Issue Date
July 08, 2010
Audit Report Number
2010-LA-1013
TO: William Vasquez, Director, Los Angeles Office of Community Planning and
Development, 9DD
FROM: Tanya E. Schulze, Regional Inspector General for Audit, Region IX, 9DGA
SUBJECT: The City of Montebello Did Not Comply With HOME Requirements
HIGHLIGHTS
What We Audited and Why
We reviewed the City of Montebello’s (City) HOME Investment Partnerships Program
(HOME) at the request of the U.S. Department of Housing and Urban Development’s
(HUD) Los Angeles Office of Community Planning and Development (CPD). The request
was based on findings contained in a 2008 single audit report and 2009 HUD CPD
technical assistance report, which stated that the City did not fully comply with HOME
program requirements in the ongoing development of its 2006 Whittier and 6th Street
project. Our objective was to determine whether the City’s project was timely, supported
with valid agreements, and accurately reported in HUD’s Integrated Disbursement and
Information System (IDIS).
What We Found
The City’s Whittier and 6th Street project was not timely, and the City committed and
disbursed $1.3 million in HOME funds without the required written agreement. It also
recorded the project as completed in IDIS although no project construction had begun.
What We Recommend
We recommend that the Director of HUD CPD require the City to repay the $1.3 million
in HOME project funds, plus any interest due, and place the funds into the HOME U.S.
Treasury account. In addition, require the City to implement written procedures and
controls over the HOME program and obtain HUD information system training.
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 directive issued because of the audit.
Auditee’s Response
We provided the City the draft report on May 18, 2010, and held an exit conference with
the City on June 3, 2010. The City generally disagreed with our report.
We received the City’s response on June 14, 2010. The complete text of the City’s
response, along with our evaluation of that response, can be found in appendix B of this
report.
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TABLE OF CONTENTS
Background and Objective 4
Results of Audit
Finding: The City’s Whittier and 6th Street Project Did Not Comply With 6
HOME Requirements
Scope and Methodology 12
Internal Controls 13
Appendixes
A. Schedule of Questioned Costs 15
B. Auditee Comments and OIG’s Evaluation 16
C. Criteria 30
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BACKGROUND AND OBJECTIVE
The HOME Investment Partnerships Program (HOME) is authorized under Title II of the
Cranston-Gonzalez National Affordable Housing Act. The program regulations are contained in
24 CFR (Code of Federal Regulations) Part 92 and the HOME Investment Partnerships Program
Final Rule. HOME funds are awarded annually as formula grants to participating jurisdictions
and used to fund a wide range of activities that build, buy, and/or rehabilitate affordable housing
for rent or homeownership or provide direct rental assistance to low-income households. The
program allows State and local governments to use HOME funds for grants, direct loans, loan
guarantees or other forms of credit enhancement, rental assistance, or security deposits. Further,
a participating jurisdiction may invest HOME funds as equity investments, interest-bearing loans
or advances, non-interest-bearing loans or advances, interest subsidies consistent with the
purposes of this part, deferred payment loans, grants, or other forms of assistance that HUD
determines to be consistent with the regulation. Households must meet certain low-income limit
criteria published by the U.S. Department of Housing and Urban Development (HUD) to receive
HOME assistance.
The City of Montebello: The City of Montebello (City) was incorporated on October 16, 1920,
and conducts its operations as a general law, council/administrator city. The City is governed by
a council of five members elected at large that serve for staggered 4-year terms. The city clerk
and city treasurer are also elected to 4-year terms. The city mayor, mayor pro tem, city
administrator, and city attorney are appointed by the city council. Montebello, CA, encompasses
8.2 square miles and has a population of approximately 65,000.
As a participating jurisdiction, the City is responsible for the overall administration and oversight
of the HOME and Community Development Block Grant (CDBG) programs. Using funds from
these programs, the City has sponsored rehabilitation, low-interest loan, and various
redevelopment projects. Between 2008 and 2009, the City was awarded just over $2.1 million in
CDBG and $1 million in HOME funds. It received $282,296 in CDBG funds under the
American Recovery and Reinvestment Act of 2009 and was allocated $333,565 in Neighborhood
Stabilization Program funds from the State of California. The City’s HOME program is
managed through its Economic Development Department, which reports to the city administrator
and city council.
