify an
               organization as a CHDO each time it receives additional set-aside or operating
               funds. See appendix C for details of applicable HOME rules and regulations.

               During the audit period, the City provided more than $191,000 in HOME funds to
               three CHDOs but did not confirm their eligibility to receive the funds. The City
               did not verify any eligibility requirements for fiscal year 2006. It also did not
               fully verify the CHDOs’ eligibility in fiscal years 2007 and 2008. Specifically,
               the following information was either out of date or missing:

                  •   Audited financial statements and/or notarized statements by the president
                      or chief financial officer verifying that the CHDO conformed to applicable
                      financial accountability standards.
                  •   Resumes and/or other documentation to verify key staff members’
                      experience with successfully completing projects similar to HOME
                      projects.
                  •   CHDO board composition information.
                  •   Documents stating that the CHDO was not controlled by or did not receive
                      directions from individuals or entities seeking profit from the organization.




                                                15
Personnel Turnover and
Requirements Not Fully
Understood

           The City experienced turnover in staff managing the HOME program, and current
           staff did not fully understand the CHDO eligibility requirements. From 2005
           through 2008, the City had three different staff members managing the program.
           The current coordinator followed the procedures of previous coordinators;
           however, previous efforts were not sufficient to meet HUD requirements.

           As a result of our review, the City developed new procedures to verify that the
           CHDOs provided proper and complete eligibility documentation. The City told
           us that it had begun implementing these new procedures, which should enhance
           the City’s eligibility determination process.

CHDOs’ Financial Stability and
Capacity Not Assured

           HUD and the City lacked assurance that the CHDOs were financially stable and
           had the experience and capacity to use HOME funds effectively. From October
           2006 through September 2008, the three CHDOs received more than $191,000 for
           HOME activities without having provided sufficient evidence that they were
           qualified to manage the funds.

Recommendation

           We recommend that the Director of the Kansas City, Kansas, Office of Community
           Planning and Development

           5A.    Ensure that City staff managing the HOME program receive sufficient
                  training and fully understand and implement the CHDO eligibility
                  requirements.




                                           16
Finding 6: The City Did Not Spend Its Program Income and Recaptured
Funds before Drawing Down Additional HOME Funds
The City did not spend its program income and recaptured funds before drawing down additional
HOME funds. This condition occurred because the City had not established adequate formal
policies and procedures. As a result, HUD lacked assurance that the City would properly spend
its program income and recaptured funds in the future.



 Program Income and
 Recaptured Funds Not Spent
 before Using HOME Funds

              The City did not spend more than $94,000 in program income and $50,000 in
              recaptured funds before drawing down additional HOME entitlement funds.
              Regulations at 24 CFR 92.503 require participating jurisdictions to deposit program
              income and recaptured funds into their HOME Investment Trust Fund local account.
              Regulations at 24 CFR 92.502 require participating jurisdictions to disburse funds
              held in the HOME Investment Trust Fund local account before making requests for
              additional HOME entitlement funds.

              HUD’s Integrated Disbursement and Information System showed that the City
              received more than $94,000 in program income in 2007. The City’s records
              showed receipt and expenditure of the funds. According to its records, the City
              funded or partially funded nine HOME activities using the 2007 program income.
              HUD’s system confirmed this information but also showed that the City funded
              seven HOME activities with entitlement funds before it spent the program
              income.

              In addition, the City’s records showed that it received more than $50,000 in
              recaptured funds in 2007 and 2008.

                 •   In September 2007, the City received $19,000 in recaptured funds.
                     HUD’s Integrated Disbursement Information System showed four HOME
                     activities funded with entitlement funds before the City spent the 2007
                     recaptured funds.
                 •   In July 2008, the City received another $19,000 in recaptured funds. It
                     then funded 11 HOME activities with entitlement funds before it started to
                     spend the recaptured funds.
                 •   In September 2008, the City received more than $12,000, adding to the
                     recaptured funds balance. The City funded three additional HOME
                     activities with entitlement funds while a recaptured funds balance
                     remained.




