Issue Date May 17, 2010 Audit Report Number 2010-AT-1004 TO: Charles Franklin, Director, Community Planning and Development Division, 4CD //signed// FROM: James D. McKay, Regional Inspector General for Audit, Atlanta Region, 4AGA SUBJECT: Mobile Housing Board, Mobile, AL, Used HOME Investment Partnerships Program Funds for Ineligible and Unsupported Costs for Its HOPE VI Redevelopment HIGHLIGHTS What We Audited and Why We audited the Mobile Housing Board (Housing Board), which serves as both the public housing agency and the administering agency for the City of Mobile, AL’s (City) HOME Investment Partnerships Program (HOME) and Community Development Block Grant (CDBG) program. We performed the audit based on a request from the Assistant Secretary, Community Planning and Development. The Assistant Secretary, along with the Director of the Office of Affordable Housing, expressed substantial concerns regarding the eligibility of the HOME and CDBG funds expended on the Housing Board’s HOPE VI project, as well as the Housing Board’s administration of the HOME and CDBG programs related to its public housing HOPE VI project, given the Housing Board’s dual role as administrator of the programs and the public housing authority. Our audit objective was to determine whether the City adequately monitored the Housing Board and whether the Housing Board’s controls and procedures to separate its public housing agency operations from its administration of HOME and CDBG programs were effective in preventing and detecting ineligible and unsupported costs in its HOPE VI redevelopment. What We Found The City did not perform annual monitoring of the Housing Board to ensure that its HOME funds were used in accordance with all program requirements. This condition occurred because the City did not maintain an adequate subrecipient agreement with the Housing Board that provided current and sufficient detail as a sound basis on which to effectively monitor the Housing Board's performance. In addition, the City did not establish procedures for monitoring the Housing Board. As a result, due to its lack of monitoring, the City failed to detect or prevent the Housing Board’s use of more than $1.1 million for unsupported and ineligible costs for the HOPE VI redevelopment. Cost allocation plans were not developed by the Housing Board to properly allocate or prorate its HOME program costs for phases III and IV. The Housing Board arbitrarily charged more than $1 million to phases III and IV. This condition occurred because the Housing Board expended the funds to meet program expenditure deadlines without regard to HOME regulations. As a result, the Housing Board disbursed $839,713 in unsupported costs on both phases. The Housing Board used $339,657 of its HOME funds to pay for ineligible costs in all four phases of its HOPE VI redevelopment project. This condition occurred because (1) the Housing Board’s controls and procedures to separate its public housing agency operations from its administration of CPD programs were ineffective in preventing and detecting ineligible costs and (2) the City did not monitor the Housing Board (see finding 1). As a result, $339,657 in HOME funds was not used as intended under the HOME program. What We Recommend We recommend that the Director for Community Planning and Development ensure that the City (1) establishes and maintains a subrecipient agreement with the Housing Board pursuant to HUD requirements, (2) develops procedures to monitor the Housing Board at least annually, and (3) reallocates the excessive $1.9 million in HOME and CDBG funds to other eligible activities and program recipients. In addition, we recommend that the Director for Community Planning and Development require the Housing Board to (1) support the $839,713 in HOME funds it charged to phases III and IV with either a cost allocation or proration plan, repaying any amount that cannot be supported; (2) lower the sales prices of the HOME units in phase I to within HUD requirements and ensure that they are occupied by qualified low-income persons in a timely manner or repay the $156,004 in ineligible HOME funds; (3) recapture the $183,653 in HOME funds 2 used to pay for ineligible costs for phases II, III, and IV of the HOPE VI redevelopment; and (4) establish controls and procedures to separate its public housing agency operations from its administration of CPD programs so that HOME funds will be used according to program requirements. 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 our review results with the Housing Board, the City and HUD officials during the audit. We provided a copy of the draft report to Housing Board officials on March 30, 2010, for their comments and discussed the report with the officials at the exit conference on April 8, 2010. The Housing Board provided written comments on April 21, 2010. It generally disagreed with our findings. The complete text of the Housing Board’s response, along with our evaluation of that response, can be found in appendix B of this report. Attachments to the Housing Board’s comments were not included in the report but are available for review upon request. 