oversight

The City of Little Falls, New York, Urban Renewal Agency, Small Cities Community Development Block Grant and HOME Programs, Complaint No. HL-09-009

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-08.

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

                                                        U. S. Department of Housing and Urban Development
                                                                                 Office of Inspector General
                                                                                 New York/New Jersey Office
                                                                               26 Federal Plaza – Room 3430
                                                                                  New York, NY 10278-0068



                                                                 MEMORANDUM NO. 2009-NY-1801

September 8, 2009

MEMORANDUM FOR:                  Vincent Hom, Director, Community Planning and Development,
                                                     2ADM1



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

SUBJECT: The City of Little Falls, New York, Urban Renewal Agency, Small Cities Community
              Development Block Grant and HOME Programs, Complaint No. HL-09-0090

                                            INTRODUCTION

We completed a review of the City of Little Falls, New York’s (the City) Small Cities
Community Development Block Grant (CDBG), and HOME Programs administered by its
Urban Renewal Agency (URA). We selected the City for review based on a hotline complaint
referral from the Office of Inspector General (OIG) Program Integrity (Hotline) Division. The
complaint alleges mismanagement of HUD funding for the CDBG and HOME programs
administered by the City and its Urban Renewal Agency. The objectives of our review were to
determine the merits of the hotline complaint, specifically whether the City of Little Falls and its
Urban Renewal Agency complied with HUD requirements while administering its CDBG and
HOME programs.

In accordance with HUD Handbook 2000.06, REV-3, within 60 days, please provide us, for each
recommendation in this memorandum, a status report on (1) the corrective action taken, (2) the
proposed corrective action and the date to be completed, or (3) why action is considered
unnecessary. Additional status reports are required 90 days and 120 days after this memorandum
is issued for any recommendation without a management decision. Also, please furnish us
copies of any correspondence or directives issued because of this review.

Should you or your staff have any questions, please contact Karen A. Campbell, Assistant
Regional Inspector General for Audit, at (212) 542-7977.

                                  METHODOLOGY AND SCOPE

The review covered the period of January 1, 2007, through March 2009, and was extended as
necessary. We performed our review work from February 2009 through May 2009 at the City of
Little Falls and its URA offices, located at 659 East Main Street, Little Falls, New York. Our

    Visit the Office of Inspector General on the World Wide Web at http://www.hud.gov/oig/oigindex.html
review included obtaining background information from applicable HUD and State regulations
and program records, interviewing City and URA staff, reviewing prior Independent Public
Accountants (IPA) audits, reviewing correspondence from HUD and the State of New York, and
selecting and testing limited nonstatistical samples of transactions relating to the allegations.
The results of the sample testing only apply to the items tested and are not to be projected.

                                       BACKGROUND

On October 15, 2008, a complainant filed a Hotline complaint with HUD OIG’s Program
Integrity (Hotline) Division. On October 27, 2008, the case was referred to the OIG Assistant
Inspector General for Audit. Subsequently, on February 10, 2009 we commenced a review to
determine the merits of the complaint allegations. In general, the complaint alleged
mismanagement of HUD funding by the City of Little Falls, New York, and its Urban Renewal
Agency. Specifically, the complaint included 13 allegations that were reviewed as discussed in
the Results of Review subsection that follows.

For many years, the City of Little Falls has been the recipient of HUD funded Small Cities grants
awarded by the State of New York’s Office of Community Renewal. The Office of Community
Renewal was created under state law within the New York State Housing Trust Fund
Corporation, a public benefit corporation, to administer and monitor the CDBG Program for the
State of New York. The New York State program provides financial assistance to eligible cities,
towns, and villages with populations fewer than 50,000 and counties with an area population
under 200,000, in order to develop viable communities by providing decent, affordable housing,
and suitable living environments, as well as expanding economic opportunities, principally for
persons of low and moderate income.

