oversight

The City of East St. Louis Did Not Properly Allocate Salary and Building Expenses or Properly Document Its Process to Secure a Consulting Services Contract

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-03-26.

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

                                                                  Issue Date
                                                                           March 26, 2010
                                                                  Audit Report Number
                                                                               2010-KC-1003




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

            //signed//
FROM:       Ronald J. Hosking, Regional Inspector General for Audit, 7AGA

SUBJECT: The City of East St. Louis Did Not Properly Allocate Salary and Building
           Expenses or Properly Document Its Process to Secure a Consulting Services
           Contract


                                    HIGHLIGHTS

 What We Audited and Why

             We audited the City of East St. Louis’ (City) Community Development Block
             Grant (Block Grant) program because it is the 10th largest recipient in the State of
             Illinois and is the largest Illinois recipient of Block Grant funds outside the
             Chicago area.

             The objectives of our review were to determine whether the City properly
             expended Block Grant funds for salaries and building expenses and followed
             proper procurement processes while awarding significant administration
             contracts.

 What We Found
             The City did not properly allocate salary expenses to the Block Grant program. For
             the past 5 years, the City’s Community Development Department (Department) had
             charged salary expenses to the Block Grant program based on an annual allocation
             instead of a documented, after-the-fact distribution of employee time.
           The City did not properly allocate building expenses to the Block Grant program.
           It was unable to provide documentation to support that the rent paid by the
           Department with Block Grant funds for the past 5 years was reasonable,
           necessary, allowable, and allocable to the Block Grant program.

           The City did not properly document the cost estimate and selection process used
           to procure a contract for developing its 5-year consolidated plan. Specifically, it
           did not document its cost analysis, method of selection, or technical evaluation of
           the proposals received.

What We Recommend
           We recommend that the U.S. Department of Housing and Urban Development
           (HUD) require the City to provide supporting documentation or reimburse its
           Block Grant program from non-Federal funds for more than $1 million paid for
           salary expenses, building rent, and the administration contract. Additionally, we
           recommend that HUD require the City to implement acceptable policies and
           procedures and provide technical assistance to ensure future compliance.

           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 March 5, 2010,
           and requested its comments by March 22, 2010. The City provided its written
           comments dated March 22, 2010. It generally agreed with Finding 1, Finding 3,
           and many of our recommendations. For Finding 2, the City agreed to make
           changes to its procedures for charging building expenses, but disagreed with our
           estimated allocation of basic utilities and building insurance.

           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report. The attachments have not
           been included since they are not required to understand the response. We
           provided a complete copy of the City’s response to the Action Official addressed
           in this report.




                                            2
                           TABLE OF CONTENTS

Background and Objectives                                                   4

Results of Audit
      Finding 1: The City Did Not Properly Allocate Salary Expenses         5
      Finding 2: The City Did Not Properly Allocate Building Expenses       7
      Finding 3: The City Did Not Properly Document the Cost Estimate and   9
                 Selection Process Used To Procure Consulting Services

Scope and Methodology                                                       12

Internal Controls                                                           13

Appendixes
   A. Schedule of Questioned Costs                                          14
   B. Auditee Comments and OIG’s Evaluation                                 15




                                           3
                      BACKGROUND AND OBJECTIVES

Title I of the Housing and Community Development Act of 1974 established the Community
Development Block Grant (Block Grant) program, a flexible program that provides communities
with resources to address a wide range of unique community development needs.

The City of East St. Louis (City) participates in the Block Grant program as an entitlement
community. These grants are allocated to larger cities and urban counties to develop viable
communities by providing decent housing, a suitable living environment, and opportunities to
expand economic opportunities, principally for low- and moderate-income persons. The U.S.
Department of Housing and Urban Development (HUD) determines the amount of each entitlement
grant by a statutory dual formula which measures community needs in relationship to those of other
metropolitan areas. The City received more than $3.6 million for fiscal years 2008 and 2009
combined. It uses these funds for several purposes including home repair, code enforcement, and
public services.

According to 24 CFR (Code of Federal Regulations) 570.200(g), the City was permitted to use a
portion of grant funds received for planning and program administrative costs. These costs included
costs for staff engaged in program administration; costs for office space such as insurance, utilities,
rental expenses, and maintenance; and costs for the development of a consolidated plan. Additional
staff costs directly related to carrying out eligible activities were also allowable when charged
directly to such activities. As outlined in 24 CFR 570.200(a)(5), the City was required to follow
Office of Management and Budget (OMB) Circular A-87, “Cost Principals for State, Local, and
Indian Tribal Governments,” for all direct and indirect costs charged to the grant.

