oversight

The County of San Bernardino, CA, Had Questionable Capacity to Administer Neighborhood Stabilization Program Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-02-11.

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

                                                                Issue Date
                                                                       February 11, 2010
                                                                Audit Report Number
                                                                         2010-LA-1007




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: The County of San Bernardino, CA, Had Questionable Capacity To Administer
         Its Allocation of Neighborhood Stabilization Program Funds

                                   HIGHLIGHTS

 What We Audited and Why

      We completed a capacity review of the County of San Bernardino’s (County)
      Neighborhood Stabilization Program (Program). We performed the audit because
      Housing and Economic Recovery Act of 2008 (HERA) reviews are part of the Office of
      the Inspector General’s (OIG) annual audit plan and the Program was identified as high
      risk. In addition, the County was awarded a significant amount of Program funds and
      applied for additional funds through the American Recovery and Reinvestment Act of
      2009 (ARRA).

      Our objective was to determine whether the County had sufficient capacity and the
      necessary controls to manage and administer Program funds provided by the U.S.
      Department of Housing and Urban Development (HUD) under HERA and the funds the
      County applied for under ARRA.


 What We Found

      The County generally had questionable capacity to administer its allocation of Program
      funds. It had difficulty in committing and spending its Program funds in a timely manner
      and had not been on track to meet the required 18-month obligation deadline, having
      obligated zero dollars toward its Program activities.
     The County had (1) sufficient staffing levels; (2) sufficient records to track financial
     expenditures and procurement activities; and (3) adequate policies and procedures for its
     financial, information technology, and procurement activities, as well as its four Program
     activities promoting single-family homeownership. However, it could improve internal
     controls for its two rental property acquisition and rehabilitation Program activities and
     Program monitoring by developing separate, specific, and well-documented policies and
     procedures for those activities.

What We Recommend

     We recommend that the Director of the Los Angeles Office of Community Planning and
     Development require the County to (1) reevaluate its current strategies and consider
     modifications, including pursuing other, more attainable Program activities, and/or
     immediately return any Program funds to HUD that are not anticipated to be obligated by
     the 18-month deadline; (2) obtain technical assistance from the HUD Office of
     Community Planning and Development; (3) create and maintain policies and procedures
     specific to the Program acquisition and rehabilitation of rental property activities; and (4)
     create and maintain policies and procedures specific to Program-monitoring activities.

     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 County a discussion draft report on January 25, 2010, and held an exit
     conference with County officials on February 1, 2010. The County provided written
     comments on February 5, 2010, and generally agreed with our findings.

     The complete text of the auditee’s 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 County Was Not on Track To Meet Its Program Obligation   6
                 Deadline

      Finding 2: The County Did Not Develop Sufficient Program Policies and   9
                 Procedures

Scope and Methodology                                                         12

Internal Controls                                                             14

Appendixes

   A. Auditee Comments                                                        16
   B. Criteria                                                                19




                                            3
                    BACKGROUND AND OBJECTIVES

The Neighborhood Stabilization Program (Program) was authorized under Title III of Division B
of the Housing and Economic Recovery Act of 2008 (HERA) and provides grants to every State
and certain local communities to purchase foreclosed-upon or abandoned homes and rehabilitate,
resell, or redevelop these homes to stabilize neighborhoods and stem declining values in
neighboring homes. HERA calls for allocating funds “to states and units of general local
government with the greatest need,” and in the first phase of the Program, the U.S. Department
of Housing and Urban Development (HUD) allocated $3.92 billion in Program funds to assist in
the redevelopment of abandoned and foreclosed-upon homes.

HUD provides the County of San Bernardino (County) with more than $7 million in Community
Development Block Grant funds, more than $4 million in HOME Investment Partnerships
Program (HOME) funds, and more than $325,000 in Emergency Shelter Grant funds annually.
HUD executed the County’s Program grant agreement on February 27, 2009, for more than
$22.7 million.

