oversight

HUD's Recapture and Reallocation Plan for Recovery Act Public Housing Capital Fund Grants Had Weaknesses

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-04-13.

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

                                                                               Issue Date
                                                                                        April 13, 2010
                                                                               Audit Report Number
                                                                                            2010-FW-0002




TO:               Dominique Blom, Deputy Assistant Secretary for Public Housing Investments, PI

                  //signed//
FROM:             Gerald R. Kirkland
                  Regional Inspector General for Audit, Fort Worth Region, 6AGA

SUBJECT:          HUD’s Recapture and Reallocation Plan for Recovery Act Public Housing
                  Capital Fund Grants Had Weaknesses


                                               HIGHLIGHTS


    What We Audited and Why

                  We audited the U. S. Department of Housing and Urban Development’s (HUD)
                  compliance with obligation, recapture, and reallocation requirements for the
                  American Recovery and Reinvestment Act of 2009 (Recovery Act) Public Housing
                  Capital Fund program. The audit was in accordance with a mandate to review
                  HUD’s awarding, disbursing, and monitoring of Recovery Act funds to determine
                  whether safeguards exist to ensure that grantees use funds for their intended
                  purposes. Our office identified the program as high risk. The audit objective was to
                  determine whether HUD had plans to recapture unobligated Recovery Act Public
                  Housing Capital Fund formula grants1 (formula grants) and to reallocate the
                  recaptured funds. The audit focused on assessing the adequacy of HUD’s specific
                  strategies and whether its plans were consistent with criteria established by the
                  Recovery Act.




1
     These funds have a mandatory obligation deadline of 1 year after award (March 17, 2010, for formula awards).
What We Found


           HUD’s plan was a generalized description of the process it would undertake to
           recapture and reallocate formula grant funds not obligated by the March 17, 2010
           deadline. It did not contain detailed procedures or timeframes for executing the
           steps necessary to complete the process. HUD planned to redistribute recaptured
           formula grant funds to unfunded Recovery Act competitive grant applications.
           Further, expenditure deadlines may conflict with Recovery Act funding
           availability.

What We Recommend


           We recommend that HUD revise its recapture and reallocation plan to include
           more detailed procedures for accomplishing HUD’s goals and a timeline for
           completing them and communicate its plan to affected entities. HUD needs to
           consult with the Office of General Counsel to obtain clarification regarding the
           conflicting deadlines and to ensure that its plan meets Recovery Act requirements.

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

Auditee’s Response


           We provided a copy of the draft report to HUD on March 23, 2010, and requested
           written comments by March 30, 2010. We held an exit conference with HUD on
           March 26, 2010. At HUD’s request, we extended the date for written comments to
           April 7, 2010. HUD provided written comments on April 7, 2010. HUD did not
           agree with parts of the finding but agreed to incorporate our recommendations in
           future revisions of its plan.

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




                                            2
                            TABLE OF CONTENTS

Background and Objective                                                         4

Results of Audit
      Finding:   HUD’s Recapture and Reallocation Plan for Recovery Act Public   5
                 Housing Capital Fund Grants Had Weaknesses

Scope and Methodology                                                            9

Internal Controls                                                                10

Appendix
   A. Auditee Comments and OIG’s Evaluation                                      11




                                            3
                          BACKGROUND AND OBJECTIVE

On February 17, 2009, the President signed the American Recovery and Reinvestment Act of
2009 (Recovery Act) into law.2 The Recovery Act made supplemental funds available for job
preservation and creation, infrastructure investment, energy efficiency and science, assistance to
the unemployed, State and local fiscal stabilization for the fiscal year ending September 30,
2009, and other purposes.

The Recovery Act provided $4 billion3 for public housing agencies to carry out capital and
management activities,4 including modernization and development of public housing. It
allocated $3 billion for formula grants and $1 billion for competitive grants. For both grant
types, the Recovery Act required public housing agencies to obligate 100 percent of the funds
within 1 year of the date on which funds became available to the agency for obligation and
expend 60 percent within 2 years and 100 percent within 3 years of such date. Public housing
agencies reported their obligations and expenditures using the U. S. Department of Housing and
Urban Development’s (HUD) Line of Credit Control System (LOCCS).

HUD made Recovery Act formula grants available to public housing agencies on March 18,
2009, resulting in an obligation deadline of March 17, 2010. If a public housing agency failed to
comply with the obligation deadline, the Recovery Act required HUD to recapture all remaining
unobligated funds awarded to the public housing agency and reallocate such funds to agencies
that complied with those requirements. Similarly, HUD was required to recapture and reallocate
remaining funds from public housing agencies that failed meet the expenditure deadlines.

