oversight

The State of Iowa Did Not Implement Adequate Controls Over Its Business Rental Assistance Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-05-26.

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

                                                                 Issue Date
                                                                      May 26, 2010
                                                                  
                                                                 Audit Report Number
                                                                      2010-KC-1004




TO:         Scott G. Davis, Director, Disaster Recovery and Special Issues Division, DGBD

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


SUBJECT: The State of Iowa Did Not Implement Adequate Controls Over Its Business
           Rental Assistance Program


                                   HIGHLIGHTS

 What We Audited and Why

             We audited the State of Iowa’s (State) business rental assistance program
             (program). Our objective was to determine whether the State ensured that the
             City of Cedar Rapids (City) provided rental assistance to eligible businesses based
             on appropriate leases.

             We audited the State because it received $799 million in disaster funding from the
             U.S. Department of Housing and Urban Development (HUD). The funding was
             comprised of $282 million through the Community Development Block Grant
             (CDBG) program in 2008 and an additional $517 million in disaster aid in 2009 to
             help it recover from the floods of 2008.

 What We Found

             The State did not implement adequate controls over its program. It did not
             provide adequate guidance for determining whether leases were market rate. It
             also did not perform a complete duplicate benefits check to verify that the
             businesses did not receive duplicate benefits from any other program, insurance,
           or source before awarding the disaster assistance funds. In addition, it did not
           perform onsite monitoring reviews to evaluate program operations.

What We Recommend

           We recommend that the Director, Disaster Recovery and Special Issues Division,
           require the State to provide documentation to support that program funds were
           properly paid or reimburse the CDBG program from non-Federal sources any
           amounts that it cannot support. We also recommend that the Director require the
           State to implement adequate controls over the program.

           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 draft report to the State on April 30, 2010, and requested a
           response by May 17, 2010. The State provided written comments on May 17,
           2010.

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




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                           TABLE OF CONTENTS

Background and Objective                                                          4

Results of Audit
      Finding 1: The State Did Not Implement Adequate Controls Over Its Program   5

Scope and Methodology                                                             8

Internal Controls                                                                 9

Appendixes
   A. Auditee Comments and OIG’s Evaluation                                       10
   B. Criteria                                                                    13




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                       BACKGROUND AND OBJECTIVE

In the late spring and early summer of 2008, Iowa suffered a series of tornados followed by
massive floods. In some cases, the same community was hit by both events. Cedar Rapids,
Iowa’s second largest city, was especially hard hit. An estimated 2,400 businesses were
damaged physically, and more than 3,000 others suffered economic losses.

On May 27, 2008, the Federal Emergency Management Agency (FEMA) declared various
counties in Iowa as disaster areas as a result of severe storms, tornadoes, and flooding. The
disaster declaration allowed those counties to receive Federal aid from FEMA, the Small
Business Administration (SBA), and the U.S. Army Corp of Engineers.

The State of Iowa (State) was awarded $282 million in disaster funding through the Community
Development Block Grant (CDBG) program in 2008 and an additional $517 million in disaster
aid in 2009 to help it recover from the floods, bringing the State’s total disaster funding to $799
million.

The Iowa Department of Economic Development (Department) was tasked with administering
the disaster recovery activities of the State. The Department’s mission is to enhance the
economic development of the State and provide for job creation and increased prosperity and
opportunities for the citizens of the State by providing direct financial and technical assistance
and training to businesses and individuals and by coordinating other State, local, and Federal
economic development programs. The Department has a nine-member voting board appointed
by the governor and seven ex officio nonvoting members and is administered by an executive
director who is appointed by the governor.

The Department contracted with the City of Cedar Rapids (City) to administer the $7.5 million
business rental assistance program (program). The City in turn subcontracted the administration
of the program. The program was meant to provide financial assistance to businesses located in
or planning to locate in a business rental space that was physically damaged by the 2008 natural
disaster(s) and which had entered into or intended to enter into a minimum 1-year, market-rate
lease. An eligible business could receive up to 6 months of rental assistance to help offset
building rental lease payments. Each business could receive a maximum of $50,000

This is our second audit of the State’s disaster funding. Our first audit identified that the State
awarded more than $10 million of its CDBG disaster funding without adequate documentation
and did not perform adequate checks for duplicate benefits before awarding the funds (report
number 2010-KC-1001, dated March 10, 2010).

