oversight

The Economic Development Corporation, Newark, New Jersey, Did Not Administer Its Community Development Block Grant Program in Accordance with HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-12-08.

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

                                                                  Issue Date
                                                                      December 8, 2008
                                                                  Audit Report Number
                                                                       2009-NY-1004




TO:        Kathleen Naymola, Director, Community Planning and Development, 2FD



FROM:      Edgar Moore, Regional Inspector General for Audit, 2AGA

SUBJECT: The Economic Development Corporation Did Not Administer Its Community
         Development Block Grant Program in Accordance with HUD Requirements

                                   HIGHLIGHTS

 What We Audited and Why

            We audited the Community Development Block Grant (CDBG) program
            administered by the Economic Development Corporation (Corporation), a
            subgrantee of Essex County Consortium (the County). We selected the
            Corporation for review because our audit of the County’s CDBG operations
            disclosed that the County did not have adequate controls over this subgrantee to
            ensure its compliance with U.S. Department of Housing and Urban Development
            (HUD) requirements. Also, HUD’s risk analysis indicated that the Corporation
            had excessive loan amounts and little activity. Our audit objectives were to
            determine whether the Corporation adequately administered its CDBG program in
            accordance with applicable rules and regulations. Specifically, we wanted to
            determine whether it efficiently and effectively disbursed CDBG funds, had a
            financial management system in place to adequately safeguard the funds, and used
            CDBG funds to meet the national objectives.

 What We Found
            The Corporation did not adequately administer its CDBG program. Specifically, it
            (1) did not properly administer economic development loan programs, (2)
            improperly converted a loan to a grant and received a duplicate drawdown, (3) did
            not carry out adequate technical assistance and site search services, (4) could not
            support that its activities met the CDBG national objectives, and (5) lacked evidence
           to justify its CDBG administrative expenses. This noncompliance occurred because
           the Corporation did not develop and implement policies and procedures to ensure its
           compliance with HUD’s requirements. As a result, more than $660,000 of the
           revolving funds was not effectively used to make economic development loans,
           $133,000 was ineligibly drawn down for economic development loans, and more
           than $1.6 million disbursed for administrative expenses was not justified.

           Also, the Corporation did not always comply with HUD requirements to ensure that
           (1) adequate financial records were maintained for its two economic development
           loan programs, (2) program income was properly accounted for, and (3) adequate
           budget and cost allocation procedures were implemented. As a result, financial
           records were inadequately maintained; program income was improperly recorded;
           and CDBG funds were not properly budgeted, allocated, and safeguarded.

What We Recommend

           We recommend that the Director of HUD’s New Jersey Office of Community
           Planning and Development instruct the County to require the Corporation to (1)
           develop and implement appropriate program plans and controls to ensure that
           $662,184 in CDBG funds is used effectively to make economic development loans,
           (2) repay $100,000 for the ineligible loan and $33,000 for the duplicate drawdown,
           (3) obtain and submit all supporting documentation showing the appropriateness and
           eligibility of more than $1.6 million in administrative expenditures, (4) develop and
           implement proper financial controls to safeguard CDBG funds, and (5) establish
           adequate procedures to ensure that receipts and expenditures of program income are
           properly recorded and reported. We also recommend that the County discontinue
           further funding to the Corporation until HUD determines that it has the capacity to
           carry out CDBG activities in compliance with HUD regulations.

           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 a draft report to auditee officials on September 23, 2008, and
           requested their responses by October 14, 2008. We discussed the results of our
           review during the audit and at an exit conference held on October 14, 2008, on
           which auditee officials provided their written comments. Auditee officials
           generally disagree with the draft report findings. 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 auditee provided numerous exhibits at the exit
           conference and a more detailed response subsequent to the exit conference that
           were too large to be included in this report, but which will be provided to the
           Field Office for review.



                                             2
                            TABLE OF CONTENTS

Background and Objectives                                                       4

Results of Audit
      Finding 1: The Corporation Inadequately Administered Its CDBG Program     5
      Finding 2: There Were Control Weaknesses in the Corporation’s Financial   10
                 Management System

Scope and Methodology                                                           14

Internal Controls                                                               15

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use            17
   B. Auditee Comments and OIG’s Evaluation                                     18




                                            3
                     BACKGROUND AND OBJECTIVES

The Community Development Block Grant (CDBG) program was established by Title I of the
Housing and Community Development Act of 1974 (Public Law 93-383). The program provides
grants to state and local governments to aid in the development of viable urban communities.
Governments are to use grant funds to provide decent housing and suitable living environments
and to expand economic opportunities, principally for persons of low and moderate income. To
be eligible for funding, every CDBG-funded activity must meet one of the program’s three
national objectives. Specifically, every activity, except for program administration and planning,
must

       Benefit low- and moderate-income persons,
       Aid in preventing or eliminating slums or blight, or
       Address a need with a particular urgency because existing conditions pose a serious and
       immediate threat to the health or welfare of the community.