3 TABLE OF CONTENTS Background and Objective 5 Results of Audit Finding 1: The City Did Not Adequately Monitor the Housing Board 6 Finding 2: The Housing Board Did Not Develop Cost Allocation Plans for 9 Phases III and IV Finding 3: The Housing Board Used HOME Funds for Ineligible Costs 12 Scope and Methodology 16 Internal Controls 17 Appendixes A. Schedule of Questioned Costs and Funds To Be Put to Better Use 18 B. Auditee Comments and OIG’s Evaluation 19 4 BACKGROUND AND OBJECTIVE The Mobile Housing Board (Housing Board) serves as the public housing authority for the City of Mobile (City). The Housing Board was incorporated in 1937 and chartered under the laws of the State of Alabama to provide and administer affordable housing programs and related programs for the citizens of Mobile, AL. The Housing Board receives policy guidance and operational approval from its five-member governing board of commissioners. The commissioners are appointed to 5-year terms by the mayor of Mobile. The Housing Board dismissed its long-time executive director on December 2, 2009, and hired Dwayne Vaughn as interim executive director. The majority of funding for the Housing Board is provided by the Federal Government through the U.S. Department of Housing and Urban Development (HUD). The Housing Board provides housing or housing assistance to more than 7,000 families through the traditional public housing and Housing Choice Voucher programs. In addition to its role as the public housing authority, the Housing Board works in collaboration with the City to administer its Community Development Block Grant (CDBG) program and, operates as a subrecipient for the City’s HOME Investment Partnerships Program (HOME). The Housing Board received a $20 million fiscal year 2003 HOPE VI revitalization grant from HUD’s Public and Indian Housing Division for redevelopment of the Albert Owens/Jesse Thomas public housing developments. The HOPE VI redevelopment was financed with the $20 million in HOPE VI funds, which leveraged another $23.9 million in investment that included HOME and CDBG funds. The audit objective was to determine whether the City adequately monitored the Housing Board and whether the Housing Board’s controls and procedures to separate its public housing agency operations from its administration of HOME and CDBG programs were effective in preventing and detecting ineligible and unsupported HOME and CDBG costs in its HOPE VI redevelopment. 5 RESULTS OF AUDIT Finding 1: The City Did Not Adequately Monitor the Housing Board The City did not adequately monitor its subrecipient, the Housing Board This condition occurred because the City did not maintain an adequate subrecipient agreement with the Housing Board that provided current and sufficient detail as a sound basis on which to effectively monitor the Housing Board’s performance. In addition, the City did not establish procedures for monitoring the Housing Board. As a result, due to its lack of monitoring, the City failed to detect or prevent the Housing Board’s use of more than $1.1 million for unsupported and ineligible costs for the HOPE VI redevelopment (see findings 2 and 3). Monitoring Reviews Not Conducted as Required The City did not comply with HUD requirements for managing its HOME program. 24 CFR 92.504(a) requires the City to review the Housing Board, at least annually, to ensure that HOME funds are used in accordance with all program requirements. However, the City had not performed monitoring reviews of the Housing Board within the past 10 years and did not have procedures for monitoring the HOME program. The City did not maintain an adequate subrecipient agreement with the Housing Board. 24 CFR 92.504(b) requires that, before disbursing HOME funds to the Housing Board, the City must enter into a written agreement. The subrecipient agreement in place was executed on August 10, 1999, and had not been revised. The 1999 agreement did not describe, in current and sufficient detail, the use of the HOME funds, including the tasks to be performed, a schedule for completing the tasks, a budget, and the period of the agreement as required by 24 CFR 92.504(c)(2)(i). The agreement did not address the use of program income and did not specify the particular records that must be maintained and the information or reports that must be submitted to assist the City in meeting its requirements as required by 24 CFR 92.504(c)(2)(ii) and (vii). Without a proper subrecipient agreement, the City lacked a sound basis upon which to effectively develop procedures to monitor the Housing Board’s performance. Consequently, the Mobile City Council allocated more than $1.9 million in excessive HOME and CDBG funds for the HOPE VI redevelopment project. On May 13, 2008, the City allocated $5.3 million to the Housing Board’s HOPE VI redevelopment project without proper documentation to support the funds needed. According to the former executive director, the funds were allocated based on the HOPE VI matching requirements. However, the Housing Board’s HOPE VI 6 status report, dated January 12, 2010, documented that only $3.308 million in HOME and CDBG funds was needed and the Housing Board confirmed that the HOME and CDBG funding amounts in that status report were still accurate as of March 23, 2010. Therefore, the City reallocated more than $1.9 million in excessive HOME and CDBG funds to the Housing Board for its HOPE VI redevelopment. These funds were not available for use to