oversight

City and County of Denver, CO, Did Not Properly Obligate and Report NSP I Funding

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-09-17.

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

                                                                Issue Date
                                                                         September 17, 2010
                                                                
                                                                Audit Report Number
                                                                             2010-DE-1006




TO:         LeRoy Brown, Director, Denver Office of Community Planning
              and Development, 8AD

            //signed//
FROM:       Ronald J. Hosking, Regional Inspector General for Audit,
                Kansas City Region, 8AGA


SUBJECT: The City and County of Denver, CO, Did Not Properly Obligate and
           Report NSP I Funding

                                   HIGHLIGHTS

 What We Audited and Why

             We audited the City and County of Denver’s (City) Neighborhood Stabilization
             Program I (NSP I). We selected the City for review based on our risk assessment
             considering the amount of Housing and Economic Recovery Act of 2008 (HERA)
             and American Recovery and Reinvestment Act of 2009 NSP funds it received and
             expended along with other evaluative factors. This review is consistent with the
             U.S. Department of Housing and Urban Development (HUD) Office of Inspector
             General (OIG) audit plan to perform audits of grantees receiving NSP funding.

             The objectives of the review were to determine whether the City obligated NSP I
             funding in accordance with HERA rules and regulations and whether the City
             followed HUD’s NSP reporting regulations and posted quarterly NSP I
             performance reports on its official Web site.




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What We Found

           The City improperly obligated more than $1.5 million of its NSP I funds by
           recording its funds as obligated in HUD’s Disaster Recovery Grant Reporting
           System (DRGR) without the funds being linked to a specific address and/or
           household. Additionally, the City did not follow HUD’s NSP I reporting
           regulations. It did not post two quarterly NSP I performance reports on its official
           Web site within the 30-day requirement.



What We Recommend

           We recommend that the Director of the Denver, CO, Office of Community
           Planning and Development require the City to develop and implement policies
           and procedures to ensure proper obligation of NSP I funding and deobligate any
           portion of the more than $1.5 million in NSP I funds that was not properly
           obligated. We also recommend that HUD provide technical assistance to the City
           regarding HUD’s reporting requirements to ensure that it posts quarterly NSP I
           performance reports on its official Web site within the 30-day requirement.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.


Auditee’s Response

           We provided the discussion draft of the audit report to the City on September 2,
           2010, and requested its comments by September 10, 2010. The City provided its
           written response on September 10, 2010, and agreed with the findings.

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




                                            2
                            TABLE OF CONTENTS

Background and Objectives                                                            4

Results of Audit
      Finding 1: The City Improperly Obligated More Than $1.5 Million of Its NSP I   5
                 Funds Before The Funds Were Committed to Specific Properties
      Finding 2: The City Did Not Post Two Quarterly NSP I Performance Reports       7
                 When Required

Scope and Methodology                                                                9

Internal Controls                                                                    11

Appendixes
   A. Schedule of Funds To Be Put to Better Use                                      12
   B. Auditee Comments and OIG’s Evaluation                                          13




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                     BACKGROUND AND OBJECTIVES

The Neighborhood Stabilization Program (NSP) I was authorized under Title III of the Housing
and Economic Recovery Act of 2008 (HERA) and provides grants to every State and certain
local communities to purchase foreclosed-upon or abandoned homes and to rehabilitate, resell, or
redevelop the homes to stabilize neighborhoods and stem declining values in neighboring homes.
In the first phase, the U.S. Department of Housing and Urban Development (HUD) allocated
more than $3.9 billion in NSP I funds to grantees.

The City and County of Denver (City) executed a grant agreement on March 20, 2009, with
HUD to receive more than $6 million in NSP I funds. The City has until Septembers 20, 2010
(18 months), to obligate the funds and until March 20, 2013 (48 months), to spend the funds.
The City contracted with two subrecipients and two developers for NSP I activities. The City’s
NSP I budget included the following:

      Nearly $375,000 to two subrecipients to establish financing mechanisms for the purchase
       and redevelopment of foreclosed-upon homes and residential properties;

      Nearly $5.1 million to two developers for the purchase and rehabilitation of abandoned or
       foreclosed-upon homes or residential properties to sell, rent, and redevelop the homes or
       properties; and

      Nearly $606,000 for planning and administration costs.

The objectives of the review were to determine whether the City obligated NSP I funding in
accordance with HERA rules and regulations and whether the City followed HUD’s NSP
reporting regulations and posted quarterly NSP I performance reports on its official Web site.