                                              17
           The City finally spent the recaptured funds balance in October 2008.

No Adequate Formal Policies
and Procedures

           The City did not have adequate formal policies and procedures to ensure that
           program income and recaptured funds were spent before it drew down additional
           HOME funds. City staff stated that they knew about the requirement but did not
           follow the proper procedures.

           As a result of our review, the City took action to improve its internal processes
           involving program income and recaptured funds. On January 26, 2009, the City
           revised its policy on the use of HOME program income and recaptured funds.
           The policy includes steps to ensure that staff is aware of when the City receives
           these funds. It also requires staff to meet to identify spending timeframes and use
           of the funds. In addition, it requires that staff maintain adequate documentation
           of program income and recaptured funds received and spent. If fully
           implemented, this procedure should help the City to consistently use program
           income and recaptured funds before requesting additional HOME entitlement
           funds.

No Assurance City Would
Properly Spend Program
Income and Recaptured Funds

           HUD lacked assurance that the City would properly spend its program income and
           recaptured funds in the future. In addition, HUD is required to recapture any funds
           not spent within five years of receiving each HOME entitlement grant. If the City
           were to receive significant program income or recaptured funds in future years and
           did not effectively plan its HOME activities to use these funds before its entitlement
           funds, it could be in jeopardy of losing HOME-related funds not spent within five
           years.

Recommendation


           We recommend that the Director of the Kansas City, Kansas, Office of Community
           Planning and Development

           6A.    Ensure that the City implements formal policies and procedures to make
                  certain that it uses program income and recaptured funds before drawing
                  down additional HOME funds.




                                             18
                         SCOPE AND METHODOLOGY

Our review covered the period October 1, 2006, to September 30, 2008, and was expanded as
necessary. Our review was limited to HOME activities.

To achieve our objectives, we reviewed HUD’s and the City’s rules, regulations, policies, and
procedures and interviewed HUD and City staff. We also reviewed the City’s HOME project
files and related documentation. In addition, we reviewed a 2005 HUD monitoring review of the
City’s HOME program, the City’s Office of Management and Budget Circular A-133 audits for
fiscal years ending 2006 and 2007, and its audited financial statements for fiscal years ending
2006 and 2007. We also reviewed documentation related to the eligibility of three CHDOs.
Finally, we reviewed the City’s payroll records, timesheets, and time-keeping certifications.

We used the City’s HOME activity reports obtained from HUD’s Integrated Disbursement and
Information System to determine that the City spent $1,006,425 in HOME funds on 47 activities
during our audit period. We reviewed a sample of 10 of the 47 activities. We based our sample
on the activities with the highest HOME funding amounts and highest amount of drawdowns
during the audit period, including at least one activity from each of the City’s CHDOs.

For the 10 activities, we reviewed each project file for pertinent documentation such as contract
agreements, bid proposals, loan documents, owner and property eligibility determinations,
contract approvals, HOME fund drawdowns, project monitoring performed by the City, and
project closeout.

We relied on computer-processed data contained in HUD’s Integrated Disbursement and
Information System and the City’s financial system used for payroll. We performed sufficient
tests of the data, and based on the assessment and testing, we concluded that the data were
sufficiently reliable to be used in meeting our objectives.

We performed audit work from November 2008 to April 2009 at the City’s office located at 701
North 7th Street, Kansas City, Kansas.

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.




                                                19
                              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: HOME program controls over

              •   Verifying that CHDOs met eligibility requirements;
              •   Allocating employee costs to the appropriate programs;
              •   Spending program income and recaptured funds;
              •   Completing and monitoring environmental reviews;
              •   Developing, awarding, and monitoring contracts;
              •   Obligating funds within two years and spending funds within five years;
              •   Ensuring that projects were eligible activities;
              •   Ensuring that project costs were allowable and properly supported;
              •   Verifying that families met income requirements; and
              •   Monitoring CHDOs, recipients, subrecipients, developers, contractors, and the
                  projects overall.

