Issue Date
December 18, 2009
Audit Report Number
2010-NY-1005
TO: Kathleen Naymola, Director, Community Planning and Development, 2FD
FROM: Edgar Moore, Regional Inspector General for Audit, New York/New Jersey,
2AGA
SUBJECT: The City of Paterson, New Jersey, Did Not Always Administer Its Community
Development Block Grant Program in Accordance with HUD Requirements
HIGHLIGHTS
What We Audited and Why
We audited the Community Development Block Grant (CDBG) program
administered by the City of Paterson (City). We selected the City for review due
to its high risk score based on the U.S. Department of Housing and Urban
Development’s (HUD) 2007 annual risk assessment. Our audit objectives were to
determine whether the City (1) disbursed CDBG funds efficiently and effectively
in accordance with its submission to HUD and applicable rules and regulations
and (2) had a financial management system in place to adequately safeguard the
funds.
What We Found
The City did not always disburse CDBG funds efficiently and effectively in
accordance with its submission to HUD and with applicable rules and regulations.
Specifically, (1) procurement requirements were not followed regarding
demolition, housing rehabilitation, and public facility activities; and (2) funds
were disbursed for unsupported fire truck leases, and an ineligible public service
activity and planning and administration expenses. As a result, the City expended
more than $3.9 million for activities that had not been procured in compliance
with HUD’s requirements and/or were either unsupported or ineligible. Further,
budgeted funds of more than $1.2 million for these activities would be used more
efficiently and in compliance with applicable requirements if increased
management controls are implemented by the City.
In addition, the City’s financial management system did not have adequate
controls to properly safeguard funds. Specifically, the City did not (1) record and
remit program income from property sales and demolition liens, (2) properly
disburse funds to two demolition activities, (3) accurately record demolition
activities in HUD’s Integrated Disbursement and Information System (IDIS), (4)
adequately maintain drawdown documentation, and (5) remit interest income to
the U.S. Treasury. As a result, (1) $720,347 in program income was not recorded
in IDIS, (2) $370,334 was disbursed for two unsupported demolition activities, (3)
$6,262 in interest income was not remitted to the U.S. Treasury, and (4) $5,000 in
demolition liens was not recorded in the City’s accounting records. In addition,
an unexpended budgetary balance of $91,871, related to completed demolition
activities, remained available to be drawn down in IDIS.
What We Recommend
We recommend that the Director of HUD’s New Jersey Office of Community
Planning and Development instruct the City to (1) provide documentation to
support more than $3.7 million of costs related to the procurement of demolition,
housing rehabilitation, public facility, and planning and administrative activities; (2)
repay more than $641,000 of ineligible disbursements and (3) develop adequate
procurement, management, and financial controls and procedures to ensure that
planned demolition, housing rehabilitation, and public facility activities comply
with regulations and that program income, demolition liens, and interest income
are properly recorded to ensure that more than $2 million in budgeted funds is put
to better use.
For each recommendation without a management decision, please respond and
provide status reports in accordance with HUD Handbook 2000.06, REV-3.
Please furnish us copies of any correspondence or directives issued because of the
audit.
Auditee’s Response
We provided a draft report to City officials on November 23, 2009, and requested
their responses by December 15, 2009. Based on discussions with the HUD field
office we made minor revisions and provided a revised copy to the auditee on
December 8, 2009. We discussed the results of our review during the audit and at
an exit conference held on December 09, 2009. City officials were unable to
provide written comments and had requested a 90 day extension; as such, they
will provide their comments as part of the audit resolution process. City officials
agreed with several issues, but generally disagreed with the draft report findings.
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TABLE OF CONTENTS
Background and Objectives 4
Results of Audit
Finding 1: The City Did Not Always Disburse CDBG Funds Efficiently and 5
Effectively in Compliance with Applicable Rules and Regulations
Finding 2: The City Did Not Properly Safeguard Program Funds When It 15
Improperly Recorded Program Income and Disbursements
Scope and Methodology 23
Internal Controls 24
Appendixes
A. Schedule of Questioned Costs and Funds to Be Put to Better Use 26
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BACKGROUND AND OBJECTIVES
The Community Development Block Grant (CDBG) program was established by Title I of the
Housing and Community Development Act of 1974 (Public Law 93-383). The program provides
grants to state and local governments to aid in the development of viable urban communities.
Governments are to use grant funds to provide decent housing and suitable living environments and
to expand economic opportunities, principally for persons of low and moderate income. To be
eligible for funding, every CDBG-funded activity, except for program administration and planning,
must
Benefit low-and moderate-income persons,
Aid in preventing or eliminating slums or blight, or
Address a need with a particular urgency because existing conditions pose a serious
and immediate threat to the health or welfare of the community
The City of Paterson (City) is a CDBG entitlement recipient that has administered $11.8 million in
CDBG funds from program years 2004 through 2007. These funds are available to support a
variety of activities directed at improving the physical condition of neighborhoods by providing
housing or public improvements and facilities, creating employment, or improving services for low-
and/or moderate-income households.
The City is governed by an elected mayor and council, which consists of nine members. Files and
records related to the City’s CDBG program are primarily maintained at the Department of
Community Development at 125 Ellison Street in Paterson, New Jersey. Financial records, as well
as files regarding demolition activities, are located at 155 Market Street (City Hall) and 111
Broadway (Department of Community Improvement), respectively.
We audited the City’s CDBG program due to its high risk score on the U.S. Department of Housing
and Urban Development’s (HUD) 2007 annual risk assessment. Our audit objectives were to
determine whether the City (1) disbursed CDBG funds efficiently and effectively in accordance
with its submission to HUD and applicable rules and regulations and (2) had a financial
management system in place to adequately safeguard the funds.
