oversight

The State of Illinois Needs To Improve Its Capacity To Effectively and Efficiently Administer Its Neighborhood Stabilization Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-08-05.

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

                                                                   Issue Date
                                                                            August 5, 2010
                                                                   Audit Report Number
                                                                            2010-CH-1011




TO:         Ray E. Willis, Director of Community Planning and Development, 5AD

            //signed//
FROM:       Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: The State of Illinois Needs To Improve Its Capacity To Effectively and
           Efficiently Administer Its Neighborhood Stabilization Program

                                    HIGHLIGHTS

 What We Audited and Why

             We audited the State of Illinois’ (State) Neighborhood Stabilization Program
             (Program). The audit was part of the activities in our fiscal year 2010 annual
             audit plan. We selected the State based upon citizens’ complaints to our office.
             Our objectives were to determine whether the State (1) had the capacity to
             effectively and efficiently administer its Program and obligate Program funds
             before the required 18-month obligation deadline, (2) awarded Program funds for
             eligible projects, and (3) used Program funds for eligible administrative costs.

 What We Found

             The State needs to improve its capacity to effectively and efficiently administer its
             Program. Although the Illinois Housing Development Authority (Authority), the
             current administrator of the State’s Program, had sufficient staffing levels and
             extensive experience with U.S. Department of Housing and Urban Development
             (HUD) programs, it is at risk of not meeting the required 18-month obligation
             deadline for Program funds. Further, the Illinois Department of Human Services
             (Department), the former administrator of the State’s Program, allocated more
             than $4.8 million in Program funds for a project that did not comply with HUD’s
             and Federal requirements for maintaining sufficient documentation to support the
             use of nearly $8,000 in Program funds for administrative expenses.
           As a result, a significant portion of the State’s nearly $20.9 million in unobligated
           Program funds is at risk of being recaptured by HUD and not being used to
           stabilize neighborhoods and stem the decline in value of neighboring homes in the
           State, and HUD lacked assurance that the State used nearly $8,000 in Program
           funds for eligible Program administrative costs.

           We informed the Authority’s executive director and the Director of HUD’s
           Chicago Office of Community Planning and Development of a minor deficiency
           through a memorandum, dated August 4, 2010.

What We Recommend

           We recommend that the Director of HUD’s Chicago Office of Community
           Planning and Development require the State to (1) implement adequate
           procedures and controls to ensure that it obligates its Program funds for eligible
           projects before September 4, 2010; (2) implement the Authority’s Program
           reallocation award plan (plan) for the more than $4.8 million in Program funds
           available after the Authority rescinded one of the Department’s allocations for a
           project; (3) provide sufficient supporting documentation or reimburse its Program
           from non-Federal funds, as appropriate, for the nearly $8,000 in Program funds
           used for unsupported administrative costs; and (4) implement adequate
           procedures and controls to address the finding cited in this report.

           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 our discussion draft audit report and/or a supporting schedule to the
           executive director of the Authority, the chairman of the members of the Authority,
           and HUD’s staff during the audit. We held an exit conference with the
           Authority’s executive director on July 6, 2010.

           We asked the Authority’s executive director to provide comments on our
           discussion draft audit report by July 16, 2010. The executive director provided
           written comments, dated July 16, 2010. The executive director only partially
           agreed with the finding. The complete text of the written comments, except for
           78 pages, including comments provided by the Department’s general counsel, that
           were not necessary to understand the executive director’s comments, along with
           our evaluation of that response, can be found in appendix B of this report. We
           provided the Director of HUD’s Chicago Office of Community Planning and




                                             2
Development with a complete copy of the Authority’s written comments plus the
78 pages of documentation.




                               3
                            TABLE OF CONTENTS

Background and Objectives                                                                5

Results of Audit
      Finding: The State Needs to Improve Its Capacity To Effectively and Efficiently
               Administer Its Program                                                    7

Scope and Methodology                                                                   13

Internal Controls                                                                       15

Appendix
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use                    17
   B. Auditee Comments and OIG’s Evaluation                                             18
   C. Federal Requirements                                                              34




                                             4
                      BACKGROUND AND OBJECTIVES

The Program. Authorized under section 2301 of Title III of the Housing and Economic
Recovery Act of 2008 (Act), as amended, Congress appropriated $4 billion for the Neighborhood
Stabilization Program (Program) to provide grants to every State and certain local communities
to purchase foreclosed-upon or abandoned homes and to rehabilitate, resell, or redevelop these
homes to stabilize neighborhoods and stem the decline in value of neighboring homes. The Act
states that amounts appropriated, revenues generated, or amounts otherwise made available to
States and units of general local government under section 2301 shall be treated as though such
funds were Community Development Block Grant (Block Grant) funds under Title I of the
Housing and Community Development Act of 1974. The U.S. Department of Housing and
Urban Development (HUD) allocated more than $3.9 billion in Program funds to more than 300
grantees.

Congress amended the Program and increased its funding as part of the American Recovery and
Reinvestment Act of 2009 (Recovery Act). The Recovery Act provided HUD an additional $2
billion in Program funds to competitively award to States, local governments, nonprofit
organizations, or consortia of nonprofit organizations, which could submit proposals in
partnership with for-profit organizations. The Recovery Act also states that HUD’s Secretary
may use up to 10 percent of the funds for capacity building of and support for local communities
receiving Program funding under the Act or the Recovery Act. Further, up to 1 percent of the
funds shall be available to HUD for staffing, training, providing technical assistance, technology,
monitoring, travel, enforcement, research, and evaluation activities. In January 2010, HUD
awarded 56 organizations more than $1.9 billion in funds through a competitive process.

The State. The State of Illinois’ (State) former governor initially designated the Illinois
Department of Human Services (Department) as the administrator of the State’s Program. The
Department was created by the Illinois General Assembly in 1997 under the laws of the State. It
is directed by a secretary appointed to a 2-year term by the governor and confirmed by the State
Senate. The Department’s overall mission is to assist customers in achieving maximum self-
sufficiency, independence, and health through the provision of seamless integrated services for
individuals, families, and communities. The Department’s records are located at 401 South
Clinton Street, and 100 West Randolph, Chicago, IL, and 100 South Grand Avenue East,
Springfield, IL.

On November 12, 2009, the current governor reassigned administration of the State’s Program to
the Illinois Housing Development Authority (Authority). The Authority was created by the
Illinois General Assembly in 1967 under the laws of the State. It is governed by a six-member
board appointed to staggered 4-year terms by the governor and confirmed by the State Senate.
The Authority’s overall mission is to increase the supply of quality affordable housing for people
of low and moderate means in the State. The Authority’s records are located at 401 North
Michigan Avenue, Chicago, IL.

HUD allocated more than $53.1 million in Program funds to the State based upon the funding
formula developed by HUD pursuant to the Act. On March 4, 2009, HUD entered into a grant


                                                 5
agreement with the Department for the full amount allocated. On September 2, 2009, the
Department allocated nearly $47.3 million in Program funds to 18 entities for Program projects.
HUD entered into an amended Program grant agreement with the Authority on December 8,
2009. The Authority entered into grant agreements with 17 of the 18 entities from April 6
through May 20, 2010. The grant agreements totaled nearly $42.5 million in Program funds.
The Authority set aside nearly $517,000 in Program funds as a contingency reserve for the
projects. On May 14, 2010, the Authority rescinded the Department’s allocation of more than
$4.8 million in Program funds to 55th and State Redevelopment, LLC (Redevelopment).

