oversight

The City of Jersey City, NJ's Community Development Block Grant Funds Used for a Float Loan Did Not Comply With Applicable Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-07-01.

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

                                                                  Issue Date
                                                                  July 1, 2010
                                                                  Audit Report Number
                                                                  2010-NY-1012




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 Jersey City, NJ’s Community Development Block Grant Funds Used
         for a Float Loan Did Not Comply With Applicable Regulations

                            HIGHLIGHTS

 What We Audited and Why

             We audited the City of Jersey City’s (City) Community Development
             Block Grant (CDBG) float loan activity because during our capacity
             review of the City’s CDBG funding under the American Recovery and
             Reinvestment Act of 2009, we noted that the City did not follow CDBG
             float loan regulations. Our audit objective was to determine whether the
             City ensured that CDBG funds used for the float loan complied with
             applicable rules and regulations.

 What We Found


             The City did not comply with applicable regulations and failed to take
             timely action when the float loan defaulted. Specifically, it did not (1)
             make a good faith effort to collect payment on the float loan in the amount
             of $3.5 million, (2) identify a proper default remedy in case the float loan
             defaulted, (3) properly account for and report float loan program income
             to the U.S. Department of Housing and Urban Development (HUD), (4)
             follow the required steps when the terms of the float loan was extended,
             and (5) maintain adequate supporting documentation to show that the
           national objective was met. This noncompliance occurred because the City
           misinterpreted the CDBG float loan regulations and believed that the float
           loan could be converted into a grant. As a result, $3.5 million disbursed
           for the float loan was not repaid, and $72,517 in program income
           generated from the float loan was not properly accounted for and reported
           to HUD.

What We Recommend


           We recommend that the Director of HUD’s New Jersey Office of
           Community Planning and Development instruct the City to reimburse the
           CDBG program from non-Federal funds in the amount of $3.5 million for
           the defaulted float loan; provide supporting documentation related to
           $72,517 in program income generated from the float loan to ensure that it
           is properly recorded, reported to HUD, and used for CDBG-eligible
           activities or repay this amount to the CDBG line of credit; establish
           adequate policies and procedures to ensure that the City complies with
           applicable CDBG float loan rules and ensures that the proper default
           remedy action is identified and exercised in a timely manner; develop
           written policies and procedures to ensure that timely payments on CDBG
           float loans (both principal and interest) and any resulting program income
           are appropriately recorded and used for eligible CDBG activities in
           compliance with HUD regulations; and provide the supporting documents
           to show that the CDBG national objective was met.

           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 June 3, 2010. City officials
           provided their written comments to our draft report on June 3, 2010. In
           their response, City officials 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 Objective                                                      4

Results of Audit
      Finding 1: The City Did Not Comply With HUD Requirements Related to a   5
                 CDBG Float Loan

Scope and Methodology                                                         9

Internal Controls                                                             10

   Appendixes

   A. Schedule of Questioned Costs and Funds To Be Put to Better Use          12

   B. Auditee Comments and OIG’s Evaluation                                   13




                                         3
                   BACKGROUND AND OBJECTIVE

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 must meet one of the program’s three national objectives. Specifically, every
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.

Regulations at 24 CFR (Code of Federal Regulations) 570.301(b) permit a grantee to use
undisbursed funds in the line of credit within its CDBG program account, which are
budgeted in statements or action plans for one or more activities that do not need the
funds immediately, for unfunded activities. Such funds are referred to as the “float,” and
an activity that uses such funds is called a float-funded activity. The float-funded activity
must meet all the same requirements that apply to CDBG activities and generally must be
expected to produce program income in an amount at least equal to the amount of the
floated funds used and must be repaid in 2.5 years.

The City of Jersey City (City) administers its community planning and development
programs through the Division of Community Development. The City is a CDBG
entitlement grantee that has received approximately $8 million annually in the past 11
years. It is governed by a mayor and a nine-member council. The council serves a 4-
year term contemporary to the mayor’s.

We audited the City’s CDBG float loan activity because during our capacity review of
the City’s CDBG funding received under the American Recovery and Reinvestment Act
of 2009, we noted that the City did not follow CDBG float loan regulations. Our
objective was to determine whether the City ensured that CDBG funds used for the float
loan complied with applicable CDBG regulations.