In its 2008 single audit report, the City’s independent auditor found that the City inappropriately
requested and received $1.3 million in HOME funds before the funds were expended or
committed to a specific local project. HUD’s June 2009 technical assistance review letter stated
that the City’s written HOME agreements did not include all of the necessary HOME provisions
and did not specify a HOME project. HUD requested that the City provide the current status of
the project, including documentation of the timeframe of the HOME commitment, accounting of
funds, and return of any funds due plus interest to the U.S. Treasury. The City issued a response
to HUD’s report, stating that the project was still on track to go forward by April 2010, but did
not provide all project details as requested by HUD.
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Our objective was to determine whether the City’s Whittier and 6th Street project was timely,
supported with valid agreements, and accurately reported in HUD’s Integrated Disbursement and
Information System (IDIS).
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RESULTS OF AUDIT
Finding: The City’s Whittier and 6th Street Project Did Not Comply
With HOME Requirements
The City did not follow HOME requirements when it drew down funds from the HOME U.S.
Treasury account for its Whittier and 6th Street project. Funds were not drawn for the project
until more than 1 year after the original commitment, they were not disbursed to the developer
for another 8 months, and construction on the project had not begun. In addition, the City did
not have a valid written agreement when it withdrew funds as required by HOME regulations.
Finally, the City improperly recorded the project as completed in IDIS. This problem occurred
because the City lacked procedures and controls over its program and did not have an adequate
understanding of HOME program requirements. As a result, its affordable housing goals had not
been met, and the project’s status was misrepresented to HUD.
The City’s Project Was Not
Timely
HOME funds totaling $1.3 million were committed in November 2006 for acquisition
and rehabilitation of the Whittier and 6th Street area of Montebello, CA. According to the
City’s records, the project would produce a mixed-use development consisting of 62
rental units, of which 10 would be affordable. Although funds were originally committed
in November 2006, they were not drawn until June 2008, and as of April 2010,
construction had not begun. Our review disclosed that the City severed its ties with its
original project developer in 2004. However, the developer was in possession of one of
the City’s properties to be used for the project and did not grant the property back to the
City’s Redevelopment Agency until 2007.
While it was severing ties with its original developer, the City was also negotiating with a
second developer to complete the project. The City entered into an exclusive negotiation
agreement with its current developer in March 2008. The City’s records also contained a
March 2008 owner’s participation agreement, a June 2008 purchase and sales agreement,
and a February 2009 loan agreement stating that the developer would receive $1.3 million
in HOME funds as a forgivable loan in exchange for the developer’s creating 10
affordable housing units as a part of the 62-unit development. Since the agreements were
signed, no project construction had taken place. Although 24 CFR 92.502 requires
HOME funds to be expended within 15 days, escrow documents showed that the $1.3
million was given to the developer for the purchase of property at the site in February
2009, 8 months after funds were withdrawn.
The City cited a number of reasons why project construction had not been initiated,
including frequent changes in the city council’s composition and unfavorable market
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conditions. The City indicated that its council had recently expressed concerns about the
height of the project and that the project was on hold until relocation of utilities from an
adjacent alley had been completed. We concluded our fieldwork in early April; however,
the City assured us that work on the utilities relocation would begin in the near future.
Like the City, the developer told us that once the utilities relocation was completed, he
could begin construction. However, the developer told us that he was still acquiring
properties for the site and searching for additional sources of funding. The developer
estimated that actual project construction could begin in 2 years with an estimated
completion date of 3 years.
24 CFR 92.2 defines a commitment for a new construction project as a project in which
construction “can reasonably be expected to start within twelve months of the agreement
date.” HOME regulations also require the funds to be committed within 24 months after
the last day of the month in which HUD notifies the participating jurisdiction of its
execution of the HOME agreement. Otherwise, HUD will reduce or recapture the
uncommitted HOME funds (see Appendix C of this report).
