oversight

The State of Mississippi, Jackson, Generally Ensured That Disbursements to Program Participants Were Eligible and Supported

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-04-18.

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

                                                                   Issue Date
                                                                            April 18, 2011
                                                                   
                                                                   Audit Report Number
                                                                                2011-AO-1005




TO:         Yolanda Chavez, Deputy Assistant Secretary for Grant Programs, Community
              Planning and Development, DG

            //signed//
FROM:       Nikita N. Irons, Regional Inspector General for Audit, Gulf Coast Region,
                11AGA

SUBJECT: The State of Mississippi, Jackson, Generally Ensured That Disbursements to
           Program Participants Were Eligible and Supported


                                    HIGHLIGHTS

 What We Audited and Why

             We conducted a review of the U.S. Department of Housing and Urban
             Development (HUD) Community Development Block Grant (CDBG)
             Supplemental Disaster Recovery program funds, administered by the State of
             Mississippi (State), a $5.5 billion CDBG Supplemental Disaster Recovery
             program grantee. Our objective was to determine whether the State ensured that
             disbursements made under the Homeowner Assistance Elevation Grant Program
             (Program) were eligible and supported. The audit was initiated as part of the
             Office of Inspector General’s (OIG) strategic plan to review activities related to
             Gulf Coast hurricane disaster relief efforts.

 What We Found

             Overall, the State generally ensured that disbursements to Program participants
             were eligible and supported. However, it disbursed funds to participants who (1)
             were initially eligible, but later defaulted, making the disbursements ineligible and
             (2) received duplicate assistance. This condition occurred because (1) the State
             had not implemented policies and procedures to assess whether there was a need
           for elevation construction before disbursing grant funds, (2) participants did not
           fully comply with the terms of the elevation grant agreement, (3) participants
           received duplicate assistance without reimbursing the State, and (4) the State had
           not identified other participants who received duplicate assistance. As a result,
           the State paid $90,000 in ineligible costs.

What We Recommend


           We recommend that HUD’s Deputy Assistant Secretary for Grant Programs
           require the State to (1) repay to its Program the $90,000 in ineligible costs; (2)
           reallocate $75,000 in unreimbursed funds, thereby ensuring that these funds are
           put to better use; and (3) develop and implement written policies to assess the
           need for elevation construction before disbursing funds to Program participants.

           We also recommend that HUD require the State to consider amending its Program
           policy to require staff performing file reviews to document its review and
           verification of required documentation; requiring land surveyors, engineers, and
           architects to submit photographs of properties with the elevation certificate;
           conducting periodic site visits of properties to ensure that homes were elevated in
           accordance with the Program elevation requirements; and conducting eligibility
           reviews across its disaster recovery programs to ensure different participants did
           not receive assistance for the same damaged property.



Auditee’s Response

           We provided a copy of the draft report to the State on February 25, 2011. We
           held an exit conference with the State on March 9, 2011. We asked the State to
           provide the written comments to the draft report by March 12, 2011, and it
           provided written comments on March 10, 2011. The State generally did not agree
           with our finding and recommendations. The complete text of the auditee’s
           response, along with our evaluation of that response, can be found in appendix B
           of this report.




                                            2
                            TABLE OF CONTENTS

Background and Objective                                                    4

Results of Audit
      Finding : The State Generally Ensured That Disbursements to Program   5
      Participants Were Eligible and Supported

Scope and Methodology                                                       10

Internal Controls                                                           11

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 OBJECTIVES

Soon after Hurricane Katrina, the U.S. Department of Housing and Urban Development (HUD)
awarded the State of Mississippi (State) more than $5.5 billion in Community Development
Block Grant (CDBG) funds to assist with the State’s disaster recovery efforts. The State tasked
the Mississippi Development Authority with administering this recovery package at the State
level. Of the $5.5 billion, the State set aside $70.5 million for the Homeowner Assistance
Elevation Grant Program (Program).

The purpose of the Program is to provide up to $30,000 in grant funds to eligible homeowners to
defray the costs of elevating their homes. To be eligible for the Program, participants must (1)
have been awarded a phase I or phase II Homeowner Assistance Program grant, (2) own and
occupy a damaged residence that requires elevation, (3) reconstruct their primary dwelling on the
same parcel for which they were awarded a Homeowner Assistance Program grant, and (4)
ensure that the property site passes an environmental review. Program participants who (1)
maintained flood insurance backed by the National Flood Insurance Program and/or (2) were
eligible for the increased cost of compliance grant, did not qualify for the Program.

