oversight

The Los Angeles County Community Development Commission Had Sufficient Capacity and the Necessary Controls to Administer its Neighborhood Stabilization Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-02.

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

                                                                Issue Date
                                                                      September 2, 2009
                                                                Audit Report Number
                                                                         2009-LA-1017




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



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

SUBJECT: The Los Angeles County Community Development Commission Had Sufficient
         Capacity and the Necessary Controls to Administer Its Neighborhood
         Stabilization Program

                                   HIGHLIGHTS

 What We Audited and Why

      We completed a capacity review of the Los Angeles County Community Development
      Commission’s (County) Neighborhood Stabilization Program. We performed the audit
      because Housing and Economic Recovery Act (HERA) reviews are part of the Office of
      the Inspector General’s (OIG) annual audit plan and the program was identified as high
      risk. In addition, the County was awarded a significant amount of Neighborhood
      Stabilization Program funds.

      Our objective was to determine whether the County had sufficient capacity and the
      necessary controls to manage and administer Neighborhood Stabilization Program funds
      provided by HUD under HERA.

 What We Found

      We found no evidence indicating that the County lacked the capacity to adequately
      administer its Neighborhood Stabilization Program funding.
Auditee’s Response


     We provided the auditee the draft report on August 21, 2009, and the auditee waived the
     exit conference.

     The final report was provided to the auditee on September 2, 2009.




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                            TABLE OF CONTENTS

Background and Objective                                                            4

Results of Audit
      The County Generally Had Sufficient Capacity and Adequate Internal Controls   5
      to Administer Its Neighborhood Stabilization Program Funds

Scope and Methodology                                                               10

Internal Controls                                                                   12

Appendixes

   A. Auditee Comments                                                              13




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                       BACKGROUND AND OBJECTIVE

The Neighborhood Stabilization Program was authorized under Title III of the Housing and
Economic Recovery Act (HERA) and provides grants to every state and certain local
communities to purchase foreclosed or abandoned homes and to rehabilitate, resell, or redevelop
these homes to stabilize neighborhoods and stem declining values in neighboring homes. HERA
calls for allocating funds “to states and units of general local government with the greatest need,”
and in the first phase of the program, HUD allocated more than $3 billion in Neighborhood
Stabilization Program funds to assist in the redevelopment of abandoned and foreclosed homes.

The Los Angeles County Community Development Commission (County) was created in 1982
by the County’s board of supervisors. The County aims to build better lives and better
neighborhoods by providing services to improve the quality of life in low- and moderate-income
neighborhoods. It manages programs in public and assisted housing, community development,
economic development, and housing development and preservation.

The Federal Register, Volume 73, Number 194 (dated October 6, 2008), provided the public a
list of grantees that would receive Neighborhood Stabilization Program funds. The County
received more than $16.8 million in program funding and amended its 2008-2009 action plan to
outline the program activities it planned to pursue with the newly acquired funds, including a
home-buyer program and a rental development program. The County’s Housing Development
and Preservation Division is responsible for implementing both activities. HUD’s Los Angeles
Office of Community Planning and Development approved the planned activities in March 2009.

As of July 2009, HUD was considering applications submitted under a competitive second round
of funding for additional Neighborhood Stabilization Program funds. These funds are authorized
by the American Recovery and Reinvestment Act of 2009. The County’s draft application for
this round of funding included a budget request of $61 million to continue its home-buyer and
rental program activities.

Our Objective

Our objective was to determine whether the County had sufficient capacity and the necessary
controls to manage and administer Neighborhood Stabilization Program funds provided by HUD
under HERA.




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                               RESULTS OF REVIEW

The County Generally Had Sufficient Capacity and Adequate Internal
Controls to Administer Its Neighborhood Stabilization Program Funds
We did not find evidence indicating that the County lacked the capacity to adequately administer
its Neighborhood Stabilization Program funding. The County had (1) a plan for and had begun
the use of program funds; (2) written policies and procedures to support its Neighborhood
Stabilization Program activities; (3) experience with programs that were similar in nature to its
Neighborhood Stabilization Program activities; (4) a plan to hire additional staff; and (5)
adequate records to support accounting transactions, procurements, home-buyer loans, and its
selection of developers to acquire and rehabilitate affordable rental housing.



