oversight

The City of Los Angeles Housing Department Did Not Always Ensure That Its HOME-Assisted Rehabilitation Work Was Complete and in Accordance with HOME Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-02-20.

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

                                                                 Issue Date
                                                                        February 20, 2009

                                                                 Audit Report Number
                                                                          2009-LA-1007




TO:         William Vasquez, Director, Los Angeles Office of Community Planning and
              Development, 9DD



FROM:       Joan S. Hobbs, Regional Inspector General for Audit, Los Angeles, 9DGA

SUBJECT: The City of Los Angeles Housing Department Did Not Always Ensure That Its
           HOME-Assisted Rehabilitation Work Was Complete and in Accordance with
           HOME Requirements


                                    HIGHLIGHTS

 What We Audited and Why

      We audited the City of Los Angeles Housing Department (Department) as a result of an
      earlier audit of the HOME Investment Partnerships Program (HOME) affordability
      monitoring requirements and inspections of HOME-assisted rental units, which detected
      four projects that may not have been rehabilitated as intended. Our audit objective was to
      determine whether HOME funds were used as intended to rehabilitate the four projects
      and in accordance with HOME requirements.

 What We Found


      The Department did not always ensure that its HOME-assisted rehabilitation work was
      complete and in accordance with HOME requirements. Of the four projects, we found
      one project in which the Department paid $22,466 in HOME funds for incomplete
      rehabilitation work. In addition, it did not maintain agreements that described the use of
      HOME funds, such as the tasks to be performed. We attribute these deficiencies to the
      Department’s inadequate policies, procedures, and controls to provide the required level
      of oversight to its HOME-assisted rehabilitation work projects.
What We Recommend


    We recommend that the Director of the Los Angeles Office of Community Planning and
    Development require the Department to properly support or repay from nonfederal funds
    $22,466 in unsupported expenses. Additionally, we recommend that the Department
    develop, maintain, and implement operating policies and procedures regarding
    construction standards and construction monitoring for multifamily rehabilitation
    activities and establish quality control procedures for the construction monitoring
    functions.

    For each recommendation without a management decision, please respond and provide
    status reports in accordance with HUD Handbook 2000.06, REV-3. Please furnish us
    copies of any correspondence or directives issued because of the audit.


Auditee’s Response


    We provided our discussion draft report to the Department on February 3, 2009 and it
    provided its written response on Februrary18, 2009. The Department agreed with our
    finding and recommendations.

    The complete text of the auditee’s response, along with our evaluation of that response,
    can be found in appendix B of this report. The Department’s attachment to their response
    contained their draft revised policies and procedures, so we did not include them, but we
    will make them available upon request.




                                            2
                            TABLE OF CONTENTS

Background and Objective                                                          4

Results of Audit
        Finding 1: The Department Did Not Always Ensure That Its HOME-Assisted    5
                   Rehabilitation Work Was Complete and in Accordance with HOME
                   Requirements

Scope and Methodology                                                             9

Internal Controls                                                                 10


Appendixes
   A.   Schedule of Questioned Costs                                              12
   B.   Auditee Comments and OIG’s Evaluation                                     13
   C.   Criteria                                                                  16
   D.   Schedule of Unsupported Costs
                                                                                  18
   E.   Examples of Plans Used Instead of Scopes of Work
                                                                                  19




                                             3
                      BACKGROUND AND OBJECTIVE

The City of Los Angeles (City) is a participating jurisdiction overseen by the U.S. Department of
Housing and Urban Development’s (HUD) Office of Community Planning and Development,
which executes the HOME Investment Partnerships Program (HOME). The City administers all
of its HOME programs under the City of Los Angeles Housing Department (Department). Due
to the variety of HOME program activities allowed under the law and the size of the entitlement
grant, the Department divides its HOME program activities under the following major
organizational units: the Major Projects Division manages the acquisition, new construction, or
rehabilitation of large affordable rental housing projects; and the Homeownership and
Preservation Division manages single-family or small multifamily purchase acquisition projects
under its Homeownership Unit and manages single-family and small multifamily rehabilitation
projects under its Preservation Unit.

