oversight

The City of Newburgh, New York, Did Not Always 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 2009-02-24.

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

                                                               Issue Date
                                                                  February 24, 2009
                                                               Audit Report Number
                                                                  2009-NY-1008




TO:        Vincent Hom, Director, Community Planning and Development, 2ADM1



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

SUBJECT: The City of Newburgh, New York, Did Not Always Administer Its Community
         Development Block Grant Program in Accordance with HUD Requirements

                                  HIGHLIGHTS

 What We Audited and Why

            We audited the City of Newburgh, New York (City), regarding its administration
            of its Community Development Block Grant (CDBG) program because of issues
            identified during our initial audit of the City’s Section 108 Loan Guarantee
            program. The objective of our audit was to determine whether the City (1)
            administered its CDBG program effectively, efficiently, and economically in
            accordance with applicable rules and regulations, and (2) expended CDBG funds
            for eligible activities that met a national objective of the program.

 What We Found
            The City did not always carry out its activities effectively, efficiently, and
            economically in compliance with HUD regulations. Further, it expended CDBG
            funds for activities that did not meet a national objective of the program.
            Specifically, the City disbursed CDBG program funds for questionable
            administrative expenditures. It routinely charged certain costs, including wages,
            fringe benefits, and other overhead costs, to the CDBG program without adequate
            support or detail. Consequently, it could not ensure that only reasonable and
            necessary administrative costs were charged to its CDBG program.
           The City also did not establish adequate administrative controls to ensure that
           CDBG program activities administered by the City or though a subrecipient
           complied with applicable HUD regulations. Specifically, it could not adequately
           demonstrate that CDBG program funds were used for eligible and necessary
           activities or that funded activities achieved program objectives. Consequently,
           the City’s ability to administer its programs efficiently and effectively, monitor
           the activities of a subrecipient, and ensure that CDBG program objectives were
           met was diminished.

           In addition, the City did not establish adequate administrative controls to ensure
           that contracts were properly procured and executed and that the services to be
           provided were clear to ensure compliance with applicable regulations. As a
           result, it awarded a contract for consulting services without ensuring compliance
           with federal procurement requirements, and the CDBG program was charged for
           the costs of the contract without evidence that all of the contract services provided
           for related to the City’s CDBG program. Consequently, program funds may have
           been expended for services that were not necessary or reasonable.

What We Recommend
           We recommend that the Director of HUD’s New York Office of Community
           Planning and Development instruct the City to (1) provide supporting
           documentation to justify the eligibility of $894,793 in questionable CDBG
           disbursements or reimburse the program from nonfederal funds any amounts not
           supported, (2) establish procedures to ensure adequate monitoring of subrecipient-
           administered activities, and (3) establish procedures to ensure compliance with
           CDBG program requirements.

           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 discussed the results of our review during the audit, provided a copy of the
           draft report to City officials, and requested their comments on January 7, 2009.
           We held an exit conference on January 14, 2009, and City officials provided their
           written comments on January 28 2009, at which time they generally disagreed
           with our 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.




                                             2
                            TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit
      Finding 1: Questionable Administrative Costs Were Charged to the CDBG       5
                 Program

      Finding 2: The City’s Administration of Program Activities Had Weaknesses   7
      Finding 3: Unsupported Costs Were Incurred for Consulting Services
                                                                                  11


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 City of Newburgh (City) is a CDBG entitlement recipient that administers more than
$800,000 in CDBG funds annually. These funds are available to support a variety of activities
directed at improving the physical condition of neighborhoods by providing housing or public
improvements and facilities, creating employment, or improving services for low- and/or
moderate-income households.

In addition to programs administered in house by the City’s Department of Community
Development, the City works with some outside nonprofit organizations to carry out its CDBG-
funded programs. It is responsible for overseeing, monitoring, and supporting its CDBG
activities. The files and records related to the City’s CDBG program are maintained in City Hall,
located at 83 Broadway, Newburgh, New York.

We selected the City for audit based on issues identified during our review of the City’s Section
108 Loan Guarantee program, audit report number 2009-NY-1001, issued on November 15,
2008. The objectives of our audit were to determine whether the City (1) administered its CDBG
program effectively, efficiently, and economically in accordance with applicable rules and
regulations, and (2) expended CDBG funds for eligible activities that met a national objective of
the program.