benefit HUD’s intended recipients, and the City should reallocate these funds to other eligible activities. Also, due to its lack of monitoring, the City failed to detect or prevent the use of HOME funds for unsupported and ineligible costs for the HOPE VI redevelopment project. The Housing Board used $839,713 for unsupported costs (see finding 2) and $339,657 for ineligible costs (see finding 3) that should be repaid. The City’s chief of staff acknowledged that the City did not monitor the Housing Board and that the subrecipient agreement was inadequate. As of January 27, 2010, the City had begun efforts to develop audit procedures and assigned an internal auditor the responsibility for monitoring the Housing Board. Before that designation, the City did not have an internal audit function in place for monitoring the Housing Board. The City’s chief of staff stated that the subrecipient agreement would be revised and maintained to reflect current HOME activities in sufficient detail to provide a sound basis for effective monitoring. Conclusion Overall, the City did not comply with HUD requirements for managing the Housing Board’s HOME program. It did not establish an adequate subrecipient agreement or have montitoring procedures in place. It allocated more than $1.9 million in excessive HOME and CDBG funds to the Housing Board for its HOPE VI redevelopment. In addition, due to its lack of monitoring, the City failed to detect or prevent the use of HOME funds for unsupported and ineligible costs for the HOPE VI redevelopment project. The Housing Board used $839,713 for unsupported costs (see finding 2) and $339,657 for ineligible costs (see finding 3) that should be repaid. Recommendations We recommend that the Director, Office of Community Planning and Development, 1A. Require the City to establish and maintain a subrecipient agreement with the Housing Board, as provided by HUD requirements that includes 7 current and sufficient detail to provide a sound basis on which to effectively monitor the Housing Board’s performance. 1B. Require the City to develop procedures for monitoring the Housing Board, at least annually, to ensure that HOME funds are used in accordance with all program requirements. 1C. Require the City to reallocate the $1,991,149 in excess HOME and CDBG funds it reallocated to the Housing Board in support of its HOPE VI redevelopment project to other eligible activities and program recipients. 8 Finding 2: The Housing Board Did Not Develop Cost Allocation Plans for Phases III and IV The Housing Board did not develop cost allocation plans to properly allocate or prorate its HOME program costs for phases III and IV. It arbitrarily charged more than $1 million to phases III and IV. This condition occurred because the Housing Board expended the funds to meet program expenditure deadlines without regard to HOME regulations. As a result, it disbursed $839,713 in unsupported costs on both phases. Four Phases of the HOPE VI Program The Housing Board’s HOPE VI redevelopment program included four phases: phase I included 9 single-family homeownership units, phase II included an 88- unit senior rental high rise, phase III included 87 family rental units, and phase IV included 48 family rental units. HUD’s Community Planning and Development Notice 98-2 states that HOME funds may be invested in mixed-income projects to assist only the HOME portion of the units in the project. It is necessary to distinguish between HOME-assisted and other units. When the units are comparable, the actual costs can be determined by prorating total development costs. When units are not comparable, the participating jurisdiction must allocate the HOME costs on a unit-by-unit basis, charging only actual costs to the HOME program. Six of the nine units for phase I received HOME funding, and three units were privately financed. Since the six units were HOME specific, allocation of the costs was not required. Phase II did not include HOME units and was not eligible for HOME funds. However, phases III and IV received mixed funding from several HUD programs and private financing, which required allocation of the HOME costs. Phase III Development Costs Phase III of the redevelopment plan consisted of a community building and 47 family buildings containing 87 subsidized units, to include 14 1-bedroom units, 53 2-bedroom units, and 20 3-bedroom units. The Housing Board estimated that it would cost more than $18.7 million to develop phase III. It planned to use mixed funding from the HOME and HOPE VI programs, along with capital funds and various tax credits, to finance the development. 