The County is the largest county in the United States with more than 20,000 square miles of
territory. The most populous region in the County is referred to as the Riverside-San
Bernardino-Ontario Metropolitan Statistical Area (MSA). In a Forbes article published on
October 15, 2008 (“Where Recession Will Hit Hardest”), the Riverside-San Bernardino-Ontario
MSA was rated the worst area in the country. More than half of the homeowners in the area (62
percent) owed more on their homes than their homes were worth. A total of 20,366 properties
went through the foreclosure process in San Bernardino County from July 1, 2007, through
September 30, 2008. The median negative equity for these properties was more than $33,000,
and rising unemployment rates added to the downward economic spiral.

The County implemented six HUD-approved activities with its Program funds:

   1) Program activity one is downpayment assistance. Activity one was designed to provide
      downpayment assistance to purchaser-occupants of foreclosed-upon homes. The County
      anticipated 85 units being made available to households with incomes at 51 to 120
      percent of the area median income. The County budgeted up to $2.5 million toward this
      activity.

   2) Program activity two is rehabilitation loan assistance. Activity two was designed to
      provide low-interest rehabilitation loans to purchaser-occupants of foreclosed-upon
      homes to address deferred maintenance. The County anticipated 54 units being made
      available to households with incomes at 51 to 120 percent of the area median income. It
      budgeted up to $1.34 million toward this activity.

   3) Program activity three is affordability assistance. Activity three was designed to provide
      affordability gap soft second mortgages to purchaser-occupants of foreclosed-upon
      homes. The County anticipated 38 units being made available to households with
      incomes below 50 percent of the area median income and 224 units being made available


                                               4
       to households with incomes at 51 to 120 percent of the area median income. It budgeted
       up to $1.5 million for households below 50 percent of the median income and up to $8.95
       million for households at 51 to 120 percent of the area median income toward this
       activity.

   4) Program activity four is the County’s acquisition, rehabilitation, and resale activity.
      Activity four was designed to acquire and rehabilitate foreclosed-upon and abandoned
      homes in heavily impacted neighborhoods and resell them to Program-eligible owner-
      occupants. The County will partner with various developers to carry out this activity. It
      anticipated seven units being made available to households with incomes of 51 to 120
      percent of the area median income. It budgeted up to $2 million toward this activity.

   5) Program activity five is the County’s activity to partner with its public housing authority
      for rental property acquisition and rehabilitation. Activity five was designed to purchase
      and rehabilitate foreclosed-upon or abandoned rental housing to primarily benefit
      households at or below 50 percent of area median income. The County anticipated 26
      units being made available to households with incomes below 50 percent of the area
      median income. It budgeted up to almost $3.94 million toward this activity.

   6) Program activity six is the County’s activity to partner with the County’s public housing
      authority for rental property acquisition and rehabilitation for special needs housing of
      Mental Health Services Act clients. Activity six was designed to supplement funding
      from the County’s Department of Behavioral Health program to house eligible clients by
      purchasing and rehabilitating foreclosed-upon or abandoned properties and providing
      housing opportunities for eligible tenants to rent those properties. The County
      anticipated one unit being made available to a household with an income below 50
      percent of the area median income. It budgeted up to $250,000 toward this activity.

Properties eligible for all six activities must be located within specific target areas or census
tracts, which have been defined by the County and approved by HUD as areas with the greatest
need. More than $2.27 million in Program funds will be used to administer the various activities.

The County applied for more than $23 million to continue its Program activities under a second
round of competitive funding authorized by the American Recovery and Reinvestment Act of
2009 (ARRA). However, HUD announced the ARRA allocations on January 14, 2010, and the
County was not awarded additional funding.

Our objective was to determine whether the County had sufficient capacity and the necessary
controls to manage and administer Program funds provided by HUD under HERA and the funds
the County applied for under ARRA.




