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)