Further, as part of a consortium, the State submitted an application to HUD, dated July 15, 2009,
which totaled nearly $35.3 million in additional Program funds under the Recovery Act. On
January 14, 2010, HUD awarded more than $18.5 million in Program funds to the consortium.
The Rock Island Economic Growth Corporation (Corporation) will serve as the lead agency to
administer the Program. The Authority will primarily assist the Corporation with oversight,
monitoring, and compliance with Federal requirements.

The citizens’ complaints to our office alleged that the State’s use of Program funds for
administrative costs was questionable and its award of Program funds was inappropriate.

Our objectives were to determine whether the State (1) had the capacity to effectively and
efficiently administer its Program and obligate Program funds before the required 18-month
obligation deadline, (2) awarded Program funds for eligible projects, and (3) used Program funds
for eligible administrative costs.




                                                6
                                RESULTS OF AUDIT

Finding: The State Needs to Improve Its Capacity To Effectively and
                  Efficiently Administer Its Program
Although the Authority had sufficient staffing levels and extensive experience with HUD
programs, it is at risk of not meeting the required 18-month obligation deadline for Program
funds. Further, the Department allocated more than $4.8 million in Program funds for a project
that did not comply with HUD’s requirements and did not comply with Federal requirements for
maintaining sufficient documentation to support the use of nearly $8,000 in Program funds for
administrative expenses. These weaknesses occurred because the Department and/or the
Authority lacked adequate procedures and controls to ensure that Program funds would be
obligated before the 18-month obligation deadline and Federal requirements were properly
followed. As a result, a significant portion of the State’s nearly $20.9 million in unobligated
Program funds is at risk of being recaptured by HUD and not being used to stabilize
neighborhoods and stem the decline in value of neighboring homes in the State, and HUD lacked
assurance that the State used nearly $8,000 in Program funds for eligible Program administrative
costs.



 The Authority Must Obligate
 Nearly $20.9 Million in
 Program Funds by September
 4, 2010

            Although the Authority had sufficient staffing levels and extensive experience with
            HUD programs, it is at risk of not meeting the required 18-month obligation
            deadline for Program funds. According to the Federal Register, dated October 6,
            2008, each grantee must obligate its Program funds within 18 months of HUD’s
            signing the Program grant agreement with the grantee. In addition, HUD’s Program
            policy alert, volume 3, dated April 2010, states that HUD generally does not
            consider Program funds to be obligated for a specific activity unless the obligation
            can be linked to a specific address and/or household. Program funds are not
            obligated for an activity when subawards or grants to subrecipients or units of
            general local government are made.

            As previously stated, on March 4, 2009, HUD entered into a grant agreement with the
            State’s Department for more than $53.1 million in Program funds. On September 2,
            2009, the Department allocated nearly $47.3 million in Program funds to 18 entities
            for Program projects. The Authority entered into grant agreements with 17 of the 18
            entities from April 6 through May 20, 2010. It set aside nearly $517,000 in Program
            funds as a contingency reserve for the projects. Further, none of the grant agreements
            identified specific properties for the Program projects and only 8 of the 17 entities’



                                                7
          proposals identified specific properties for the Program projects. On May 14, 2010,
          the Authority rescinded the Department’s allocation of more than $4.8 million in
          Program funds to Redevelopment. The Authority developed a Program reallocation
          award plan (plan) for the more than $4.8 million in Program funds.

          As of July 23, 2010, the Authority had obligated more than $26.9 million of the State’s
          more than $47.8 million in Program funds set aside for Program projects.

The Department Allocated
More Than $4.8 Million in
Program Funds for an
Ineligible Project

           On September 2, 2009, the Department issued an award letter to Redevelopment
           allocating $4,833,000 in Program funds for the redevelopment of the Schulze
           Baking Company building, a commercial building located at 40 East Garfield
           Boulevard, Chicago, IL. Redevelopment planned to convert the Schulze Baking
           Company building into a mixed use building with commercial space and rental
           housing for low- and moderate-income households. However, the project did not
           comply with HUD’s requirements.

           The Federal Register, dated October 6, 2008, states that eligible uses for Program
           funds include the following: (1) the establishment of financing mechanisms for
           the purchase and redevelopment of foreclosed-upon homes and residential
           properties, including such mechanisms as soft-seconds, loan-loss reserves, and
           shared-equity loans for low- and moderate-income home buyers; (2) the purchase
           and rehabilitation of homes and residential properties that have been abandoned
           or foreclosed upon to sell, rent, or redevelop such homes and properties; (3) the
           establishment of land banks for homes that have been foreclosed upon; (4) the
           demolition of blighted structures; and (5) the redevelopment of demolished or
           vacant properties.

           On December 14, 2006, Maktub Chicago Development, LLC (Maktub),
           purchased from the Chicago Baking Company a commercial property that
           included the Schulze Baking Company building; a detached retail building located
           at 10 East Garfield Boulevard, Chicago, IL; and a lot behind the detached retail
           building. On December 28, 2006, Maktub transferred the entire commercial
           property to Redevelopment under a single deed. Further, there were 15 parcel
           identification numbers associated with the commercial property. The Schulze
           Baking Company building was located on all 15 of the parcels. Therefore,
           Redevelopment’s project would only qualify as an eligible Program project if the
           entire commercial property was vacant. However, the commercial property was
           not vacant.




                                              8
On February 9, 2010, the Authority rescinded the Department’s allocation of
more than $4.8 million in Program funds to Redevelopment based on concerns
with the financial feasibility of the project and Redevelopment’s capacity to
obligate Program funds within the required 18-month obligation deadline. HUD’s
Chicago Office of Community Planning and Development asked the Authority to
reconsider Redevelopment’s proposal due to concerns expressed by community
leaders and the need for revitalization in the neighborhood. Therefore, the
Authority did not follow through with its February 9, 2010, rescission of the
Department’s allocation to Redevelopment and continued working with
Redevelopment to ensure that Redevelopment would be able to meet HUD’s
obligation and disbursement requirements for Program funds.

On April 14, 2010, we conducted a site visit to the commercial property. The first
floor of the Schulze Baking Company building contained a remote control car
race track with racing banners, an enclosed area with tables and chairs, and a
skateboard area with ramps and a rail. The building’s garage contained five
vehicles. Further, the detached retail building contained office space, and
construction vehicles were on the lot behind the detached retail building.

Redevelopment’s managing member said that he and his friends raced remote
control cars as a hobby and hung the banners to make the space feel like a real
race track. They used the enclosed area to build and repair remote control cars.
The skateboard area was also for him and his friends. He used the office space in
the detached retail building to operate his three businesses: Maktub; Spirit
Wrecking and Excavating, Inc.; and New South Partners, LLC. The construction
vehicles on the lot behind the detached retail building were from Spirit Wrecking
and Excavating, Inc. On May 7, 2010, the managing member provided a picture
showing that an additional vehicle was in the Schulze Baking Company
building’s garage. He also provided documentation to support that three of the
vehicles were owned by a partnership that included him and another partner for
the purpose of conducting the general business of acquiring antique automobiles
as a hobby. Two of the remaining vehicles were owned by either the other partner
or an individual related to the other partner. The managing member could not
provide ownership information for the sixth vehicle.

