oversight

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)

                                                                  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.




                                             2
                            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




                                             3
                       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.



                                                 4
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).




                                              5
                                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

                                                6
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




                                         7
             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.




                                              9
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.

                                            10
  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.




                                          11
                        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.




                                               12
                               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.



                                                13
Sufficient policies and procedures to ensure that the Whittier and 6th Street project
complied with HOME program rules and regulations.




                                 14
                                     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.




                                               15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         16
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




             23
                         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

                                             24
            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

                                            25
            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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