oversight

State of California's Department of Housing and Community Development, Sacramento, California, Review of the Allocation Formula for the Neighborhood Stabilization Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-08-21.

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

                                                                Issue Date
                                                                        August 21, 2009
                                                                Audit Report Number
                                                                         2009-LA-1016




TO:         Maria Cremer, Acting Director, San Francisco Office of Community Planning
            and Development, 9DD



FROM:       Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA

SUBJECT: State of California’s Department of Housing and Community Development,
         Sacramento, California, Review of the Allocation Formula for the Neighborhood
         Stabilization Program

                                    HIGHLIGHTS

 What We Audited and Why

      We audited the State of California’s Department of Housing and Community
      Development (State) to determine the basis and method used to allocate its $145 million
      in Neighborhood Stabilization Program (NSP) grant funds. Our objective was to
      determine whether the methodology the State used in allocating its NSP grant funds was
      logical, equitable, and in accordance with U.S. Department of Housing and Urban
      Development (HUD) requirements.

 What We Found
      The State generally logically and equitably allocated its NSP grant funds to those areas
      with greatest need, as described in the Housing and Economic Recovery Act of 2008.

      We provided the State a discussion draft report on August 11, 2009, and held an exit
      conference with appropriate officials on August 13, 2009.

      The auditee provided comments on the draft report on August 19, 2009 and we provided
      the auditee the final report on August 21, 2009.
                           TABLE OF CONTENTS

Background and Objective                                                      3

Results of Audit
      The Methodology the State Used in Allocating Its NSP Grant Funds Was    4
      Generally Logical, Equitable, and in Accordance with HUD Requirements

Scope and Methodology                                                         6

Internal Controls                                                             7

Auditee Comments                                                              8




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                       BACKGROUND AND OBJECTIVE

The Neighborhood Stabilization Program (NSP) is authorized under Division B, Title III, of the
Housing and Economic Recovery Act of 2008 (HERA). It was established for the sole purpose of
stabilizing communities that have suffered from foreclosures and abandonment. Additionally, the
program provides grants to all states and selected local governments on a formula basis to assist in
the redevelopment of abandoned and foreclosed homes and residential properties.

There is additional NSP funding authorized by the American Recovery and Reinvestment Act of
2009 and substantive revisions to NSP initially published in the Housing and Economic
Recovery Act of 2008. These revisions include, but are not limited to:

      Funds can be used to establish and operate land banks for homes and residential properties
      that have been foreclosed upon. This allows a governmental or nongovernmental
      nonprofit entity to assemble, temporarily manage, and dispose of vacant land for the
      purpose of stabilizing neighborhoods and encouraging re-use or redevelopment of urban
      property.
      Substantially all program income must be disbursed for eligible NSP activities before
      additional cash withdrawals are made from the US Treasury.
      Purchase discount requirements for foreclosed homes or residential property were
      modified from five percent to one percent.

The allocation process is further changed because the funds are awarded on a competitive basis.

The State of California’s Department of Housing and Community Development (State) received
an allocation of more than $145 million in NSP grant funds, which it did not allocate to the 46
Community Development Block Grant (CDBG) entitlement jurisdictions that received NSP
funds directly from HUD. The NSP funds were allocated to those cities and metropolitan, urban,
and other areas with greatest need, including those

       With the greatest percentage of home foreclosures,
       With the highest percentage of homes financed by a subprime mortgage-related loan, and
       Identified by the State or unit of general local government as likely to face a significant
       rise in the rate of home foreclosures.

Our objective was to determine whether the methodology the State used in allocating its NSP
grant funds was logical, equitable, and in accordance with HUD requirements.




                                                  3
                                RESULTS OF AUDIT

The Methodology the State Used in Allocating Its NSP Grant Funds
Was Generally Logical, Equitable, and in Accordance with HUD
Requirements
The methodology the State used in allocating its NSP grant funds was generally logical,
equitable, and in accordance with HUD requirements. The State allocated its NSP grant funds
based on a methodology and data provided by HUD.