Recent HUD-funded grants awarded to the City during the years from 2000 through 2008
include:
          Year                   Amount                  Award Type
          2000                  $ 400,000            Economic Development
          2002                     750,000           Comprehensive
          2003                     300,000           Economic Development
          2004                     700,000           Economic Development
          2004                     350,000           Comprehensive
          2005                     400,000           HOME
          2006                     400,000           Housing Rehabilitation
          2008                     650,000           Comprehensive
          Total                 $3,950,000

To locally administer its HUD-funded grants the City has opted to use its Urban Renewal
Agency (URA). The Little Falls URA was established in 1963 under New York State Law §575.
The municipal urban renewal agency constitutes a corporate and political body that is perpetual
in duration and consists of not less than three and not more than five members including
the mayor. Four members of the board are appointed by the mayor, and the mayor acts as the
fifth member. Additional members of the URA are also appointed by the mayor with the


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concurring approval of the city council. Currently, the URA employs one full-time employee,
holding the position of program coordinator.


                                    RESULTS OF REVIEW

Each of the thirteen specific allegations raised in the complaint have merit, as described in the
below analysis of each allegation:

Allegation # 1

Funding for each of the URA’s seven bank accounts were not adequately controlled.

The complaint alleges that City funds were comingled between the various URA accounts and
bills were being paid from comingled accounts with the highest available balances and/or
without regard to the proper funding source or program responsible for the costs, draw downs
were not current, and the first electronic transfer (drawdown) of CDBG funds for the Housing
Rehabilitation Program was never credited to the CDBG cash account.

The review disclosed that the URA had routinely commingled funds between its various cash
accounts and expended funds without regard to the proper funding source or program responsible
for the costs. To date, none of the URA cash accounts have been reconciled to determine the
accurate sources and uses of funds as they relate to specific grant awards. Moreover, draw
downs for the City’s 2006 Housing Rehabilitation grant were not always made timely, and the
first draw down in December 2006 was deposited in a URA program income cash account rather
than the CDBG cash account. During the review in February 2009, the URA Program
Coordinator confirmed that the funds from the first draw down remain in the program income
account and have not been transferred to the CDBG cash account.

The New York State Office of Community Renewal’s Community Development Block Grant
Program Grant Administration Manual (NYS CDBG Grant Manual) Chapter 3, Section C. 2,
provides that separate accounting records must be maintained for each NYS CDBG project so
that revenues and expenditures can be readily identified. Moreover, Chapter 3, Section C.2.,
refers to regulations at 24 CFR 85.20 (b) (2), which provides that recipients and sub recipients
must maintain accounting records, which adequately identify the source and application of funds
provided for financially assisted activities. Accordingly, this allegation has merit.

Allegation # 2

The URA’s HOME Program funding was frozen because required forms were not submitted to
the State.

The initial review determined that the City’s HOME program funding had been frozen by the
State due to discrepancies on a HOME funded disbursement request submitted by the URA.
According to documentation from the State, the funding would be frozen until such time that the
URA provided additional documentation to explain/address the discrepancies. Thus, the

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allegation has merit. However, during the course of the onsite review, the URA was able to
provide satisfactory documentation to the State regarding the discrepancies, resulting in a return
of the City’s HOME program funds.

Allegation # 3

Code Enforcement inspection and completion forms for both the CDBG program and the HOME
program have not been prepared or submitted to the State.

The City did not always maintain adequate documentation showing that final inspections and
completion reports were prepared on housing projects that were determined to be completed.
The allegation that the forms were not prepared has merit, however although the forms were not
submitted to the State, this does not appear to be a requirement. According to New York State’s
Grant Administration Manual, applicable to the CDBG program, and the HOME Disbursement
and Reporting Instructions, applicable to the HOME program, the City is responsible for
maintaining complete project files, including inspection reports and completion forms for each
unit funded under their housing rehabilitation program(s).

