oversight

The Municipality of Mayaguez Did Not Ensure Compliance With HOME Program Objectives

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-04-08.

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

                                                                Issue Date
                                                                      April 8, 2011
                                                                Audit Report Number
                                                                      2011-AT-1006




TO:        José R. Rivera, Director, Community Planning and Development, San Juan Field
              Office, 4ND


           //signed//
FROM:      James D. McKay, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT: The Municipality of Mayaguez, PR, Did Not Ensure Compliance With HOME
            Program Objectives

                                   HIGHLIGHTS

 What We Audited and Why

            We audited the Municipality of Mayaguez (Municipality) HOME Investment
            Partnerships Program (HOME). We selected the Municipality for review as part of
            our strategic plan, based on the amount of HOME funds approved. The objectives
            of the audit were to determine whether the Municipality met program objectives in
            its HOME-funded activities and maintained its financial management system in
            compliance with U.S. Department of Housing and Urban Development (HUD)
            requirements.

 What We Found


            The Municipality disbursed more than $4.4 million for two activities that did not
            meet HOME program objectives and more than $2.8 million for an additional
            activity for which it could not support its compliance with HOME program
            objectives. As a result, HUD had no assurance that funds were used solely for
            eligible purposes and that HOME program objectives were met.
           The Municipality’s financial management system did not support the eligibility of
           $1.5 million in disbursements, and did not account for more than $23,000 in
           HOME receipts. In addition, the Municipality failed to disburse HOME funds in a
           timely manner and provided HUD with inaccurate information. As a result, HUD
           lacked assurance that funds were adequately accounted for, safeguarded, and used
           for authorized purposes.

What We Recommend


           We recommend that the Director of the San Juan Office of Community Planning
           and Development require the Municipality to repay more than $4.7 million for
           ineligible expenditures that did not result in benefits to the HOME program. The
           Director should also require the Municipality to provide all supporting
           documentation to demonstrate the allocability and eligibility of more than $2.5
           million in disbursements. The Municipality should also reprogram and put to
           better use more than $900,000 in unexpended funds for an activity that did not
           meet HOME program objectives.

           The Director should also require the Municipality to develop and implement an
           internal control plan to ensure that the HOME program has (1) a financial
           management system that complies with HUD requirements and (2) controls and
           procedures which ensure that HOME requirements are followed and accurate
           information is reported to HUD.

           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 findings with HUD and the Municipality during the audit and at
           the exit conference on February 22, 2011. The Municipality provided its written
           comments to the draft report on March 7, 2011. In its response, the Municipality
           generally disagreed with the findings.

           The complete text of the Municipality’s response, along with our evaluation of that
           response, can be found in appendix B of this report. Attachments to the
           Municipality’s comments were not included in the report but are available for
           review upon request.




                                            2
                            TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit
      Finding 1: The Municipality Did Not Meet HOME Program Objectives            5

      Finding 2: The Municipality’s Financial Management System Did Not Comply   11
                 With HUD Requirements

Scope and Methodology                                                            17

Internal Controls                                                                19

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use             21
   B. Auditee Comments and OIG’s Evaluation                                      22




                                            3
                      BACKGROUND AND OBJECTIVES

The HOME Investment Partnerships Program (HOME) is authorized under Title II of the
Cranston-Gonzalez National Affordable Housing Act as amended. The U.S. Department of
Housing and Urban Development (HUD) allocates funds by formula to eligible State and local
governments for the purpose of increasing the supply of decent, safe, sanitary, and affordable
housing to low- and very low-income families. State and local governments that become
participating jurisdictions may use HOME funds to carry out multiyear housing strategies through
acquisition, rehabilitation, new housing construction, and tenant-based rental assistance.

Participating jurisdictions are required to commit HOME funds within 24 months and expend
them within 5 years after the last day of the month in which HUD notifies the participating
jurisdiction of HUD’s execution of the HOME agreement. Participating jurisdictions draw down
HOME funds through HUD’s Integrated Disbursement and Information System (information
system). HUD’s information system is also used to monitor and track HOME commitments,
program income, repayments, and recaptured funds, among other things.