              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:




                                               20
•   City staff did not sufficiently understand federal regulations governing
    environmental reviews, procurement bidding procedures, contract provisions
    and monitoring, and CHDO eligibility to ensure that it complied with federal
    rules (findings 1, 2, 4, and 5).
•   The City did not use employee timesheets to ensure that it accurately allocated
    employee costs to the appropriate programs (finding 4).
•   The City had not established adequate policies and procedures to ensure
    proper use of program income and recaptured funds (finding 6).




                                21
                                     APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                 Recommendation               Ineligible    Unsupported
                        number                        1/             2/
                                1A                             $171,779
                                2A                             $100,196*
                                3A                $17,517


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.

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.

     * To avoid duplication, we did not include $129,279 in unsupported costs for one project
     questioned in finding 2 that we also questioned in finding 1. We questioned the costs for
     this project only as part of recommendation 1A.




                                             22
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                          Auditee Comments




Comment 1




            **We provided HUD officials with the exhibits that the City included with its
            written response. Due to the sensitive nature and volume of the exhibits, we have
            not included them in the report but can provide them upon request. In addition, we
            redacted names and addresses from the auditee comments for privacy reasons.




                                                  23
Comment 2




Comment 3



Comment 4




Comment 5




Comment 6



Comment 7




            24
Comment 8




Comment 9




            25
Comment 10




             26
Comment 11




Comment 12




Comment 13




Comment 14




             27
Comment 15




Comment 16




Comment 17




             28
Comment 18




Comment 19




Comment 20




             29
30
                            Evaluation of Auditee Comments



Comment 1   As stated in the report, we selected the City for review based on our risk
            assessment. HUD’s 2008 and 2009 risk assessments for the City’s HOME
            program were only two factors of several that we considered. As noted in the
            report, we also considered HUD’s 2005 HOME program monitoring review
            (HUD did not conduct a review in 2006), which indicated deficiencies in the
            City’s HOME program. During the audit, we reviewed the City’s fiscal years
            2006 and 2007 A-133 audits. The 2006 audit contained a finding that the City did
            not perform on-site monitoring of subrecipients and did not have procedures in
            place to follow up on subrecipient audit findings in a timely manner. The 2007
            audit had no findings related to the HOME program.

Comment 2   We believe that our report fairly depicts our conclusions and we reached those
            conclusions based on a reasonable sample, not minor weights of data. Our sample
            consisted of 10 of 47 HOME activities on which the City spent more than $1
            million in HOME funds between October 2006 and September 2008.

Comment 3   As noted in comment 2, we audited the City’s program using a reasonable sample.
            HOME initiatives related to the questioned HOME projects may have begun in
            the early 1990s and been closed out in 2002; however, we reviewed HOME
            projects on which the City spent HOME funds in more recent years. Regardless
            of the closeout, the City was required to follow HUD environmental requirements
            on the sampled properties.

Comment 4   We do not disagree that the questioned property may qualify as a categorically
            excluded project according to the HUD rules and relevant circumstances.
            Therefore, we did not cite the City for not having an overall environmental review
            available for the main site on which the property was located. However, even as a
            categorically excluded project, the City was required to complete the statutory
            checklist of 14 environmental concerns. The City did not have an adequate and
            proper environmental review because the statutory checklist contained only 5 of
            the 14 required items and was missing determinations and supporting
            documentation. Although the project was located in a redevelopment area, this
            did not excuse the City from having a proper environmental review.

Comment 5   We maintain that this was a material issue. HUD regulations outline the various
            eligibility requirements for organizations to qualify as CHDOs and participate in
            the HOME program. The City did not verify any CHDO eligibility requirements
            for fiscal year 2006, and did not fully verify CHDO eligibility in fiscal years 2007
            and 2008. While the City may have familiarity with the CHDOs due to its using
            these CHDOs for a number of years, the City was to evaluate various aspects of
            each CHDO every year and be able to provide evidence that it had completed this
            task. The City was not able to provide such evidence during our audit.



