oversight

                                                      U.S. Department of Housing and Urban Development
                                                      Office of Inspector General, Region VI
                                                      819 Taylor Street, Suite 13A09
                                                      Fort Worth, Texas 76102

                                                      (817) 978-9309 FAX (817) 978-9316
                                                       http://www.hud.gov/offices/oig/
                                                      OIG Fraud Hotline 1-800-347-3735



January 15, 2010                                      MEMORANDUM NO:
                                                      2010-FW-0801


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

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

SUBJECT:       HUD Guidance on American Recovery and Reinvestment Act Capital Fund
               Physical Needs Assessment


                                        INTRODUCTION

We reviewed the U. S. Department of Housing and Urban Development’s (HUD’s) guidance on
using American Recovery and Reinvestment Act of 2009 (Recovery Act) capital funding for
physical needs assessments. We performed the review due to concerns that came to our attention
while performing a Recovery Act capacity review of a public housing agency (grantee). Our
objective was to determine whether HUD’s guidance to grantees on using Recovery Act capital
funds for physical needs assessments was sufficient to ensure grantees had the information
needed to avoid missing the grant obligation deadline of March 17, 2010.

We provided a draft report to HUD on January 5, 2010, and received comments on January 11,
2010. While agreeing with the conclusions, the comments mostly discussed a draft
recommendation that we removed based upon the actions that HUD took.

                                METHODOLOGY AND SCOPE

We reviewed HUD's guidance provided between February and December 2009 related to its
requirement that grantees perform a physical needs assessment as a condition of Recovery Act
capital fund formula grants.1 We reviewed the language in the grant agreement,2 related HUD
notices, and information posted on HUD’s internet site. We also discussed the matter with HUD
staff responsible for developing revised requirements for physical needs assessments. We
performed the work in December 2009.

1
    We did not review HUD's compliance with its clearance procedures for issuing directives.
2
    Form HUD-53012, American Recovery and Reinvestment Act (ARRA) Formula Grant Capital Fund Program
    (CFP) Amendment To The Consolidated Annual Contributions Contract.
                                            BACKGROUND

HUD allocates capital funds annually via a formula to grantees for development, financing,
modernization, and management improvements. HUD also administers the capital fund
financing program that authorizes grantees to borrow funds conditioned on a promise to pay the
debt service from capital fund grants. Grantees were required to submit a physical needs
assessment to HUD as part of the comprehensive plan every 6th year following the initial year of
participation in the capital fund program.3

On February 17, 2009, the President signed the Recovery Act. Title XII of the Recovery Act
appropriated $4 billion for public housing agencies to carry out capital and management
activities, as authorized under section 9 of the United States Housing Act of 1937. The
legislation required that $3 billion of these funds be distributed to grantees by formula with the
remaining $1 billion to be made available through a competitive process.

HUD required all grantees to perform physical needs assessments, as specified by HUD, as a
condition of the Recovery Act capital fund formula grant.4 However, HUD did not require
grantees to complete the assessments before commencing modernization work using the grant
funds.5 The grant agreements were effective March 18, 2009.

In a “frequently asked questions” document dated July 17, 2009, posted to its internet site, HUD
wrote that it was in the process of revising the requirements for physical needs assessments and
advised grantees not to undertake a Recovery Act physical needs assessment until it provided
further guidance. In another “frequently asked questions” document dated July 24, 2009, HUD
advised grantees not to obligate Recovery Act funds for physical needs assessments because it
had not completed revising the requirements. There was no indication whether all grantees
received this guidance.

In August and September 2009, we audited a large grantee6 that budgeted funds for a physical
needs assessment but had not made obligations because it was waiting for guidance from HUD.
The grantee had not followed HUD’s guidance because it did not review the frequently asked
questions on HUD’s internet site. We recommended the grantee revise its grant budget to
reallocate the funds to other eligible activities.

Since HUD did not require grantees to perform physical needs assessments before commencing
Recovery Act work, there did not appear to be a nexus between the physical needs assessments
and the Recovery Act capital fund grants. Furthermore, the Recovery Act itself did not establish
the requirement; HUD added it to the grant agreement on its own accord. HUD stated the
physical needs assessments would be useful in determining the impact of the Recovery Act
funds, even though they would be performed after Recovery Act work was substantially
complete.

3
    24 Code of Federal Regulations 968.
4
    Section 7(k) of the grant agreement.
5
    Notice PIH 2009-12 (HA), issued March 18, 2009.
6
    Report 2010-FW-1001, Dallas Housing Authority, Dallas, Texas, Demonstrated Capacity to Administer its
    Recovery Act Capital Fund Formula Grant, issued December 18, 2009.

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                                        RESULTS OF REVIEW

We discussed the physical needs assessment requirement with HUD and raised the concern that
other grantees may be waiting to obligate funds for physical needs assessments once they
received guidance from HUD. Grantees risked losing the funds because the March 17, 2010
obligation deadline was fast approaching. The Recovery Act required HUD to recapture any
funds not obligated by that date. HUD agreed to contact grantees and clarify its guidance on the
matter.

In part because of our concerns, HUD sent an electronic message on December 18, 2009, to all
grantees reminding them about the information posted on its internet site regarding physical
needs assessments. HUD restated that to avoid violating obligation and expenditure deadlines
grantees should not use Recovery Act capital funds to conduct required physical needs
assessments.7 HUD also provided a link to its website and an attachment containing the specific
information referenced in the electronic message. We appreciate HUD quickly clarifying its
position. We have no further recommendations.




7
    HUD recommended that grantees budget future capital funding allocations for physical needs assessments.

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