Allegation # 4

The URA has not been able to provide evidence to show that it is adhering to the guidelines in
the New York State Public Authorities Act, as amended in 2005.

The City’s URA was not able to provide evidence that it complied with the New York State
Public Authorities Act, as amended in 2005. A primary purpose of the Act is to codify in statute
certain basic principles of effective corporate governance and to promote the understanding and
adoption of these principles by State and local public authorities. For example, there was no
evidence that the URA had adopted a code of ethics and mission statement, established written
operating procedures and personnel policies or internal control procedures, as required by the
Act. Accordingly, the allegation has merit.

Allegation # 5

Lead Base Paint issues within case files.

The complaint alleges that there was no evidence of clearance exam reports in the files, summary
notices issued within 15 days of lead inspection activities, and risk assessments being sent to the
property owners. Our review found that the City appeared to be aware of their responsibilities
regarding lead compliance with homes receiving HUD funds, including the use of contractors
who have been trained and certified as having completed a lead based paint training course
pursuant to 24 CFR Part 35. Nevertheless, the files did not reflect that all homes provided
rehabilitation under HUD funded programs were currently in compliance with the Lead Safety
Rule. Specifically, we found instances where the documents referred to in the complaint were
not included in the project files, as required. Accordingly, the allegation has merit.




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The NYS CDBG Grant Manual, Chapter 6, Section III, paragraph G provides that recipients
must maintain files containing evidence of notifications, evaluation, disclosure, inspections,
testing and abatements, work practices, and clearance for at least three years. In addition,
paragraph 9 of the HOME Disbursement and Reporting Instructions requires recipients to
maintain complete project files to include all lead paint hazard documentation.

Allegation # 6

Other rehabilitation project deficiencies.

The complaint alleges that, for the City’s 2006 Small Cities CDBG program, inspection reports
and building permits were missing, certain projects were deleted initially and then added on as
change orders to certain contracts rather than given to the original low bidder, contracted
amounts could not always be determined because contracts were unclear due to deletions and
change orders, case files were missing deferred loan agreements, there was unclear separation
between single and multiple unit houses, construction on all projects was not complete as of
August 29, 2008, and construction for two properties had not yet begun.

The review concluded that the URA had not always maintained adequate documentation in the
project files for the homes funded under the City’s 2006 Small Cities Program. Specifically, the
URA had not maintained adequate records to ensure compliance with all applicable CDBG
program and New York State grant administration requirements. Accordingly, this allegation
has merit.

Allegation # 7

URA is a separate entity and should not handle monies disbursed by the CDBG or HOME
programs.

The complaint alleges that the URA is a separate entity and that there is no clear documentation
detailing the roles of the URA. We verified that the URA is a separate organization as created
under New York State law. Moreover, the agency was unable to provide us with any agreement
between the URA and the City regarding its roles and responsibilities relating to the
administration of HUD grant funds awarded to the City. Further, the URA staff consists of only
one employee who has sole control over the administration, receipt, and disbursement of grant
funds. Consequently, since the City, and not the URA, is the recipient of HUD-funded grants
awarded by the State of New York, the review concluded that this allegation has merit and that
CDBG and HOME grant funding should not be directly controlled by the URA as currently
exists.

The NYS CDBG Grant Manual, Chapter 1 Section II provides that if a recipient chooses not to
directly administer the CDBG project, they must enter into a contract for services that describes
the division of grant management responsibilities. Moreover, Chapter 3 Section II C of the NYS
CDBG Grant Manual provides that the recipient is responsible for establishing and maintaining a
system of internal controls to protect the integrity of grant funds. To the greatest extent possible,



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the system should provide for adequate separation of duties so that no one individual has
authority over all fiscal functions.


Allegation # 8

The State Program Income Plan (PIP) account is supposed to be a CDBG program income
account, but it has not been recorded properly or reported to the State correctly.