The Economic Development Corporation (Corporation), is a private nonprofit organization and is a
subgrantee of the Essex County Consortium (County). The Corporation was incorporated in
November 1982 to promote the economic growth in Essex County and has received annual
CDBG funds to carry out economic development programs for the County. During program
years 1999 to 2006, the Corporation disbursed approximately $1.7 million in CDBG funds to
administer its economic development activities including two CDBG-financed revolving loan
programs–Community Development Revolving Loan Fund (CDRLF) and Community Economic
Revitalization Program (CERP). Both of these programs were to provide financial assistance to
local businesses to either create job opportunities or benefit the area through facade
improvements. In addition, CDBG administrative funds were used to cover the overhead of
other non-CDBG-financed economic development loan programs and consulting services such as
technical assistance and site search services.

Currently, the Corporation only has one full-time employee and a part-time executive director
who also serves as the director of the County’s Office of Small Business and Affirmative Action.
The Corporation is located at the County’s Hall of Records, 465 Dr. Martin Luther King, Jr.,
Boulevard, Newark, New Jersey.

We audited the Corporation because our audit of the County’s CDBG operations disclosed that
the County did not have adequate controls over this subgrantee to ensure its compliance with
U.S. Department of Housing and Urban Development (HUD) requirements. Also, a HUD risk
analysis indicated that the Corporation had excessive loan amounts and little activity. Our audit
objectives were to determine whether the Corporation adequately administered its CDBG
program in accordance with applicable rules and regulations. Specifically, we wanted to
determine whether it efficiently and effectively disbursed CDBG funds, had a financial
management system in place to adequately safeguard the funds, and used CDBG funds to meet
the national objectives.




                                                4
                                 RESULTS OF AUDIT


Finding 1: The Corporation Inadequately Administered Its CDBG
           Program
The Corporation did not adequately administer its CDBG program. Specifically, it (1) did not
properly administer economic development loan programs, (2) improperly converted a loan to a
grant and received a duplicate drawdown, (3) did not carry out adequate technical assistance and site
search services, (4) could not support that its activities met the CDBG national objectives, and (5)
lacked evidence to justify its CDBG administrative expenses. This noncompliance occurred
because the Corporation did not develop and implement policies and procedures to ensure its
compliance with HUD’s requirements, and the County did not have proper program and financial
controls over the CDBG activities administered by the Corporation. As a result, more than
$660,000 in revolving funds was not effectively used to make economic development loans,
$133,000 was ineligibly drawn down for economic development loans, and more than $1.6 million
in administrative expenses was not justified or reasonable.


 Economic Development Loan
 Programs Not Administered
 Properly


               The Corporation did not properly administer its CDBG economic development
               revolving loan program. Specifically, it lacked productivity in making CDBG
               economic development loans and did not follow HUD regulations in originating and
               administering an economic development loan of $100,000 through the Community
               Development Revolving Loan Fund (CDRLF) program in 2005. As a subrecipient
               of the County’s CDBG entitlement grant since the mid-1980s, the Corporation had
               administered the County’s CDBG economic development loans through the CDRLF
               program, which was supposed to help to create jobs, and the Community Economic
               Revitalization Program (CERP), which was supposed to result in facade
               improvements and area benefits. The Corporation used the proceeds from loan
               repayments to generate new economic development loans and used the annual
               CDBG grant from the County to pay for administrative expenditures of these
               activities.

               The annual performance reports submitted by the Corporation to HUD demonstrated
               that the Corporation was passive in making economic development loans and lacked
               productivity in originating loans. Except for two CDRLF loans, which were made in
               August and November 2005, the Corporation had not generated any CDRLF loans
               since September 1995. In addition, one of the two CDRLF loans had defaulted and
               was improperly converted to a grant because it had not complied with the
               subrecipient agreement and job creation objectives (see the “Improper Loan
               Conversion and Drawdown” section). Further, only one CERP loan had been

                                                 5
           originated since program year 1999. Therefore, the Corporation did not use CDBG
           funds in a timely manner and diminished the objectives and accomplishments of the
           CDBG program. These two revolving loan funds had balances of $326,852 (as of
           September 13, 2007) and $335,332 (as of August 31, 2007), respectively.
           Corporation staff acknowledged the slow progress and stated that they could have
           done better. Moreover, there was little evidence that the CDRLF loans achieved job
           creation objectives during program years 1999 to 2006 (see the “Unsupported
           Accomplishment of National Objectives” section).

           Accordingly, the Corporation did not comply with the regulations at 24 CFR (Code
           of Federal Regulations) 85.20(a) (4) and 570.200 (a)(3) pertaining to performance
           and productivity of HUD programs. As a result, there was no assurance that more
           than $660,000 in remaining revolving loan funds would be used effectively as funds
           had not been used to make loans to businesses, create jobs, or make other
           improvements.