                                                5
                                   RESULTS OF AUDIT

Finding 1: The County Was Not on Track to Meet Its Program
           Obligation Deadline
Despite sufficient staffing levels and extensive experience with HUD programs, the County had
not been able to commit and spend its Program funds in a timely manner and was in danger of
not meeting the required 18-month obligation deadline. It had difficulty in using Program funds
due to unanticipated external market forces and delays in obtaining properties for Program use.
If the County continues at its current rate, there is a risk that significant portions of its allocation
of Program funds will not be used for their intended purpose, and the housing problem in the
County will not have received the full benefit of the Program.



 The County’s Obligations Were
 Not Timely

        The County was not on track to meet the Program’s timeframe requirements. According
        to Public Law 110-289, Section 2301(c)(1), any unit of general local government that
        receives amounts pursuant to this section shall, not later than 18 months after the receipt
        of such amounts, use such amounts to purchase and redevelop abandoned and foreclosed-
        upon homes and residential properties. HUD executed the County’s Program grant
        agreement on February 27, 2009. According to the County’s most recent quarterly
        performance report, as of December 31, 2009, 10 months before the 18-month deadline,
        the County had not obligated any funds for its Program activities and had not assisted any
        families. The County obligated $1 million (4.4 percent) and expended $282,013 of its
        total grant amount for its administration of the Program but nothing for the Program
        activities themselves. If the County continues at its current rate of progress, we anticipate
        that it will not be able to obligate significant portions of the more than $21.7 million in
        remaining Program funds.

        The County believed that it would meet the 18-month obligation deadline of August 27,
        2010, due to recent and planned changes to its Program. It expanded its eligible target
        areas on December 1, 2009, and County management anticipated the board of directors
        approving additional upcoming changes in January 2010. Reportedly, these changes
        included reallocating funds among its Program activities, including moving funds from
        its downpayment and affordability assistance activities to its rental property acquisition
        and rehabilitation activity. This change would allow the County to obligate a large
        portion of its Program funds if it can find a suitable property to acquire. In addition,
        County management anticipated combining the remaining funding from the separate
        downpayment and affordability assistance activities to create a joint activity seven. This
        change would allow buyers to receive the benefits of the two former activities, while




                                                    6
     applying to only one. However, documentation was not available to detail these
     anticipated changes during our fieldwork.

     Based on the County’s obligation rate and the time elapsed, we are concerned that these
     changes will not provide an adequate solution. While the County was depending on these
     changes to help it meet its 18-month obligation deadline, we question whether the
     changes will enable it to obligate all of the remaining Program funding. Despite
     combining its downpayment assistance and affordability assistance activities into a single
     activity, the County provided no indication that the activities themselves were
     substantively changing to make them more successful. In addition, allocating additional
     money to its rental property acquisition and rehabilitation activity would potentially
     allow the County to obligate large amounts of funding; however, given that the County
     had not contracted with any multifamily rental properties more than half way to the
     obligation deadline, it remained questionable whether the County would be able to
     obligate the additional funding within Program timeframes.

Market Forces and Other
Explanations for Delays


     The County’s difficulty in spending can be attributed to various unanticipated market
     forces and other explanations that significantly delayed the use of Program funds.

        1. Private investors provided unexpected but aggressive competition. Without the
           encumbrance of meeting Program documentation requirements and using cash,
           private investors were able to outbid the County and its developers for targeted
           foreclosed-upon properties.

        2. Banks were holding on to many bank-owned homes instead of putting them on
           the market, lowering the amount of foreclosed-upon homes available for
           purchase.

        3. The County was not involved with the National Community Stabilization Trust
           (Trust), which was set up as an intermediary between national lenders and local
           government to help facilitate the management, rehabilitation, and selling of
           foreclosed-upon properties to ensure that homeownership and rental housing are
           available to low- and moderate-income families. The County stated that it hoped
           to be working with the Trust by early January.

        4. The County required home buyers to find the properties for its downpayment,
           loan assistance, and affordability assistance activities, which had become
           increasingly difficult with the market forces listed above.

        5. Some developer partners indicated that they had been hesitant to buy properties
           under the acquisition, rehabilitation, and resale activity due to the County’s
           unwillingness to incur subsidy costs or a potential loss if a property was not sold



                                             7
             for the original planned amount. A loss on a property resale results in the
             developer receiving less than its stated fee or possibly no fee at all.