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RESULTS OF AUDIT
Finding 1: The City Did Not Always Disburse CDBG Funds Efficiently
and Effectively in Compliance with Applicable Rules and
Regulations
The City did not always disburse CDBG funds efficiently and effectively in accordance with its
submission to HUD and applicable rules and regulations. Specifically, (1) procurement
requirements were not followed regarding demolition, housing rehabilitation, and public facility
activities; and (2) funds were disbursed for unsupported fire truck leases, and an ineligible public
service activity, and planning and administration expenses. This condition was caused by the
City not having adequate controls to ensure compliance with federal and local procurement
requirements and that activities were eligible and complied with its HUD-approved action plan.
As a result, the City disbursed more than $3.9 million for activities that had not been procured in
compliance with HUD’s requirements and/or were either unsupported or ineligible. Further,
budgeted funds of more than $1.2 million for these activities would be used more efficiently and
in compliance with applicable requirements if increased management controls are implemented
by the City.
Nonadvertised Pool Used for
Demolition Services
The City did not have adequate controls over procurement for its subgrantees and
contractors. Accordingly, it did not ensure that regulations at 24 CFR (Code of
Federal Regulations) 85.36 and local procurement regulations established by the
City were followed. Specifically, the City did not ensure that contracts were
awarded in a manner providing full and open competition. Review of the
procurement of 22 demolition contracts revealed that five were publically advertised
but the remaining 17 were selected using a nonadvertised list of contractors.
According to City officials, contractors were added to the list upon visiting the
City’s building department and later taken off the list if they did not complete a
demolition for an extended period as determined by the City. The selection of a
contractor to complete the demolition was accomplished by placing telephone calls
to a number of contractors on the list to solicit bids and then selecting the lowest
bidder. The number of contractors providing bids varied from one to five
contractors. City officials stated that contractors on the list were contacted on a
rotational basis to ensure that each had a chance to be selected to perform a
demolition service.
City officials stated that New Jersey State regulations were used to justify the cited
bidding practices with no corresponding advertisement to the public. However,
regulations at 24 CFR 85.36(d)(4)(i) and local City requirements specify that
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noncompetitive bidding is allowable when the small purchase, sealed bids, and
competitive proposals methods of procurement are deemed infeasible and that either
(1) the procurement is available only from a single source; (2) a public exigency or
emergency for the requirement will not permit a delay resulting from competitive
solicitation; (3) the awarding agency authorizes noncompetitive proposals; or (4)
after solicitation of a number of sources, competition is deemed inadequate.
However, City officials did not show that the use of a publicly advertised pool of
contractors was not feasible for use by the City when procuring demolition services.
Therefore, the City improperly used a non–publicly advertised list of contractors to
award the contracts.
In addition, 24 CFR 85.36(c)(4) mandates that grantees and subgrantees ensure that
all prequalified lists of persons, firms, or products that are used in acquiring goods
and services are current and include enough qualified sources to ensure maximum
open and free competition. However, the City did not ensure that sufficient
competition was obtained when it used a list of contractors that had not been
obtained through public advertising.
As a result of not following federal and local procurement requirements, the City
precluded free and open competition and may have expended more in CDBG funds
for demolition services than would have been necessary with the competitive
bidding process. Accordingly, the City cannot ensure HUD that it used CDBG
funds in the most efficient and economical manner for demolition services.
Consequently, we view the $403,200 disbursed for the 17 demolition activities
conducted as unsupported costs. We also consider $140,000 in CDBG funds
planned to be expended during program year 2009 for demolition services as a cost
savings if the City ceases this method of procurement and implements additional
management controls when procuring for demolition services, as it will ensure that
demolition services are efficiently procured at competitive prices and prevent the
improper obligation or expenditures of agency funds.
Inadequate Advertising for
Housing Rehabilitation Services
The City also used a list of contractors compiled by the City to perform housing
rehabilitation services as part of the Paterson Pride Program. Homeowners who
were approved to participate in the housing rehabilitation program were provided a
subset of six contractors from the list and instructed to obtain three bids. According
to documentation provided by the City, homeowners are also given the opportunity
to select their own contractors. If three bids were not obtained, community
development employees were supposed to contact more contractors on the
contractors list to obtain additional bids. City officials indicated that contractors
were contacted on a rotational basis to ensure that each contractor on the list had a
chance to be selected to perform housing rehabilitation services.
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Unlike the lack of public advertisement for demolition services, the City attempted
to publicly advertise for housing rehabilitation services; however, the advertisement
used by the City did not meet the requirement of free and open competition as
required by federal and local regulations. The advertisement conducted by the City
consisted of placing a text message on the City’s local public access television
station for a period of six months. The text messages aired on the City’s local
television channel during calendar years 2000, 2005, and 2007 for six months each
year.
Federal regulations at 24 CFR 85.36(c)(1) and local City regulations state that a
procurement system has to ensure that all transactions are conducted in a manner
that provides for maximum open and free competition consistent with reasonable
and prudent practices. The City did not meet these requirements since the
advertisement was limited to contractors based in Paterson and was aired on local
public access television just three times in nine years. As a result, more than $1.9
million in CDBG funds expended for housing rehabilitation services is considered
unsupported. We also consider $340,000 in CDBG funds to be expended during
program year 2009 for housing rehabilitation services as a cost savings if the City
ceases this method of procurement and implements additional management controls
when procuring housing rehabilitation services, as it will ensure free and open
competition at competitive prices and prevent the improper obligation or
expenditures of agency funds..
Noncompliance with
Procurement Requirement for
Public Facility and
Demolition/Cleanup Activities
Other instances of noncompliance with federal and local procurement regulations
regarding public facility and demolition/cleanup activities involved similar
deficiencies with regard to maintaining supporting documentation to justify the
procurement.