The State disbursed the grant in one of two ways: one payment of $30,000 or two payments of
$15,000. If participants completed elevation and provided a certificate of occupancy and an
elevation certificate indicating that elevation construction was complete, the State disbursed one
payment of $30,000. For the two payments, the State disbursed (1) $15,000 after the Program
participant provided a valid building permit and elevation certificate and (2) $15,000 after the
Program participant provided a certificate of occupancy and a final elevation certificate. After
the closing date and disbursement of the initial $15,000, the State required Program participants
to complete the elevation of their homes within 2 years.

As of October 25, 2010, the State had disbursed more than $29 million to 1,0951 Program
participants. Our objective was to determine whether the State ensured that disbursements made
under the Program complied with Federal regulations and program policies and procedures.
Specifically, we wanted to determine whether elevation grant disbursements to Program
participants were eligible and supported.




1
  Of the 1,095 Program participants, 213 received only the initial disbursement of $15,000, totaling just under $3.2 million. The remaining 882
program participants received the full disbursement of $30,000, totaling more than $26.4 million.



                                                                       4
                                 RESULTS OF AUDIT

 Finding: The State Generally Ensured That Disbursements to Program
              Participants Were Eligible and Supported
The State generally ensured that disbursements to Program participants were eligible but
disbursed funds to five participants who were initially eligible, but later defaulted, making the
disbursements ineligible and one participant who received duplicate assistance. This condition
occurred because (1) the State had not implemented policies and procedures to assess whether
there was a need for elevation construction before disbursing funds to one participant; (2) three
participants, who received the initial $15,000 payment, did not fully comply with the terms of the
elevation grant agreement; (3) one participant received duplicate assistance without reimbursing
the State; and (4) the State had not identified one participant who received duplicate assistance.
As a result, the State paid $90,000 in ineligible costs.


 Five Participants Were
 Deemed Ineligible After
 Receiving Disbursements

               Although five participants were initially eligible, but later defaulted, making the
               disbursements ineligible, the State generally ensured that disbursements to
               Program participants were eligible and supported. The State disbursed grant
               funds in one of two ways: one payment of $30,000 or two payments of $15,000.
               After meeting the eligibility requirements, to receive grant funds, the State
               required Program participants to execute an elevation grant agreement (grant
               agreement), which stated that the participants understood and agreed to

                  Elevate the primary residence at or above the Federal Emergency Management
                   Agency advisory base flood elevation or the base flood elevation contained in
                   the Digital Flood Insurance Rate Map, issued on November 15, 2007, and
                  Complete elevation within 2 years of the date of the agreement.

               In addition to the eligibility determination and execution of the grant agreement,
               before disbursing grant funds, the State’s Program process guide and procedures
               manual required it to ensure that the file included

                  A building permit,
                  An elevation certificate, and
                  A certificate of occupancy.

               Further, the Robert T. Stafford Disaster Assistance and Emergency Relief Act - Title
               III, Section 312, or 42 U.S.C. (United States Code) 5155, prohibited the State from



                                                   5
providing financial assistance to persons who received financial assistance under any
other program or from insurance or any other source for the same purpose. Funds
were also to be disbursed based upon need.

A file review of 22 participants who received disbursements totaling $510,000
determined that

       One participant did not need elevation funds. Although this participant
        provided a valid elevation certificate and met other Program requirements, the
        property was located in an area above sea level and did not require additional
        elevation (see picture on the right below). Therefore, the property did not
        undergo construction to elevate it, and the participant did not need the
        elevation grant funds. This condition occurred because the State had not
        implemented policies and procedures to examine the home’s current height,
        which would have assisted it in assessing whether there was a need for
        elevation construction. Before our review, the State identified this ineligible
        participant, who received $30,000, and had taken action. However, the State
        must implement policies and procedures to assess the need for elevation
        construction.




    As a comparison, this home underwent elevation construction.   This home (discussed above) did not undergo elevation construction.


Although the State generally ensured that disbursements to the remaining 21
participants were eligible and supported,

       One participant did not elevate her home to the required height. Before our
        review, the State deemed this participant, who received $15,000, ineligible.
        The State received full reimbursement from this participant on June 3, 2009.

       One participant received assistance under the Mississippi Emergency
        Management Agency (MEMA) elevation program and, therefore, received a
        duplication of benefits. However, before our review, the State identified the
        issue during its management review and had taken action on this grant. The
        State stated that it had placed the participant on a repayment plan to recoup
        the $15,000 but had not provided us with documentation to support this claim.
        The State also stated that the MEMA program began after the elevation grant



                                                        6
                              program and it had implemented controls to prevent a duplication of benefits
                              between the two programs.

