oversight

The City of Grand Prairie, TX, Maintains Capacity to Adequately Administer Recovery Funding But Needs to Make Program Improvements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-01-06.

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

                                                     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

                                                     MEMORANDUM NO:
January 6, 2010                                      2010-FW-1803

MEMORANDUM FOR:               Katie S. Worsham
                              Director, Office of Community Planning and Development, 6AD

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

SUBJECT:       The City of Grand Prairie, TX, Maintains Capacity To Adequately Administer
               Recovery Funding But Needs To Make Program Improvements


                                       INTRODUCTION

As part of our organization’s commitment to ensure the proper use of recovery funding, we
performed a review of the City of Grand Prairie’s (City) operations to evaluate its capacity to
administer the $3.2 million under the Housing and Economic Recovery Act of 2008 (HERA) and
the American Recovery and Reinvestment Act of 2009 (ARRA). Specifically, our objective was
to review and assess the City’s capacity and risks in the following areas: basic internal controls,
financial operations, and procurement.

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 review.

                               METHODOLOGY AND SCOPE

Our review period was October 1, 2008, to September 30, 2009. We conducted our review from
August 31 through October 28, 2009, at the City’s Housing and Neighborhood Services
Department (HNS), 205 West Church Street, Grand Prairie, TX.

To accomplish our objective, we

       Reviewed and obtained an understanding of HERA and ARRA legislation, relevant
       program guidance and criteria, the City’s grant agreements with U.S. Department of
       Housing and Urban Development (HUD), and its planned activities under HERA and
       ARRA.
       Interviewed City management and staff regarding the City’s operations.
       Reviewed City procurement files for 15 contracts totaling more than $370,254. We
       selected contracts based upon dollar value from existing HUD-funded City programs.
       While this was not a statistical sample, we expect it to be representative of the City’s
       procurement for recent activities similar to HERA and ARRA contracts.
       Reviewed $139,723 of a total of more than $1.1 million, or 12 percent of all of the
       expenses from Community Development Block Grant (CDBG) public service activity
       providers, CDBG and HOME Investment Partnerships Program (HOME) rehabilitation
       projects, and the City’s two Neighborhood Stabilization Programs (NSP): foreclosed
       home acquisition and resale grant for only governmental employees (4-GOV) and the
       foreclosed home purchase assistance grant (FHPAG).
       Made site visits to four NSP purchase and resale homes during the City’s open house.

                                         BACKGROUND

The City was incorporated in 1909 and is a home rule city operating under a council/manager
form of government. The city council appoints a professional city manager to administer and
coordinate municipal operations and programs.

Through various programs, HUD provides the City with resources to address a wide range of
unique community development needs. Annually, the City receives approximately $1.4 million
in CDBG and $580,000 in HOME funds. The City’s annual action plan updates the City’s 5-
year consolidated plan and describes the HUD activities budgeted under each of its programs. In
2009, the City received more than $2.2 million under HERA and more than $941,000 under
ARRA. Both HERA and ARRA require swift obligation and expenditure with stringent
emphasis on accountability and transparency. The City’s HNS department administers all the
CDBG, HOME, HERA, and ARRA programs. The City’s HNS department assists citizens with
housing rehabilitation, housing reconstruction, emergency repairs, fair housing, and other
community housing issues with HUD funding.

              Table 1: Program funding
               Program                    Funding source       Amount
               NSP                             HERA             $2,267,290
               HPRP*                          ARRA                 569,746
               CDBG-Recovery                  ARRA                 372,620
               Total                                            $3,209,656
              * Homelessness Prevention and Rapid Re-Housing Program

                                   RESULTS OF REVIEW

Generally the City has capacity to administer its HERA and ARRA funding. However, its NSP
programs benefited government employees more than other City residents, and the City needs to
make some improvements in its administration of its HOME program and contract
administration.




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Assistance Provided to Governmental Employees Was More Than That Provided to
Nongovernmental Recipients

As designed, the City’s 4-GOV program, which aids only government employees, provides
greater assistance than that provided to other City residents assisted under the City’s FHPAG.1
The City divided its more than $2.2 million in NSP funds evenly between its 4-GOV and
FHPAG programs. Under the 4-GOV program, the City, through HNS, purchased and
rehabilitated 10 houses. The purchasers of these houses, limited to government employees,
received or will receive a 20 percent discount on the sales price. Under FHPAG, the City
provides assistance to approved buyers of foreclosed-upon properties. The City assists the
buyers with closing costs, up to 50 percent of the downpayment, and City-approved
rehabilitation cost, not to exceed a total of $20,000.