The City’s Block Grant program is currently administered by its Community Development
Department (Department), which is located in the City’s municipal building. Additionally, the City
is subject to the Financially Distressed City Law and is accordingly under control of the State-
established East St. Louis Financial Advisory Authority, which provides oversight and assistance.

The objectives of our review were to determine whether the City properly expended Block Grant
funds for salaries and building expenses and followed proper procurement processes while
awarding significant administration contracts.




                                                  4
                                RESULTS OF AUDIT

Finding 1: The City Did Not Properly Allocate Salary Expenses
The City did not properly allocate salary expenses to the Block Grant program. This condition
occurred because the City was not aware of the requirements for determining and documenting
salaries charged to Federal awards. As a result, HUD had no assurance that the $917,669 paid
for salary expenses was reasonable, necessary, allowable, and allocable to the Block Grant
program.


 The City Did Not Maintain
 Detailed Time Records

              The City did not properly allocate salary expenses to the Block Grant program.

              For the past 5 years, the City’s Department had charged salary expenses to the Block
              Grant program based on an annual allocation. Its allocation charts indicated the
              percentage of each employee’s salary that was to be charged to direct and indirect
              (administration) cost activities for the upcoming year.

              Under OMB Circular A-87, salary expenses are generally only allowable based on a
              documented, after-the-fact distribution of employee time. This time distribution
              includes instances in which employees work on more than one Federal award, both a
              direct cost activity and an indirect cost activity, or a Federal award and a non-
              Federal award. The documentation is required to be prepared at least monthly,
              coincide with one or more pay periods, account for all activity for which each
              employee is compensated, signed by the employee, and approved by a responsible
              official of the governmental unit. For employees working on only one cost
              objective, such as those working on code enforcement activities, the City was
              required to perform periodic certifications that the employees worked solely on that
              activity for the period covered by the certification.

              The City did not prepare the necessary documentation, such as personnel activity
              reports and periodic certifications, to support salary expenses. Consequently, it
              could not support its calculation of the direct and indirect salary charges to the Block
              Grant program.

 The City Was Not Aware of
 Requirements

              The City was not aware of the requirements for determining and documenting
              salaries charged to Federal awards and did not have a written policy for allocating


                                                 5
             and supporting salaries. According to the Department’s accounting manager, the
             City inherited the allocation chart method from the nonprofit that previously
             administered its Block Grant program and was not aware that this practice conflicted
             with Federal requirements.

HUD Had No Assurance That
the Costs Were Reasonable

             HUD had no assurance that the $917,669 paid for salary expenses over
             approximately 23 months was reasonable, necessary, allowable, and allocable to the
             Block Grant program.

Conclusion

             The City needs to provide supporting documentation to HUD or reimburse its Block
             Grant program from non-Federal funds for any portion of direct or indirect salary
             expenses it cannot support as reasonable, necessary, allowable, and allocable to the
             Block Grant program. In addition, the City should prepare and implement effective
             written policies and procedures to ensure that it properly supports and allocates
             future charges to all Federal awards for salary expenses in accordance with 24 CFR
             Part 570 and OMB Circular A-87.

Recommendations

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

             1A. Require the City to provide supporting documentation showing that the funds
                 paid for direct and indirect salary expenses were reasonable, necessary,
                 allowable, and allocable to the Block Grant program or reimburse its Block
                 Grant program $917,669 from non-Federal funds.

             1B. Ensure that the City’s management and staff fully implement acceptable
                 written policies and procedures for allocating and supporting future charges to
                 Federal awards for salary expenses in accordance with 24 CFR Part 570 and
                 OMB Circular A-87.

             1C. Provide technical assistance to the City to ensure that its management and staff
                 comply with 24 CFR Part 570 and OMB Circular A-87 requirements for salary
                 expenses.




                                               6
Finding 2: The City Did Not Properly Allocate Building Expenses
The City did not properly allocate building expenses to the Block Grant program. This condition
occurred because the City was not aware of the requirements for determining allowable rent. As
a result, HUD had no assurance that the $58,205 paid for building rent was reasonable,
necessary, allowable, and allocable to the Block Grant program.


 The City Did Not Perform a
 Cost Allocation


              The City did not properly allocate building expenses to the Block Grant program.

              For the past 5 years, the City had been charging its Department monthly rent. The
              City was unable to provide documentation to support that the rent paid by the
              Department with Block Grant funds was reasonable, necessary, and allocable to the
              Block Grant program.