                             Two participants, who received $15,000 each, did not elevate their homes
                              before the required completion deadline. These two participants’ time expired
                              during the course of our review. For example, one participant had until
                              January 5, 2011, to submit an appeal for an extension of time to elevate but
                              did not submit the appeal as required. As related to tracking participants who
                              reach the 2-year deadline, the State had a system in place to monitor the
                              expiration of the 2-year deadline period. The State was aware of this issue
                              and stated that it had deemed these participants ineligible and they would not
                              receive the final disbursement. The State also asserted that it would begin the
                              collection process to recapture the $30,0002 disbursed to these two
                              participants.

                        The State must repay to its Program the $75,000 in ineligible costs. It must also
                        ensure that it reallocates the $60,000 in unreimbursed funds for the four Program
                        participants who were later deemed ineligible, thereby ensuring that these funds
                        are put to better use.

                        The remaining 17 Program participants received disbursements totaling $420,000
                        that were eligible and supported. However, we believe that the State could
                        implement additional measures to further prevent ineligible disbursements.

    Additional Review Was
    Conducted

                        We extended our review to identify other participants who received benefits under
                        both the MEMA and State programs. As a result, we identified 16 Program
                        participants who received assistance under both programs. Of the 16, the State
                        had identified 10 and had taken action to recoup the funds disbursed to these
                        participants. However, it had not identified the remaining six. Upon request, the
                        State reviewed those six participants and provided additional documentation to
                        support its review. Based upon the State’s review of the six,

                                   One participant received assistance under both the MEMA and State
                                    programs. The State asserted that it has placed the participant in
                                    collections to recapture the $15,000 disbursed; and

                                   Five participants did not receive duplicate assistance because although the
                                    damaged addresses used under both programs were the same, the MEMA
                                    participants’ names were different from the State’s participants’ names.



2
    Each applicant received the initial $15,000 grant. A total of $30,000 was disbursed to the two applicants.



                                                                          7
             We reviewed the additional documentation and agreed with the State’s
             assessment. As such, the State must repay its Program the $15,000 in ineligible
             costs. In addition, it must also ensure that it reallocates the $15,000 in
             unreimbursed funds for this participant, thereby ensuring that these funds are put
             to better use. Further, since the MEMA damaged addresses were the same as the
             State’s damaged addresses, the State should consider conducting eligibility
             reviews across its disaster recovery programs to ensure different participants did
             not receive assistance for the same damaged property.

Conclusion


             The State generally ensured that disbursements to Program participants were
             eligible but disbursed funds to participants who (1) were initially eligible, but
             later defaulted, making the disbursements ineligible and (2) received duplicate
             assistance. This condition occurred because (1) the State had not implemented
             policies and procedures to assess whether there was a need for elevation
             construction before disbursing grant funds, (2) participants did not fully comply
             with the terms of the elevation grant agreement, (3) participants received
             duplicate assistance without reimbursing the State, and (4) the State had not
             identified other participants who received duplicate assistance. As a result, the
             State disbursed $90,000 in questioned costs.

Recommendations



             We recommend that the HUD’s Deputy Assistant Secretary for Grant Programs

             1A. Ensure that the State repays to its Program the $90,000 in ineligible costs for
                 the six participants who did not comply with the Program requirements
                 and/or received assistance under the MEMA program.

             1B. Ensure that the State reallocates the $75,000 in unreimbursed funds for the
                 five program participants who were later deemed ineligible, thereby ensuring
                 that these funds are put to better use and used for eligible activities.

             1C. Require the State to develop and implement additional written policies,
                 which include procedures for verifying the need for elevation construction,
                 before disbursing final payment to ensure that funds are properly spent.

             We also recommend that the Deputy Assistant Secretary require the State to
             consider




                                              8
1D. Amending its Program policy to include a requirement that staff performing
    file reviews document its review and verification of required documents
    needed to support eligibility prior to the disbursement of funds.

1E. Requiring land surveyors, engineers, and architects to submit, in addition to
    elevation certificates, photographs of properties that they certify as having
    been elevated. The photographs should clearly show the property address.

1F. Conduct site visits of all properties for which Program participants have
    received the full $30,000 disbursement to ensure that homes have been
    elevated in accordance with the Program elevation requirements. The State’s
    administrative procedures should indicate the frequency of those site visits.

1G. Conducting eligibility reviews across its disaster recovery programs to ensure
    different participants did not receive assistance for the same damaged
    property.




