oversight

The State of Washington Did Not Always Allocate Its Neighborhood Stabilization Program Funds Based on Greatest Need

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-15.

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
                                                                                               Region X
                                                                                 Federal Office Building
                                                                             909 First Avenue, Suite 126
                                                                       Seattle, Washington 98104-1000
                                                                                         (206) 220-5360
                                                                                    Fax (206) 220-5162


                                                                    Issue Date

                                                                          September 15, 2009
                                                                    Audit Report Number

                                                                             2009-SE-1802



MEMORANDUM FOR:               Jack Peters, Director, Region X, Office of Community Planning
                              and Development, 0AD



FROM:                         Joan S. Hobbs
                              Regional Inspector General for Audit, Region X, 0AGA

SUBJECT:                      The State of Washington Did Not Always Allocate Its
                              Neighborhood Stabilization Program Funds Based on Greatest
                              Need


                                       INTRODUCTION

We audited the State of Washington’s (State) Neighborhood Stabilization Program (Program).
The audit was part of our fiscal year 2009 annual audit plan. We selected the State because it
was responsible for the distribution of funds to the entitlement areas, as well as to nonentitlement
areas, of the State. Our objective was to determine whether the State’s Program implementation
was compliant with U.S. Department of Housing and Urban Development (HUD) requirements.
Specifically, we wanted to determine whether

       The State’s selection of the subrecipients was based on greatest need,
       The subrecipients’ proposals contained only eligible activities, and
       The subrecipients had the capacity to administer the funds.

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.
                               SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed

       Applicable laws; the Federal Register, dated October 6, 2008; HUD’s regulations at 24 CFR
       [Code of Federal Regulations] Parts 85 and 91; and other HUD guidance;
       Community Planning and Development Regional Office files for the State’s Program grant; and
       The State’s 2008 Action Plan Amendment for the Program, policies and procedures,
       subrecipients’ proposals, draft contracts with subrecipients, Community Development Block
       Grant monitoring files, and financial reports.

We also interviewed the State’s employees and HUD’s staff.

We performed our on-site audit work from June through July 2009 at the State’s office located in
Olympia, Washington. The audit covered the period October 2008 through July 2009.

This was a limited scope review. Therefore, our work was not performed in accordance with
generally accepted government auditing standards.


                                        BACKGROUND

The Program. Authorized under Title III of the Housing and Economic Recovery Act (Act), as
amended, the Program provides grants to every state and certain local communities to purchase
foreclosed or abandoned homes and to rehabilitate, resell, or redevelop these homes to stabilize
neighborhoods and stem the decline in value of neighboring homes. HUD allocated more than
$3.9 billion in Program funds to grantees.

The State. HUD allocated nearly $28.2 million in Program funds to the State based upon the
funding formula developed by HUD pursuant to the Act. On March 20, 2009, HUD entered into
a grant agreement with the State’s Department of Community, Trade, and Economic
Development for the full amount allocated. Effective July 26, 2009, this department changed its
name to the Department of Commerce.

Congress amended its Program and increased its funding as part of the American Reinvestment
and Recovery Act of 2009 (Recovery Act). The State submitted an application, dated July 16,
2009 for additional Program funds under the Recovery Act. The application is under review by
HUD.


                                   RESULTS OF REVIEW

The State’s Program implementation was generally compliant with HUD requirements.
However, the distribution was not entirely based on greatest need. This condition occurred
because the State misinterpreted foreclosure need score data obtained from the Local Initiatives
Support Corporation. As a result, some communities received excessive allocations, while
others that had a greater need did not receive an allocation.


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According to the Program’s statutory requirements, grantees must distribute funds to areas with
the greatest need. The State determined which areas had the greatest need by using foreclosure
need score data from two datasets created by the Local Initiatives Support Corporation. One
dataset contained foreclosure “needs scores” for Community Development Block Grant
jurisdictions (entitlement areas), and one dataset contained the “needs scores” at the ZIP Code
level within each state (all communities including entitlement areas). These scores incorporated
measures of subprime lending, foreclosures, delinquency, and vacancies to help state and local
officials quickly assess the relative needs of different jurisdictions for Program funding within
each state and allocate funds accordingly.

The State used both datasets for its distribution; however, the databases were not comparable. The
dataset methodology stated, “Users are advised NOT to compare foreclosure needs scores at the
ZIP Code level with CDBG [Community Development Block Grant] Jurisdiction needs scores,
as each set of scores is based on an independent ranking system.” As a result, some of the
Community Development Block Grant jurisdictions did not receive funds although they had a
greater need than some of the smaller communities that were funded.