The following are photographs of the project site awaiting development:
Front - Whittier and 6th Street view of preexisting store
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Side – 6th Street view of City’s vacant lot granted to developer
Rear view of vacant lot
Funds Were Drawn Without a
Valid Written Agreement
In March 2008, the City entered into an exclusive agreement with its current developer to
determine whether it wished to proceed with further negotiations to redevelop the
Whittier and 6th Street properties. The agreement did not state that the developer would
produce a specific amount of affordable units or discuss project funding but only
8
indicated that both parties (the City and developer) agreed to negotiate exclusively with
each other concerning overall project development. If after a 1-year term, each party
agreed that the developer could deliver the project as specified, an owner’s participation
agreement, specifying design, construction, and financing of the project, would be
entered into by both parties.
The City provided a copy of an owner’s participation agreement; however, it had not
been officially approved. The City’s project file also contained a number of
memorandums stating its intention to obtain such an agreement, and the City had recently
contracted with its attorney to prepare the owner’s participation agreement. HOME
regulations at 24 CFR 92.2 state that a commitment to a specific local project means the
participating jurisdiction has executed a legally binding agreement under which HOME
funds will be provided to the owner for an identifiable project. In addition, the agreement
did not include the required description of the use of HOME funds, as required by 24
CFR 92.504(c)(3), including a schedule for completing tasks and a budget. The City’s
purchase and loan agreements also did not contain all required provisions, and the loan
agreement was executed after withdrawal of funds. As a result, the City did not meet
HUD’s commitment and agreement requirements before withdrawing and disbursing the
funds to the developer.
The City Inaccurately Reported
the Project in HUD’s System
The City recorded the project as a completed acquisition and rehabilitation activity in
IDIS. HOME regulations state that project completion means that all the necessary title
transfer requirements and construction work have been performed and the project
complies with HOME property standards (see Appendix C). Therefore, it is not possible
for the rehabilitation portion of the project to have been complete since construction had
not been initiated.
The City claimed that this action was necessary because the acquisition portion of the
project had been completed. However, HUD’s IDIS Reference Manual identifies in
progress projects as “underway” and details the various stages of rental and homebuyer
activities. In order for a HOME activity to be recorded as completed, IDIS requires that
the participating jurisdiction enter such information as the total number of completed
units, monthly rents, and household income. This information is not yet available since
project construction has not begun.
It is important that projects be recorded accurately in IDIS, as it feeds into other HUD
financial and program reporting systems and is used to track the project status.
Therefore, the City must record its projects accurately and in accordance with stated
HOME and other applicable guidance.
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HUD Was Not Informed of
Project Problems
The City told us that it remained in contact with HUD and had informed the Los Angeles
CPD field office of the problems associated with the project. However, we could find no
records in the City’s or HUD’s files that confirmed this claim, and the field office had
been unaware of the problems associated with the project. The City’s records showed
that the City was concerned about losing a portion of its HOME funding due to a
commitment shortfall and wanted to expedite the withdrawal of funds. Therefore, it is
likely that the City did not want to inform HUD of the problems and delays associated
with the project because HUD may have required the return of project funds, as HUD
later did after its 2009 review (see Background and Objective section). The City then
misinformed HUD of its commitment status.
HUD’s HOMEfires guidance recognizes and allows for unforeseen events that can occur
and are beyond the control of the grantee and advises grantees to remain in contact so that
a workable solution can be achieved. However, HUD will make a finding if a
participating jurisdiction has committed HOME funds to a project when there is not a
reasonable expectation that construction would start within 12 months. In such instances,
HUD requires cancellation of the project (see Appendix C).
The City Had No Written
Internal Policies and
Procedures
The City informed us that they did not maintain current written policies and procedures to
administer its HOME program. Instead, the City stated that it regularly consulted the HUD
CPD website as needed for program information. However, based on the issues identified
above, the City did not sufficiently consider HOME program requirements nor have an
adequate understanding of HUD’s IDIS system. A proper system of written procedures and
controls would help ensure the City’s personnel administering the program understand and
adhere to HOME requirements. Such a system would reduce the risk to the program when
unusual circumstances or issues are encountered.
Conclusion
The City did not comply with HOME requirements when it withdrew and spent $1.3
million in HOME funds for its Whittier and 6th Street project. This condition occurred
because the City lacked sufficient procedures, controls, and understanding of HOME
requirements to take proper action when difficulties arose with the project. The City’s
lack of communication with HUD officials further aggravated the problem.