Our review disclosed that the URA had been utilizing the State PIP cash account as a general
fund, and that the URA had failed to establish adequate accounting records to record and report
on program income earned on a grant specific basis. In addition to the fact that the cash balance
in the State PIP account was commingled, reconciled amounts for program income have not yet
been determined by the URA or reported to the State. Consequently, we have concluded that
while the State PIP account is supposed to be a program income account, it was in fact being
utilized as a general fund, and to date, the account’s sources and uses of funds has not been
reconciled. Also, a 2008 State request that the URA provide them with program income data
relating to various grants awarded to the URA by the State since 2000 has not yet been
determined by the URA nor provided to the State. Thus, the allegation has merit.

Chapter 3 Section II C of the NYS CDBG Grant Manual provides that separate accounting
records must be maintained for each NYS CDBG project so that NYS CDBG revenues and
expenditures can be readily identified. Regulations at 24 CFR 85.20 (b) (2) provide that
recipients and sub recipients must maintain accounting records, which adequately identify the
source and application of funds provided for financially assisted activities.


Allegation # 9

Program income has not been disbursed prior to draw down of grant funds.

Our review concluded that program income was not always disbursed prior to the drawdown of
additional grant funds. For instance, we verified that $91,685 was drawn down from the City’s
2006 CDBG Housing Rehabilitation Grant in December 2007. Subsequently, in January 2008,
$69,560 of the $91,685 was transferred to the URA’s State Program Income Plan cash account,
and the remaining $22,125 was transferred to the URA’s Revolving Loan Fund cash account
(also called the HUD Program Income Plan cash account). At the time of the drawdowns, the
State Program Income Plan cash account had a balance of $50,000 and the revolving Loan Fund
cash account had a balance of $7,000. Consequently, it appears that program income was not
always disbursed prior to the drawdown of additional grant funding. Thus, the allegation has
merit.

Chapter 3 Section IV A of the NYS CDBG Grant Manual provides that the Office of Community
Renewal shall require recipients to the maximum extent feasible, to disburse program income that is
subject to the requirements of 24 CFR 570.489 before requesting additional funds from the Office of
Community Renewal for activities.


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Allegation # 10

A separate ledger for the CDBG program has not been maintained.

Our review disclosed that the URA did not maintain a general ledger to account for activity by
grants received. Rather, the URA's automated accounting records consist of "Quick Books"
accounting software that is only being used to track disbursements and receipts by bank account.
Notwithstanding, we verified that the "Quick Books" software used has the ability to produce a
General Ledger. However, the URA did not established General Ledger accounts to properly
account for transactions by specific grants received. We informed the URA that since their
accounting software has the capabilities to establish proper General Ledger accounts; they should
seek advice from their contracted consultants and establish general ledger accounts that can
properly account for activities on a grant specific basis. Nonetheless, since the URA bank
accounts are currently commingled and since a functioning general ledger had not been
established, there is no assurance that grant funds are being adequately controlled or accounted
for, or that grant expenditures are eligible when paid. Accordingly, this allegation has merit.

Chapter 3 Section II C of the NYS CDBG Grant Manual provides that separate accounting
records must be maintained for each NYS CDBG project so that revenues and expenditures can
be readily identified. Regulations at 24 CFR 85.20 (b) (2) provides that recipients and sub
recipients must maintain accounting records, which adequately identify the source and
application of funds provided for financially assisted activities.

Allegation # 11

Budget modifications have not been prepared that may have been needed.

Our review determined that budget modifications have not always been prepared that may have
been needed. Specifically, we reviewed the URA’s available budget files and noted three
instances where budgets were modified internally by the URA, but formal modifications were
not prepared and/or approved by the State or HUD. For example, the URA established and
submitted to HUD a program income budget for 2007 activities amounting to $105,000. Of that,
$60,000 was budgeted for a Veteran’s Memorial Park Improvements activity as a match for a
State-funded Canal Harbor grant. Subsequently, on March 19, 2009, the Mayor directed that
City funds will be provided for the $60,000 match. As such, the URA should modify its 2007
Program Income Budget by re-allocating the funding for other eligible activities and submit it to
HUD for approval. However, it should be noted that until we brought this issue to the attention
of the URA, they were unaware that they would need to modify their budget. At the time of our
review, the budget had not been modified, nor had HUD been notified that the budget will need
to be modified, thus, this allegation has merit.