During our review, we noted that after its initial allocation, the State had $1.3 million available for
distribution because two of the subrecipients declined to participate in the program after initially
notifying the State that they intended to participate. The State planned to hold these funds in
reserve to be distributed at a later date to subrecipients that were timely in expending their
funding and could obligate the funding before HUD’s September 18, 2010, deadline. We
recommended that these funds be offered to three communities that had not previously received
funding and three existing subrecipients that were underfunded based on their foreclosure need
score ranking. The State agreed with our audit recommendations and has already taken corrective
action (see appendix A for details).


                                      RECOMMENDATION

We recommend that the Seattle Office of Community Planning and Development ensure that the
State

    1A. Awards the $1.3 million in Program funds to subrecipients that were not funded or were
        underfunded so that these funds will be used for communities that had a greater need
        than some of the communities that received funding.

    1B. Ensure it fully understands external data before using it to make future allocations of
        funds.

                                     AUDITEE’S RESPONSE

We provided a discussion draft memorandum report to the auditee on August 25, 2009, and held
an exit conference with its staff on September 8, 2009. The State chose not to provide any
written comments. It agreed with our findings and recommendations.




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Appendix A

                            SCHEDULE OF
                    FUNDS TO BE PUT TO BETTER USE

                              Recommendation        Funds to be put
                                  number            to better use 1/
                                       1A             $1,335,314


1/ 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 preaward reviews, and any other savings that are specifically identified. The amount in
this report represents funds that would have been distributed to the existing subrecipients if our
recommendation had not been implemented. The State has already implemented our
recommendation.




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Appendix A-1

                    SCHEDULE OF
   FUNDS TO BE PUT TO BETTER USE BY SUBRECIPIENT

                                   Final State Audit determined   Funds to be put
Subecipient        County         distribution   distribution       to better use
Aberdeen           Grays Harbor     $756,938          $756,938
Bellingham*        Whatcom                    *         343,666         $343,666
Centralia **       Lewis             391,315                **
Clark County       Clark            1,577,664         1,577,664
Everett            Snohomish         546,899            546,899
Federal Way        King              651,688            651,688
Hoquiam            Grays Harbor      448,918            448,918
Kelso              Cowlitz           430,326            514,472           84,146
Kennewick          Benton                     *         402,364          402,364
Kent               King              475,264            475,264
King County        King             2,285,126         2,465,051          179,925
Kitsap County      Kitsap            671,745            862,836          191,091
Lacey              Thurston          356,065            356,065
Lakewood           Pierce            626,793            626,793
Moses Lake         Grant             329,666            329,666
Pasco              Franklin          402,141            402,141
Pierce County      Pierce           4,692,761         4,692,761
Richland           Benton                     *         134,121          134,121
Seattle            King              458,126            458,126
Sedro-Woolley *** Skagit                 ***               ***
Shelton **         Mason             943,998                **
Snohomish County   Snohomish        2,313,822         2,313,822
Spokane            Spokane          1,085,281         1,085,281
Spokane County     Spokane           689,625            689,625


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                                       Final State Audit determined        Funds to be put
Subecipient           County          distribution   distribution            to better use
Sunnyside             Yakima               622,508              622,508
Tacoma                Pierce             3,083,548            3,083,548
Toppenish             Yakima               252,351              252,351
Vancouver             Clark                802,767              802,767
Walla Walla           Walla Walla          306,974              306,974
Wapato                Yakima               257,900              257,900
Yakima                Yakima               650,614              650,614
Yelm                  Thurston             640,505              640,505
State reserves **                        1,335,313
State administrative funds               1,407,965            1,407,965
Totals                                 $28,159,293          $28,159,293          $1,335,313


* These Community Development Block Grant jurisdictions did not initially receive funds although
they had a greater need than some of the smaller communities that were funded.

** Two subrecipients decided not to participate after the final distribution was made. The State
was holding these funds in reserve to be distributed at a later date to subrecipients that were
obligating the funds in a timely manner. However, as a result of our audit, the State will
redistribute these funds to communities that had previously not received funding or that had
initially been underfunded.

*** Sedro Woolley decided not to participate after HUD approved the Washington State Action
Plan Amendment, dated December 2008. The State distributed the Sedro Woolley funds to the
smaller communities and published a January 29, 2009 Final NSP Distribution List on its Web
site.




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