oversight

The City of Los Angeles Housing Department Generally Had Sufficient Capacity and Adequate Internal Controls To Administer its Neighborhod Stabilization Program Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-03-17.

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

                                                                 Issue Date
                                                                         March 17, 2010
                                                                 Audit Report Number
                                                                          2010-LA-1008




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 City of Los Angeles, CA, Generally Had Sufficient Capacity and Adequate
         Internal Controls To Administer Its Neighborhood Stabilization Program Funds


                                   HIGHLIGHTS

 What We Audited and Why

      We completed a capacity review of the City of Los Angeles’ Housing Department’s
      (City) Neighborhood Stabilization Program (Program). We performed the review
      because Housing and Economic Recovery Act of 2008 (HERA) reviews are part of the
      Office of Inspector General’s (OIG) annual audit plan and the program was identified as
      high risk. We previously audited several different aspects of the City’s HOME
      Investment Partnerships program, all of which disclosed significant monitoring and
      oversight problems. Thus, given the significant amount of funds awarded and the prior
      audit results, we had concerns regarding the City’s capacity to administer the Program
      funds. The City applied for additional funds through the American Recovery and
      Reinvestment Act of 2009 (ARRA).

      Our objective was to determine whether the City 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
      City applied for under ARRA.
What We Found

     We found no evidence indicating that the City lacked the capacity to adequately
     administer its Program funding.

Auditee’s Response


     We provided the City a discussion draft report on March 9, 2010. The City declined an
     exit conference, but provided a written response on March 10, 2010, in which it agreed
     with our report.

     The complete text of the City’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
      The City Generally Had Sufficient Capacity and Adequate Internal Controls To   5
      Administer Its Program Funds

Scope and Methodology                                                                12

Internal Controls                                                                    14

Follow-up on Prior Audits                                                            15

Appendix

   A. Auditee Comments                                                               16




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                     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.

The City of Los Angeles is a participating jurisdiction which administers its entire Program
under the City of Los Angeles’ Housing Department (City). The City was created to address the
Los Angeles housing crisis. The City’s mission is to advocate safe and livable neighborhoods
through the promotion, development, and preservation of decent, safe, and affordable housing.

The Federal Register, Volume 73, Number 194 (dated October 6, 2008), provided the public a
list of grantees that would receive Program funds. The City received more than $32.8 million in
Program funding and amended its 2008-2009 action plan to outline the Program activities it
planned to pursue with the newly acquired funds, including a homeownership and rental housing
activity. The City’s Homeownership and Preservation Division is responsible for implementing
both activities. HUD executed the City’s Program grant agreement on February 27, 2009;
therefore, the City has until August 27, 2010 (18 months), to obligate the Program funds and
until February 27, 2013 (4 years), to spend all of the Program funds. As of December 31, 2009,
the City had obligated and spent $3.6 million (11 percent) of the Program funds.

The City applied for $100 million to continue its Program activities under a second round of
competitive funding authorized by the American Recovery and Reinvestment Act of 2009
(ARRA). HUD announced the ARRA allocations on January 14, 2010, and the City was
awarded the full amount of additional funding. The City plans to use the same homeownership
and rental housing activities to administer both the HERA and ARRA funding.

Our Objective

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




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                                 RESULTS OF AUDIT

The City Generally Had Sufficient Capacity and Adequate Internal
Controls to Administer Its Program Funds
We did not find evidence indicating that the City lacked the capacity to adequately administer its
Program funding. The City had (1) plans for and had begun the use of program funds; (2)
written policies and procedures to support its Program activities; (3) experience with programs
that were similar in nature to its Program activities; (4) a plan to hire additional staff; and (5)
adequate records to support accounting transactions, procurements, and homeownership
activities.



 The City Had Adequate Plans
 for Using the Program Funds

       The City had plans for two activities using its Program funds:

             1. The homeownership activity was designed to be implemented using two
                components:

                  a. The purchase assistance with rehabilitation program was designed to offer
                     a financing mechanism to eligible home buyers to enable them to directly
                     acquire foreclosed-upon or abandoned single-family homes using Program
                     funds. The program would provide mortgage assistance and rehabilitation
                     loans for health- and safety-related repairs totaling up to $125,000 for low-
                     and moderate-income households (less than 80 percent of area median
                     income) and $100,000 for middle-income households (81-120 percent of
                     area median income).

                  b. The City’s subrecipient was to purchase clusters of foreclosed-upon or
                     abandoned properties from lenders, loan servicers, and the National
                     Community Stabilization Trust at a discount. The properties were to be
                     rehabilitated, if needed, and resold to eligible home buyers whose incomes
                     did not exceed 120 percent of the area median income.