A public facility activity (HUD’s Integrated Disbursement and Information
System (IDIS) activity #1630) received $150,000 in funding for a third floor
renovation. This public facility was dedicated to providing social services for
women and children and offering educational opportunities to help women
compete in today’s marketplace. The City selected a contractor for the renovation
service after soliciting public bids in a local newspaper with only one bid being
received from a contractor that was already on site providing other contracting
services. Federal regulations at 24 CFR 85.36 and City policies provide that
procurement transactions are to be conducted in a manner that provides full and
open competition and that for sealed bidding to be feasible, two or more
responsible bidders have to be willing and able to compete effectively for the
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business. In addition, the invitation for bid must be publicly advertised and shall
be solicited from an adequate number of known suppliers, providing them
sufficient time before the date set for opening the bids. The file, however,
contained no evidence that two bids were received and that known contractors
were solicited to provide free and open competition as required by federal and
local regulations. Therefore, the $150,000 public facility cost for the third floor
renovation services is considered unsupported.
A second public facility activity (IDIS activity #1504) received funding of
$250,000 for a renovation addition for a family life center. Programs conducted
in the addition of the facility included adult medical day care, early preschool
care, family preservation services, and other counseling and training services.
However, documentation for preparing the bids, taking and analyzing the bids,
and preparation of the construction contracts was not adequately supported. In a
September 2006 monitoring review conducted by the City along with
correspondence issued in August 2007, the City attempted to obtain supporting
documentation for the renovation project. However, a review of the activity’s file
and related inquiries with City staff revealed that the required supporting
documentation regarding the activity’s procurement was never received from the
subgrantee. Accordingly, as a result of obtaining no supporting documentation to
justify the activity’s procurement, according to 24 CFR 85.36(b)(9) and local
procurement regulations, and due to the City’s failure to adequately follow up on
its attempt to obtain the required supporting documentation from the subgrantee,
the $250,000 public facility cost of the renovation addition is considered
unsupported.
Another public facility activity (IDIS activities #1410 and #1485) involving the
renovation of a pedestrian bridge was provided $345,840 in CDBG funds.
However, as of the date of our pre exit conference, documentation had not been
provided to support the activity’s procurement compliance with 24 CFR
85.36(b)(9). As a result, the $345,840 public facility cost to compete the
renovation of a pedestrian bridge is an unsupported cost.
Further, another activity (IDIS activities #1486 and #1496) involved the
demolition and cleanup of an abandoned factory owned by the City. The cost for
cleanup and demolition services drawn from CDBG funding amounted to
$312,659 and was awarded to a firm without competitive bidding. The City’s
awarding resolution attempted to justify not to competitively bid this procurement
by mentioning that the services rendered were “extraordinary and unspecifiable”
in keeping with state regulations. However, the documents in the file did not
contain justification that competition was deemed inadequate and that the small
purchase, sealed bids, or competitive proposal methods of conducting
procurements were not feasible as required by federal and local regulations.
Therefore, the method of procuring this activity is also questioned (see also
finding 2 for this activity).
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Compliance with federal and local procurement regulations is a necessity in that the
City may have expended more CDBG funds for public facility services than needed
since competitive bidding was not performed. In addition, federal regulations at 24
CFR 85.36 (b)(9) require that grantees and subgrantees maintain records sufficient to
detail the significant history of a procurement. These records will include but are
not necessarily limited to the following: rationale for the method of procurement,
selection of contract type, contractor selection or rejection, and the basis for the
contract price. By applying these required procedures, the City will ensure that
$790,000 in budgeted public facility funds for next year will be used more
efficiently, as it will prevent their improper obligation and/or expenditure.
CDBG Funds Disbursed for
Three Ineligible Fire Truck
Leases
Contrary to HUD requirements, the City charged $263,141, representing the first
annual payment for the lease of three ladder fire trucks to the CDBG program.
Federal regulations at 24 CFR 570.207(b)(1) state that the purchase of equipment
with CDBG funds is generally ineligible. An exception is for the purchase of fire
equipment, which can be an integral part of a public facility. However
regulations do not allow for a lease of fire equipment unless requirements of
24CFR Part 85(b)(4) are achieved and documented. These requirements state that
an analysis must be made concerning lease versus purchase alternatives to
determine the most economical approach. In January 2006, the City prepared a
lease versus purchase analysis in order to determine whether leasing the trucks
were more economical. This analysis, however, based its conclusions on a five
year lease instead of the actual lease term of nine years as applied by the City. In
addition, the analysis stated that maintenance costs were included as part of the
monthly lease payments. The leases, however, stated that the City is responsible
for maintenance costs. As a result, City officials could not adequately
demonstrate that leasing the fire trucks were more economical that purchasing
them. Therefore, we view $263,141 representing the first annual payment for the
lease of three aerial ladder fire trucks as an unsupported cost.
A review of the City’s program year 2005 action plan for public facility and
improvements disclosed that the City funded $100,000 for one new fire safety
equipment purchase (IDIS activity #1443). The program year 2005 consolidated
annual performance evaluation report stated that funding for this purchase was
amended to $325,000.
During the months of March and June 2006, the City drew down a cumulative
amount of $263,141 from its CDBG line of credit to pay for the first-year costs of
three fire truck leases. See details below for the leases of the three fire trucks.
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A B C
Truck make 9-year lease Annual lease
model type cost payment
E-One
HP100 Aerial $623,907 $69,323
E-One Mid
Mount Aerial $878,640 $97,626
E-One HP
100 Tiller $865,729 $96,192
Total $2, 368, 276 $263,141
Further review of the City’s consolidated annual performance evaluation report
for program year 2006 revealed that the funding for the fire station equipment
amounting to $261,000 was removed and shifted to contingencies, as a result of
discussions with representatives from HUD’s Newark Office of Community
Planning and Development. Nevertheless, the City charged the cost of the first
year of the three leases to the CDBG program from the amount funded in the
City’s HUD-approved 2005 action plan.