                                                4
                                RESULTS OF AUDIT

Finding 1: The City Improperly Obligated More Than $1.5 Million of
Its NSP I Funds Before The Funds Were Committed to Specific
Properties
The City improperly obligated more than $1.5 million of its NSP I funds before the funds were
committed to specific properties. This problem occurred because the City did not have written
policies and procedures for obligating NSP I funds in HUD’s Disaster Recovery Grant Reporting
(DRGR) system. As a result, HUD will recapture any portion of the funds not properly obligated
by the September 20, 2010, deadline, and the intended recipients will lose the benefit of the
planned activities.




 The City Improperly Obligated
 Its NSP I Funds

              The City improperly obligated more than $1.5 million of its NSP I funds before
              the funds were committed to specific properties. It obligated NSP I funds based
              on the contract amount with its developers and subrecipients. These contracts
              with the developers and subrecipients did not identify specific properties.
              However, Federal Register Volume 73, No. 194, dated Monday, October 6, 2008,
              states that funds are obligated when they are linked to specific activities. NSP
              Policy Alert, Volume 3, April 2010, further states that HUD does not consider
              NSP funds obligated for a specific activity unless the obligation can be linked to a
              specific address and/or household.

              As of July 29, 2010, the City had obligated more than $6 million in NSP I funds
              in HUD’s DRGR system when only a little more than $4.5 million was linked to
              specific addresses and/or households, which means that more than $1.5 million
              was obligated before the funds were committed to specific properties.



 The City Lacked Written
 Policies and Procedures

              The City did not have written policies and procedures for obligating NSP I funds
              in DRGR. It used its policies and procedures for other HUD programs when it
              obligated NSP I funds in DRGR. Those policies and procedures did not comply
              with NSP I obligation requirements.



                                               5
HUD Will Recapture Funds Not
Properly Obligated

           HUD will recapture any portion of the City’s NSP I funds not properly obligated
           by the September 20, 2010, deadline, and the intended recipients will lose the
           benefit of the planned activities. If the City does not deobligate the more than
           $1.5 million improperly obligated and reobligate the funding properly, HUD will
           recapture those funds.

           HERA and the grant agreement between HUD and the City require the grantee to
           obligate NSP I funds 18 months from the date the grant agreement was signed by
           HUD. The grant agreement was signed on March 20, 2009, which means that the
           City has until September 20, 2010, to obligate the NSP I funds.

           Federal Register Volume 73, No. 194, dated Monday, October 6, 2008, states that
           if any jurisdiction, State, or insular or local area fails to meet the requirement to
           use its grant within 18 months of receipt of the amounts, HUD will proceed to
           recapture the unused funds.


Recommendations


           We recommend that the Director of the HUD Denver Office of Community
           Planning and Development require the City to

           1A. Deobligate any portion of the $1,535,289 in NSP I funds which was not
               properly obligated.

           1B. Develop and implement policies and procedures to ensure proper obligation of
               NSP I funding.




                                             6
Finding 2: The City Did Not Post Two Quarterly NSP I Performance
Reports When Required
The City did not post two quarterly NSP I performance reports on its official Web site within the
30-day requirement. This delay occurred because the City misunderstood HUD’s reporting
requirements. As a result, the public did not have access to timely information regarding the
spending of the NSP I funds.



 Quarterly NSP I Performance
 Reports Were Not Posted When
 Required


               The City did not post two quarterly NSP I performance reports on its official Web
               site within the 30-day requirement. It posted the December 31, 2009, quarterly
               NSP I performance report on May 25, 2010, which was 115 days late. It posted
               the March 31, 2010, quarterly NSP I performance report on May 27, 2010, which
               was 27 days late.

               Federal Register Volume 73, No. 194, dated Monday, October 6, 2008, and the
               City’s policies and procedures require NSP I performance reports to be posted on
               the City's official Web site 30 days after the end of the quarter.


 The City Misunderstood HUD’s
 Reporting Requirements

               The City misunderstood HUD’s reporting requirements. It thought the quarterly
               NSP I reports had to be approved by HUD in DRGR before it could post them to
               its Web site. As a result of our review, the City posted the two quarterly NSP I
               performance reports to its official Web site.


 The Public Did Not Have
 Access to Timely Information

               The public did not have access to timely information regarding the spending of
               the NSP I funds. The City was not transparent regarding its use of the NSP I
               funds as required.




                                                7
Recommendations


          We recommend that the Director of the HUD Denver Office of Community
          Planning and Development

          2A. Provide technical assistance to the City regarding HUD’s reporting
              requirements to ensure that the City posts quarterly NSP I performance reports
              on its official Web site within the 30-day requirement.