                                                4
                                RESULTS OF AUDIT

Finding 1: Questionable Administrative Costs Were Charged to the
           CDBG Program
Contrary to HUD requirements, the City disbursed CDBG program funds for questionable
administrative expenditures. Specifically, it routinely charged certain costs, including wages,
fringe benefits, and other overhead costs, to the CDBG program without adequate supporting
documentation. We attribute these deficiencies to the City’s failure to implement controls over
disbursements that were sufficient to ensure compliance with applicable regulations.
Consequently, the City could not ensure that only reasonable and necessary administrative costs
were charged to its CDBG program.


 Federal Requirements
              Regulations at 24 CFR (Code of Federal Regulations) 85.22(b) require the City to
              comply with the cost principles of Office of Management and Budget (OMB)
              Circular A-87, “Cost Principles for State, Local, and Indian Tribal Governments.”
              Attachment A, paragraph C(1)(a), requires that all costs be necessary and reasonable
              for proper and efficient performance and administration of federal awards, and
              paragraph C(1)(j) requires that all costs be documented. Therefore, the City is
              required to maintain records sufficient to document the reasonableness and necessity
              of expenditures. In addition, 24 CFR 85.22 requires that accounting records be
              supported by source documentation such as payrolls, timesheets, and attendance
              records.

 Administrative Costs Not
 Adequately Supported


              Contrary to regulations, the City routinely charged certain costs, including wages,
              fringe benefits, and other overhead costs, to the CDBG program without adequate
              support or detail. Specifically, it did not have adequate documentation to support its
              method of allocating costs, including salaries, fringe benefits, and related overhead
              costs for its Planning Department staff, whose duties included program areas
              administered by the City’s Industrial Development Agency (Agency). Instead, the
              City merely listed selected employees by name and title and the percentage of their
              time to be charged to its CDBG program or other Agency-related activities without
              detailed timesheets or a time study to support the percentages used to allocate the
              wages. Moreover, during the period January through December 2007, the City
              charged its CDBG program the entire costs of these employees. According to the
              City’s comptroller, the Agency had routinely reimbursed the CDBG program for
              employees’ time charged to the Agency but paid from CDBG program funds.
              However, over the past several years, the Agency’s funding sources had diminished,

                                                5
             and it had been unable to totally reimburse the CDBG program. As of May 2008,
             the City’s general ledger report detailed $558,344 due to the CDBG program from
             the Agency for employee wages, fringe benefits, and other overhead costs allocated
             to the Agency but paid from CDBG program funds.


Conclusion

             The City lacked an acceptable cost allocation plan and did not have adequate time
             distribution records to account for the salaries charged to its CDBG program.
             Thus, its controls over administrative costs did not ensure that the costs incurred
             were reasonable and necessary expenses. The lack of controls allowed
             questionable administrative costs to be charged to the CDBG program. Contrary
             to applicable requirements, the City lacked documentation to show that $558,344
             in CDBG funds used to pay for administrative costs was for reasonable and
             necessary expenditures.

Recommendations

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

             1A. Provide documentation to justify the $558,344 in unsupported administrative
                 costs incurred, so that HUD can make an eligibility determination, and
                 reimburse from nonfederal funds any unsupported costs determined to be
                 ineligible.

             1B. Implement procedures and effective disbursement controls to ensure that all
                 transactions charged to the CDBG program are properly incurred, supported,
                 and in compliance with applicable regulations.




                                              6
Finding 2: The City’s Administration of Program Activities Had
           Weaknesses
The City’s administration of its program activities had weaknesses. Specifically, the City could
not adequately demonstrate that CDBG program funds amounting to $230,240 were used for
eligible and necessary activities or that the funded activities achieved program objectives.
Contrary to HUD regulations, the City did not establish adequate administrative controls to
ensure that CDBG program activities administered directly by the City or through a subrecipient
complied with applicable HUD regulations. Consequently, its ability to administer its programs
efficiently and effectively, monitor the activities of a subrecipient, and ensure that CDBG
program objectives were met was diminished.


To determine the adequacy of the City’s administration and the eligibility of costs incurred, we
selected five CDBG program activities for review. The activities selected were administered during
the City’s fiscal year 2005 through 2007 program years. For each activity reviewed, administrative
weaknesses were identified that resulted in costs having been incurred that were unsupported.
Details regarding the review of each activity are discussed below.