Inadequate Monitoring for a
Public Service Activity
The City disbursed CDBG funds totaling $286,600 from program years 2004
through 2007 to pay for employees’ salaries and other operating expenses
associated with the Great Falls Historic District Cultural Center (IDIS activities
#1323, #1391, #1423, #1525, #1584, and #1612). This activity’s national
objective was designated to provide a benefit to low- and moderate-income
persons. Further, the activity’s service to low- and moderate-income persons was
determined to be based upon an area benefit in program year 2004. For program
years 2005 through 2007, the City stated that the activity’s benefit to low- and
moderate-income persons was determined to be based upon a limited clientele;
i.e., Paterson school children.
According to 24 CFR 570.208(a), activities will be considered to benefit low- and
moderate-income persons unless there is substantial evidence to the contrary. In
addition, 24 CFR 570.208(a)(2)(i)(D) and 24 CFR 570.506(b)(3)(ii) state that an
activity needs to demonstrate that its clientele will primarily be benefiting low-
and moderate-income persons. Lastly, 24 CFR 570.208(a)(2)(i) states that an
activity may not qualify as a limited clientele activity if the benefits are available
to all residents of an area. Documents in the activity’s file and inquiries of City
and visitor center staff revealed that a majority of visitors were not Paterson
school children or residents of Paterson. Specifically, a majority of visitors were
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either from other cities in New Jersey or from other states and foreign countries.
See the following table for details.
(A) (B) (C) (D) (E)
Percentage
Total of non-
Non- number of Paterson
Program Paterson Paterson visitors visitors
year visitors visitors (A+B) (C/D)
2004 1373 6205 7578 82%
2005 1526 2604 4130 63%
2006 4587 3162 4587 69%
2007 1702 6036 7738 78%
These deficiencies were due to inadequate monitoring by the community
development staff.
As a result, since the center’s visitors were predominately from outside Paterson,
the $249,282 disbursed from CDBG funds to pay for the visitor center’s salaries,
as well as $37,318 for other operating expenses erroneously charged to general
administration and planning, are considered to be ineligible costs. Therefore, a
total of $286,600 should be repaid to the CDBG program’s line of credit from
nonfederal funds.
Ineligible Planning and
Administration Expenses
Charged
During program years 2004 through 2007, salaries of three employees who
neither performed tasks nor assumed responsibilities related to the CDBG
program were charged as CDBG administration and planning costs. The total
payroll costs charged to administration and planning amounted to $281,444 for
the three employees. The three employees were community development
specialists and were responsible for organizing various events for the City. These
events included an Easter egg hunt; the Paterson-Great Falls Festival and Holiday
Parade; a Black History Month flag-raising ceremony; Bangladesh Mother’s
Language Day; and various events for cancer, Fourth of July, and Patriot’s Day.
The City also disbursed $12,052 in CDBG funds to pay for operating expenses
associated with these special event activities. City officials stated that they were
not aware that these administrative costs were an ineligible use of CDBG
administration funds until the City’s CDBG consultant instructed them.
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Federal regulations at 24 CFR 570.207(a)(2) state that except as otherwise
specifically authorized in subpart 570.207 or under Office of Management and
Budget (OMB) Circular A–87, expenses required to carry out regular
responsibilities of a unit of general local government are not eligible for
assistance. Thus, salary and operating expenses for special events are an
ineligible cost because they are general local government expenses. Therefore,
the total cost of $293,496 was ineligible and should be reimbursed from
nonfederal funds to the City’s CDBG program line of credit.
In addition, during program years 2004 and 2006, CDBG funds were used to pay
$60,710 for administrative salaries pertaining to other programs such as the Section
8 and economic development programs. The administrative salaries were related to
four employees who assumed responsibilities and performed duties related to the
CDBG program and other programs in program years 2004 and 2006. Regulations
at 24 CFR 570.200(a)(5) state that costs incurred must be in conformance with OMB
Circular A-87. OMB Circular A-87 states that cost principles provide that federal
awards bear their fair share of costs and that a cost allocation plan is required when
there is an accumulation of indirect costs that will ultimately result in charges to a
federal award.
These deficiencies resulted from the City’s not using a cost allocation plan. As a
result, the City should reimburse $60,710 to the CDBG program from nonfederal
funds for payroll costs that should not have been paid from the CDBG program.
During the conclusion of our fieldwork, we discovered a fifth employee who was
functioning as a brownfields coordinator while performing duties as a CDBG
program monitor. Additionally, this employee’s salary was allocated entirely to
the CDBG program. Consequently, we recommend that the City conduct an
annual cost allocation analysis for all applicable years for the brownfields
coordinator who performed duties for other programs in addition the CDBG
program. The costs determined to be chargeable to other programs should be
reimbursed to the CDBG program’s line of credit from nonfederal funds.
Conclusion
The City did not follow federal and local procurement regulations to ensure that
CDBG funds expended are not more than needed according to the competitive
bidding process. In addition, the City did not have adequate management controls
to ensure that costs associated with its public facility, public service, and
administration and planning activities were supported and/or eligible. This
problem was caused by the City’s not establishing adequate controls to ensure
compliance with federal and local procurement requirements and that activities
were eligible and in compliance with its HUD-approved action plan. As a result,
the City disbursed more than $3.9 million for activities that had not been procured
in compliance with HUD’s requirements and/or were either unsupported or
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ineligible. Lastly, budgeted funds of more than $1.2 million for these activities
would be used more efficiently and in compliance with applicable requirements if
increased management controls are implemented by the City to ensure
competitive procurements.
Recommendations
We recommend that the Director of HUD’s New Jersey Office of Community
Planning and Development instruct the City to
1A. Provide supporting documentation regarding the procurements of $403,200 of
demolition services so that HUD can determine whether the procurements
were in compliance with HUD’s requirements. Any procurements that did not
comply with the procurement standards at 24 CFR 85.36 should be repaid to
the CDBG program line of credit from non-federal funds.