The Department is the administrator of the City’s HOME entitlement program. It follows
monitoring standards and procedures to review and fund affordable housing developments to
ensure compliance with HUD’s program regulations. For example, it reviews the status of the
HOME grant to ensure that the 24-month deadline to commit and five-year deadline to expend
funds are complied with, monitors and reports on the HOME match requirements to ensure that
the 12.5 percent match requirement is met, ensures that HOME-assisted rental units are inspected
with the required frequency and comply with housing quality standards, and ensures that home-
buyer and rental properties follow the applicable period of affordability. During the period of
affordability, it reviews tenant household incomes and rents for compliance with HOME and
other program requirements.

The objective of the audit was to determine whether HOME funds were used as intended to
rehabilitate the four projects and in accordance with HOME requirements.




                                                4
                                RESULTS OF AUDIT

Finding 1: The Department Did Not Always Ensure That Its HOME-
Assisted Rehabilitation Work Was Complete and in Accordance with
HOME Requirements
The Department did not always ensure that its HOME-assisted rehabilitation work was complete
and in accordance with HOME requirements. Of the four projects reviewed, the Department
paid $22,466 in HOME funds for incomplete rehabilitation work at one project. It also did not
maintain agreements describing the use of HOME funds, such as the tasks to be performed. This
condition occurred because the Department had inadequate policies, procedures, and controls to
effectively monitor construction activities. As a result, neither the Department nor HUD was
assured that the HOME funds were used for their intended purpose.



 Rehabilitation Construction
 Deficiencies

       Pursuant to 24 CFR [Code of Federal Requirements] 92.504(a), the Department had a
       responsibility to manage the day-to-day operations of its HOME program to guarantee
       that HOME funds were used in accordance with all program requirements. Three of the
       four projects reviewed had deficiencies. For one of the three projects, rehabilitation work
       was incomplete; however, payment had been disbursed to the developer. The other two
       projects had minor rehabilitation work deficiencies; for example, the rehabilitated work
       was completed, but the materials used were not those agreed upon. However, since the
       cost differences were not substantial, we did not recommend recovery of the related
       funds.


 Examples of Deficiencies


       For one of the four projects reviewed, the rehabilitation construction work required to be
       performed was not completed as specified, but the Department paid $22,466 in HOME
       funds to the developer. More specifically, carpet, medicine cabinets, and vanities with
       sinks were not installed in all of the units as described in the scope of work. Appendix D
       details the work items and related costs. The following pictures provide examples of the
       deficiencies observed.




                                                5
None of the 30 units had carpets installed as indicated in the scope of work.




Only 1 of 17 bathrooms had bathroom cabinets installed as required. The remaining 16 bathrooms had only a
shower and toilet as shown above.




Only 11 of 17 bathrooms had mirrors and medicine cabinets installed as required.




                                                          6
     The problem occurred because the Department had inadequate policies, procedures, and
     controls to provide the required level of oversight to its HOME-assisted rehabilitation
     projects. These weaknesses resulted in the payment of $22,466 in HOME funding for
     unsupported rehabilitation expenses. Accordingly, HUD had no assurance that projects
     paid for with HOME funds were completed satisfactorily and in accordance with HOME
     requirements.


Agreements Not Maintained


     Contrary to 24 CFR 92.504(b) (see appendix C), the Department did not maintain
     agreements before disbursing HOME funds to an entity. Of the four projects reviewed,
     two did not have the required written agreements. We were only able to locate
     preliminary work write-ups and spreadsheets. A construction specialist responsible for
     one of the two projects explained that projects originating in the Major Projects Division
     usually included plans but not final work write-ups or scopes of work (see appendix E).
     Consequently, we could not determine whether the projects paid for with HOME funds
     were completed as originally planned and agreed upon.