The Authority’s senior policy director stated that since the Authority was not
designated as the administrator of the State’s Program until November 2009, the
Authority decided to review all of the proposals for which the Department had
allocated Program funds to ensure that the projects were eligible and would meet
HUD’s obligation and disbursement requirements.

As of May 7, 2010, the Authority was still working with Redevelopment to ensure
that Redevelopment would be able to meet HUD’s obligation and disbursement
requirements for Program funds. The Authority did not have a concern with the
eligibility of the project regarding the vacancy of the property. On May 14, 2010,
and as a result of our audit, the Authority rescinded the Department’s allocation of



                                 9
            more than $4.8 million in Program funds to Redevelopment. On May 27, 2010,
            the Authority provided its plan for the more than $4.8 million in Program funds.
            The plan stated that the funds would be available to the State’s Program recipients
            and Program recipients in the State that were funded directly by HUD under the
            Act. To be eligible for additional Program funds, the entities must demonstrate
            progress in the implementation of their current Program scope of work and/or
            projects and a clear capacity to implement additional eligible Program projects in
            areas of greatest need within the obligation, production, and expenditure deadlines
            for the Program. The State would also consider allowing the Authority to directly
            implement eligible projects with the reallocated funds. The plan also stated that
            the Authority would request information for the additional eligible Program
            projects beginning May 24, 2010, and continue accepting information through
            August 30, 2010. The Authority would award the reallocated Program funds on a
            rolling basis, subject to the availability of funding, based on the qualifications of
            the entities and the documentation provided. The senior policy director said that
            the Authority informed the State’s Program recipients of the reallocated Program
            funds during update meetings and was working with HUD’s Chicago Office of
            Community Planning and Development to identify possible projects associated
            with the Program recipients in the State that were funded directly by HUD.

The Department Lacked
Documentation To Support
Nearly $8,000 in Administrative
Expenses

            We reviewed all of the State’s administrative expenses for the period March 2009
            through March 2010, which totaled $539,544 in Program funds. HUD’s
            regulations at 24 CFR (Code of Federal Regulations) 570.506(h) require grantees
            to maintain evidence to support how Block Grant funds are expended, and Office
            of Management and Budget Circular A-87 requires all costs to be necessary,
            reasonable, and adequately documented. The Department lacked sufficient
            documentation to support that it used $7,938 in Program funds from July through
            August 2009 for eligible Program administrative costs. The unsupported
            disbursements included wages for technical assistance personnel ($2,313) and the
            Department’s Program accountant ($5,625).

The State Lacked Adequate
Procedures and Controls

            The weaknesses regarding the obligation of Program funds, allocation of Program
            funds for an ineligible project, and lacking documentation to support that
            administrative costs were eligible occurred because the Department and/or the
            Authority lacked adequate procedures and controls to ensure that Program funds
            would be obligated before the 18-month obligation deadline and were allocated



                                             10
             for an eligible project, sufficient documentation was maintained to support
             administrative costs, and Federal requirements were properly followed.
             The Authority’s senior policy director stated that the Authority had not obligated
             Program funds for projects due to its not having been designated as the
             administrator of the State’s Program nearly 9 months into the 18-month obligation
             period. The Department allocated the Program funds to 18 entities before the
             Authority started administering the Program. Therefore, while preparing to
             administer its Program, the Authority focused on performing its due diligence by
             reviewing the entities’ proposals and working with the entities to ensure that the
             projects were eligible and would meet HUD’s obligation and disbursement
             requirements.

             The senior policy director said that the Authority did not question the eligibility of
             Redevelopment’s project regarding the vacancy of the property since the Program
             funds were only going to be used to redevelop the Schulze Baking Company
             building. Although Redevelopment’s personnel were using the Schulze Baking
             Company building for recreational purposes, the Authority considered the
             building vacant since there were no legal occupants of the building.

             The Department’s chief financial officer said that the Department used nearly
             $6,000 in Program funds for wages for a temporary employee who provided
             accounting services. Due to a lack of management oversight and an immediate
             need for additional staff to implement the Program, the Department paid for the
             wages without ensuring that it maintained timesheets for the employee.

Conclusion

             The State needs to improve its capacity to effectively and efficiently administer its
             Program. As previously mentioned, the State lacked adequate procedures and
             controls to ensure that Program funds would be obligated before the 18-month
             obligation deadline and were allocated for an eligible project and that it
             maintained sufficient documentation to support administrative costs, and properly
             followed Federal requirements.

             As a result, a significant portion of the State’s nearly $20.9 million in unobligated
             Program funds is at risk of being recaptured by HUD and not being used to
             stabilize neighborhoods and stem the decline in value of neighboring homes in the
             State, and HUD lacked assurance that the State used nearly $8,000 in Program
             funds for eligible Program administrative costs.

Recommendations

             We recommend that the Director of HUD’s Chicago Office of Community
             Planning and Development require the State to



                                              11
1A.   Implement adequate procedures and controls to ensure that it obligates its
      Program funds for eligible projects before September 4, 2010.

1B.   Implement the Authority’s plan for the $4,833,000 in Program funds
      available after the Authority rescinded the Department’s allocation to
      Redevelopment.

1C.   Implement adequate procedures and controls to ensure that it awards
      Program funds for eligible projects and that its recipients use Program
      funds for the redevelopment of commercial properties in accordance with
      HUD’s requirements.

1D.   Provide sufficient supporting documentation or reimburse its Program
      from non-Federal funds, as appropriate, for the $7,938 in Program funds
      used for unsupported administrative costs.

1E.   Implement adequate procedures and controls to ensure that sufficient
      documentation is maintained and Program funds are only used for eligible
      administrative costs.




                               12
                         SCOPE AND METHODOLOGY

To accomplish our objectives, we reviewed

           •   Applicable laws; the Federal Register, dated October 6, 2008, and June 19, 2009;
               HUD’s regulations at 24 CFR Parts 85 and 570; Office of Management and
               Budget Circular A-87; HUD’s Program grant agreements with the Department
               and the Authority; HUD’s Chicago Office of Community Planning and
               Development’s monitoring report for the State’s HOME Investment Partnerships
               program; HUD’s Program policy alert, volume 3, dated April 2010; and the
               Program’s explanation of property types under each eligible use.

           •   The State’s consolidated plan for 2005 and 2010, action plans for 2008 and 2009,
               annual performance reports for 2007 and 2008, and data from HUD’s Disaster
               Recovery Grants Reporting system.

           •   The Department’s accounting records, policies and procedures, procurement files,
               contracts and agreements, Program applications, Program distribution and award
               files, and organizational chart.

           •   The Authority’s audited financial statements, annual reports, accounting records,
               policies and procedures, contracts and agreements, staffing plans and allocations,
               job descriptions, organizational chart, and budget.

We also interviewed the Department’s and the Authority’s employees, Redevelopment’s
personnel, and HUD’s staff.

As previously stated, on March 4, 2009, HUD entered into a grant agreement with the State’s
Department for more than $53.1 million in Program funds.

We reviewed the State’s Program to determine whether the State had the capacity to effectively
and efficiently administer its Program.

