Issue Date May 27, 2009 Audit Report Number 2009-NY-1013 TO: Nelson R. Bregon, General Deputy Assistant Secretary for Community Planning and Development, D FROM: Edgar Moore, Regional Inspector General for Audit, New York Region, 2AGA SUBJECT: Lower Manhattan Development Corporation, New York, New York, Administered Disaster Recovery Assistance Funds in Accordance with HUD Regulations HIGHLIGHTS What We Audited and Why This is the twelfth in our series of congressionally mandated audits of the Lower Manhattan Development Corporation’s (auditee) administration of the Community Development Block Grant (CDBG) Disaster Recovery Assistance funds awarded to the State of New York in the aftermath of the September 11, 2001, terrorist attacks on the World Trade Center in New York City. During the audit period, April 1 through September 30, 2008, the auditee disbursed $103.4 million of the $2.783 billion it administers. Our audit objectives were to determine whether the auditee (1) disbursed CDBG Disaster Recovery Assistance funds in accordance with the guidelines established under U.S. Department of Housing and Urban Development (HUD)-approved partial action plans and applicable laws and regulations, (2) expended CDBG Disaster Recovery Assistance funds for eligible planning and administrative expenses in accordance with applicable laws and regulations, and (3) had a financial management system in place that adequately safeguarded funds and prevented misuse. What We Found The auditee administered the grant funds we reviewed in accordance with HUD regulations, expended funds for eligible planning and administrative expenses, and continued to maintain a financial management system that adequately safeguarded funds and prevented misuse. However, several issues require HUD’s attention. Specifically, the Chinatown Clean Streets program subrecipient was reimbursed $508,361 for costs that were not adequately supported at the time of audit, and $19,643 was disbursed for costs related to an auditee division for which other sources of funding were available. Additionally, the Affordable Housing subrecipient monitoring procedures to increase assurance of compliance with a 30-year affordability requirement had not been finalized. What We Recommend We recommend that HUD’s General Deputy Assistant Secretary for Community Planning and Development direct the auditee to (1) obtain and review documentation substantiating the $508,361 reimbursed to the Chinatown Clean Streets program subrecipient for its nonprofit contractor’s expenditures and recover any amounts not supported, (2) reimburse $14,603 ($19,643 less $5,040 already recovered) to the HUD CDBG Disaster Recovery Assistance fund from other than HUD sources so that these funds can be available for administration and planning expenses, and (3) ensure that its Affordable Housing program subrecipient finalizes monitoring procedures to enhance controls over compliance with the 30-year period affordability 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 and at an exit conference held on April 14, 2009. We provided a draft report on April 3, 2009, and requested a written response by April 14, 2009. Based upon a review of documentation provided by the auditee, and several conversations with auditee officials, subsequent to the exit conference, we issued a revised draft on April 24, 2009 and again on May 4, 2009. We received the auditee’s written response on May 13, 2009. The auditee generally agrees with the issues noted and has implemented corrective action to address our recommendations. 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: The Auditee Administered Grant Funds in Accordance 6 with HUD Regulations Scope and Methodology 9 Internal Controls 11 Appendixes A. Schedule of Questioned Costs and Funds to Be Put to Better Use 12 B. Auditee Comments and OIG’s Evaluation 13 C. Schedule of Disbursements as of September 30, 2008 17 3 BACKGROUND AND OBJECTIVES The Lower Manhattan Development Corporation (auditee) was created in December 2001 as a subsidiary of the Empire State Development Corporation to function as a joint city-state development corporation. A 16-member board of directors, appointed equally by the governor of New York State and the mayor of New York City, oversees the auditee’s affairs. The Empire State Development Corporation performs all accounting functions for the auditee, including payroll, payments to the auditee’s vendors, and drawing down funds from the U.S. Department of Housing and Urban Development (HUD). The State of New York designated the auditee to administer $2.783 billion1 of the $3.483 billion in Community Development Block Grant (CDBG) Disaster Recovery Assistance funds appropriated by Congress following the September 11, 2001, terrorist attacks on the World Trade Center to assist with the recovery and revitalization of Lower Manhattan. Planned expenditures of Disaster Recovery Assistance funds are documented in action plans that receive public comment and are approved by HUD. HUD had approved 15 partial action plans as of September 30, 2008, that allocated the $2.783 billion to various programs and activities (see appendix C for amounts by program). As of September 30, 2008, the auditee had disbursed approximately $1.56 billion, or 56 percent, of the $2.783 billion allocated. During this audit, we reviewed administrative and planning costs and administrative costs related to the Utility Restoration and Infrastructure Rebuilding program, financial management procedures, and disbursements related to the following programs: World Trade Center Memorial and Cultural program: As of September 30, 2008, HUD had approved approximately $690 million2 to fund the planning, selection, coordination, and construction of a memorial, including $250 million for the planning, design, and construction of the World Trade Center Memorial and Museum and related facilities. In addition, funds were earmarked for planning and possible construction of memorial-related improvements and museum and cultural uses on the World Trade Center site and adjacent areas, complementing the commercial redevelopment and infrastructure improvements by the Port Authority of New York and New Jersey, the owner of the World Trade Center Site. Affordable Housing program: As of September 30, 2008, HUD had approved $54 million for projects to create new and affordable housing units, preserve and rehabilitate existing affordable housing units, and make capital improvements to existing Mitchell Lama3 and affordable housing developments. Partial action plan 6 defined affordable housing as housing that costs no more than 30 percent of annual household income. The final action plan defines low-income households as those with income less than 50 percent of area median income,4 moderate income households are defined as those with income from 50 to 80 percent of area median income, and middle income households are defined as those with income less than 175 percent of area median 1 The Empire State Development Corporation administers the remaining $700 million. 2 Of this amount, $37.5 million is from the supplemental funding appropriation of $783 million. 3 Created in 1955, Mitchell-Lama is a state program designed to provide affordable rental and cooperative housing to moderate- and middle-income families. 4 Area median income estimates are based on 2000 Census data, local Bureau of Labor Statistics, Census American Community Survey State data, and Census Current Population Survey data. The New York metropolitan statistical median income for a family of four is $62,800. 4 income. The auditee allocated $15 million to the Tribeca Site 5B program for soft costs related to the planning and design of a new mixed-use development project consisting of 163 units5 with 33 low-income units, 44 middle-income units, and one superintendent’s unit. In addition, $16 million was allocated to the Chinatown/Lower East Side Acquisition Grant program to facilitate the acquisition of privately owned mid-size buildings (containing approximately 15-40 residential units) in Chinatown and on the Lower East Side of Manhattan by nonprofit property managers and developers where the average rents are under $1,000. Lower Manhattan Enhancement Fund: As of September 30, 2008, HUD had approved approximately $88.9 million for this program to provide grants through competitive selection processes to not-for-profit organizations for projects that address cultural and community needs in lower Manhattan and demonstrate the ability to spur long-term revitalization of the area, benefiting area residents, workers, businesses, and visitors. Chinatown Local Development Corporation: As of September 30, 2008, HUD had approved approximately $7 million to initiate community improvements in Chinatown through short-term projects and long-term planning. The Chinatown Clean Streets program was allocated $5.4 million of the $7 million for manual and mechanical sweeping of the sidewalks, curbs, and gutters; frequent removal of bagged litter from street corners; pressure cleaning of sidewalks; graffiti removal; and additional maintenance. The remaining $1.6 million will be allocated for short-term community development projects, marketing, and public outreach efforts undertaken by the Local Development Corporation. Economic Development - Other program: As of September 30, 2008, HUD had approved approximately $7 million to fund projects that (1) increase economic activity in lower Manhattan by promoting additional commercial and residential development, (2) attract businesses and residents to locate in lower Manhattan, and/or (3) provide short-term and/or long-term jobs in lower Manhattan. Our audit objectives were to determine whether the auditee (1) disbursed CDBG Disaster Recovery Assistance funds in accordance with the guidelines established under HUD-approved partial action plans and applicable laws and regulations, (2) expended CDBG Disaster Recovery Assistance funds for eligible planning and administrative expenses in accordance with applicable laws and regulations, and (3) had a financial management system in place that adequately safeguarded funds and prevented misuse. 5 The remaining 85 units are market rate and are not being funded by the auditee. 