oversight

City of Los Angeles' Community Development Department, Los Angeles, California, Projects Dd Not Comply with Community Development Block Grant Program Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-12-04.

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

                                                                  Issue Date
                                                                         December 4, 2009
                                                                  Audit Report Number
                                                                           2010-LA-1003




TO:         William Vasquez, Director, Los Angeles Office of Community Planning and
            Development, 9DD



FROM:       Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA

SUBJECT: City of Los Angeles’ Community Development Department, Los Angeles,
         California, Projects Did Not Comply with Community Development Block
         Grant Program Requirements

                                    HIGHLIGHTS

 What We Audited and Why

      We audited the City of Los Angeles’ Community Development Department (City) as the
      result of problems noted during a prior audit involving activities administered by the
      Community Redevelopment Agency of the City of Los Angeles (subrecipient). Our
      objective was to determine whether U.S. Department of Housing and Urban
      Development (HUD) funds awarded to Los Angeles and administered by the City were
      administered in accordance with HUD’s requirements for the Community Development
      Block Grant (CDBG) program as they relate to a specific subrecipient.


 What We Found


      The City initially failed to demonstrate that any of the five CDBG-assisted projects
      reviewed, totaling more than $4.8 million, administered by its subrecipient, complied
      with the national objectives. Subsequent to our audit fieldwork, the City located and
      provided additional records to adequately support that the national objectives were met
      for four of these projects. Therefore, only one of the five projects totaling $935,000
     remained inadequately supported. In addition, the City did not always effectively
     monitor CDBG-assisted projects administered by its subrecipient. We attribute these
     deficiencies to the City’s and subrecipient’s not implementing written policies and
     procedures to ensure that each project met a national objective and that the projects
     benefitted the intended low- and moderate-income persons.

What We Recommend

     We recommend that the Director of the Los Angeles Office of Community Planning and
     Development require the City to (1) provide supporting documentation showing that the
     Capitol Records Surface Parking CDBG project met a national objective or repay its
     program from nonfederal funds, (2) implement adequate monitoring controls over its
     subrecipient and CDBG-assisted projects, and (3) suspend all CDBG funding to the
     subrecipient until acceptable policies and procedures are in place to ensure compliance
     with CDBG program 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 the City a draft report on October 13, 2009, and held an exit conference
     with City officials on October 27, 2009. The City provided written comments on
     November 12, 2009. It generally disagreed that the projects did not meet the
     requirements, but agreed that it needed to improve its monitoring procedures.

     The complete text of the auditee’s response, along with our evaluation of that response, is
     in appendix B of this report. We did not include the attachments provided with the
     auditee’s response because it was too voluminous; however, they can be provided upon
     request.




                                              2
                            TABLE OF CONTENTS

Background and Objective                                                          4

Results of Audit
      Finding 1: The City Failed to Demonstrate Compliance with National          6
                 Objectives for Its Subrecipient-Administered CDBG Projects

      Finding 2: The City Did Not Always Effectively Monitor Its Subrecipient’s   12
                 CDBG-Assisted Projects

Scope and Methodology                                                             16

Internal Controls                                                                 17

Appendices

   A. Schedule of Questioned Costs                                                18
   B. Auditee Comments and OIG’s Evaluation                                       19
   C. Criteria                                                                    28




                                            3
                      BACKGROUND AND OBJECTIVE
The CDBG Program

The Community Development Block Grant (CDBG) program provides annual grants on a
formula basis to entitled cities and counties to develop viable urban communities by (1)
providing decent housing and a suitable living environment and (2) expanding economic
opportunities, principally for low- and moderate-income persons. The program is authorized
under Title 1 of the Housing and Community Development Act of 1974, Public Law 93-383, as
amended, 42 United States Code 5301.

The U.S. Department of Housing and Urban Development (HUD) awards grants to entitlement
community grantees to carry out a wide range of community development activities directed
toward revitalizing neighborhoods, economic development, and providing improved community
facilities and services. Entitlement communities develop their own programs and funding
priorities. However, grantees must give maximum feasible priority to activities which benefit
low- and moderate-income persons. A grantee may also carry out activities which aid in the
prevention or elimination of slums or blight. Additionally, grantees may fund activities when the
grantee certifies that the activities meet other community development needs having a particular
urgency because existing conditions pose a serious and immediate threat to the health or welfare
of the community where other financial resources are not available to meet such needs. CDBG
funds may not be used for activities which do not meet these broad national objectives.

The City

The Community Development Department (City) has been improving the quality of life for Los
Angeles residents for nearly 30 years by offering economic, social, and employment
opportunities for individuals, families, and neighborhoods in need. The City offers services to
business owners and developers either directly or through its network of service provider
agencies. Through the provision of financing, technical assistance, training, business tax
incentives, and workforce programs, the City strives to improve the economic climate of Los
Angeles, help businesses grow, and provide living-wage jobs for Los Angeles workers and high
quality goods and services to underserved communities.

The Subrecipient

The Community Redevelopment Agency of the City of Los Angeles (subrecipient) is an
independent agency of the City, established to (1) attract private investment into economically
depressed communities; (2) eliminate slums, abandoned or unsafe properties, and blight
throughout Los Angeles; (3) revitalize older neighborhoods through historic preservation and
new development; (4) build housing for all income levels; (5) encourage economic development;
(6) create and retain employment opportunities; and (7) conduct related activities. The
subrecipient receives funding from many sources including the City.




