oversight

The City of Waterbury, Connecticut's Subrecipient, Waterbury Development Corporation, Needs to improve its capaccity to Effectively Administer Its Neighborhood Stabilization Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-01-20.

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

                                                                Issue Date
                                                                      January 20, 2010
                                                                Audit Report Number
                                                                      2010-BO-1004




TO:        Gary Reisine, Director Community Planning and Development, 1ED


FROM:
           John Dvorak, Regional Inspector General for Audit, Boston Region, 1AGA

SUBJECT:   The City of Waterbury, Connecticut’s Subrecipient, Waterbury Development
           Corporation, Needs to Improve Its Capacity to Effectively Administer Its
           Neighborhood Stabilization Program

                                  HIGHLIGHTS

 What We Audited and Why

            In accordance with our goal to review and ensure the proper administration of
            Neighborhood Stabilization Program (NSP) funds provided under the Housing
            and Economic Recovery Act of 2008 (HERA) and the American Recovery and
            Reinvestment Act of 2009 (Recovery Act), we conducted a capacity review of the
            City of Waterbury’s (subgrantee), Waterbury Development Corporation’s,
            operations (subrecipient), who has responsibility for administering the City’s NSP
            program. The City of Waterbury is a subgrantee of the State of Connecticut,
            Department of Economic and Community Development (grantee). Our objective
            was to determine whether the subrecipient had sufficient capacity to adequately
            administer the subgrantee’s NSP funds.


 What We Found


            Our review found that the subrecipient needs to improve its capacity to effectively
            administer NSP funds provided through the HERA. We found that the
         subrecipient 1) staffing was inadequate, 2) had an inadequate selection process for
         approving NSP applicants, 3) may have delays in completing projects, 4) had
         inadequate support for the scope of work developed for two projects, 5) had an
         inadequate procurement process, 6) will not meet performance goals for its
         rehabilitation activities, and 7) did not properly charge NSP expenses to the
         program. As a result, the subrecipient may not meet program requirements and its
         goals for the NSP.


What We Recommend


         We recommend that the Hartford Connecticut Director of HUD’s Office of
         Community Planning and Development require the grantee to ensure the
         subgrantee/subrecipient 1) implements adequate policies, procedures, and
         controls to ensure that NSP funds are used effectively and efficiently, and in
         accordance with applicable requirements, 2) hires additional staff, as needed, to
         assist in administrating the NSP to ensure that the subrecipient has sufficient
         capacity to effectively and efficiently administer program funds, 3) strengthens its
         procurement controls to ensure that they are following the subgrantee's policies
         and Federal policies when procuring services, 4) submits an amendment to its
         NSP local action plan reducing the number of units to be completed for its
         acquisition and rehabilitation activities. and 5) requests comments from the
         Connecticut State Historical Preservation Office for properties approved for NSP
         rehabilitation funding that are not in accordance with the Secretary of the
         Interior’s Rehabilitation Standards and Guidelines.

         We also recommend that the Hartford Connecticut Director of HUD’s Office of
         Community Planning and Development 1) perform additional monitoring, and
         provide technical assistance to the subrecipient, as needed, to ensure that the
         subrecipient properly administers the NSP funding in accordance with federal
         requirements, and 2) review salaries charged by staff to determine whether costs
         were properly charged to HUD programs and require the subrecipient to make
         adjustments to its direct and indirect expenses as necessary.

         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.




                                          2
Auditee’s Response


           We provided the subrecipient the draft report on December 30, 2009, and held an
           exit conference on January 5, 2010. The subrecipient generally disagreed with
           our findings and recommendations.

           We received the subrecipient’s response on January 12, 2010. The complete text
           of the subrecipient’s response, along with our evaluation of that response, can be
           found in appendix B of this report. In addition, we received comments from HUD
           program staff on January 11, 2010, for us to consider. HUD’s comments, along
           with our evaluation of their comments, can be found in appendix C of this report.




