oversight

The City of Bethlehem, Pennsylvania, Generally Administered Its Community Development Block Grant Program in Accordance with HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-02-02.

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

                                                              Issue Date
                                                                 February 2, 2009
                                                              Audit Report Number
                                                                 2009-PH-1005




TO:        Nadab O. Bynum, Director, Philadelphia Regional Office of Community
            Planning and Development, 3AD


FROM:      John P. Buck, Regional Inspector General for Audit, Philadelphia Region,
             3AGA


SUBJECT:   The City of Bethlehem, Pennsylvania, Generally Administered Its Community
            Development Block Grant Program in Accordance with HUD Requirements


                                 HIGHLIGHTS

 What We Audited and Why

           We performed an audit of the City of Bethlehem’s (City) Community
           Development Block Grant (CDBG) program as a result of a citizen complaint.

           Our audit objective was to determine whether the City administered its CDBG
           program in compliance with U.S. Department of Housing and Urban
           Development (HUD) requirements. We focused our review on whether the City
           (1) had adequate internal controls over its management process, accounting, and
           data processing; (2) used CDBG program funds for eligible activities; (3) used
           CDBG funds to meet the program’s national objectives; and (4) properly
           accounted for CDBG program income.

 What We Found


           The City generally administered its CDBG program in compliance with HUD
           requirements.
Auditee’s Response


           We provided the auditee the final report on February 2, 2009.




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                          TABLE OF CONTENTS

Background and Objective                                                        4

Results of Audit
      The City Generally Administered Its CDBG Program in Accordance with HUD   5
      Requirements

Scope and Methodology                                                           8

Internal Controls                                                               9

Appendixes                                                                      11
   A. Auditee Comments




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                      BACKGROUND AND OBJECTIVES

The Community Development Block Grant (CDBG) program was created under Title I of the
Housing and Community Development Act of 1974, as amended, and is regulated by 24 CFR
[Code of Federal Regulations] Part 570. The program provides annual grants on a formula basis
to entitled cities and counties to develop viable urban communities by providing decent housing
and a suitable living environment and by expanding economic opportunities, principally for low-
and moderate-income persons. The U.S. Department of Housing and Urban Development
(HUD) awards grants to entitlement community grantees to carry out a wide range of community
development activities directed toward revitalizing neighborhoods, economic development, and
providing improved community facilities and services. Entitlement communities develop their
own programs and funding priorities. Grantees must use the funds for an eligible activity that
meets one or more of the CDBG program’s national objectives, which are to (1) benefit low- and
moderate-income persons, (2) aid in the prevention or elimination of slums or blight, and (3)
meet other community development needs having a particular urgency because existing
conditions pose a serious and immediate threat to the health or welfare of the community and
other financial resources are not available to meet such needs. CDBG funds may not be used for
activities which do not meet these broad national objectives.

HUD has designated the City of Bethlehem (City) an entitlement community eligible to receive
funding from the Office of Community Planning and Development annually. HUD awarded the
City $1.7 million in CDBG funding annually in fiscal years 2006, 2007, and 2008.

The City was incorporated in 1962 under the provisions of the constitution and general statutes
of the Commonwealth of Pennsylvania. It is a third class city, as defined by the state statutes. It
operates under a mayor-council form of government and provides a full range of services
including public safety, roads, sanitation, health, culture and recreation, and general government
services. The City administers the CDBG program through its Department of Community and
Economic Development. A director manages the daily operations of the department, which
maintains its records at 10 East Church Street, Bethlehem, Pennsylvania.

Our audit objective was to determine whether the City administered its CDBG program in
compliance with HUD requirements. Specifically, we wanted to determine whether the City (1)
had adequate internal controls over its management process, accounting, and data processing, (2)
used CDBG funds for eligible activities, (3) used CDBG funds to meet the program’s national
objectives, and (4) properly accounted for program income.




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                                RESULTS OF AUDIT

The City Generally Administered Its CDBG Program in Accordance
with HUD Requirements
The City had adequate internal controls over its management process, accounting, and data
processing and used its program funds for eligible activities that met the program’s national
objectives. Additionally, the City properly accounted for CDBG program income and had taken
corrective action to ensure that its CDBG program income was reported and recorded in a timely
manner.



 The City’s Internal Controls
 and Financial Management
 System Were Adequate


              The City’s accounting department was a separate entity from its community
              development department. The community development staff reviewed all
              incoming invoices before sending them to the accounting department for
              additional review and payment. The City’s accounting policies and procedures
              reasonably ensured that program implementation was consistent with HUD laws
              and regulations. Its financial management/accounting software was adequate to
              account for all financial transactions made by the City related to its CDBG
              program. In addition, its CDBG activities were included in its HUD-approved
              action plans, it had adequate policies and procedures governing its economic
              development loan programs, and it adequately monitored its subrecipients.