                                 9
                                                SCOPE AND METHODOLOGY

We conducted our audit at the State’s office and the HUD Office of Inspector General (OIG)
office in Jackson, MS. We performed our audit work between October 2010 and January 2011.

To accomplish our objective, we used disbursement data from Program inception to October 25,
2010, which consisted of 1,0953 program participants, totaling more than $29 million. Through
file reviews, we determined that the disbursement data were generally reliable. We used a
stratified sampling approach to statistically select 224 of the 1,095 program participants, totaling
$510,000, for review. We chose this method because it allowed selections to be made without
bias from the audit population and allowed conclusions to be reached about the population or
activity being tested, based on mathematically defensible projections from the sample. We
reviewed files for the 22 Program participants who received disbursements to determine whether
the disbursements were eligible and supported. For our expanded review, we obtained
disbursement data from MEMA and compared MEMA’s data to the State’s disbursement data
for its Program participants. We did not assess the reliability of the data or conduct file reviews.

In addition to the file and expanded reviews, we

          Interviewed pertinent HUD, MEMA, State, and contractor staff.
          Obtained and reviewed relevant laws, regulations, and other applicable legal authorities
           relevant to the CDBG Supplemental Disaster Recovery program grants.
          Obtained and reviewed the grant agreements executed between HUD and the State.
          Reviewed the State’s written Program policies and procedures.
          Analyzed and reviewed contracts and amendments executed between the State and its
           contractors.
          Obtained and reviewed the State’s monitoring report.
          Obtained HUD’s review of the State’s Program.
          Conducted site visits to homes of participants who received the full $30,000
           disbursement to ensure that the properties had been elevated.

Our audit period covered March 2008 through October 2010. We expanded our audit period 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 objective. We believe that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objective.




3
  Of the 1,095 program participants, 213 received only the initial disbursement of $15,000, totaling just under $3.2 million. The remaining 882
program participants received the full disbursement of $30,000, totaling more than $26.4 million.
4
  Of the 22, 10 program participants received the initial disbursement of $15,000, and 12 received the full disbursement of $30,000.



                                                                      10
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

        Effectiveness and efficiency of operations,
        Reliability of financial reporting, and
        Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls
               We determined that the following internal controls were relevant to our audit
               objective:

                   Policies and procedures implemented and/or followed by the State and its
                   contractors to ensure compliance with applicable laws and regulations when
                   making disbursements under the Program.

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control does
               not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.

 Significant Deficiency


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

                  The State had not implemented written policies and procedures to assess the
                   need for elevation construction before disbursing funds (see finding).




                                                 11
                                    APPENDIXES

Appendix A

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

      Recommendation            Ineligible 1/    Funds to be put to
             number                                   better use 2/
                     1A             $90,000
                     1B                                   $75,000

                 Totals             $90,000               $75,000


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.

2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an 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.




                                                12
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         13
Comment 2




Comment 3




Comment 4




            14
Comment 5




Comment 6




Comment 7




            15
Comment 7




Comment 8




Comment 9



Comment 10




Comment 11




             16
Comment 12




Comment 13




             17
                          OIG Evaluation of Auditee Comments

Comment 1   We disagree. The State asserted that there was no material findings sufficient to
            merit the conclusions reached. However, we identified issues with 5 of the 22
            files reviewed. Of which, one instance involved an applicant who met the
            Program requirements and provided the appropriate documentation, thus received
            $30,000. However, the applicant's property did not undergo any elevation
            construction and the applicant did not need the elevation grant funds. We also
            disagree with the State's assertion that our testing revealed that the State's internal
            controls were adequate in every regards. In fact, the results of our review
            determined that the State did not implement adequate controls to assess the need
            for elevation construction prior to disbursing funds.

Comment 2   The State believed that OIG has boldly declared that the State disbursed CDBG
            funds to "ineligible" EGP applicants, citing some 5 cases from its initial review of
            22 files. The State asserted that, except for one case of suspected fraud, those
            cited applicants were in fact legally eligible to participate in the program. We
            agreed at the exit conference to revise the report language and have done so. We
            revised the report to clarify that these applicants were initially eligible for the
            Program, but later defaulted on their grant agreements, thus making the
            disbursements ineligible.

Comment 3   We acknowledge the State for taking action to recover the funds disbursed.

Comment 4   The State explained that two applicants had their completion deadlines - as
            established by program rules and their grant agreements - come up during the
            OIG review. The State maintained that one of these applicants has been
            determined to be in default and collection efforts have been initiated to recoup the
            initial $15,000 payment. However, the State maintained that the other applicant
            submitted documentation showing that construction had begun on his home and
            requested an extension of the deadline. The State explained that the request was
            granted in accordance with established EGP policies and a new deadline was set.
            Therefore, the State asserted that there is no basis at this time to recapture this
            applicant's initial $15,000 payment.