                                           3
                            TABLE OF CONTENTS

Background and Objectives                                                             5

Results of Audit
      Finding 1: The City of Waterbury’s Subrecipient Needs to Improve Its Capacity   7
      to Effectively Administer the NSP

Scope and Methodology                                                                 15

Internal Controls                                                                     17

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                  19
   B. Auditee Comments and OIG’s Evaluation                                           20
   C. HUD Comments and OIG’s Evaluation                                               28




                                            4
                       BACKGROUND AND OBJECTIVES

The NSP was established for the purpose of stabilizing communities that have suffered from
foreclosures and abandonment. NSP-1, a term that references the NSP funds authorized under
Division B, Title III of the Housing and Economic Recovery Act (HERA) of 2008, provides
grants to all states and selected local governments on a formula basis. NSP-2, a term that
references the NSP funds authorized under the American Recovery and Reinvestment Act
(Recovery Act) of 2009, provides grants to states, local governments, nonprofits and a
consortium of nonprofit entities on a competitive basis.

The Waterbury Development Corporation (subrecipient) is the City of Waterbury's (subgrantee)
official economic and community development entity. The subrecipient is a 501(c)(3) non-stock
corporation, organized and incorporated under the laws of Connecticut. The subrecipient was
founded in May 2004, as a partnership of the public and private sectors to help the subgrantee, its
businesses, and its residents revitalize their city, stimulate and support economic development,
promote investment in education, rehabilitate and maintain the subgrantee’s housing stock,
eliminate urban blight and decay, and improve the overall quality of life.

The business and financial affairs of the subrecipient are managed by a 25-member Board of
Directors, which consists of appointed volunteers from the government, neighborhood and
business communities. The Board is responsible for electing from its own members an
Executive Committee to supervise and manage the day-to-day activities of the subrecipient.
Other committees elected by the Board of Directors are the Loan, Permitting, Transportation,
downtown and Business Growth Committees.

The subrecipient has responsibility for oversight of $8,456,458, of which $3,486,000 is NSP-1
under HERA.1

The following is a list of fiscal year 2009 HUD grant programs the subrecipient plans to
administer:

          Program                                                                    HUD Funding
          Neighborhood Stabilization Fund (NSP-1)                                     $3,486,000
          Community Development Block Grant (CDBG)                                    $2,282,284
          HOME                                                                        $1,048,678
          Homelessness Prevention & Rapid Re-Housing Program (HPRP)                    $931,128
          Emergency Shelter Grant (ESG)                                                 $99,820
          Community Development Block Grant - Recovery (CDBG-R)                        $608,548
          Total                                                                       $8,456,458




1
 NSP-1grant agreement between HUD and the grantee was issued in March 9, 2009. The grantee and subgrantee
entered into an agreement on June 1, 2009. The subgrantee and subrecipient entered into an agreement for
administration of NSP-1 funds on May 14, 2009.

                                                     5
The subgrantee/subrecipient proposed to use the NSP funds for the full range of allowable
activities, with exception of establishing land banks. The following is a breakdown of the
activities the subgrantee planned to fund with NSP-1 funds:

   •   Establish financing mechanisms for purchase and redevelopment of foreclosed upon
       homes and residential properties, including such mechanisms as soft-seconds and
       shared-equity loans for low-, moderate- and middle-income (LMMI) homebuyers –
       $1,220,000 (35%);
   •   Purchase and rehabilitate homes and residential properties that have been abandoned
       or foreclosed upon, in order to sell, rent or redevelop such homes and properties –
       $1,500,000 (43%);
   •   Demolish blighted structures – $500,000 (15%);
   •   Redevelop demolished or vacant properties – $100,000 (3%); and
   •   Administration - $166,000 (per Grantee allocation)
   •   Total NSP - $3,486,000

Our objective was to determine whether the subrecipient had the necessary capacity to
adequately administer the subgrantee’s NSP funds.