1B. Provide supporting documentation regarding the procurements of $1,924,627
of housing rehabilitation services so that HUD can determine whether the
procurements were in compliance with HUD’s requirements. Any
procurements that did not comply with the procurement standards at 24 CFR
85.36 should be repaid to the CDBG program line of credit from non-federal
funds.
1C. Obtain adequate supporting documentation for three public facility
procurement activities totaling $745,840 to jusify the rationale for the method
of procurement, selection of contract type, contractor selection or rejection,
and basis for the contract price or repay the amount determined to be
ineligible from nonfederal funds.
1D. Develop and implement increased management control procedures to comply
with federal and local procurement regulations for demolition services,
housing rehabilitation services and public facility activities. These procedures
would ensure that $1,270,000 in CDBG funds to be expended during program
year 2009 for demolition services, housing rehabilitation services and public
facility activities would be used more efficiently and in compliance with
federal and local requirements.
1E. Obtain adequate supporting documentation for the procurement of the
demolition and clean-up of an abandoned factory, owned by the City (IDIS
activities #1486 and #1496) to jusify the rationale for the method of
procurement, selection of contract type, contractor selection or rejection,
and basis for the contract price.
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1F. Develop and implement management control procedures to ensure compliance
with the City’s HUD-approved action plans when conducting monitoring
reviews and disbursing CDBG funds.
1G. Obtain adequate supporting documentation for the first year lease payment for
three fire trucks totaling $263,141 to jusify the rationale for leasing the trucks
rather than purchasing them. Any amount determined to be ineligible
should be repaid to the CDBG program line of credit from nonfederal funds.
1H. Reimburse $286,600 to the CDBG program’s line of credit from nonfederal
funds for the ineligible costs related to salaries and operating expenses of the
Great Falls Historic District Cultural Center.
1I. Reimburse $293,496 from nonfederal funds to the CDBG program’s line of
credit for ineligible planning and administration costs charged to the CDBG
program.
1J. Develop and implement a cost allocation plan to ensure that costs are correctly
allocated and that the CDBG program does not pay more than its fair share of
salary costs.
1K. Reimburse $60,710 from nonfederal funds to the CDBG program’s line of
credit for ineligible salary costs allocated to the CDBG program.
1L. Conduct an annual cost allocation analysis for program years 2004 through
2009 related to the brownfields coordinator who performed duties in addition
to those for the CDBG program. Specifically, the City should determine the
cost allocation percentage and apply the percentage to the program monitor’s
annual salary and reimburse the CDBG program’s line of credit from
nonfederal funds for any amounts determined to be ineligible, or not chargable
to the CDBG program.
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Finding 2: The City Did Not Properly Safeguard Program Funds When
It Improperly Recorded Program Income and Disbursements
The City’s financial management system did not have adequate controls to properly safeguard
funds. As a result, the City did not (1) record and remit program income from property sales and
demolition liens, (2) provide documentation to support disbursements for two demolition
activities, (3) accurately record demolition activities in IDIS, (4) adequately maintain drawdown
documentation, and (5) remit interest income to the U.S. Treasury. We attribute these conditions
to the City’s inadequate internal and financial controls. As a result, (1) $720,347 in program
income was not recorded in IDIS, (2) $5,000 in demolition liens was not recorded in the
accounting records, (3) $370,334 was disbursed for two unsupported demolition activities, and
(4) $6,262 in interest income was not remitted to the U.S. Treasury. Further, an unexpended
budgetary balance of $91,871 in IDIS, related to completed demolition activities, remained
available to be drawn down.
Program Income Not Recorded
and Remitted from the Sale of
Properties Owned by the City
The City did not record and remit the proper amount of program income to the
CDBG program for two properties that were owned and controlled by the City when
demolition services were accomplished. These demolitions included the removal of
abandoned factories for which some of the costs were paid with CDBG funds. After
the demolitions were completed, both properties were sold, and no additional CDBG
activities were created in IDIS to ensure that any future development of the
properties would be eligible and meet a national objective under CDBG regulations.
In addition, no documentation was provided to support that (1) the sale of the two
properties was mentioned in the City’s action plans and consolidated annual
performance and evaluation reports as of the City’s program year 2007, and that (2)
affected citizens were provided reasonable notice and opportunity by the City to
comment on the City’s plan to sell the properties. As a result, the City should remit
the applicable portion of the sales proceeds to the CDBG program because the
properties had been improved with CDBG funds and had been sold without meeting
program requirements.
The first demolition activity reviewed (IDIS activities #1486 and #1496) occurred at
a 15-35 East 26th Street and 177-203 3rd Avenue site and required more than $1.1
million in total funds to complete the demolition, of which $312,659 (28.1 percent)
was drawn from CDBG funds. During June 2007, the property, along with two
other properties, was sold to a limited liability corporation for $2.3 million. Based
upon the percentage of the site’s assessed value when compared to the other two
properties sold, the sales proceeds were adjusted to around $1.65 million. Therefore,
program income in the amount of $463,825 (28.1% x $1,650,622) was generated
15
from the sale but was not recorded and remitted to the CDBG program as required
by federal regulations.
The second demolition activity reviewed (IDIS activities #1262, #1429, and #1433)
occurred at 95-113 Cliff Street and required $562,669 in total funds to complete the
demolition, of which $57,675 (10.25 percent) was drawn from CDBG funds.
During 2007, the property was sold to the Housing Authority of the City of Paterson
for $2.1 million. Therefore, program income in the amount of $215,250 (10.25% x
$2.1 million) was generated but was not remitted to the CDBG program as required
by federal regulations.