Improper Loan Conversion and
Drawdown

           The Corporation did not follow HUD regulations in originating and administering
           an economic development loan of $100,000 through the CDRLF program in
           2005. Regulations at 24 CFR 570.209 provide that a recipient who used CDBG
           funds for special economic development activities must create or retain at least
           one full-time equivalent permanent job per $35,000 in CDBG funds used. The
           loan agreement indicated that the loan proceeds would be used for the
           construction of a day care business to benefit students from low- and moderate-
           income families and that the borrower must meet the job creation and day care
           student enrollment objectives. In addition, the loan could be converted to a
           CDBG grant if the borrower met these two objectives. However, instead of
           declaring default and taking remediation actions, the Corporation improperly
           converted the loan to a grant, although the borrower did not achieve the job
           creation objectives. This fact was corobortated by the independent public
           accountant’s audit report of the Corporation, which provided that the loan
           recipient failed to comply with the job creation requirements. Further, the loan
           was awarded without adequate collateral or proper analysis of the borrower’s
           solvency, and the grant agreement between the Corporation and the County did
           not authorize the Corporation to provide grants to local businesses. The loan
           agreement did not require collateral, and correspondence from the bank and the
           recipient confirmed that there was no collateral to secure the loan. Moreover,
           awarding grants by using CDRLF was not in compliance with the objectives of
           this program. Therefore, this CDRLF loan was ineligible, and the $100,000
           should be reimbursed to the CDBG program from nonfederal funds.

           In addition, the Corporation received a duplicate drawdown of $33,000 from the
           County for a CDRLF loan due to an error. This amount should also be
           reimbursed to the CDBG program from the Corporation’s CDRLF bank account.

                                            6
 Inadequate Technical
 Assistance and Site Search
 Services
           According to the annual action plan submitted to HUD through the County, the
           Corporation provides technical assistance and site search services to local
           businesses. The Corporation’s application for the CDBG grant specified that the
           assistance would include assisting businesses in preparing business plans that
           were designed to support the growth of area business and job opportunities, as
           well as educating and supporting small businesses in Essex County through
           conferences and meetings. Several Corporation employees charged their time to
           technical assistance services over the years. However, the Corporation only
           assisted 7 of 161 local businesses that sought assistance in preparing business
           plans during program years 1999 to 2006. Only two of the seven assisted
           businesses received CDBG-financed loans from the Corporation. The remaining
           154 businesses were not given adequate attention or assistance.

           The Corporation’s application further described that the Corporation would
           provide site search services to local businesses seeking areas to relocate, start up,
           or expand within Essex County. However, it did not deliver site search services
           before program year 2004 and only performed limited site search services after
           program year 2004.

           As a result of the ineffective technical assistance and site search services, the
           Corporation could not generate sufficient economic development loans to help local
           businesses or meet job creation objectives.


Unsupported Accomplishment
of National Objectives

           The Corporation did not maintain adequate documents to demonstrate that it met
           at least one of the three CDBG national objectives as prescribed by 24 CFR
           570.200. Regulations at 24 CFR 209 provide that a recipient who used CDBG
           funds for special economic development activities must create or retain at least
           one full-time equivalent permanent job per $35,000 in CDBG funds used for
           economic development projects. The annual performance report submitted to
           HUD by the Corporation claimed that the majority of economic development
           loans it originated met the national objective of benefiting low- and moderate-
           income persons. However, the loan agreement between the Corporation and the
           businesses indicated the number of jobs to be created but did not provide the titles
           of these jobs. The supporting documentation for accomplishments only showed
           the list of new employees; therefore, the Corporation could not show whether the
           reported jobs were created or refilled. In addition, the list of new employees
           could not adequately support that the number of jobs was counted accurately



                                             7
            because more than one employee could have been hired for a same position
            during a program year.

            Further, multiple technical assistance loans did not achieve job creation
            objectives. The loans were financed by non-CDBG funds, and their
            administrative costs were paid with CDBG funds. Although the loans were
            closed more than five years ago, no jobs had been created. However, instead of
            enforcing HUD regulations and taking appropriate corrective actions against the
            loan recipients that failed to accomplish job creation objectives in a timely
            manner, the Corporation stated in its annual performance report that it was still in
            the process of collecting job creation data for these loans. Therefore, it did not
            effectively monitor the job creation results of its loan recipients.

            As a result, the Corporation did not properly evaluate the jobs created during
            these years and ensure compliance with HUD regulations and the national
            objectives.

Unsupported/Ineligible
Administrative Costs

            The Corporation disbursed more than $1.6 million for administrative costs during
            program years 1999 through 2006 to manage the economic development loans,
            provide technical assistance and site search services to local businesses, and
            ensure accomplishment of the national objective of job creation. However, these
            administrative costs did not appear to be reasonable. The Corporation only
            generated three CDBG-financed loans, provided technical assistance to seven
            businesses, and carried out limited site search services for business. In addition, it
            did not maintain adequate documents to demonstrate that its activities met the
            CDBG national objective of job creation. As a result, it lacked evidence to
            support that it administered its CDBG activities in accordance with federal
            regulations and its action plan submitted to HUD. Since the Corporation did not
            carry out its economic development loan programs, technical assistance, and site
            search services, as stated in its action plan and submission to HUD, or achieve the
            objectives of increasing business growth and creating jobs, the administrative
            costs for these activities are questioned pending an eligibility determination by
            HUD.




