oversight

The Union County Consortium, Elizabeth, New Jersey, Had Administrative Weaknesses in Its Community Development Block Grant Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-05-15.

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

                                                                 Issue Date
                                                                 May 15, 2009
                                                                 Audit Report Number
                                                                 2009-NY-1010




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



FROM:      Edgar Moore, Regional Inspector General for Audit, New York/New Jersey, 2AGA



SUBJECT: The Union County Consortium, Elizabeth, New Jersey, Had Administrative
         Weaknesses in Its Community Development Block Grant Program


                                HIGHLIGHTS

 What We Audited and Why

             We performed an audit of the Union County Consortium’s (County)
             administration of its Community Development Block Grant (CDBG)
             program as part of the Office of Inspector General’s (OIG) strategic plan
             goals to improve the U.S. Department of Housing and Urban
             Development’s (HUD) fiscal accountability. We selected the County
             based on its administration of more than $5 million in CDBG funds
             annually, its low HUD Community Planning and Development 2008 risk
             assessment score, and because the County had not received on-site
             monitoring from HUD since 2004.

             The objectives of the audit were to determine whether the County (1)
             disbursed CDBG funds efficiently and effectively in accordance with its
             submission to HUD and in compliance with HUD rules and regulations,
             (2) maintained a financial management system to adequately safeguard
             funds, and (3) established adequate controls to ensure that program
             activities were administered properly and complied with CDBG national
             objectives.
What We Found


           The County did not always disburse CDBG funds in accordance with
           regulations, maintain a financial management system that always
           safeguarded funds, or establish sufficient controls to ensure that program
           activities were properly administered and complied with CDBG national
           objectives. Specifically, weaknesses in the County’s financial and
           monitoring controls caused the County to (1) draw down CDBG funds
           instead of first using available program income, (2) transfer program
           income and CDBG funds for non-CDBG uses, (3) use program income for
           unsupported items, (4) inadequately record and report program income,
           and (5) inadequately monitor its consultant. These weaknesses occurred
           because County officials were unfamiliar with HUD regulations and did
           not institute controls to adequately safeguard funds and ensure compliance
           with regulations.

What We Recommend
           We recommend that the Director of HUD’s New Jersey Office of
           Community Planning and Development instruct the County to (1) establish
           controls to ensure that available program income is used before drawing
           down funds from HUD’s line of credit, (2) reimburse the program income
           account $463,793 from nonfederal sources if the County cannot provide
           supporting documentation, (3) implement policies and procedures to
           ensure that the program income is accurately recorded and reported, and
           (4) instruct its consultant to remit $31,851 to the County to be put back
           into the County’s line of credit since the funds were not disbursed.

           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 and at an exit
           conference held on May 4, 2009. County officials were asked to provide
           written comments by May 6, 2009, which we received on May 5, 2009.
           They generally agreed with the finding and recommendations. The
           complete text of the County’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: The County Had Weaknesses in Its Financial and Monitoring   5
                 Controls


Scope and Methodology                                                        12

Internal Controls                                                            14

Appendixes

   A. Schedule of Questioned Costs and Funds to Be Put to Better Use         16

   B. Auditee Comments and OIG’s Evaluation                                  17




                                         3
                  BACKGROUND AND OBJECTIVES

Union County’s (County) Division of Planning and Community Development operates
under the County’s Department of Parks and Community Renewal and is located at 10
Elizabethtown Plaza, Elizabeth, New Jersey. The Division of Planning and Community
Development consists of four bureaus, which include the Bureaus of Community
Development, Housing, Land Use, and the Administrative/Fiscal Bureau. The Bureau of
Community Development is responsible for administrating the Community Development
Block Grant (CDBG) program.

The CDBG program was established by Title 1 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 U.S. Department of Housing and Urban Development’s (HUD) funding agreements
with the County showed that the County was granted more than $5.3 million and $5.4
million in CDBG funds for program years 2006 and 2007, respectively. The County’s
CDBG program year runs from August 1 through July 31.