5 RESULTS OF AUDIT Finding 1: The Auditee Administered Grant Funds in Accordance with HUD Regulations The auditee administered the grant funds we reviewed in accordance with HUD regulations, expended funds for eligible planning and administrative expenses, and continued to maintain a financial management system that adequately safeguarded funds and prevented misuse. However, several issues require HUD’s attention. Specifically, the Chinatown Clean Streets program subrecipient was reimbursed $508,361 for costs that were not adequately supported, and $19,643 was disbursed for costs related to an auditee division for which other sources of funding were available. Additionally, the Affordable Housing subrecipient monitoring procedures to increase assurance of compliance with a 30-year affordability requirement had not been finalized. Subrecipient Expenses Not Adequately Supported Costs of $508,361 reimbursed to the Chinatown Clean Streets program recipient on April 3, 2008 were not adequately supported at the time of our field work. The subrecipient’s policy is to provide advances to its nonprofit contractor that are to be subsequently supported, and the auditee’s policy is to reimburse the subrecipient for its actual disbursements. The subrecipient disbursed to its nonprofit contractor $308,361 and $200,000 on October 5, 2006, and February 7, 2007, respectively, for actual and anticipated expenditures as per its policy. An auditee official advised that the subrecipient was to provide documentation to support the $508,361 reimbursement with its second request for payment. This documentation was not available for review during our field work; the auditee is currently conducting a post audit of the documentation and an official said that payment of the subrecipient’s second reimbursement request made on September 25, 2008 is being withheld pending the completion of this post audit. Funds Disbursed for an Auditee Division When Other Funding Sources Were Available The auditee disbursed $19,643 from its administrative and planning funds for payroll-related expenses of the Lower Manhattan Construction Command Center, a division of the auditee. Specifically, HUD funds were disbursed for division- related costs of $9,426 ($6,203 during the audit period and $3,223 in December 2007) for unemployment insurance costs; $8,817 for workers’ compensation insurance premium costs covering October 31, 2006, to October 31, 2008; and $1,400 for disability insurance premium costs covering September 2007 and the period from November 2007 to February 2008. 6 While these expenses were eligible as administrative and planning expenses, the auditee’s plan was to use other than HUD funds for these expenses. The auditee received a grant from the Federal Transportation Administration, supplemented by other funds, to establish and maintain this division. In April and May 2005, the auditee’s board of directors approved the use of CDBG funds to pay division startup costs not expected to exceed six months, and an auditee official said that the board later authorized the use of HUD funds for the division only through March 31, 2006. The disbursements after this timeframe were attributed to inconsistent application of the established cost allocation plan causing HUD funds to be charged instead of other funding sources for these payroll-related costs. The auditee has returned $5,040 for the division’s unemployment costs, thus ensuring that these funds can be put to better use; however, the remaining $14,603 should be reimbursed. Subrecipient Affordable Housing Monitoring Procedures Not Finalized Monitoring procedures for compliance with affordability requirements in the Affordable Housing program had not been finalized at the time of our audit. The subrecipient agreement for the Chinatown Lower East Side grant acquisition program specifies that participants that receive funds for eligible properties must maintain records regarding the rents for all dwelling units and income verification for the rental of vacant dwelling units for a period of 30 years after the acquisition of eligible properties, and that these documents are subject to audit by the subrecipient, grantee, and/or HUD at any time within the 30-year period. In response to our inquiry about how compliance with the 30-year affordability requirement will be monitored, the auditee obtained a memorandum, dated January 20, 2009, and subsequently updated on March 6, 2009, in which the subrecipient described its monitoring plan. This plan will require participants to annually submit a certified rent roll, certify that there has been no subletting of units, and notify the subrecipient of unit vacancies as they occur, which will include the previous rent, new rent, and certification that the income level of new tenants is within the 80 percent median guideline. Although these procedures have not been finalized, when implemented, this will serve as an adequate control in addition to the potential for audit of all records. The subrecipient agreement for the Site 5B Mixed Income Residential Building provides that the program will be implemented in accordance with the Mixed Income Program Guidelines