                  All homes purchased through the homeownership activity would be required to
                  be single family, vacant, and foreclosed upon or abandoned pursuant to
                  program guidelines. In addition, aside from meeting income guidelines,
                  eligible home buyers would be required to provide a minimum downpayment,
                  receive 8 hours of home-buyer education from a HUD-certified education
                  provider, and occupy the properties as their primary residences. The City
                  anticipated that approximately 125 units of foreclosed-upon single-family



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          housing units would be acquired and rehabilitated through the homeownership
          activity. It budgeted more than $15.5 million for homeownership activities.

     2. The rental housing activity was designed in a similar way as the second
        component of the homeownership activity. However, the properties acquired
        for this activity would be multifamily properties. The City envisioned that these
        properties would be acquired and then offered through a competitive request for
        qualifications/proposal process for rehabilitation and ownership to entities with
        demonstrated capacity and experience who would maintain the properties as
        affordable rental housing. Properties could be bundled together and offered to
        these organizations to achieve economies of scale with the rehabilitation work
        and long-term ownership. If necessary, the City’s subrecipient would
        rehabilitate the properties and then offer them for sale. The City anticipated that
        approximately 186 units of foreclosed-upon multifamily rental housing would
        be acquired and rehabilitated for occupancy by lower and middle-income
        households. A minimum of 100 units would be restricted to occupancy by
        households having income at or below 50 percent of the area median income.
        The City had budgeted more than $14 million for rental housing activities.

Properties eligible for both activities would be required to be located within specific
target areas or census tracts, which had been defined by the City as areas with the greatest
need. The City had budgeted about $3.3 million in Program funds to administer its
Program activities.

As of December 31, 2009, the City had spent about 11 percent (around $3.6 million) of
its more than $32 million in funding on Program administration and homeownership
activities. The City had funded 14 home-buyer loans through the purchase assistance
with rehabilitation program, and the City’s subrecipient had acquired 13 single-family
properties to be rehabilitated and resold.

In January 2010, the City acknowledged that it needed to restrategize to ensure that it
could spend the Program funding within the required timeframes. Effective January
2010, the City had suspended the acceptance of reservation requests for the purchase
assistance with rehabilitation program funds under its homeownership activity since the
program was not the most effective method for implementing the homeownership
activity. Home buyers, real estate agents, lenders, and City staff had expended a great
deal of time and effort with marginal results.

We believe that the City has adequate capacity to use the Program funds within the
required timeframes. First, we noted that the City’s rate of using funds in December
2009 had increased, as compared to the rate of using funds in prior months (September
and November 2009). Second, the City had restrategized by putting all of its effort and
support into executing Program activities through its subrecipient, whose activity level
had been increasing, after an initial ramping up period. Since January 2010, the City had
assisted three home buyers with the purchase of properties (totaling $162,644) and
executed three rehabilitation construction contracts (totaling $101,989). In addition, the



                                         6
     City was executing seven more rehabilitation construction contracts (estimated to total
     $217,686). The City’s subrecipient had also acquired eight more properties and was
     executing rehabilitation construction contracts, averaging about $178,438 each, for a total
     of 17 Program-assisted properties. In addition, the City’s subrecipient was screening
     and/or acquiring 30 single-family properties to rehabilitate and resell. Lastly, the City
     planned to execute rental housing activities in the near future. Rental housing activities
     use Program funds at a more rapid rate, as rental housing activities include multifamily
     properties, which use a larger amount of funds for acquisition and rehabilitation. Based
     on this increased activity level, we believe that the City will be able to use the Program
     funds within the required timeframes.

Written Policies and
Procedures Were Adequate


     At the initiation of our review in October 2009, the City’s Program procedures were
     incomplete for its subrecipient’s homeownership activities, and lacked procedures for the
     rental housing activity. However, in February 2010, before the subrecipient had sold any
     property or executed any rental housing activity, the City completed its Program
     procedures. The City’s procedures were sufficient to support its homeownership and
     rental housing activities. They complied with the major provisions of HERA and
     addressed the major aspects of each activity, including program requirements and City,
     subrecipient, and home-buyer responsibilities. In addition, the City had established
     written procedures for monitoring its Program activities and had complete written
     policies and procedures to support its financial management and procurement functions.