Our audit objectives were to determine whether the County (1) disbursed CDBG funds
efficiently and effectively in accordance with its submission to HUD and in compliance
with HUD rules and regulations, (2) maintained a financial management system to
adequately safeguard funds, and (3) established adequate controls to ensure that program
activities were administered properly and complied with CDBG national objectives.




                                            4
                            RESULTS OF AUDIT

Finding 1: The County Had Weaknesses in Its Financial and
           Monitoring Controls
Weaknesses existed in the County’s financial and monitoring controls. Specifically,
contrary to regulations, the County (1) drew down CDBG funds instead of first using
available program income, (2) transferred program income and used CDBG funds for
County-wide pension and other non-CDBG-related expenses, (3) used program income
for unsupported items, (4) did not adequately record and report program income, and (5)
did not adequately monitor its consultant to ensure compliance with escrow fund
regulations. These weaknesses occurred because County officials were unfamiliar with
HUD regulations and did not institute adequate controls to safeguard funds and ensure
compliance with regulations. As a result, the County unnecessarily drew down over $1.2
million in CDBG funds, transferred over $1.6 million for non-CDBG uses, disbursed
over $438,000 in program income for unsupported items, did not adequately record or
report $1.1 million in program income , did not support a $25,000 draw down in IDIS,
and did not ensure that its consultant returned over $31,000 in unused funds.


 CDBG Funds Drawn Down
 Instead of Using Program
 Income
              During program years 2004 through 2007, the County maintained and
              underutilized an average program income balance of more than $2 million
              since its program income receipts were inaccurately reported in the HUD’s
              Integrated Disbursement and Information System (IDIS). For example, in
              February 2007, County officials drew down $171,662 of CDBG funds
              even though a balance of $1,922,444 in program income was available.
              The County’s Director of Planning and Community Development stated
              that the former staff accountant believed that program income receipts
              were required to be disbursed in three working days. Therefore, the staff
              accountant for many years recorded program income receipts based on
              program costs incurred or paid, which did not reflect the actual amounts of
              program income receipts deposited into its bank accounts. For example on
              July 27, 2006, $53,000 was recorded as disbursed from program income
              for activity 2130 kitchen replacement and $53,000 was also
              simultaneously recorded as received from program income. Moreover,
              the inaccurate reporting of program income receipts in IDIS led to the
              County’s inability to use its program income funds as revolving funds as
              defined by 24 CFR 570.500 (b) for carrying out specific activities related
              to its CDBG multi-jurisdictional home rehabilitation program or any other
              immediate cash need.



                                           5
         Regulations at 24 CFR 570.500 (b), defines the revolving fund as a
         separate fund (with a set of accounts that are independent of other program
         accounts) established for the purpose of carrying out specific activities
         which, in turn, generates payments to the fund for use in carrying out the
         same activities. In addition, HUD regulations at 24 CFR Part 85.21(f)(1)
         requires that grantees and sub-grantees shall disburse repayments to and
         interest earned on a revolving fund before requesting additional cash for
         the same activity. Regulations at 24 CFR 570.504(b) (2) (ii) requires that
         substantially all other program income shall be disbursed for eligible
         activities before additional cash withdrawals are made from the U.S.
         Treasury.

         During the period from August 2006 to July 2008, there was at least $1.5
         million of available program income in the County’s bank account, except
         for in May 2008, which had $964,232 of available program income
         because of the inappropriate transfer of program income to pay County-
         wide pension costs (see below). Despite this large balance in program
         income, County officials unnecessarily drew down funds from HUD as
         follows. From August 2006 through July 2008, the County drew down
         $929,507 for its multi jurisdictional rehabilitation program and during
         March 2007 to July 23, 2007, $366,333 was drawn down for the senior
         home improvement program even though program income was available
         to be disbursed. Therefore, if the County complied with the above
         regulation, it would have eliminated $1,295,840 ($929,507 + $366,333) of
         unnecessary draw downs.

Program Income Used for
Pension and Other Non-CDBG-
Related Costs


         During the period April-May 2008, County officials transferred $130,000
         from CDBG funds and $1.5 million in program income to its current fund
         to pay County-wide employee pension costs. Regulations at 24 CFR
         570.207(a)(2) state that expenses required to carry out the regular
         responsibilities of the unit of general local government are not eligible for
         assistance under this part. Therefore, County officials inappropriately
         transferred more than $1.6 million to pay County-wide pension costs that
         were not related to the CDBG program. Although County officials later
         repaid the $1.6 million that they transferred from program income and
         CDBG accounts, these transfers were not allowed.