established by the New York City Housing Development Corporation and the project regulatory agreement, which states that monitoring will be done using the Housing Development Corporation’s low- income housing tax credit monitoring procedures. However, these procedures do not identify the subrecipient’s role in the monitoring process and do not explain how these procedures relate to the 33 low-income units and 44 middle-income units subsidized by the auditee. Consequently, uncertainty exists as to how they would be monitored for compliance with the 30-year rent and income affordability requirements required by the subrecipient agreement. In response to 7 our inquiry, an auditee official said that the subrecipient is finalizing procedures to ensure that this affordability requirement is monitored. Conclusion The auditee administered the grant funds we reviewed in accordance with HUD regulations, expended funds for eligible planning and administrative expenses, and continued to maintain a financial management system that adequately safeguarded funds and prevented misuse. However, the auditee reimbursed a subrecipient $508,361 for costs that were not adequately supported, paid $19,643 for costs related to a division for which other sources of funding were available, and needs to ensure that monitoring procedures in the Affordable Housing program will provide increased assurance that the affordability requirements are met throughout the 30 year period. Recommendations We recommend that HUD’s General Deputy Assistant Secretary for Community Planning and Development instruct the auditee to 1A. Obtain and review documentation substantiating $508,361 reimbursed to the Chinatown Clean Streets program subrecipient for its nonprofit contractor’s expenses, and recover any amounts not substantiated. 1B. Ensure that the subrecipient’s reimbursement controls are enhanced to provide greater assurance that requests for reimbursement are adequately supported. 1C. Reimburse $14,603 ($19,643 less $5,040 already returned) to the CDBG Disaster Recovery Assistance fund from other than HUD sources, so that these funds will be available for administration and planning expenses. 1D. Determine whether additional CDBG funds have been disbursed for the benefit of the Lower Manhattan Construction Command Center’s employees that could have been financed by non-HUD funds and if so, reimburse the CDBG Disaster Recovery Assistance fund. 1E Strengthen internal controls to ensure that the general administrative cost allocation plan is consistently followed. 1F. Ensure that its subrecipient for the Affordable Housing program has finalized its monitoring procedures to be performed throughout the 30- year period for compliance with affordability requirements. 8 SCOPE AND METHODOLOGY To achieve our audit objectives, we reviewed applicable laws, regulations, and program requirements; HUD-approved partial action plans; and the auditee’s accounting books and records. We documented and reconciled disbursements recorded during the audit period in HUD’s Line of Credit Control System to the auditee’s records. We interviewed officials of the auditee and its parent corporation and conducted a site visit at the Chinatown Partnership Local Development Corporation. During the audit period, April 1 through September 30, 2008, the auditee disbursed $103.4 million of the $2.783 billion in Disaster Recovery Assistance funds for activities related to the rebuilding and revitalization of lower Manhattan. We selected five programs to review based upon a risk assessment, for which $66.8 million was disbursed. Within the five programs, we tested on a nonstatistical basis $28.2 million, representing 27 percent of the $103.4 million disbursed for the period, as follows: Amount disbursed April 1 through September 30, 2008 Amount tested Program area (in millions) (in millions) World Trade Center Memorial and Cultural program $51.02 $16.34 Chinatown Local Development Corporation $ 1.14 $ 1.14 Affordable Housing program $12.24 $10.64 Lower Manhattan Enhancement Fund $ 2.41 $ .03 Economic Development - Other $ .01 $ .01 Total $66.82 $28.16 Within the World Trade Center Memorial and Cultural program, we reviewed one disbursement made to a subrecipient awarded $250 million for planning, design, and construction of the World Trade Center Memorial and Museum and related facilities. Within the Chinatown Local Development Corporation program, we reviewed the one disbursement made to the subrecipient. Within the Affordable Housing program, we reviewed disbursements for the Tribeca Site 5B program and the Chinatown/Lower East Side Acquisition Grant program. We reviewed disbursements for project administration within the Lower Manhattan Enhancement Fund and Economic Development - Other program. We obtained a general understanding of the auditee’s system of internal controls for the programs in which disbursements were tested. We also reviewed the auditee’s general 9 administrative and planning costs as well as administrative costs related to the Utility Restoration and Infrastructure Rebuilding program. We performed our on-site work at the auditee’s office in lower Manhattan and at the auditee’s parent company, the Empire State Development Corporation, in Midtown Manhattan from November 2008 through March 2009. 