        6. Some developer partners viewed areas that the County had targeted for rehabilitation
           and resale as less attractive areas in which to acquire homes.

No Outputs to Test

     Given the County’s lack of progress with Program activities one through six, we were not
     able to review any completed Program files for activities one through six or determine the
     adequacy of the County’s record keeping for specific Program activities. We were able
     to review the beginning stages of an applicant’s Program file for downpayment and
     affordability assistance; however, the County cancelled the application before loan
     approval, so we were not able to review the completed process.

     Further, since the County had not funded any properties under the Program, we were not
     able to conduct site visits to properties funded under the Program or draw conclusions
     related to such properties.

Conclusion


     Despite sufficient staffing levels and extensive experience with HUD programs, the
     County generally had questionable capacity to administer its allocation of Program funds.
     It had not been on track to use Program funds in a timely manner due to unanticipated
     external market forces and delays in obtaining properties for Program use, and it had only
     recently begun to officially modify its strategies. As a result, Program funds were at risk
     of not being spent as intended to provide aid to mitigate the foreclosure crisis to the
     fullest extent possible.

Recommendations

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

        1A. Reevaluate its strategies and consider modifications, including pursuing other,
            more attainable Program activities, and/or immediately return any Program funds
            to HUD that are not anticipated to be obligated by the 18-month deadline.

        1B. Obtain technical assistance from the HUD Office of Community Planning and
            Development.




                                              8
Finding 2: The County Did Not Develop Sufficient Program Policies
           and Procedures
Although the County had adequate policies and procedures for its financial, information
technology, and procurement activities, as well as its four Program activities promoting single-
family homeownership, it did not have separate, specific written/documented policies and
procedures for its two rental property acquisition and rehabilitation Program activities or its
Program monitoring. Instead, the County relied on its staff’s experience with HUD’s HOME
program, which has similar requirements to the County’s Program activities; however, the
HOME program does not have policy manuals to instruct staff on the County’s internal policies
and procedures related to HOME. The County did not believe that specific Program policies and
procedures were necessary, generally disregarding its own policy manual. Without thorough,
well-documented, Program-specific policies and procedures, the County was operating its
Program under a weakened control environment, increasing the risk of waste, fraud, and/or
abuse.



 Policies and Procedures Were
 Adequate in Several Key Areas

       The County had complete written policies and procedures to support its financial
       management, information technology, and procurement functions. In addition, the
       County’s procedures for its Program activities to promote homeownership (activities one
       through four) were sufficient to support those activities. The procedures complied with
       the major provisions of HERA and addressed the major aspects of each activity,
       including Program requirements and County, applicant, and lender responsibilities.

 Rental Program Activities and
 Program Monitoring Lacked
 Policies and Procedures


       The County did not have well-documented written policies and procedures for its rental
       property acquisition and rehabilitation Program activities five and six. In addition, the
       County’s Program-monitoring procedures were inadequate to ensure sufficient
       monitoring of Program activities. The County’s policy manual authorizes it to prepare
       internal “instruction manuals” identifying policies and procedures specific to individual
       departmental needs. In this case, the Program only applies to the County’s Community
       Development and Housing department. Therefore, the department should develop an
       internal manual to address the necessary “desk level instructions” to ensure “an integrated
       system of communication from the point of policy direction to the points of ultimate
       execution,” as stated in the County’s policy manual.




                                                9
    To ensure a sound internal control environment, the County needs written policies that
    discuss the purposes and objectives of the Program and procedures that establish, in
    considerable detail, the internal procedures of the various Program activities. The
    Program policies and procedures manual should be in sufficient detail to support every
    step and function of the County’s various Program activities. The policies and
    procedures should provide instruction to all personnel directly related to Program
    activities, such as but not limited to

           Developer approval,
           Application processing,
           Property selection and approval,
           Rehabilitation,
           Appraiser selection,
           Lender selection,
           Income eligibility,
           Reimbursement processing,
           File maintenance,
           Delegation,
           Reporting requirements,
           Monitoring requirements, and
           Ensuring that Program personnel are free from conflicts of interest.