 City Park Improvements


               During fiscal year 2006, the City used $60,000 in CDBG funds to reimburse its
               municipal general expense account for park improvements originally budgeted in
               fiscal year 1998. Specifically, in fiscal year 2001, the City used municipal funds
               for a $430,000 park improvement project. The project consisted of improvements
               to a soccer field and playground. In August 2006, after being warned by HUD
               that CDBG funds might be recaptured due to slow progress and lack of capacity,
               the City reimbursed its municipal general expense account for a portion of the
               project’s cost, using $60,000 in CDBG funds. Our review found no evidence to
               support that federal procurement rules and labor laws, such as Davis Bacon, were
               followed or that the project was monitored for compliance with national
               objectives. The only support for the expenditure consisted of a one-page
               document showing the breakdown of the contractor’s costs for the project. In
               addition, the timing of the activity raises concerns about citizen participation in
               the approval of this project since it was completed and paid for in 2001, five years
               before the use of CDBG funds in 2006. Any citizen participation for this activity
               would have had to occur in 1998. Paragraph 570.200(a)(2) of the CFR requires
               the City to ensure and maintain evidence that each of its CDBG-funded activities
               meets one of the broad national objectives of the CDBG program. Since the
               activity was not initially a CDBG activity, the City did not maintain evidence
               from 2001 to 2006 that the activity met a national objective and had a community
               benefit. Moreover, the City did not revise its consolidated plan as required; thus,
               we considered the use of $60,000 in CDBG funds to be unsupported.



                                                7
    Property Acquisition


             In August 2006, the City expended $64,494 in CDBG funds to reimburse its
             municipal general expense account for a property acquisition activity. In fiscal year
             2005, the City purchased a building for $150,000 from a local nonprofit organization.
             The building, located adjacent to a park, was to be used for park-related services and
             conference space and as an information center. According to City records, the
             purchase was funded with equipment contingency funds. However, as noted above,
             upon receiving notice from HUD that CDBG funds might be recaptured, the City
             reimbursed its municipal general expense account using $64,494 in CDBG funds.
             Our review concluded that the use of the $64,494 in CDBG funds was questionable
             and considered unsupported since there was no evidence that the City followed any of
             the property acquisition requirements, such as documenting an appraisal for the
             $150,000 purchase price, in accordance with 49 CFR 24.102.1 In addition, there was
             no evidence that there had been a determination of whether the activity addressed a
             national objective based on the planned use of the property after the acquisition as
             required by 24 CFR 570.208(d).2 In addition, the City had not revised its
             consolidated plan and, more than three years after the building was purchased, it
             remained vacant and unused with no planned use.


    Ritz Theatre Repairs

                  The CDBG program was charged for costs reimbursed to a subrecipient for
                  improvements to a local theater that were not supported by adequate
                  documentation. Specifically, the City did not monitor the activity to ensure that
                  costs were eligible before reimbursement, and documentation submitted by the
                  subrecipient showed that the costs were not adequately supported. For example,
                  CDBG funds that were to be used for new theatre seating were instead used for
                  interior demolition work and architect design costs. The City disbursed the funds
                  without evidence supporting the propriety and reasonableness of these costs and
                  without the benefit of competitive bidding or detailed work specifications.
                  Moreover, the project files contained no evidence of monitoring by the City as
                  required by 24 CFR 85.40. Although the City demonstrated a national objective
                  for the theatre repairs, the CDBG funds may not have been used in an efficient
                  and economical manner and in accordance with program objectives. Accordingly,
                  we considered the use of $50,000 in CDBG funds to be unsupported.


1
  49 CFR Part 24, Uniform Relocation Assistance and Real Property Acquisition for Federal and Federally Assisted
  Programs, provides that before initiation of negotiations, the real property to be acquired shall be appraised. When
  an appraisal is determined to be unnecessary, a waiver valuation shall be prepared.
2
  24 CFR 570.208(d) provides that for acquisition of real property, a preliminary determination of whether the
  activity addresses a national objective may be based on the planned use of the property after acquisition. A final
  determination shall be based on the actual use of the property, excluding any short-term temporary use.