                                               4
CDBG Funds

The City received more than $231 million in CDBG funds between 2005 and 2007, and at least
one-third of this funding was passed through to the subrecipient (see table below).

CDBG funds
                                                  Amount from the
       Fiscal         Amount from HUD to             City to the
       Year                 the City               subrecipient              Percentage
       2007               $74,142,574               $33,901,130                  46
       2006               $74,453,491               $26,456,273                  36
       2005               $82,783,415               $27,390,934                  33
       Total             $231,379,480               $87,758,337                  38

Audit Objective

The objective of this audit was to determine whether HUD funds awarded to and administered by
the City were administered in accordance with HUD’s requirements for the CDBG program as
they relate to a specific subrecipient.




                                             5
                                RESULTS OF AUDIT

Finding 1: The City Failed to Demonstrate Compliance with National
           Objectives for Its Subrecipient-Administered CDBG
           Projects
The City initially failed to demonstrate that any of the five CDBG-assisted projects reviewed that
were administered by its subrecipient complied with the national objectives. Subsequent to our
audit fieldwork, the City located and provided additional records to adequately support that the
national objectives were met for four of these projects. Therefore, only one of the five projects
totaling $935,000 remained inadequately supported. This condition occurred because neither the
City nor the subrecipient developed written policies and procedures to ensure that adequate
documentation was maintained to support that each project met a national objective. As a result,
HUD had no assurance that the City’s CDBG projects administered by its subrecipient benefitted
low- and moderate-income persons as intended.



 Insufficient Documentation of
 National Objectives Maintained

       Regulations at 24 CFR (Code of Federal Regulations) 570.200 state that CDBG-funded
       activities must meet one of the following national objectives: benefit low- and moderate-
       income families, prevent or eliminate slums or blight, or meet urgent community
       development needs. Regulations at 24 CFR 570.506 state that each recipient shall
       establish and maintain sufficient records to demonstrate that each activity undertaken
       meets one of the national objectives. We reviewed five CDBG-assisted projects, totaling
       more than $4.8 million, and found that initially the City did not have sufficient
       documentation to support that any of the projects met a national objective as claimed.
       The projects reviewed were as follows:

              Project                         National objective             Funding spent
Capitol Records Surface Parking
project                                  Job creation and retention                     $935,000
Capitol Records Campus Development       Slum and blight area
project                                  benefit                                      $1,382,330
Western Avenue Commercial Façade         Slum and blight area
and Signage Improvement Program          benefit                                        $548,700
                                         Slum and blight area
Venice Hope Park                         benefit                                        $100,000
                                         Low and moderate area
Pico Union 1                             benefit                                      $1,881,293




                                                6
Capitol Records Surface
Parking Project


    Job Creation
    The City approved its subrecipient to oversee the Capitol Records Surface Parking
    project. This project planned to use $935,000 in CDBG funds to acquire two real
    properties on Yucca Street known as the Gogerty Building, relocate the occupants, and
    construct a 25-space surface parking lot in an effort to retain and create jobs. This project
    was to create from 80 to 500 jobs over a five-year period. After the properties were
    purchased, in recognition of important historic features of the Gogerty Building, the city
    council office and subrecipient staff encouraged Capitol Records to rehabilitate and
    expand the Gogerty Building rather than demolish it to make way for surface parking.
    This change would also allow Capitol Records to expand its staff in Hollywood by 80
    people. Later, the decision was made to rehabilitate the buildings purchased instead of
    build the parking lot. In the meantime, the subrecipient purchased another real property
    in the same block on Argyle Street only one month after purchasing the second Yucca
    Street property. The Argyle Street property was also purchased for parking, but CDBG
    funding was not used in the Argyle purchase. Nonetheless, the City anticipated the
    creation of at least 80 jobs to be created from the parking lot.

    While jobs were ultimately created, the City did not have sufficient records and
    documentation to show that the jobs provided went to low- and moderate-income
    persons. The City stated that because Capitol Records is located in a high-poverty census
    tract, the project met the presumed benefit for low- and moderate-income persons as
    stated in federal regulations. Projects that do not specifically benefit low- and moderate-
    income persons can be considered a presumed benefit if a census tract qualifies for the
    presumptions permitted under 24 CFR 570.208(a)(4)(iv)(A)(1) and (B). Basically, the
    regulations state that an assisted business is presumed to have provided benefit to at least
    51 percent low- and moderate-income persons if the census tract “has a poverty rate of at
    least 20 percent as determined by the most recently available decennial census
    information” (see appendix C). Beyond the poverty level of the census tract where the
    business is located, the City believed no additional documentation regarding a
    “reasonable effort” to make those jobs available to low- and moderate-income persons
    was required.




                                              7
However, regulations at 24 CFR 570.506 state that each recipient shall establish and
maintain sufficient records to determine whether the recipient has met the requirements
of this part. Specifically, for jobs made available to low- and moderate-income persons,
the regulations state that a copy of a written agreement containing a commitment by the
business that it will make at least 51 percent of the jobs available to low- and moderate-
income persons and will provide training for any of those jobs requiring special skills or
education is needed. Also required is a listing by job title of the permanent jobs to be
created indicating (1) which jobs will be available to low- and moderate-income persons,
(2) which jobs require special skills or education, and (3) which jobs are part time, if any,
and a description of actions to be taken by the recipient and business to ensure that low-
and moderate-income persons receive first consideration for those jobs. In addition, a
listing is required by job title of the permanent jobs filled and which of those jobs were
available to low- and moderate-income persons and a description of how first
consideration was given to such persons for those jobs. The description shall include (1)
what hiring process was used, (2) which low- and moderate-income persons were
interviewed for a particular job, and (3) which low- and moderate-income persons were
hired. The City did not provide sufficient documentation to support that any of the above
actions took place.

