oversight

The City of Jersey City, NJ, Needs to Strengthen Its Controls To Ensure That It Will Be Able To Effectively Administer CDBG-R Funds

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

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

                                                                 Issue Date
                                                                 February 2, 2010

                                                                 Audit Report Number
                                                                 2010-NY-1007




TO:         Kathleen Naymola, Director, Community Planning and Development, 2FD

            //SIGNED//
FROM:       Edgar Moore, Regional Inspector General for Audit, New York/New Jersey,
                                                2AGA


SUBJECT: The City of Jersey City, NJ, Needs To Strengthen Its Controls To Ensure That It
         Will Be Able To Effectively Administer CDBG-R Funds


                                 HIGHLIGHTS

 What We Audited and Why

              We selected the City of Jersey City (City) for audit because it received
              $1.7 million in Community Development Block Grant (CDBG) funding
              provided under the American Recovery and Reinvestment Act of 2009
              (Recovery Act), and based on a fiscal year 2008 risk analysis conducted
              by the U.S. Department of Housing and Urban Development’s (HUD)
              New Jersey Office of Community Planning and Development.

              Our objectives were to evaluate the City’s capacity in the areas of internal
              controls, eligibility, financial controls, procurement, and output/outcomes
              in administering CDBG funds.

 What We Found


              The City generally had adequate financial controls and staff capacity to
              administer its CDBG funds; however, it needs to strengthen its controls to
              ensure that it will be able to effectively administer CDBG funds provided
              under the Recovery Act (CDBG-R) and comply with applicable
              requirements.Specifically, the City did not ensure that costs charged to
           CDBG planning and administration by its subgrantee were reasonable and
           necessary, and have adequate procedures to ensure compliance with
           procurement requirements. As a result, ineligible costs of $61,718 and
           unsupported costs of $117,721 were charged to CDBG planning and
           administration, and procurement contracts lacked a description of the work
           to be performed and a budget and schedule for completing the work. In
           addition, the subgrantee did not rebid a construction contract, although
           there was a substantial increase in the contact amount. Accordingly, we
           are concerned that these deficiencies will affect the City’s capacity to
           administer CDBG-R funds.

What We Recommend

           We recommend that the Director of HUD’s New Jersey Office of
           Community Planning and Development instruct the City to strengthen its
           controls by (1) repaying $61,718 in ineligible costs charged to CDBG
           planning and administration, (2) supporting the allocability of $117,721 in
           planning and administration costs charged to the CDBG program, and (3)
           ensuring that procurements are conducted in accordance with all Federal
           requirements.

           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 discussed the results of our review with HUD and City officials during
           the audit and at an exit conference held on January 12, 2009. City
           officials provided their written comments to our draft report at the exit
           conference, which generally disagreed with the findings.

           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 Objectives                                                     4

Results of Audit

       Finding: The City’s Controls Did Not Ensure That It Would Be Able To   5
                Effectively Administer CDBG-R Funds

Scope and Methodology                                                         10

Internal Controls                                                             12

Appendixes

A. Schedule of Questioned Costs                                               14

B. Auditee Comments and OIG’s Evaluation                                      15




                                         3
                  BACKGROUND AND OBJECTIVES

The American Recovery and Reinvestment Act of 2009 (Recovery Act) became Public
Law 111-5 on February 17, 2009. It established supplemental appropriations for job
preservation and creation, infrastructure investment, energy efficiency and science,
assistance to the unemployed, State and local fiscal stabilization for fiscal year ending
September 30, 2009, and other purposes.

Authorized under Title XII of the Recovery Act, HUD allocated $1 billion in Community
Development Block Grant (CDBG) funds to State and local governments to carry out, on
an expedited basis, eligible activities under the CDBG program.

The City of Jersey City (City) administers its community planning and development
programs through its Division of Community Development; this division will also be
responsible for Recovery Act funds. HUD awarded $6.7 million in CDBG funds to the
City during program year 2007 (April 1, 2007, to March 31, 2008). In addition, on July
31, 2009, HUD awarded $1.7 million in CDBG funding provided under the Recovery Act
(CDBG-R). The City plans to undertake four additional CDBG-eligible activities and
also allocated $50,000 for administration and oversight of CDBG-R funds. At the time of
our review, the City had not entered into an agreement with its subgrantees and had not
disbursed any CDBG-R funding.