                                             31
Comment 6     We maintain that the City did not understand HUD environmental review
              requirements. The current HUD environmental officer has been in Kansas City
              for more than five years. Throughout that time, which encompasses our audit
              period, he provided consistent environmental training and technical assistance to
              City staff.

Comment 7     We maintain the City could not ensure that the subject homes were reasonably
              protected from environmental hazards. Because the City could not provide
              documentation to show that it had conducted adequate and proper environmental
              reviews, HUD could not be sure that the homes were reasonably protected from
              environmental hazards. In addition, the documentation that the City provided
              with its comments was provided to us during the audit and we considered it in
              reaching our reported conclusions. The City had recently reconstructed the
              statutory checklists for the questioned properties and provided some evidence to
              support the environmental determinations reached on the reconstructed
              documents. However, we did not accept the reconstructed checklists as evidence
              of proper environmental reviews conducted at the time that the City spent HOME
              funds on the subject properties.

              Further, the October 2002 letter from the Department of Wildlife and Parks gave
              environmental clearance on only 1 of the 14 checklist items. This does not
              constitute a complete clearance of environmental issues that HUD required the
              City to review.

Comment 8     As explained in comment 7, the City provided some documentation on the subject
              property. However, the City had reconstructed the environmental review record
              and the statutory checklist when asked for supporting documentation during our
              audit. The City was required to complete the checklist before beginning the new
              construction project. As explained in comment 7, we did not accept the
              reconstructed information.

Comment 9     We do not disagree with the City considering the subject property as categorically
              excluded from the larger redevelopment site. However, the City was still required
              to evaluate and provide proper evidence to support its conclusions on the 14
              statutory checklist requirements. This was not accomplished as the checklist
              contained only 5 of the 14 required items and was missing determinations and
              supporting documentation in key environmental areas.

Comment 10 We do not disagree with the City considering the subject property as categorically
           excluded from the larger redevelopment site. However, the Kansas Department
           of Health and Environment records provided addressed only the removal of
           underground storage tanks and that they did not present any human health or
           environmental threats. The records did not address all of the HUD-required
           checklist items. Further, the City agreed that it could not locate the original
           environmental review record and the statutory checklist. The City had provided



                                              32
              only a few supporting documents for individual items required by the checklist.
              This did not constitute a proper environmental review.

Comment 11 This paragraph provides a history of one of the questioned projects in finding 2.
           This information was not relevant to finding 1; however, we considered it in
           evaluating the City’s response to finding 2.

Comment 12 We commend the City for taking steps to train its staff about HUD’s
           environmental review requirements.

Comment 13 We did not conclude or report that the City had awarded two HOME construction
           projects improperly because sealed bids were not a part of the selection
           methodology. We initially noted that sealed bids are preferred but our conclusion
           was that the City could not support that it had properly awarded two
           noncompetitive contracts. To avoid confusion, we removed the sentence referring
           to sealed bids from the report.

Comment 14 We did not contend that sole sourcing the contracts was wrong. We concluded
           only that the City could not provide documentation that it had properly evaluated
           the circumstances and reached a supportable conclusion to noncompetitively
           award the contracts at the time that it selected the contractors. The documentation
           that the City provided with its comments was provided to us during the audit.
           However, we did not accept the information as evidence of the City properly
           evaluating and supporting noncompetitive awards because the City had
           reconstructed its recollection of the events that ensued and did provide evidence
           to support the information in the reconstructed documents.

              Further, the City could not provide any documentation showing that it had
              provided the indicated information to the City’s purchasing director or received
              his approval.

Comment 15 As mentioned above, we did not contend that the City erred in sole sourcing of the
           contracts, only that the City could not provide the proper documentation for this
           process.

Comment 16 Based on interviews of City staff members and the staff having to recreate
           documents justifying the sole source selections, we maintain that the City did not
           understand procurement requirements to properly evaluate and document
           noncompetitive awards.