                                                6
                                 RESULTS OF AUDIT

Finding 1: The City of Waterbury’s Subrecipient Needs to Improve Its
Capacity to Effectively Administer the NSP


Our review found that the subrecipient needs to improve its capacity to effectively administer
NSP funds provided through the HERA. Specifically, our review found that the subrecipient

    •   did not have adequate staffing to run the NSP;
    •   did not have an open and objective process for selecting and approving
        applicants for NSP funding;
    •   may potentially have delays in completing rehabilitation projects;
    •   did not have adequate support for the scope of work developed for two projects;
    •   will not meet performance goals for its acquisition and rehabilitation activity ; and
    •   did not have an adequate procurement/contracting process.
    •   did not properly charge direct and indirect costs to the program

The causes of the deficiencies identified were that the subrecipient did not have adequate
management procurement, and accounting controls to ensure that the program was administered
effectively and efficiently and in accordance with requirements. Additionally, the subgrantee’s and
the subrecipient’s employees lacked adequate knowledge of federal procurement requirements.
As a result, the subrecipient may not meet program requirements and its goals for the NSP.


Inadequate Staffing



               The subrecipient did not have adequate staffing to run the NSP. The subrecipient
               filled the Housing and Community Development Director position for its
               Neighborhood Reinvestment Unit in September 2009. This individual was new
               and was working on stimulus funding under Community Development Block
               Grant (CDBG-R) and Homeless Prevention and Rapid Re-Housing Program
               (HPRP) during our audit. However, she did have extensive experience working
               with HUD entitlement programs. The subrecipient’s CDBG manager left in
               August 2009 and the subrecipient did not advertise the position until November
               22, 2009. Only one person was running the day to day tasks of the NSP and in his
               job description, he also had other responsibilities/duties under the CDBG
               program. He previously worked on CDBG with the CDBG manager but stated
               NSP takes up all of his time now. He had 2 years of experience working with
               HUD programs. The subrecipient acknowledged that it needed to fill the CDBG
               manager position and planned to hire a monitoring person who will be responsible

                                                7
            for monitoring its HOME, CDBG, Emergency Shelter Grant (ESG), and the NSP
            program. The subrecipient advertised the monitoring position on November 22,
            2009.


Selection and Approval Process
Not Open and Objective

            The subrecipient did not have an open and objective process for selecting and
            approving applicants for NSP funding. There was no evaluation process for the
            applications received, such as whether the applicant met the eligibility criteria,
            whether the project was cost effective, whether the funding would have an impact
            in that area, and there was no ranking of the applications. For example, a property
            was closed on and NSP agreements were signed, yet the subrecipient did not
            obtain income eligibility documentation to ensure the applicant met the eligibility
            criteria of the program. The subrecipient stated the bank would have this
            documentation; however, it did obtain the eligibility documentation once we
            inquired where it was.

            The subrecipient based their approval on what the applicant put on their
            application for income. This process runs the risk that selected applicants may
            not be eligible. In another example, one investor was approved for $300,000 in
            rehabilitation funding for a 3-unit project with no investment of rehabilitation
            funds required by the investor, and the loan will be forgiven after 15 years if the
            investor abides by NSP requirements. We question the cost effectiveness of such
            a project.

            The subrecipient used a first come first serve approach whereby whoever was
            ready to close first on the property would receive funding up to the amount
            determined in the scope of work, as long as it was in a target area. Investors were
            approved for the majority of the acquisition and rehabilitation funding. Investors
            may have had an unfair advantage, using the subrecipient’s current selection
            method. The investor previously discussed above applied for NSP funding on
            June 1, 2009, and the counter-offer to the bank for the property was also signed
            on the same day.

            Additionally, the subrecipient’s board of directors (Board) gave approval
            authorization for an NSP committee to approve NSP loans/projects instead of the
            Board in order to speed up the approval process since the Board only meets
            monthly. The committee consisted of the subrecipient’s CEO, and two
            subrecipient employees. In discussions with subrecipient staff, the Board was
            updated at the monthly board meetings regarding the status of projects and
            funding. The updates were verbal and were a general summary of information.
            They do not give the Board specific project information, although it was available
            if the Board requested this information. By the Board not reviewing/approving
            NSP loans/projects, there was less oversight.