The City is governed by a mayor and a nine-member council. The council serves a 4-
year term during the same period as the mayor’s term.

In support of our goal to conduct capacity reviews of the entities receiving Recovery Act
funds, we selected the City’s CDBG program for review. The City received the fourth
highest total of CDBG-R funding in the State of New Jersey.

Our objectives were to evaluate the City’s capacity in the areas of internal controls,
eligibility, financial controls, procurement, and output/outcomes in administering CDBG
funds.




                                             4
                             RESULTS OF AUDIT


Finding: The City’s Controls Did Not Ensure That It Would Be
         Able To Effectively Administer CDBG-R Funds
The City generally had adequate financial controls and staff capacity to administer its
CDBG funds; however, it needs to strengthen its controls to effectively administer CDBG
funds and to provide assurance that CDBG-R funds will comply with applicable
requirements. Specifically, the City did not ensure that costs charged to CDBG planning
and administration by its subgrantee were reasonable and necessary, and have adequate
procedures to ensure compliance with procurement requirements. As a result, ineligible
costs of $61,718 and unsupported costs of $117,721 were charged to CDBG planning and
administration, and procurement contracts lacked a description of the work to be
performed and a budget and schedule for completing the work. In addition, its
subgrantee did not rebid a construction contract, although there was a substantial increase
in the contact amount. These deficiencies were caused by the City not developing and
implementing adequate controls over its CDBG program. Accordingly, we are concerned
that these deficiencies will affect the City’s capacity to administer CDBG-R funds.



 Costs Charged to CDBG
 Planning and Administration
 Were Not Reasonable and
 Necessary

               The Jersey City Redevelopment Agency (Agency), a subrecipient of the
               City, received CDBG funding for expenditures associated with the
               planning and execution of community development activities. The Agency
               allocated certain costs to the CDBG program that included employees’
               health, prescription, and dental benefits and monthly parking costs.
               Although only 4 of 14 employees were responsible for CDBG activities,
               all 14 employees’ health, dental, and prescriptions benefits were charged
               to the CDBG program.

               The Agency also charged its consultant, legal, mission statement,
               accounting program support (training), commercial auto and general
               liability insurance, auditing, office rent, and equipment rental costs to the
               CDBG program. An Agency official agreed that consultant, legal, and
               mission statement costs should not have been charged to the CDBG
               program. However, Agency officials did not provide adequate
               explanations as to why and how these costs were allocated to the program.




                                             5
                An Agency official further stated that these were standard costs charged to
                the CDBG program and since they did not exceed the funding amount, the
                Agency believed it was acceptable to charge the costs. City officials
                agreed that costs were shared by other programs (State and privately
                funded programs). However, contrary to requirements contained in Office
                of Management and Budget (OMB) Circular A-87, the City did not ensure
                that its subgrantee required its employees to track and allocate their time
                by activity or project, although its staff worked on multiple projects.Since
                costs were split between CDBG and other non-Federal programs,
                subgrantee officials should have had a cost allocation plan.

                Federal Regulations at 24 CFR (Code of Federal Regulations) 85.20 (b)
                (5) require grantees to follow applicable OMB cost principles and HUD
                program regulations in determining the reasonableness, allowability, and
                allocability of costs. However, there was no assurance that costs charged
                to CDBG planning and administration were necessary and reasonable, as
                ineligible costs of $61,718 associated with consultant, legal, and mission
                statement costs; employees’ fringe benefits not related to CDBG activities;
                and unsupported costs of $117,721 associated with employees’ monthly
                parking, accounting program support, commercial auto and general
                liability insurance, auditing, office rent, and equipment rental costs were
                charged to the CDBG program.

                City officials are planning to allocate $50,000 in CDBG-R funds for
                administration; therefore, they need to ensure that expenditures associated
                with the planning and execution of community development activities are
                supported by source documentation, properly allocated, and properly
                justified before costs are charged to its CDBG program. This measure will
                ensure that CDBG funds provided under the Recovery Act will be
                properly expended.