HUD awarded $2.985 billion in formula grants to 3,134 public housing agencies and $995
million for 396 competitive grants to 211 public housing agencies. HUD received administrative
funds under the Recovery Act provisions.

The audit objective was to determine whether HUD had plans to recapture unobligated formula
grants and to reallocate the recaptured funds. The audit focused on assessing the adequacy of
HUD’s specific strategies and whether its plans were consistent with criteria established by the
Recovery Act.




2
    Public Law 111-5.
3
    Remaining available until September 30, 2011.
4
    As authorized under Section 9 of the United States Housing Act of 1937.
                                                       4
                                        RESULTS OF AUDIT

Finding: HUD’s Recapture and Reallocation Plan for Recovery Act
         Public Housing Capital Fund Grants Had Weaknesses
HUD’s plan was a generalized description of the process it would undertake to recapture and
reallocate formula grant funds not obligated by the March 17, 2010, deadline. HUD should
improve its plan by revising it to include more detailed procedures for accomplishing HUD’s
goals and a timeline for completing them. It should also communicate its plan to ensure that
affected entities are aware of its intentions and policies. Further, HUD should build on its
experience with the formula grants to establish a standard plan for future recapture and
reallocation events. By doing so, it could avoid errors, resolve questions, and be in a better
position to defend its actions as being impartial and transparent.


    HUD Created a Generalized
    Recapture and Reallocation
    Plan


                  HUD provided a generalized plan to recapture and redistribute unobligated
                  formula grant funds following the March 17, 2010, obligation deadline. HUD’s
                  plan would allow public housing agencies 5 working days after the deadline to
                  record eligible obligations into LOCCS, after which time HUD would process an
                  electronic recapture of unobligated funds. HUD planned to redistribute the
                  recaptured formula funds by awarding additional grants to public housing
                  agencies whose applications it did not fund under the competitive grant category
                  for the creation of energy-efficient, green communities (moderate rehabilitation).5
                  HUD did not anticipate recapturing a significant amount of formula funds and
                  held that there would be insufficient funds available to reallocate by formula.

                  As of January 30, 2010, public housing agencies had not obligated more than
                  $900 million in formula grants. Because of HUD’s considerable effort to ensure
                  that public housing agencies obligated the formula grant funds, between
                  January 30 and March 17, 2010, the agencies obligated all of the remaining funds
                  except for $3.2 million that 21 agencies returned for various reasons.

                  It was evident in discussions with HUD staff that they had given thought to many
                  aspects of the reallocation and recapture processes, including consulting with a
                  variety of staff in the Office of Public and Indian Housing (PIH) and the Office of

5
     HUD funded competitive grants under four categories in a notice of funding availability (NOFA). For the first
     three categories, it funded applications on a first-come first-funded basis. It rated and ranked applications for
     two options in category 4, creation of energy-efficient, green communities. Option 1 was for substantial
     rehabilitation, and option 2 was for moderate rehabilitation. There remained 230 public housing agencies with
     unfunded applications for category 4/option 2 that met or exceeded the minimum score (60 of 110 points) to
     qualify for funding under the NOFA.
                                                           5
           General Counsel. However, HUD should revise its generalized plan to
           incorporate more detailed procedures for accomplishing its goals and a timeline
           for completing them.

HUD Should Establish Detailed
Recapture Procedures


           To avoid errors and complaints and increase transparency, HUD should define the
           procedures necessary to recapture funds in accordance with requirements and in a
           timely manner. For example, it should include a deadline for public housing
           agencies to appeal to have recaptured funds restored and create target dates for
           HUD to determine the final amount available for reallocation, select new
           grantees, and execute grant agreements. The plan should be clear, specific, and
           unambiguous and should address nuances specific to the Recovery Act grants. It
           should also plan target dates associated with future recapture and reallocation
           events resulting from expenditure and competitive grant deadlines.

           HUD’s plan allowed it to restore recaptured formula funds if a public housing
           agency provided documentation showing that it did obligate the funds before the
           deadline. The plan did not disclose how HUD would communicate this with
           public housing agencies or the circumstances or documentation that it would
           consider. Further, the plan did not disclose how many days a public housing
           agency would have to recover the funds. While it might be reasonable to review
           appeals on a case-by-case basis, HUD should establish and communicate the
           baseline and documentation for making these determinations. Although this was
           not a concern for the formula grants, HUD should consider the matter for future
           deadlines and revise its procedures accordingly.