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, 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. 10 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. Significant Weaknesses There were no significant weaknesses identified. 11 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Unsupported Funds to be put number / Costs 1/ to better use 2/ 1A $508,361 1C _______ $19,643 Total $508,361 $19,643 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, costs not incurred by implementing recommended improvements, avoidance of unnecessary expenditures noted in pre-award reviews, and any other savings that are specifically identified. In this instance, if the $19,643 ($14,603 plus $5,040 already repaid) is paid from the Lower Manhattan Construction Command Center’s other funding sources; it will result in funds to be put to better use. 12 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 13 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments Comment 1 Comment 2 Comment 3 14 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 The auditee’s actions are responsive to our recommendation and have minimized any risk of financial loss. Once the post audit is complete, any disallowed costs should be recovered and documentation obtained supporting disbursements should be made available to HUD program officials for review, during the audit resolution process. Comment 2 Disbursements to this subrecipient had not been reviewed in our previous audits; nevertheless, the inadequate documentation disclosed during the auditee’s post audit indicates that the auditee should ensure that the subrecipient’s reimbursement controls are enhanced. Comment 3 Based upon the recommendation, the auditee identified additional expenses of $11,200 that were offset, thus resulting in funds to be put to better use. Comment 4 The auditee’s actions are responsive to our recommendation. 16 Appendix C SCHEDULE OF DISBURSEMENTS AS OF SEPTEMBER 30, 2008 Audit period Cumulative Balance Budget as of disbursements Program disbursed as of remaining as Sept. 30, 2008 Apr. 1 – Sept. Sept. 30, 2008 Sept. 30, 2008 30, 20081 Business Recovery Grant program 218,946,000 (27,086) 218,883,462 62,538 Job Creation and Retention 143,000,000 3,542,408 104,803,730 38,196,270 Small Firm Attraction 29,000,000 318,884 27,892,134 1,107,866 Residential Grant (housing assistance program) 237,500,000 12,329 236,180,810 1,319,190 Employment Training Assistance 346,000 337,771 8,229 Memorial Design & Installation 315,000 309,969 5,031 Columbus Park Renovation 998,571 998,571 Marketing History and Heritage Museums 4,664,000 4,612,620 51,380 Downtown Alliance Streetscape 4,000,000 4,000,000 0 New York Stock Exchange Area Improvements 25,160,000 5,476,000 19,684,000 Parks and Open Space 46,981,689 17,771,320 29,210,369 Hudson River Park Improvements 72,600,000 27,827,675 58,070,322 14,529,678 West Street Pedestrian Connection 22,955,811 418,814 18,746,315 4,209,496 Lower Manhattan Communications Outreach 1,000,000 1,000,000 0 Green Roof Project 100,000 100,000 Chinatown Tourism & Marketing 1,160,000 999,835 160,165 Lower Manhattan Information program 2,570,000 1,752,391 817,609 World Trade Center Memorial and Cultural2 690,017,180 51,023,636 428,689,177 261,328,003 Lower Manhattan Tourism 4,176,000 3,950,000 226,000 East River Waterfront Project 150,000,000 209,694 1,452,992 148,547,008 Local Transportation and Ferry Service 9,000,000 818,003 2,176,594 6,823,406 East Side K-8 School 23,000,000 28,703 22,971,297 Fitterman Hall Reconstruction 15,000,000 1,784 14,998,216 Chinatown Local Development Corporation 7,000,000 1,142,739 1,306,862 5,693,138 Affordable Housing 54,000,000 12,243,186 12,243,186 41,756,814 Public Services Activities 6,796,900 331,886 6,406,606 390,294 Administration & Planning 112,262,000 2,826,878 82,628,313 29,633,687 Disproportionate Loss of Workforce 33,000,000 32,999,997 3 Utility Restoration and Infrastructure Rebuilding 697,500,000 270,545,615 426,954,385 Lower Manhattan Enhancement Fund 88,950,849 2,409,078 13,542,212 75,408,637 Drawing Center 2,000,000 2,000,000 Fulton Corridor Revitalization 38,000,000 273,401 704,183 37,295,817 Economic Development – Other 7,000,000 2,040 2,040 6,997,960 Transportation Improvements 31,000,000 31,000,000 Education – Other 3,000,000 3,000,000 Total 2,783,000,000 103,373,565 1,557,514,943 1,225,485,057 1 Negative amounts represent recoveries to the program. 2 On September 2, 2008, HUD approved the reallocation of $37.5 million from the Utility Restoration and Infrastructure Rebuilding program to the World Trade Center Memorial and Cultural Program, and HUD’s Line of Credit Control System was updated on October 24, 2008. 17
Lower Manhattan Development Corporation, New York, New York, Administered Disaster Recovery Assistance Funds in Accordance with HUD Regulations
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-05-27.
Below is a raw (and likely hideous) rendition of the original report. (PDF)