                                                          8
Newburgh Community and
Neighborhoods

          The City established the Newburgh Community and Neighborhoods activity as
          part of its 2007 CDBG program year. The activity, with a budget of $50,000, was
          earmarked to support the development and implementation of targeted
          neighborhood organizations by providing revitalization strategies and activities to
          serve the City’s low- and moderate-income areas. At the time of our review, the
          City had expended $28,586 in payroll costs for a special projects coordinator,
          employed within the office of the city manager, to administer the activity on
          behalf of the City. Analysis of the project activity folder and review of the related
          disbursement documentation showed that support for the costs consisted of the
          summary payroll records for the City employee. The project file contained no
          documentation showing what was accomplished under this activity, what services
          were provided, or the number of individuals served by this activity. OMB
          Circular A-87 requires that costs be necessary, reasonable, and adequately
          supported; therefore, the $28,586 was considered unsupported. Moreover, based
          on the unsupported use of program funds for this activity, the remaining
          unexpended budget balance of $21,414 should be reprogrammed for other eligible
          uses and put to better use.


Improvements to City-Owned
Properties

         The City established a handicap accessibility improvement activity, with a budget
         of $150,000, as part of its 2005 CDBG program year. At the time of our review, the
         City had expended $93,238 for this activity. Analysis of the project activity
         documentation showed that there were three disbursements made under this activity
         in October 2006. Two of these disbursements, totaling $27,160, represented costs
         that were questionable regarding their eligibility for CDBG funding and, therefore,
         were considered unsupported pending an eligibility determination. Specifically,
         $20,000 in CDBG funds was used to reimburse the City for non-handicap-related
         renovation work performed at City Hall in 2004. In addition, $7,160 in CDBG
         funds was expended to provide weather stripping and new entry doors at various
         City-owned buildings. Therefore, the costs incurred should be characterized as
         general government and maintenance expenses. According to CDBG regulations at
         24 CFR 570.207(a)(2), expenses required to carry out the regular responsibilities of
         the unit of general local government are not eligible for assistance under this part;
         therefore, a total of $27,160 was questioned. In addition, the City stated that it had
         no further projects planned for this activity: thus, the remaining unexpended budget
         of $56,762 should be reprogrammed for other eligible CDBG program activities.



                                            9
Conclusion

         The City did not establish adequate controls to ensure that costs were eligible and
         necessary before being charged to the CDBG program. Consequently, it expended
         $230,240 ($60,000 + $64,494 + $50,000 + 28,586 + 27,160) for unsupported costs,
         which diminished its ability to effectively and efficiently administer CDBG funding
         for program activities. In addition, $78,176 ($21,414 + $56,762) in unexpended
         funds would result in a cost savings if these amounts were reallocated to other
         eligible activities.

Recommendations

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

             2A. Provide documentation to justify the $230,240 ($60,000 for the City park
                 improvements, $64,494 for the property acquisition, $50,000 for the Ritz
                 theatre repairs, $28,586 for the Newburgh Community and Neighborhoods
                 activity, and $27,160 for the improvements to City-owned property) in
                 unsupported costs incurred so that HUD can make an eligibility
                 determination. Any unsupported costs determined to be ineligible should be
                 reimbursed from nonfederal funds.

             2B. Reprogram the remaining unexpended balance of $78,176 ($21,414 for the
                 Newburgh Community and Neighborhoods activity and $56,762 for the City-
                 owned property improvement activity) and put these funds to better use for
                 other eligible program activities.

             2C. Establish adequate procedures to improve the administration of program
                 activities including the proper monitoring and maintenance of program
                 activity files.




                                            10
Finding 3: Unsupported Costs Were Incurred for Consulting Services
The City awarded a contract for consulting services without ensuring compliance with federal
procurement requirements, and the CDBG program was charged for the costs of the contract
without evidence that all of the contract services provided for related to the City’s CDBG
program. These deficiencies are attributed to a lack of adequate administrative controls to ensure
that contracts were properly procured and executed and that services provided were applicable to
the CDBG program. As a result, program funds may have been expended for services that were
not necessary or reasonable. Accordingly, payments totaling $106,209 were considered to be
unsupported pending a HUD eligibility determination.


A review of the payments made to the consultant included a review of the contract services and the
documentation supporting the payments. The review was made to determine whether the payments
were reasonable, necessary, and properly documented and in conformance with the contract and the
CDBG program regulations. The deficiencies found during the review are described in the
subsections that follow.

 Method of Procurement Not
 Substantiated


               Regulations at 24 CFR 85.36 provide in part that the grantee shall maintain
               sufficient records to detail the procurement history. At a minimum, the records
               will include the grantee’s rationale for the method of procurement, selection of
               contract type, contractor selection or rejection, and the basis for the contract price.
               In addition, a cost analysis is required for any sole source procurement.