We reviewed the 18 projects for which the Department allocated nearly $47.3 million in Program
funds on September 2, 2009, and the nearly $517,000 in Program funds the Authority set aside as
a contingency reserve for the projects to determine whether the State had the capacity to obligate
Program funds before the required 18-month obligation deadline and awarded Program funds for
eligible projects.

We reviewed all of the State’s Program administrative expenses for the period March 2009
through March 2010. The administrative expenses totaled nearly $540,000 and were selected to
determine whether the State used Program funds for eligible administrative costs.

We reviewed the 17 grant agreements that the Authority entered into with entities from April 6
through May 20, 2010. The grant agreements totaled nearly $42.5 million in Program funds.


                                               13
The grant agreements were selected to determine whether the State sufficiently protected
Program funds.

We performed our audit work from February through June 2010 at the Department’s offices
located at 401 South Clinton Street and 100 West Randolph, Chicago, IL; the Authority’s office
located at 401 North Michigan Avenue, Chicago, IL; and HUD’s Chicago, IL, regional office.
The audit covered the period July 1, 2008, through December 31, 2009, and was expanded as
determined necessary.

We performed our 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 finding and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our finding
and conclusions based on our audit objectives.




                                               14
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about 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:

               •      Effectiveness and efficiency of operations - Policies and procedures that
                      management has implemented to reasonably ensure that a program meets
                      its objectives.

               •      Reliability of financial reporting - 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 applicable 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 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 and efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws or regulations on a
               timely basis.




                                                 15
Significant Deficiency

            Based on our review, we believe that the following item is a significant
            deficiency:

            •   The Department and/or the Authority lacked adequate procedures and controls
                to ensure that Program funds would be obligated before the 18-month
                obligation deadline and/or that Federal requirements were properly followed
                in regard to the allocation of Program funds for projects and maintaining
                sufficient documentation to support Program funds used for administrative
                expenses.

Separate Communication of a
Minor Deficiency


            We informed the Authority’s executive director and the Director of HUD’s
            Chicago Office of Community Planning and Development of a minor deficiency
            through a memorandum, dated August 4, 2010.




                                            16
                                   APPENDIXES

Appendix A

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

                   Recommendation                         Funds to be put
                       number           Unsupported 1/    to better use 2/
                          1B                                $4,833,000
                          1D                $7,938
                         Totals             $7,938          $4,833,000


1/   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.

2/   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, if the State implements recommendation
     1B, it will ensure that Program funds are spent according to Federal requirements.




                                             17
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation                                    Auditee Comments




             July 16, 2010



             Mr. Heath Wolfe
             Regional Inspector General for Audit, region V
             U.S. Department of Housing and Urban Development
             77 West Jackson Blvd, Suite 2646
             Chicago IL 60604

             RE: Response to the HUD OIG Neighborhood Stabilization Program Audit

             Dear Mr. Wolfe:

             Enclosed please find a response from the Illinois Housing Development Authority and Illinois Department
             of Human Services to the HUD Office of Inspector General (HUD OIG) Audit Report on the State of Illinois
             Neighborhood Stabilization Program. The content of the State's response addresses issues raised in the
             HUD OIG NSP Draft Audit Report released on June 30, 2010, with certain revisions as proposed by
             Thomas McManigal of your staff on July 13, 2010.

             In particular, Mr. McManigal advised that we should address two portions of the report as if the proposed
             changes have already been made. These areas included:

Comment 1        •   The amount of unsupported administrative costs which would be reduced to $12,947;and

Comment 2        •   The removal of the issue (throughout the report) that the Authority did not sufficiently protect
                     Program Funds.

             In addition, there were other changes noted by Mr. McManigal. Given that the Draft Audit Report was not
             finalized, and per our conversation with Brent Bowen today, we are submitting this response with the
             understanding that it may be necessary to supplement or amend our response depending on the
             language of the final report.

             Thank you.

             /signed/
             Gloria L. Materre




                                                             18
Ref to OIG Evaluation                          Auditee Comments



              State of Illinois (State) Response to HUD Office of Inspector General –
              Neighborhood Stabilization Program Audit Report
              Prepared by: Illinois Housing Development Authority and Illinois Department
              of Human Services
              Date: July 16, 2010; supplemented July 27, 2010

              General Comments and Response to the HUD Office of Inspector General –
              Neighborhood Stabilization Program Audit Report – Response Date July 16, 2010;
              supplemented July 27, 2010

                       In January 2010, the U.S. Department of Housing and Urban Development
              Office of Inspector General (HUD OIG) initiated a review of the State of Illinois’ capacity
              to implement the Neighborhood Stabilization Program (NSP) based upon the
              Congressional identification of the NSP Program as a high risk program, two citizen
              complaints regarding the prior allocation of NSP program funds and use of
              administrative funds, and delays in the implementation of the State’s NSP activities due
              to a transfer of administrative responsibilities between agencies of the State. Federal
              regulations require that all NSP funds be obligated within 18 months of the NSP Grant
              award to the State.

                       The HUD OIG staff conducted the audit of the NSP Program for a five month
              period concurrently with the State’s implementation of the NSP Program. The NSP
              Audit Report recommends that the State improve its capacity to effectively and
              efficiently administer its Neighborhood Stabilization Program. We appreciate the effort
Comment 3     expended by the HUD OIG staff during the review and audit. While the HUD OIG report
              identified certain specific areas for improvement in the implementation of the NSP
              Program, we believe that the State has established policies and procedures to
              effectively implement NSP, and that the specific factors identified by the HUD OIG NSP
              Audit Report are:
                       • limited in scope,
                       • addressed by procedures and documentation in place that were presented
                           to the HUD OIG Auditors, and
                       • can be further managed through continued procedural improvements.

Comments 4    The required obligation period for the NSP Program is ongoing at the date of the NSP
 and 5        Audit Report and clear demonstrated progress continues towards the obligation of the
              full grant by September 4, 2010.




                                                  19
Ref to OIG Evaluation                          Auditee Comments


Comments 2           We believe that the State has demonstrated during the course of the review
 and 3       and audit that the current administrator, the Illinois Housing Development Authority
             (IHDA), has the staff capacity, experience, and established procedures to implement
             and protect the NSP Program funds in accordance with the published NSP Program
             rules and guidelines, and within the mandated timeframes.

             Obligation of Program Funds by September 4, 2010
             HUD OIG Recommendations 1A: Implement adequate procedures and controls to
             ensure that it [the State] obligates its Program funds for eligible projects before
             September 4, 2010.

                     The Illinois Housing Development Authority (IHDA) agrees with the
             recommendation that adequate procedures and controls are necessary in order to
             ensure that the State can meet the 18 month timeline for fund obligation established
             for the Neighborhood Stabilization Program in the HERA legislation and HUD Federal
             Register notice of October 6, 2008. We further agree that the timelines for obligation
             for funding are constrained for this new and complex federal housing and community
             development program, and acknowledge the transfer of administrative and program
             responsibility between State agencies during the grant period has caused a delay in the
             obligation of NSP funding by the State Grantee and Subgrantees.