              According to OMB Circular A-87, rent payments between parties of the same
              governmental unit are considered less-than-arms-length transactions and subject to
              limitations. These rental costs are only allowable up to the amount that would be
              allowed had title in the property been vested in the governmental unit (in this case,
              the Department). Under this rule, rent is intended to cover a reasonable allocation of
              actual expenses only, since there are no mortgage costs associated with this building.
              An allowable allocation of actual expenses could include the Department’s share of
              utilities, insurance, maintenance, property taxes, and other expenses related to the
              occupancy of the building.

              The City did not perform a cost allocation to determine allowable rent for the
              Department. Additionally, it failed to allocate the rent charged to the Department
              among the various HUD programs its staff administered, including the Block Grant,
              HOME Investment Partnerships, and Emergency Shelter Grant programs.

 The City Considered the Rent
 Charges Reasonable

              The City was not aware of the requirements for determining allowable rent and did
              not have a written policy for allocating and supporting building expenses. Further, it
              considered the rent charged to the Department reasonable because it was
              considerably less than the amount charged to its Tax Increment Financing
              Department and because the Block Grant program could bear the costs charged.




                                                7
HUD Had No Assurance That
the Costs Were Reasonable


             HUD had no assurance that the $58,205 paid for building rent was reasonable,
             necessary, allowable, and allocable to the Block Grant program. While the City
             charged its Department more than $2,700 per month in building rent over the 21-
             month period reviewed, our analysis found that a reasonable allocation of basic
             utilities and building insurance totaled less than $420 per month.

Conclusion

             The City needs to provide supporting documentation to HUD or reimburse its Block
             Grant fund from non-Federal funds for any portion of rent charges that it cannot
             support as reasonable, necessary, allowable, and allocable. In addition, the City
             should prepare and implement effective written policies and procedures to ensure
             that it properly supports and allocates future charges to all Federal awards for rental
             costs in accordance with OMB Circular A-87.

Recommendations

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

             2A. Require the City to provide supporting documentation showing that the funds
                 paid for building rent were reasonable, necessary, allowable, and allocable to
                 the Block Grant program or reimburse its Block Grant program $58,205 from
                 non-Federal funds.

             2B. Ensure that the City’s management and staff fully implement acceptable
                 written policies and procedures for allocating and supporting future charges to
                 Federal awards for rental costs in accordance with OMB Circular A-87.

             2C. Provide technical assistance to the City to ensure that its management and staff
                 comply with OMB Circular A-87 requirements for rental costs.




                                                8
Finding 3: The City Did Not Properly Document the Cost Estimate and
           Selection Process Used To Procure Consulting Services
The City did not properly document the cost estimate and selection process used to procure a
contract for developing its 5-year consolidated plan. It incorrectly believed that it was
acceptable to informally perform cost analyses, evaluate proposals, and negotiate with
respondents. As a result, HUD had no assurance that the $49,924 paid for the contract was
reasonable and necessary.


 The City Did Not Properly
 Document Its Procurement
 Process

              The City did not properly document the cost estimate and selection process used to
              procure consulting services to develop its 5-year consolidated plan. Specifically, the
              City violated 24 CFR 85.36(b)(9), which required it to maintain records sufficient to
              detail the significant history of a procurement, and the City’s own purchasing policy,
              which required it to maintain appropriate records covering purchase transactions.

              In October 2008, the City published a notice of request for proposals seeking a
              qualified consulting firm to carry out an involved planning process, resulting in a 5-
              year consolidated plan. These plans serve as an application for HUD entitlement
              grant programs, including the Block Grant, HOME Investment Partnerships, and
              Emergency Shelter Grant programs.

              Independent Cost Estimate
              The City did not document its cost analysis. Federal regulations at 24 CFR
              85.36(f)(1) state that as a starting point, grantees are required to perform an
              independent estimate before receiving proposals to determine the reasonableness of
              the proposed contract price. According to the City’s purchasing manager, the City
              informally reviewed previous contracts and consulted with other municipalities to
              determine the amount budgeted. However, it was unable to provide documentation
              of the informal review.

              Method of Selection
              The City did not properly document its method of selection. According to 24 CFR
              85.36(d)(3)(iii), the City was required to have a method for conducting technical
              evaluations and selecting awardees. Specifically, it was required to identify all
              evaluation factors and their relative importance in the publicized request for
              proposals. The request included a section outlining four bases of award criteria,
              including price structure, that were each valued as 25 of 100 points. However, a
              later section of the request listed four more detailed evaluation criteria that did not
              clearly correlate with the bases of award criteria. This inconsistency had the



                                                 9
           potential to cause confusion regarding which evaluation factors were relevant and
           how each would be considered in the awarding process.