 The City Made Expenditures
 for Eligible Activities


              The City used its funds for eligible CDBG activities. We reviewed all 11
              economic development loans, valued at $469,251, that were reported in the City’s
              financial records between December 1, 2006 and June 12, 2008, as being
              outstanding for less than 2.5 years to determine whether the related activities were
              eligible. We reviewed the economic development loans because the complainant
              alleged that the City made inappropriate float loans. Regulations at 24 CFR
              [Code of Federal Regulations] 570.301(b) state that a recipient may use
              undisbursed program funds that are budgeted in statements or action plans for one
              or more other activities that do not need the funds immediately, subject to specific
              limitations. These funds are referred to as “the float.” Whenever the recipient
              proposes to fund an activity with the float, it must include the activity in its action

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           plan or amend the action plan for the current program year. The City did not
           identify any float-funded activities in its action plan provided to HUD for its
           CDBG program in 2006, 2007, or 2008. Documentation in the loan files showed
           that the loans were not float loans. Instead, although the loans appeared in the
           City’s financial records to have been outstanding for less than 2.5 years, they
           were actually loans that had been modified in the City’s financial records as a
           result of its obtaining private debt financing. Specifically, of the $469,251 in
           CDBG funds initially disbursed, the City obtained private debt financing totaling
           $346,634 from financial institutions to replace and secure the CDBG funds that it
           disbursed initially. Thus, the City was ultimately responsible for only $122,617
           in CDBG funds related to these loans. In addition, we nonstatistically selected 10
           expenditures of CDBG funds totaling $51,690 that the City made between
           December 2006 and April 2008. Documentation supporting the expenditures
           showed that the related activities were eligible.

The City’s Expenditures Met
the Program’s National
Objectives


           The activities related to the 11 economic development loans and the 10
           expenditures identified above met the CDBG program’s national objectives. The
           City issued three of the economic development loans, valued at $160,500, under
           its Fund for Revitalization and Economic Development program. The intent of
           this program is to provide an economic development tool to furnish low interest
           rate financing to firms that will create and/or retain employment opportunities for
           low- to moderate-income City residents and enhance the City’s tax base. This
           loan program met the CDBG program’s national objective of providing activities
           that benefit low- and moderate-income persons. The City issued the remaining
           eight economic development loans, valued at $308,751, under its Façade
           Program. The City established its Façade Program to provide property owners
           with incentives to restore, rehabilitate, or otherwise improve the façade of their
           buildings. This loan program met the CDBG program’s national objective of
           providing activities which aid in the prevention or elimination of slums or blight.
           Of the 10 expenditures reviewed, the City made six, valued at $19,928, related to
           activities which aided in the prevention or elimination of slums or blight. It made
           two expenditures, valued at $25,075, related to activities benefiting low- and
           moderate-income persons and it made two expenditures, valued at $6,687, for
           administration costs related to its housing rehabilitation program.




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The City Properly Accounted
for Program Income


             Although the City did not always report program income in a timely manner, it
             spent the program income before drawing additional CDBG funds. The City has
             taken corrective action to ensure that its CDBG program income was reported and
             recorded in a timely manner. The regulations at 24 CFR 570.504(a) require that
             the receipt and expenditure of program income be recorded as part of the financial
             transactions of the grant program. Further, the regulations at 24 CFR
             570.504(b)(1) and (2) state that program income received before grant closeout
             may be retained by the recipient if the income is treated as additional CDBG
             funds subject to all applicable requirements governing the use of CDBG funds. If
             the recipient chooses to retain program income, that program income shall be
             disposed of before drawing additional CDBG funds for the same activity. For
             example, in the citizen complaint, it was alleged that the City did not report
             $300,000 in program income in its financial records as it was earned or during the
             year in which it was earned. However, the City deposited the $300,000 into its
             escrow bank account for 21 days before transferring it to its CDBG program bank
             account. The City used the program income for program expenditures in January
             2007 before drawing additional CDBG funds. The City was made aware of the
             potential problems associated with delayed reporting of program income by its
             independent auditor in October 2007 and corrected the problem.

Conclusion


             The City generally administered its CDBG program in accordance with HUD
             requirements.




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                        SCOPE AND METHODOLOGY

We conducted the audit at the City’s offices in Bethlehem, Pennsylvania, from May through
December 2008. The audit covered transactions representative of operations current at the time
of the audit and included the period December 2006 through April 2008. We expanded the
scope of the audit as necessary. We discussed operations with responsible City employees and
officials from HUD’s Philadelphia, Pennsylvania, field office. To accomplish our audit
objective, we

       Reviewed applicable legislation, regulations, and HUD handbooks/guidebooks.

       Reviewed the City’s policies and procedures for the organization’s accounting controls,
       procurement practices, and monitoring policies to ensure that they were consistent with
       HUD requirements.

       Evaluated the internal controls and conducted sufficient tests to determine whether the
       controls functioned as intended.

       Identified and examined controls over computer systems to identify sources of data, the
       relevance of data, and the reliability of the systems.

       Reviewed the City’s fiscal years 2005 and 2006 audited financial statements and its 2006,
       2007, and 2008 annual CDBG plans.

       Reviewed all 11 of the City’s economic development loans totaling $469,251 that were
       outstanding for less than 2.5 years from the 168 economic development loans valued at
       more than $2.6 million that were reported in the City’s financial records between
       December 1, 2006 and June 12, 2008.

       Reviewed the City’s accounting for $300,000 in CDBG program income that it received
       in December 2006.

       Nonstatistically selected and reviewed 10 expenditures totaling $51,690 from a universe
       more than $2.4 million in expenditures that the City made between December 2006 and
       April 2008.

We performed our review 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 conclusions based on our audit objective. We
believe that the evidence obtained provides a reasonable basis for our conclusions based on our
audit objective.




                                               8
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives 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
              objective:

                      Compliance with applicable laws, regulations, and provisions of program
                      agreements – Policies and procedures that management has implemented to
                      reasonably ensure that a program meets its objectives.

                      Program operations – 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.



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Significant Weaknesses


           We did not identify any significant weaknesses in the relevant controls identified
           above.




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                APPENDIXES

Appendix A

             AUDITEE COMMENTS




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