                                              8
Conclusion


             The Corporation did not adequately administer its CDBG programs.
             Consequently, more than $660,000 in revolving funds was not used effectively to
             make economic development loans, CDBG funds were not safeguarded as
             $133,000 was ineligibly drawn down for economic development loans, and more
             than $1.6 million in administrative funds was disbursed without adequate support
             that the costs were reasonable and eligible. This noncompliance occurred because
             the Corporation did not develop and implement policies and procedures to ensure
             its compliance with HUD’s requirements, and the County did not have proper
             program controls over the CDBG activities administered by the Corporation.

Recommendations

             We recommend that the Director of HUD’s New Jersey Office of Community
             Planning and Development instruct the County to

             1A.    Require the Corporation to develop and implement an adequate program
                    plan and proper management controls to ensure that $662,184 or the
                    current balance of CDBG funds in the two revolving loan accounts is used
                    to make economic development loans, thus ensuring that these funds are
                    put to better use.

             1B.    Require the Corporation to develop and implement appropriate review and
                    monitoring procedures to minimize the risk of defaulted loans.

             1C.    Require the Corporation to reimburse $100,000 from nonfederal funds to
                    the CDBG program for the ineligible loan and $33,000 from its CDRLF
                    bank account to the CDBG program for the duplicate drawdown.

             1D.    Require the Corporation to obtain and submit all supporting
                    documentation for the CDBG activities carried out and the jobs created
                    during program years 1999 to 2006 so that HUD can determine
                    compliance with HUD regulations and the eligibility and reasonableness
                    of the $1,678,332 that the Corporation disbursed for administering its
                    CDBG economic development activities during that period. Any amounts
                    determined to be ineligible or unreasonable must be reimbursed to the
                    CDBG program from nonfederal funds.

             1E.    Discontinue funding the Corporation with CDBG funds until HUD
                    determines that it has the capacity to carry out CDBG economic
                    development activities in compliance with HUD regulations.



                                             9
Finding 2: There Were Control Weaknesses in the Corporation’s
           Financial Management System
The Corporation had weaknesses in its financial management system. Specifically, it did not
always comply with HUD requirements to ensure that (1) adequate financial records were
maintained for its two economic development loan programs, (2) program income was properly
accounted for, and (3) adequate budget and cost allocation procedures were implemented. This
noncompliance occurred because the Corporation did not develop and implement adequate
procedures to ensure compliance with HUD requirements. As a result, financial records were
inadequately maintained, program income was improperly recorded, and CDBG funds were not
properly allocated and safeguarded.


 Inadequate Financial Records


              The County issued a monitoring report regarding the Corporation’s
              noncompliance with its financial and management controls in program year 2005.
              Our review confirmed that the Corporation lacked financial controls for its CDBG
              programs and that no corrective actions were taken in response to the County’s
              monitoring review.

              Regulations at 24 CFR 85.42, 570.506, and 570.502 indicate that the grantee
              should maintain proper supporting documentation for at least four years after the
              last expenditure report is submitted, in which the activity is reported as complete.
              The Corporation did not maintain adequate records such as the original grant
              agreements or the history of the grants for its two economic development loan
              programs: the Community Development Revolving Loan Fund (CDRLF) and the
              Community Economic Revitalization Program (CERP). The documentation
              provided only indicated that there had been a lump-sum drawdown of $700,000
              from CDBG funds related to the CDRLF program. However, the current
              Corporation staff stated that they only received $453,742 of the $700,000 and
              accumulated the current balance from the repayments of CDRLF loans.
              According to the Corporation, $257,383 in CDRLF initial funding was
              reprogrammed to the County’s other CDBG activities in 1991. In addition, the
              Corporation stated that it did not receive initial start-up funding from CDBG for
              its CERP loan program. However, these explanations were not supported by
              adequate documents; therefore, the Corporation could not show that the
              information regarding the initial funding, financial transactions, and current
              balances for these two revolving loan programs was accurate. Moreover, because
              of its inadequate financial records, HUD and the citizens of Essex County were
              not adequately notified of all major changes to the Corporation’s CDBG
              activities.