Our objective was to determine whether the State ensured that the City provided rental assistance
to eligible businesses based on appropriate leases.




                                                  4
                                RESULTS OF AUDIT

Finding 1: The State Did Not Implement Adequate Controls Over Its
Program
The State did not implement adequate controls over its program. This condition occurred because
the State implemented the program quickly due to urgent needs resulting from the floods. As a
result, the State did not know whether the amounts of the City’s awards were correct or whether
they were made to eligible recipients.



 Lack of Guidance

              The State did not provide adequate guidance for administering the program in
              compliance with the requirements. Iowa State law and the U.S. Department of
              Housing and Urban Development (HUD)-approved action plan specify that to be
              eligible for the program, a business must have entered into or intend to enter into
              a minimum 1-year, market-rate lease.

              The State did not provide adequate guidance for determining whether leases were
              market rate. The guidance should have included or instructed the City to develop a
              standard market-rate lease matrix showing a range of reasonable lease rates
              considering various factors. These factors could include the type of space, class of
              space, and the property location. In addition, the State did not instruct the City to
              obtain the necessary information from the applicants. To determine whether a lease
              is market rate, the City needed to obtain the lease amount, total square feet being
              leased, type/class of space, and location/area of the property. Finally, the guidance
              should have instructed the City to analyze and compare the price per square foot to
              the standard to determine whether it was market rate.


Incomplete Duplication of
Benefits Check

              The State did not adequately verify that the businesses did not receive duplicate
              benefits through any other program, insurance, or source before awarding disaster
              assistance funds. This verification is necessary to satisfy the Stafford Act, which
              provides that no business will receive assistance for any loss for which it has
              already received financial assistance. The State did check with SBA and did not
              find any duplication of benefits. However, this SBA check was not complete
              because it did not address funding received from insurance companies and other
              sources of funding.




                                                5
Lack of On-Site Monitoring

               The State did not perform onsite monitoring reviews to evaluate program
               operations. Monitoring needs to occur in the ordinary course of operations and
               includes regular management and supervisory activities and other actions needed
               to assess the quality of the internal control system. Management needs
               appropriate procedures in place to monitor on an ongoing basis or to periodically
               evaluate the administration and effectiveness of the program.

Inadequate State Oversight
Caused by Urgent Need


               The program was a new program that had to be implemented quickly because of
               the urgent needs resulting from the floods. This program was a learning
               experience for the State, which believed that it could contract with local entities
               for proper administration of the program. The State felt that the local entities
               could do the best job of establishing market-rate criteria, since lease rates vary
               based on locale. The State did not provide the local entity with guidance on
               determining fair-market leases but did ask that administrative entities document
               their files. Additionally, the State believed that its desktop monitoring of the
               program activities was sufficient. Finally, the State was in the process of
               developing a duplication of benefit system that addressed insurance and other
               sources of funding at the time it disbursed program funds.


Eligibility of Recipients in
Doubt

               The State did not know whether the amounts of the City’s awards were correct or
               whether they were made to eligible recipients.

               Our review of a sample of recipient files found that none of the files contained a
               market-rate analysis. In addition, some files contained no square footage
               information, and many of these same files contained no explanation or analysis of
               possible identity-of-interest relationships between the lessor and lessee. The
               City’s subcontractor administering the program indicated that these results were
               representative of how the files were processed. The subcontractor did not require
               applicants to supply the square footage information but did have the square
               footage in the applicants’ files if it was a part of the lease. Further, the
               subcontractor did not perform a lease-per-square-foot calculation or determine
               whether it was market rate. However, the subcontractor stated that it had
               identified one applicant who had an identity of interest with the lessor, whose
               lease was for $120 per square foot. The subcontractor negotiated this amount
               down to $17 per square foot, which it believed to be a good market rate. While
               this was a positive step, since the subcontractor did not routinely calculate lease



                                                 6
          per square foot, there may have been other applicants with very high lease
          amounts. Also, there was no documentation showing whether the new per-
          square-foot cost was market rate.

          Further, the State did not know whether awards were made to recipients that had
          unreimbursed needs. The applicants may have been ineligible for further amounts
          if insurance or other sources had already provided sufficient funds to cover their
          needs.