                                             4
                             RESULTS OF AUDIT

Finding 1: The City Did Not Comply With HUD Requirements
           Related to a CDBG Float Loan

The City did not comply with applicable regulations for a CDBG float loan. Specifically,
it did not (1) make a good faith effort to collect payment on the float loan, (2) identify a
proper default remedy in case the float loan defaulted, (3) properly account for and report
float loan program income to the U.S. Department of Housing and Urban Development
(HUD), (4) follow the required steps when the terms of the float loan was extended, and
(5) maintain documentation to support that the national objective was met. This
noncompliance occurred because the City misinterpreted the CDBG float loan regulations
and believed that the float loan could be converted into a grant. As a result, $3.5 million
disbursed for the float loan was not repaid, and $72,517 in program income generated
from the float loan was not properly accounted for and reported to HUD.


 A Good Faith Effort To Collect
 Payments on the Float Loan
 Was Not Made


               Regulations at 24 CFR 570.301(b) permit a grantee to use undisbursed
               funds in the line of credit and its CDBG program account, which are
               budgeted in statements or action plans for one or more activities that do
               not need the funds immediately, for unfunded activities. Such funds are
               referred to as the “float,” and an activity that uses such funds is called a
               float-funded activity. The float-funded activity must meet all the same
               requirements that apply to CDBG activities and generally must be
               expected to produce program income in an amount at least equal to the
               amount of the floated funds used.

               The City disbursed $3.5 million for a float loan during November 2000.
               However, the loan agreement executed between the City and the
               subgrantee did not provide for repayment of the loan from program
               income within 2.5 years and did not include a repayment schedule.
               Regulations at 24 CFR 570.301(b)(2) and (3) specify that the float loans
               should be repaid from program income within 2.5 years. The subgrantee
               agreement indicated that the float loan was for a one year period but also
               stated the subgrantee could request an extension of the grant period. Also,
               the City did not ensure that the subgrantee was capable of generating
               program income in an amount at least equal to the amount of the float loan
               as required by regulations at 24 CFR 570.301(b). In addition, the full
               amount of program income projected to be generated from the float loan

                                             5
            activity was not listed as the source of program income contrary to
            regulations at 24 CFR 570.301(b)(3).


A Remedy in Case of Loan
Default Was Not Identified

            The City did not identify a default remedy in its action plan or an
            amendment to the action plan. The City was required to declare one of the
            four regulatory options it would take if the float-funded activity failed to
            generate the projected amount of program income on schedule as required
            at 24 CFR 570.301(b)(4). Instead, it had reprogrammed funding from
            other projects to finance the float loan. As a result, several projects were
            negatively impacted, and HUD and the City lost $3.5 million because the
            funds were no longer available due to the default and lack of an
            appropriate default remedy. Therefore, we consider $3.5 million as an
            ineligible cost because the City failed to comply with applicable rules and
            regulations, did not identify an appropriate default remedy, and did not
            take timely action when the float loan defaulted.


Program Income Was Not
Properly Accounted For and
Reported to HUD


            The City did not adequately account for or report the receipts and
            expenditures of program income as required by regulations. Section
            570.500(a)(1)(v) states that payments of principal and interest on loans
            made using CDBG funds are considered to be program income. The
            receipt and expenditure of program income are supposed to be recorded as
            part of the financial transactions of the grant program and may be retained
            by the recipient if the income is treated as additional CDBG funds subject
            to all applicable requirements governing the use of CDBG funds, as
            required by 24 CFR 570.504(a). Review of the City’s consolidated plan
            annual performance report for program year 2002 showed that $72,517 in
            program income was received from the float loan. However the City did
            not properly account for the program income and report it in HUD’s
            Integrated Disbursement and Information System (IDIS); therefore, we
            could not determine how the program income was used. City officials did
            not recall how the program income was used, but stated that the funds
            would have been used for other eligible CDBG activities. As a result,
            there was no assurance that the City reported accurate CDBG program
            income and used this income in accordance with HUD regulations.




                                         6
The Required Steps Were Not
Followed When the Loan Terms
Were Extended


           The City extended the float loan for another year according to a resolution
           of the municipal council of the City, which authorized a 1-year extension
           up to September 2002. However, the City did not list and describe the
           new float-funded activity in its action plan or an amendment to the action
           plan as required. Regulations at 24 CFR 570.301(b)(2)(ii) state that any
           extension of the term for a float-funded activity shall be considered to be a
           new float-funded activity and may be implemented by the grantee only if
           the extension is made subject to the same limitations and requirements as
           applicable to a new float-funded activity. Section 570.301(b)(1) also
           states that each float-funded activity must be individually listed and
           described in the action plan. As a result, the City did not properly inform
           HUD and its citizens of changes to the float loan terms, which could
           impact the other community development activities that may depend on
           the funds from the float loan repayments. In addition, as with the original
           terms the City did not specifically require repayments or a default remedy
           in the extension as required.