                                               10
Inadequate Accounting for
Program Income

          The Corporation did not properly record loan repayments and improperly
          transferred funds between CDBG-financed and non-CDBG-financed programs.
          This conduct violated regulations at 24 CFR 570.200, which require that an
          activity may be assisted with CDBG funds only if it meets one of the CDBG
          national objectives. For example, the Corporation’s general ledger disclosed that
          the monthly repayments of a CDRLF loan were not deposited into the CDRLF
          account; instead, they were deposited into the non-CDBG-financed revolving loan
          fund account. In addition, although the Corporation transferred a lump-sum
          amount back to the CDRLF account four years later, the total repayment amount
          of this loan to the CDRLF account was approximately $1,900 less than the loan
          principal amount. Moreover, there were at least four other loans for which
          repayments were deposited into the revolving loan fund account for several
          months; however, the Corporation only transferred the principal amount back to
          the CDRLF account. As a result, program income, including the interest earned
          from these four CDRLF loans, was not fully returned to the CDRLF account and
          might have been used for non-CDBG activities. Therefore, the CDBG funds were
          not properly safeguarded.

          Regulations at 24 CFR 85.20, 24 CFR 570.504, and 570.500 require that receipts
          and expenditures of program income be recorded as part of the financial
          transactions of the grant program and are subject to all applicable requirements
          governing the use of CDBG funds as mentioned above. The Corporation obtained
          repayments of principal and interest on economic development loans and also
          charged late fees to borrowers that did not repay loans on time. During program
          years 2004 to 2006, these repayments and late fees were deposited into the
          economic development loan accounts and used to finance other loans. However,
          the Corporation did not adequately report the income generated by these
          transactions to the County or HUD. The total amount of program income was
          $68,820 for these three program years. Therefore, the County and HUD were not
          provided a proper accounting for the program income related to the CDBG
          economic development loan programs administered by the Corporation.


Inadequate Budget and Cost
Allocation Plan

          The Corporation did not have an adequate budget for CDBG activities.
          Regulations at 24 CFR 85.20(b)(4) require that grantees’ financial information be
          related to performance or productivity data, including the development of unit
          cost information. However, the grant agreement between the County and the
          Corporation did not provide a breakdown of budget information for individual
          economic development activities, except for the lump-sum amount of the CDBG
          funds awarded to the Corporation. Accordingly, the Corporation did not indicate
          how its CDBG and other funds were going to be budgeted among its loan

                                          11
             programs and economic development activities such as site search and technical
             assistance. As a result, due to the lack of a budget by type of activity, it was
             difficult for the County and HUD to evaluate the performance against the funds
             provided for each activity.

             In addition, there was no evidence showing that the Corporation allocated the
             administrative costs among CDBG activities and non-CDBG activities in
             accordance with the regulations in Office of Management and Budget Circular A-
             87. Documentation submitted by the Corporation to the County for its
             administrative cost reimbursements indicated that its CDBG administrative costs
             were categorized into “salaries” and “expenses.” However, salaries and expenses
             were not associated with the CDBG activities that the Corporation was supposed
             to carry out as suggested in its action plan submitted to HUD. It carried out not
             only CDBG activities, but also non-CDBG activities. For example, the financial
             statement indicated that the Corporation incurred $180,000 in CDBG expenses
             and more than $1.5 million in non-CDBG expenses for program year 2005.
             However, it did not have a proper cost allocation plan to prorate the salaries and
             overhead costs between CDBG activities and non-CDBG activities. Corporation
             staff stated that the cost allocation ratio was determined by the Corporation’s
             executive director and fiscal analyst/program monitor; however, this ratio was not
             approved by the County or HUD. As a result, CDBG funds may have been used
             on non-CDBG-related activities and, therefore, may have been ineligible.


Conclusion

             The Corporation had weaknesses in its financial controls. For instance, financial
             records were inadequately maintained, program income was inadequately
             accounted for, and there were inadequate budget and allocation procedures. As a
             result, the Corporation could not show that the information regarding the initial
             funding, financial transactions, and current balances for its two revolving loan
             programs was accurate; program income consisting of the interest earned from
             loans was not fully returned to the CDRLF account; and CDBG sources and uses
             of funds may not have been accurately allocated to activities and may have been
             used for non-CDBG-related expenses. This condition resulted from the
             Corporation’s not establishing and implementing adequate financial controls.




                                             12
Recommendations

          We recommend that the Director of HUD’s New Jersey Office of Community
          Planning and Development instruct the County to

          2A.     Require the Corporation to develop and implement adequate controls to
                  ensure proper record keeping for its CDBG activities.

          2B.     Require the Corporation to obtain and submit all supporting
                  documentation for the disbursements from and deposits into its economic
                  development loan accounts (the CDRLF and CERP programs) so that
                  HUD can assess the correct balances for these programs. Any amounts
                  determined to be ineligible must be reimbursed to CDBG program from
                  nonfederal funds.

          2C.     Require the Corporation to develop and implement adequate controls to
                  ensure that receipts and expenditures of program income are properly
                  recorded and reported.

          2D.     Require the Corporation to develop and implement an adequate budget
                  processing and cost allocation plan to ensure that CDBG funds and
                  expenditures are properly allocated to individual activities.