 State Methodology


       The State’s allocation of the NSP grant funds totaling more than $145 million was based
       on a three-step method. First, the State deducted from its total NSP funds its eligible
       anticipated administrative costs amounting to more than $7.2 million. Second, the State
       will competitively award the NSP funds to be used to meet the low-income set-aside
       criteria using a separate NOFA process. As of the last day of our fieldwork, the funds
       that will be made available to meet the low-income set-aside criteria had not been
       finalized but will be at least $38 million. The amount will be adjusted to include
       whatever NSP funds are not accepted and/or declined by the jurisdictions allocated NSP
       funds in the third step of the State’s methodology. Third, it allocated more than $99.6
       million to those cities and metropolitan, urban, and other areas not among the 46 CDBG
       entitlement jurisdictions that received direct NSP funds from HUD. The jurisdictions
       receiving an allocation by this step have an opportunity to accept their allocation through
       a notice of funding availability (NOFA) application.

 HUD Methodology

       HUD's allocation of the NSP grant funds appropriated by Title III of Division B of
       HERA was made based on a two-step method. First, HUD made statewide allocations,
       followed by local (sub state) allocations, resulting in the State’s being allocated more
       than $145 million in funds to administer. In determining its substate allocations, HUD
       used the following elements:

              Amounts available for allocation (less the minimum state grants),
              Local and state foreclosure data,
              Local and state vacancy rates, and
              A pro-rata ratio.




                                                4
     The State's methodology for allocating its grant funds was modeled after HUD’s substate
     methodology. Specifically, in determining its allocations, the State used the following
     elements:

             Amount available for allocation (less 25 percent of funds to meet low-income set-
             aside criteria and administrative costs),
             Local and state foreclosure data, and
             A pro-rata ratio.

     Although HUD and the State’s methodology used nearly the same elements, the State did
     not use vacancy rates as a factor. HUD used vacancy rates to account for the problem of
     abandonment. The State determined that it would not incorporate vacancy rates as factors in
     its methodology because HUD has a low vacancy rate and abandonment risk score for
     California. Additionally, based on a survey of 53 cities, counties, and nonprofits that the
     State conducted between September and October 2008, there was interest in foreclosed
     properties, and some cities, counties, and nonprofits had waiting lists of interested buyers.

  HUD Data
  Equipment
    HUD provided local-level data for all of its NSP state grantees on its HUD user Web site
    for use in allocating their funds. The State used local-level data obtained from HUD in
    its methodology to allocate its NSP funds.

     During our review of the State’s calculations, we found a difference between the data the
     State used and the data obtained from HUD. There were a total of six instances in which
     there were discrepancies in the data. However, the total of these errors represented only
     0.17 percent of the State’s total NSP grant funds. Because of the insignificance of this
     amount, we chose to not issue a recommendation but will address this issue with the State
     in a separate memorandum.

Conclusion

     The State generally logically and equitably allocated its NSP grant funds to those areas
     with greatest need, as described in the Housing and Economic Recovery Act of 2008.




                                               5
                                 SCOPE AND METHODOLOGY

We performed the audit work between May 13 and July 16, 2009, in Sacramento, California.
We reviewed the State’s NSP allocation formula to determine whether the formula the State used
to allocate its NSP grant funds—to those recipients that were not among the 46 CDBG
entitlement counties or cities that received other NSP funds—was logical and equitable. More
specifically, to accomplish the audit, we performed the following:

        Reviewed relevant HUD regulations, including the Housing and Economic Recovery
        Act of 2008, Title III of Division B, and the notice of allocation regulations at 73 F.R.
        (Federal Register) 58330;

        Reviewed the NSP contract between the State and HUD;

        Reviewed the State’s NSP substantial amendment;

        Reviewed pertinent correspondence between HUD’s Office of Community Planning and
        Development and the State relating to the State’s allocation methodology;

        Reviewed HUD’s methodology used to allocate the $3.92 billion in NSP funds
        appropriated by Title III of Division B of the Housing and Economic Recovery Act of
        2008;

        Reviewed the State’s methodology used to allocate its NSP grant funds; and

        Verified that the State used its documented methodology and the data sets provided by
        HUD to determine its NSP grant fund allocations.

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.




                                                 6
                              INTERNAL CONTROLS

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

       Program operations,
       Relevance and reliability of information,
       Compliance with applicable laws and regulations, and
       Safeguarding of assets and resources.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. They include the processes and procedures for planning,
organizing, directing, and controlling program operations as well as the systems for measuring,
reporting, and monitoring program performance.



 Relevant Internal Controls


       We determined that the following internal controls were relevant to our audit objective:

              Policies and procedures the State used to allocate its $145 million in NSP grant
              funds.

       We assessed the relevant controls identified above.

       A significant weakness exists if internal 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

       We did not identify any significant weaknesses in the relevant controls identified above.




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Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




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