During our review period, the City closed on eight NSP-assisted homes, two with the 4-GOV
program and six with FHPAG. The table below shows the amount of NSP nonacquisition costs
spent per house. The 4-GOV program purchasers received $73,765 and $59,413, respectively, in
assistance, while the most the FHPAG purchasers received was $18,938. While HUD does not
prohibit such disparities in assistance between programs, the City must guard against a real or the
appearance of a conflict of interest or abuse. The following table and figure show the assistance
provided to the two programs’ recipients.

       Table 2: Comparison of NSP-funded programs
        Eligible participants                   4-GOV program 2                        FHPAG
        Number of homes closed on
        as of September 30, 2009                                        2                             6
        Rehabilitation                                            $91,678                       $36,495
        Downpayment                                                     0                        14,172
        Closing costs                                                   0                        29,423
        Other                                                           0                         1,420
        Discount of sales price                                    41,500                             0
        Average assistance                                        $66,589                       $13,585




1
    Both City programs are funded through NSP.
2
    The program is open to Federal, State, or local government employees that work in the City. Approximately 3
    percent of Grand Prairie’s population was either a City or Grand Prairie Independent School District employee.

                                                        3
Figure 1: Benefits received per participant

                                 Nonacquisiton costs
    FHPAG                    $8,442

    FHPAG                    $9,905

    FHPAG                   $14,276

    FHPAG                    $14,954

    FHPAG                   $14,996                                            Non Acquisiton Costs

    FHPAG                    $18,938

    4-GOV                                              $59,413

    4-GOV                                                        $73,765

            $0        $20,000         $40,000     $60,000        $80,000


Further, the City sold one NSP house to an HNS employee and included a refrigerator as a post
contract concession. The other buyer of a 4-GOV program house was not offered the same
incentive. This buyer’s income was less than 50 percent of the median income threshold,
whereas the HNS employee’s income was not. The City should ensure that it provides all 4-
GOV program participates similar assistance to avoid the appearance of favoritism or a conflict
of interest.

Ineligible Expenses Were Included in the Sales Price

The City included ineligible expenses in determining the sales price of one 4-GOV program
house. HUD regulations3 required the City to allocate costs to each property based on the cost
associated with that property. However, the City included the cost of the lock boxes for all of the
4-GOV program and FHPAG houses and the estimated salaries of the HNS employees
performing rehabilitation work in the sales price for one house. It did so because it did not
allocate the costs of the lock boxes to the individual properties and wanted to recover estimated
staff costs related to property rehabilitation. As a result, the City overcharged the buyer $3,952.
Thus, HUD should require the City to reduce the loan by $3,162.4

Further, the City did not maintain sufficient records to allocate employees’ time to specific jobs.
The HNS director stated that the City estimated the cost in computing the sales price. After the
matter was brought to the director’s attention, he agreed to start requiring the employees to
document time spent on the NSP-funded programs.



3
     Federal Register, Volume 73, Number 194 J. 2
4
     Amount reflects the 20 percent discount provided by the City. $3,952 * 80 percent = $3,162

                                                        4
The City Did Not Record Expenses Correctly

The City incorrectly recorded the expenses for one 4-GOV program house to the 120 percent of
median income portion of the grant. However, the home buyer was a person with income of less
than 50 percent of the median income level. The City must report this information to HUD in
order for HUD to measure the City’s compliance with requirements for aiding people with
income of less than 50 percent of the median income level.5 The City needs to ensure that it
correctly records and reports expenses to its NSP-funded programs.

The City Did Not Meet All HOME Requirements

The City did not meet all HOME requirements. Specifically, for one house for which the City
used CDBG6 and HOME funds, it did not have a subsidy-layering plan7 and did not perform
after-built valuations8 for HOME new construction projects. Further, the City did not maintain
complete documentation showing that refinancing reduced the cost to the homeowner and lacked
new construction cost estimates. HUD regulations required a subsidy-layering plan when using
HOME and other HUD funds in combination.9 HOME regulations further required after-built
valuations, documentation showing that new financing reduced the cost to the homeowner, and
cost estimates.10 The City was unaware of the requirements. Without a subsidy-layering plan
the City could not ensure that it was not investing more HOME funds than allowed and that the
costs met other HOME requirements.

The City Had No Controls To Prevent Payment of Service Contracts Before Contract Execution

The City paid a public service activity provider $2,147 nine days before executing a contract.
The chief financial officer stated that it was the department head’s responsibility to ensure that
only valid contract payments were made. The HNS director explained that the City paid the
contractor before the contract execution due to a delay in executing the contract. Unfortunately,
the City’s accounts payable system had no control to prevent payments before contract
execution. As a result, the City paid $2,147 without a legal instrument under which to make a
payment.

City Contracts Lacked Required Clauses

Both of the NSP-funded programs required that the City choose the contractors for the
rehabilitation work. Thus, the regulations required certain contract clauses to protect the City’s
interest. The City was unaware of the contract clause requirement; thus, it did not include
several required contract clauses in its contracts. As a result, the City did not protect itself
contractually. The following table shows the missing contract causes.