                                          13
                        SCOPE AND METHODOLOGY

The audit focused on determining whether the Corporation administered its CDBG programs in
accordance with HUD requirements. To accomplish our objectives, we

       Reviewed relevant federal and New Jersey state regulations;

       Interviewed appropriate personnel of HUD’s Office of Community Planning and
       Development, Newark field office, and reviewed relevant grant files to obtain an
       understanding of CDBG program requirements and identify HUD’s concerns with the
       County’s operations;

       Reviewed the Corporation’s policies, procedures, and practices and interviewed key
       personnel to obtain an understanding of its administration of the CDBG program;

       Reviewed monitoring reports and independent accountant audit reports; and

       Reviewed and tested the Corporation’s files and records of selected activities to
       determine whether the costs were eligible and adequately supported as required by HUD
       regulations.


The Corporation had only generated two CDRLF loans since September 1995 and one CERP
loan since June 1999. We reviewed all three of the loans. Since the Corporation used CDBG
funds to cover the overhead of general technical assistance loans (non-CDBG-financed), we
reviewed one of the 20 general technical assistance loans generated during program years 1999
to 2006. We also reviewed all four defaulted CDRLF loans. We examined all of the files
provided by the Corporation for technical assistance and site search services. In addition, we
evaluated whether the Corporation had adequate financial controls to safeguard CDBG funds,
including the program income generated during our audit period. Further, we tested whether job
creation national objectives were achieved for the economic development activities.

The audit generally covered the period June 1, 1999, through May 31, 2007. To accomplish our
objectives, we extended the period back to the inception of the Corporation in the 1980s. We
performed our audit fieldwork from December 2007 through April 2008 at the Corporation’s
office, located in the County’s office building in Newark, New Jersey, located at the Hall of
Records, 465 Dr. Martin Luther King, Jr., Boulevard, Newark, New Jersey.

We performed our 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 audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                               14
                             INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being 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. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls
              We determined the following internal controls were relevant to our audit objectives:

                      Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

                      Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

                      Safeguarding resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

                      Validity and reliability of data – Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

              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.




                                               15
Significant Weaknesses


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

                  The Corporation did not have adequate controls over compliance with laws
                  and regulations, as it did not always comply with HUD regulations while
                  administering the economic development loan programs and disbursing
                  CDBG funds (see finding 1).

                  The Corporation did not safeguard resources, as it did not establish adequate
                  financial controls to ensure adequate financial records, proper accounting for
                  program income, and an adequate budget and cost allocation system (see
                  finding 2).




                                            16
                                     APPENDIXES

Appendix A

               SCHEDULE OF QUESTIONED COSTS
              AND FUNDS TO BE PUT TO BETTER USE


      Recommendation                                                     Funds to be put
          number            Ineligible 1/       Unsupported 2/           to better use 3/
              1A                                                            $662,184
              1C              $133,000
              1D                                    $1,678,732
             Total            $133,000              $1,678,732              $662,184


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 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.

3/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. This includes reductions in outlays, deobligation of funds, withdrawal of
     interest subsidy costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures, and any other savings which are specifically
     identified. In this instance, if the County implements our recommendation to establish
     and implement adequate procedures and controls over its economic development loan
     programs, it will be able to assure HUD and its citizens that the existing loan fund balances
     will be used in a timely manner to create jobs, facade improvements, and area benefits.




                                               17
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         19
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3




Comment 4




                         20
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 4




Comment 4




Comment 5




                         21
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 5




Comment 5




Comment 2




Comment 6




Comment 6




                         22
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 7




Comment 2




                         23
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 8




Comment 2




                         24
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 9


Comment 9

Comment 10

Comment 9

Comment 4

Comment 9


Comment 11



Comment 9


Comment 12




Comment 2




                         25
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 2




                         26
                         OIG Evaluation of Auditee Comments

Comment 1   Corporation officials indicated that they had closed 19 CDRLF loans since the
            inception of the program (in the mid-1980s). They state that $771,000 in funds
            represents a lump sum drawdown of $453,000 and recycled principal and interest
            payments. They stated that the current loan fund balance of $342,000 was
            available for future CDRLF projects. Corporation officials also state they
            generated 59 jobs for low to moderate income people from these projects. They
            also stated that they had closed 20 CERP loans and 20 non-CDBG loans and that
            the loan recipients had reported the creation of 126 full time equivalent jobs for
            low and moderate income people. Corporation officials believed the demand for
            these programs is increasing and that generating new loan activity for the CDRLF
            and CERP programs is a priority. However, the Corporation only closed a total of
            three CDRLF and CERP loans during our audit period for program years 1999
            through 2006. Finding 2 explains the problems regarding adequate financial
            documentation for the two loan programs and that Corporation officials could not
            show that the information regarding the initial funding, financial transactions, and
            current balances for the two revolving loan programs was accurate. We did give
            credit for the non-CDBG loans in evaluating the Corporation’s achievements (i.e.,
            job creation objectives) for carrying out economic development activities.
            However, the Corporation officials’ responsibility to originate a reasonable
            amount of CDBG loans cannot be replaced with the non-CDBG loans. In
            addition, regarding the claim for jobs created, the evidence provided did not
            always support that new jobs were created or whether old jobs were refilled.
            Thus, the evidence of job creation was not always sufficient.