Additionally, federal regulations at 24 CFR 570.506(7) state, “for purposes of
documenting, pursuant to paragraph (b)(5)(i)(B), (b)(5)(II)(C) or (b)(6)(v) of this section,
that the person for whom a job was either filled by or made available to a low- or
moderate-income person based upon the census tract where the person resided or in
which the business is located, the recipient, in lieu of maintaining records showing the
person’s family size and income, may substitute records showing either the person’s
address at the time the determination of income status was made or the address of the
business providing the job, as applicable, the census tract in which that address was
located, the percent of persons residing in that tract who either are in poverty or who are
low- and moderate-income, as applicable, the data source used for determining the
percentage, and a description of the pervasive poverty and general distress in the census
tract in sufficient detail to demonstrate how the census tract met the criteria in section
570.208(a)(4)(v), as applicable.” The City provided documentation showing (1) the
census tract where Capitol Records was located, (2) the percentage of persons residing in
the tract who either were in poverty or were of low and moderate income, and (3) the data


                                          8
    source. Subsequent to our audit fieldwork, the City provided additional documentation
    with a description of the pervasive poverty and general distress in the census tract.

    Job Retention
    The second part of the Capitol Records Surface Parking project was to save and/or create
    500 jobs over the next five years. Regulations at 24 CFR 570.208(a)(4)(ii) state, “(ii) For
    an activity that retains jobs, the recipient must document that the jobs would actually be
    lost without the CDBG assistance…” City council actions state that since 1994, the
    mayor’s Office of Economic Development had worked diligently to secure a commitment
    from Capitol Records to remain in Hollywood. Through the cooperative efforts of the
    subrecipient, Capitol Records, the mayor’s office, and Hollywood property owners, a
    letter of commitment was prepared by the mayor’s office in December 1996, which
    finalized the terms and conditions under which Capitol Records would remain in
    Hollywood and proceed with campus expansion. City/subrecipient construction of a safe
    and secure parking structure in this area was one of these conditions. It appeared that
    Capitol Records threatened to move from its location, but the City was unable to provide
    documentation showing that jobs would be lost without the CDBG assistance.

Capitol Records Campus
Development, Western Avenue
Commercial Façade, and
Venice Hope Park Projects

    Slum and Blight Area Benefit
    The City approved its subrecipient to oversee the Capitol Records Campus project ($1.38
    million), the Western Commercial Façade and Signage Improvement Program
    ($548,700), and the Venice Hope Park ($100,000). According to regulations at 24 CFR
    570.506(b)(8), the grant recipient is required to document the boundaries of the area and
    give a description of the conditions which qualified the area at the time of its designation
    in sufficient detail to demonstrate how the area met the criteria. Initially the City did not
    provide any of the aforementioned items to support that any of the aforementioned
    projects qualified for the slum and blight national objective. Subsequent to our audit
    fieldwork, in response to the draft report, the City provided census information, maps,
    and California Redevelopment Law Section 33031(a) which described physical
    conditions that cause blight. This new information supported that each of the three
    aforementioned projects met the national objective of slum and blight. We had asked for
    supporting documentation on numerous occasions during our audit fieldwork, but none
    was provided during that time. This information should have been maintained in the
    project files to adequately support the project’s compliance with the requirements.




                                              9
Pico Union 1

     Low and Moderate Benefit
     The City approved its subrecipient to oversee the Pico Union 1 project ($1.88 million).
     Regulations at 24 CFR 570.506(b)(2) state that the grant recipient is required to document
     the boundaries of the service area and the income characteristics of families and unrelated
     individuals in the service area. Despite numerous requests during the audit fieldwork, the
     City did not provide documentation to show that the project qualified for low and moderate
     benefit to the area. However, subsequent to our audit fieldwork, in response to the draft
     report, the City provided census information which showed that 91.7 percent of the families
     in this area are low and moderate income families. This new information supported that the
     Pico Union project met the requirements.

Conclusion

     The City initially failed to demonstrate compliance with the national objectives for its
     subrecipient-administered CDBG projects, despite numerous requests during our audit
     fieldwork. In response to the draft report, however, the City located and provided
     sufficient documentation to show that four of the five projects did meet the stated
     national objective. This documentation should have been retained in the project files so
     that it was evident that the projects met the national objectives. One of the projects
     (Capitol Records Surface Parking) totaling $935,000 remained unsupported as to whether
     it met the national objective. This condition occurred because at the time these projects
     were initiated the City did not have written policies and procedures to ensure that each
     project met a national objective and that the corresponding documentation was
     adequately maintained. The City acknowledged this shortcoming in its response to the
     draft report, and stated that it has instituted changes to its record maintenance procedures.
     When we requested the City’s policies and procedures specific to CDBG projects, we
     only received a Web link that provides help to applicants and a link to the Code of
     Federal Regulations for CDBG programs. However, these are not formal policies and
     procedures for the City to use in administering its CDBG program. The subrecipient also
     did not have policies and procedures for administering its CDBG-assisted projects.
     When asked about this deficiency, City officials indicated that there was nothing in place
     and that the development of policies and procedures was a work in progress because there
     was a lot going on with the City. As a result, HUD had no assurance that the City’s
     CDBG projects administered by its subrecipient benefitted the intended low- and
     moderate-income persons.