 The County Had Plans for and
 Had Begun the Use of Program
 Funds

       The County had implemented two activities with its Neighborhood Stabilization Program
       funds:

           1) The Housing Economic Recovery Homeownership (HERO) program provides
              assistance to eligible low-, moderate-, and middle-income home buyers who are
              unable to qualify for a home mortgage and/or obtain the necessary downpayment
              without financial assistance. Purchased homes must be vacant and foreclosed
              upon or abandoned pursuant to program guidelines and must be the principal
              residence of the home buyer. The County budgeted more than $10 million for
              eligible HERO program activities.

           2) The Scattered Sites Rental program is designed to provide financial assistance for
              the development of affordable rental housing for low-income persons. The
              program will provide assistance through secured loans to developers who will
              acquire and rehabilitate foreclosed or abandoned properties for low-income
              persons. The residence must be a vacant property with between one and four
              units. The County budgeted more than $4 million for the Scattered Sites Rental
              program.

       Properties eligible for the HERO and Scattered Sites Rental programs must be located
       within specific target areas, or census tracts, which have been defined by the County as
       areas with the greatest need. About $2 million in Neighborhood Stabilization Program
       funds will be used to administer the HERO and Scattered Sites Rental programs.




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    The activities were in their initial stages, as HUD awarded funding in March 2009. As of
    the initiation of our review in May 2009, the County had completed program guidelines
    for each of its activities and had begun funding loans for the HERO program and making
    final developer selections for its Scattered Sites Rental program. As of June 2009, the
    County had expended 3 percent (around $400,000) of its more than $16 million in
    funding. As of July 2009, five home-buyer loans had been funded through the HERO
    program, and 12 loans were pending. In addition, two developers had been selected for
    the Scattered Sites Rental program, and a memorandum of understanding was being
    executed with one of the developers, with the second developer acting as a backup in case
    the first could not identify a location in a timely manner.

Written Policies and
Procedures Were Adequate


    The County’s procedures were sufficient to support its HERO and Scattered Sites Rental
    program activities. The procedures complied with the major provisions of HERA and
    addressed the major aspects of each program, including program requirements and
    county, applicant, and lender responsibilities. In addition, the County had established
    written procedures for monitoring its Neighborhood Stabilization Program activities and
    had complete written policies and procedures to support its financial management and
    procurement functions.

The County Had Experience
with Similar Programs

    The County had experience with other programs that mirrored its Neighborhood
    Stabilization Program activities.

           The County’s Homeownership Program is funded by HUD’s HOME Investment
           Partnerships Program (HOME) and is comparable to the HERO program in that it
           is designed to provide low-income families with the necessary financial assistance
           to purchase a home. The program expended more than $7 million in the fiscal
           year ending June 30, 2008, making it comparable in size to the HERO program.

           The County’s original Scattered Sites program is also HOME funded and is
           similar to the Neighborhood Stabilization Program’s scattered sites program in
           that its purpose is to provide financial assistance for the development of
           affordable housing for low-income persons.

    Although we have not reviewed the County’s management of its HOME funds, the HUD
    Los Angeles Office of Community Planning and Development rated the County as a
    “good performer” in the use of its HOME funds during a 2007 HUD program review.




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Staffing Levels Were
Appropriate

     The County’s staffing level appeared appropriate to administer its existing Neighborhood
     Stabilization Program funding level and planned activities. There were 12 individuals
     within the responsible Housing Development and Preservation Division units charging
     time to the Neighborhood Stabilization Program. Six of the twelve had more direct
     program responsibilities and charged between 25 and 55 percent of their time to the
     program; the remaining six people primarily supervised, managed, or provided
     administrative support and charged between 6 and 20 percent of their time to
     Neighborhood Stabilization Program activity. Therefore, the staff had been dividing its
     time between preexisting work with prior programs and the Neighborhood Stabilization
     Program activity. However, we verified that there had been a significant decrease in
     activity for the Homeownership Program, making staff available for the Neighborhood
     Stabilization Program activity.

     The County informed us that it planned to hire additional staff if awarded additional
     funding under the second competitive round of Neighborhood Stabilization Program
     funding (see Background and Objective section). Although this potential funding was
     outside the scope of our review, we agree that this measure should facilitate the County’s
     efforts to accomplish an increased Neighborhood Stabilization Program workload.

The County Had Support for
Its Financial Transactions,
Procurements, Home-Buyer
Loans, and Developer Selections

     We reviewed nonstatistical samples of Neighborhood Stabilization Program financial and
     accounting transactions, contracts from the County’s contract log, HERO program loan
     files, and the selection of developers to acquire and rehabilitate affordable rental housing.