The City Had Experience with
Similar Programs

     The City had extensive experience with other programs that mirrored its Program
     activities.

             The City had operated low-income purchase assistance with rehabilitation and
             moderate-income purchase assistance with rehabilitation programs, which
             closely resemble the homeownership activities, since 1994 and 2005,
             respectively. From 2007 to 2009, the City loaned more than $28.5 million to
             assist 310 households in purchasing and rehabilitating homes throughout Los
             Angeles.

             The City had operated major projects acquisition and new construction and
             acquisition and rehabilitation programs to create affordable rental housing, which
             resemble the rental housing activities, since 1979. From 2007 to 2009,
             affordable housing developers funded under this program successfully completed
             rehabilitation of 732 affordable housing units with a total of $26.7 million in City
             funding and a total development cost of $166.2 million.


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     The City’s low-income purchase assistance with rehabilitation program is funded by
     HUD’s Community Development Block Grant (CDBG) program but in the past, had also
     been partially funded by HUD’s HOME Investment Partnerships Program (HOME). The
     City’s major projects acquisition and new construction and acquisition and rehabilitation
     programs are partially funded by both CDBG and HOME. In our prior audits of the
     City’s HOME program, we had findings related to inadequate or lacking City monitoring,
     which was caused by either inadequate or lacking policies and procedures. However,
     during our Program review, we found that the City was monitoring its Program activities
     and had adequate policies and procedures for its Program.

Staffing Levels Were
Appropriate


     The City’s staffing level appeared to be appropriate to administer its HERA Program
     funding and planned activities. There were 10 individuals within the responsible
     Homeownership and Preservation Division working on Program activities. All 10
     individuals had direct program responsibilities and spent between 28 and 100 percent of
     their time on Program activities. We were initially concerned about the loan processing
     staff’s concerns about time restraints imposed by the City’s mandatory furloughs and the
     loss of a staff member. However, through observation, we noted that the loan processing
     staff had adjusted to the mandatory furloughs, the rate of the homeownership activities
     was not overwhelming, and in February 2010, the division obtained a displaced staff
     member through the City’s layoff process, who would also directly assist with Program
     activities.

     The City informed us that it planned to hire additional staff for the additional funding
     under the second competitive round of Program funding through ARRA (see Background
     and Objective section). We agree that this measure should facilitate the City’s efforts to
     accomplish an increased Program workload.

The City Had Support for Its
Financial Transactions,
Procurements, and
Homeownership Activities


     We reviewed nonstatistical samples of Program financial and accounting transactions,
     procurements, and homeownership activity files.




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       Financial Data:
       All Program accounting transactions reviewed were accurate, adequately supported,
       eligible, and consistent with the proposed activities in the City’s amendment to its 2008-
       2009 action plan.

       Procurement:
       All contract services reviewed were properly procured consistent with the City’s policies
       and procedures, as well as 24 CFR (Code of Federal Regulations) Part 85, Administrative
       Requirements for Grants and Cooperative Agreements to State, Local, and Federally
       Recognized Indian Tribal Governments.

       Homeownership Activity Files:
       Our review of files for the City’s homeownership activity indicated that the City was in
       compliance with all applicable program requirements.

 Site Visits Confirmed That
 Assisted Properties Met
 Program Requirements

       We conducted site visits and were able to confirm that the Program-assisted and -funded
       properties were located within the areas targeted by the City as having the “greatest
       needs.”

Example of property assisted through the purchase assistance with rehabilitation program.




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Examples of properties acquired and being rehabilitated through the City’s subrecipient.




                                               10
Conclusion

    The City appeared to generally have sufficient capacity and adequate controls to
    administer its award of Program funding through HERA in accordance with HERA
    requirements. The City’s procedures and controls should also be adequate to administer
    the continuation of these activities under the second round of Program funds through
    ARRA since the City plans to administer the funds using the same activities. However,
    given that the ARRA funding is more than three times that of the City’s HERA funding,
    we generally agree with the City’s plans to hire additional staff to ensure that it can
    adequately administer an increased activity level.