                                              10
Recommendations

    We recommend that the Director of the Los Angeles Office of Community Planning and
    Development

       1A. Require the City to provide documentation supporting that the –Capitol Records
           Surface Parking CDBG project met a national objective or repay its CDBG
           program $935,000 from nonfederal funds.

       1B. Require the City and subrecipient to establish and implement effective policies
           and procedures to ensure that they maintain adequate documentation to support
           compliance with CDBG national objective requirements.

       1C. Require the City to suspend all CDBG funding to the subrecipient until
           acceptable policies and procedures are in place to ensure compliance with all
           CDBG program requirements.




                                          11
Finding 2: The City Did Not Always Effectively Monitor Its
           Subrecipient’s CDBG-Assisted Projects
The City did not always effectively monitor CDBG-assisted projects administered by its
subrecipient. We attribute this condition to the City’s lack of written procedures and insufficient
monitoring controls over this subrecipient. As a result, as discussed in finding 1, HUD could not
be assured that CDBG-assisted projects complied with the national objectives and fully met the
program intent.


 City’s Monitoring Not Always
 Effective

       As discussed in finding 1, the City initially did not demonstrate that any of the five
       CDBG-assisted projects reviewed, administered by its subrecipient, complied with the
       national objectives. In two of the projects, we identified situations in which the City did
       not effectively monitor its subrecipient to ensure that the CDBG projects were
       administered to their fullest extent. Improvements to the City’s monitoring controls
       would ensure that future CDBG projects would be fully maximized.

       Pico Union 1
       The City gave more than $1.8 million in CDBG funds to the subrecipient, which then
       loaned these funds to the Pico Union Housing Corporation (Corporation) to build a
       childcare center (center) for low- and moderate-income families. The land on which the
       center sits is owned by the subrecipient, which has a ground lease with the Corporation
       that was executed in March 2002. Later, the Corporation was allowed to sublease the
       childcare center to the Los Angeles Unified School District (District), which is the
       operator.

       The Corporation is responsible for monitoring the childcare center. Annual reports are
       supposed to be provided to the subrecipient to determine whether the Corporation is in
       compliance with the lease requirements. If all terms and conditions are met, the
       Corporation only has to pay annual rent of $1 for the center. However, if all terms and
       conditions are not met, the Corporation would have to pay $5,000 per month to rent the
       center. According to the loan agreement between the subrecipient and the Corporation, if
       the borrower is in default, the borrower shall make all annual loan payments during the
       period of default. The audit determined that the District did not submit the annual reports
       to the Corporation and the Corporation did not submit the annual reports to the
       subrecipient. Therefore, the lack of submission of the annual reports constituted a default
       in the loan agreement, and none of the entities involved was in compliance with the
       contractual monitoring.




                                                12
The annual monitoring reports for this project are important because they document
whether the children attending the center are from low- and moderate-income families. If
the City had monitored this project, it would have known that these monitoring reports
were a contractual requirement and that they were missing. These reports are basically
the only way for the City to know whether this project meets the national objectives.
Because there were no monitoring reports, the City failed to identify at least $325,000
that should have been recorded as program income. The subrecipient, under its
agreement with the City, was to submit to the City a list of all grant or funding
agreements entered into between it and other organizations concerning activities funded
under the agreement and of any termination, default, suspension, or disallowed costs
under the funding agreements. Also, the City is to monitor and evaluate all of the
performance under all contracts under the agreement. In addition, the subrecipient
accepts full responsibility for compliance with all HUD/CDBG rules and regulations.
According to the agreement, the City shall, through its designated representative(s),
continually monitor and evaluate the Contractor’s [subrecipient] performance under this
agreement. As the contractor, the subrecipient shall be responsible for implementing its
standard oversight functions relating to policies, procedures, and guidelines. Upon
request, copies of the aforementioned documents shall be provided to the City.




Western Commercial Façade
The City gave $548,700 in CDBG funds to the subrecipient, which then used these funds
for the Western Avenue Commercial Façade and Signage Program for the Wilshire
Center and Korea Town Recovery Redevelopment project area. The objective of the
façade program was to improve the physical appearance of the storefronts and signage to
enhance the business environment and attract more businesses and patronage to the area.
As a result, the project was established to aid in the prevention or elimination of slums or
blight under 24 CFR 570.208(b). When we visited the storefronts in April 2009, we
found graffiti in various forms, such as paint and glass etching, which ultimately defeated
the purpose of the $548,700 spent for this project for these 13 storefronts. In addition, we
learned that the assistant project manager did not perform regular site visits to the
storefronts. The project manager stated that she sometimes drove by the storefronts after
work, but she did not document her site visits. Consequently, the 13 storefronts could
possibly return to their original slum and blight condition. While the City provided us


                                        13
with the maintenance agreement between the storefront owners and the subrecipient, the
graffiti we found on our visit is evidence that neither the City nor the subrecipient is
adequately holding the business owners accountable to the terms of the contract which
was signed and that there is inadequate monitoring of the projects’ compliance after the
initial completion. Without adequate oversight, neither HUD nor the City was assured
that the use of CDBG funding was fully maximized.