Procurement Procedures Were
Inadequate
                The City did not ensure that its subgrantee always followed appropriate
                procurement procedures. The City provided funding to a subgrantee, the
                Jersey City Department of Public Works, for the replacement of sidewalks
                and curbs and executed three agreements. The initial contract was
                executed between the City and the sub grantee, for the period November 1,
                2005, to October 31, 2006, for $459,285. City officials executed a second
                agreement with this subgrantee for the period December 1, 2006, to
                November 30, 2007, in the amount of $112,755; and a third agreement for
                the period June 1, 2007, to May 31, 2008, in the amount of $64,237. As
                such, a total of $636,277 through three contracts was executed for this
                activity. However, contrary to requirements the subgrantee did not rebid
                the contracts for the second and third agreements even though the initial



                                             6
             contract was being extended and increased. Also, the two extended
             agreements did not include provisions regarding the statement of work,
             description of work to be performed, a schedule for completing the work,
             and a budget.

             Regulations at 24 CFR 85.36(b) state, that “grantees and sub grantees will
             use their own procurement procedures, which reflect applicable State and
             local laws and regulations provided that the procedures conform to
             applicable Federal law and standards.” Regulations at 24 CFR 85.36(c)
             provide that “All procurement transactions will be conducted in a manner
             providing full and open competition consistent with the standards of Sec.
             85.36.” In addition, OMB Circular A-87, Attachment A, section C. 2,
             indicates that for costs to be allowable for Federal programs, they must be
             reasonable. Factors to be considered in determining the reasonableness of
             a cost are market prices for comparable goods and services and whether
             the individuals concerned acted with prudence in the circumstances,
             considering their responsibilities to the governmental unit, its employees,
             the public at large, and the Federal Government.

             City officials indicated that competitive procurement was not required for
             the second or third extensions of the contract based on the Local Public
             Contracts Law. However, regulations at 24 CFR 85.36 (c)(1) require that
             all procurement transactions be conducted in a manner to promote full and
             open competition and 24 CFR 85.36 (b) requires that grantees and
             subgrantees may use their local laws and regulations if they conform to the
             applicable Federal requirements. City officials disbursed $578,747 under
             the three contracts, however, since the second and third contracts were not
             rebid as required, the $119,462, paid to the contractor in excess of the
             original contract ($578,747 - $459,285) is considered to be an unsupported
             cost pending an eligibility determination by HUD.

             This issue is of concern because the City is planning to undertake similar
             activities with CDBG-R funds and $600,000 will be provided to its
             subgrantee, the Jersey City Division of Engineering, and $350,000 to the
             Jersey City Division of Parks and Forestry. Accordingly, the City needs to
             ensure that its subgrantees follow the appropriate procurement procedures,
             so that it can assure HUD that CDBG funds provided under the Recovery
             Act will be properly expended.


Conclusion

             The City generally had adequate financial controls and staff capacity to
             administer its CDBG funds; however, it needs to strengthen its controls to
             effectively administer CDBG funds and to provide assurance that CDBG-
             R funds will comply with applicable requirements. Specifically, the City



                                          7
          did not ensure that costs charged to CDBG planning and administration by
          its subgrantee were reasonable and necessary, and have adequate
          procedures to ensure compliance with procurement requirements. As a
          result, ineligible costs of $61,718 and unsupported costs of $117,721 were
          charged to CDBG planning and administration, and procurement contracts
          lacked a description of the work to be performed and a budget and
          schedule for completing the work. In addition, its subgrantee did not rebid
          a construction contract, although there was a substantial increase in the
          contact amount. These deficiencies were caused by the City not
          developing and implementing adequate controls over its CDBG program.
          Accordingly, since the activities reviewed were similar to those CDBG
          activities that will be funded under the Recovery Act, we are concerned
          that these deficiencies will affect the City’s capacity to properly
          administer CDBG-R funds.

Recommendations


          We recommend that the Director of HUD’s New Jersey Office of
          Community Planning and Development instruct the City to

          1A.     Repay from non-Federal funds $61,718 in costs charged to CDBG
                  planning and administration associated with the Agency’s
                  consultant, legal, mission statement, and employees’ fringe benefit
                  costs for individuals who were not responsible for CDBG
                  activities.

          1B.     Develop a time distribution system and require the City and its
                  subgrantees to track and allocate their employees’ time by activity
                  or project when costs are allocated between CDBG and non-
                  Federal programs.

          1C.     Require the City to submit documentation to support the basis of
                  its allocation and the reasonableness of the costs associated with
                  employees’ monthly parking, accounting program support,
                  commercial auto and general liability insurance, auditing, office
                  rent, and equipment rental costs that were charged to the CDBG
                  program or reimburse $117,721 from non-Federal funds.
          1D.     Require the City to provide supporting documents for the $119,462
                  of costs paid in excess of the original contact for sidewalk and curb
                  replacement, so that HUD can make an eligibility determination.
                  Any amounts determined to be ineligible must be reimbursed to the
                  CDBG program from non-Federal funds.