The Municipality of Mayaguez (Municipality) is the sixth largest participating jurisdiction in
Puerto Rico, for which HUD has approved more than $3.5 million in HOME funds during the
past 3 fiscal years. HUD’s information system reflected expenditures exceeding $1.02 million
during the fiscal year ending June 30, 2009, for the following activities:

                          Activity type                              Amount expended
  Home-buyer assistance                                                   $453,114
  Community housing development organizations (CHDO)                       409,963
  Tenant-based rental assistance                                             82,715
  Planning and administration                                                66,527
  Homeowner assistance - new construction                                    12,957
  Total                                                                 $1,025,278

The Municipality’s Department of Housing and Federal Funds was responsible for managing the
HOME program. Its books and records were maintained at #123 South Ramon E. Betances
Street, Mayaguez, PR. We audited the Municipality’s HOME program as part of the HUD Office
of Inspector General’s (OIG) strategic plan.

The objectives of the audit were to determine whether the Municipality met HOME program
objectives and maintained its financial management system in compliance with HUD
requirements.




                                                4
                                   RESULTS OF AUDIT

Finding 1: The Municipality Did Not Meet HOME Program Objectives
The Municipality disbursed more than $4.4 million for two activities that did not meet HOME
program objectives and more than $2.8 million for an additional activity for which it could not
support its compliance with HOME program objectives. We attribute the noncompliance to the
inadequate monitoring of HOME-funded activities and the Municipality’s unfamiliarity with
HUD requirements. As a result, HUD had no assurance that funds were used solely for eligible
purposes and that HOME program objectives were met.



 HOME Objectives Not Met


              HUD’s regulations at 24 CFR (Code of Federal Regulations) 92.1 state that HOME
              funds are allocated to participating jurisdictions to strengthen public-private
              partnerships and to expand the supply of decent, safe, sanitary, and affordable
              housing for low- and very low-income families. Regulations at 24 CFR 92.205(e)
              provide that a HOME-assisted activity that is terminated before completion, either
              voluntarily or otherwise, constitutes an ineligible project and any HOME funds
              invested must be repaid to the participating jurisdiction’s treasury account.

              Contrary to HUD’s regulations, the Municipality failed to ensure that two activities
              met HOME objectives.

              Estancias del Rio housing project - In July 1993, the Municipality initially
              funded through a community housing development organization (CHDO) the
              construction of a 121-unit housing project named Estancias del Rio. The
              agreement with the CHDO indicated that the construction should have been
              completed in August 1997. More than 17 years had elapsed since the housing
              project was initially funded, and the Municipality had completed only 22 (18
              percent) of the proposed housing units, of which 21 were occupied.




              Partial view of incomplete and abandoned units within the Estancias del Rio housing project




                                                     5
                                  Aerial view of Estancias del Rio, source Google maps.

                 The CHDO responsible for the development of Estancias del Rio defaulted on the
                 construction loan, and in June 2006, the bank sued the CHDO for the collection of
                 monies, foreclosure of pledge agreement, and breach of contract, among other
                 things. As a result, the construction work stopped. In an attempt to restart the
                 project, the Municipality disbursed $400,000 in HOME funds in April 2009 to pay
                 off the outstanding construction loan. In May 2010, the Municipality delegated to
                 another CHDO the completion of the project, reduced the scope of the project to
                 85 units, and committed an additional $1.2 million in HOME funds.
                 The Municipality disbursed more than $4.43 million in HOME funds and failed to
                 ensure the timely completion of the activity. More than 17 years had elapsed, and
                 the project had not been completed. As a result, HUD had no assurance that the
                 activity provided the intended benefits and met HOME objectives. HUD informed
                 us that providing additional HOME funds to a project that the Municipality had not
                 been able to complete in more than 17 years was inconsistent with HOME
                 regulations. Therefore, the Estancias del Rio housing project did not comply with
                 HOME requirements, and the Municipality needs to return all of the funds
                 disbursed. In a letter, dated October 27, 2010, HUD informed the Municipality of
                 its decision, disallowing all funds disbursed, requesting the reimbursement of more
                 than $4.3 million, and prohibiting any additional funding to the housing project. 1
                 The Municipality contended that HUD requirements did not establish timeframes
                 for when a project should be completed. Thus, it believed that the Estancias del
                 Rio housing project complied with program requirements and that the development
                 of the housing project should continue. This was not an acceptable explanation for