9 The Housing Board committed HOME funds of $990,525 for phase III. As of December 31, 2009, it had drawn $842,973 in HOME funds but only charged $835,641 to phase III. The remaining $7,332 was used to pay for costs associated with phases I and II. A portion of the $835,641 was used to pay $130,872 in ineligible expenses for demolition fees. The ineligible costs are discussed in finding 3. The remaining $704,769 was unsupported because the Housing Board did not have a cost allocation plan to support the distribution of the costs among the various funding sources. In addition, the Housing Board committed and expended $22,735 in HOME funds to acquire a parcel of land used for phase III. The Housing Board purchased the parcel of land expecting to receive an earlier HOPE VI grant. However, it did not receive the grant. At the time the land was purchased with HOME funds, there was not reasonable expectation that construction would begin within 12 months, as required by 24 CFR 92.2(2) (i). Because the Housing Board subsequently applied for and was awarded the HOPE VI redevelopment grant, and the land was necessary for that HOPE VI project, purchase of the land was an allowable cost. However, the cost was unsupported since a cost allocation plan was not in place to distribute the costs among the various funding sources. Phase IV Development Costs Phase IV of the redevelopment plan consisted of 24 twin buildings containing 48 family units, to include 14 2-bedroom units and 34 3-bedroom units. The Housing Board estimated that it would cost more than $10.3 million to develop phase IV and planned to finance it using mixed funds from the HOME and HOPE VI programs, along with capital and CDBG funds, to finance the development. The Housing Board committed more than $1.2 million in HOME funds to phase IV. As of December 31, 2009, it had expended more than $7.3 million, charging $160,709 to the HOME program. A portion of the $160,709 was used to pay $48,500 in ineligible expenses for architectural fees. The ineligible costs are discussed in finding 3. The Housing Board did not have a cost allocation plan to support the remaining $112,209 in costs expended. Therefore, $112,209 was not a supported cost for phase IV. Cost Allocation Plan Not Prepared The Housing Board provided a document between the City and the Housing Board, dated June 16, 2009, signed by the Housing Board’s former executive director. The Housing Board identified this document as an allocation plan. The document pertained only to phase IV, and its purpose was for the Housing Board 10 to acknowledge to the City that 11 of the 48 units built in phase IV would be set aside as HOME units. The document did not identify the units to be set aside, the bedroom size, or the square footage. These elements are necessary to establish unit comparability. There was no evidence that the Housing Board used this document to allocate the program costs. The Housing Board did not develop an allocation plan because it expended the funds to meet program expenditure deadlines without regard to HOME regulations. According to the former executive director, if a HOME program expenditure deadline was near, the Housing Board would use HOME funds to make a payment even if the costs were not for the HOME program, thus charging the HOME program incorrectly. The Housing Board was preparing a cost allocation plan. It sought HUD’s assistance to ensure that the allocation plan would meet HOME requirements and costs to the HOME program would be accurately stated and supported. Since the Housing Board failed to develop a cost allocation plan to distribute the costs among the various funding sources, it made $839,713 in unsupported charges to the HOME program. This process not only resulted in unsupported costs being charged to the HOME program, it will also result in additional staff time needed to revisit and adjust the expenditures once a proper cost allocation plan is developed. Recommendations We recommend that the Director, Office of Community Planning and Development, 2A. Require the Housing Board to prepare a cost allocation or proration plan to support the $839,713 charged to its HOME program for phases III and IV or repay the U.S. treasury account the amount that cannot be supported from its nonfederal funds. 2B. Require the Housing Board to adjust HOME program costs based on the cost allocation plan developed. 2C. Require the Housing Board to adopt procedures that ensure a cost allocation plan is developed for its projects before it commits HOME funds. 11 Finding 3: The Housing Board Used HOME Funds for Ineligible Costs The Housing Board used $339,657 of its HOME funds to pay for ineligible costs in all four phases of its HOPE VI redevelopment project. This condition occurred because (1) the Housing Board’s controls and procedures to separate its public housing agency operations from its administration of CPD programs were ineffective in preventing and detecting ineligible costs and (2) the City did not monitor the Housing Board (see finding 1). As a result, $339,657 in HOME funds was not used as intended under the HOME program. $156,004 in Ineligible HOME Funds for Phase I The Housing Board committed HOME funds of $312,586 for phase I and disbursed $156,004 to build six single-family houses. However, the houses were not eligible for HOME funds because the sales prices were above the $200,160 statutory median sales price limitations for Mobile, AL. The houses were certified for occupancy and offered for sale. The Housing Board must get qualified occupants into the houses. The Housing Board agreed that the houses were priced above the statutory limits established in 24 CFR 92.254(a). It said it was unaware of and overlooked the requirements limiting the sales prices. Because none of the houses had been sold, the Housing Board had the opportunity to reduce the sales prices. The Housing Board agreed and had begun lowering the sales prices for its existing sales contracts. Two of the houses were under