Comment 17 The City stated that several other employees worked on HOME activities but did
           not charge their employee costs to the HOME program. The City provided a
           narrative of estimated hours that other City staff claimed to have worked on
           HOME projects but provided no support to prove the legitimacy of estimated
           hours or that the persons did the work. Therefore, we did not accept this




                                              33
              additional information as sufficient to offset the improper overcharges detailed in
              the report.

Comment 18 We maintain that the City did not fully understand what provisions were required
           in HOME contracts. In our sample, we reviewed two contracts between a CHDO
           and a nonprofit and neither contained the required provisions. In addition, we
           reviewed three contracts between the City and a contractor and two of the three
           did not include the required provisions. Therefore, given that the City did not
           include required provisions in four of five contracts reviewed, we maintain that
           the City did not fully understand the requirements.

Comment 19 We maintain that City staff did not fully understand the CHDO eligibility
           requirements. The City had not verified any CHDO eligibility requirements for
           fiscal year 2006, and it had not fully verified CHDO eligibility in fiscal years
           2007 and 2008. We discussed the eligibility requirements outlined in CPD Notice
           97-11 with the staff member most recently responsible for CHDO eligibility. She
           confirmed to us that she was not aware of all requirements.

Comment 20 The City stated that it had reviewed and evaluated capacity and financial stability
           requirements when recertifying the CHDOs. However, it did not provide
           evidence of its efforts in this regard during the audit. In addition, we agree that
           capacity and financial elements of an entity can change quickly and this makes it
           all the more important that the City diligently monitor its CHDOs’ eligibility to
           participate in the HOME program.




                                               34
Appendix C

                                        CRITERIA

Criterion 1
Regulations at 24 CFR 58.38 state that the responsible entity must maintain a written record of
the environmental review undertaken under this part for each project. This document is
designated the environmental review record and shall be available for public review. The
responsible entity must use the current HUD-recommended formats or develop equivalent
formats.

Criterion 2
Regulations at 24 CFR 58.38(a) state that the environmental review record should contain all of
the environmental review documents, public notices, and written determinations or
environmental findings required by this part as evidence of review, decision making, and actions
pertaining to a particular project of a recipient.

Criterion 3
Regulations at 24 CFR 58.38(b) state that the environmental review record should contain
verifiable source documents and relevant base data used or cited in environmental assessments,
environmental impact statements, or other project review documents. These documents may be
incorporated by reference into the environmental review record, provided each source document
is identified and available for inspection by interested parties.

Criterion 4
Regulations at 24 CFR 58.5 state that the responsible entity must assume responsibilities for
environmental review, decision making, and action that would apply to HUD under the
following specified laws and authorities. The responsible entity must certify that it has complied
with the requirements that would apply to HUD under these laws, and authorities and must
consider the criteria, standards, policies, and regulations of these laws and authorities.
Regulations at 24 CFR 58.6 state that the responsible entity also remains responsible for
addressing requirements in its environmental review record and meeting these requirements,
where applicable, regardless of whether the activity is exempt or categorically excluded.

The statutory requirements (checklist) for categorically excluded projects subject to 24 CFR 58.5
and 58.6 include

   •   Air quality,
   •   Airport hazards,
   •   Coastal zone management,
   •   Contamination and toxic substances,
   •   Endangered species,
   •   Environmental justice,
   •   Explosive and flammable operations,


                                               35
   •   Farmland protection,
   •   Floodplain management,
   •   Historic preservation,
   •   Noise control,
   •   Water quality (sole source aquifers),
   •   Wetland protection, and
   •   Wild and scenic rivers.

Criterion 5
CPD Notice 01-11, “Environmental Review and the HOME Investment Partnerships Program,”
paragraph 1B, states that completion of the environmental review process is mandatory before
taking a physical action on a site or making a commitment or expenditure of HUD or non-HUD
funds for property acquisition, rehabilitation, conversion, lease, repair, or construction activities.
Contractors, owners, and developers (including CHDOs) may not commit or expend funds on
HOME projects until the participating jurisdiction or state recipient completes the environmental
review process.