1
  During the audit, we consulted HUD headquarters about the propriety of using $400,000 in HOME funds to pay off
the defaulted construction loan. In its response, HUD informed us and the San Juan HUD CPD field office that the
Estancias del Rio housing development was not compliant with program requirements. As a result of our review and
inquiries, HUD requested the reimbursement of all funds.

                                                       6
not completing this activity in a timely manner and allowing it to go on for more
than 17 years. HUD’s regulations at 24 CFR 92.500(d) requires participating
jurisdictions to expend HOME funds within 5 years from the execution of the
HOME program agreement. Regulations at 24 CFR 92.2 define commitments to
specific local projects as those that can be reasonably expected to commence
within 12 months of the agreement date.

The Municipality did not adequately manage this activity to ensure that it was
carried out in a timely manner and that funds were used in accordance with all
HOME requirements as provided at 24 CFR 92.504(a). We attribute this
deficiency to the inadequate planning and capacity of the CHDO. For example,
the Municipality selected three different CHDOs to undertake the activity, but it
had not been able to complete the project in more than 17 years. In addition, one
of the CHDOs did not have the capacity to repay and defaulted on the project
construction loan and selected a contractor that could not provide a payment and
performance bond. The Municipality should discontinue this activity and
reimburse more than $4.43 million in HOME disbursements. In addition,
$906,091 in unexpended HOME funds, as reflected in HUD’s system, should be
reprogrammed and put to better use for other eligible efforts.

Home-buyer assistance activity #1141 - This activity was initially funded in July
2007, providing $10,000 in HOME assistance to a participant for the acquisition of
a home. In April 2009, the Municipality withdrew from HUD the full amount, but
it had not disbursed any funds toward the acquisition of the home. Thus, the
Municipality failed to ensure that the activity provided the intended benefits and
met HOME objectives.

Regulations at 24 CFR 92.502(c)(2) state that HOME funds withdrawn from the
treasury account must be expended for eligible costs within 15 days. Any
unexpended drawdowns must be returned to HUD. Contrary to HUD’s
regulations, the Municipality did not disburse the funds it withdrew from its
HOME treasury account and did not return to HUD the unexpended drawdown.

The HOME program supervisor informed us that one of the parties involved in the
transaction died and the funds remained in the Municipality’s bank account. The
official also informed us that she was not aware of HUD’s timeframe requirements
for disbursing drawdowns. This was not an acceptable explanation for not
performing an integral component of its HOME program responsibilities. Thus,
the Municipality did not adequately manage this activity to ensure that it was
carried out in a timely manner and that funds were used in accordance with all
program requirements. The Municipality should not continue with this activity
and must reimburse $10,000 in HOME disbursements.




                                 7
    HOME Objectives Not
    Supported

                 Villas de Felisa housing project - The Municipality disbursed more than $2.4
                 million in HOME funds for the acquisition of approximately 24.59 acres of land
                 and the development of a 272-unit housing project named Villas de Felisa.2
                 Although the construction of the project was completed in April 2002, HUD’s
                 information system showed it as an open activity with the final draw made in
                 February 2001. The activity remained open in HUD’s information system because
                 the Municipality did not have the required information on participants, including
                 information to support that income eligibility requirements had been met. As a
                 result, HUD had no assurance that this activity increased the supply of decent,
                 safe, sanitary, and affordable housing to low- and very low-income families and
                 that HOME objectives were met.

                 HUD’s regulations at 24 CFR 92.1 state that HOME funds are allocated to
                 participating jurisdictions to strengthen public-private partnerships to expand the
                 supply of decent, safe, sanitary, and affordable housing to low- and very low-
                 income families. Regulations at 24 CFR 92.203(a) provide that participating
                 jurisdictions must determine that each participant family is income eligible.