For real property within the recipient’s control that was improved in whole or in part
using CDBG funds in excess of $25,000, federal regulations at 24 CFR 570.505
apply. In addition, 24 CFR 570.505(a) states that a recipient may not change the use
or planned use of any such property from that for which the improvement was made
unless the recipient provides affected citizens with reasonable notice of and
opportunity to comment on any proposed change. Further, the new use of such
property must meet one of the national objectives. Since there was no
documentation supporting that the disposition of the two properties was made
available for public comment after they were improved with CDBG funds and since
the future use of the properties was uncertain as far as meeting a national objective
according to CDBG regulations, program income amounting to $679,075 should be
remitted to the CDBG program. These funds, when properly remitted to the CDBG
program, would permit other eligible CDBG activities to be accomplished and
funded without drawing additional funds from the City’s CDBG line of credit.
CDBG Funds Not Properly
Disbursed for Two Demolition
Activities
The City did not provide supporting documentation in the activity’s file that
suggested that (1) the disposition of the two properties above was approved
according to the City’s action plans and consolidated annual performance and
evaluation reports, and that (2) the affected citizens were provided reasonable
notice and opportunity by the City to comment on the property’s dispositions.
Regulations at 24 CFR Part 85.20(b)(3), provides that effective control and
accountability must be maintained for all real property and other assets. Further,
grantees and subgrantees must adequately safeguard all such property and must
ensure that it is used solely for authorized purposes. As a result, since adequate
documentation was not provided to support the use of CDBG funds in the
demolition of these properties, the $370,334 expended is considered unsupported.
16
Program Income from
Demolition Liens Not Recorded
and Remitted to the CDBG
Program
Twenty-one demolitions were completed and paid for with CDBG funds during
program years 2004 through 2007 for properties that were not owned or
controlled by the City when the demolitions were completed. New Jersey
Statutes Annotated 40:48-2.5 provides that a municipal lien for the cost of the
demolition shall be filed against the real property for which the costs were
incurred. As such, these liens would represent program income to the City.
However, of the 21 properties, 10 properties were later sold, and the correct
amount of program income was not computed and remitted to the CDBG
program. Specifically, for 1 of the 10 property liens amounting to $28,280, the
City cancelled the lien as a result of a lawsuit by the owner of the property against
the City, with no corresponding program income and interest being remitted to the
CDBG program. Although the lien was canceled, CDBG funds were used for the
demolition on this property, as such, these funds should be reimbursed to the
CDBG programs line of credit. Of the remaining nine demolition liens, five liens
were sold with $12,992 in computed interest not being remitted to the CDBG
program, and four liens were sold with no interest being computed and remitted to
the CDBG program. Therefore, $41,272 ($28,280 + $12,992) in program income
should be recorded in IDIS for the cancellation of one lien and the sale of five
liens. In addition, interest should be computed for the four remaining sold liens,
and the interest should be remitted to CDBG program’s line of credit.
Of the remaining 11 of 21 liens reviewed that were not sold, three liens were
understated by a cumulative amount of $5,000 when compared to actual
demolition costs of the corresponding activities. Federal regulations at 24 CFR
85.20(b) (3) provide that effective control and accountability must be maintained
for all grant and subgrant cash, real and personal property, and other assets.
Grantees and subgrantees must adequately safeguard all such property and must
assure that it is used solely for authorized purposes. As such, if the City records
the correct amount of these liens in its accounting records, the $5,000 should be
considered as a cost savings measure since this will ensure that the City collects
the proper amount of program income and will prevent unnecessary drawdowns
in the future. In addition, the recording of these liens will ensure that funds owed
to the City are properly accounted for.
Thirty-two additional liens for CDBG-funded demolitions were paid off during
program years 2004 through 2007. These liens had corresponding demolition
activities that were completed before program year 2004. The amount of these
additional liens paid off totaled $286,890, and this amount was credited to the
CDBG line of credit. However, interest was not remitted to the CDBG program
between the time of the liens’ recordings and the sale of the properties. As a
17
result, program income resulting from the interest on the liens was not remitted to
the City’s CDBG line of credit. Therefore, the City needs to compute the amount
of interest on the liens for CDBG-funded activities that have been sold and remit
the amount of computed interest as program income to the CDBG program’s line
of credit.
Federal regulations at 24 CFR 570.501 state that the recipient is responsible for
ensuring that CDBG funds are used in accordance with all program requirements.
Also section 570.500(a) adds that program income is defined as gross income
received by the recipient or a subrecipient directly generated from the use of
CDBG funds. Lastly section 570.504(a) states that the receipt and expenditure of
program income shall be recorded as part of the financial transactions of the grant
program. By not correctly recording the liens for the demolitions that had been
paid with CDBG funds and remitting the amount due to the CDBG program’s line
of credit, the City did not properly safeguard funds due the program. Properly
recording the correct amount of income from demolition liens and remitting the
program income to the CDBG program upon their sale ensures that other eligible
CDBG activities can be funded without drawing additional funds from the CDBG
program’s line of credit.
Demolition Information in IDIS
Not Accurate
Review of information recorded in IDIS for demolition activities revealed that the
information was not always accurate. In a number of instances, financial
information entered into IDIS did not match actual disbursement records for
demolition activities. The following are examples of the types of deficiencies noted:
- Two demolition activities that were paid with CDBG funds were not
recorded in IDIS (99 North Main Street, 108 North 2nd Street).
- IDIS activity #1481 stated that the status of two properties was
“underway” (207 and 211/213 Governor Street). IDIS showed that the
activity received $95,500 in funding, of which $70,220 had been
disbursed and a budgetary balance of $25,280 remained. However, the
disbursement amount for these demolition activities was $32,400, with
both demolition activities having been completed.
- IDIS activity #1629 listed $14,900 as disbursed for 65-67 Market Street
when actual disbursement records listed a total demolition cost of
$88,580.