The subrecipient agreed in the scope of work section of the contract for this project to
continually monitor and evaluate the activities for the Western Commercial Façade.
More specifically, the subrecipient agreed to

       Continually monitor and evaluate the activities indicated for this project under the
       agreement;

       In the event that a subcontractor was involved, monitor and evaluate the
       performance of such subcontractor and ensure that its activities were in
       accordance with the conditions set forth in the agreement; and

       Ensure adherence to the HUD eligibility and national objective requirements, as
       well as other applicable federal and City requirements pertaining but not limited
       to environmental clearance, procurement, record keeping, and reporting as
       stipulated elsewhere in the agreement.

Also, the application that was signed by the owners and tenants stated the following:
“The Owner and Tenant are obligated to maintain the improvements in a clean, graffiti-
free condition for a period of ten years from the completion of the improvements. Any
modifications to the façade and signage during the 10-year period must have prior
approval from the Agency.”




The problem occurred because of the lack of monitoring controls, compounded by poor
record keeping. Without adequate controls, the City may not have provided the required
level of oversight to its CDBG-assisted projects to ensure that requirements were met.
As a result, HUD may have provided CDBG funding to projects that did not fully
maximize the programs’ intent and comply with contractual agreements.



                                         14
Grantee Performance Reports

    We also noted that the grantee performance reports for three of the five projects reviewed
    were incomplete and two had no grantee performance reports. The three projects with
    incomplete grantee performance reports left various areas blank, such as the proposed
    and actual accomplishments, specific outcome indicators, and businesses assisted.
    Ensuring that these reports are complete is critical to the City’s effective monitoring and
    oversight of its subrecipient’s performance as well as the CDBG-assisted projects
    themselves.


Conclusion

    The City did not always effectively monitor its subrecipient and its subrecipient’s CDBG-
    assisted projects. We attribute this condition to the City’s lack of written procedures and
    insufficient monitoring controls over this subrecipient. As a result, HUD could not be
    assured that CDBG-assisted projects complied with the national objectives and fully met
    the program intent.

Recommendations


    We recommend that the Director of the Los Angeles Office of Community Planning and
    Development

       2A. Require the City to implement adequate monitoring controls to ensure that its
           subrecipient effectively administers its CDBG-assisted projects and that those
           projects comply with the national objectives and any related contractual
           agreement requirements.




                                            15
                         SCOPE AND METHODOLOGY

We performed the audit between February and September 2009 at the City and subrecipient
offices, both located in Los Angeles, California. The audit generally covered the period July
2004 through June 2007. To accomplish our objectives, we reviewed the City’s compliance with
applicable laws and HUD regulations. Our primary methodologies included

       Reviewing the applicable HUD handbooks.

       Reviewing applicable policies and procedures established by the City and its
       subrecipient.

       Reviewing contracts and agreements between the City and its subrecipient.

       Reviewing contracts between the subrecipient and various entities for various CDBG-
       funded projects.

       Interviewing various HUD personnel within the Office of Community Planning and
       Development.

       Interviewed various City employees and various employees working for the subrecipient.

       Reviewed independent public accountants’ reports on the subrecipient for the scope of
       our audit period.

We nonstatistically selected for review five projects, totaling $4,847,323, from the subrecipient’s
universe of 66 active projects. We focused our review on projects valued at $900,000 or more.
We focused on this amount because the dollar value of all 66 projects funded equaled
$53,171,112 and the value of all projects $900,000 or more equaled $38,326,653 (72 percent of
the funding universe). We initially selected the first four projects from this list and then later
expanded the sample to review the fifth project because it was a new Capital Records project in
which the funding was transferred from the Capitol Records Surface Parking project (in our
initial sample).

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.




                                                16
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives 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 over program operations,
              Controls over reliability of data,
              Controls over compliance with federal laws and CDBG program regulations, and
              Controls over the safeguarding of resources against waste, loss, and misuse.

       We assessed the relevant controls identified above.

       A significant weakness exists if internal 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 a significant weakness:

       The City did not

              Demonstrate compliance in meeting national objectives for its CDBG programs
              (see finding 1).

              Sufficiently monitor CDBG-assisted projects administered by its subrecipient (see
              finding 2).


                                                17
                                   APPENDICES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

        Recommendation                            Unsupported 1/
            number
                1A                                   $935,000


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.