                                             8
            The subrecipient’s process for selecting and approving NSP funding created a
            high risk for potential favoritism, conflicts of interests, potentially ineligible
            participants, and funding projects that were not cost effective.

Potential Rehabilitation Project
Delays


            The subrecipient’s environmental review process, particularly for checking
            historical significance of a property, was not in accordance with the Connecticut
            State Historical Preservation Office (SHPO) requirements and may cause delays
            in completing rehabilitation. Further, if the subrecipient completes a project not
            in accordance with environment requirements, HUD could determine the project
            costs to be ineligible.

            The subrecipient did not notify SHPO of rehabilitation projects prior to approval,
            but was instead using a historical properties list included with its 1997
            memorandum of understanding with SHPO to verify whether the property was on
            its list. According to discussions with SHPO, the subrecipient is required to
            request comments from SHPO for all federally funded projects, if the
            rehabilitation standards to be used are not in accordance with the Secretary of the
            Interiors Standards for Rehabilitation and Guidelines for historic buildings, even
            if the properties were not on the 1997 historical properties list.

            For one project reviewed, SHPO was notified by the lead assessor of the planned
            rehabilitation work, and the subrecipient was then notified that the property had
            historical significance. As a result, the project, which was already approved and
            closed on July 14, 2009, had to have its scope of work revised, which increased
            the cost of the rehabilitation; a new as-is appraisal was performed; and a revised
            NSP agreement with the owner for the maximum approved funding amount
            needed to be signed.

            As of November 19, 2009, the subrecipient’s attorneys had not updated the
            agreement, and the rehabilitation work will not be put out to bid until the revised
            agreement has been executed. In addition, the subrecipient’s process did not
            include contacting SHPO if the property when required. The subrecipient
            instructed the lead assessors not to forward its results to SHPO in the future. As a
            result, there is a risk that historical properties may be rehabilitated in violation of
            preservation laws, there may be additional NSP project delays, and all or some of
            the project costs could be determined to be ineligible by HUD once the project is
            completed.




                                               9
    Scope of Rehabilitation Work
    Was Unsupported

                   The scope of work developed by the construction specialist for two properties we
                   reviewed was not supported. Estimates shown for various rehabilitation items for
                   one project were generally rounded to the nearest five thousand. For example,
                   various items would be estimated at $5,000, $10,000, $15,000, and $20,000.
                   Various rehabilitation items on another project would be $8,500, $9,500, $16,500,
                   and $22,500. The construction specialist’s project file did not contain support for
                   these figures and he advised that he rounds to the nearest $500. Additionally,
                   contingency amounts were included in the maximum approved funding amount to
                   the applicant with no documented basis for the increase. Because the scope of
                   work was not supported, cost reasonableness of bids received for construction
                   work on these properties could not be determined.

                   Additionally, the scope of work for one project included approximately $24,600
                   ($8,900 of which has been completed, and $15,700 remains) for items that were
                   excessive and well above and beyond the extent necessary to comply with
                   applicable laws, codes and other requirements relating to housing safety, quality,
                   and habitability.

                   Under HERA2, any rehabilitation of a foreclosed upon home or residential
                   property shall be to the extent necessary to comply with applicable laws, codes,
                   and other requirements relating to housing safety, quality, and habitability, in
                   order to sell, rent, or redevelop such homes and properties. Rehabilitation may
                   include improvements to increase the energy efficiency or conservation of such
                   homes and properties or provide a renewable energy source or sources for such
                   homes and properties.

                   This one project’s scope of work and invitation for bid included a full bathroom,
                   estimated at $3,500 in the basement of a single-family home based on the
                   homeowner’s request. At this same property, the scope of work included a high-
                   end vinyl fence that was estimated at $14,000, skylights in the master bedroom
                   with an estimated cost of $1,100, and replacement of an eight foot by eight foot
                   front porch with an eight foot by 25 foot front porch, which increased the costs by
                   approximately $6,000 (per the construction specialist). These excessive upgrades
                   added significant cost increases resulting in a project that may not be cost
                   effective.3




2
    Division B, Title III of the Housing and Economic Recovery Act (HERA) of 2008 §2301(d)(2)
3
    The rehabilitation work for this started during our audit.