                      In order to meet the obligation timelines, mitigate the risk of loss of NSP
             funding through non-obligation of funds, and implement the program in accordance
             with federal requirements, the Illinois Housing Development Authority (IHDA) has
             conducted project review and due diligence, established procedures and controls, and
Comments 4   instituted project tracking protocols with IL NSP Subgrantees. As of July 16, 2010, over
 and 6       $26.4 million of the total $53.1 million NSP award has been obligated in the HUD NSP
             reporting system DRGR. As of July 23, 2010, the total obligated NSP funding increased
             to $31.2 million. Copies of the DRGR Obligation Reports are attached to this Audit
             response. Continued implementation of established procedures, communication
             protocols, technical assistance, and project tracking activities will assist Subgrantees to
             fully obligate funds during the remaining obligation period through September 4, 2010.

                    As referenced in the HUD OIG NSP Audit Report, on November 12, 2009, nine
             months after the initial grant award, the Illinois governor authorized responsibility for
             implementation of programming for NSP to be transferred from the Illinois Department
             of Human Services (DHS) to IHDA, the state’s housing finance agency. The HUD OIG NSP




                                                  20
Ref to OIG Evaluation                         Auditee Comments


                     Audit Report acknowledges sufficient staffing capacity and expertise within
             IHDA to administer the NSP Program.

Comment 5       Since assuming responsibility for NSP, IHDA has moved forward diligently to
             implement the NSP Program, and appropriately obligate NSP funds in accordance with
             NSP Program requirements and obligation timelines. The following procedures have
             been established and activities have been completed:

                 1) Completed revision of the State of Illinois Substantial Amendment for NSP
                    Action Plan, and entered into the revised NSP Grant Agreement between the
                    US Department of Housing and Urban Development (HUD) and IHDA, on behalf
                    of the State of Illinois.

                 2) Assigned and trained five full-time and one partially allocated staff within IHDA
                    to assume direct responsibility for the NSP implementation. Roles and
                    responsibilities of direct NSP staff include: project coordination, compliance
                    and reporting, fund draws, and management. Additional IHDA staff work on
                    NSP as needed based upon their specific expertise and assigned
                    responsibilities, i.e. legal counsel prepare documents and oversee project
                    closings; architectural staff review NSP plans and specifications, as applicable
                    for individual projects; financial staff review and approve fund draw requests;
                    and inspectors are assigned to conduct construction inspections in accordance
                    with established procedures.

                 3) Developed written NSP Program internal procedures based on federal NSP
                    guidance available and incorporating already existing procedures within IHDA
                    for implementing federally funded housing programs. Internal procedures are
                    reviewed periodically based on revised guidance from HUD, and other
                    efficiency improvements identified by NSP staff.

                 4) Completed project due diligence review of 18 recommended NSP fund
                    allocations forwarded from DHS. NSP Subgrantees proposed a wide range of
                    eligible NSP activities including acquisition and rehabilitation of foreclosed and
                    abandoned homes for sale or rent to low, moderate and middle income
                    households; demolition of blighted properties; redevelopment of an
                    abandoned hotel for housing for homeless veterans; and new construction of
                    multi-unit permanent supportive housing.




                                                 21
Ref to OIG Evaluation                       Auditee Comments




                5) Drafted and authorized NSP Subgrantee Agreements with 17 Subgrantees. The
                   NSP Agreements define the NSP requirements and obligations of Subgrantees;
                   outline preliminary project parameters, budgets and goals; and set milestones
                   for performance. NSP regulations do not require Subgrantees to include
                   property addresses in the NSP funding agreements. In addition, given the
                   changing availability of foreclosed, abandoned, and REO housing stock targeted
                   for acquisition and rehabilitation under the NSP Program, property specific
                   addresses were not required to be included in the NSP Agreements.

                6) Developed the Illinois NSP Subgrantee Manual outlining NSP requirements,
                   procedures, and sample forms to aid Subgrantees to implement their projects
                   under the NSP Program, based on available guidance from HUD as of March
                   2010.

                7) Redesigned and distributed procedure guidance and forms to IL Subgrantees to
                   address updated guidance on eligible property definitions and obligation
                   requirements received from HUD on April 2, 2010 and April 22, 2010,
                   respectively.

                8) Implemented and reviewed preliminary Tier I environmental review procedures
                   for all Subgrantees’ project areas; with follow up Tier II procedures completed
                   as property addresses are confirmed, and conducted Full Assessment reviews
                   where applicable.

                9) Worked with HUD designated NSP Technical Assistance Provider to deliver
                   technical assistance to IL Subgrantees, including assessment of Subgrantee
                   capacity, review of project progress, clarification of technical NSP Program
                   questions posed by Subgrantees, and conduct site visits with those Subgrantees
                   experiencing difficulty with project implementation.

Comment 2       10) IHDA has designed a system to protect NSP Program funds through a series of
                    mechanisms that include legal documents citing NSP Program requirements,
                    review of project closing and all funding draw documentation, escrow
                    agreements outlining final funding commitments, property inspections, and use
                    of third party escrow agents to review and manage all project fund
                    distributions.




                                               22
Ref to OIG Evaluation                          Auditee Comments




                  11) Established regular reporting systems with IL NSP Subgrantees on property
                      identification and fund obligation projections. Monthly reports are submitted
                      to HUD CPD on IL NSP Program activities.

Comment 7         12) Developed and implemented an NSP Reallocation Plan to reallocate NSP funds
                      rescinded from previously awarded projects.

Comments 4             Based on the above completed activities, IHDA has made significant progress
 and 5        towards the obligation deadline for NSP funds. As of July 23, 2010, over $31.2 million
              of the total $53.1 million dollar NSP grant has been obligated. The above referenced
              implementation procedures, technical assistance, and project tracking activities will
              continue to assist Subgrantees to fully obligate funds during the remaining obligation
              period.

              HUD OIG Recommendation 1B. Implement the Authority’s plan for reallocation of
              the $4,833,000 in Program funds available after the Authority rescinded the DHS
              allocation to the 55th & State St. Redevelopment Project.

Comment 7               IHDA has moved forward with the implementation of the NSP Reallocation Plan
              to facilitate obligation of rescinded NSP funding by the September 4, 2010 deadline.
              As of June 30, 2010, IHDA has reallocated $4.03 million in NSP funding to two projects
              for eligible program and administrative costs. NSP Subgrantees receiving reallocated
              funds include 1) an existing IL NSP Subgrantee that has identified all properties for full
              obligation of an initial $1.3 million NSP award, and has identified additional properties
              for acquisition and rehabilitation under NSP Eligible Activity B, and 2) an IL NSP Direct
              Grantee that has obligated over 95% of their initial $5.1 million award, and identified
              additional properties for acquisition and rehabilitation under Eligible Activity B. An
              additional award for the balance of NSP resources available for reallocation will be
              allocated to an existing Subgrantee that has additional funding needs. Proposals were
              received from current IL NSP Subgrantees requesting additional funding, and other IL
              NSP Direct Grantees requesting to expand their existing NSP Program. As outlined in
              the State of Illinois NSP Reallocation Plan reallocation of NSP funding may continue
              through August 30, 2010.




                                                  23
Ref to OIG Evaluation                          Auditee Comments




              Project Eligibility
              HUD OIG Recommendation 1C. Implement adequate procedures and controls to
              ensure that it awards Program funds for eligible projects and that its recipients use
              Program funds for the redevelopment of commercial properties in accordance with
              HUD’s requirements.