           In another example of areas in which the plan appeared to lack specificity, HUD
           limited public housing agency administration costs to 10 percent of the grant.
           This limit should continue to apply to the revised grant total following any
           recapture of funds. HUD staff commented that they did not want to penalize
           public housing agencies if they incurred legitimate administrative expenses, such
           as procurement activities that did not result in contract awards. However, it
           would be unreasonable to allow public housing agencies that failed to meet
           obligation requirements to earn more than 10 percent for administration of the
           grant. HUD should enforce the limit relevant to the revised grant amounts and
           recapture overages accordingly. It should establish procedures to guide staff in
           determining the amount subject to recapture.

           HUD should also improve the plan related to its electronic recapture process. The
           plan did not describe the procedures for determining recapture amounts or refer to
           existing procedures. HUD staff stated that they would electronically deobligate
           grant funds in HUD’s Project Accounting System (PAS), which in turn would
           reduce grant amounts in LOCCS. HUD field office personnel would then be
           responsible for making corrections to the individual budget line items for each
           grant in LOCCS. To ensure a smooth recapture process, HUD should formally
                                            6
                 establish or refer to existing procedures to determine amounts subject to
                 recapture, make the recapture, and delineate related staff responsibilities.

                 Lastly, the plan was silent on the recapture of funds after March 17, 2010, related
                 to public housing agencies’ terminating an activity or completing an activity for
                 less than the obligated amount. The plan should address how HUD would
                 recapture and reallocate these funds. The plan mentioned the recapture of funds
                 “mistakenly reported as fully obligated” but did not define this phrase. The plan
                 should define this phrase and describe how it would identify, recapture, and
                 reallocate these funds. As with other recaptured funds, the plan should have clear
                 deadlines and delineate the ability to appeal.

    HUD Planned to Reallocate
    Formula Funds to Competitive
    Grants

                 HUD planned to redistribute recaptured formula grant funds to unfunded
                 competitive grant applications. 6 The plan described the procedures HUD would
                 take to ensure that public housing agencies could still implement the projects in
                 their competitive applications if awarded recaptured funds, including a firm
                 commitment to leverage funds and whether the project remained unfunded. The
                 plan should reiterate that reallocated funds would only go to public housing
                 agencies that were in compliance with the 1-year obligation requirement and
                 HUD’s intent to restrict reallocated funds to only one competitive grant per
                 project.7 The plan should also include the procedures HUD would use to review
                 grant applications to ensure that it only awards Recovery Act funds for viable,
                 prudent projects to avoid wasteful spending.

    HUD Should Plan for Future
    Recapture and Reallocation
    Events

                 The Recovery Act required HUD to recapture and reallocate funds if public
                 housing agencies failed to meet the obligation and expenditure deadlines. HUD
                 should build on its experience with the formula grants to establish a standard
                 recapture and reallocation plan.

                 For example, the 1-year obligation deadlines for the competitive grants will occur
                 in September 2010, and expenditure deadlines for both grant categories will
                 follow through September 2012 (refer to table below). However, the Recovery
                 Act funds are only available through September 30, 2011. HUD needs to consult
                 with the Office of General Counsel to obtain clarification regarding the
                 conflicting deadlines and to ensure that its plan meets Recovery Act requirements.

6
     HUD had more than $240 million in unfunded applications meeting the NOFA requirements.
7
     The NOFA for the competitive grants restricted awards to one grant per project.
                                                      7
             Obligation and expenditure deadlines by grant type

                                                                  60%         Funds        100%
                               Obligation      Obligation     expenditure   available   expenditure
               Grant type        start          deadline        deadline       until      deadline
                                 March           March           March      September      March
                Formula
                                 2009             2010            2011         2011         2012
                               September       September       September    September    September
              Competitive
                                 2009             2010            2011         2011         2012

             By having a standard plan addressing the recapture and reallocation of funds,
             HUD could easily resolve questions and logistics. HUD would also be in a better
             position to defend its actions as being impartial and transparent.


Conclusion


             HUD’s plan was a generalized description of the process it would undertake to
             recapture and reallocate formula grant funds not obligated by the March 17, 2010,
             deadline. Under the plan, HUD would redistribute recaptured formula grant funds
             to unfunded Recovery Act competitive grant applications. However, HUD’s plan
             did not contain detailed procedures or timelines for completing the necessary
             steps or address future recapture and reallocation requirements. HUD should
             expand on its plan to recapture and reallocate unobligated formula grant funds by
             including more detailed procedures and timelines for completing tasks. It should
             amend its procedures for reallocated funds and use its experience to build on its
             plans for future recapture and reallocation events.