Consequently, HUD’s and the City’s affordable housing goals were not met.
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The City’s commitment and expenditure of HOME funds without a valid written
agreement was an ineligible use of funds, and, therefore the funds should be returned to
the U.S. HOME Investment Treasury account, where they can be reallocated to fund
other HOME projects. Since the funds were not expended for eligible costs within 15
days of withdrawal, interest would also be due.
Recommendations
We recommend that the Director of HUD’s Office of Community Planning and
Development require the City to
1A. Repay $1,300,000 in HOME project funds, plus any interest due, to the HOME U.S.
Treasury account.
1B. Revise the Whittier and 6th Street project information to accurately reflect the
project’s status in IDIS.
1C. Implement internal written procedures and controls over the administration of the
HOME program.
1D. Obtain formal IDIS training.
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SCOPE AND METHODOLOGY
We performed our onsite audit work at the City, located in Montebello, CA, between October
2009 and April 2010. Our audit generally covered the period November 1, 2006, through March
2010.
To accomplish our audit objectives, we
Reviewed applicable HUD regulations, including 24 CFR Part 92, and the IDIS Reference
Manual.
Reviewed the City’s Financial Department’s general ledger details and summaries for the
City’ fiscal years2007 through 2009.
Reviewed the City’s action plans and grant agreements.
Reviewed single audit reports for fiscal years 2007 and 2008.
Reviewed HUD’s technical assistance review and other correspondence between HUD and
the City.
Reviewed agreements between the City and its developer.
Reviewed IDIS reports pertaining to the $1.3 million in HOME funds.
Reviewed HUD Line of Credit and Control System reports to analyze and verify the City’s
drawdowns.
Reviewed the City’s board meeting minutes, resolutions from city council meetings, and
organization charts.
Interviewed appropriate City management and staff.
Interviewed the project developer and escrow company staff.
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.
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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 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 significant weaknesses:
The City did not have
Sufficient policies and procedures to ensure that its Whittier and 6th street project
accomplished HOME affordable housing program goals.
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Sufficient policies and procedures to ensure that the Whittier and 6th Street project
complied with HOME program rules and regulations.
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APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
Recommendation number Ineligible 1/
1A $1,300,000
1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
that the auditor believes are not allowable by law; contract; or Federal, State, or local
policies or regulations.
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Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
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Comment 1
Comment 1
Comment 2
Comment 1
Comment 3
17
Comment 4
18
Comment 1
Comment 5
19
Comment 1
Comment 5
Comment 6
20
Comment 1
Comment 7
Comment 8
Comment 9
21
Comment 10
22
Comment 1
Comment 11
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OIG Evaluation of Auditee Comments
Comment 1 The City’s response stated that it “acted in good faith to implement the intent and
requirements of the HOME program and associated regulations,” that it
“consistently informed and worked with HUD staff in implementing the program,
discussing project specifics, seeking guidance, and following HUD’s guidance.”
However, there was no evidence in the City’s or HUD’s records to confirm that
the City informed the local HUD Community Planning and Development field
office of the problems surrounding the project.
We also disagree with the City’s statements that our report did not completely or
adequately address the extenuating circumstances that impacted the Whittier and
6th Street project, and that our recommendation that the City repay the $1.3
million in HOME funds was excessive. The report discussed the external factors
mentioned by the City, including market conditions, problems with the prior
developer, and City Council’s concerns about the project. Although the housing
market experienced an unprecedented drop, this does not excuse the violations of
the program requirements identified in the report. HOME regulations at 24 CFR
92.2 state that a commitment to a specific local project consisting of rehabilitation
or new construction (with or without acquisition) means that a participating
jurisdiction has executed a written legally binding agreement under which HOME
assistance will be provided to the owner of an identifiable project. The
agreements that were on record when the City drew down the $1.3 million, an
Exclusive Negotiation Agreement (ENA) an Owner’s Participation Agreement
(OPA), and Purchase and Sales Agreement, were insufficient to support the draw
down. The ENA was merely a preliminary agreement the City had with its
developer to establish the City’s intent to proceed with further negotiations to
redevelop the Whittier and 6th Street properties, and did not contain the required
HOME provisions described in 24 CFR 92.504(c)(3). The signature page of the
OPA, submitted to HUD in response to its 2009 technical review to show the City
had entered into a commitment, had approval signatures and dates that appeared
to be inappropriately cut and pasted from the ENA, making it invalid. Upon
further inquiry, the City confirmed there actually was no approved OPA. The
Purchase and Sales Agreement was executed at the time that funds were
withdrawn, but was incomplete and also did not contain the required HOME
provisions. As a result, our recommendation is in accordance with HUD guidance
and we do not consider it to be excessive.
