oversight

The City of Chattanooga, TN, Needs To Strengthen Controls for Tracking Obligations and Reporting for Its Neighborhood Stabilization Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-09-03.

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

                                                               Issue Date

                                                                   September 3, 2010
                                                               Audit Report Number

                                                                      2010-AT-1012




TO:         Mary Wilson, Director, Office of Community Planning and Development,
             Knoxville, TN, 4JD

            //signed//
FROM:       James D. McKay, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT: The City of Chattanooga, TN, Needs To Strengthen Controls for Tracking
          Obligations and Reporting for Its Neighborhood Stabilization Program


                                   HIGHLIGHTS

 What We Audited and Why

             We reviewed the City of Chattanooga’s (City) Neighborhood Stabilization
             Program (program). We selected the City for review based on its low percentage
             of obligations and the approaching September 6, 2010, deadline for obligating
             funds. Our objective was to determine whether the City administered its program
             in accordance with U.S. Department of Housing and Urban Development (HUD)
             rules and regulations.

 What We Found


             The City generally administered its program in accordance with HUD’s rules and
             regulations. However, it was sometimes inconsistent in identifying obligations
             and was not always accurate in its reporting to HUD.
What We Recommend


            We recommend that the Director of the Knoxville Office of Community Planning
            and Development continue to monitor the City’s progress in obligating its
            program funds to ensure that it meets the September 6, 2010, deadline. We also
            recommend that the City be required to develop and implement improved internal
            controls for tracking obligations and reporting.

            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 provided the draft report to HUD on August 17, 2010, and discussed the
            report with City officials at an exit conference on August 25, 2010. The City
            agreed with the report’s finding and recommendations.

            The complete text of the City’s response, along with our evaluation of that
            response, can be found in appendix A of this report.




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                           TABLE OF CONTENTS

Background and Objective                                                          4

Results of Audit
      Finding 1: The City Generally Complied With Program Requirements but Some   5
      Internal Controls Had Weaknesses

Scope and Methodology                                                             8

Internal Controls                                                                 9

Appendix A: Auditee Comments and OIG’s Evaluation                                 10




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                      BACKGROUND AND OBJECTIVES

The Neighborhood Stabilization Program (program) was authorized under Title III of the
Housing and Economic Recovery Act of 2008 (Act). The program provided grants to every
State and certain local communities to purchase foreclosed-upon or abandoned homes and to
rehabilitate, resell, or redevelop the homes to stabilize neighborhoods and stem declining values
in neighboring homes. The Act called for allocating funds “to states and units of the general
local government with the greatest need.” In addition, the Act required that not less than 25
percent of the funds be used to benefit individuals or families whose incomes do not exceed 50
percent of area median income. The U.S. Department of Housing and Urban Development
(HUD) awarded $4 billion in grants to 309 grantees. The grantees were allowed 18 months from
the date HUD signed their grant agreements to obligate funds and 4 years to expend the funds.

The City of Chattanooga (City) was incorporated under the State of Tennessee Private Acts of
1839. It is governed by a mayor and a nine-member city council. The City received about $17.2
million in HUD community planning and development funding during the past 3 fiscal years
(2008-2010). It received $2.98 million in program funding including more than $2.11 million
directly from HUD and an additional $867,625 from the State of Tennessee. The City’s program
activities for its $2.11 million HUD grant include land banks, new construction/redevelopment,
demolition, and financing.


      Activity                               Purpose                              Budget   Projected
                                                                                           # of units
 1- Land banks      Establish land banks for properties that have been            $250,000     5
                    foreclosed upon.
  2- New            Redevelop demolished or vacant properties; purchase and $1,052,427         17
 construction/      redevelop homes and residential properties that have been
 redevelopment -    abandoned or foreclosed upon to sell, rent, or redevelop
 vacant units       such homes or properties.
 3- Demolition      Demolish blighted structures that pose a safety hazard to      $100,000    18
                    the community.
 4- Financing       Use program funds to provide principal reductions, interest    $500,000    25
                    rate buy-downs, downpayment assistance, and closing
                    costs at zero to low interest rates for qualified home buyers
                    whose incomes do not exceed 120% of area median
                    income.
   Administration   Use 10% of program funds for administration and planning       $211,300    NA
    and planning    activities.
       Total                                                                      $2,113,727   65

Our objective was to determine whether the City administered its program in accordance with
HUD rules and regulations.




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                                 RESULTS OF AUDIT


Finding 1: The City Generally Complied With Program Requirements
but Some Internal Controls Had Weaknesses
The City generally complied with program requirements and recently made significant progress
in obligating its funds; however, it needs to strengthen its controls over tracking obligations and
reporting to HUD. The City’s method for tracking obligations was confusing and inconsistent,
and its reporting was not always accurate or sufficiently detailed. This deficiency occurred
because the City had not developed adequate written procedures for obligation tracking or
reporting on its activities. As a result, it lacked assurance that its recorded obligations and
reporting to HUD and the public were accurate.