- The demolition costs recorded in IDIS was $62,095 for the property at
95-113 Cliff Street (IDIS activities #1262, #1429, and #143). However,
18
this amount was overstated by $4,420. The actual disbursement cost
charged to the CDBG program for this demolition was $57,675.
- Actual disbursement costs of $40,760 for the property at 415 Main Street
were entered into IDIS as $66,893 disbursed, $133,484 funded, and a
budgetary balance of $66,591 under IDIS activity #1617. However, the
demolition activity for 415 Main Street had been completed.
These deficiencies occurred because to the City did not have adequate financial
controls in place to ensure the accuracy of recording budgetary and disbursement
information regarding demolition activities in IDIS. As a result, $91,871 in
unexpended budgetary balances in IDIS remained available to be drawn down for
demolition activities that have already been completed. According to regulations at
24 CFR 85.20(b)(1), accurate, current, and complete disclosure of the financial
results of financially assisted activities must be in accordance with the financial
reporting requirements of the grant. In addition, grantees must maintain records that
adequately identify the source and application of funds provided for assisted
activities. Therefore, if the City reconciles and reviews all demolition activity from
program year 2004 to the present to ensure that demolition activity entered in IDIS
accurately matches actual disbursement information, the $91,871 in unused funds
would represent funds that could be put to better use. This measure will ensure that
$91,871 in unexpended funds budgeted for demolition activities already completed
is available to be applied to other eligible activities.
Inadequate Supporting
Documentation for Monthly
Drawdowns
Review of the City’s monthly drawdown and receipt folders maintained by the
Community Development Department disclosed instances in which supporting
documentation was not present in the file. Monthly drawdown and receipt folders
included a monthly transaction report of all disbursement and receipt transactions
initiated by the City for the current month concerning the CDBG program. Upon
receipt of the monthly transaction report, the Community Development
Department entered transactions into IDIS, which initiated monthly drawdowns
with offsetting receipts to the City’s CDBG program line of credit. The City was
then reimbursed from the Community Development Department’s CDBG bank
account for costs paid in advance for CDBG-related activities.
Supporting documentation for program income receipts and disbursements
recorded in IDIS related to demolition activities was not present in the monthly
drawdown and receipt folders. In addition, the monthly drawdown folders did not
contain monthly itemized listings of program income receipts recorded by the
City. Therefore, City officials in the Community Development Department
recorded receipts of program income in IDIS without disclosing the source of the
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receipts by activity. When four cumulative program receipts, totaling $244,304,
could not be verified, City officials used staff from the Division of Accounts and
Controls, as well as the Community Development Department, to obtain the
supporting documentation that was not located in the monthly drawdown and
receipt folders. City officials agreed that monthly drawdown and receipt folders
needed to contain supporting documentation for all receipts and disbursements
before financial information was entered into IDIS by Community Development
Department staff.
Federal regulations at 24 CFR 85.20(b)(3) state that effective control and
accountability must be obtained for all cash, real and personal property, and other
assets. Grantees must adequately safeguard all such property and must ensure
that it is used solely for authorized purposes. In addition, accounting records
must be supported by source documentation. Implementing adequate
management controls ensures accountability for the grantee and places the grantee
in a more favorable position to properly evaluate the efficiency and effectiveness
of its CDBG program. Accordingly, the Community Development Department
needs to maintain supporting documents as per 24 CFR 85.20(b)(6) for all
receipts and disbursements for the CDBG program when entering data into IDIS.
Bank Interest Not Remitted to
the Treasury
In addition to the above, City officials did not remit bank interest earned from the
City’s interest-bearing account for the CDBG program during program years 2004
through 2007. The total amount of interest attributed to the CDBG program
amounted to $6,262. This deficiency was due to the City’s inadequate
management controls. Regulations at 24 CFR 570.500(a) (2) prescribes that the
interest earned on grant advances must be remitted to HUD for transmittal to the
U.S. Treasury.
Conclusion
The City’s financial management system did not have adequate controls to properly
safeguard funds. These conditions are attributable to the City’s inadequate internal
and financial controls. As a result, (1) $720,347 in program income was not
recorded in IDIS, (2) $5,000 in demolition liens was not recorded in the City’s
accounting records, (3) $370,334 was disbursed for two unsupported demolition
activities, and (4) $6,262 in interest income was not remitted to the U.S. Treasury.
Further, an unexpended budgetary balance in IDIS of $91,871, related to completed
demolition activities, remained available to be drawn down.
20
Recommendations
We recommend that the Director of HUD’s New Jersey Office of Community
Planning and Development instruct the City to
2A. Develop and impelement management control procedures that will ensure the
proper recording of program income earned from the sale of properties and
demolition activities in the City’s CDBG account.
2B. Record program income of $679,075 in the CDBG program’s line of credit
for the sale of two City-owned properties ($463,825 for IDIS activities #1486
and #1496 and $215,250 for IDIS activities #1262, #1429, and #1433),
which received demolition services that had been paid with CDBG funds.
This measure will result in additional funds being available to pay for eligible
CDBG activities.
2C. Provide supporting documentation for the use of $370,334 in CDBG funds for
the demoliton of two properties so that HUD can determine whether (1) the
sale of the two properties was mentioned in the City’s action plans and
consolidated annual performance and evaluation reports, and that 2) affected
citizens were provided reasonable notice and opportunity by the City to
comment on the property’s dispositions or any other proposed change. Any
disbursements that did not comply with regulations at 24 CFR 85.20(b)(3)
should be repaid to the CDBG program line of credit from non-federal funds.
2D. Record program income of $41,272 in the CDBG program’s line of credit
related to the cancellation of one lien and from interest not being computed
and recorded from the sale of five demolition liens. In addition, the City
should compute the amount of lien interest for the sale of four additional
demolition liens and record the amount in the CDBG program’s line of credit.