Comment 2 The City maintained that its loan agreement, which preceded a formal
development agreement (or OPA) with its developer, expressly required
development of 10 affordable units, required compliance with HOME program
requirements, and was secured by a first deed of trust to ensure recourse in the
event of default. While HOME program requirements do not specify what type of
agreement a participating jurisdiction must execute, HOME does require that a
participating jurisdiction have a written, legally binding agreement, and specific
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provisions outlined in 24 CFR 92.504(c)(3). The City established a loan
agreement with its developer; however, it was executed 8 months after withdrawal
of funds. The loan agreement also did not include all required HOME provisions,
such as a schedule for completing tasks and a budget.
Comment 3 The City claimed that the report mischaracterized the use of funds as “property
acquisition.” However, our report referred to the project as an “acquisition and
rehabilitation” project because this was how the City recorded it in HUD’s
Integrated Disbursement and Information System (IDIS). The City’s 2009-2010
Action Plan also referenced the use of HOME funds for the City’s “Acquisition
and Rehabilitation Program.” The audit report stated that the project would
“produce a mixed-use development consisting of 62 rental units, of which 10
would be affordable.”
Comment 4 We disagree with the City’s contention that our report contained an inflexible
standard for commencement of construction. The City committed the $1.3
million for the project in IDIS in November 2006. However, nearly four years
later, no work has started and the project has therefore not been timely.
HOMEfires guidance acknowledges that projects may experience unforeseen
delays; however, the participating jurisdiction should inform the HUD field office
if a project is likely not to proceed within the prescribed 12-month timeframe, or
reasonably thereafter. The Field Office will review the circumstances causing
delays and advise whether or not the project should be cancelled.
The City stated that it had extensive documentation to show that the project was
moving forward, and therefore had a reasonable expectation that construction
would commence within twelve months of commitment. However, there was no
evidence any such information or documentation was provided to HUD. The City
should have notified HUD once it became clear that the project would be delayed
beyond the prescribed 12-month timeframe, so that HUD could have advised
whether the project should have been cancelled. Instead, the project remained in
IDIS with a misleading status of “completed.”
Our report did not use different connotations for the HOME program definition of
a “commitment” and did not miscalculate the time of original funds commitment.
The City’s response stated that November 2006, the date the City recorded the
$1.3 million in IDIS as a commitment, was not the true funds commitment date.
The City also asserted that June 2008 was the actual date that funds were
committed, because it was the date that the loan agreement with the developer
was recorded. The City’s statements are incorrect. According to IDIS Reference
Manual, paragraph 9.1.4, the $1.3 million was obligated for future use when the
City recorded the funds in IDIS in November 2006. Reports from HUD’s IDIS
System confirm the November 2006 commitment date. The City’s and HUD’s
records show that June 2008 was the date the City withdrew the $1.3 million for
use. When the funds were withdrawn, all necessary agreements should have been
in place. However, contrary to the City’s assertion, the City did not have a loan
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agreement or any other valid agreement in place at that time. The loan agreement
was not finalized until February 2009, eight months later.
Comment 5 Plans and specifications alone will not satisfy the regulatory requirements stated
in 24 CFR 92.2. In addition, we disagree with the City’s statement that its
expectation that construction would begin within 12 months of the executed loan
agreement further satisfies the requirements of 24 CFR 92.2. The 12 month
timeframe for initial construction began when funds were committed in
November 2006, not when the loan agreement was executed in February 2009.