                       IHDA has established procedures and controls for review of project activities to
              determine eligibility under the NSP regulations and guidance. IHDA procedures were
              designed to review eligibility criteria for all NSP activities not just those proposed under
              Eligible Activity E – Redevelopment including redevelopment of commercial properties.
              The established procedures include review of documentation submitted by the
              Subgrantee once a specific property is identified. Specific criteria reviewed include: 1)
              location within “area of greatest need” 2) property qualification based on Eligible
              Activity and National Objective 3) property occupancy status 4) environmental review
              and clearance 5) purchase price (as applicable) 6) proposed end use, and 7) applicable
              use restrictions.

                      As indicated in the HUD OIG Audit Report, IHDA conducted due diligence on all
              recommended NSP projects, including the 55th & State Redevelopment Project to
              ensure that the projects were eligible and would meet HUD’s obligation and
              disbursement requirements. This due diligence review process and other conditions
              were anticipated and documented in letters sent by DHS to the 55th & State
              Redevelopment Project and all recommended NSP applicants.

Comment 8              The Authority did not proceed with an award of NSP funds to the 55th & State
              Redevelopment Project and as such there is no award, nor any expenditure of NSP
              funding for an ineligible activity. The HUD OIG Audit Report does not accurately reflect
              the facts concerning the eligibility and due diligence review conducted by the Authority
              on the 55th & State Redevelopment Project. In a February 9, 2010 letter, the allocation
              of NSP funds was rescinded from the 55th & State Redevelopment Project based on
              concerns with the financial feasibility of the project and capacity of the development
              team to implement within the NSP mandated timeframes. In May 2010, the HUD OIG
              office made a determination that the property did not meet the vacancy requirements
Comment 9     of Eligible Activity E under the NSP Program. A written definition for vacancy is not
              included in the NSP regulations or guidance available from HUD.




                                                  24
Ref to OIG Evaluation                         Auditee Comments


              HUD OIG Recommendation 1D: Provide sufficient supportive documentation or
              reimburse its Program from non-Federal funds, as appropriate, for the $12,947 in
              Program funds used for unsupported administrative costs.


Comment 1              DHS partially agrees with HUD OIG’s conclusion that DHS failed to maintain
              sufficient documentation to support administrative costs relating to a temporary
              employee and the indirect cost allocation of a vendor. However, the volume of
              documents produced to HUD OIG, and the content thereof, clearly demonstrates that
              DHS did, in fact, maintain sufficient documentation to support all administrative costs
              expended while the Program was administered by DHS.

Comment 10            Throughout the audit, there appeared to be a communication issue with
              respect to the requests of HUD OIG. However, as HUD OIG’s investigation proceeded,
              HUD OIG’s requests for information became more specific and DHS continued to
              produce documents responsive to each request. DHS produced numerous documents
              to HUD OIG, and even produced the same documents to HUD OIG on three different
Comment 1     occasions. By the time of the July 6, 2010 Exit Conference, the amount of unsupported
              administrative costs had been reduced to $12,947; this is less than 2.5% of the
              $539,544 of Program administrative expenses between November 2008 and December
              2009.

Comment 1              The temporary employee referenced in the HUD OIG Report was paid $5,625
              by DHS. While DHS partially agrees with HUD OIG that adequate documentation was
Comment 11    lacking in that the temporary employee did not maintain time sheets, he did work full-
              time on the Program during his tenure at DHS and prepared an affidavit to that effect.
              That affidavit has been submitted to HUD OIG. In addition, the affidavit of DHS
              Assistant Secretary Grace Hou, who was the ultimate supervisor of the temporary
              employee, was provided to HUD OIG on July 22, 2010, in further support of the fact
              that the temporary employee worked full-time on the Program. Also on July 22, 2010,
              in response to questions from one of the auditors as to the calculation of the
              temporary employee’s wages and salary, DHS sent the auditor an e-mail breaking down
              the calculation of the wages and salary.

Comment 1             With respect to the additional staff, DHS has submitted documentation to HUD
              OIG, including time sheets and other financial records, to support the calculation of
              their wages and benefits, most of which HUD OIG has accepted as sufficient
              documentation to support those administrative costs. In addition, DHS has submitted




                                                 25
Ref to OIG Evaluation                        Auditee Comments


                     documentation to support the disbursements for repaid Program funds,
              overhead costs, and office expenses.

Comment 1             With respect to support for the repaid Program funds, DHS has provided
              documentation which it believes supports that disbursement. Following the July 6,
              2010 Exit Conference, DHS provided HUD OIG with a copy of a check made payable to
              the Corporation for Supportive Housing in the amount of $2,438.71. This check, which
              is dated January 11, 2010 and bears the number AH5903801, represents the balance of
              the reimbursed funds from the Illinois Assistive Technology Program. The statement in
              the revised discussion draft audit report that DHS “could not provide documentation to
              support what it did with the $2,439 of the reimbursed Program funds” is incorrect.

Comment 1            DHS is confident that HUD OIG will conclude that the additional documentation
              which has been provided is sufficient to support the $12,947 in administrative expenses
              which are currently in question.

              HUD OIG Recommendation 1E: Implement adequate procedures and controls to
              ensure that sufficient documentation is maintained and Program funds are only used
              for eligible administrative costs.

                       IHDA has established procedures and controls to ensure that NSP funding
              is expended for eligible administrative costs, and that documentation is
              maintained in accordance with federal guidelines. NSP rules and guidelines
              permit the expenditure of administrative funds to cover NSP related general
              staffing and management, overhead and indirect costs as well as other NSP costs
              that cannot be attributed to a specific property. Administrative costs may be
              incurred by staff or by contracted parties. The systems and procedures put in
              place by IHDA for NSP are based on established procedures for administration of
              all grant funding and guidance provided by HUD Technical Assistance Providers.

                       General Staffing: NSP funds are invoiced for reimbursement of general
              staffing and management costs based on completion of electronic time sheets by
              all IHDA staff; with identifying program codes. The number of hours recorded
              for the NSP program are then applied to corresponding staff salaries and benefit
              costs. Documentation is maintained to support the billing to NSP for general
              staffing and management costs.




                                                26
Ref to OIG Evaluation                         Auditee Comments




                     Contract Costs: All contracts for services for the administration of the
              NSP Program are awarded in accordance with the applicable Federal
              procurement requirements, State of Illinois Procurement Code and IHDA
              Procurement Requirements and Procedures. Payments on contracts are
              approved based on documented completion of the scope of work. Invoices are
              approved by NSP Program staff and reviewed by managers based on established
              protocols for payments. Documentation is maintained to support contracts and
              payment for work completed.

                       Overhead and Indirect Costs: IHDA implements an indirect cost
              allocation plan for NSP, HOME and other federal and state funded housing
              programs. This allocation plan is based on the ratio of recorded hours worked for
              a specific program to the total hours recorded worked by all IHDA staff. The
              allocation factor is then applied to general overhead and indirect costs.
              Documentation is maintained to support the calculation of overhead and indirect
              cost allocations.