Conclusion


     The problem occurred because the Department lacked current policies, procedures, and
     controls regarding the construction monitoring of its HOME projects, compounded by
     poor record keeping. We obtained a manual; however, the manual focused on the role of
     finance development officers rather than construction specialists, who are ultimately
     responsible for monitoring the construction of the projects. Without adequate procedures
     and controls, the Department may not have provided the required level of oversight to its
     HOME-assisted rehabilitation work projects to ensure that requirements were met. As a
     result, HUD may have provided HOME funding to projects that were not satisfactorily
     completed. Without adequate oversight, neither HUD nor the Department was assured
     that the HOME funds were used for their intended purpose. Department officials
     informed us that they were revising their policies and procedures to ensure the adequacy
     of the Department’s oversight and record keeping.

Recommendations

     We recommend that the Director of the Los Angeles Office of Community Planning and
     Development require the Department to

     1A. Provide adequate support for the $22,466 in HOME funding for rehabilitation costs
         or repay this amount from nonfederal funds.



                                              7
1B. Develop and maintain current operating policies and procedures regarding
    construction standards and construction monitoring for multifamily rehabilitation
    activities.

1C. Establish quality control procedures for the construction monitoring functions for
    projects managed in house.




                                        8
                        SCOPE AND METHODOLOGY

We performed our on-site audit work at the Department, located in Los Angeles, California,
between September and December 2008. Our audit generally covered the period of June 1999
through May 2006. We expanded our scope when necessary. Our objective was to determine
whether HOME funds were used as intended to rehabilitate the four HOME projects and in
accordance with HOME requirements.
To accomplish our audit objectives, we

       Interviewed HUD and the Department’s personnel to acquire background information
       about the Department;
       Interviewed the Department’s accounting department to obtain an understanding of its
       financial operations, practices, and controls;
       Reviewed the applicable federal laws, regulations, and HUD guidance for the HOME
       program;
       Reviewed the Office of Management and Budget (OMB) regulations for local grantees;
       and
       Reviewed the Department’s accounting records, policies and procedures, and file
       documentation.

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.




                                               9
                              INTERNAL CONTROLS

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

       Effectiveness and efficiency of operations,
       Reliability of financial reporting, and
       Compliance with applicable laws and regulations.

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:

              Policies and procedures to ensure that HOME-assisted rehabilitation projects are
              carried out in accordance with applicable laws and regulations.
              Policies and procedures to ensure that HOME-assisted rehabilitation projects’
              expenditures are adequately supported.
              Policies and procedures to reasonably ensure that valid and reliable data are
              obtained and maintained.

       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.




                                                10
Significant Weaknesses


     Based on our review, we believe that the following items are significant weaknesses:

            The Department did not have adequate policies and procedures to ensure that
            rehabilitation construction for HOME projects was carried out in accordance with
            applicable laws and regulations (finding 1).

            The Department did not have adequate policies and procedures to ensure that
            HOME-assisted rehabilitation projects’ expenditures were adequately supported
            (finding 1).

            The Department did not have adequate policies and procedures to reasonably
            ensure that valid and reliable data were obtained and maintained (finding 1).




                                             11
                                    APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                     Recommendation number        Unsupported Costs 1/
                             1A                        $22,466




1/   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. The unsupported costs are HOME funds that
     the Department disbursed to the developer without adequate monitoring and record
     keeping for the rehabilitation construction of one of its HOME projects. It is the prorated
     amount expended on the project for which the Department was unable to provide
     adequate documentation to support the cost of rehabilitation.




                                             12
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                            13
14
                         OIG Evaluation of Auditee Comments

Comment 1   We would like to note that the questioned costs were not for permits, as stated.
            Rather, the funds in question were for carpet, medicine cabinets, and vanities with
            sinks as described in the scope of work.