5
     HERA, section 2301(f)(3)(A)(ii), requires that 25 percent of funds appropriated be made available to families
     whose incomes do not exceed 50 percent of median income.
6
     The City used CDBG funds for preconstruction testing, surveying, and grading.
7
     24 CFR (Code of Federal Regulations) 92.508(a)(3)(x)
8
     24 CFR 92.254(b)(1)
9
     Community Planning and Development Notice 98-1
10
     24 CFR 85.36(b)(9)

                                                         5
               Table 3: Missing contract clauses

                           Contracts                Clause lacking
                 HPRP public service activity,      Administrative remedies for
                 NSP 4-GOV, FHPAG                   breach11
                 NSP 4-GOV, FHPAG                   Contract work hours and safety
                                                    standards12
                 NSP 4-GOV, FHPAG                   Antikickback13
                 NSP 4-GOV, FHPAG                   Mandatory standards on energy
                                                    efficiency14

When brought to the City’s attention, the City corrected the lack of breach clause in its HPRP
contracts with its public service activity providers.

Conclusion

Generally the City maintained capacity to administer its HERA and ARRA funding. However, it
needs to be cognizant of potential favoritism, conflicts of interest, and the inclusion of ineligible
expenses in NSP funding programs’ sales prices. Further, it needs to make some improvements
to its HOME program and to its contracting and payment process, and policies and procedures.

                                       RECOMMENDATIONS

We recommend that the Director, Fort Worth Office of Community Planning and Development,

1A. Monitor the 4-GOV program closely to ensure that favoritism or conflicts of interest are
    avoided and are detected if they occur.

1B. Require the City to reduce the loan by $3,162 from non-Federal funds for the inclusion of
    the ineligible expenses in the sales price calculation for one home.

1C. Require the City to develop policies and procedures to ensure that it records and reports
    expenditures correctly.

1D. Ensure that the City’s HOME policies and procedures include provisions requiring (1) a
    subsidy-layering plan and (2) for new construction projects, after-built valuations,
    documentation showing that the projects reduced the overall cost to the buyers, and cost
    estimates.

1E. Require the City to reimburse the CDBG grant $2,147 for funds paid without an executed
    contract or document payment eligibility.

1F. Require the City to include the required clauses in its contracts.

11
     24 CFR 570 502(a)(12) and 24 CFR 85.36(i)(1)
12
     24 CFR 85.36(i)(6)
13
     24 CFR 85.36(i)(4)
14
     24 CFR 85.36(i)(13)

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                                      APPENDIXES

Appendix A
                   SCHEDULE OF QUESTIONED COSTS



    Recommendation                        Ineligible 1/
        number

         1B                                   $3,162
         1E                                    2,147

       Total                                  $5,309




1/ Ineligible costs are costs charged to HUD-financed or HUD-insured programs or activity that
   the auditor believed are not allowable by law; contract; or Federal, State, or local policies or
   regulations.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation                              Auditee Comments




                              HOUSING AND NEIGHBORHOOD SERVICES


             December 21, 2009


             Gerald R. Kirkland, Regional Inspector General
             U.S. Department of Housing and Urban Development
             Office of the Inspector General, Region VI
             819 Taylor St. Suite 13A09
             Fort Worth, Texas 76102


             Dear Mr. Kirkland:

             Attached you will find our written response, recommended corrective action, and comments regarding
             the draft report on the City of Grand Prairie’s capacity to adequately administer recovery funds.

             Though we do not agree with all of the findings contained in the report, we look forward to the resolution
             of the disputed items and also seek agreement on the effective corrective actions noted in our response.

             Thank you for your consideration of our response, and we look forward to the issuance of the final report
             with the requested adjustments.

             Sincerely,



             William A. Hills, Director
             Housing and Neighborhood Services




                                                       8
Ref to OIG Evaluation                               Auditee Comments




                               HOUSING AND NEIGHBORHOOD SERVICES
             Requested Responses To HUD OIG Draft Report Dated December 14, 2009

Comment 1    1A. Monitor the 4-GOV program closely to ensure that favoritism or conflicts of interest are avoided and
             are detected if they occur.

             Response:
             The 4-GOV program is designed to purchase foreclosed properties that have been on the market for an
             inordinate period of time. These properties require significantly more rehabilitation due to their less than
             favorable condition in comparison to properties that are presented as part of the FHPAG program
             depicted in Table 2. (comparison of NSP-funded programs). We firmly believe that the 4-GOV program
             did exactly what was intended:
                  the program purchased foreclosed property that no one would purchase because the homes were in
                  such disrepair, i.e., foundation issues, plumbing issues
                  rehabilitate these homes, creating jobs for contractors
                  bring the home value back up to market with other homes in the neighborhood
                  resulting in less devaluation of all homes in the neighborhood
                  providing affordable, decent housing for qualified buyers.