Therefore, the City should have either started project construction, or notified
HUD of project delay within the 12 month timeframe. Contrary to the City’s
assertions, our report discussed other factors that the City stated impacted the
project’s timeliness, and the auditors reviewed documents from the City’s project
file and additional documents on the project’s progress. According to
HOMEfires, Volume 3, No.5, April 2001, failure to initiate a project within the
specified 12-month timeframe does not automatically necessitate cancellation of
the project. However, our audit recommendations were not solely based on the
fact the project was delayed. The City did not comply with HOME program
regulations which clearly state that the definition of a commitment means that the
participating jurisdiction has executed a legally binding agreement with an entity
receiving HOME funds. While the City did later execute a loan agreement with
its developer, it was executed eight months after withdrawal of funds. The City’s
response states that execution of the loan agreement within eight months of
disbursement of funds to the developer to be a “reasonable period thereafter.” We
disagree, funds were not disbursed to the developer until February 2009, and 24
CFR 92.504(b) states agreements must be in place before disbursement of funds.
Comment 6 We disagree that the City adhered to 24 CFR 92.502(c)(2), which states that
HOME funds drawn from the United States Treasury account must be expended
for eligible costs within 15 days. The City initially placed the $1.3 million in
HOME funds in escrow on July 2, 2008. However, the funds were not actually
provided to the Developer until eight months later. The funds were moved from
the original escrow company and were wired to a second escrow company in
February 2009. According to public search information provided by the City, the
property was purchased in February 2009 with the $1.3 million recorded as a loan
to the developer. As the City’s response states, the funds were originally recorded
in the City’s ledgers in July 2008. However, the funds were not actually provided
to the developer, and therefore not actually spent until February 2009.
Comment 7 We reviewed all pertinent agreements related to the project, including the HOME
loan agreement that the City executed with the developer in February 2009. Our
review determined that in addition to being executed eight months after the $1.3
million in HOME funds were withdrawn, the loan agreement was incomplete, and
did not include all required HOME provisions, including a schedule for
completing project tasks and a budget. These requirements are thoroughly
26
outlined in 24 CFR 92.504(c)(3). The agreements that were on record at the time
of funds withdrawal (the ENA, OPA, and Purchase and Sales Agreement) were
deficient, for reasons earlier noted. Regardless of the Deed of Trust recorded
against other project property, based on HUD criteria, our statements regarding
the validity of the City’s agreements at the time of funds withdrawal are accurate.
In addition, we revised the criteria reference in this section of the report to
underscore that the City had no legally binding agreement meeting the program
requirements before withdrawing and disbursing funds to its developer.
Comment 8 We disagree that the “completed” status currently recorded in IDIS is an accurate
reflection of the project’s status. According to 24 CFR Part 92.2, all necessary
conditions must be met in order to consider a project completed. In addition to
necessary title transfer requirements and completion of all construction work, the
project must comply with property standards outlined in 24 CFR 92.251. The
property standards require that housing constructed or rehabilitated with HOME
funds meet all applicable local codes, rehabilitation standards, ordinances, and
zoning ordinances at the time of project completion.
The City recorded the project as completed in IDIS on August, 27, 2008.
However, this inaccurately reflects the project’s true status, as stated in our audit
finding. As the City’s response states, 24 CFR 92.502(d)(1) requires participating
jurisdictions to enter project completion data into IDIS within 120 days of making
the final draw for a project. However, this information is not yet available since
project construction has not begun. The City’s response states that it would be
misleading to leave $1.00 in the IDIS system after drawdown of funds in order to
reflect the project as “underway.” However, showing the project as completed in
IDIS implies that the project has met all the stated requirements, and is more
misleading than leaving a minimal dollar amount in the system so that the actual
project status of “underway” may be reflected. A HUD 2007 HOME Monitoring
Report found that the City disbursed HOME funds to a different project in which
the activity address, description, and current status were not properly reflected in
IDIS. The report stated that the City incorrectly reported the status of the project
as completed, when in fact the project was still under construction (underway).
The report stated the City agreed to adjust IDIS to reflect the correct status of the
project as underway. Similar to the HUD Monitoring Report, we maintain that
the City should have identified the Whittier and 6th Street project status as
“underway.”
Although the City states the project was to produce affordable units for “owner
occupied” very low- and low-income families, its loan agreement with its
developer made references to project “household purchasers” and project
affordability requirements for “new construction of rental housing.” This would
not affect the project’s status in IDIS or other issues noted in our report.