Support for Meeting the
National Objective Was Not
Documented

           The City did not maintain documentation to support that the national
           objective of low- and moderate-income job creation was met as provided
           by regulations at 24 CFR 570.208. City officials stated that the City did
           not have all of the files related to the float loan readily accessible. They
           later attempted to provide supporting documents, which showed that 176
           positions—16 full time, and 156 part time, and 4 management positions—
           were created. However, it appeared that the documents provided pertained
           to a Section 108 loan job creation and also indicated that the jobs were
           created before the float loan funding was provided to the subgrantee.
           Thus, since the IDIS report for this activity showed that the City had
           proposed that 225 jobs would be created from the float loan project, the
           City failed to provide the equivalent number of full-time positions.
           Regulations at 24 CFR 570.209(b)(1)(i) require the grantee to create or
           retain at least one full-time equivalent permanent job per $35,000 in
           CDBG funds used. Therefore, the City should have created the equivalent
           of 100 full-time jobs for the $3.5 million used for the float loan-funded
           activity. Accordingly, there is no evidence that the float loan activity met
           the national objective of creation of low- and moderate-income jobs.

                                         7
Conclusion

             The City did not comply with applicable regulations for float-funded
             activities and failed to take timely action when the float loan defaulted.
             As a result, $3.5 million disbursed for the float loan was not repaid, and
             $72,517 in program income generated from the float loan was not properly
             accounted for and reported to HUD. This noncompliance occurred
             because the City misinterpreted the CDBG float loan regulations and
             believed that the float loan could be converted into a grant.


Recommendations


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

     1A.     Establish adequate policies and procedures to ensure that proper default
             remedy actions, as required by regulations at 24 CFR 570.301(b)(4), are
             identified in its action plan and exercised in a timely manner when a float
             loan defaults.

     1B.     Reimburse the CDBG program from non-Federal funds in the amount of
             $3.5 million representing the unrecovered principal of the defaulted float
             loan.

     1C.     Provide documentation related to $72,517 in program income generated
             from the float loan to ensure that it is properly recorded and reported to
             HUD and used for CDBG-eligible activities or repay this amount to the
             CDBG line of credit.

     1D.     Develop written policies and procedures to ensure that timely payments on
             CDBG float loans (both principal and interest) and any resulting program
             income are appropriately recorded and used for eligible activities in
             compliance with HUD regulations.

     1E.     Provide the supporting documentation to show how the national objective
             of the CDBG program was met.

     1F.     Establish procedures to ensure that appropriate documentation is
             maintained to show that the national objectives of the CDBG program are
             met.




                                           8
                    SCOPE AND METHODOLOGY

The objective of our review was to determine whether the City ensured that CDBG funds
used for the float loan complied with applicable CDBG regulations.

       To accomplish our objectives, we

           Reviewed applicable laws, regulations, and HUD program requirements at 24
           CFR (Code of Federal Regulations) 570.

           Conducted interviews with City officials to gain an understanding of the
           internal controls related to the administration of its CDBG activities.

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

           Selected the float loan activity from the City’s program year 2007
           Consolidated Annual Performance and Evaluation Report (CAPER) and
           reviewed the related files to ensure compliance with program regulations and
           procedures

We performed our fieldwork from January to March 2010 at the City’s office located at
30 Montgomery Street in Jersey City, New Jersey. Our audit generally covered the
period from June 1, 2000 through September 30, 2003 and was expanded as necessary

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.




                                           9
                          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 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

                      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 resources - Policies and procedures that management
                      has implemented to reasonably ensure that resources are safeguarded
                      against waste, loss, and misuse

                      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

              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.

                                            10
Significant Weaknesses


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

           The City had no policies and procedures on how to properly administer a
           float loan (See finding).




                                         11
                                 APPENDIXES

Appendix A

            SCHEDULE OF QUESTIONED COSTS
           AND FUNDS TO BE PUT TO BETTER USE

     Recommendation
         number         Ineligible 1/    Unsupported 2/
           1B            $3,500,000
           1C                                  $72,517



          Total          $3,500,000            $72,517

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.