    The policies and procedures should also detail all relevant statutes, regulations, policies,
    procedures, and best practices applicable to all aspects of the Program. The areas
    addressed should include both internal and external processes.

The County’s Reliance on
HOME Policies and Procedures
Was Not Adequate

    The County stated that it was completing its rental property acquisition and rehabilitation
    Program activities five and six in the same manner as HUD’s HOME program; however,
    the County did not have written internal HOME policies and procedures for handling
    HOME loans within the Community Development and Housing department. County
    management confirmed that there were no manuals detailing the department’s HOME
    project development or occupancy/rental practices that it planned to use for the Program.
    According to relevant County staff working on Program projects, the County was
    sufficiently satisfied with the staff’s knowledge of HOME requirements to also apply
    those procedures to the County’s Program activities. Although some of the HOME
    processes are similar, they do not specifically address the Program and its specific
    requirements and regulations. In addition, the County’s approach downplayed the
    importance of documented controls as an integral part of the control environment.




                                             10
Monitoring Policies and
Procedures Were Not Adequate

    The County’s Program monitoring procedures were not adequate to ensure sufficient
    monitoring of Program activities. Although the intended monitoring strategy for its
    downpayment, rehabilitation loan, and affordability assistance Program activities seemed
    sufficient to ensure that owner-occupancy requirements would continue to be met, the
    reported procedures were not documented. Without a documented internal monitoring
    policy, the intended monitoring strategy may change or otherwise not be implemented by
    the time monitoring is performed. In addition, although the written Program guidelines
    for the acquisition and resale Program activity included two clauses on monitoring
    through rehabilitation inspections, they were not adequate to ensure proper monitoring of
    the Program activity. Further, no monitoring procedures existed for the County’s rental
    property acquisition Program activities.

Conclusion

    Despite having adequate policies and procedures for its financial, information
    technology, and procurement activities, as well as its homeownership Program activities,
    the County generally had questionable capacity to administer its allocation of Program
    funds. It did not have well-documented written policies and procedures for its rental
    property acquisition Program activities or its Program monitoring because it did not
    believe specific Program policies and procedures were necessary. By creating and
    maintaining policies and procedures specific to its activities and monitoring, the County
    would strengthen its control environment, reducing the risk of waste, fraud, and/or abuse.
    This measure would improve the County’s ability to administer its Program funding.

Recommendations


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

        2A. Create and maintain policies and procedures specific to its rental property
            acquisition Program activities.

        2B. Create and maintain policies and procedures specific to Program-monitoring
            activities.




                                            11
                        SCOPE AND METHODOLOGY

We performed our on-site audit work at the County, located in San Bernardino, CA, between
September and December 2009. Our audit generally covered the period February through
December 2009. We expanded our scope as necessary.

To accomplish our audit objective, we reviewed

       HERA.

       ARRA.

       The Federal Register (FR), Volume 73, No. 194, dated October 6, 2008 (73 FR 58330).

       The Neighborhood Stabilization Program Bridge Notice, dated June 19, 2009.

       HUD regulations at 24 CFR (Code of Federal Regulations) Parts 85, 91, 92, and 570.

       The County’s substantial amendment to its 2008-2009 annual action plan to include
       proposed Program activities.

       The County’s Program grant agreement, executed February 27, 2009.

       The County’s organizational charts.

       HUD risk analysis for the County’s Community Development Block Grant, HOME, and
       Emergency Shelter Grant programs.

       HUD monitoring reports.

       HUD’s Disaster Recovery Grant Reporting system and Line of Credit Control System
       financial data.

       The County’s single audit report for the year ending June 30, 2008.

       The County’s internal policies and procedures that support Program activities as well as
       the County’s financial management, information technology, procurement, and
       monitoring policies and procedures.

       Participation agreements with contracted developers.

       The County’s procurement process and developer selections.