                                        8
1E.   Require the City to establish and implement controls to ensure that
      all procurements, including those conducted by subgrantees, are
      conducted in accordance with all Federal requirements.

1F.   Implement adequate policies, procedures, and controls to ensure
      that CDBG-R funds are used effectively and efficiently and in
      accordance with all applicable requirements.

In addition, HUD’s Office of Community Planning and Development staff
should

1G.   Perform additional monitoring and provide technical assistance to
      the City, as needed, to ensure that the City properly administers the
      CDBG-R funding in accordance with Federal requirements




                            9
                     SCOPE AND METHODOLOGY


The objectives of our review were to determine whether the City had the capacity to
administer its CDBG funds, thus providing assurance that CDBG-R funding would be
properly administered. At the time of our review, the City had not entered into an
agreement with its subgrantees and had not disbursed any CDBG-R funding. Therefore,
we reviewed the City’s program year 2007 CDBG activities.
To accomplish our objectives, we

       Reviewed and obtained an understanding of the Recovery Act legislation, relevant
       program guidance and criteria, the City’s grant agreements with HUD, and its
       proposed activities under CDBG-R funding.
       Reviewed applicable laws, regulations, and HUD program requirements at 24
       CFR Parts 85 and 570; New Jersey State regulations for procurements; and the
       notice of program requirements for CDBG program funding under the Recovery
       Act.

       Conducted interviews with City officials to gain an understanding of the internal
       controls related to the administration of its CDBG and CDBG-R programs.

       Reviewed the City’s program policies and procedures, action plans, HUD’s
       monitoring report, independent accountants’ audit reports, funding agreements,
       city council minutes, budgets,and general ledgers.

       We selected a sample of 20 CDBG activities from the City’s program year 2007
       consolidated annual performance and evaluation report and reviewed the related
       files to ensure compliance with program regulations and procedures. We selected
       these activities by grouping them into the following categories: acquisitions,
       public facilities and improvement (general and other), clearance and demolition,
       public service (general and other), relocation, rehabilitation, and planning and
       administration activities. The drawdowns for the sampled activities totaled
       $4,503,191, which represents 58 percent of the total drawndowns of $7,730,353
       for 109 activities in the sample universe for the period. Our selection was based
       on significant drawdown amounts from each category.

        Reviewed the largest drawndown of funds that occurred in December 2008 for
        program year 2007 funding along with all of the supporting documents, reviewed
        program income receipts and disbursements for program year 2007, traced
        amounts to the supporting documents and bank statements, and compared
        program income reported to HUD with the City’s books and records.
We performed our audit fieldwork from July to October 2009 at the City’s offices located
at Montgomery Street and Journal Square in Jersey City, NJ. Our audit generally covered
the period April 1, 2007, through March 31, 2008, and was expanded as necessary.



                                           10
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.




                                           11
                          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.




                                            12
Significant Weaknesses


           Based on our review, we believe that the following item is a significant
           weakness:

                 The City did not develop and implement adequate controls to ensure
                 compliance with laws and regulations regarding its CDBG activities.
                 Specifically, it did not (1) maintain documentation to support the
                 basis of the allocation and the reasonableness of the costs charged
                 to CDBG planning and administration by its subgrantee; and (2)
                 ensure that its subgrantee followed appropriate procurement
                 procedures (see finding).




                                        13
                               APPENDIXES

Appendix A

             SCHEDULE OF QUESTIONED COSTS


            Recommendation
            number              Ineligible 1/     Unsupported 2/
            1A                  $61,718
            1C                                     $117,721

            1D                                     $119,462

            Total               $61,718            $237,183

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.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured
     program or activity when we cannot determine eligibility at the time of the audit.
     Unsupported costs require a decision by HUD program officials. This decision, in
     addition to obtaining supporting documentation, might involve a legal
     interpretation or clarification of departmental policies and procedures.