         In addition, during program year 2006, County officials may have spent
         $438,793 in program income for other non-CDBG-related activities.
         Officials of the County’s finance department claimed that the $438,793



                                       6
         payment was a reimbursement of prior program costs paid by the County’s
         other funding sources since the County’s community development
         program was short of funds at the time. However, officials of the
         County’s finance department were unable to substantiate their claim with
         documentation showing that the $438,793 consisted of eligible CDBG
         costs. Regulations at 24 CFR 570.200(a) require that an activity be
         assisted in whole or in part with CDBG funds only if it meets one of the
         CDBG national objectives. Since County officials did not provide support
         for these transfers, there is no assurance that these costs met one of the
         national objectives. As a result, $438,793 in disbursements of program
         income is considered unsupported.


Program Income Used for
Unsupported Disbursement
Disbursement
        County officials could not support a drawdown of $25,000 from program
        income. Officials allocated $310,000 in CDBG funds to the City of
        Rahway, a subgrantee, for its CDBG housing rehabilitation program
Disbursement
        during program year 2005. The drawdown report for this activity showed a
        total drawn-down amount of $335,000, which included $25,000 in
        program income. However, the County’s and subgrantee’s files did not
        contain supporting documents for the $25,000.

         Regulations at 24 CFR 85.20(b)(6) require that accounting records be
         supported by source documents such as cancelled checks and paid bills.
         In addition, regulations at 24 CFR 570.506(h) requires recipients to
         maintain evidence to support how CDBG funds provided were expended.
         Such documents must include, to the extent applicable, invoices and
         schedules comparing budgeted amounts with actual expenses.

         The subgrantee stated that County officials may have erroneously drawn
         down an additional $25,000, thus showing a total $335,000 for the City of
         Rahway’s activity. In the absence of supporting documents, the eligibility
         of $25,000 drawn down could not be determined.


Program Income Not Recorded
and Reported Accurately

         County officials did not record and report the receipts of program income
         accurately in IDIS, which may also have affected the County’s timeliness
         ratio.

         The County generates program income from its CDBG multijurisdictional
         housing rehabilitation program. The Cities of Rahway, Linden, and



                                      7
                Plainfield are subgrantees of the County that also generate program
                income. During program year 2005, County officials did not report more
                than $1.2 million in program income, which included $443,515 of the
                County’s own program income. In program year 2006, County officials
                did not report $537,267 in program income generated by its subgrantees
                but overstated the subgrantees’ program income by $664,852 during
                program year 2007. Therefore, County officials did not accurately record
                more than $1.1 million1 in program income in IDIS.

                County officials may also not have been aware of HUD’s requirements for
                financial reporting. Regulations at 24 CFR 570.504(a) and (b) require that
                receipts and expenditures of program income as defined in section
                570.500(a) be recorded as part of the financial transactions of the grant
                program and be subject to all applicable requirements governing the use of
                CDBG funds. Based on the above, County officials could not assure HUD
                that they accurately recorded receipts and expenditures of program income
                in IDIS.

                Further, regulations at 24 CFR 570.902(a)(2)(i) provide that HUD may
                determine that the recipient is not carrying out its activities in a timely
                manner if the amount of CDBG program income the recipient has on hand
                60 days before the end of its current program year, together with the
                amount of funds in its CDBG line of credit, exceeds 1.5 times the
                entitlement grant amount for its current program year. Records indicated
                that the County’s cash on hand already exceeded 1.5 times its entitlement
                grant; however, if the underreported program income of more than $1.1
                million is added to the line of credit balance for program year 2008, the
                County’s timeliness ratio would increase from 2.17 to 2.39; thus, the
                County did not disburse its funds in a timely manner.