2E. Record $5,000 for three demolition liens that were understated. This measure
would ensure that the proper amount will be collected from the sale of these
demolition liens in the future and would result in additional program income.
2F. Record the amount of lien interest on the 32 properties that were demolished
before program year 2004 and remit the computed amount of interest to the
CDBG program’s line of credit.
2G. Develop and implement financial controls to ensure that disbursement
information related to demolition activities is accurately recorded in IDIS. In
addition, procedures should ensure that receipts of program income are
recorded in IDIS by activity number to disclose the source and application of
the receipts.
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2H. Conduct a review of all demolition activity from program year 2004 to the
present to ensure that demolition activity entered in IDIS accurately matches
actual disbursement information. This measure will ensure that $91,871 in
unexpended funds budgeted for demolition activities are available to be
applied to other eligible activities.
2I. Maintain supporting documentation for all receipts and disbursements of
program income by activity in the monthly drawdown and receipt folders.
2J. Remit $6,262 in bank interest generated in program years 2004 through 2007
to the U.S. Treasury as required. Also, calculate and remit any bank interest
generated from programs year’s 2008 to the present.
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SCOPE AND METHODOLOGY
The audit focused on determining whether the City complied with HUD regulations while
administering its CDBG program. To accomplish our objectives, we
Reviewed applicable federal, state, and local regulations.
Conducted inquiries with HUD staff located at HUD’s Newark Office of Community
Planning and Development and reviewed monitoring reports, actions plans, consolidated
annual performance and evaluation reports, and general correspondence files.
Conducted inquiries with City staff located within its Community Development
Department, Community Improvement Department, and the Division of Accounts and
Controls to obtain an understanding of the City’s administration of the CDBG program.
Reviewed the City’s independent audit reports, Community Development Department
monitoring reports, and subrecipient agreements.
Reviewed and tested CDBG activities for eligibilty and whether activity files contained
adequate supporting documentation as required by HUD regulations.
Disbursement records reflected that more than $11.8 million in CDBG funds was disbursed
between July 1, 2004, and June 30, 2008. Activities selected for review included those for
public service, public facilities, and demolition and cleanup. We also reviewed funds disbursed
for general administration and planning expenses. We reviewed 100 percent of the demolition
and cleanup activities paid for with CDBG funds during the audit period, which consisted of 23
activities. We also selected one of seven public service activities that received funding in
program year 2007 and four of five public facility activities with disbursed funds in excess of
$50,000.
The review covered the period July 1, 2004, through June 30, 2008, and was extended as
necessary. We performed audit work from December 2008 through July 2009 at the City’s
Community Development Department’s offices in Paterson, New Jersey.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.
23
INTERNAL CONTROLS
Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following controls are achieved:
Program operations,
Relevance and reliability of information,
Compliance with applicable laws and regulations, and
Safeguarding of assets and resources.
Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. They include the processes and procedures for planning,
organizing, directing, and controlling program operations, as well as the systems for measuring,
reporting, and monitoring program performance.
Relevant Internal Controls
We determined that the following internal controls were relevant to our audit
objectives:
Program operations – Policies and procedures that management has
implemented to reasonably ensure that a program meets its objectives.
Validity and reliability of data – Policies and procedures that management has
implemented to reasonably ensure that valid and reliable data are obtained,
maintained, and fairly disclosed in reports.
Compliance with laws and regulations – Policies and procedures that
management has implemented to reasonably ensure that resource use is
consistent with laws and regulations.
Safeguarding of resources – Policies and procedures that management has
implemented to reasonably ensure that resources are safeguarded against
waste, loss, and misuse.
We assessed the relevant controls identified above.
A significant weakness exists if management controls do not provide reasonable
assurance that the process for planning, organizing, directing, and controlling
program operations will meet the organization’s objectives.
24
Significant Weaknesses
Based on our review, we believe that the following items are significant weaknesses:
The City did not ensure compliance with laws and regulations regarding
procurement for demolition, housing rehabilitation, and public facility activities.
Also, the City did not always have adequate controls over program operations to
ensure that funds were only disbursed for eligible activities (see finding 1).
The City did not always adequately safeguard resources. Specifically, it did not
accurately record program income receipts and disbursement information in
IDIS related to demolition services (see finding 2).
25
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Funds to be put to
number Ineligible 1/ Unsupported 2/ better use 3/
1A $403,200
1B 1,924,627
1C 745,840
1D $1,270,000
1G 263,141
1H $286,600
1I 293,496
1K 60,710
2B 679,075
2C 370,334
2D 41,272
2E 5,000
2H 91,871
2J 6,262
Total $640,806 $3,707,142 $2,093,480
1/ Ineligible 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.
2/ Unsupported costs are those costs charged to a HUD-financed or insured program or activity
when we cannot determine eligibility at the time of the audit. Unsupported costs require a
decision by HUD officials. This decision, in addition to obtaining supporting documentation,
might involve a legal interpretation or clarification of departmental policies and procedures.
3/ Recommendations that funds be put to better use are estimates of amounts that could be used
more efficiently if an Office of Inspector General (OIG) recommendation is implemented. These
amounts include reductions in outlays, deobligation of funds, withdrawal of interest, costs not
incurred by implementing recommended improvements, avoidance of unnecessary expenditures
noted in preaward reviews, and any other savings that are specifically identified. If the City
implements our recommendations and develops adequate procurement, management, and
financial controls and procedures to ensure that planned demolition, housing rehabilitation, and
public facility activities are in compliance with regulations and that program income, demolition
liens, and interest income are properly recorded, it will ensure that more than $2 million in
budgeted funds is put to better use.
26
The City of Paterson, New Jersey, Did Not Always Administer Its Community Development Block Grant Program in Accordance with HUD Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-12-18.
Below is a raw (and likely hideous) rendition of the original report. (PDF)