contract with sales prices of $223,900 and $229,000. The Housing Board lowered the sales prices for each house to $200,160 to comply with HUD’s sales price limitation. The Housing Board said it would reduce the sales prices for the remaining HOME-funded houses according to requirements. To make phase I eligible for HOME funds, in addition to reducing the sales price, the Housing Board must also comply with 24 CFR 92.216 and 92.217 that requires that it get low-income occupants into the units, either owner-occupants that purchase the houses or tenants that rent from the Housing Board. Also, the Housing Board must impose the affordability requirements provided in 24 CFR 92.252 for rental housing or 24 CFR 92.254 for homeownership units. The houses have stood vacant for long periods of time. As of February 28, 2010, none of the six HOME-funded houses were occupied even though the houses were ready and available for occupants from 170 to 255 days. Despite the low demand for homeownership units, the Housing Board preferred to continue its efforts to sell the houses versus renting them. However, if the houses are not sold soon, the Housing Board understood that either it would have to rent the houses to qualified low-income tenants or repay the HOME funds. 12 Repaid funds must be deposited into the City’s HOME treasury account and used for additional HOME projects in accordance with HOME program requirements. However, the City had no HOME treasury account and the funds should be repaid to the U.S. treasury account. Because the houses were priced above statutory sales price limits and were not occupied by qualified persons, the activity was ineligible. Therefore, the $156,004 will have to be repaid unless the Housing Board (1) lowers the sales prices according to requirements, (2) gets eligible low-income occupants into the houses, and (3) imposes the HOME affordability requirements. $4,281 in Ineligible HOME Funds for Phase II The Housing Board used $4,281 of its HOME funds to pay ineligible costs for phase II, an 88-unit senior center with no HOME designated units. It erroneously charged the $4,281 to its phase III development, but the vouchers and receipts showed that the costs were for groundbreaking ceremonies for phase II. The Housing Board acknowledged that it had charged $4,281 to phase III by mistake and agreed that the $4,281 was an ineligible HOME cost. The $4,281 in HOME funds should be repaid. $130,872 in Ineligible HOME Funds for Phase III The Housing Board used $130,872 of its HOME funds for ineligible costs for phase III. The HOME funds were used for the demolition of public housing, a prohibited HOME cost. The Housing Board paid the demolition costs for public housing because it was unaware that HOME regulations made a distinction between costs for demolition and demolition of public housing. While 24 CFR 92.205(a) (1) states that HOME funds may be used for demolition costs, they cannot be used for the demolition of public housing. 24 CFR 92.214(a)(4) provides that HOME funds may not be used to pay for costs for which public housing receives funding under Section 9 of the Housing Act of 1937 (Act), and funds were provided under the Act for the demolition of public housing. Thus, demolition of public housing was not an eligible HOME cost. The $130,872 in HOME funds should be repaid. 13 $48,500 in Ineligible HOME Funds for Phase IV The Housing Board used $48,500 of its HOME funds for ineligible costs for architectural/engineering drawings that were no longer part of phase IV or the approved HOPE VI redevelopment. It paid for architectural/engineering drawings for 150 homeownership units that were intended to have been constructed within phase IV. However, the Housing Board revised its HOPE VI redevelopment by terminating its plan to construct the 150 homeownership units and decided to construct 48 public housing rental units instead. The Housing Board planned to use the drawings to construct 52 homeownership single-family houses when the housing market becomes more stable. However, these units would be constructed outside the approved HOPE VI redevelopment. 24 CFR 92.503(b)(2) provides that HOME funds invested in a project that is terminated before completion, either voluntarily or otherwise, must be repaid. As a result, the $48,500 in HOME funds was not available to benefit the HOME program’s intended recipients. The $48,500 in HOME funds should be repaid. Conclusion The Housing Board used HOME funds of $339,657 for ineligible costs to support its HOPE VI redevelopment project. It used HOME funds of $156,004 to pay ineligible phase I costs. However, the Housing Board can correct this condition and avoid repayment of the funds if it (1) lowers the sales prices (2) gets eligible low-income occupants into the houses as either buyers or tenants, and (3) impose the HOME affordability requirements. $183,653 to pay for ineligible costs for phases II, III, and IV of the HOPE VI redevelopment that should be repaid. Overall, the Housing Board incurred the ineligible costs because its controls and procedures to separate its public housing agency operations from its administration of community planning and development grant programs were ineffective in preventing and detecting ineligible costs. Also, the City did not monitor the Housing Board (see finding 1). As a result, HOME funds of $339,656 were not used as intended under the HOME program. Recommendations We recommend that the Director, Office of Community Planning and Development, 14 3A. Ensure that the Housing Board (1) lowers the sales prices of the HOME units in phase I to within HUD requirements and (2) places qualified low- income occupants into the homes within a reasonable amount of time, whether those occupants are home buyers or tenants. Otherwise, HUD should ensure that the Housing Board repays the U.S. treasury account all of the $156,004 in ineligible HOME funds expended for phase I from nonfederal funds. 