Comment 2   The actions of the Corporation officials are responsive to the finding.


Comment 3   Corporation officials agreed to reimburse the $33,000 duplicate drawdown for
            one CDRLF loan back to the Division of Housing and Community Development
            of Essex County.

Comment 4   Regarding converting the CDRLF loan to a grant, Corporation officials stated that
            the feasibility and credit worthiness of the business proposal was reviewed and
            approved by the Corporation’s Legal & Project Finance Committee, the business
            (WISOMMM) had previously received funding of $500,000 from other sources or
            a private bank and the Division of Housing and Community Development of
            Essex County (DHCD) also approved the loan (Exhibit D). Corporation officials
            acknowledge that regulations don’t reference a recoverable grant, but allows for
            grants for special economic development activities. As such, Corporation
            officials also acknowledged that at the time of the HUD OIG audit, the business
            that received the $100,000 CDRLF loan in 2005 had not documented that it had
            achieved the job creation bench mark. However, at the exit conference the
            officials provided documentation that the business submitted evidence (Exhibit F)
            indicating that it had actually generated 3 full time and one part time job for low
            and moderate income people and had met the child care enrollment objectives

                                             27
            (Exhibits G and H). Therefore, Corporation officials did not immediately declare
            the loan in default after the first year, nor officially convert the loan into a grant.
            Accordingly, Corporation officials requested that HUD reconsider the conclusion
            that the CDRLF funding should be reimbursed based on information presented.

            Regarding the credit worthiness of the business (WISOMMM) that received the
            loan, Corporation officials failed to mention in their comments that the business
            was fully leveraged with over $4.5 million in funds borrowed from a bank; and
            that the bank refused to authorize the business to assume any additional debt
            including a loan from the Corporation, because the Corporation would hold liens
            subordinate to the bank against the property owned by the business. As such, the
            Corporation converted the loan into a “recoverable grant loan” without requesting
            any collateral. Further, verification of the documentation provided at the exit
            conference regarding the jobs created (Exhibit F) disclosed that the Corporation’s
            current job creation form cannot sufficiently support whether these jobs were
            newly created or whether they were just refilling existing positions or replacing
            former employees. Since the business did not provide sufficient evidence to show
            that it fulfilled the job creation requirement in accordance with the loan agreement
            the requirements for converting the loan to a grant were not satisfied.
            Accordingly, Corporation officials need to request additional supporting
            documents such as payroll data to verify whether these jobs were created and
            maintained for a reasonable time period. Further, given the highly leveraged
            financial condition of the business, the lack of collateral for the loan, and the fact
            that adequate documentation was not provided to support job creation, it is
            evident that EDC has exposed HUD CDBG funds to high risk, therefore, HUD
            should require the $100,000 loan to be repaid.


Comment 5   Corporate officials stated that EDC had provided technical assistance to over 160
            small businesses for program year 1999 through 2006. Corporate officials also
            stated that services such as providing economic data to small business, marketing
            and educational activities have been categorized as general technical assistance
            and that detailed data on these services had not been requested. At the exit
            conference Corporation officials provided a listing of the businesses assisted
            (Exhibit I) and stated that they provided adequate technical assistance to 161
            small businesses during the program years 1999 through 2006, even though 119
            businesses did not choose to follow up with the Corporation after an initial
            meeting. Corporation officials also claimed that the time spent in meeting with
            the business owners should be credited, even if no loan was generated or business
            plan was completed. Corporate officials stated that nine other projects should be
            recognized as having received extensive technical assistance from EDC but had
            not been reviewed by the auditors because they had been packed in a separate file
            box. Corporation officials also stated that 44 projects interacted with EDC for
            several sessions and should be recognized for receiving technical assistance.

            Review of the documentation provided by Corporation officials revealed that
            technical assistance was provided to 161 businesses for program years 1999

                                              28
            through 2006. The records provided by Corporation officials disclosed that over
            an eight year period a total of 481 hours was spent in assisting 154 businesses,
            which did not generate any measurable results such as business plans or loans. In
            comparison, the seven businesses that we considered received adequate attention
            or assistance obtained 665 staff hours of assistance from the Corporation.
            Therefore, we concluded that Corporation officials did not provide documentation
            to show that significant time was spent in assisting the 154 businesses that did not
            have a measurable output in terms of a loan or business plan and question the
            value of the assistance provided in terms of helping to increase economic
            development. Several requests were made for all the records pertaining to
            technical assistance but files related to general technical assistance were not
            provided. In addition, Corporation officials stated that we did not review nine
            files which were in a separate file box. However, at the exit conference
            Corporation officials agreed that these nine files were never delivered to HUD
            OIG auditors. It is the Corporation’s responsibility to provide all the records
            requested by HUD OIG auditors, especially after numerous requests made by the
            auditors during the field work period. As such the files should be provided to
            HUD Field Office officials as part of the audit resolution process.