                                             18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         19
Comment 1




            20
Comment 2




Comment 3




Comment 4




            21
Comment 5




Comment 6




Comment 7




            22
23
                         OIG Evaluation of Auditee Comments

Comment 1   "The City maintains that once the poverty threshold has been established by fact,
            the City can invoke the "presumption" provisions without need of additional
            documented proof of poverty and general distress." We maintain that while jobs
            were ultimately created, the City did not have sufficient records and
            documentation to show the jobs provided went to low- and moderate-income
            persons. The City has not addressed the regulations at 24 CFR 570.506(b)(5)(ii)
            which state,
            "(5) For each activity determined to benefit low- and moderate-income persons
            based on the creation of jobs, the recipient shall provide the documentation
            described in either paragraph (b)(5)(i) or (ii) of this section.
            (ii) Where the recipient chooses to document that at least 51 percent of the jobs
            will be held by low- and moderate-income persons, documentation for each
            assisted business shall include:
            (A) A copy of a written agreement containing:
            (1) A commitment by the business that at least 51 percent of the jobs, on a full-
            time equivalent basis, will be held by low- and moderate-income persons." The
            City provided a copy of the Disposition and Development Agreement which
            states in section 4.7 "The Developer will cooperate in good faith to assist the City
            in satisfying all job creation and retention requirements associated with the
            Agency Funds..." However, it is not evident that the business was aware that part
            of satisfying all job creation and retention requirements involved making at least
            51 percent of the jobs available to low- and moderate-income persons. The
            regulations go on to state, "(2) A listing by job title of the permanent jobs to be
            created, identifying which are part-time, if any." In the regulations, the words to
            be created imply that the business would know ahead of time what jobs it planned
            on creating. The documentation provided by the City was not created before
            Capital Records, Inc. started hiring it was created after hiring was done. Next, it
            states, "(B) A listing by job title of the permanent jobs filled and which jobs were
            initially held by low- and moderate-income persons." The City provided nothing
            showing which jobs were initially held by low- and moderate-income persons.
            Finally, the regulations state, "and (C) For each such low- and moderate-income
            person hired, the size and annual income of the person’s family prior to the person
            being hired for the job.”

            Further down in section 7 of the regulations is an alternative for (C) which states,
            (7) For purposes of documenting, pursuant to paragraph (b)(5)(i)(B), (b)(5)(ii)(C),
            (b)(6)(iii) or (b)(6)(v) of this section, that the person for whom a job was either
            filled by or made available to a low- or moderate-income person based upon the
            census tract where the person resides or in which the business is located, the
            recipient, in lieu of maintaining records showing the person’s family size and
            income, may substitute records showing either the person’s address at the time the
            determination of income status was made or the address of the business providing
            the job, as applicable, the census tract in which that address was located, the
            percent of persons residing in that tract who either are in poverty or who are low-



                                             24
            and moderate-income, as applicable, the data source used for determining the
            percentage, and a description of the pervasive poverty and general distress in the
            census tract in sufficient detail to demonstrate how the census tract met the
            criteria in section 570.208(a)(4)(v), as applicable.” The OIG agrees that the City
            provided information to show the census tract was in distress, however, the
            regulations mentioned in this section require the recipient to provide
            documentation showing that requirements 1, 2 and 3 were met. The City has only
            met number 3.

Comment 2   As stated in Comment 1, we concluded that while jobs were ultimately created,
            the City did not have sufficient records and documentation to show the jobs
            provided went to low- and moderate-income persons as required by 24 CFR
            570.506(b)(5)ii). The City provided the agreement for this project which states,
            "This project meets the following national objective: Activities benefiting low and
            moderate income persons under 24 CFR 570.208 Job Creation/Retention activities
            that are designed to create or retain jobs for at least 51 percent low and moderate
            income persons." The City also provided the Scope of Work which states, "The
            project is anticipated to eliminate blighted conditions and save and/or create
            approximately five hundred (500) jobs over the next five years." The Scope of
            Work also states under the Identification of Project Eligibility/National Objective
            section "The Contractor shall endeavor to pursue development of the Capitol
            Records Surface Parking Project after acquisition of the real property in order to
            meet the national objective indicated herein.

            Additionally, 24 CFR 570.506 (b)(6) states "(6) For each activity determined to
            benefit low- and moderate-income persons based on the retention of jobs:
            (i) Evidence that in the absence of CDBG assistance jobs would be lost." The
            City provided an article from the Los Angeles Business Journal that states,
            "Before entering serious discussions with the city, Capitol had been working with
            a real estate brokerage considering relocation alternatives outside of Hollywood,
            sources confirmed." In our opinion, merely relocating does not necessarily mean
            that the jobs would have been permanently lost. Therefore, we will consult with
            HUD during the resolution of the audit to determine whether this adequately
            supports the eligibility under the job retention requirements.

            The regulations go on to state, "(ii) For each business assisted, a listing by job title
            of permanent jobs retained, indication which of those jobs are part-time and
            (where it is known) which are held by low- and moderate-income persons at the
            time the CDBG assistance is provided. Where applicable, identification of any of
            the retained jobs (other than those known to be held by low- and moderate-
            income persons) which are projected to become available to low- and moderate-
            income persons through job turnover within two years of the time CDBG
            assistance is provided. Information upon which the job turnover projections were
            based shall also be included in the record; (iii) For each retained job claimed to
            be held by a low- and moderate-income person, information on the size and
            annual income of the person’s family; (iv) For jobs claimed to be available to



                                              25
            low- and moderate-income persons based on job turnover, a description covering
            the items required for “available to “ jobs in paragraph (b)(5) of this section; and
            (v) Where jobs were claimed to be available to low- and moderate-income
            persons through turnover, a listing of each job which has turned over to date,
            indicating which of those jobs were either taken by, or available to, low- and
            moderate-income persons. For jobs made available, a description of how first
            consideration was given to such persons for those jobs shall also be included in
            the record.