                                               12
        The County’s expenditure report and supporting documentation for a nonstatistical1
        sample of $57,851 of $282,013 in Program administrative expenses as of June 30, 2009.
        We generally found that each expense was eligible, properly authorized, and supported
        by documentation.

        The County’s application for the competitive second round of Program funds.

In addition, we interviewed County staff and developers responsible for Program execution.
Given the County’s lack of progress with all Program activities, we were not able to review
Program files or determine the adequacy of the County’s record keeping for specific Program
activities. Further, since the County had not funded any properties under the Program, we were
not able to conduct site visits to properties funded under the Program or draw conclusions related
to such properties.

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.




1
 Our sample was based on Program expenditures covering areas such as newspaper advertising expenses, consultant
services, and computer services. We selected expenditures that were higher in dollar value.


                                                      13
                              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 objective:

              Effectiveness and efficiency of program operations - Implementation of policies and
              procedures to ensure that Program activities meet established objectives and
              operations are effective and efficient.

              Compliance with applicable laws and regulations - Implementation of policies and
              procedures to ensure that Program activities comply with applicable laws and
              regulations.

              Safeguarding of assets and resources - Implementation of policies and procedures to
              ensure that Program activities ensure the safeguarding of the Program’s resources.


       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.




                                                14
Significant Weaknesses

     Based on our review, we believe that the following items are significant weaknesses:

            The County lacked controls to ensure that funds were spent in a timely manner
            (finding 1).

            The County lacked policies and procedures to ensure a sound internal control
            environment (finding 2).




                                             15
                APPENDIXES

Appendix A

             AUDITEE COMMENTS




                    16
17
18
                                          Appendix B

                                           CRITERIA
Public Law 110-289, Section 2301(c)(1)
In general -- Any State or unit of general local government that receives amounts pursuant to this
section shall, not later than 18 months after the receipt of such amounts, use such amounts to
purchase and redevelop abandoned and foreclosed homes and residential properties.

Federal Register, Volume 73, No. 194, dated October 6, 2008, Section I(B)2, “Formula:
Reallocation”
If any jurisdiction, State, insular, or local area fails to meet the requirement to use its grant within
18 months of receipt of the amounts, as required, HUD, on the first business day after that
deadline, will simultaneously notify the grantee and restrict the amount of unused funds in the
grantee’s line of credit. HUD will allow the grantee 30 days to submit information to HUD
regarding any additional “use” of funds not already recorded in the Disaster Recovery Grant
Reporting system. Then HUD will proceed to recapture the unused funds. HUD will reallocate
these unused funds in accordance with 42 U.S.C. [United States Code] 5306(c)(4).

Federal Register, Volume 73, No. 194, dated October 6, 2008, Section II(A), “Definitions for
Purposes of the CDBG [Community Development Block Grant] Neighborhood Stabilization
Program”
Use for the purposes of section 2301(c)(1): Funds are used when they are obligated by a State,
unit of general local government, or any subrecipient thereof, for a specific NSP [Program]
activity; for example, for acquisition of a specific property. Funds are obligated for an activity
when orders are placed, contracts are awarded, services are received, and similar transactions
have occurred that require payment by the State, unit of general local government, or
subrecipient during the same or a future period. Note that funds are not obligated for an activity
when subawards (e.g., grants to subrecipients or to units of local government) are made.

Federal Register, Volume 73, No. 194, dated October 6, 2008, Section II(M), “Timeliness of
Use and Expenditure of NSP Funds”
One of the most critical NSP provisions is the HERA requirement at section 2301(c)(1) that any
grantee receiving a grant: “...shall, not later than 18 months after the receipt of such amounts, use
such amounts to purchase and redevelop abandoned and foreclosed homes and residential
properties.” HUD has defined the term “use” in this notice to include obligation of funds.

    1. Timely use of NSP funds. At the end of the statutory 18-month use period, which begins
       when the NSP grantee receives its funds from HUD, the State or unit of general local
       government NSP grantee’s accounting records and Disaster Recovery Grant Reporting
       information must reflect outlays (expenditures) and unliquidated obligations for approved
       activities that, in the aggregate, are at least equal to the NSP allocation.