Recommendations

          We recommend that the Director of the Disaster Recovery Assistance and Special
          Issues Division require the State to

          1A.     Provide documentation to support that program funds were paid to
                  businesses having a minimum 1-year, market-rate lease as required by the
                  Iowa Administrative Code or reimburse the CDBG program from non-
                  Federal sources for amounts that it cannot support.

          1B.     Develop and implement improved controls over the program.




                                          7
                         SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed applicable Code of Federal Regulations requirements,
the Stafford Act, Office of Management and Budget circulars, HUD handbooks, waivers, guides
and manuals, applicable sections of the Iowa Administrative Code, State duplication of benefits
procedures, relevant audit reports, applicable contracts, agreements, and the program’s applicant
files. We also interviewed applicable State and City contractor staff.

The State had paid more than $4.5 million in program funds to the City as of January 2010. We
reviewed 20 business rental assistance applications funded by the City to determine whether they
contained sufficient support regarding market-rate leases, identity-of-interest issues, and low and
moderate income status.

During the audit, we obtained computerized spreadsheets showing program funding activities,
and we used these data for background purposes only.

We performed audit work from January through March 2010 at the Department’s office at 200
East Grand Avenue, Des Moines, IA, and at the Corridor Company Works office at 222 3rd
Street SE, Suite 600, Cedar Rapids, IA. Our audit period generally covered May 2009 through
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
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                 8
                              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
              objective:

                     Controls to ensure that CDBG funds were disbursed only to businesses with
                      eligible leases.

              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:

                     The State did not have adequate controls in place to ensure that CDBG
                      funds were disbursed only to eligible recipients.




                                                9
                        APPENDIXES

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation      Auditee Comments




Comment 1




                            10
Comment 2




Comment 3




            11
                         OIG Evaluation of Auditee Comments

Comment 1   As a result of our audit, the State has agreed to require administrative entities to
            update their files providing evidence that the lease has been analyzed and
            determined to be market rate. If the lease amounts are found to be market rate,
            this will satisfy recommendation 1A.

Comment 2   We acknowledge the State for developing a more comprehensive duplication of
            benefits check for both future applicants and prior recipients upon learning that
            the SBA check was not as comprehensive as required.

Comment 3   While the State did conduct remote monitoring of this program, it did not identify
            the fact that the contractor was not evaluating whether leases were market-rate
            and did not have the necessary information to make that evaluation. We support
            the State’s plans to follow up with onsite monitoring visits.




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Appendix B
                                          CRITERIA

Iowa Administrative Code

Section 261, paragraph 79.1(15), states that the purpose of the disaster recovery business rental
assistance program is to provide financial assistance to a business located in or planning to locate
in a business rental space that was physically damaged by the 2008 natural disaster(s).
Assistance will be in the form of rental assistance to help offset building rental lease payments
for a maximum of 6 months, not to exceed a total award amount of $50,000. In-home businesses
are not eligible for the funds.

261—79.3(1) An eligible business is a business that:
     a. Is located in or planning to locate in a business rental space that was physically
              damaged by the 2008 natural disaster(s); and
     b. Has entered into or intends to enter into a minimum one-year, market-rate lease.

261—79.4(1) An eligible business may apply for rental assistance to help offset building rental
     lease payments for a maximum of six months.

261—79.4(2) The maximum amount of program funds available for rental assistance per
     business is the equivalent of six months’ rent up to a maximum of $50,000.

Robert T. Stafford Disaster Relief and Emergency Assistance Act, Public Law 93-288, as
Amended, 42 U.S.C. (United States Code) 5121-5207

Section 312. Duplication of Benefits (42 U.S.C. 5155) states:

(a) General prohibition - The President, in consultation with the head of each Federal agency
    administering any program providing financial assistance to persons, business concerns, or
    other entities suffering losses as a result of a major disaster or emergency, shall assure that no
    such person, business concern, or other entity will receive such assistance with respect to any
    part of such loss as to which he has received financial assistance under any other program or
    from insurance or any other source.

(c) Recovery of duplicative benefits - A person receiving Federal assistance for a major disaster
    or emergency shall be liable to the United States to the extent that such assistance duplicates
    benefits available to the person for the same purpose.




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