            (7) For purposes of documenting, pursuant to paragraph (b)(5)(i)(B), (b)(5)(ii)(C),
            (b)(6)(iii) or (b)(6)(v) of this section, that the person for whom a job was either
            filled by or made available to a low- or moderate-income person based upon the
            census tract where the person resides or in which the business is located, the
            recipient, in lieu of maintaining records showing the person’s family size and
            income, may substitute records showing either the person’s address at the time the
            determination of income status was made or the address of the business providing
            the job, as applicable, the census tract in which that address was located, the
            percent of persons residing in that tract who either are in poverty or who are low-
            and moderate-income, as applicable, the data source used for determining the
            percentage, and a description of the pervasive poverty and general distress in the
            census tract in sufficient detail to demonstrate how the census tract met the
            criteria in section 570.208(a)(4)(v), as applicable.” The documentation provided
            by the City in Packet A of its response did not meet the requirements of 24 CFR
            570.506(b)(6).

Comment 3   The additional information provided by the City adequately supported the projects
            met the slum and blight national objective. Therefore, we revised the finding
            accordingly and reduced the questioned costs.

Comment 4   The additional information provided by the City adequately supported the projects
            met the low and moderate benefit national objective. Therefore, we revised the
            finding accordingly and reduced the questioned costs.

Comment 5   We appreciate that changes in the project file development and maintenance have
            been instituted and will be reviewed more timely and more rigorously assessed.
            During our audit fieldwork, we had repeatedly asked for all the records and
            information for the five projects we reviewed, so it is unclear as to why this
            information was not provided prior to the City’s response to the draft report.

Comment 6   We agree that there are monitoring procedures and controls within the City and
            that the Project and Expenditure Plan can be an effective tool. However, we have
            not been provided any policies and procedures to assure ourselves that the
            subrecipient has rigorous standards for its CDBG-funded projects. Therefore, we
            cannot agree with that statement.




                                             26
Comment 7   Since the recommendation is addressed to HUD’s Director of the Office of
            Community Planning and Development, we will confer with him during the audit
            resolution process and reach a management decision on the recommendation to
            suspend CDBG funding to the subrecipient until acceptable policies and
            procedures are in place. .As of the report issuance date, the Director had not
            expressed any disagreement with the recommendation and we believe it is
            appropriate and necessary to ensure that HUD’s CDBG funding is spent
            appropriately in the future.




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Appendix C

                                          CRITERIA
24 CFR 570.208, Criteria for National Objectives

The following criteria shall be used to determine whether a CDBG-assisted activity complies
with one or more of the national objectives as required under section 570.200(a)(2):

       (a) Activities benefiting low- and moderate-income persons. Activities meeting the
       criteria in paragraph (a)(1), (2), (3), or (4) of this section as applicable, will be considered
       to benefit low- and moderate-income persons unless there is substantial evidence to the
       contrary. In assessing any such evidence, the full range of direct effects of the assisted
       activity will be considered. (The recipient shall appropriately ensure that activities that
       meet these criteria do not benefit moderate income persons to the exclusion of low
       income persons).

       (4) Job creation or retention activities. An activity designed to create or retain permanent
       jobs where at least 51 percent of the jobs, computed on a full time equivalent basis,
       involve the employment of low- and moderate-income persons. To qualify under this
       paragraph, the activity must meet the following criteria:

       (i) For an activity that creates jobs, the recipient must document that at least 51 percent of
       the jobs will be held by, or will be available to, low- and moderate-income persons.

       (ii) For an activity that retains jobs, the recipient must document that the jobs would
       actually be lost without the CDBG assistance and that either or both of the following
       conditions apply with respect to at least 51 percent of the jobs at the time the CDBG
       assistance is provided:

       (A) The job is known to be held by a low- or moderate-income person; or

       (B) The job can reasonably be expected to turn over within the following two years and
       that steps will be taken to ensure that it will be filled by, or made available to, a low- or
       moderate-income person upon turnover.

       (iii) Jobs that are not held or filled by a low- or moderate-income person may be
       considered to be available to low- and moderate-income persons for these purposes only
       if:

       (A) Special skills that can only be acquired with substantial training or work experience
       or education beyond high school are not a prerequisite to fill such jobs, or the business
       agrees to hire unqualified persons and provide training; and

       (B) The recipient and the assisted business take actions to ensure that low- and moderate-
       income persons received first consideration for filling such jobs.


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       (iv) For purposes of determining whether a job is held by or made available to a low- or
       moderate-income person, the person may be presumed to be a low- or moderate-income
       person if:

       (A) He/she resides within a census tract (or block numbering area) that either:

       (1) Meets the requirements of paragraph (a)(4)(v) of this section;

       (2) Has at least 70 percent of its residents who are low- and moderate-income persons; or

       (B) The assisted business is located within a census tract (or block numbering area) that
       meets the requirements of paragraph (a)(4)(v) of this section and the job under
       consideration is to be located within that census tract.

       (v) A census tract (or block numbering area) qualifies for the presumptions permitted
       under paragraphs (a)(4)(iv)(A)(1) and (B) of this section if it is either part of a Federally-
       designated Empowerment Zone or Enterprise Community or meets the following criteria:

       (A) It has a poverty rate of at least 20 percent as determined by the most recently
       available decennial census information;

       (B) It does not include any portion of a central business district, as this term is used in the
       most recent Census of Retail Trade, unless the tract has a poverty rate of at least 30
       percent as determined by the most recently available decennial census information; and

       (C) It evidences pervasive poverty and general distress by meeting at least one of the
       following standards:

       (1) All block groups in the census tract have poverty rates of at least 20 percent;

       (2) The specific activity being undertaken is located in a block group that has a poverty
       rate of at least 20 percent; or

       (3) Upon the written request of the recipient, HUD determines that the census tract
       exhibits other objectively determinable signs of general distress such as high incidence of
       crime, narcotics use, homelessness, abandoned housing, and deteriorated infrastructure or
       substantial population decline.