                 Contrary to HUD’s regulations, the Municipality did not take the appropriate
                 measures to ensure that subsidized units were occupied by eligible participants.
                 The Municipality could not support the income eligibility of the participants as
                 required by HUD.3 Therefore, HUD lacked assurance of the allowability and
                 allocability of more than $2.4 million charged to the HOME program.

                 The Municipality also did not use or develop all of the 24.59 acres of land acquired
                 for the Villas de Felisa housing project. According to Municipality records, only
                 18.64 acres of land were developed for the housing project. Therefore,
                 approximately 6.48 acres of land had remained unused since being acquired in
                 1998 without providing the intended benefit of expanding the supply of decent,
                 safe, sanitary, and affordable housing for low- and very low-income families.
                 HUD’s regulations at 24 CFR 205(a)(2) state that acquisition of vacant land must
                 be undertaken only with respect to particular projects intended to provide
                 affordable housing. Because the land did not provide affordable housing, it did not
                 comply with HOME objectives. Contrary to HUD’s regulations, the Municipality
                 disbursed more than $273,000 for ineligible purposes.4



2
  The Municipality disbursed an additional $420,000 in Community Development Block Grant funds for this activity.
3
  A September 2007 HUD monitoring report disclosed a similar deficiency, but it had not been resolved.
4
  The ineligible amount represents the proportional price paid for the unused land (6.48 acres) based on the total
purchase price for the 24.59 acres of land acquired [($1,036,000/24.59 acres) x 6.48 unused acres].

                                                        8
                 The Municipality failed to ensure that each participant family living at Villas de
                 Felisa was income eligible and that HOME objectives were met. This
                 noncompliance occurred because the Municipality disregarded HUD requirements.
                 Therefore, more than $2.56 million in disbursements was unsupported, and more
                 than $273,000 paid for the unused property was ineligible.

    Conclusion

                 The Municipality failed to ensure that activities met HOME objectives. This
                 deficiency occurred because the Municipality did not properly monitor HOME-
                 funded activities and was not fully aware of HUD requirements. As a result, HUD
                 had no assurance that funds were used solely for eligible purposes and that HOME
                 program objectives were met. The Municipality paid more than $4.7 million for
                 activities that did not provide the intended benefits. In addition, it failed to support
                 the allowability and allocability of more than $2.56 million.

    Recommendations


                 We recommend that the Director of the San Juan Office of Community Planning
                 and Development

                 1A. Require the Municipality to reimburse its HOME treasury account or HUD,
                     as appropriate, from non-Federal funds $4,433,035 for disbursements
                     associated with two activities that did not meet HOME program objectives.5

                 1B. Require the Municipality to reprogram and put to better use $906,091
                     associated with unexpended funds for the Estancias del Rio housing project.

                 1C. Require the Municipality to submit all supporting documentation showing
                     the allowability and allocability of $1,062,991 disbursed for participant
                     families at the Villas de Felisa housing project or reimburse this amount to its
                     HOME treasury account or HUD, as appropriate, from non-Federal funds. 6

                 1D.   Require the Municipality to reimburse its HOME treasury account or HUD,
                       as appropriate, from non-Federal funds $273,009 paid for land acquired for
                       the Villas de Felisa housing project that did not provide the intended benefits.

                 1E.   Require the Municipality to establish and implement appropriate monitoring
                       procedures to ensure HOME requirements and objectives are met.



5
 Total disbursements of $4,444,697 were adjusted to consider $11,662 questioned in recommendation 2B.
6
 Total disbursements of $2,836,000 were adjusted to consider $1,500,000 questioned in recommendation 2A and
$273,009ineligible in recommendation 1D.

                                                      9
1F.   Provide training and technical assistance to the Municipality’s HOME
      program staff on timeliness requirements for disbursements and completion
      of activities.