                                          14
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                                               Auditee Comments
                                                                                 DEPARTMENT OF
                                                      HOUSING, ECONOMIC DEVELOPMENT & COMMERCE
                                                   Division of Community Development
                                                            30 Montgomery Street, Suite 404, Jersey City, NJ 07302
                                                                                          Phone: (201) 547-6910
                                                                                              Fax: (201) 547-5104
         Jer Jerramiah T. Healy, Mayor
             CITY OF JERSEY CITY
             January 11, 2010

             Edgar Moore
             Regional Inspector General for Audit
             U.S. Department of Housing and Urban Development
             Office of Inspector General
             26 Federal Plaza, Room 3430
             New York, NY 10278-0068

             Re: CDBG-R Capacity Audit

             Dear Mr. Moore:

             The City has reviewed the Office of the Inspector General’s Draft report. Overall, the report
             indicates that “the City generally has adequate financial controls and staff capacity to administer
             its CDBG funds; however, it needs to strengthen its controls to ensure that it will be able to
             effectively administer CDBG funds provided under the Recovery Act (CDBG-R) and comply with
             applicable requirements.” You further state the following:

                Specifically, the City did not (1) ensure that costs charged to CDBG planning and
                administration by its subgrantee were reasonable and necessary, (2) have a system in
                place for tracking program income generated by its subgrantee, and (3) have adequate
                procedures to ensure compliance with procurement requirements. As a result, (1)
                ineligible costs of $61,178 and unsupported costs of $117,721 were charged to CDBG
                planning and administration, (2) $99,785 in program income earned by its subgrantee was
                not returned to the CDBG line of credit, and (3) procurement contracts lacked a
                description of the work to be performed and a budget and schedule for completing the
                work. In addition, the subgrantee did not rebid a construction contract, although there was
                a substantial increase of $176,992 in the contact amount. Accordingly, we are concerned
                that these deficiencies will affect the City’s capacity to administer CDBG-R funds.”

             The City strongly disagrees with your statement of finding. While we agree that controls need to
             be strengthened in a couple of areas to more effectively administer CDBG funds, the City does
             have adequate controls in place to administer CDBG funds. Your statement of finding is very
             broad and it leads one to think the City has not responsibly and effectively administered CDBG.
             During the past several years the City has put many systems in place to more effectively
             administer CDBG. In fiscal year 2009-2010, after March 2008 HUD monitoring visit, the City
             addressed deficiencies in how program income is tracked. The following provides additional
             information about each of the points in your draft report




                                                15
            Re: CDBG-R Capacity Audit
            January 11, 2010
            Page 2

            Program Income

            One system implemented in 2009 – 2010 (after a March 2008 HUD monitoring visit) pertained
            to program income. The City has modified language in our Subgrantee Agreements regarding
Comment 1   program income (See Attachment 1 - Excerpts from the City’s 2007-2008 and 2009 - 2010
            Subgrantee Agreements). In addition, a program income reporting form has been created to
            capture information on program income (See Attachment 2).

            Your report indicated that JCRA acquired properties for a total cost of more than $2.9 million.
            Actually, JCRA acquired properties during the period of September 2007 through October 2008
            for a total cost of $3,785,085 (See Attachment 3-Deeds). JCRA sold their properties to a
            developer in December 2008 for $3,875,024 (See Attachment 4-Deed). The difference in cost
            is $89,939. Accordingly, JCRA should have paid the City $12,771 in program income, not
            $99,785. The Subgrantee in question is required to comply with the modified program income
            requirements. The City does acknowledge that we need to memorialize written procedures
            specific to project income.

            JCRA Planning and Administration

            As it relates to JCRA’s planning and administrative costs, the City acknowledges that cost
            allocation records were not specifically maintained for staff involved with this activity. However,
Comment 2   the City disagrees with the determination to disallow $61,718 in cost and $117,721 in cost as
            unsupported.

            The JCRA has been awarded numerous CDBG allocations for various projects over the last
            several decades. For the period of 2007/2008, the JCRA was awarded $955,837 for the MLK
            Drive Thomas Jackson Estates Project and $200,000 for the Morris Canal Berry Lane Park
            Project in addition to the administrative award of $199,240 through the Community
            Development Block Grant Program.

            Prior to that for the period of 4-1-06 through 3-31-07, the JCRA was awarded $325,000 for
            Morris Canal, $250,500 for Secaucus Road, $243,000 for 202 MLK Drive and $50,000 for 448-
            450 MLK Drive. During the period in question, the JCRA staff did not track its individual time
            worked on CDBG eligible activities. However, Agency staff spent numerous hours working on
            these projects as well as maintaining others that had received previous awards of CDBG
            monies.