            Financial Data:
            All Neighborhood Stabilization Program accounting transactions reviewed were
            adequately supported, eligible, and consistent with the proposed activity in the
            County’s amendment to its 2008-2009 action plan. In addition, the County’s
            division administration allocation was supported by a reasonable and equitable
            allocation methodology.

            Procurement:
            All contract services reviewed were properly procured, monitored, and completed
            consistent with its policies and procedures, as well as 24 CFR (Code of Federal
            Regulations) Part 85, Administrative Requirements for Grants and Cooperative
            Agreements to State, Local, and Federally Recognized Indian Tribal
            Governments.




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           Homebuyer Loan Files and Developer Selections:
           Our review of both funded and pending home-buyer loan files for the HERO loan
           program and documentation pertaining to the selection of developers for the
           Scattered Sites Rental program indicated that the County was in compliance with
           program requirements.

Site Visits Confirmed That
Assisted Properties Met
Program Requirements


    We conducted site visits and were able to confirm that the Neighborhood Stabilization
    Program-funded homes were located within the areas targeted by the County as having
    the “greatest needs” and that homes with pending loans appeared to be foreclosed or
    abandoned.

             Examples of homes pending funding through the HERO loan program




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  Because the Scattered Sites Rental program was in its initial stages during our fieldwork
  and had only recently selected developers, no sites had been selected for acquisition and
  rehabilitation.

Conclusion

  The County appeared to generally have sufficient capacity and adequate controls to
  administer its existing award of Neighborhood Stabilization Program funding in
  accordance with HERA requirements. The County’s procedures and controls should also
  be adequate to administer the continuation of these programs under its proposed draft
  application for a second round of Neighborhood Stabilization Program funds through the
  American Recovery and Reinvestment Act of 2009. However, given the requested
  funding is over three times that of its current program, we generally agree with the
  County’s plans to hire additional staff to ensure it can adequately administer an increased
  activity level.




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                        SCOPE AND METHODOLOGY

We performed our on-site audit work at the County, located at Monterey Park, California,
between May and July 2009. Our audit generally covered the period March through June 30,
2009. We expanded our scope as necessary to obtain information about the County’s original
Homeowner and Scattered Sites programs.

To accomplish our objective, we reviewed

       HERA.
       HUD regulations at 24 CFR Parts 85 and 570.
       The County’s amendment to its 2008-2009 action plan to include proposed
       Neighborhood Stabilization Program activities.
       The County’s internal policies and procedures that support Neighborhood Stabilization
       Program activities. We also reviewed the County’s financial management, procurement,
       monitoring, and password protection policies.
       Organizational charts, timesheets, and payroll distribution reports to determine the
       staffing level and amount of staff time spent on Neighborhood Stabilization Program
       activities.
       Original Scattered Sites program request for proposal and program guidelines to aid in
       our understanding of the County’s Neighborhood Stabilization Program Scattered Sites
       Rental program request for proposal and program guidelines.
       Neighborhood Stabilization Program Scattered Sites Rental program request for proposal
       and program guidelines to determine the County’s requirements and process for
       recruiting potential developers for acquisition and rehabilitation of affordable rental
       housing.
       As there were no Neighborhood Stabilization Program procurements, we reviewed a
       nonstatistical sample of 2 of 24 Housing Development and Preservation department
       procurement contracts (for the period of January through March 2009) to determine
       whether services were properly acquired, which represented $1,473,999 out of
       $3,228,395 in Housing Development and Preservation procurement contracts.
       Financial statements and board approval letters.
       2007 HUD program review assessment letter.
       Budget revenue and expenditure reports, journal vouchers, and support documentation,
       including the review of a nonstatistical sample of $130,643 of the $323,183 in
       Neighborhood Stabilization Program expenses as on June 30, 2009.
       A nonstatistical sample of 1 of 5 funded and 1 of 12 pending home-buyer loan files and
       the developer selection packages.
       We also conducted site visits to a nonstatistical sample of 9 of the 17 funded and pending
       homes receiving rehabilitation loans under the Neighborhood Stabilization Program.
       The American Recovery and Reinvestment Act (ARRA) of 2009.




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In addition, although generally outside the scope of our review, we reviewed the County’s draft
application for the second competitive round of Neighborhood Stabilization Program funds as it
was submitted to HUD during the course of our fieldwork.

We conducted the review 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 stated
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our 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 objectives are achieved:

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

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



 Relevant Internal Controls


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

              Implementation of policies and procedures to ensure that Neighborhood
               Stabilization Program activities meet established objectives.

              Implementation of policies and procedures to ensure that Neighborhood
               Stabilization Program activities comply with applicable laws and regulations.

       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




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