 The City Generally Complied
 With Program Requirements

               The City was executing its program in accordance with its approved action plan.
               With the exception of the internal control weaknesses discussed below, we found no
               significant deficiencies. The City’s planned activities and expenditures were eligible
               and supported. Although the City had been slow in obligating its funds, it had
               recently made significant progress in that area.

               The regulations require that recipients obligate program funds within 18 months of
               executing their grant agreements. Thus, the City has until September 6, 2010, to
               obligate its funds before they become subject to recapture by HUD. As of May 1,
               2010, the City had obligated only $201,300 or about 9.5 percent of its funds.
               However, during June, it increased its obligations to just over $1 million or about 49
               percent. In addition, the City indicated that it had an additional $605,680 in pending
               obligations, potentially bringing its total obligations to more than $1.6 million or
               about 78 percent of its funding. If the planned activities are carried out in
               accordance with the executed project agreements, the City can cover the remaining
               22 percent of its outstanding obligations, including the required 25 percent set-aside
               for families at or below 50 percent of the area median income.




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The City Needs To Improve
Some Internal Controls

             The City needs to improve its procedures for tracking program obligations.
             Obligations were tracked by the community development manager using a
             spreadsheet. However, the tracking of obligations was inconsistent, and
             information on the spreadsheet could not always be traced back to supporting
             documents. Similar activities on the spreadsheet were treated differently even
             when they were in the same stage of development. This practice made it difficult
             for the City to accurately determine and report the obligations. Such
             inconsistencies could easily result in the City’s significantly overstating or
             understating its obligations.

             Grantees are required to submit a detailed quarterly performance report using
             HUD’s Web-based Disaster Recovery Grant Reporting system. The reports must
             also be posted prominently on the grantee’s official Web site.

             The City’s latest performance report, dated March 31, 2010, understated its
             obligations by $29,369 and contained other incorrect information. The City reported
             obligations of $201,300, although it had committed to obligations of $230,669. It
             failed to include a $24,000 contract for the rehabilitation of a property located at 113
             North Moore Street and understated another contract by $5,369. The City
             mentioned the property purchased for rehabilitation in its report narrative but
             misidentified the property and failed to include the $24,000 contract as obligated
             funds.

Conclusion


             The City generally complied with program requirements with respect to its program
             activities and had made significant progress toward obligating its funds. However, it
             needs to strengthen controls for tracking obligations and reporting. Improved
             controls will reduce the City’s risk of having funding recaptured and improve its
             reporting to HUD and the public.

Recommendations


             We recommend that the Director of the Knoxville Office of Community Planning
             and Development

             1A.     Continue to monitor the City’s progress in obligating program funds to
                     better ensure that the City can obligate its remaining funds before the
                     September 6, 2010, deadline.



                                                6
1B.   Require the City to develop acceptable written procedures for improved
      tracking of obligations and reporting its activities.




                              7
                          SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed

             The program notice, related HUD documents, and the City’s program records dated
             from November 2008 through July 2010;
             24 CFR (Code of Federal Regulations) 85.12 (special conditions for governmental
             units), 24 CFR 84.14 (special conditions for nonprofits), and 24 CFR 570.910
             (corrective and remedial actions for Community Development Block Grants);
             The City’s approved program action plan (submitted to both HUD and the State of
             Tennessee);
             One hundred percent of the City’s claimed program obligations (excluding
             appraisals and inspections), 100 percent of its program expenditures, and its latest
             report to HUD; and
             The City’s three highest program procurements selected from a total of eight.

All electronic data relied upon during the review were tested during the performance of the
various review steps. We found the electronic data to be reliable.
We also interviewed HUD’s Knoxville, TN, Office of Community Planning and Development
staff and made site visits to a nonstatistical sample of five properties to ensure their existence.

We performed our onsite audit work from June 7 through July 2, 2010, at Chattanooga City Hall,
101 East 11th Street, Chattanooga, TN.

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.




                                                  8
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

       Effectiveness and efficiency of operations,
       Reliability of financial reporting, and
       Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls

               We determined that the following internal controls were relevant to our audit
               objectives:

                  Controls over compliance with laws and regulations.
                  Controls over reliability of data.

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control does
               not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.

 Significant Deficiencies


               Based on our review, we believe that the following items are significant deficiencies:

                  Controls over the tracking of program obligations.
                  Controls over reporting program activity to HUD.



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                        APPENDIXES

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation      Auditee Comments




Comment 1




                            10
Comment 2




            11
                         OIG Evaluation of Auditee Comments


Comment 1   The City enclosed with its comments proposed changes to its policies and
            procedures with respect to tracking program obligations and reporting to HUD. If
            the City implements and follows the proposed changes, more accurate tracking of
            obligations and reporting to HUD should result. We provided the information to
            the Knoxville Office of Community Planning and Development for ensuring the
            changes are implemented.

Comment 2   The City indicated that it had obligated 100 percent of its program funds. We
            provided the information to the Knoxville Office of Community Planning and
            Development.




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