                                10
Finding 2: The Municipality’s Financial Management System Did Not
Comply With HUD Requirements
The Municipality’s financial management system did not support the eligibility of $1.5 million in
disbursements, and did not account for more than $23,000 in HOME receipts. In addition, it
failed to disburse HOME funds in a timely manner and provided HUD with inaccurate
information. These deficiencies occurred because the Municipality lacked written procedures and
controls to ensure compliance with HUD requirements. As a result, HUD lacked assurance that
funds were adequately accounted for, safeguarded, and used for authorized purposes.


 Unsupported Program
 Disbursements

              Regulations at 24 CFR 92.205(a) allow disbursements for reasonable expenditures
              associated with the HOME program that are supported with records that enable
              HUD to determine that HOME requirements were met. In addition, 24 CFR
              508(a)(3)(ii) requires participating jurisdictions to maintain records demonstrating
              the source and application of funds for each project including supporting
              documentation in accordance with 24 CFR 85.20.

              The Municipality did not provide documentation supporting the reasonableness,
              allowability, and allocation of $1.5 million charged to the HOME program,
              associated with the Villas de Felisa housing project. It paid for construction work
              without progress/engineering certifications, cost descriptions, or other support
              showing the work or service that was performed. A Municipality official informed
              us that the disbursements made to the developer of the housing project were based
              on the contract agreement. No detailed documentation was provided by the
              contractor. Therefore, HUD lacked assurance that funds were used for authorized
              purposes.

Inaccurate Accounting Records


              Regulations at 24 CFR 85.20(a) require participating jurisdictions to maintain
              fiscal controls and accounting procedures sufficient to permit the preparation of
              reports and the tracing of funds to a level of expenditures adequate to establish that
              such funds have not been used in violation of the restrictions and prohibitions of
              applicable statutes.

              The Municipality’s accounting records were not accurate, current, and complete.
              They did not reflect complete financial information on HOME activities and did
              not permit the adequate tracing of program expenditures. For example, the



                                                11
           expenditures shown in the Municipality’s accounting records did not agree with
           amounts reflected in HUD’s information system.

                                                         HUD’s
                                                      information   Accounting
                        Activity type                    system       records   Difference
             Estancias del Rio                         $4,096,677    $4,085,015 $(11,662)
             Home-buyer assistance                       $387,402      $376,000   (11,402)
             (as of April 30, 2010)
             Tenant-based rental assistance              $82,715        $81,917        (798)
             (as of June 30, 2008)
                                              Total                                $(23,862)

           The Municipality could not explain the discrepancies and could not account for
           more than $23,000 drawn from HUD for various HOME activities.

HOME Funds Not Disbursed in a
Timely Manner

           The Municipality withdrew more than $1.7 million in HOME funds from its
           treasury account between July 1, 2008, and April 30, 2010. Regulations at 24 CFR
           92.502(c)(2) state that HOME funds drawn down from the treasury account must
           be expended for eligible costs within 15 days. Any unexpended drawdowns must
           be returned to HUD.

           Contrary to HUD’s regulations, the Municipality failed to disburse drawdowns
           totaling more than $470,000 (27 percent) in HOME funds within 15 days. Further,
           it did not return any of the HOME funds to HUD and consistently maintained a
           high cash balance in its bank account.


                                       Date of                                 Days elapsed
            Voucher     Activity      drawdown              Date of         between deposit and
            number      number         deposit           disbursement       disbursement dates
             5092780        1057      Apr. 14, 2010        Apr. 30, 2010           16
             5060693         804       Feb. 2, 2010        Feb. 23, 2010           21
             1659119         219       Apr. 8, 2009        May 07 ,2009            29
             1659119         219       Apr. 8, 2009        May 07, 2009            29
             5064784        1307      Feb. 11, 2010        Mar. 12, 2010           29
             5078366         872      Mar 15, 2010         Apr. 22, 2010           38
             1655352         219      Mar. 27, 2009        Aug. 20, 2009           146
             5004751        1281      Sept. 9, 2009         Jul. 07, 2010          301
             1663576        1141      Apr. 21, 2009       Not disbursed            n/a

           Regulations at 24 CFR 92.502(c)(3) require that HOME funds in the participating
           jurisdiction’s local bank account be disbursed before additional grant funds are


                                                12
           requested. The Municipality consistently maintained a high cash balance in its
           bank account. The Municipality’s June 30, 2010, bank statement reflected a cash
           balance of more than $70,000, and the Municipality maintained a monthly average
           balance of more than $100,000 during the 24-month period ending June 30, 2010.