     Inadequate Monitoring of
     Consultant

                Contrary to federal regulations, County officials did not appear to
                adequately monitor the County’s consultant to ensure compliance with
                federal regulations. For instance, the consultant that carries out the
                County’s CDBG multijurisdictional rehabilitation program invested
                escrow funds in a non-interest-bearing account. Regulations at 24 CFR
                570.511 require that funds held in an escrow account be deposited into an
                interest-bearing account and that the amount of funds deposited into an
                escrow account be limited to the amount expected to be disbursed within
                10 working days from the date of deposit. If the escrow account, for
                whatever reason, contains funds exceeding 10 days’ cash needs, the

1
 $1,263,726 plus $537,267 in program income not reported minus $664,852 in overstated program income
equals $1,136,141.


                                                  8
         grantee should immediately transfer the excess funds to its program
         account.

         Regulations at 85.20(b)(7) require the grantee to make drawdowns as
         close as possible to the time of making disbursements. However, the
         consultant’s bank statements for program years 2006 and 2007 showed
         that the consultant maintained an average monthly bank balance of
         $164,472. It did not disburse funds to contractors for approximately two
         to seven months after receiving funds from the County.

         For three of five rehabilitation project files reviewed, the County drew
         down and transferred to the consultant $67,542 based on the vouchers the
         consultant submitted. However, the consultant disbursed $51,599 to the
         contractors who performed the work. Instead of returning the remaining
         $15,943 to the County, the consultant retained the funds for several years.
         For another rehabilitation project, the County drew down $78,787 during
         July and August 2006; however, it had not paid a balance of $15,908 to
         the contractor. Since the $31,851 ($15,943 + $15,908) had not been spent
         by the consultant but sat idle in the consultant’s bank account, these funds
         appear to have been unnecessarily drawn down and should be remitted to
         the County.


Conclusion

         Weaknesses existed in the County’s financial and monitoring controls. As
         a result, County officials unnecessarily drew down over $1.2 million in
         CDBG funds, transferred more than $1.6 million for non-CDBG uses,
         disbursed more than $438,000 in program income for unsupported items,
         did not support a $25,000 drawdown in IDIS, did not adequately record or
         report $1.1 million in program income, and did not adequately monitor its
         consultant to ensure that excess drawdowns of more than $31,000 were
         returned to the County. We attribute this condition to County officials’
         unfamiliarity with HUD regulations that led to the development of
         inadequate controls to safeguard funds and ensure compliance.

Recommendations


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

         1A.    Establish procedures for using separate revolving accounts for
                program income, as defined by 24 CFR 570.500(b), and ensure
                that disbursements of program income amounts are in accordance
                with 24 CFR 85.21(f)(1) and 24 CFR 570.504(b)(2)(ii).



                                       9
1B.   Instruct its finance department to discontinue its practice of
      transferring CDBG funds and program income amounts to other
      County accounts for non-CDBG disbursements.

1C.   Reimburse the program income account $438,793 from nonfederal
      sources if the County cannot provide documentation supporting
      that the amount was a repayment of CDBG-eligible expenses
      initially paid with the County’s other funds.

1D.   Provide documentation to support the eligibility of the $25,000 in
      unsupported drawdowns of program income or repay any amounts
      determined to be ineligible.

1E.   Establish procedures for ensuring that each drawdown is supported
      with adequate documentation.

1F    Establish and implement procedures for properly recording
      receipts and disbursements of program income in IDIS as required
      by 24 CFR 570.504(a) and (b).

1G.   Establish controls to ensure available program income is used
      before drawing down funds from HUD’s line of credit.

1H.   Develop and implement proper policies and procedures to ensure
      that program income is properly recorded and reported, including
      the $1,136,141 that had not been reported in IDIS, so that HUD
      can be assured that these funds will be put to better use by
      eliminating unnecessary drawdowns from the entitlement grant.

1I.   Establish procedures for ensuring that funds held in escrow accounts
      by the consultant are invested in an interest-bearing account and are
      disbursed within 10 business days from the date of deposits, and if
      not disbursed for any reason, the funds should be transferred back to
      the County as required by 24 CFR 570.511.

1J.   Direct the consultant to remit $31,851 to the County to be put back
      into the County’s line of credit since the funds were not disbursed by
      the consultant and, therefore, drawn down unnecessarily.