            It should also be noted that JCRA did not charge any of its staff time to its direct project awards.
            The Agency acquired properties for the Thomas Jackson Estates, Berry Lane Project and
            Summit Heights. The Agency also worked on other projects that were CDBG eligible such as
            Harriet Tubman Homes and Fred W. Martin Apartments.




                                                16
            Re: CDBG-R Capacity Audit
            January 11, 2010
            Page 3

            The Agency completed the acquisition of 448-450 MLK Drive which allowed for the start of
            Webb Apartments by Genesis Partners, a forty (40) unit affordable housing project.
Comment 2
            In addition, the Agency monitored and managed the MLK HUB project and continues to do so.
            The Agency’s Executive Director, himself, routinely visits the MLK HUB to ensure the project is
            being maintained. Without having a record, it is easily conceivable that the entire Agency staff
            collectively spent up to 50% of its time working on CDBG eligible programs during the
            aforementioned period.

            Below is a list of all Agency employees at the time in question and I am requesting this be
            considered part of the record. The total staff salary for the period was $1,030,870. Even if the
            Agency used a conservative number of one-third (1/3) of its time spent on CDBG eligible
            activities, that would have resulted in administrative salary costs at $340,187 far exceeding its
            $199,240 award. While we agree that some costs (Consultant - $2,176, Legal cost for MLK
            project - $2,432.50 and JCRA Mission Statement - $2,511) should not have been charged to
            CDBG, the fact remains that Agency staff had spent a considerable portion of time working on
            CDBG eligible projects during this period.

            Although it was previously stated that only five of the fourteen employees were overseeing
            CDBG activities, the agency certifies that all employees on some level participated in the
            Agency’s administration of CDBG eligible activities. However, if only the staff time as
            previously listed was applied, the following would be the breakdown:

                   Employee Name                  Time Assigned to CDBG              Applicable Salary
                                                         Projects
                   Franklyn D. Ore                        100%                           $60,000

                   Benjamin Delisle                       60%                            $42,427

                   Maureen Mortola                        60%                            $33,813

                  Mark Van Wagner                         70%                            $38,431

                   Christoper Fiore                       40%                            $33,371

                                         Total                                           $208,042


            This illustrates that the Agency was involved in working on CDBG eligible activities and that if
            time had properly been tracked, it would have shown the same.




                                                 17
            Re: CDBG-R Capacity Audit
            January 11, 2010
            Page 4

            The City is maintaining time allocation records for all ARRA funds including CDBG-R. In
            addition, the City has carefully budgeted administrative cost to insure that costs are properly
            justified. Therefore, documentation of administrative costs for CDBG-R will be in full compliance
            with federal requirements.

            Department of Public Works – Sidewalk Replacement Project

            Pursuant to the Local Public Contracts Law, N.J.S.A. 40A:11-1 et seq. (the local procurement
Comment 3   law), the City of Jersey (City) advertised for bids for a contract to replace curbs and sidewalks at
            various locations, Project No. 06-004. The City received three bids on June 1, 2006. On June
            28, 2006, Resolution 06-511 awarded a contract in the amount of $459,285.00 to the low bidder,

            Pursuant to paragraph no. 20 of the Information to Bidders section of the contract, a change
            order for additional work could be issued for unforeseeable problems. Additionally, N.J.A.C.
            5:30-11.8 authorizes change orders for construction contracts for:

                     Unforeseeable problems, which are defined as conditions or circumstances that
                     could not be foreseen at the time the specifications were written and the
                     contract awarded; provided that a substantial amount of the construction would
                     be delayed, which would result in substantial increases in costs above the
                     original contract amount or substantial inconvenience to the public if bidding
                     were to be required; and

                     Minor modifications to effect economies, improve service or resolve minor
                     problems with affected property owners.

            For Project No. 06-004, the unforeseeable problem that arose related to the grade of the
            sidewalks. When a sidewalk was replaced in front of a building, it resulted in an uneven grade
            with the old sidewalks on either side of the building. In order to make the sidewalks safe for
            pedestrian use, the sidewalks on either side of the new sidewalk also had to be replaced. This
            was additional work that was performed. Change Order 30028 issued on September 6, 2007 in
            the amount of $64,237.00 helped to cover cost for this additional work .