           Technical Evaluation
           The City did not document its technical evaluation of proposals received. It only
           provided documentation for part of the procurement process. It was unable to
           document that it performed a technical evaluation of the proposals received as
           required by 24 CFR 85.36(d)(3)(iii). According to the City’s purchasing manager,
           the evaluation of the proposals was performed informally, and the deciding factor
           was negotiating price between the two firms. While price structure was listed in the
           request for proposals as a basis of award criterion, it was supposed to be equally
           weighted with the other three criteria.

           Additionally, while the City provided e-mails from the two firms showing revisions
           made to the proposed cost and scope of work, it was unable to provide
           documentation showing how it requested these revisions, whether it requested the
           same revisions from both respondents, and whether these actions were allowable
           under Federal procurement requirements.

The City Did Not Understand
Requirements

           The City did not fully understand Federal requirements for procurement by
           competitive proposals. Specifically, the City’s purchasing manager incorrectly
           believed that it was acceptable to informally perform cost analyses, evaluate
           proposals, and negotiate with respondents.

           Further, the City’s purchasing policy did not sufficiently follow the Federal
           procurement standards laid out in 24 CFR 85.36. For example, the City’s policy did
           not cover the Federal requirement to perform an independent cost estimate.
           Additionally, while Federal requirements allow for negotiation of compensation
           once the most qualified competitor is selected, the City’s policy allowed for
           negotiations between the City and each competitor.

HUD Had No Assurance That
the Costs Were Reasonable

           As a result of the conditions described above, HUD had no assurance that the
           $49,924 paid for the contract was reasonable and necessary. Further, due to the
           inconsistencies in the request for proposals and the City’s inability to show how it
           requested revisions to the price and scope of work, HUD had no assurance that the
           procurement was performed in a manner providing full and open competition
           without arbitrary actions as described in 24 CFR 85.36(c)(1)(vii).




                                             10
Conclusion


             The City needs to provide supporting documentation to HUD or reimburse its Block
             Grant fund from non-Federal funds for any portion of the $49,924 paid to the
             selected consulting firm that it cannot support as reasonable and necessary. In
             addition, the City should prepare and implement effective procurement procedures
             to ensure that it properly conducts and documents future procurements in accordance
             with 24 CFR 85.36.

Recommendations

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

             3A. Require the City to provide supporting documentation showing that the funds
                 paid for the administration contract were reasonable and necessary or
                 reimburse its Block Grant program $49,924 from non-Federal funds.

             3B. Ensure that the City’s management and staff fully implement acceptable
                 written policies and procedures to ensure that the City properly conducts and
                 documents future procurements in accordance with 24 CFR 85.36.

             3C. Provide technical assistance to the City to ensure that its management and staff
                 comply with 24 CFR 85.36 requirements for procurement.




                                              11
                          SCOPE AND METHODOLOGY

To accomplish our objectives, we reviewed applicable laws and regulations, met with HUD and
City staff, and reviewed City policies and procedures.

We also reviewed City records related to salaries, building expenses, and significant administration
contracts. For salaries, we reviewed annual salary breakdown allocation charts and paystubs
covering all 24 pay periods of 2008 and the first 21 pay periods of 2009. For building expenses, we
reviewed all rental payments made from the Department to the City between January 2008 and
September 2009, along with building insurance and utility expense documentation for the City’s
municipal building. For the 5-year consolidated plan contract, we requested and reviewed all
documentation related to the contract including the request for proposals, initial proposals received
by all respondents, follow-up e-mails received, internal memorandums, and related documentation.

We used reports obtained from HUD’s Integrated Disbursement and Information System as
background information for our review. Specifically, we used the reports to initially identify
amounts paid under salaries activity codes between January 1, 2008, and December 9, 2009.
However, we did not rely on these data for our conclusion. All conclusions were based on
additional review performed during the audit.

As part of our review of building expenses, we performed an analysis to determine the amount of
space occupied by the Department in the City’s municipal building. We determined that the
Department occupied approximately 4.7 percent of the building space. Using this factor, we
calculated the pro-rata expense for building insurance and basic utilities for the operation of the
Department’s space in the municipal building.