           The independent public accountant report included similar cash management
           deficiencies during the past 3 years. However, the deficiency continued to exist.


Inaccurate Reporting


           Participant jurisdictions are required by 24 CFR 92.500(d) and 92.502 to commit
           HOME funds within 24 months of their allocation and report commitment
           information in HUD’s information system. HUD’s regulations at 24 CFR 92.2
           define “commitment” as (1) an executed, legally binding agreement with a State
           recipient, a subrecipient, or a contractor to use a specific amount of HOME funds
           to produce affordable housing or provide tenant-based rental assistance or an
           executed written agreement reserving a specific amount of funds to a CHDO or (2)
           having met requirements to commit to a specific local project, which also requires
           that a written, legally binding agreement be executed with the project or property
           owner. HUD Notice 07-06 dated June 1, 2007, also requires that the signatures of
           all parties be dated to show the execution date.

           The Municipality reported in HUD’s information system that it had committed
           more than $35,000 in HOME funds, although it did not have executed agreements
           with the recipients. The actual commitments occurred between 266 and 1,170
           days after the funding date. Therefore, the funds were not reported as committed
           in accordance with HUD requirements.


                                            13
              Reported
             commitment
              amount in     Funding date
                HUD’s        in HUD’s           Actual            Days elapsed
  Activity   information    information       agreement        between agreement
  number        system         system            date          and reporting dates
    896          $12,975    Sept. 8, 2005    Nov. 21, 2008            1,170
    658          $22,752    Nov. 25, 2003    Aug. 17, 2004             266
   Total         $35,727

We also found 11 instances in which the Municipality reported in HUD’s
information system the commitment of more than $1.6 million in HOME funds
between 1 and 76 days after the grant agreement was executed. Therefore, the
funds were not reported as committed in accordance with HUD requirements.

              Reported
             commitment                                           Days elapsed
              amount in      Funding date                            between
                HUD’s          in HUD’s           Actual          reporting and
  Activity   information      information       agreement           agreement
  number        system           system            date               dates
   1345           $40,000    Jan. 25, 2010     Nov. 10, 2009            76
   1337           $40,000    Oct. 23, 2009     Aug. 21, 2009            63
   1290           $50,000    June 12, 2009     Apr. 24, 2009            49
   1254           $40,000    Mar. 25, 2009     Mar. 11, 2009            14
   1342           $40,000    Nov. 24, 2009     Nov. 10, 2009            14
   1280           $40,000    May 26, 2009      May 14, 2009             12
   1299           $46,000    July 24, 2009     July 16, 2009             8
   1298           $40,000    July 24, 2009     July 16, 2009             8
   1339           $40,000    Nov. 06, 2009     Oct. 30, 2009             7
   1340           $40,000    Nov. 06, 2009     Oct. 30, 2009             7
   1351       $1,206,541     May 28, 2010      May 27, 2010              1
   Total      $1,622,541

HUD’s information system contained additional inaccurate information concerning
the Municipality’s HOME activities. Regulations at 24 CFR 92.502(d) require
participant jurisdictions to report in HUD’s information system the status of each
activity assisted with HOME funds. However, the Municipality did not always
report accurate information associated with its activities. Three activities were
shown as open activities with unexpended funds, although the construction was
completed in November 2009. A Municipality official informed us that the
activities were not closed because it planned to use the remaining unexpended
$2,008 on other activities. This was not an acceptable explanation for not
performing an integral component of its HOME program responsibilities. HUD’s
regulations at 24 CFR 92.502(d) also state that participant jurisdictions need to


                                 14
             enter project completion information within 120 days from the final drawdown.
             The Municipality must close these activities and reprogram the $2,008 in
             unexpended funds.

             The inaccurate data compromised the integrity of HUD’s information system and
             the degree of reliability HUD could place on the data for monitoring commitments
             and compiling national statistics on the HOME program. Management must
             improve its controls to ensure the accuracy of its reported accomplishments and
             that it complies with HUD requirements.