Regulations at 24 CFR 570.427 requires that grantees shall request prior HUD approval for all
program amendments involving new activities or alteration of existing activities that will
significantly change the scope, location, or objectives of the approved activities or beneficiaries.
Thus, since the URA decided to eliminate the $60,000 activity from the total budget of $105,000,
this would constitute a significant change in scope.

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Further, Chapter 7 Section I of the NYS CDBG Grant Manual provides that during the
administration of a grant, recipients may need to modify the Office of Community Renewal’s
approved program budget in order to more effectively administer the grant and to meet the needs of
the community and project. A formal request is required when a change in the funding of an activity
exceeds $5,000. If the budget modification represents more than 25%, a program amendment is
required. Formal budget modifications require recipients to submit a written request from the Chief
Elected Official explaining the reason and the impact of the modification to the project and its
proposed accomplishments.


Allegation # 12

Administrative funds may have been drawn down prematurely.

Our review disclosed that administrative funds had, at times, been drawn down prematurely. For
example, we noted correspondence from the State regarding the City’s 2004 Small Cities
Comprehensive grant stating that recent draws had been questioned as to the proportion of funds
being drawn, and that administrative and program delivery costs should be drawn roughly
proportionate to the main activities. Moreover, we reviewed the draw downs associated with the
City’s 2006 Housing Rehabilitation Grant and found that for the first 12 of 13 draw downs made
on the grant, the City drew down administrative funding in disproportion to the main grant
activity (Housing Rehabilitation). For instance, the cumulative amounts budgeted for
administration was 5.5 percent of the total grant amount, however draw downs through draw
number 12 exceeded the 5.5 percent limit for these items. As such, from the time of draw
number 1, dated December 13, 2006, through the time of draw number 12, dated September 10,
2008, or for approximately 21 months, the City drew down funding for administration at a rate
that exceeded the 5.5 percent budgetary limit for these items of cost. It was not until the final
13th draw that the total amounts drawn for administration was equal to the budgeted limit of 5.5
percent for administrative costs. Nonetheless, the history of the drawdowns for this grant does
confirm that throughout the time that the grant was active, the City drew down funds for
administrative costs prematurely, and at a rate that exceeded budgetary limits. Thus, this
allegation has merit.

Apart from the above, our analysis of the City’s 2006 Housing Rehabilitation Grant showed that
for the first seven draw downs, the amount drawn for administration and program delivery
exceeded the 20% threshold identified in Chapter 1 of the NYS Small Cities Grant
Administration Manual.

Chapter 1 Section IV of the NYS CDBG Grant Manual provides that Office of Community
Renewal will process funds in accordance with recipients’ program schedule. Requests for
administration and program delivery expenditures that exceed the budgeted amount accumulated
for that quarter or exceed 20% of the program activity expended will not be processed for
payment.




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Allegation # 13

An agreement between the URA and the City regarding a $60,000 State-funded Canal Grant
could not be located or provided.

The complaint alleges that an agreement between the URA and the City regarding a $60,000
State-funded Canal grant could not be located or provided, thus, the grant was apparently made
to the City and not the URA; therefore, the City would be responsible for the $60,000 match.
The review concluded that the allegation did have merit since the agreement between the URA
and the City was not located. However, based on actions undertaken by the City, the matter of
what entity would provide the matching funds for the State grant appears to have been resolved.
On May 19, 2009, the Mayor informed the URA that the City of Little Falls would provide the
$60,000 in matching funds for the State grant.