              The State Lacked Adequate Procedures and Controls

Comment 3          We disagree with this statement contained in the NSP Audit Report. The language
              is very broad and does not accurately reflect the conditions and controls that are in
              place and that were presented to the Auditors. The NSP Audit Report acknowledges
              that IHDA has:

                 •   put in place sufficient staffing with expertise for implementation of the NSP
                     Program,
Comment 2        •   prepared and implemented policies and procedures to implement and protect
                     the NSP Program funds,
                 •   completed due diligence of all recommended projects to determine eligibility
                     and feasibility to meet NSP obligation timelines,
                 •   has rescinded an allocation of $4.8 million in NSP funding to the 55th & State
                     Redevelopment Project ,
                 •   implemented procedures to assure documentation is maintained for use of NSP
                     funds for administrative costs.




                                                 27
Ref to OIG Evaluation                         Auditee Comments




Comment 1    Additionally as reported above, DHS has presented documentation to support the use
             of NSP funds for eligible administrative costs including staffing, overhead, and office
             expenses.

             Significant Weakness


Comments 3            We disagree with the conclusion of significant weakness presented by HUD OIG
 and 5       in the NSP Audit Report. Over the course of five months DHS and IHDA presented
             documentation as noted above in this Response to demonstrate capacity and
             procedures in place to implement the NSP Program in accordance with published
             federal regulations and guidance. The Authority continues to work aggressively with
             Subgrantees to obligate the NSP within the mandated timelines.




                                                 28
                            OIG’s Evaluation of Auditee Comments

Comment 1   We revised this report to state the following:

            •       The Department lacked sufficient documentation to support that it used
                    $7,938 in Program funds from July through August 2009 for eligible Program
                    administrative costs. The unsupported disbursements included wages for
                    technical assistance personnel ($2,313) and the Department’s Program
                    accountant ($5,625).

            We removed the following from this report:

                •    The unsupported disbursements were for technical assistance to community
                     organizations and the State, salaries and benefits, overhead costs, and office
                     expenses.

                •    In addition, the Department paid Illinois Assistive Technology Project more
                     than $180,000 in Program funds for salaries and benefits and technical
                     assistance, overhead, travel, office expenses, and administrative costs from
                     June through November 2009. In August 2009, Illinois Assistive
                     Technology Project reimbursed the Department $2,670 for unexpended
                     Program funds. However, the Department could not provide documentation
                     to support what it did with $2,439 of the reimbursed Program funds.

                •    The Department’s chief financial officer said that the Department would
                     provide additional documentation to support the disbursements for repaid
                     Program funds, overhead costs, and office expenses.

            We also removed from this report the table that showed the cost category and
            amounts of Program funds paid for the unsupported expenses.

            In addition, we amended recommendation 1D to reflect these revisions.

Comment 2   We removed the following from this report:

            •       The Authority also needs to improve its procedures and controls for protecting
                    Program funds. HUD’s regulations at 24 CFR 85.20(b)(3) state that effective
                    control and accountability must be maintained for all grant and subgrant cash,
                    real and personal property, and other assets. Grantees and subgrantees must
                    adequately safeguard all such property and ensure that it is used solely for
                    authorized purposes. The Authority entered into grant agreements with two
                    entities for single-site multifamily projects. Although the Authority included
                    a number of provisions in the grant agreements regarding compliance and
                    remedies for noncompliance, it did not fully protect the more than $4.5
                    million in Program funds for the two projects. It did not ensure that the



                                                29
                entities would have sufficient non-Program funds to complete the projects
                before Program funds could be used.

            •   The Authority entered into a grant agreement with New Moms for more than
                $4 million in Program funds. The cost of the project totaled nearly $11.3
                million. However, the Authority could not provide firm commitments for
                more than $6.8 million of the nearly $7.3 million in non-Program funds
                needed to complete the project. Further, the grant agreement only made the
                use of the Program funds contingent on New Moms’ first receiving and
                placing into an escrow nearly $6.8 million in non-Program funds needed to
                complete the project.

            •   The Authority entered into a grant agreement with Will County, IL, for
                $500,000 in Program funds. The cost of the project totaled nearly $15.5
                million. However, the Authority could not provide firm commitments for any
                of the nearly $15 million in non-Program funds needed to complete the
                project. Further, the grant agreement did not include a statement making the
                Program funds contingent on the non-Program funding from other sources.

            We also removed from this report the recommendation that the Director of HUD’s
            Chicago Office of Community Planning and Development require the State to

                 Implement adequate procedures and controls to ensure that Program funds
                 are sufficiently protected for single-site multifamily projects that include
                 non-Program funds from other sources. These procedures and controls
                 could consist of including in the State’s grant agreements a provision that
                 the receipt and use of the Program funds is contingent on the entities’ first
                 receiving all of the non-Program funding from the other sources.

            We added to this report that we informed the Authority’s executive director and
            the Director of HUD’s Chicago Office of Community Planning and Development
            of a minor deficiency through a memorandum, dated August 4, 2010.

Comment 3   Although the Authority had sufficient staffing levels and extensive experience
            with HUD programs, it is at risk of not meeting the required 18-month obligation
            deadline for Program funds. Further, the Department allocated more than $4.8
            million in Program funds for a project that did not comply with HUD’s
            requirements and did not comply with Federal requirements for maintaining
            sufficient documentation to support the use of nearly $8,000 in Program funds for
            administrative expenses. These weaknesses occurred because the Department
            and/or the Authority lacked adequate procedures and controls to ensure that
            Program funds would be obligated before the 18-month obligation deadline and
            Federal requirements were properly followed. As a result, a significant portion of
            the State’s nearly $20.9 million in unobligated Program funds is at risk of being
            recaptured by HUD and not being used to stabilize neighborhoods and stem the
            decline in value of neighboring homes in the State, and HUD lacked assurance


                                            30
            that the State used nearly $8,000 in Program funds for eligible Program
            administrative costs.

Comment 4   We revised this report to state the following:

            •   The State needs to improve its capacity to effectively and efficiently
                administer its Program.

            •   As of July 23, 2010, the Authority had obligated more than $26.9 million of
                the State’s more than $47.8 million in Program funds set aside for Program
                projects. As a result, a significant portion of the State’s nearly $20.9 million
                in unobligated Program funds is at risk of being recaptured by HUD and not
                being used to stabilize neighborhoods and stem the decline in value of
                neighboring homes in the State.

Comment 5   We agree that the State has made progress in its obligation of Program funds for
            Program projects. However, of the more than $26.9 million in Program funds the
            Authority obligated, more than $17.2 million in Program funds (64.1 percent) was
            for Program projects in which eight entities’ proposals identified specific
            properties for the Program projects and less than $9.7 million in Program funds
            (35.9 percent) was for Program projects in which nine entities’ proposals did not
            identify specific properties for the Program projects. Further, the Authority had
            obligated 89.7 percent (more than $17.2 million) of the more than $19.2 million in
            Program funds it allocated and/or awarded for the Program projects in which the
            entities’ proposals identified specific properties and only 37.3 percent (less than
            $9.7 million) of the more than $25.9 million in Program funds it allocated and/or
            awarded for the Program projects in which the entities’ proposals did not identify
            specific properties. As a result, a significant portion of the State’s nearly $20.9
            million in unobligated Program funds is at risk of being recaptured by HUD and
            not being used to stabilize neighborhoods and stem the decline in value of
            neighboring homes in the State, and the State needs to improve its capacity to
            effectively and efficiently administer its Program.

Comment 6   The State’s System report for Program fund obligations, dated July 23, 2010,
            showed that the Authority obligated more than $31.2 million in Program funds.
            The obligations included more than $26.9 million for Program projects and more
            than $4.3 million for administration.