                                                        10
Performance Goals Will Not Be
Met


           The subrecipient will not meet its performance goals included in the subgrantee’s
           action plan for acquisition and rehabilitation funds. Specifically, the goals were
           to fund 30 to 35 units under this activity, but the subrecipient approved all the
           funding under this activity for only 20 units. In addition, the local action plan
           includes $1,220,000 under the financing mechanisms activity with a goal to help
           25 to 30 households. As of November 16, 2009, they had only closed on five
           loans using funds totaling $147,828 for this activity. Because of the slow process
           for funding financing mechanisms, these goals may not be achieved.

           During discussions with subrecipient staff, they stated that they may revise the
           local action plan and move a majority of the financing mechanism activity
           funding to the acquisition and rehabilitation activity. However, with the funding
           amounts per project that it currently plans to provide to NSP participants, it will
           not meet its combined goal for these activities to help 55 to 65 households.

           The subrecipient/grantee stated that rehabilitation costs were much higher than
           expected as other investors are purchasing the better properties quickly and they
           are ending up funding properties that require more rehabilitation funds because
           they need to be gutted. Since more funds will be required to rehab these projects,
           and fewer units will be completed than planned, we recommend that the
           subrecipient obtain an approved amendment to its NSP local action plan from the
           grantee. Additionally, by not funding unnecessary/excessive rehabilitation costs,
           more funds will be available to complete additional units.


Procurement Process Was
Inadequate


           The subgrantee’s procurement process was inadequate. It did not adequately
           document the history of its procurements for its lead assessors and construction
           specialists, which were used for NSP activities. Specifically, it did not:

           •    specify the type of contract to be used,
           •    document the rationale for the method of procurement,
           •    document the contractor selection or rejection, or
           •    support the basis for the contract price.

           The subgrantee’s procurement files did not contain:

           •    award letters to the winning bidder/proposer,



                                            11
           •    letters from the evaluation committee recommending who should be
                awarded the contract,
           •    evaluations from the committee members used in determining the winning
                proposer,
           •    contracts with the winning proposer, or
           •    cost or price analyses.

           The subrecipient used the subgrantee’s purchasing department to procure services
           and construction/rehabilitation work. The subrecipient maintained the contract in
           its office and copies of the contract were forwarded to other offices in the City,
           but they were not forwarded to the subgrantee’s purchasing department. This
           process creates a weakness in that the subrecipient could potentially not contract
           with the lowest qualified bidder as determined by the purchasing department.
           Additionally, contracts/purchase orders did not contain all required federal
           contract provisions and there was no contract administration system in place.

           In addition, the subrecipient did not perform or document a price analysis for two
           procurements we reviewed prior to requesting that the purchasing department
           issue the request for proposal for services. It also did not perform a cost analysis
           when only one proposal was submitted, and did not document its evaluations of
           the proposals. This occurred because the subgrantee and subrecipient lacked
           adequate knowledge of federal procurement requirements.

           Further, the subrecipient’s contracting process was slow. For example, although
           it issued a request for proposal for lead assessors due August 4, 2009, it still had
           not awarded the contract/purchase order for these services as of November 16,
           2009. Additionally, the subrecipient executed a contract with one of its
           construction specialist in April 2009; however, the proposal for that request for
           proposal was submitted in September 2008. Also, as of November 16, 2009, one
           project that needed a revised NSP agreement based on the SHPO changes to the
           rehabilitation work that was approved by the subrecipient at the beginning of
           August 2009, still had not been revised by the subrecipient’s attorneys.


Accounting/Financial Controls
and Computer Controls


           The subrecipient had adequate documentation for NSP program expenses and had
           an adequate allocation plan for charging program costs. However, based on
           comments made at the exit conference regarding several staff working on the
           program besides the primary person, we reviewed additional payroll sheets and
           found that the main person working on the NSP program was not properly
           charging his time to NSP. Most of his time was charged to the CDBG program.
           Therefore, although the subrecipient had an adequate allocation plan for charging



                                            12
             program expenses, the plan was not followed. As a result, program costs were not
             properly charged.

