oversight

The City of Rome, New York, Did Not Administer Its Economic Development Activity in Accordance with HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-05-20.

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

                                                                 Issue Date
                                                                    May 20, 2009
                                                                 Audit Report Number
                                                                    2009-NY-1012




TO:        Nancy Peacock, Director, Community Planning and Development, 2CD



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


SUBJECT: The City of Rome, New York, Did Not Administer Its Economic Development
         Activity in Accordance with HUD Requirements


                                   HIGHLIGHTS

 What We Audited and Why

            We audited the City of Rome, New York (City), pertaining to its administration of
            the economic development activity known as General Cable under its Community
            Development Block Grant (CDBG) program. We selected the activity for review
            because of issues identified during our initial audit of the City’s CDBG program.
            The objective of our audit was to determine whether the City (1) administered its
            economic development activity known as General Cable effectively, efficiently,
            and economically in accordance with applicable U.S. Department of Housing and
            Urban Development (HUD) rules and regulations and (2) expended related 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 an activity that did not meet a national objective of the program.
            Specifically, the City failed to (1) develop a plan to ensure that the required job
            creation goal would be achieved, (2) adequately address known concerns about
            the activity’s progress, and (3) maintain adequate supporting documentation. As
           a result, no jobs were created, and there was no assurance that activity costs were
           necessary, reasonable, and in accordance with federal regulations. Consequently,
           the City did not use CDBG funds to address community needs.

What We Recommend
           We recommend that the Director of HUD’s Buffalo Office of Community
           Planning and Development require the City to implement procedures and controls
           to ensure that funded economic development activities are feasible and can be
           completed in a timely manner to meet a national objective of the CDBG program.
           We also recommend that HUD require the City to (1) establish a schedule for
           documenting completion of the activity and the jobs retained and/or created at the
           site and (2) reimburse HUD any portion of the more than $2.95 million in CDBG
           funds expended on the activity for costs that do not qualify as meeting the job
           creation requirement.

           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 April 9, 2009. City
           officials generally agreed with our finding and provided their written comments
           during the exit conference held on April 23, 2009. The complete text of the
           auditee’s response, along with our evaluation of that response, can be found in
           appendix B of this report.




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                                  TABLE OF CONTENTS

Background and Objectives                                               4

Results of Audit

      Finding 1: The City Did Not Administer Its Economic Development    5
                 Activity in Accordance with HUD Requirements

Scope and Methodology                                                   8

Internal Controls                                                       9

Appendixes
         A. Schedule of Questioned Costs                                11
         B. Auditee Comments and OIG’s Evaluation                       12




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                     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 Rome (City) is a CDBG entitlement recipient that administers more than $1 million
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. The City is responsible for overseeing, monitoring, and
supporting its CDBG activities. The files and records related to the City’s CDBG programs are
maintained in City Hall, located at 198 North Washington Street, Rome, New York.

The redevelopment of the former General Cable manufacturing site began in 1994. The project
site contained five large-scale, deteriorated, and partially collapsed structures with failed
infrastructure systems, contributing to what was considered one of the most blighted
neighborhoods in the city. The site is strategically located adjacent to the Erie Canal to the
south, Mill Street to the north, and private industrial and commercial sites to the east. In the
mid-1990s, an 18-acre section of the industrial site was selected for redevelopment as a business
park, East Rome Business Park, with no specific plans for the remaining 200 acres. The goal
was to concentrate on the smaller area to begin the reversal of the site’s negative value and
stimulate redevelopment of the entire site for industrial and commercial purposes. The project
includes land acquisition, building demolition, and construction of a new access road through the
site.

We audited the City’s administration of it economic development activity known as General
Cable based on the results of a review of the City’s CDBG program. The City has conducted
very little economic development and/or job creation apart from this large activity. The
objective of our audit was to determine whether the City (1) administered its economic
development activity known as General Cable effectively, efficiently, and economically in
accordance with applicable U. S. Department of Housing and Urban Development (HUD) rules
and regulations and (2) expended related CDBG funds for eligible activities that met a national
objective of the program.