Recommendations

             We recommend that the Deputy Assistant Secretary for Public Housing Investments

             1A.      Revise the recapture and reallocation plan to include more detailed
                      procedures for accomplishing HUD’s goals and a timeline for completing
                      them and communicate its plan to ensure that affected entities are aware of
                      its intentions and policies.

             1B.      Consult with the Office of General Counsel to obtain clarification
                      regarding the conflicting deadlines and to ensure that its plan meets
                      Recovery Act requirements.




                                                     8
                         SCOPE AND METHODOLOGY

We conducted the audit at our offices in Fort Worth, Texas, from January to March 2010. We
reviewed the period from March 18, 2009, through March 17, 2010. To meet our objective, we
obtained and reviewed relevant laws and implementing guidance, program regulations, HUD
policies and procedures, and information HUD posted on its Internet site. We held an entrance
conference and requested that HUD provide its written plan to address the obligation deadline
and recapture and reallocation procedures. We reviewed HUD’s plan to determine its
compliance with the Recovery Act and other requirements and the reasonableness and adequacy
of the plan. In additon to evaluating HUD’s plan, we also took into consideration activities that
would take place following the March 17, 2010 formula grant obligation deadline. We
interviewed key PIH personnel in the Office of Capital Improvements, the Office of Field
Operations, and the Fort Worth, Texas regional office.

We periodically reviewed obligation data from LOCCS and PAS to determine public housing
agencies’ progress in obligating the formula grant funds. We used the data for background
purposes and to gauge public housing agencies’ progress in obligating funds as the deadline
approached. We did not validate data related to grant obligations because public housing
agencies self-reported the information and it was beyond the scope of the audit. We did
reconcile the grant amounts in LOCCS and PAS and found them to be in agreement. The data
were sufficiently reliable to identify grant amounts and estimate obligation amounts entered by
public housing agencies.

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




                                                9
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following controls are achieved:

         Program operations,
         Relevance and reliability of information,
         Compliance with applicable laws and regulations, and
         Safeguarding of assets and resources.

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



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

                  Policies and procedures to recapture and reallocate Recovery Act funds in
                  accordance with requirements.

              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.


 Significant Weaknesses


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

                  HUD’s recapture and reallocation plan contained insufficient procedures to
                  ensure that it met Recovery Act and other requirements (finding).




                                               10
                                              APPENDIX

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation                                  Auditee Comments
                                               U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
                                                                  WASHINGTON, OC 20410-5000


                HUD LOGO                                         April 7, 2010
                OFFICE OF PUBLIC AND INDIAN HOUSING



                MEMORANDUM FOR:                       Gerald R. Kirkland Regional Inspector General for Audit, Fort
                                                      Worth, 6AGA

                               //signed//
                FROM:          Dominique Blom, Deputy Assistant Secretary for Public Housing Investments,
                               PI

                SUBJECT: Comments on OIG Draft Audit: HUD Should Improve Its Recapture and
                         Reallocation Plan for Recovery Act Public Housing Capital Fund Grants

                        Thank you for providing your draft report entitled, "HUD Should Improve Its Recapture and
                Reallocation Plan for Recovery Act Public Housing Capital Fund Grants," dated March 23, 2010 and
                for soliciting our input. We have reviewed the draft and offer the following comments for your
                consideration.

                        Your report focused on how HUD was going to recapture and reallocate the Capital
COMMENT 1       Fund Recovery grants, We recently provided you a detailed recapture plan and, during the audit, we
                provided you with a description of the reallocation process. Providing a specific time line for the
                reallocation process during the audit was not possible because the magnitude of the recaptured funds
                was not known.

                        There are several sections of the report that do not accurately capture the recapture and
                reallocation process as provided to you in the Recapture and Redistribution Summary document and
                the detailed recapture plan recently provided. Please consider revising the following sections:

                     • Page 6: In the report, the following paragraph references a formal appeal process:

                      "To avoid errors and complaints and increase transparency, HUD should define the procedures
                      necessary to recapture funds in accordance with requirements and in a timely manner. For
                      example, it should include a deadline for public housing agencies to appeal to have recaptured
                      funds restored and create target dates for HUD to determine the final amount available for
                      reallocation, select new grantees, and execute grant agreements."