             Our limited review of computer controls did not disclose any concerns.


Conclusion



             We are concerned about the subrecipient’s ability to administer NSP-1funding
             until such time it can satisfactorily address and demonstrate adequate
             management, accounting, and procurement controls, and adequate staffing levels.
             In addition, the subrecipient needs to improve its processes to effectively and
             efficiently utilize available NSP funds and meet program requirements and its
             goals for the NSP.

Recommendations



             We recommend that the Hartford Connecticut Director of HUD’s Office of
             Community Planning and Development require the grantee to ensure the
             subgrantee/subrecipient:

             1A.    Implements adequate policies, procedures, and controls to ensure that NSP
                    funds are used effectively and efficiently, and in accordance with
                    applicable requirements.

             1B.    Hires additional staff, as needed, to assist in administrating the NSP to
                    ensure that the subrecipient has sufficient capacity to effectively and
                    efficiently administer program funds.

             1C.    Strengthens its procurement controls to ensure that they are following the
                    subgrantee's policies and Federal policies when procuring services.

             1D.    Removes approximately $15,700 in excessive upgrades from the approved
                    rehabilitation plans for the single-family property for the basement
                    bathroom, and high-end vinyl fence which have not been completed.

             1E     Repays from non-federal sources $8,900 in costs for the skylights and the
                    extended porch that were determined to be unnecessary/unreasonable costs
                    of the program.

             1F.     Submits an amendment to its NSP local action plan reducing the number
                    of units to be completed for its acquisition and rehabilitation activities.

                                             13
1G.    Considers sending employees to training on Section 106 of the National
       Historic Preservation Act provided by the Advisory Council on Historic
       Preservation.

1H.    Requests comments from the SHPO for properties approved for NSP
       rehabilitation funding that are not in accordance with the rehabilitation
       standards to ensure that the scope of work is in accordance with
       requirements.

We also recommend that the Hartford Connecticut Director of HUD’s Office of
Community Planning and Development:

1I.    Performs additional monitoring, and provide technical assistance to the
       subrecipient, as needed, to ensure that the subrecipient properly
       administers the NSP funding in accordance with federal requirements.

1J.    Review salaries charged by staff to determine whether costs were properly
       charged to HUD programs and require the subrecipient to make
       adjustments to its direct and indirect expenses as necessary.




                                14
                        SCOPE AND METHODOLOGY

We conducted our audit between September and November 2009. We completed our fieldwork at
the subrecipient’s office located at 24 Leavenworth Street, Waterbury, Connecticut and the
subgrantee’s office located at 236 Grand Street, Waterbury, Connecticut. Our audit covered the
period July 1, 2008, through August 31, 2009, and was extended when necessary to meet our audit
objectives.

To accomplish our audit objectives, we reviewed

   •   HERA regulations and guidance.
   •   The approved funding agreement between the grantee and the subgrantee.
   •   The agreement for pass through funding between the subgrantee and subrecipient.
   •   The subgrantee’s local action plan.
   •   HUD monitoring reports and the subrecipient’s financial statements for findings/ areas of
       concern with the subrecipient’s administration of other programs.
   •   The procurement for a sample of two of eight service contracts for the NSP. We selected
       procurements for a construction specialist and lead assessor for review.
   •   A sample of two of the seven approved NSP acquisition and rehabilitation activity
       projects. We selected projects with the highest per unit funding amount. We also
       performed a site visit of these two properties to determine the condition of the properties
       (abandoned/foreclosed).
   •   The subrecipient’s documentation such as policies and procedures, organizational charts,
       and job descriptions to obtain an understanding of the subrecipient’s internal controls.
   •   The allocation plan and selected and tested a sample of 3 out of 6 expense types (rent,
       supplies, and insurance) for three months to ensure the subrecipient was following its
       plan.
   •   Verified that time sheets for five individuals agreed with the prorated salary charges for
       various programs for April and August 2009.
   •   Reviewed prorated salary charges for ten individuals from June to November 2009, to
       verify whether several employees were charged to NSP.
   •   A sample of two transactions out of 32 to test the process from request for payment to
       disbursement of payment to subrecipient/for-profit developer, including input into
       accounting system.