3B. Ensure that the Housing Board repays, from nonfederal funds, HOME funds of $183,653 used to pay for ineligible costs for phases II, III, and IV of the HOPE VI redevelopment. Repaid funds must be deposited into the U.S. treasury account for additional HOME projects. 3C. Require the Housing Board to establish controls and procedures to separate its public housing agency operations from its administration of CPD programs to provide reasonable assurance that HOME funds are used according to HOME program requirements. 15 SCOPE AND METHODOLOGY To accomplish our objectives, we Researched HUD handbooks, the Code of Federal Regulations, and other requirements and directives that govern the City’s HOME program; Interviewed officials of the Birmingham HUD Offices of Community Planning and Development and Public and Indian Housing, headquarters Office of Affordable Housing, the Housing Board, and the City; Reviewed HUD’s monitoring reports and files for the Housing Board’s HOME program; Reviewed the Housing Board’s procedures and controls used to administer its CPD program activities; and Reviewed all costs charged to the HOME program that were related to the HOPE VI program and the supporting documentation. The HOPE VI redevelopment was financed with $20 million in HOPE VI funds, which leveraged additional funds, including HOME and CDBG funds of $5.3 million. We tailored our audit to focus on the $5.3 million in HOME and CDBG funds used in the HOPE VI program. We did not review and assess general and application controls over the Housing Board’s information system. We conducted other tests and procedures to ensure the integrity of computer-processed data that were relevant to the audit objective. The tests included comparison of computer-processed data to written agreements, contracts, and other supporting documentation. We did not place reliance on the Housing Board’s information and used other supporting documentation for the activities reviewed. The review generally covered the period January 1, 2007, through August 31, 2009. We performed the review from September 2009 to January 2010 at the offices of the Housing Board located in Mobile, AL. We adjusted the review period when necessary. We assigned a value to the potential savings to the HOME program if HUD implements our recommendations. If HUD implements recommendation 1C requiring the City to reallocate the $1.9 million of excessive HOME and CBDG funds, those funds will not be used for inappropriate expenses, and the funds will be applied to eligible activities. 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 objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. 16 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 control was relevant to our audit objective: Compliance with laws and regulations – Policies and procedures that management has implemented to reasonably ensure that its resources are used in accordance with laws and regulations. We assessed the relevant control identified above. A significant weakness exists if internal controls do not provide reasonable assurance that the processes for planning, organizing, directing, and controlling program operations will meet the organization’s objectives. Significant Weaknesses Based on our review, we believe that the following item is a significant weakness: The Housing Board’s controls and procedures to separate its public housing agency operations from its administration of community planning and development grant programs were not effective in preventing and detecting unsupported and ineligible costs in its HOPE VI redevelopment (see findings 2 and 3). 17 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Ineligible 1/ Unsupported Funds to be put number 2/ to better use 3/ 1C $1,991,149 2A $839,713 3A $156,004 3B $183,653 Total $339,657 $839,713 $1,991,149 1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the auditor believes are not allowable by law; contract; or Federal, State, or local policies or regulations. 2/ 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. 3/ 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. Implementation of our recommendation to require the City to reallocate the excessive HOME and CBDG funds will result in costs not being incurred for inappropriate expenses, and the funds will be applied to eligible activities. 