COMMENT 2             HUD had prepared an appeal process for housing authorities that challenged the recaptures. This
                      process required the appealing PHA to submit the obligation documents obligating the Recovery
                      Act funds to HUD. After HUD reviewed the documents and concurred that the obligations were
                      correct and obligated by the obligation deadline the PHA would be notified and the funds would
                      be restored to the PHA. If HUD did not concur with the obligations the PHA claimed the PHA
                      would be notified that HUD had denied its appeal and the recapture would stand. However, since
                      no recaptures were electronically processed HUD did not need to implement this process.
                      HUD will add a description in the plan describing the appeal process in subsequent revisions.


                                                         11
             • Page 6 and 7: In the following paragraph, the IG indicates that the method to determine
               the recapture was not clear:

                "HUD should also improve the plan related to its electronic recapture process. The plan
                did not describe the procedures for determining recapture amounts or refer to existing
                procedures. HUD staff stated they would electronically deobligate grant funds in HUD's
                Project Accounting System (PAS) which in turn would reduce grant amounts in
                LOCCS."

COMMENT 3   The plan did not describe the procedures for determining the recapture amounts because
            LOCCS is the only source for the reported obligations. HUD planned to use the obligation
            data from the CFO LOCCS information in datamart on March 25,2010 to determine the
            recapture amounts. This eliminates any accuracy problems by drawing the data directly from
            the CFO data. However, given your comment, we will add a description in the plan for clarity
            for outside reviewers in subsequent revisions.

             • Page 10: The below section from the IG report:

            "Based on our review, we believe that the following item is a significant weakness: HUD's
            recapture and reallocation plan contained insufficient procedures to ensure it met Recovery
            Act and other requirements (finding 1)."

COMMENT 4   We request that the OIG change this assessment from a "significant weakness" to "an area for
            improvement". We do not agree that there were significant weaknesses or a possibility that
            HUD would not meet the requirements of the Recovery Act. HUD took measures in LOCCS
            to prevent any disbursements of unobligated funds after the March 17, 2010 deadline. This
            was accomplished by preventing PHAs from disbursing from LOCCS amounts above the
            reported obligation. This provides the first level of protection. The second level of protection
            was provided by preventing PHAs from reporting obligations for the March 17, 2010
            reporting period after 8PM March 24, 2010. This measure, when coupled with the first
            measure, prevented PHAs from disbursing any funds above the amount obligated by March
            17, 2010. This allowed HUD time to process the recaptures without a concern that PHAs
            would be changing data in LOCCS regarding their obligations. As to the reallocation of
            funds, the Recovery Act does not specify a specific timeframe by which this must be
            completed so HUD is compliant with the reallocation requirements of the Recovery Act.




                                               12
        Thank you for providing HUD the opportunity to provide these comments on the
draft report. We ask that you please consider incorporating them into the report. Should
you have any questions or comments please contact Jeff Riddel at 202-402-7378 or Rick
Smith at extension 7652.




                               13
                    OIG Evaluation of Auditee Comments

Comment 1   We acknowledge that planning for recapture and reallocation was a
            dynamic process. However, HUD will encounter similar recapture
            and reallocation requirements in the future with competitive and
            expenditure deadlines approaching. For effective and efficient
            program management, HUD should plan for meeting its goals and
            requirements.

            While the revised recapture plan referred to in HUD’s comments
            appears to be an improvement, HUD should further revise its plan,
            incorporating items in this report.

Comment 2   We considered HUD’s comments but did not revise the report
            because the appeal process described was not included in its plan.
            Further, HUD did not have to electronically process recaptures
            because the limited number of grantees not in compliance returned
            formula funds instead of having them recaptured. However, HUD
            cannot be assured this will be the case with future obligation and
            expenditure deadlines.

            We appreciate HUD’s agreement to add a description of its appeal
            process in future revisions of its plan.

Comment 3   The procedures HUD described in its comments were not evidenced
            in its written plan provided for review and analysis during the audit;
            therefore, we did not revise the report. We appreciate HUD’s
            agreement to add a description of its procedures for determining
            recapture amounts in future revisions of its plan.

Comment 4   Government auditing standards define “significance” as the relative
            importance of a matter within the context in which it is being
            considered, including quantitative and qualitative factors. We assessed
            whether HUD’s recapture and reallocation plan contained sufficient
            procedures to ensure that it met Recovery Act and other requirements
            and reported on deficiencies within the plan.

            We acknowledge that HUD staff had given thought to many aspects of
            the reallocation and recapture process; however, the written plan lacked
            specific details, which we concluded was a significant weakness. HUD
            should ensure that it has a documented plan for seamless continuity of
            its operations.




                                        14