We also interviewed the subrecipient’s management, staff members, construction specialist, the
subgrantee’s Purchasing Director, and a Review Compliance Associate at SHPO.

We obtained assistance from HUD’s Office of Community Planning and Development (CPD) and
requested a legal opinion from HUD-OIG’s Office of Legal Counsel, regarding potential conflicts
of interest.

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

                                               15
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective(s).




                                               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 controls were relevant to our audit
              objectives:

                  •   Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

                  •   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.

                  •   Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.


              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.




                                               17
Significant Weaknesses


           Based on our review, we believe that the following items are significant weaknesses
           (finding 1):

           •      The subrecipient lacked adequate management, procurement, and accounting
                  controls to ensure that the program was administered effectively and
                  efficiently and complied with Federal requirements. (see finding 1)




                                            18
                                    APPENDIXES

Appendix A

SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT
                 TO BETTER USE

       Recommendation     Unreasonable Funds to be
           number         or unnecessary put to better
                                3/          use 1/
                       1D                     $15,700

                       1E          $8,900


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. In this instance, the funds to be put to better use amount
     represents unreasonable/unnecessary costs for excessive construction upgrades that
     would not be incurred if our recommendation is implemented.

3/   Unreasonable/unnecessary costs are those costs not generally recognized as ordinary,
     prudent, relevant, and/or necessary within established practices. Unreasonable costs
     exceed the costs that would be incurred by a prudent person in conducting a competitive
     business.




                                          19
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG
Evaluation       Auditee Comments




Comment 1




                              20
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG
Evaluation       Auditee Comments




Comment 2




Comment 3




Comment 4




                              21
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG
Evaluation       Auditee Comments




Comment 5



Comment 6




Comment 7




                              22
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG
Evaluation       Auditee Comments




Comment 8




Comment 9




                              23
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG
Evaluation       Auditee Comments




                              24
                         OIG Evaluation of Auditee Comments

Comment 1   We considered your comments and have revised our conclusion to show that the
            subrecipient needs to improve its capacity rather than that it lacked the capacity.
            Although the subrecipient’s response states that they disagree with many of our
            findings, several actions proposed by the subrecipient implement our
            recommendations and should strengthen WDC’s capacity to administer the NSP.

Comment 2   Our conclusions were based on discussions held with the subrecipient, as well as a
            review of job descriptions. Additionally, the subrecipient acknowledged during
            the audit that it needed to hire a monitoring person and CDBG manager, which
            had been vacant since August 2009. The staff member primarily responsible for
            NSP was responsible for both NSP and other HUD programs per his job
            description. The subrecipient stated at the exit conference and in its response that
            several staff members worked on the NSP program at the peak period. However,
            our review of additional payroll information obtained after the exit conference for
            this period did not show that several staff members charged time to the NSP
            program. Additionally, salary costs were not charged to NSP for the staff
            member primarily responsible for the day to day activities of the NSP, even
            though he was the primary person working with us during the audit. Based on
            additional review of payroll sheets provided after the exit conference, we revised
            our report to show that NSP expenses were not properly charged and have added a
            recommendation for HUD to monitor salary charges and determine what
            adjustments are necessary.

Comment 3   The subrecipient's response that the board member recuses himself when matters
            concerning the bank and subrecipient were discussed and/or were voted on
            satisfies our concern. Because we did not determine there was an actual conflict
            of interest or apparent conflict of interest, we have removed this section from the
            report. However, HUD has expressed concerns regarding this area, and may
            pursue this issue further.

Comment 4   Based on additional discussion with HUD, the grantee, and subrecipient, we have
            removed this section from the report.