Comment 6   Corporation officials explained that they tried various site search methods prior to
            2004, but none of them were effective. However, after 2004 they subscribed to a
            data base of available sites in Essex County that increased the number of requests
            for site search services. Corporation officials agreed to stimulate greater demand
            for this service in the future and to provide more detailed information in the
            Corporation’s annual GPR.

Comment 7   Corporation officials stated that they reported 126 full time equivalent jobs and
            exceed the job creation requirements as stipulated in HUD regulations. In
            addition, the officials indicated that its compilation of job creation data was
            documented in conjunction with HUD and the Division of Housing and
            Community Development of Essex County, and they have not been advised that
            its job creation data collection process needed to be revised. As stated in the
            report, the current form used by Corporation officials to collect job creation data
            cannot demonstrate that the new person hired is filling a new position or replacing
            a former employee, therefore, the reported 126 jobs created might not be accurate.
            As a subgrantee of HUD CDBG program, the Corporation is responsible to ensure
            that the information reported to HUD is accurate. Thus, additional documentation
            is needed to show that the 126 jobs listed as created were not just the refilling of
            already existing positions, but were actual jobs created for a reasonable period of
            time, as required. Once these documents are received HUD can make an
            eligibility determination during the audit resolution process.

Comment 8   In justifying its $1.6 million CDBG administrative expenses incurred,
            Corporation officials stated that for program years 1999 through 2006, the
            Corporation closed 3 CDBG and 20 non-CDBG loans and created 126 full time
            equivalent jobs to low to moderated income people. Corporation officials stated
            all disbursements were properly supported by vouchers and invoices, which were

                                             29
               submitted to the Division of Housing and Community Development of Essex
               County. Corporation officials stated that they would modify its budget
               presentation to show how costs are expended per activity that they had complied
               with directions from the Division regarding budget and annual expenditures.
               However, since the Corporation only generated 3 CDBG-financed loans, provided
               technical assistance to 7 businesses, and carried out limited site search services
               for businesses during the audit period, we disagree that the Corporation’s
               administrative costs were justified. In addition, Corporation officials'
               responsibility to generate a reasonable amount of CDBG loans cannot be replaced
               with the 20 non-CDBG loans it originated during the program years 1999 to 2006.

Comment 9      Corporation officials stated that they have managed the CERP and CDRLF
               accounts in a satisfactory manner, records have been reconciled and are consistent
               with bank statements and ledgers, and the Division of Housing and Community
               Development of Essex County did not expressed any major concerns.
               Corporation officials stated that they would continue to send summary
               information to the Division of Housing and Community Development and other
               requested information to ensure the accounts are managed correctly. We disagree
               with Corporation officials because it did not adequately maintain records to
               support the initial funding or the establishment of the two revolving accounts.
               Also, the ledger provided by Corporation officials disclosed accounting errors and
               CDBG funds still remained in the non-CDBG account (see Comment 10). In
               addition, as stated in the audit report the County issued a noncompliance
               monitoring report in 2005, which indicated the weakness of the Corporation’s
               financial system.

Comment 10 Corporation officials acknowledged that there were some clerical errors in
           depositing CDRLF funds prior to 1995, but that improved staff diligence and
           software have diminished the potential errors. However, some loan payments
           were also not properly recorded and some loan repayments had been deposited
           into the non-CDBG financed revolving loan account. In the Corporation’s later
           detailed response to the audit, Corporation officials identified that interest and late
           fees of $1,379 still remained in its non-CDBG financed program and agreed to
           reimburse these funds to the CDBG-financed revolving loan fund account. The
           reimbursement of these funds should be addressed as part of the audit resolution
           process with HUD.

Comment 11 Corporation officials stated that they had provided the Division of Housing and
           Community Development of Essex County the financial records about program
           income, through GPR reports and bank statements. However, Corporation
           officials did not determine the actual amount of the program income.
           Nevertheless Corporation officials agreed to work with HUD and the County to
           develop a system to deliver this information in a concise, efficient manner.

Comment 12 Corporation officials indicated that in regards to the statement that “EDC incurred
           $180,000 in CDBG expenses and more than $1.5 million of non-CDBG
           expenses” that the Corporation had carried out a non-CDBG financed training

                                               30
program with the total funding of $1.566 million, of which the Corporation
obtained approximately $142,000 for operating costs. The Corporation’s
financial statements for program year 2005 indicated that the Corporation
incurred more than $180,000 of CDBG expenses and had over $1.5 million of
non-CDBG expenses. Our audit revealed that the Corporation did not have a
proper cost allocation method to allocate salaries and overhead among programs.
Corporation officials agreed to modify their budget submissions in order to
facilitate evaluation of performance against the funds provided for each activity,
and develop systems and procedures to ensure compliance with HUD guidelines
which is responsive to the finding.




                                31