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                             SCOPE AND METHODOLOGY

We performed our on-site audit work at the City, located at 1200 West 7th Street, Los Angeles,
California, between October 2009 and February 2010. Our audit generally covered the period
February through December 2009. We expanded our scope as necessary.

To accomplish our objective, we reviewed

        HERA.
        ARRA.
        The Program bridge notice, dated June 11, 2009.
        HUD regulations at 24 CFR Parts 85, 91, 92, and 570.
        HUD monitoring reports.
        HUD risk analyses for the CDBG, HOME, Emergency Shelter Grant, and Housing
        Opportunities for Persons with AIDS programs.
        The City’s single audit report for the year ending June 30, 2008.
        The City’s substantial amendment to its 2008-2009 action plan to include proposed
        Program activities.
        The Program grant agreement, dated February 27, 2009.
        The City’s application for the second competitive round of Program funds.
        Disaster Recovery Grant Reporting system financial data.
        Organizational charts.
        The City’s internal policies and procedures that support Program activities. We also
        reviewed the City’s financial management, procurement, and monitoring policies and
        procedures.
        The City’s progress in obligating funds based on the latest information reported in
        HUD’s Disaster Recovery Grant Reporting system as of December 30, 2009.
        Budget reports, journal and payment vouchers, and supporting documentation, including
        the review of a nonstatistical sample1 of $605,287 of more than $1.4 million in Program
        expenses as of November 30, 2009. We generally found that each expense was accurate,
        supported, allowable, and reasonable.
        The procurement process and selections for lenders, appraisers, lead and title services,
        and contractors.
        A nonstatistical sample2 of 6 of 26 available project files covering homeownership
        activities. We generally found that the project files followed applicable Program rules
        and regulations.


1
  Our sample was based on expenditures covering the homeownership activity areas such as appraisal and title fees,
property acquisition transactions, contractor reimbursements, and Program administration. We selected all journal
vouchers; all payment vouchers made to the City’s subrecipient and consultant; the lowest, middle, and highest
amount payment vouchers made to titles companies; and the highest amount payment voucher made to all of the
remaining vendors.
2
  Our sample was based on the lowest, middle, and highest amount activities through December 2009 for the City
and its subrecipient.


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We also interviewed City staff and several key officials responsible for Program execution and
conducted site visits to a nonstatistical sample3 of 23 properties assisted and/or funded under the
Program. We found that each property was in an eligible target area and supported the City’s
execution of eligible Program activities.

We conducted the review 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 finding and conclusion based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our finding and
conclusion based on our audit objective.




3
 We conducted site visits to 23 out of the 26 properties assisted through the City and/or funded through the City’s
subrecipient through December 2009.


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                              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:

              Implementation of policies and procedures to ensure that Program activities meet
              established objectives.
              Implementation of policies and procedures to ensure that Program activities
              comply with applicable laws and regulations.

       We assessed the relevant controls identified above.

       A significant weakness exists if management controls do not provide reasonable
       assurance that the process for planning, organizing, directing, and controlling program
       operations will meet the organization’s objectives.

 Significant Weaknesses

       Based on our review, we did not find any weaknesses in the internal controls.




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                            FOLLOW-UP ON PRIOR AUDITS


    Audit of the City of Los Angeles
    Housing Department – HOME
    Affordability Monitoring and
    Inspections, 2008-LA-1016,
    dated September 18, 2008


         We audited the City’s HOME affordability monitoring and inspection requirements
         regarding HOME-assisted rental units, prompted by a prior audit (2008-LA-1004), which
         detected problems in this area. We found that the City did not comply with HOME
         affordability monitoring and inspection requirements for its HOME-assisted rental
         housing. It failed to maintain the required tenant eligibility information for 26 HOME-
         assisted rental housing projects totaling nearly $38 million. In addition, it did not
         maintain complete tenant eligibility information, did not ensure that its contractor
         conducted occupancy monitoring in accordance with HOME program requirements, and
         failed to inspect HOME-assisted rental housing projects when required. On December 2,
         2008, we entered into management decisions with HUD to correct the items in the
         recommendations, which have a target completion date of April 16, 2010.4




4
  There are other prior audits that are pending resolution; however, this was the only audit that was directly related to
the City’s administration of its HOME program and included program activities similar to those being used to
implement Program funds.


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                 APPENDIX

Appendix A

             AUDITEE COMMENTS




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