                                       CONCLUSION

Each of the allegations reviewed were substantiated and determined to have merit. The City and
its URA have begun to address the allegations and are attempting to correct deficiencies that
exist within their HUD funded programs. For example, the City has recently contracted with a
consultant to provide technical assistance, the URA program coordinator and board members
have attended training, and the URA is in the process of upgrading their accounting software so
that proper fund accounting procedures can be implemented. Nonetheless, our review of the
URA’s operations determined that the agency’s books and records could not be relied upon to
provide current or accurate data, and are considered not auditable at this time. Thus, the
substantiated allegations have generated recommended corrective or administrative actions to
ensure that the City and its URA are adequately administering its Small Cities CDBG and
HOME program grants in compliance with applicable requirements.

                                  RECOMMENDATIONS

We recommend that the Director of HUD’s New York City Office of Community Planning and
Development instruct the State of New York’s Office of Community Renewal and Housing Trust
Corporation to coordinate their efforts to

1A.    Conduct a comprehensive monitoring of the City of Little Falls and its URA to ensure
       that it is adequately administering its HUD-funded Small Cities CDBG grants in
       compliance with applicable HUD and State of New York requirements.

We also recommend that HUD instruct the State of New York’s Office of Community Renewal
and Housing Trust Corporation to coordinate their efforts to require the City and its URA to

1B.    Fully reconcile the sources and uses of all grant funds for each CDBG project and cash
       account that it administers, and develop procedures to ensure that the appropriate cash
       accounts are used for grant income and expense transactions.




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1C.   Implement procedures to ensure that grant funds are drawn down in a timely manner and
      are credited to the appropriate cash account, so that the proper cash accounts are used for
      grant expenses in accordance with the grant agreement.

1D.   Develop administrative control procedures to ensure compliance with all HOME program
      disbursement and reporting requirements.

1E.   Establish procedures to ensure the proper monitoring and maintenance of CDBG and
      HOME program activity files to ensure compliance with all applicable CDBG and
      HOME program and New York State grant administration requirements

1F.   Implement procedures to ensure the requirements of the New York State Public
      Authorities Act are adopted and adhered to.

1G.   Implement procedures to ensure that all properties funded under the City’s housing
      rehabilitation program(s) are brought into compliance with the Lead Safe Housing Rule
      at 24 CFR (Code of Federal Regulations) Part 35.

1H.   Establish program guidelines to ensure that the requirements of the Lead Safe Housing
      Rule are consistently implemented.

1I.   Execute a contract between the City and its URA for services that describes the division
      of grant management’s responsibilities.

1J.   Establish internal controls that provide for adequate separation of duties so that no one
      individual has authority over all fiscal functions.

1K.   Establish procedures to ensure the accuracy and reliability of accounting data and to
      ensure that assets are adequately safeguarded.

1L.   Account for, reconcile, and report on all program income earned on grants awarded to the
      URA by the State since 2000 as previously requested by the State.

1M.   Implement procedures to ensure that program income is disbursed before requesting
      additional funds from the New York State Office of Community Renewal for activities.

1N    Establish a functioning general ledger for recording resources, liabilities, and equity for all
      HUD funded grants and program income transactions.

1O.   Establish procedures to ensure that budgets are modified timely as needed and are
      approved by the funding agency when required.

1P.   Establish procedures to ensure that draw downs for administrative costs are within
      program limits and are in proportion to the main activities.




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            AUDITEE COMMENTS AND OIG’S EVALUATION



Ref to OIG Evaluation       Auditee Comments




Comment 1




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            AUDITEE COMMENTS AND OIG’S EVALUATION



Ref to OIG Evaluation       Auditee Comments




Comment 1




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                         OIG Evaluation of Auditee Comments

Comment 1   Officials for the City have no significant disagreements on the allegations, details,
            and recommendations presented in the audit memorandum. The corrective
            actions taken by the officials are responsive to our review.




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