               Despite these requirements, the City did not maintain the required documentation
               to substantiate its rationale for the method of procurement, selection of contractor
               and contract type, or the basis for the contract price.

 Payments Made without
 Adequate Supporting
 Documentation


               Review of the supporting documentation for the consultant services disclosed that
               the services were paid for before the execution of a contract. On January 31,
               2005, the City received a proposal from the consultant detailing proposed services
               for assisting the City with the completion of its HUD five-year consolidated plan
               in line with the City’s stated deadline of April 15, 2005. Despite the City’s stated
               deadline, the five-year plan was not submitted to HUD until August 15, 2005.

               The proposal also included preliminary work on a sustainable community master
               plan. The master plan integrated the city planner’s priorities, collected data,

                                                 11
             sustainable planning, and citizen involvement, along with the City’s consolidated
             plan. The total cost for the proposed consulting services was $22,860, which
             included $13,600 related to the preparation of the City’s HUD consolidated plan.
             On October 10, 2005, the City and its consulting firm entered into a contract for
             $107,030, which provided for the consultant to assist in the implementation of a
             sustainable community master plan.

             Our review of the invoices paid in connection with the initial proposal and the
             contract showed that $26,902 in program funds was paid to the consultant during
             the period June to September 2005, which was before the execution of the
             contract in October 2005. During the period March to December 2006, the
             consultant was paid an additional $79,307 from program funds. The consulting
             firm was paid a total of $106,209 from CDBG program funds; however,
             examination of the invoices submitted for payment by the consultant determined
             that the payments were not adequately supported. The invoice billings submitted
             were vague and unclear as to the actual services provided in support of the City’s
             CDBG program. Generally, the invoices did not contain adequate descriptions
             identifying the services performed or the time spent performing the services.
             Below is a summary of the unsupported payments in question.

        Date              Voucher        Amount     Check   Description
                          number                   number
        June 21, 2005     53324          $393.08    6561    Sustainable master plan
        June 23, 2005     53433         9,095.76    6567    HUD consolidated plan & leadership
        Sept. 1, 2005     61190         4,375.00    6644    Tuition per person for citizen stakeholder Training
        Sept. 14, 2005    61557        13,038.38    6663    Stakeholder training, expenses & consolidated plan
        Mar. 10, 2006     67471         6,798.26    6865    Planning support services
        Mar. 17, 2006     67728         9,172.85    6873    Planning support services
        Mar. 27, 2006     67889         5,080.00    6887    Master planning process/planning support services
        May 12, 2006      68844         7,959.37    6936    Planning support services
        June 1, 2006      69230         7,000.00    6959    Planning support services
        July 14, 2006     70179         9,364.58    7002    Planning support services
        July 19, 2006     70309         4,575.38    7012    Planning support services
        Sept. 12, 2006    71449           429.46    7067    Planning support services
        Sept. 12, 2006    71716         7,884.68    7078    Planning support services
        Nov. 21, 2006     72894        13,389.44    7135    Planning support services
        Dec. 19, 2006     73482         7,652.61    7164    Planning support services
               Total                 $106,208.85


Conclusion

             The City did not establish adequate administrative controls to ensure that
             contracts were properly procured and executed and that services provided were
             applicable to the CDBG program. As a result, $106,209 in unsupported costs for
             consulting services was charged to the CDBG program without assurance that the
             costs were necessary and reasonable and met a national objective.



                                             12
Recommendations

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

          3A. Provide documentation to justify the $106,209 in unsupported costs incurred
              so that HUD can make an eligibility determination. Any unsupported costs
              determined to be ineligible should be reimbursed from nonfederal funds.

          3B. Implement adequate procurement procedures to ensure that all future
              procurement activities are supported by sufficient records to detail the
              procurement history as required by 24 CFR Part 85.




                                           13
                          SCOPE AND METHODOLOGY

Our review focused on whether the City complied with HUD regulations, procedures, and
instructions related to the administration of its CDBG program. To accomplish our objectives, we
reviewed relevant HUD regulations, guidebooks, and files and interviewed HUD officials to obtain
an understanding of and identify HUD’s concerns with the City’s operations. In addition, we
reviewed the City’s policies, procedures, and practices and interviewed key personnel responsible
for the administration of the City’s CDBG program.