    2. Timely expenditure of NSP funds. The timely distribution or expenditure requirements
       of sections 24 CFR 570.494 and 570.902 are waived to the extent necessary to allow the
       following alternative requirement: All NSP grantees must expend on eligible NSP


                                                  19
       activities an amount equal to or greater than the initial allocation of NSP funds within
       four years of receipt of those funds or HUD will recapture and reallocate the amount of
       funds not expended.

24 CFR 85.20(b). The financial management systems of other grantees and subgrantees must
meet the following standards:

   1. Financial reporting. Accurate, current, and complete disclosure of the financial results of
      financially assisted activities must be made in accordance with the financial reporting
      requirements of the grant or subgrant.

   2. Accounting records. Grantees and subgrantees must maintain records which adequately
      identify the source and application of funds provided for financially assisted activities.
      These records must contain information pertaining to grant or subgrant awards and
      authorizations, obligations, unobligated balances, assets, liabilities, outlays or
      expenditures, and income.

   3. Internal control. Effective control and accountability must be maintained for all grant
      and subgrant cash, real and personal property, and other assets. Grantees and subgrantees
      must adequately safeguard all such property and must assure that it is used solely for
      authorized purposes.

County of San Bernardino Policy Manual, Preface
The Policy Manual is issued to provide a single source of authoritative reference to the policies
for managing the internal operations of the County Government. The assignment of this manual
to your office carries with it the responsibility for compliance with the policies contained within.

County of San Bernardino Policy Manual, No. 04-01, “Standard Practice Manual”
The successful operation of any large-scale organization is largely dependent upon a balanced
relationship between centralization of policy direction and administration, and decentralization
of authority and responsibility for policy implementation. The effective functioning of this
relationship is, in turn, dependent upon the existence of an integrated system of communication
from the point of policy direction to the points of ultimate execution.

The nature and complexity for the County’s operations require a system of Standard Practice
Manuals that will ensure that the policies established by the Board of Supervisors, for the
internal management of the County’s operations, and the duties and responsibilities of the
various County departments and agencies, are properly documented, coordinated, and translated
into systems, procedures, and detailed instructions for execution at the appropriate organizational
levels.

Departmental Instruction Manuals’ purpose is to satisfy only peculiar departmental needs or
where very detailed desk level instructions are necessary to implement Standard Practice
Instructions.




                                                 20
Government Auditing Standards, chapter 7.15(c), states that internal control includes the
plan, policies, methods, and procedures adopted by management to meet its missions, goals, and
objectives. Internal control includes the processes for planning, organizing, directing, and
controlling program operations. It includes the systems for measuring, reporting, and monitoring
program performance. Internal control serves as a defense in safeguarding assets and in
preventing and detecting errors; fraud; violations of laws, regulations, and provisions of contracts
and grant agreements; or abuse.

Documenting and evaluating internal control (including policies and procedures) at the entity
level is a solid starting point in building a strong internal control environment. When
weaknesses are identified, an entity can refer to its documented control procedures and properly
analyze and implement changes, if necessary. Additionally, well-documented controls provide
assurance and contribute to minimizing risk. Internal control can be broken down into four
objectives:

       Effectiveness and efficiency of program operations,

       Relevance and reliability of information,

       Compliance with applicable laws and regulations, and

       Safeguarding of assets and resources.

To reach those objectives, internal control can be broken down into the following parts:

       Control environment - Sets the tone for the organization, influencing the control
       consciousness of its people. It is the foundation for all other components of internal
       control.

       Risk assessment - The identification and analysis of relevant risks to the achievement of
       objectives, forming a basis for how the risks should be managed.

       Information and communication - Systems or processes that support the identification,
       capture, and exchange of information in a form and timeframe that enable people to carry
       out their responsibilities.

       Control activities - The policies and procedures that help ensure that management
       directives are carried out.

       Monitoring - Processes used to assess the quality of internal control performance over
       time.




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