Comment 5   The practice of first come first served, with limited oversight by the Board for
            approved applicants, does create a high risk for favoritism and potential for
            conflicts of interests. There are less controls when the same staff who approve
            NSP funding for applicants are also responsible for reviewing the applications,
            requesting the appraisals, scope of work, tax clearances, etc. that are required in
            order to close on the property. Staff could potentially speed up certain steps for
            some applicants in order for them to be ready to close first.




                                             25
            Additionally, the subrecipient would be able to help more applicants, if it required
            investors to fund a percentage of the rehabilitation costs with private funds.

Comment 6   We have removed this issue from the report based on discussions with HUD.

Comment 7   We reviewed the programmatic agreements, including the lead based paint hazard
            agreement and held a discussion with SHPO regarding what the subrecipient was
            required to do per their programmatic agreements. Based on this discussion, we
            revised this section of the report. SHPO stated that the subrecipient is required to
            request comments on all federally funded projects that do not meet the Secretary
            of the Interior's "Standards for Rehabilitation", even if the 1997 historical
            inventory list does not show them as being historical or having historical
            significance (NR(National Register Listed/NRE (National Register Eligible)). As
            such, we did not remove this as a concern. The subrecipient should consult with
            SHPO regarding any steps they need to take for properties already approved for
            NSP funding that do not meet the "Standards for Rehabilitation" to ensure they
            are not in violation of preservation laws in regard to these projects and to clarify
            requirements under its programmatic agreements.

Comment 8   We requested the support behind the figures for the scope of work, and the
            construction specialist could not provide the details behind the estimate. In order
            to determine the cost reasonableness of bids received, the scope of work needs to
            be supportable. Additionally, per the construction specialist, a high end vinyl
            fence was included in the bid specifications, not a medium grade fence. Based on
            pictures provided at the exit conference, surrounding properties had stockade
            fences. This would be a more reasonable cost to allow. NSP funds should not be
            used for unnecessary improvements to the property. The owner/occupant was a
            single person moving into the home and therefore, we don't see the necessity of
            adding a bathroom in the basement, when after rehabilitation, the home would
            have 1 1/2 baths on the upper levels.

            The subrecipient should also be reviewing its current contracts for
            unnecessary/unreasonable costs where the rehabilitation work has not begun yet
            as these costs could later be determined to be unnecessary/unreasonable and the
            program would have to be reimbursed with nonfederal funds for these costs.
            Based on the subrecipient’s response that the porch and skylights have been
            completed with a cost of $8,900, we revised the recommendations from $24,600
            in funds to be put to better use to $15,700 and have included the $8,900 in costs
            for the completed porch and skylights as unnecessary/unreasonable costs.

Comment 9   We considered the subrecipient’s comments, as well as HUD and the grantee's
            comments, and have revised this section and the corresponding recommendation.
            We consider this an issue since the subrecipient /subgrantee could be determined
            by the grantee to be in default under its agreement due to it not meeting
            performance measures as indicated in its local action plan. Also, although the



                                             26
subrecipient states that they disagree, the proposed actions support our finding
and proposed recommendation for corrective action.




                                 27
Appendix C

             HUD COMMENTS AND OIG’S EVALUATION


Ref to OIG
Evaluation          Auditee Comments




Comment 1




                                 28
Appendix C

             HUD COMMENTS AND OIG’S EVALUATION


Ref to OIG
Evaluation          Auditee Comments


Comment 2




                                 29
OIG Evaluation of HUD Comments

Comment 1   We removed this section from the report and the corresponding recommendation
            that the Board Member recues himself from voting. Since HUD is ultimately
            responsible for making the final determination, and has concerns that there may in
            fact be a financial interest or benefit to the board member and that a procurement
            violation may exist, HUD should follow up with their regional counsel as deemed
            necessary, and take corrective action, as appropriate.


Comment 2   We considered HUD’s, the grantee’s, and the subrecipient’s comments on this
            issue and have revised this section and the corresponding recommendation
            accordingly.




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