For fiscal years 2004 through 2007, the City received approximately $3.7 million in CDBG funding,
and at the time of our review, the City had expended $2.7 million on CDBG activities. We selected
a nonstatistical sample of nine activities administered by the City or its subrecipient for review from
the City’s consolidated annual performance and evaluation reports. We reviewed the expenditures
and related supporting documents for the activities to determine whether the expenditures met
CDBG requirements, were reasonable, and complied with the national objectives. We also
examined the City’s internal controls over its CDBG program.

The review covered the period January 1, 2004, through March 31, 2008, and was extended as
necessary. We performed audit work from April through August 2008 at the City’s offices in
Newburgh, New York. 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 objectives. 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 achieved:

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

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



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

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

                      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.

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

              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 that the following items are significant weaknesses:

             The City did not have adequate controls over its program operations when it did
             not establish adequate administrative controls to ensure that program activities
             administered by the City or through a subrecipient would meet a national
             objective of the CDBG program (see finding 2).

             The City did not have adequate controls over compliance with laws and
             regulations, as it did not always comply with HUD regulations while
             disbursing CDBG funds (see findings 1, 2, and 3).

             The City did not have an adequate system to ensure that resources were properly
             safeguarded when unsupported costs were charged to the program and when it
             did not maintain adequate supporting documentation (see findings 1, 2, and 3).




                                          16
                                          APPENDIXES

Appendix A

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

              Recommendation        Unsupported            Funds to be put
                     number                        1/      to better use 2/

                             1A         $558,334
                             2A         $230,240
                             2B                            $78,176
                             3A         $106,209
                            Total       $894,793           $78,176


1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.

2/   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. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest subsidy costs not incurred by implementing recommended
     improvements, avoidance of unnecessary expenditures noted in preaward reviews, and
     any other savings that are specifically identified. In this instance, if the City implements
     our recommendations of taking appropriate action to reprogram unexpended activity
     balances, funds can be put to better use for other eligible activities.




                                              17
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1



Comment 2




                         18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation   Auditee Comments



Comment 2


Comment 1


Comment 3




Comment 4




Comment 5




Comment 6




                         19
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation   Auditee Comments



Comment 6



Comment 7



Comment 8




Comment 9




Comment 10

Comment 11


Comment 12




                         20
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation   Auditee Comments



Comment 12




Comment 12



Comment 13




Comment 14




                         21
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation   Auditee Comments




Comment 15




                         22
                         OIG Evaluation of Auditee Comments


Comment 1   Officials for the City confirm that the support staff’s cost for activities
            administered by the City’s Industrial Development Agency (IDA) were charged to
            the CDBG program, and they state that the practice was discontinued as of
            December 31, 2007. We observed that the expense ledger does not show an
            increase in the amount due from the IDA after December 2007. Nevertheless,
            HUD field officials should verify this.

Comment 2   Officials for the City state that the majority of the unsupported expenditures have
            been reimbursed to the CDBG program and they provided documentation at the
            exit conference to support that $388,826 of the $558,344 in unsupported
            administrative costs were reimbursed to the CDBG program on December 18,
            2008. We have reviewed the documentation and find it acceptable; however,
            since the reimbursement occurred because we brought the issue to the attention of
            officials during the audit, the finding will remain. Further, the intention of
            officials to document that the remaining funds were properly expended will be
            addressed during the audit resolution process, at which time the officials should
            inform HUD of the payment(s) and subsequent results in order to address the
            finding recommendation.

Comment 3   City officials contend that procedures and controls have been implemented to
            ensure that all transactions charged to the CDBG program are in compliance with
            HUD regulations. In addition, time sheets have been developed and put in place,
            as of January 1, 2009, to be utilized by all staff funded under the CDBG program.
            We have reviewed the copies of the timesheets provided to us during the exit
            conference and conclude that they are sufficient. The actions of the officials are
            responsive to our recommendations

Comment 4   Officials for the City disagree with the finding pertaining to the city park
            improvements. The officials contend that it is established operating procedure to
            follow the Wicks Law, Davis-Bacon, and all other applicable laws, rules and
            regulations pertaining to public bidding and award of contracts. In support of
            their assertion, the officials submitted a copy of the common council resolution,
            dated March 27, 2000, which authorized the award and execution of the contract
            for the park improvement project as evidence that the bidding and procurement
            process was properly followed. However, we have reviewed the common council
            resolution and have determined that contrary to the City’s assertions, it does not
            provide the evidence to support that federal procurement rules and labor laws
            were followed.