             We take exception to this depiction of the two programs, and that the funding dedicated to each indicates
             any favoritism being granted to those persons utilizing the 4-GOV program as opposed to the FHPAG
             program.

             Additionally, no 4-GOV buyers were offered incentives to purchase properties. However all 4-GOV
             purchasers were afforded some post contract concessions where requested. The premise that some 4-
             GOV purchasers were not afforded concessions is inaccurate as all have received some form of
             concession. We respectfully request this item be removed from this report. (Documentation of assertions
             available upon request.)

             1B. Require the City to reduce the lien by $3,162 from non-Federal funds for the inclusion of the
Comment 2    ineligible expenses in the sales price calculation for one home.

             Response:
             Based on the allocated costs requirements sited in this report, employee time records now document the
             actual time spent on each project. In calculating home prices, actual time spent rather than estimates will
             be used. A new lien with a reduction of $3162.00 will be issued to the purchaser and appropriately filed.




                                                        9
Ref to OIG Evaluation                               Auditee Comments




                              HOUSING AND NEIGHBORHOOD SERVICES

Comment 2    1C. Require the City to develop policies and procedures to ensure that it records and reports expenditures
             correctly.

             Response:
             The city cannot predict which income bracket a 4-Gov house will be sold to ahead of time. The city has
             and will continue to record expenditures accurately. When a house is sold to a person in an income
             bracket different from the income budget line that expenses were paid through, it will adjust the voucher
             in DRGR and also include the information in the narrative section of the QPR, as we have already done.
             The manager and director will ensure that when 4Gov homes sell, these brackets will be compared and
             ensure adjustments are made when necessary. This process was reviewed by the Office of Community
             Planning and Development who is fully aware of the process we have in place and we will continue to
             make the necessary adjustments post sale. Based on the information provided, we respectfully request
             this item be removed from this report.

             1D. Ensure the City’s HOME policies and procedures include provisions requiring (1) a subsidy-layering
Comment 2    plan and (2) for new construction projects, after-built appraisals, documentation showing that the projects
             reduced the overall cost to the buyers, and cost estimates.

             Response:
             The city of Grand Prairie has commissioned a consultant to assist in the preparation of our one and five
             year consolidated plan. In the preparation of these documents, we have requested a subsidy layering plan
             be included. This plan will directly affect new construction projects, including post construction
             appraisals and documentation illustrating the project reduction of overall cost to the buyers.

Comment 3    1E. Require the City to reimburse the CDBG grant $2,147 for funds paid without an executed contract or
             document payment eligibility.

             Response:
             After reviewing the documentation associated with this payment it was discovered that the payment
             issued to the public service activity provider was indeed issued nine days prior to the execution of the
             contract. We have enhanced our controls regarding these payments to prevent any future occurrences of
             this potential error. However, in our review we also note that the payment was issued for a fully eligible
             CDBG activity and furthermore, no federal funds were drawn for payment until 10 days after the
             execution of the contract (see attached). Therefore, at no time were any federal funds committed without
             a contract in place. We feel that no reimbursement is warranted, as no Federal funds were ever at risk
             without a contract in place and we respectfully request this item be removed from this report.




                                                       10
Ref to OIG Evaluation                                Auditee Comments




                               HOUSING AND NEIGHBORHOOD SERVICES


Comment 2
             1F. Require the city to include the required clauses in its contracts.

             Response:
             The city has already included the required clauses in both the Homelessness Prevention and Rapid Re-
             housing (HPRP) program and both the Neighborhood Stabilization Program (NSP) program contracts as
             noted in the draft report table 3.
             The added clauses now cover:

                  1)   Administrative remedies for breach;
                  2)   Contract work hours and safety standards;
                  3)   Anti-kickback;
                  4)   Mandatory standards for energy efficiency.

             As these changes were made prior to the issue of this report, we respectfully request this item be removed
             from this report.




                                                        11
                          OIG Evaluation of Auditee Comments

Comment 1    We changed wording in the finding based on comments from the City. However,
             as designed the City provides more assistance to the 4-GOV participants than to
             the FHPAG participants. Therefore, the City must be cognizant of the increased
             risk of conflicts of interest or favoritism with the 4-GOV assistance.

Comment 2 We appreciate the actions the City will take to implement the recommendation.

Comment 3 We changed wording in the finding based on comments received by HUD. We
          appreciate the action the City will take to implement the recommendation. The
          City’s response did not address the finding that it obligated and obtained
          reimbursement of CDBG funds prior to contract execution. Therefore, we did
          not modify the recommendation.




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