Lack of Procedures and
Controls

             The lack of program controls and procedures also contributed to the Municipality’s
             improper administration of HOME funds. Controls and procedures implemented
             by the Municipality were not sufficient and adequate to provide HUD assurance
             that all funds were properly tracked, reported, and used in accordance with HUD
             requirements. For example, the Municipality’s written procedures did not provide
             for controls that ensured the adequate reporting or monitoring of commitment
             information reported in HUD’s information system. In addition, the procedures
             did not provide for controls that ensured the timely use of HOME drawdowns.
             Management must revise and implement its controls and procedures to ensure the
             proper administration of program receipts and improve the accuracy of data
             reported to HUD.

             The lack of program controls and procedures has been pointed out in previous
             audits. Our previous audit of the Municipality’s Community Development Block
             Grant and Section 108 Loan Guarantee Assistance program disclosed a number of
             compliance and financial management problems. Similarly the Municipality’s
             most recent independent audit disclosed continuing noncompliance with HUD
             requirements.

Conclusion


             Because the Municipality lacked adequate procedures and internal controls, it
             made ineligible and unsupported disbursements, could not account for funds
             drawn, did not disburse funds in a timely manner, and did not ensure the accuracy
             of commitments and other information entered into HUD’s information system.
             The lack of established procedures to permit the tracing of HUD funds and ensure
             that they have not been used in violation of applicable statutes is a major concern.
             Management must improve its internal controls to ensure that HUD requirements
             are met and that it achieves HOME program goals.




                                              15
Recommendations

          We recommend that the Director of the San Juan Office of Community Planning
          and Development

          2A. Require the Municipality to submit all supporting documentation showing the
              eligibility and propriety of $1.5 million charged to the HOME program for the
              development of the Villas de Felisa housing project or reimburse the program
              from non-Federal funds.

          2B. Require the Municipality to submit all supporting documentation showing the
              eligibility and propriety of $23,862 drawn from HUD or reimburse the HOME
              program from non-Federal funds.

          2C. Require the Municipality to deobligate in HUD’s information system, then
              reprogram and put to better use, $2,008 associated with unexpended funds
              related to the completed activities.

          2D. Require the Municipality to establish and implement adequate procedures to
              ensure that it disburses HOME funds for eligible activities within HUD’s
              established timeframes.

          2E. Require the Municipality to establish and implement adequate controls and
              written procedures to ensure that accurate commitment and activity
              information is reported in HUD’s information system.

          2F. Require the Municipality to review all grant agreements for each activity
              entered into HUD’s information system and correct any inaccurate
              information, including funding amount, activity status, and funding type
              classification.

          2G. Require the Municipality to develop and implement a financial management
              system that permits the tracing of HOME funds to a level which ensures that
              such funds have not been used in violation of the restrictions and prohibitions
              of applicable statutes and that funds are drawn and used for their intended
              purpose only.




                                           16
                  SCOPE AND METHODOLOGY

The objectives of the audit were to determine whether the Municipality met HOME
program objectives and maintained its financial management system in compliance with
HUD requirements. The financial requirements included the expenditure of HOME funds
for eligible and supported project costs, reporting accurate and supported commitments in
HUD’s information system, and disbursing HOME funds within the established
timeframes.

To accomplish our objectives, we

       Reviewed applicable HUD laws, regulations, and other HUD program
       requirements;

       Reviewed the Municipality’s controls and procedures as they related to our
       objectives;

       Interviewed HUD, Municipality, developer, and CHDO officials;

       Reviewed monitoring, internal review, and independent public accountant reports;

       Reviewed the Municipality’s files and records, including activity files and
       accounting records;

       Traced information reported in HUD’s information system to the Municipality’s
       records, including accounting records and executed agreements; and

       Performed site inspections of the activities.