Comment 5   Officials for the City contend that the park improvement activity was always
            intended as a CDBG eligible activity and was carried out on a reimbursement
            basis from the CDBG program. Since the activity was included in the 1998
            CDBG budget and subjected to required public review at that time, the officials
            further contend that no additional public review process was required and the

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            Consolidated Plan did not require revision. Lastly, officials state that the park is
            within an income-eligible community and therefore meets the national objectives
            criteria. However, in reviewing the common council resolution referred to above,
            there was no mention of the project being paid for or reimbursed from CDBG
            program funds. In fact, in the council minutes supporting the resolution, it is
            noted that the funds were tucked away to go ahead with the project. Further, the
            City did not reimburse its municipal general expense account for a portion of the
            project’s cost until five years after the project was completed and after it was
            warned by HUD that the CDBG funds might be recaptured due to slow progress
            and lack of capacity. Although the park is located within an income-eligible
            census tract, it does not change the facts of the finding. As such, we remind the
            City of the requirements contained at 24 CFR Part 91.505(a)(2), which requires
            the City to amend the consolidated plan to carry out an activity not previously
            described in the action plan. Since the City did not include the park improvement
            in its 2006 action plan, an amendment to the consolidated plan would have been
            required. Additionally, paragraph 91.505(b) provides that amendments to the
            consolidated plan are subject to a citizen participation process.


Comment 6   Officials for the City contend that an appraisal of the property in question was
            required and received from the City Assessor in advance of the property
            acquisition, and provided a copy of the appraisal along with their comments for
            our review. In addition, as reasoned above, the officials contend that a revision of
            the consolidated plan was not required. Nevertheless, the contention of the
            officials is inaccurate and not supported by the facts. During the audit, we
            reviewed the project files and found no evidence to support the property
            acquisition. City officials were unable to provide us the property appraisal until
            now. Our review noted that the common council resolution supporting the
            property acquisition was dated May 9, 2005, and the property was purchased by
            the City on September 15, 2005; however, the property appraisal received from
            the City Assessor is dated September 28, 2005, more than four months after the
            acquisition was approved by the common council. Further, since the officials for
            the City did not include the property acquisition in its 2006 action plan, an
            amendment to the consolidated plan was required. Moreover, the officials do not
            contest the fact that there was no evidence to show that the activity addressed a
            national objective of the CDBG program, since there was no planned use for the
            property and the building remains vacant and unused, more than three years after
            its purchase.

Comment 7   Officials for the City state that the use of CDBG funds for demolition and related
            work at the Ritz theater is an approved use. Further, the officials suggest that the
            costs incurred for demolition and related work on the theater was funded by and
            conducted under the rules and regulations of the New York State Division of
            Housing and Community Renewal. However, these statements are not responsive
            to the issues identified in the report. The activity in question was funded under
            the CDBG program, thus, the officials were required to comply with the rules and
            regulations of the Department of Housing and Urban Development. The CDBG

                                             24
              funds were disbursed without the evidence supporting the propriety and
              reasonableness of the costs and without benefit of competitive bidding or detailed
              work specifications. Moreover, our review of the project files found no evidence
              of monitoring by the City as required by 24 CFR 85.40. Consequently, the City
              has not demonstrated compliance with HUD CDBG rules and regulations, as
              required.

Comment 8     Officials for the City disagree with the finding pertaining to the Newburgh
              Community and Neighborhoods (CAN) program, and contend that the records
              reflecting the accomplishments of the program were provided to us during and
              after the audit. According to the officials, $20,500 in funds was reprogrammed
              from this activity in November 2008 during the regular course of budget
              development and not in response to our audit. However, the documentation
              provided during the audit consisted only of summary payroll records for the City
              employee responsible for administering the program. Further, we reviewed the
              documentation provided after the audit and determined that it was not adequate to
              show exactly what was accomplished under this activity, what services were
              provided, or the number of individuals served by this activity, as required. Thus,
              the $28,586 in payroll costs remains unsupported. In addition, during the
              resolution process, officials should inform HUD as to whether the $20,500
              represents the total funding to be reprogrammed for this activity, as recommended
              in our report.