            Because the original contract amount was $459,285 and the City only awarded the Department
            of Public Works $401,755, it was necessary to obligate additional funds for this project. As
            required by HUD, the City amended the Annual Action Plan to appropriate additional funds for
            the Sidewalk Replacement Project. According to Local Public Contracts Law, the City is
            allowed to increase the contract by up to 20% of the original contract amount without a
            resolution. Again, the original contract amount was $459,285. An increase of up to $91,857
            was permissible without further authorization. The increases of $112,755 + $64,237 totals
            $176,992.




                                           18
            Re: CDBG-R Capacity Audit
Comment 3   January 11, 2010
            Page 5

            Given that $57,530 was needed to cover the full contract amount of $459,285 and the City could
            increase the contract amount by $91,857, the City was in compliance with the Local Public
            Contracts Law up to an increase of $149,387. According to your correspondence, $176,992
            was unsupported. The actual amount that exceeded what would be an allowable increase is
            $27,605.

            The City did not intentionally breach what is permissible under procurement laws. However,
            due to unforeseen conditions, including an understatement of square footage of sidewalks (see
            attached letter) and acceptance of the lowest bid that exceeded the original CDBG award for
            this project, additional funds were needed to complete the project. This matter has been
            brought to the attention of the City’s Business Administrator, Chief Financial Officer and
            Comptroller. We will make the necessary adjustments to insure that the City is in full
            compliance with procurement laws.

Comment 4   Finally the City respectfully request that you delineate why the City was deemed “High Risk.

            The City appreciates the constructive feedback received as a result of this audit. We are
            committed to strengthening our controls to increase the effectiveness of administering CDBG
            funds.


            Sincerely,


            Darice Toon
            Director




                                            19
                     OIG Evaluation of Auditee Comments

Comment 1   Auditee officials provided documentation at the exit conference that was
            not provided during the audit, which showed that the properties sold
            included addition parcels of land with additional costs of
            acquisition.Based on a review of the documents, we determined that no
            program income from the sale of the properties had to be repaid to the
            CDBG program, as such; we have removed the program income issue
            from the report.

Comment 2   Auditee officials disagreed regarding the determination of unsupported
            and ineligible costs, but, acknowledged that cost allocation records were
            not specifically maintained for Jersey City Redevelopment Agency staff
            involved in the planning and administration activity. Although the auditees
            comments contains a schedule listing the percentage of employees time
            assigned to CDBG projects; auditee officials did not provide any evidence
            on how these percentages were computed. As such, auditee officials need
            to provide other documentation supporting their methodology for
            computing the percentages used to allocate costs to the CDBG program, so
            that HUD can make an eligibility determination during audit resolution
            process.

Comment 3   City officials’ state that pursuant to the contract change orders were
            allowed to be claimed due to unforeseen problems. In this case they stated
            that unforeseen circumstances led to a need to conduct additional sidewalk
            work. In addition, they state that local public law allows them to increase
            the original contract amount by 20% without a resolution. Accordingly,
            they believe that they were allowed to increase their obligations by up to
            $149,387 without breaking the law. The $149,387 represents the portion
            of the original contract not obligated plus 20% of the original contract
            amount ($57,530 + $91,857 respectively). Finally, they stated that our
            report indicates that they exceeded the contract amount by $176,992 when
            the real amount is only $27,605 ($176,992 - $149,387).

            A review of New Jersey Local Public Contract Law revealed that the law
            does not allow for contracts to be increased without a valid written change
            order or public bidding. Accordingly, although City officials state that
            they issued a change order for additional sidewalk work, they did not
            provide such documents during the audit or the at the exit conference, nor
            did they solicit bids for the additional work. As such, we have revised the
            report to only question the amount drawn down and expended in excess of
            the original contract amount. We determined that a total of $578,747 had
            been drawdown and expended on the three contracts, therefore, we
            consider $119,462 ($578,747 - $459,285) the amount expended in excess
            of the original contract as unsupported,




                                        20
Comment 4   Auditee officials requested a delineation of why the City was deemed
            “high risk.” Although we revised the highlights section of the report to
            reflect that we selected the City for audit because it received $1.7 million
            in CDBG funding provided under the American Recovery and
            Reinvestment Act of 2009 (Recovery Act), and based on a fiscal year
            2008 risk analysis conducted by HUD’s New Jersey Office of Community
            Planning and Development. The auditee was classified as high risk
            because of its high funding level and the fact that it was not recently
            monitored by HUD’s Office of Community Planning and Development.




                                         21