Comment 7   The Authority’s commitment to its plan for the more than $4.8 million in Program
            funds available after it rescinded the Department’s allocation to Redevelopment,
            if fully implemented, should assist the Authority in obligating the more than $4.8
            million before September 4, 2010.




                                              31
Comment 8     We added the following to this report:

              •   On February 9, 2010, the Authority rescinded the Department’s allocation of
                  more than $4.8 million in Program funds to Redevelopment based on concerns
                  with the financial feasibility of the project and Redevelopment’s capacity to
                  obligate Program funds within the required 18-month obligation deadline.
                  HUD’s Chicago Office of Community Planning and Development asked the
                  Authority to reconsider Redevelopment’s proposal due to concerns expressed
                  by community leaders and the need for revitalization in the neighborhood.
                  Therefore, the Authority did not follow through with its February 9, 2010,
                  rescission of the Department’s allocation to Redevelopment and continued
                  working with Redevelopment to ensure that Redevelopment would be able to
                  meet HUD’s obligation and disbursement requirements for Program funds.

              The Authority provided a letter from its executive director to Redevelopment’s
              managing member, dated May 14, 2010, stating that the Authority must rescind
              the Department’s allocation of more than $4.8 million in Program funds to
              Redevelopment. The executive director stated that HUD’s Office of Inspector
              General raised major concerns as to whether Redevelopment’s commercial
              property was vacant and, therefore, eligible under the Program. The executive
              director also stated that given the questions regarding the eligibility of
              Redevelopment’s Program project, the Authority could not proceed with awarding
              the more than $4.8 million in Program funds to Redevelopment. Therefore, the
              Authority’s rescission of the Department’s allocation of more than $4.8 million in
              Program funds to Redevelopment was as a result of our audit.

Comment 9     The Federal Register, dated October 6, 2008, states that eligible uses for Program
              funds include the redevelopment of demolished or vacant properties.
              Redevelopment’s project would only qualify as an eligible Program project if the
              entire commercial property was vacant. However, the commercial property was
              not vacant.

Comment 10 The Department provided many documents to support its administrative costs.
           However, some of the documentation was insufficient and required additional
           information and/or documentation to support the administrative costs.

Comment 11 The affidavit of the Department’s assistant secretary did not include the number
           of hours the Department’s Program accountant worked. Further, the
           Department’s senior advisor to the secretary stated in his electronic message to us
           that the Program accountant worked 37.5 hours per week at $25 per hour. The
           senior advisor also stated that since there were 6 weeks from June 15 through July
           31, 2009, the Program accountant’s wages totaled $5,625 for the period.
           However, there were 7 weeks from June 15 through July 31, 2009. Therefore,
           due to this discrepancy and the Department not being able to provide sufficient
           documentation to support the number of hours the Program accountant worked




                                              32
during the period, we were unable to determine whether $5,625 in wages for the
Program accountant was an eligible administrative expense for the Program.




                               33
Appendix C

                           FEDERAL REQUIREMENTS

Section 2301(c)(1) of Title III of the Act states that any State or unit of general local government
that receives amounts pursuant to this section shall, not later than 18 months after receipt of such
amounts, use such amounts to purchase and redevelop abandoned and foreclosed-upon homes
and residential properties.

The Federal Register, dated October 6, 2008, states that each grantee must use its Program funds
within 18 months of HUD signing its Program grant agreement with the grantee. Program funds
are used when a State, unit of general local government, or any subrecipient thereof obligates the
Program funds for a specific Program activity. Program funds are obligated when orders are
placed, contracts are awarded, services are rendered, and similar transactions have occurred that
require payment by the State, unit of general local government, or subrecipient. If a State or unit
of general local government fails to use its Program funds within 18 months, HUD will recapture
any unused funds and reallocate the funds in accordance with 42 United States Code 5306(c)(4).

The Federal Register also states that eligible uses for Program funds include the following: (1)
the establishment of financing mechanisms for the purchase and redevelopment of foreclosed-
upon homes and residential properties, including such mechanisms as soft-seconds, loan-loss
reserves, and shared-equity loans for low- and moderate-income home buyers; (2) the purchase
and rehabilitation of homes and residential properties that have been abandoned or foreclosed
upon to sell, rent, or redevelop such homes and properties; (3) the establishment of land banks
for homes that have been foreclosed upon; (4) the demolition of blighted structures; and (5) the
redevelopment of demolished or vacant properties.

In addition, the Federal Register states that except as described in the Federal Register, statutory
and regulatory provisions governing the Block Grant program, including the provisions in
subparts A, C, D, I, J, K, and O of 24 CFR Part 570, as appropriate, shall apply to the use of
Program funds.

HUD’s regulations at 24 CFR 85.20(b)(2) require that grantees and subgrantees to maintain
records that adequately identify the source and application of funds provided for financially
assisted activities. These records must contain information pertaining to grant and subgrant
awards and authorizations, obligations, unobligated balances, assets, liabilities, outlays or
expenditures, and income. Section 85.20(b)(6) states that accounting records must be supported
by such source documentation as cancelled checks, paid bills, payrolls, time and attendance
records, and contract and subgrant award documents.

HUD’s regulations at 24 CFR 85.22(b) state that allowable costs for State, local, or Indian tribal
governments will be determined in accordance with cost principles contained in Office of
Management and Budget Circular A-87.




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HUD’s regulations at 24 CFR 570.502(a) state that recipients that are governmental entities,
including public agencies, shall comply with the Office of Management and Budget Circular A-
87. Section 570.502(a)(4) states that recipients that are governmental entities shall comply with
24 CFR 85.20, except for section 85.20(a). Section 570.502(a)(6) states that recipients that are
governmental entities shall comply with 24 CFR 85.22.

HUD’s regulations at 24 CFR 570.506 state that recipients shall establish and maintain sufficient
records to enable HUD to determine whether the recipients have met the requirements of 24 CFR
Part 570. Section 570.506(a) states that recipients need to maintain records providing a full
description of each activity assisted with Block Grant funds; the amount of Block Grant funds
budgeted, obligated, and expended for the activities; and the provisions under which the
activities are eligible. Section 570.506(h) states that recipients need to maintain financial records
in accordance with the applicable requirements in section 570.502. Recipients shall maintain
evidence to support how Block Grant funds are expended. The documentation must include
invoices, schedules containing comparisons of budgeted amounts and actual expenditures,
construction progress schedules signed by appropriate parties, and/or other documentation
appropriate to the nature of the activity as applicable.

Attachment A, paragraph C.1, of Office of Management and Budget Circular A-87, revised May
10, 2004, requires all costs to be necessary, reasonable, and adequately documented.

HUD’s Program grant agreements with the Department and the Authority, dated March 4, 2009,
and December 8, 2009, respectively, state that the following are part of the grant agreements:
the Federal Register, dated October 6, 2008; the Act; the State’s submission for Program
assistance; HUD’s regulations at 24 CFR Part 570; and the funding approval.

HUD’s Program policy alert, volume 3, dated April 2010, states that HUD generally does not
consider Program funds to be obligated for a specific activity unless the obligation can be linked
to a specific address and/or household. Program funds are not obligated for an activity when
subawards or grants to subrecipients or units of general local government are made.




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