                                          12
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




                        13
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 1




Comment 2




                        14
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 2




Comment 3




Comment 4




Comment 5




                        15
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 6




Comment 7




Comment 3




                        16
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 6


Comment 5



Comment 6




                        17
                     OIG Evaluation of Auditee Comments


Comment 1   Although City officials stated that they took action to collect the float
            loan, including declaring a default and initiating legal action, they did not
            provide any supporting documents during the audit and at the exit
            conference to show that good faith efforts were made to collect the float
            loan payment. Regulations at 24 CFR 570.301(b)(2) and (3) specify that
            float loans should be repaid from program income within 2.5 years, and
            the grantee must include in its action plan the full amount of expected
            program income from these activities. The City did not repay the float
            loan within 2.5 years and also the loan agreement executed between the
            City and the subgrantee did not provide for repayment of the loan from
            program income within 2.5 years. As such, the $3.5 million is an
            ineligible cost which needs to be repaid to the CDBG program regardless
            of what efforts were made to collect the float loan.

Comment 2   The City officials acknowledged that they did not identify one of the four
            regulatory default options in the action plan or amendment to the action
            plan. They stated that only one of the default options which allows for
            the amendment or deletion of activities in an amount equal to any default
            or failure to produce sufficient income in a timely manner was feasible.
            However, the City did not exercise this option in a timely manner.
            Further, Regulations at 24 CFR 570.301(b)(4)(i) require that if the grantee
            makes this choice, it must include a description of the process it will use to
            select the activities to be amended or deleted and how it will involve
            citizens in that process; and it must amend the applicable statement(s) or
            action plan(s) showing those amendments or deletions promptly upon
            determining that the float funded activity will not generate sufficient or
            timely program income. City officials indicated that funds were
            reprogrammed from other activities to finance the float loan and that no
            projects were negatively impacted. However, funds used for the float
            loan, which were not repaid, were not available for other eligible
            community development activities and other activities had to be delayed
            because the funds were not available.

Comment 3   Review of the City’s program income report obtained from the HUD’s
            Integrated Disbursement and Information System (IDIS) did not show that
            $72,517 of the program income was recorded and properly accounted for.
            As such, since the program income was not recorded in IDIS, HUD has no
            assurance that it was used for eligible CDBG activities; accordingly our
            recommendation stands.

Comment 4   City officials acknowledged that the extension of the term of the float loan
            was not treated as a new activity as required by regulations at 24 CFR

                                         18
            570.301(b)(2)(ii). They also did not specifically require repayment of the
            float loan or specify a proper default remedy option. City officials
            indicated a number of actions that were taken, which improved the
            viability of the float loan funded activity; however, the actions taken were
            not an effective default remedy as the float loan was not repaid.

Comment 5   City officials stated that national objective was erroneously set up as an
            activity that qualifies based on low/moderate income jobs when it should
            have been set up as qualifying based on a low/ moderate income area
            benefit as communicated to a former HUD official. In addition, although
            the City resolution, which extended the float loan, made reference to the
            area wide benefit, it also indicated that the float loan was required to
            create 225 full time jobs. Nevertheless, City officials were not able to
            provide any documents to show that HUD approved the change in the
            national objective and also did not change the national objective in the
            HUD’s Integrated Disbursement and Information System (IDIS).
            Therefore, there was no evidence that the float fund activity was changed
            for the area wide benefit or that it met the national objective of creation of
            low/moderate income jobs. Furthermore, even if the float funded activity
            had been approved for the area wide benefit, since the loan had not been
            repaid in 2.5 years as required, the use of the funds was ineligible. Thus
            the funds should be repaid to the CDBG line of credit.

Comment 6   The City does not plan to fund any more float funded activities and will
            consult with HUD if the City chooses to engage in float funded activities.
            This action is responsive to the finding, however, if the City decides to
            have float funded activities in the future it should submit the new
            procedures for approval by HUD prior to engaging in float funded
            financing.

Comment 7   City officials acknowledged that errors were made in executing the float
            funded activity; however, they strongly disagree with reimbursing the
            funds spent. Nevertheless, City officials did not provide any
            documentation to support that good faith efforts were made to collect
            payment on the loan, the float fund activity met the national objective of
            low moderate income job creation, or evidence of HUD approval to
            change the activity to a low/moderate area benefit. Regulations at 24
            CFR 570.301(b)(2) and (3) specify that float loans should be repaid from
            program income within 2.5 years, therefore, since the City did not identify
            any default remedy and failed to recover the loan funds as required, we
            consider $3.5 million as an ineligible cost.




                                          19