18 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 19 20 Comment 1 Comment 2 21 Comment 3 Comment 3 22 23 Comment 3 Comment 2 24 Comment 3 Comment 4 25 Comment 4 26 Comment 5 Comment 6 27 Comment 7 28 29 30 31 Comment 8 32 33 OIG Evaluation of Auditee Comments Comment 1 The OIG develops findings, instead of management improvement suggestions, to put deficiencies in the proper perspective, in this case by describing the relationship of the deficiencies to the Housing Board’s administration of its HOME and CDBG programs. Comment 2 The City’s chief of staff acknowledged that it did not monitor the Housing Board as required and recently assigned an internal auditor to monitor the Hosing Board. Before the designation, the City did not have a function in place to monitor the Housing Board. Comment 3 The subrecipient agreement between the City and the Housing Board was more than 10 years old. The agreement did not contain detailed information about the current HOME activities, tasks, timeliness, or budgets. The subrecipient agreement is more than a document to be executed and archived; rather, the subrecipient agreement is a key management tool for the City to monitor the Housing Board's proper use of HOME funds. HUD regulations 24 CFR 92.504 require that the City must enter into a written agreement with its subrecipient that assists the City in meeting its requirements under the HOME program. The agreement in place, while fulfilling the basic requirement that an agreement be established, was insufficient as a monitoring tool for the City, and did not provide the City with a sound basis to effectively develop procedures to monitor the Housing Board’s performance. The Housing Board requested that we include a clarification in the recommendation that the City can issue a new resolution with respect to additional homeownership activities in order to remedy the finding. However, the recommendation is written to allow the City to make the decision to fund a HOME activity the Housing Board desires or other eligible activities preferred by the City. Comment 4 During the audit, we requested cost allocation plans from the Housing Board several times and the Housing Board did not provide the plans. The Housing Board informed us that it was trying to develop them. The Housing Board provided draft allocation plans at the exit conference. Thus we did not verify the draft allocation plans. The Housing Board should provide the draft allocation plans to HUD for review. The Housing Board stated that no particular form of allocation is required by HUD and it also does not require a specific form or formal cost allocation plan. Although HUD does not prescribe or provide an example for the form of an allocation plan this does not preclude the Housing Board from preparing one. Regardless of the format, an allocation plan is needed from the beginning of the project to properly administer the HUD funds from the different funding sources. 34 Comment 5 The allocation plan submitted to HUD did not show any cost adjustments. HUD’s Office of Affordable Housing reviewed and rejected the plans submitted by the Housing Board. HUD rejected the plans because the proration method of allocation is prohibited in a project that will contain public housing units. Because HOME funds can never be used in a unit that receives capital funds and HOME-funded units can only be used in a public housing unit that receives HOPE VI funds, the cost allocation must identify, in detail, the actual costs paid for with Capital and HOPE VI funds. Since the Housing Board’s allocation plans were based on a prorated method, it will have to go back and reallocate the funds based on actual costs. Comment 6 We did not review the internal procedures. The enhanced procedures will be considered by HUD during the management decision process. Comment 7 The $130,872 of HOME funds used for demolition of public housing was a prohibited cost based on the HOME requirements in 24 CFR 92.214(a)(4) that do not allow HOME funds to be used for any costs that would otherwise be funded under Section 9 of the Housing Act. That Act authorizes public housing funds for demolition of public housing units; therefore, HOME funds may not be used to pay for the demolition of public housing units. The $48,500 was ineligible because HOME funds cannot be invested in a project that is terminated before completion, either voluntarily or otherwise. The Housing Board’s comments on HUD’s Office of General Counsel written opinion are not relevant to the finding because the determination that the costs were ineligible was not based on overlapping of HOME funds with public housing units, which is permissible based on the Office of General Counsel opinion. The Housing Board has reduced the sales price of the homeownership units to comply with HOME sales price limitations. The Housing Board acknowledged that the $4,281 was ineligible. The Housing Board’s comments indicated its willingness to make the necessary improvements. Comment 8 The Housing Board's comments indicate its agreement and willingness to implement recommendation 3C, that HUD require the Housing Board to establish controls and procedures to separate its public housing agency operations from its administration of CDBG programs to provide reasonable assurance that HOME funds are used according to HOME program requirements. 35
Mobile Housing Board, Mobile, AL, Used HOME Investment Partnerships Program Funds for Ineligible and Unsupported Costs for Its HOPE VI Redevelopment
Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-05-17.
Below is a raw (and likely hideous) rendition of the original report. (PDF)