24 CFR 570.506(b)(5) and (6), Records to Be Maintained

Each recipient shall establish and maintain sufficient records to enable the Secretary [of HUD] to
determine whether the recipient has met the requirements of this part. At a minimum, the
following records are needed:
       (b) Records demonstrating that each activity undertaken meets one of the criteria set forth
       in section 570.208. (Where information on income by family size is required, the



                                                 29
recipient may substitute evidence establishing that the person assisted qualifies under
another program having income qualification criteria at least as restrictive as that used in
the definitions of “low and moderated income person” and “low and moderated income
household” (as applicable) at section 570.3, such as Job Training Partnership Act (JTPA)
and welfare programs; or the recipient may substitute a copy of a verifiable certification
from the assisted person that his or her family income does not exceed the applicable
income limit established in accordance with section 570.3; or the recipient may substitute
a notice that the assisted person is a referral from a state, county or local employment
agency or other entity that agrees to refer individuals it determines to be low and
moderated income persons based on HUD’s criteria and agrees to maintain
documentation supporting these determinations.) Such records shall include the
following information:

(5) For each activity determined to benefit low- and moderate-income persons based on
the creation of jobs, the recipient shall provide the documentation described in either
paragraph (b)(5)(i) or (ii) of this section.

(i) Where the recipient chooses to document that at least 51 percent of the jobs will be
available to low and moderated income persons, documentation for each assisted business
shall include:

(A) A copy of a written agreement containing:

(1) A commitment by the business that it will make at least 51 percent of the jobs
available to low- and moderate-income persons and will provide training for any of those
jobs requiring special skills or education;

(2) A listing by job title of the permanent jobs to be created indicating which jobs will be
available to low- and moderate-income persons, which jobs require special skills or
education, and which jobs are part-time, if any; and

(3) A description of actions to be taken by the recipient and business to ensure that low-
and moderate-income persons receive first consideration for those jobs; and

(B) A listing by job title of the permanent jobs filled, and which jobs of those were
available to low- and moderate-income persons, and a description of how first
consideration was given to such persons for those jobs. The description shall include
what hiring process was used; which low- and moderate-income persons were
interviewed for a particular job; and which low- and moderate-income persons were
hired.

(ii) Where the recipient chooses to document that at least 51 percent of the jobs will be
held by low- and moderate-income persons, documentation for each assisted business
shall include:
(A) A copy of a written agreement containing:




                                         30
(1) A commitment by the business that at least 51 percent of the jobs, on a full-time
equivalent basis, will be held by low- and moderate-income persons; and

(2) A listing by job title of the permanent jobs to be created, identifying which are part-
time, if any;

(B) A listing by job title of the permanent jobs filled and which jobs were initially held
by low- and moderate-income persons; and

(C) For each such low- and moderate-income person hired, the size and annual income of
the person’s family prior to the person being hired for the job.

(6) For each activity determined to benefit low- and moderate-income persons based on
the retention of jobs:

(i) Evidence that in the absence of CDBG assistance jobs would be lost:

(ii) For each business assisted, a listing by job title of permanent jobs retained, indication
which of those jobs are part-time and (where it is known) which are held by low- and
moderate-income persons at the time of the CDBG assistance is provided. Where
applicable, identification of any of the retained jobs (other than those known to be held
by low- and moderate-income persons) which are projected to become available to low-
and moderate-income persons through job turnover within two years of the time CDBG
assistance is provided. Information upon which the job turnover projections were based
shall also be included in the record;

(iii) For each retained job claimed to be held by a low- and moderate-income person,
information on the size and annual income of the person’s family;

(iv) For jobs claimed to be available to low- and moderate-income persons based on job
turnover, a description covering the items required for “available to” jobs in paragraph
(b)(5) of this section; and

(v) Where jobs were claimed to be available to low- and moderate-income persons
through turnover, a listing of each job which has turned over to date, indicating which of
those jobs were either taken by, or available to, low- and moderate-income persons. For
jobs made available, a description of how first consideration was given to such persons
for those jobs shall also be included in the record.

(7) For purposes of documenting, pursuant to paragraph (b)(5)(i)(B), (b)(5)(ii)(C),
(b)(6)(iii) or (b)(6)(v) of this section, that the person for whom a job was either filled by
or made available to a low- or moderate-income person based upon the census tract
where the person resides or in which the business is located, the recipient, in lieu of
maintaining records showing the person’s family size and income, may substitute records
showing either the person’s address at the time the determination of income status was
made or the address of the business providing the job, as applicable, the census tract in



                                          31
which that address was located, the percent of persons residing in that tract who either are
in poverty or who are low- and moderate-income, as applicable, the data source used for
determining the percentage, and a description of the pervasive poverty and general
distress in the census tract in sufficient detail to demonstrate how the census tract met the
criteria in section 570.208(a)(4)(v), as applicable.




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