1K.   Develop a policy to reconcile amounts advanced and expended by its
      consultant for each rehabilitation project before disbursing additional
      funds to the consultant.




                            10
1L.   Establish procedures to periodically monitor the consultant’s
      activities to ensure compliance with CDBG rules and regulations.

1M.   Require its finance department to establish procedures for
      complying with HUD’s standards for financial management
      systems at 24 CFR 85.20.




                          11
                     SCOPE AND METHODOLOGY

To accomplish our objectives, we:

   Reviewed applicable laws, regulations, and HUD program requirements at 24
   CFR Parts 85 and 570 .

   Analyzed the County’s funding and drawdown information for CDBG funds
   and program income in HUD’s Line of Credit Control System (LOCCS) and
   IDIS.

   Reconciled the County’s consolidated annual performance and evaluation
   report (CAPER) project activities with actual financial data schedules,
   cancelled checks, and other payment information.

   Reviewed HUD’s monitoring reports and administrative files for the County’s
   CDBG program.

   Conducted interviews with the County’s administrative and finance staff to
   gain an understanding of the internal controls related to the administration of
   its CDBG program.

   Reviewed the County’s program policies and procedures, its CAPER and
   action plans, annual audited financial statements, funding agreements, board
   of freeholder minutes, budgets, general ledgers, contract registers, LOCCS
   drawdowns, and vouchers related to the CDBG program.

   Selected a nonstatistical sample of 24 out of 189 project activities that were
   completed or underway via the use of Audit Command Language (ACL) and
   reviewed the related files to ensure compliance with program regulations and
   procedures.

   Conducted interviews and inquiries with HUD’s Office of Community
   Planning and Development field office officials to obtain an understanding of
   the County’s CDBG program.

We performed our audit fieldwork between August 2008 and January 2009 at the
County’s Department of Parks and Community Development administrative
offices located at 10 Elizabethtown Plaza, Elizabeth, New Jersey. Our audit
generally covered the period August 1, 2006, through July 31, 2008, and was
expanded as necessary.

We conducted the audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to


                                    12
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.




                                   13
                          INTERNAL CONTROLS

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

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

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


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

                  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.




                                            14
Significant Weaknesses


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

               The County did not ensure compliance with laws and regulations as it
               did not always comply with HUD regulations for drawing down funds
               from the CDBG line or credit and for the usage of program income (see
               finding).

               The County did not always properly safeguard resources when it allowed
               its consultant to retain excess cash balances and did not use its program
               income balances before drawing down funds from the CDBG line of
               credit (see finding).

               The County did not always ensure that valid and reliable data were
               reported to HUD when program income was not properly recorded and
               reported in IDIS (see finding).




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                               APPENDIXES

Appendix A

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

 Recommendation                                                     Funds to be put to
                        Ineligible 1/         Unsupported 2/
     number                                                           better use 3/

         1C                                      $438,793
         1D                                       $25,000
         1H                                                            $1,136,141
         1J               $31,851               ________               _________
     Total                $31,851               $463,793               $1,136,141

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 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.

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. These amounts include reductions in outlays,
     deobligation of funds, withdrawal of interest, 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
     case, if County officials establish controls to ensure that available program
     income is used before drawing down funds from HUD’s line of credit, it will
     eliminate unnecessary drawdowns, which will result in the effective use of
     $1,136,141 in program income, representing funds to be put to better use.




                                         16
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation    Auditee Comments




Comment 1




                        17
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                    Auditee Comments




Comment 2



Comment 1



Comment 3




                        OIG Evaluation of Auditee Comments




                                       18
                     OIG Evaluation of Auditee Comments


Comment 1   The Auditee’s comments and planned actions are responsive to our
            recommendations.

Comment 2   County officials indicated that $348,994.31 had already been reimbursed
            and the balance of $89,798.69 would be reimbursed to its CDBG program.
            As such, these repayments should be verified by the Field Office during
            the audit resolution process.

Comment 3   County officials indicated that a check in the amount of $15,628 was
            deposited and the balance will be remitted to the County’s line of credit.
            As such, these repayments should be verified by the Field Office during
            the audit resolution process.




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