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.
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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.
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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
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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.
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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
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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.
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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
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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
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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:
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• 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).
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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.
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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.
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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
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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.
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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
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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
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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.
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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,
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• 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.
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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
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• 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.
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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)