                                                4
                                RESULTS OF AUDIT

Finding 1:        The City Did Not Administer Its Economic Development
                  Activity in Accordance with HUD Requirements

The City did not ensure that an economic development activity known as General Cable was
administered effectively in accordance with HUD requirements. Specifically, the City failed to
(1) develop a plan to ensure that the required job creation goal would be achieved, (2) adequately
address known concerns about the activity’s progress, and (3) maintain adequate supporting
documentation. As a result, there was no assurance that the project costs were necessary,
reasonable, and in accordance with federal regulations. Consequently, since the City did not use
CDBG funds to address community needs, we consider more than $2.95 million in activity costs
as unsupported pending a HUD eligibility determination.


 A Plan for Meeting the National
 Objective of Job Creation Was
 Not Developed
             Since 1996, the City had expended $2.95 million in CDBG funds on an economic
             development activity known as General Cable without meeting the required
             national objective of job creation. The City invested more than $6 million from all
             funding sources at the site, completing such work as an access road, demolishing
             old buildings, and general cleanup of the old industrial site to attract private
             commercial investment. While such a large investment is commendable, the City
             failed to adequately plan for job creation in accordance with regulations at 24 CFR
             (Code of Federal Regulations) 570.203, which pertain to special economic
             development activities and require the City to provide a public benefit. Further, 24
             CFR 570.209 provides the guidelines for evaluating and selecting economic
             development activities.


 Concerns about the Progress of
 the Activity Were Not
 Adequately Addressed

             The City failed to adequately address HUD’s concerns about meeting the national
             objective in a timely manner. The General Cable activity started in 1996. In
             August 2002, HUD reminded the City that as a rule, it would allow up to five years
             for most economic development projects to meet the job requirements, thereby
             meeting the national objective of creating and/or retaining jobs for low- to
             moderate-income persons. The City was further informed by HUD that since the
             General Cable activity had been granted CDBG funds for the past six years, the
             City should already have met some of the job creation requirements. Officials for
             the City admitted that the activity had progressed much more slowly than expected
                                                  5
             and that they hoped to create 60 jobs. In 2005, HUD again expressed concern about
             the lack of progress at the General Cable site. Despite the use of nearly $3 million
             in CDBG funds and HUD’s approval of the activity based upon the City’s
             projection of job creation, no jobs had been created in nine years. In June of 2008,
             HUD advised the City that the CDBG funds expended over a 10-year period at the
             General Cable site had not met the national objective and would be subject to
             recapture if the City could not provide documentation supporting their eligibility.
             City officials attributed the slow progress to its difficulty in cleaning up the
             property site, as the required removal of asbestos in old buildings at the site before
             demolition had become time consuming and costly. However, the length of time
             that had elapsed since the project’s inception demonstrates that the City failed to
             appropriately plan to meet the national objective in a timely manner.

 Activity Costs Were Not
 Adequately Supported

               The vast majority of the CDBG expenditures pertaining to the General Cable
               activity occurred before 2002. The most recent voucher and payment, made in
               September 2003 in the amount of $350,000, was paid to the City as
               reimbursement for the remediation contracts related to demolition at the site. The
               reimbursement was made to the City’s capital account from CDBG funding.
               However, the $350,000 payment was not supported by documentation reflecting
               what costs were reimbursed to the City. The standards for financial management
               systems, as provided at 24 CFR 85.22, require the City to maintain adequate
               source documentation to support the specific use of grant funds. However, since
               this was not done, these costs are considered to be unsupported.

There Had Been Recent
Progress at the Project Site

               Recently, the City was able to attract a local steel plate distributor business to
               relocate to a building the City was constructing at the General Cable site. The
               steel producing plant was undergoing construction and was tentatively scheduled
               to open in the spring of 2009. A total of 35 jobs were targeted to be created
               and/or retained. The City hoped the new steel plant would spur additional job
               creation and business development at the site. Although these jobs would be the
               first created at the site, the City had not determined how many of these jobs would
               qualify as being available to low- to moderate-income individuals. Moreover, the
               City was required to create or retain at least 25 additional jobs to fully comply
               with the national objective benchmark of creating at least 60 jobs.

               In accordance with 24 CFR 570.209(b)(3)(i)(A), HUD requires that at least one
               full-time-equivalent, permanent job be created or retained for each $50,000 in
               funding. HUD also requires that at least 51 percent of the jobs be held by or made
               available to low- and moderate-income individuals.