Criterion 6
Regulations at 24 CFR 85.36(d)(2) state that with procurement by sealed bids, the bids are
publicly solicited and a firm-fixed-price contract (lump sum or unit price) is awarded to the
responsible bidder whose bid, conforming with the material terms and conditions of the
invitation for bids, is the lowest in price. The sealed bid method is the preferred method for
procuring construction.

Criterion 7
Regulations at 24 CFR 85.36(d)(4)(i) state that procurement by noncompetitive proposals may
be used only when the award of a contract is infeasible under small purchase procedures, sealed
bids, or competitive and one of the following circumstances applies:

   •   The item is only available from a single source,
   •   The public exigency or emergency for the requirement will not permit a delay resulting
       from competitive solicitation,
   •   The awarding agency authorizes noncompetitive proposals, or
   •   After solicitation of a number of sources, competition is determined inadequate.

Cost analysis, (i.e., verifying the proposed cost data, the projections of the data, and the
evaluation of the specific elements of costs and profits), is required.

Criterion 8
The City’s Procurement and Contract Compliance Department Memorandum, dated November
17, 2005, “Construction Thresholds,” states that effective January 1, 2006, construction projects
with a cost of less than $50,000 will require three quotes. Of those three quotes, one will need to
be from a local firm and one from a minority or a woman-owned firm. Construction projects in
excess of $50,000 will be required to engage in the formal bidding process.




                                                  36
Criterion 9
The City’s Procurement and Contract Compliance policies, article 3, section 3-102, states that
contracts shall be awarded by competitive sealed bidding except as otherwise provided and
competitive sealed bidding is the preferred method for procurement. The sealed bidding process
is also outlined in this section.

Criterion 10
The City’s Procurement and Contract Compliance, article 3, section 3-105, states that a contract
may be awarded for a supply, service, or construction item without competition when the
purchasing director, after conducting a good review of available sources, determines in writing
that there is only one source for the required supply, service, or construction item.

Criterion 11
Regulations at 24 CFR 92.2 define a community housing development organization (CHDO) as a
private nonprofit organization that

   •   Is organized under state or local laws;
   •   Has no part of its net earnings inuring to the benefit of any member, founder, contributor,
       or individual;
   •   Is neither controlled by or under the direction of individuals or entities seeking to derive
       profit or gain from the organization;
   •   Has a tax exemption ruling from the Internal Revenue Service;
   •   Does not include a public body (including the participating jurisdiction);
   •   Has standards of financial accountability that conform to 24 CFR 84.21, “Standards for
       Financial Management Systems”;
   •   Has among its purposes the provision of decent housing that is affordable to low-income
       and moderate income persons, as evidenced in its charter, article of incorporation,
       resolutions, or bylaws;
   •   Maintains accountability to low-income residents by having at least one-third of its
       board’s membership for residents of low-income neighborhoods, other low-income
       community residents, or elected representatives of low-income neighborhood
       organizations and, also, provides a formal process for low-income program beneficiaries
       to advise the organization;
   •   Has demonstrated capacity for carrying out activities assisted with HOME funds; and
   •   Has a history of serving the community within which housing to be assisted with HOME
       funds is to be located. In general, an organization must be able to show one year of
       serving the community before HOME funds are reserved for the organization.

Criterion 12
CPD Notice 97-11, “Guidance on CHDOs under the HOME Program,” contains an eligibility
checklist in attachment A that is a tool for participating jurisdictions. Attachment A describes
eligibility criteria and the supporting documentation recommended for use by participating
jurisdictions to certify or recertify CHDOs. The participating jurisdiction should maintain the
completed checklist to document compliance with the regulations. The checklists contain
different categories and include such areas as



                                                37
   •   Legal status,
   •   Capacity,
   •   Organizational structure, and
   •   Relatonship with for profit entities. .

Criterion 13
HUD HOMEfires Notice, April 2002 states that HUD strongly recommends recertification of
CHDOs annually. However, at a minimum, a participating jurisdiction must requalify an
organization as a CHDO each time it receives additional set aside or operating funds.




                                                 38