Comment 9     Officials for the City disagree with the finding pertaining to the improvements to
              City-owned properties. Specifically, the officials assert that the new entry doors
              and weather stripping at various City-owned buildings were to accommodate
              persons with disabilities. Further, officials state that $76,000 in funds was
              reprogrammed from this activity in November 2008 during the regular course of
              budget development and that the audit report is in error as only $74,000 in CDBG
              funds were expended for this activity. However, the documentation provided by
              the officials during the audit do not support that the new entry doors and weather
              stripping performed at various City-owned buildings was to accommodate
              persons with disabilities. If supporting documents are now available, it will be
              reviewed by the HUD field office during the audit resolution process. Further,
              during the audit resolution process, City officials should inform HUD as to
              whether the $76,000 reprogrammed from this activity represents the total funding
              to be reprogrammed. Lastly, in direct contrast to the allegation that the audit
              report is in error, we remind the officials that the audit results are based on our
              review and analysis of the City’s books and records. The City’s 2006 CDBG
              program year expense ledger details expenditures for this activity totaling
              $93,238.


Comment 10 Officials for the City provided documentation which they believe justifies the
           unsupported costs and meets the recommendation detailed. We have reviewed all
           of the documentation provided to us during and after the audit and found that it
           does not provide evidence that the City ensured that $230,240 in costs were

                                              25
               eligible and necessary before being charged to the CDBG program. Specifically,
               $60,000 for park improvements, $64,494 for property acquisition, $50,000 for
               theater repairs, $28,586 for the CAN activity, and $27,160 for improvements to
               City-owned property are still considered unsupported for the various reasons cited
               above in Comments 4 through 9. Thus the recommendation will remain.

Comment 11 Officials for the City contend that the current fiscal year 2009 budget, adopted in
           November 2008, includes $96,500 in funds reprogrammed as the result of regular
           budget development and not in response to this audit. During the audit resolution
           process, the City should provide the required documentation to HUD. Upon
           concurrence from HUD, this would appear to address this recommendation.

Comment 12 Officials for the City detail the additional internal institutional controls they have
           implemented to address the concerns raised in the audit. The official’s actions are
           responsive to our recommendations.

Comment 13 Officials for the City disagree with the contention of the audit that the
           procurement process by which the consultant was retained was improper.
           Specifically, the officials assert that the law of the State of New York is clear that
           the public bidding process requirement of general municipal law and other rules
           and regulations do not apply to the retention of professional services. Further, the
           officials state that under the City Charter, Municipal Home Rule Law of the State
           of New York and other applicable laws, the adoption of the resolution authorizes
           the expenditure of funds and constitutes the City’s agreement to be bound by the
           contract. Contrary to the official’s assertions, regulations at 24 CFR (Code of
           Federal Regulations) 85.36 is the authority for local governments to use when
           procuring consulting services under an independent contractor relationship, as
           provided at 24 CFR 570.502 (a) (12). Cities can use their own procurement
           procedures which reflect applicable State and local laws and regulation, if the
           procurement conforms to applicable Federal law and the standards identified in
           CFR 85.36. Accordingly, as detailed in the audit report, the City did not maintain
           the required documentation to substantiate its rational for the method of
           procurement, selection of contractor and contract type, or the basis for the
           contract price.

Comment 14 Officials for the City disagree that the payments for the consulting services were
            made before an agreement was in place. They state that no funds are expended
           unless mandated procedures are followed. They further state that the City
           council’s adoption of the resolution authorized the expenditure for the consultant,
           and that no prior audit identified premature expenditures. However, our review
           disclosed that although the consultant’s contract was not executed until October
           2005, payments for consultant services were made from June 2005 through
           September 2005 without an executed contract (see chart on page 12). Moreover,
           the comments of the officials do not address the fact that the City could not
           demonstrate that the services provided were applicable to the CDBG program.
           Accordingly, the costs incurred for the activity are properly classified as
           unsupported.

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Comment 15 Officials for the City contend that they have shown that all expenditures met
           national objectives; controls are in place to satisfy all HUD regulations and
           requirements pertaining to disbursements; and all costs and expenses are properly
           supported with adequate and sufficient documentation. However, in contrast with
           the City’s beliefs our audit work concluded that the City did not comply with
           CDBG program rules and regulations, did not adequately support CDBG
           expenditures with adequate and sufficient documentation, and could not
           adequately demonstrate that the expenditures met a national objective of the
           CDBG program. As such, consultation with HUD officials during the audit
           resolution process is necessary to resolve our concerns. Therefore, we have not
           adjusted the findings to the audit report.




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