            The State provided documentation to show the granted extension. We reviewed
            the documentation and determined that the applicant's deadline to file an appeal
            for an extension had past, in violation of the State’s policy. The State’s policy
            required the applicant to file an appeal for an extension by February 15, 2011.
            However, the applicant did not file an appeal until February 23, 2011, missing the
            deadline by 8 days and therefore in default of the signed grant agreement. In
            addition, other than a statement from the applicant, the State did not provide
            documentation supporting the applicant’s claim that construction had begun.
            Therefore, we stand by our conclusion.




                                              18
Comment 5     We disagree. The State asserted that our report uncovered nothing and interpreted
              that our ultimate conclusion was that the State's written policies and controls were
              inadequate. However, the audit report accurately reflects the issues identified and
              our conclusions which determined that the State had not implemented adequate
              controls to assess the need for elevation construction prior to disbursing funds.

Comment 6     We acknowledge the State for taking action on this applicant. However, the State
              asserted that its Program controls worked exactly as designed by detecting the
              suspected fraud and the applicant met the Program requirements and provided the
              appropriate documentation, thus received $30,000. The only reason the State
              identified the issue was because of a hotline compliant, which prompted the State
              to review the applicant's file. At the exit conference, the State asserted that the
              hotline is used to detect noncompliance. The State did not discuss or provide
              documentation to support any other methods for detecting noncompliance. In
              addition, had the State implemented policies and procedures to assess the need for
              elevation construction, it could have prevented these funds from being disbursed.
              Therefore, we stand by our original conclusion.

Comment 7     The State believed that it was not responsible for the two applicants who received
              duplicate disaster assistance. The State provided documentation to support that its
              disbursements to the two applicants occurred prior to the applicants applying for
              MEMA assistance. We reviewed the additional documentation and determined
              that in one instance the applicant was deemed eligible for the MEMA program
              prior to receiving a disbursement under the State’s program. In the other instance,
              the applicant received a disbursement under the State’s program prior to receiving
              assistance under the MEMA program. Despite these determinations, the State
              should have been aware of and coordinated with MEMA, at the initiation of
              MEMA’s program, to ensure that no duplication of benefits occurred, instead of
              after the fact. In addition, the State made the determination that both of these
              applicants received a duplication of benefits, and had taken action to recover the
              funds disbursed. Therefore, we stand by our conclusion and once the State
              recovers the funds, it should pay those funds back to its Program.

Comment 8     As discussed in comment 2, we revised the report as agreed. As discussed in
              comments 4 and 7 above, we stand by our conclusions and recommendation for
              all six applicants.

Comment 9     As discussed in comment 2, we revised the report as agreed. We acknowledge the
              State for taking action on this recommendation. The State should provide
              supporting documentation to HUD’s staff, which will assist the Authority with
              resolving recommendation 1B.

Comment 10 The State objected to this recommendation, asserting that adequate written
           policies, procedures and controls existed in this regard for the Program. We
           disagree. As discussed in the report and in comment 1, the State did not have




                                               19
              adequate controls in place to assess the need for elevation construction.
              Therefore, we stand by this recommendation.

Comment 11 We agree that State has a system in place to maintain Program documentation and
           during the review, we reviewed several checklists. The checklists included
           verifications that the State obtained the required documentation from the
           applicants. However, the checklists did not confirm the accuracy of the
           documentation. In addition, we could not always identify the staff responsible for
           completing the checklists. Further, as reflected in the report, we only asked the
           State to consider implementing this additional measure.

Comment 12 The State asserted that a photograph of the property is simply inadequate and far
           less reliable when compared to a document essentially issued under oath by a
           professional with authority to give it. We agree that the elevation certificate is a
           reliable document. However, coupled with a photograph, we believe that the
           State could have immediately recognized that the property, for the applicant who
           did not need elevation funds, did not undergo any elevation construction. In
           addition, as reflected in the report, we only asked the State to consider
           implementing this additional measure.

Comment 13 We acknowledged that the State has implemented procedures to check for
           duplication of benefits between the State's and MEMA's elevation programs. This
           recommendation was related to the State conducting eligibility reviews across all
           of its disaster recovery programs to ensure that different participants did not
           receive assistance for the same damaged property. Again, as reflected in the
           report, we only asked the State to consider implementing this recommendation.




                                               20