However, we adjusted our report to include criteria that is applicable to both
homebuyer and rental projects.
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Comment 9 The City’s statement that the review of the project “superseded the knowledge
and ability of the current CPD representative,” and was “referred to OIG to
provide guidance and review to the HUD Field Staff,” is incorrect. The matter
was referred by HUD to OIG after the City did not provide requested details
concerning project commitments and expenditures. To that end, our purpose was
to review the City’s HOME program, not to provide “guidance and review” to
HUD staff.
The City did not provide evidence of contact with HUD concerning the project
when requested by the auditors, and we found no such documentation in HUD’s
or the City’s files. In addition, we cannot rely on un-validated claims of “verbal
direction” from HUD. Although one HUD-CPD representative has retired, we
spoke with two other field office representatives, one who previously had
responsibility for the City’s HOME program and the current representative. Both
told our auditors they had no prior knowledge of any of the problems, issues, and
delays associated with the project.
The City stated that it responded immediately to an initial letter sent by the
Director regarding the $1.3 million in HOME funds. However, we only found
evidence of the City’s communication with HUD concerning the project after
HUD stated in a June 2009 letter that it would require repayment of project funds
if the City failed to provide adequate project details. This letter was preceded by
an April 2009 site visit in which a HUD CPD representative requested project
records, and according to the technical assistance report, the City failed to provide
the requested records. The City’s response, dated July 2009, was incomplete
because it did not provide much of the requested documentation.
The City’s Consolidated Annual Performance and Evaluation Reports (CAPERs)
only provided a broad overview of how the City used its HOME funds, and did
not provide sufficient detail to allow HUD to be aware of the factors that caused
the City’s project to be delayed. As the City’s response indicated, the CAPERs
provide a minimal amount of information on project progress.
Comment 10 Our review determined that the main reason the City’s project did not comply
with HOME program requirements was because the City did not have procedures
and controls to ensure it followed program requirements. Written procedures and
controls would have helped the City ensure the project met the commitment
requirements and was supported with a written, legally binding agreement at the
time that funds were withdrawn. Although the City stated that it has attended
numerous HUD trainings and regularly accesses the HUD-CPD website, these
actions have not been sufficient to prevent the City’s noncompliance with
program regulations. While a valuable resource, the HUD-CPD website does not
substitute for readily available, organized internal procedures that can be accessed
by all staff members working with the program as needed. Written internal
policies and procedures are a valuable tool in maintaining consistency in program
knowledge among various staff, especially when there is staff turnover.
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Comment 11 We encourage the City to continue its affordable housing program efforts.
However, the City must comply with applicable program requirements if it wishes
to participate in HUD programs. The City must also ensure that it remains in
contact with HUD representatives, to ensure that there is agreement concerning
project progress, as well as project commitments and expenditures.
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Appendix C
CRITERIA
A. 24 CFR 92.2, Definitions – “Commitment” means
1. The participating jurisdiction has executed a legally binding agreement with a State
recipient, a subrecipient or a contractor to use a specific amount of HOME funds to
produce affordable housing or provide tenant–based rental assistance; or has executed
a written agreement reserving a specific amount of funds to a community housing
development organization; or has met the requirements to commit to a specific local
project, as defined in paragraph (2), below.
2. Commit to a specific local project, which means:
i. If the project consists of rehabilitation or new construction (with or without
acquisition) the participating jurisdiction (or State recipient or subrecipient)
and project owner have executed a written legally binding agreement under
which HOME assistance will be provided to the owner for an identifiable
project under which construction can reasonably be expected to start within
twelve months of the agreement date. If the project is owned by the
participating jurisdiction or State recipient, the project has been set up in the
disbursement and information system established by HUD, and construction
can reasonably be expected to start within twelve months of the project set-up
date.
B. 24 CFR 92.2, Definitions – “Project Completion” means that all necessary title transfer
requirements and construction work have been performed; the project complies with the
requirements of this part (including the property standards under 92.251); the final drawdown
has been disbursed for the project; and the project completion information has been entered
in the disbursement and information system established by HUD. For tenant-based rental
assistance, project completion means the final drawdown has been disbursed for the project.