                                            15
Appendix C

                                    CRITERIA

  A. 24 CFR Part 92, Home Investment Partnerships Program

       24 CFR 92.504(a) states, “The participating jurisdiction is responsible for managing
       the day to day operations of its HOME program, ensuring that HOME funds are used
       in accordance with all program requirements and written agreements, and taking
       appropriate action when performance problems arise. The use of State recipients,
       subrecipients, or contractors does not relieve the participating jurisdiction of this
       responsibility. The performance of each contractor and subrecipient must be
       reviewed at least annually.”
       24 CFR 92.504(b) states, “Before disbursing any HOME funds to any entity, the
       participating jurisdiction must enter into a written agreement with that entity, a State
       recipient, subrecipient, or contractor which is administering all or a part of the HOME
       program on behalf of the participating jurisdiction, must also enter into a written
       agreement with that entity……”
       24 CFR 92.504(c) states, “The contents of the agreement may vary depending upon
       the role the entity is asked to assume or the type of project undertaken. This section
       details basic requirements by role and the minimum provisions that must be included
       in a written agreement.”
       24 CFR 92.504(c)(1)(i) states, “The agreement must describe the use of the HOME
       funds, including the tasks to be performed, a schedule for completing the tasks, and a
       budget. These items must be in sufficient detail to provide a sound basis for the State
       to effectively monitor performance under the agreement.”
       24 CFR 92.508(a) states, “Each participating jurisdiction must establish and maintain
       sufficient records to enable HUD to determine whether the participating jurisdiction
       has met the requirements……”
       24 CFR 92.508(a)(3)(ii) requires records demonstrating the source and application of
       funds of each project, including supporting documentation in accordance with 24
       CFR 85.20.
       24 CFR 92.508(a)(6) requires records demonstrating compliance with the written
       agreements required by Section 92.504.
       24 CFR 92.251(a)(1) states, “Housing that is constructed or rehabilitated with
       HOME funds must meet all applicable local codes, rehabilitation standards,
       ordinances, and zoning ordinances at the time of project completion……”




                                            16
B. Cost Principles for State, Local, and Indian Tribal Governments (OMB Circular A-
87)
      2 CFR Part 225 requires costs claimed under federal awards to be reasonable and
      adequately documented. In determining the reasonableness of a given cost,
      consideration shall be given to market prices for comparable goods and services.

C. Administrative Requirements for Grants and Cooperative Agreements to State,
Local, and Federally Recognized Indian Tribal Governments

       2 CFR Part 85. 20 states, “A state must expand and account for grant funds in
       accordance with State laws and procedures for expending and accounting for its own
       funds…”

D. OMB Circular A-133, subpart C(.300b), states, “ the auditee shall: (b) maintain
internal control over federal programs that provides reasonable assurance that the auditee is
managing federal awards in compliance with laws, regulations, and the provisions of
contracts or grant agreements that could have a material effect on each of its federal
programs……”




                                            17
Appendix D

                      SCHEDULE OF UNSUPPORTED COSTS

                       A               B              C               D                E               F             G
 Rehabilitation    Work item      Number of       Number of     Cost per unit    Cost per unit    Unsupported   Unsupported          Total
  work item         contract       units with       units in         for              for             cost          cost          unsupported
                    amount       uncompleted         which      uncompleted      uncompleted         (DxB)         (ExB)             costs
                                 rehabilitation    required     rehabilitation   rehabilitation
                                     work         work was          work             work
                                                  completed         (A/17         (A/30 units)
                                                                 bathrooms)


 Bath cabinets          $6,000              16             1             $353               NA         $5,648              NA          $5,648
 Installation of
 bath cabinets          $4,000              16             1             $235               NA         $3,760              NA          $3,760
 Vanity with
 sink                   $1,200              14             3              $71               NA           $994              NA            $994
 Mirrors and
 medicine
 cabinets               $1,600               6            11             $100               NA           $564              NA            $564


 Carpet                 $8,500              30             0              NA             $283*            n/a        $8,500*           $8,500
 Installation of
 carpet                 $3,000              30             0              NA               $100           n/a            $3,000        $3,000


                                                                                                                Total:                $22,466
*The exact cost per unit is $283.33. The total unsupported cost is $8,500 ($283.33 x 30 units).




                                                               18
Appendix E

EXAMPLE OF PLANS USED INSTEAD OF SCOPES OF WORK

Existing plan




                      19
Reconfigurated plan




                      20