                                                6
.

    Conclusion

                 The City did not adequately administer its economic development activity, as a
                 plan for meeting the national objective of job creation was not developed,
                 concerns about project progress were not adequately addressed, and project costs
                 were not adequately supported. We attribute these deficiencies to the City’s
                 failure to develop adequate controls to ensure compliance with all HUD
                 regulations and safeguard funds. While the City was realizing some progress at
                 the General Cable site, no jobs had been created or retained. As a result, we
                 consider the more than $2.95 million in CDBG funds expended at the General
                 Cable site as unsupported costs pending a HUD eligibility determination. City
                 officials should strongly consider partnering with a national group or a consultant
                 that assists entities with economic development planning activities to achieve the
                 national objectives. In accordance with 24 CFR 570.209(b)(3)(i)(A), the City will
                 be required to create or retain at least 60 jobs and then determine how many of
                 these jobs will be available to low- and moderate-income individuals.

    Recommendations

                 We recommend that the Director, Buffalo Office of Community Planning and
                 Development, require the City of Rome to

                 1A. Implement procedures and controls to ensure that all funded economic
                     development activities are feasible and can be completed in a timely manner to
                     meet a national objective of the CDBG program.

                 1B. Establish a schedule for documenting completion of the General Cable activity
                     and the jobs retained and/or created at the site and reimburse HUD any portion
                     of the $2,953,754 in CDBG funds expended on the activity for costs that do
                     not qualify as meeting the job creation requirement.




                                                  7
                         SCOPE AND METHODOLOGY

Our review focused on whether the City complied with HUD regulations, procedures, and
instructions related to the administration of its economic development activity known as General
Cable. To accomplish our objectives, we reviewed relevant HUD regulations, guidebooks, and files
to obtain an understanding of and identify HUD’s concerns about 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 economic development program.

For CDBG program years 1996 through 2003, the City expended more than $2.95 million in
CDBG funds on the General Cable activity. We reviewed the most recent expenditures and
related supporting documentation relating to the General Cable activity to determine whether the
expenditures met CDBG requirements, were reasonable, and complied with the primary and
national objectives. We also examined the City’s internal controls over its CDBG program.

The review covered the period April 1, 2002, through March 31, 2008, and was extended as
necessary. We performed audit work from October 2008 through February 2009 at the City’s
offices located at City Hall, 198 North Washington Street, Rome, New York. We conducted the
audit in accordance with generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient and 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 finding and conclusion
based on our audit objectives.




                                                 8
                              INTERNAL CONTROLS


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




                                                 9
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 costs
                  associated with the General Cable activity were eligible and met a national
                  objective of the CDBG program (see finding).

                  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 finding).

                  The City did not have an adequate system to ensure that resources were
                  properly safeguarded when it did not maintain adequate supporting
                  documentation for costs charged to the activity (see finding).




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                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

          Recommendation         Unsupported 1/
                 number
                         1B           $2,953,754

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.




                                             11
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         12
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         13
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




Comment 3




                         14
                        OIG Evaluation of Auditee Comments
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                Auditee Comments




Comment 3



Comment 4




                                       15
                            OIG Evaluation of Auditee Comments


Comment 1: City officials provide historical background on the General Cable project and the
           recent positive developments at the project site.

Comment 2: City officials generally agree with the finding and state that they have since
           completed a number of planning efforts to revitalize underserved neighborhoods,
           remove eyesores, mitigate environmental hazards, and remove the barriers to job
           creation and economic development. We commend the officials for accelerating
           their efforts to develop the project site and the surrounding area.

Comment 3: City officials acknowledge the facts and conclusions in the report and explain that
           they are working towards achieving the national job creation objectives with
           support from the federal, state, and local levels. We encourage City officials to
           continue to work with HUD, along with state and local partners to resolve the
           issues identified in the report and to complete the project.

Comment 4: City officials agree to work with HUD to implement the report recommendations
           and comply with the national objective of the project. Further, the officials have
           closed the activity and reallocated all remaining funds to other eligible activities.
           Overall, the City agrees with the audit report finding, conclusions, and
           recommendations of the audit report. The actions taken by the officials are
           responsive to our finding.




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