C. 24 CFR 92.500(d)(1)(B), HUD will reduce or recapture HOME funds in the HOME
Investment Trust Fund by the amount of any funds in the United States Treasury account that
are not committed within 24 months after the last day of the month in which HUD notifies
the participating jurisdiction of HUD’s execution of the HOME Investment Partnership
Agreement.
D. 24 CFR 92.500(d)(1)(C), Any funds in the United States Treasury account that are not
expended within five years after the last day of the month in which HUD notifies the
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participating jurisdiction of HUD’s execution of the HOME Investment Partnership
Agreement.
E. 24 CFR 92.502(c)(2), HOME funds drawn from the United States Treasury account must be
expended for eligible costs within 15 days. Any interest earned within the 15 day period may
be retained by the participating jurisdiction as HOME funds. Any funds that are drawn down
and not expended for eligible costs within 15 days of the disbursement must be returned to
HUD for deposit in the participating jurisdiction’s United States Treasury account of the
HOME Investment Trust Fund. Interest earned after 15 days belongs to the United States
and must be remitted promptly, but at least quarterly, to HUD, except that a local
participating jurisdiction may retain interest amounts up to $100 per year for administrative
expenses and States are subject to the Intergovernmental Cooperation Act (31 U.S.C. 6501 et
seq.).
F. 24 CFR 92.504(b), Before disbursing any HOME funds to any entity, the participating
jurisdiction must enter into a written agreement with that entity. Before disbursing any
HOME funds to any entity, a State recipient, subrecipient, or contractor which is
administering all or a part of the HOME program on behalf of the participating jurisdiction,
must also enter into a written agreement with that entity. The written agreement must ensure
compliance with the requirements of this part.
G. 24 CFR 92.504(c)(3)(i), The agreement between the participating jurisdiction and a for-
profit or non-profit housing owner, sponsor or developer must describe the use of the HOME
funds, including the tasks to be performed, a schedule for completing the tasks, and a budget.
These items must be in sufficient detail to provide a sound basis for the participating
jurisdiction to effectively monitor performance under the agreement.
H. IDIS Reference Manual, Chapter 9, Setting up and Completing HOME Activities,
Section 9.1.3, The term “Project” refers to the Consolidated Plan and Action Plan items
added and maintained in the system. Each HOME project is called an “Activity” in IDIS.
I. IDIS Reference Manual, Chapter 4, Setting up the Activity Common Path, Section
4.3.3, states that activities should be given a status of “underway” if funds have been drawn
down.
J. IDIS Reference Manual, Chapter 9, Setting up and Completing HOME Activities,
Section 9.4, details how to set up a HOME Rental Activity.
K. IDIS Reference Manual, Chapter 9, Setting up and Completing HOME Activities,
Section 9.6, details how to record a HOME Rental Activity as completed.
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L. IDIS Reference Manual, Chapter 9, Setting up and Completing HOME Activities,
Section 9.10, details how to set up a HOME Homebuyer Activity
M. IDIS Reference Manual, Chapter 9, Setting up and Completing HOME Activities,
Section 9.12, details how to complete a Homebuyer Activity.
N. HOMEfires, Volume 3, No.5, April 2001, Participating Jurisdictions with projects
experiencing significant delays must document their files of the causes for delays, and assess
whether there is a likelihood that the project will go forward. A PJ [participating
jurisdiction] should consider canceling a construction project nearing the end of the twelve
month period or an acquisition only project nearing the end of the six month period, if it does
not appear that construction is likely to begin or transfer to occur within the required time
frame or within a reasonable period thereafter. The PJ should also keep the Field Office
informed of its concerns.
The Field Office will review the circumstances causing project delays and advise the PJ if the
project should be canceled. Projects that have been canceled for this reason can be set-up
again when they are ready to move forward. The Field Office, however, will make a finding
if a PJ has committed HOME funds to a project when there was not a reasonable expectation
that construction would start within twelve months for new construction and rehabilitation, or
transfer take place within six months for acquisition. In such instances, the Field Office may
require cancellation of the project if it remains unlikely.
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The City of Montebello, CA, Did Not Comply With HOME Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-07-08.
Below is a raw (and likely hideous) rendition of the original report. (PDF)