                                           8
                          SCOPE AND METHODOLOGY


We performed the onsite review work from April through June 2010 at the City’s office located at
201 West Colfax Avenue, Denver, CO. Our audit period was March 1, 2009, through March 31,
2010, and was expanded to include the most current data available for obligations.

To accomplish the audit objectives, we reviewed HUD’s rules and regulations as well as the City’s
policies and procedures related to NSP I. We also interviewed HUD’s and the City’s NSP I staff.
In addition, we reviewed the NSP I grant agreement between HUD and the City and the City’s
audited financial statements from 2008.

We reviewed all four contracts between the City and its developers and subrecipients. We also
examined the City’s official Web site to determine whether the City posted quarterly NSP I
performance reports as required.

We reviewed the City’s NSP I obligations recorded during our audit period in DRGR and compared
these obligations with the City’s internal records. We used grant data maintained by HUD in the
DRGR system to determine that the City obligated more than $6 million while it could only support
a little more than $4.5 million as of July 29, 2010. We subtracted the $4.5 million of supported
obligation from the total of $6 million obligated in DRGR to determine the funds to be put to better
use is approximately $1.5 million.

We compared the data maintained in HUD’s Line of Control Credit System (LOCCS) with the
City’s internal data on expenditures. We then used the data maintained in the City’s computer
systems to select a sample of disbursements. We selected and reviewed 13 of the 63 NSP I draws
during our audit period. We did not perform a 100 percent selection or a representative selection
using statistical or nonstatistical sampling because we wanted to select (1) NSP I draws that had the
largest dollar amount and (2) samples from the City’s administrative draws and each one of the
City’s NSP I developers and subrecipients.

For administration activities, we reviewed the City’s payroll records, such as timesheets, and journal
entries to determine whether administration expenditures were supported. For purchase and
rehabilitation activities, we reviewed project files to determine whether they contained the correct
documentation such as appraisals, invoices, purchase agreements, and environmental and historical
reviews.

We also reviewed project files to determine whether the properties were previously foreclosed upon
or abandoned, whether the purchase discount amount was more than 1 percent, and whether
appraisals and environmental reviews were completed before the property’s closing date. Further,
we reviewed project files to determine whether the expenses were NSP I eligible, were adequately
documented, and complied with NSP I expenditure requirements.

Finally, we reviewed supporting documentation for two properties sold by the developers to
determine whether the properties’ buyer received 8 hours of housing counseling and whether the


                                                  9
sales price was less than the sum of the acquisition price combined with rehabilitation costs as
required by HUD regulations.

We used LOCCS and DRGR for background information only and did not rely on the data to base
our conclusions. We based our conclusions on the source data. We relied on computer-processed
data maintained by the City for tracking NSP I activities. We performed sufficient tests of the
data, and based on the assessment and testing, we concluded that the data were sufficiently
reliable to be used in meeting our objectives.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                                 10
                              INTERNAL CONTROLS

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

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

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



 Relevant Internal Controls

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

                  Management’s controls to ensure that NSP I funds are obligated in accordance
                   with HERA rules and regulations.
                  Management’s controls to ensure that NSP I funds are reported on the City’s
                   official Web site in accordance with HUD rules 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 or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on
               a timely basis.

 Significant Deficiencies

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

                  Controls over obligating funds in the DRGR system (finding 1).
                  Controls over posting NSP I quarterly performance reports on the City’s Web
                   site (finding 2).                            



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                                   APPENDIXES

Appendix A

    SCHEDULE OF FUNDS TO BE PUT TO BETTER USE
               Recommendation                             Funds to be put
               number                                     to better use 1/
                       1A                                   $1,535,289

    Recommendations that funds be put to better use are estimates of amounts that could be
    used more efficiently if an OIG recommendation is implemented. These amounts include
    reductions in outlays, deobligation of funds, withdrawal of interest, costs not incurred by
    implementing recommended improvements, avoidance of unnecessary expenditures
    noted in preaward reviews, and any other savings that are specifically identified.

    Implementation of our recommendations require the City to deobligate any portion of an
    estimated $1.5 million in NSP I funds which were improperly obligated so that those
    funds can be put to better use on projects that have obligations that can be linked to a
    specific address and/or household.




                                            12
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                Auditee Comments




Comment 1
                        OIG Evaluation of Auditee Comments




                                       13
Ref to OIG Evaluation                Auditee Comments




Comment 2
                        OIG Evaluation of Auditee Comments




                                       14
                            OIG Evaluation of Auditee Comments

The City’s written response along with its verbal response at the exit conference indicates
agreement with the findings and recommendations.

Comment 1      Planned actions on the part of the City should resolve identified issues.

Comment 2      Planned actions on the part of the City should resolve identified issues.




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