Our audit period generally covered January 2008 through December 2009. We performed our audit
work on site at the City’s municipal building located at 301 River Park Drive, East St. Louis, IL,
from September 2009 to January 2010.

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.




                                                 12
                              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:

              •       Controls to ensure that staff understands and follows all applicable laws and
                      regulations.

              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 items are significant weaknesses:

              •       The City did not have adequate controls in place to ensure that staff
                      understood and followed Federal requirements for determining and
                      documenting salaries, determining allowable rent, and procurement by
                      competitive proposals (see findings 1, 2, and 3, respectively).
              •       The City did not have written policies for allocating salaries and building
                      expenses (see findings 1 and 2, respectively).
              •       The City’s purchasing policy did not sufficiently follow the Federal
                      procurement standards laid out in 24 CFR 85.36 (see finding 3).


                                                13
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                        Recommendation number Unsupported 1/
                                1A                 $917,669
                                2A                  $58,205
                                3A                  $49,924


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.




                                             14
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         15
Ref to OIG Evaluation   Auditee Comments




Comment 2




                         16
Ref to OIG Evaluation   Auditee Comments




Comment 3




                         17
Ref to OIG Evaluation   Auditee Comments




Comment 4

Comment 5


Comment 6




                         18
Ref to OIG Evaluation   Auditee Comments




Comment 7




                         19
Ref to OIG Evaluation   Auditee Comments




Comment 8


Comment 9




Comment 10




                         20
OIG Evaluation of Auditee Comments

Comment 1   We applaud the City’s efforts to implement changes to ensure compliance with
            laws and regulations.

Comment 2   While Block Grant funding was only used for staff whose responsibilities include
            work on Block Grant programs, staff often worked on both direct and indirect
            Block Grant cost activities as well as other HUD and non-Federal programs. The
            City has now begun tracking actual time spent on activities each day (see
            Comment 3 below); however, it did not previously prepare the necessary
            documentation, such as personnel activity reports and periodic certifications, to
            support salary expenses. Consequently, it could not support its calculation of the
            direct and indirect salary charges to the Block Grant program.

Comment 3   We support the City’s efforts to begin implementing changes, namely to begin
            compiling daily allocation sheets. However, we note that the City was informed
            of this finding prior to mid-February, including a formal briefing in late
            November and informal briefings throughout the course of our audit.
            Additionally, the City was also informed of payroll documentation issues in
            August 2009 by its financial auditors who noted that employees did not perform
            semi-annual certifications and that the City’s time tracking system does not reflect
            allocations of employee’s time worked on the grant and other cost centers of the
            City.

Comment 4   To date, the City has been unable to provide documentation that an analysis was
            performed by its insurance broker and show that any analysis performed followed
            requirements for less-than-arms-length transactions.

Comment 5   The $420 figure cited in the report is an illustration of a reasonable allocation of
            basic utilities and building insurance based on documentation provided by the
            City and the percentage of building space occupied by staff working on Block
            Grant programs. While rent charges could include additional expenses such as
            telephone services, we were unable to calculate additional amounts reasonably
            allocable to Block Grant funds using the documentation provided by the City.

Comment 6   As stated in the report, City staff indicated that the City was not aware of the
            requirements for determining allowable rent and did not have a written policy for
            allocating and supporting building expenses. Therefore, we support the City’s
            decision to work with both an outside consultant and HUD as it seeks to ensure
            compliance with OMB Circular A-87.

Comment 7   As the City works to revise its policies and procedures, it should begin
            documenting all cost analyses performed, including independent estimates
            required prior to receiving proposals.




                                              21
Comment 8     While 24 CFR 85.36(d)(3)(v) permits negotiation of fair and reasonable
              compensation after the most qualified competitor is selected under procurement
              by competitive proposals, the City had not yet selected the contractor when it
              informally solicited revised offers. Even if the CFR had allowed for the City to
              request best and final offers from all competitors, the documentation provided by
              the City indicates that it allowed one of the proposers to submit multiple revisions
              prior to selection. Further, the revisions submitted by both competitors included
              changes in the scope of work in addition to the reduced proposed contract price.

Comment 9     As explained above, 24 CFR 85.36 only permits negotiation of fair and reasonable
              compensation after the most qualified competitor is selected. The CFR does not
              explicitly cite oral negotiations as permissible; however, 24 CFR 85.36(b)(9)
              indicates that grantees must maintain records sufficient to detail the significant
              history of a procurement.

Comment 10 We support the City’s efforts to properly document all future procurements,
           including tracking of all relevant communication.




                                               22