HUD’s information system reflected that the Municipality had 22 open HOME-funded
activities as of April 30, 2010. We selected and reviewed four activities for which the last
draw was more than a year earlier, with withdrawals totaling more than $4.4 million. We
also reviewed five activities that were funded on or before 2005 and for which the last
draw was between 100 and 200 days old (before April 30, 2010), with withdrawals
totaling more than $108,000. We reviewed the nine activities in the sample to determine
the status of activities for which HOME funds were disbursed but which reflected slow
progress.

HUD’s information system reflected that the Municipality committed more than $1.05
million between July 1, 2008, and April 30, 2010. We selected for review a sample of
commitments equal to or greater than $40,000, which resulted in commitments of
$416,000 associated with 10 activities. We reviewed one additional commitment totaling
more than $1.2 million that was made on May 28, 2010, because the amount was
significant. We reviewed these activities to determine whether the commitments reported
to HUD were accurate and supported.

                                         17
The Municipality drew down from HUD between July 1, 2008, and April 30, 2010, more
than $1.7 million in HOME funds. We selected and reviewed 12 withdrawals greater than
or equal to $35,000. We also reviewed eight withdrawals greater than $5,500 made
between January and April 2010 and reviewed two withdrawals based on the program year
funding. A total of 22 withdrawals totaling more than $900,000 (about 52 percent) were
reviewed to determine whether the Municipality expended grant funds in accordance with
HUD requirements.

To achieve our audit objectives, we relied in part on computer-processed data contained in
the Municipality’s database and HUD’s information system. Although we did not perform
a detailed assessment of the reliability of the data, we performed a minimal level of testing
and found the data adequate for our purposes. The results of the audit apply only to the
items selected and cannot be projected to the universe or population.

The audit generally covered the period July 1, 2008, through April 30, 2010, and we
extended the period as needed to accomplish our objectives. We conducted our fieldwork
from June through November 2010 at the Municipality’s offices in Mayaguez, PR.

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.




                                         18
                               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
               objectives:

                      Program operations - Policies and procedures that the audited entity has
                      implemented to provide reasonable assurance that a program meets its
                      objectives, while considering cost effectiveness and efficiency.

                      Compliance with applicable laws and regulations and provisions of
                      contracts or grant agreements - Policies and procedures that the audited
                      entity has implemented to provide reasonable assurance that program
                      implementation is in accordance with laws, regulations, and provisions of
                      contracts or grant agreements.

                      Safeguarding of assets and 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 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.


                                                 19
Significant Deficiencies

             Based on our review, we believe that the following items are significant deficiencies:

                    The Municipality failed to ensure that HOME activities met program
                    objectives (see finding 1).

                    The Municipality did not develop and implement a financial management
                    system that complied with HUD requirements (see finding 2).




                                               20
                                    APPENDIXES

Appendix A

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

      Recommendation                                                       Funds to be put
          number                  Ineligible 1/    Unsupported 2/          to better use 3/

             1A                    $4,433,035
             1B                                                                  $906,091
             1C                                        $1,062,991
             1D                       273,009
             2A                                          1,500,000
             2B                                             23,862
             2C                                                                     2,008
            Total                  $4,706,044          $2,586,853                $908,099


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.

3/   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. In this
     instance, if HUD implements recommendations 1B and 2D, funds will be available for
     other eligible activities consistent with HOME requirements.




                                              21
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                          22
Comment 1




            23
Comment 1




            24
Comment 1




            25
Comment 1




Comment 2




            26
Comment 2




Comment 3




Comment 4




Comment 4




            27
28
Comment 5




            29
Comment 6




Comment 6




            30
Comment 6




Comment 6




            31
Comment 7




Comment 7




            32
Comment 7




            33
Comment 8




            34
Comment 9




            35
36
37
Comment 10




             38
Comment 10




Comment 10




             39
40
Comment 11




             41
Comment 12




Comment 13




             42
Comment 13




Comment 14




             43
Comment 15




Comment 15




             44
Comment 16




             45
Comment 17




Comment 18




             46
47
                          OIG Evaluation of Auditee Comments

Comment 1   The Municipality believed that it complied with all program requirements. It
            stated that the Cranston Gonzalez Act and HUD regulations did not establish
            timeframes for the completion of HOME assisted activities. The Municipality also
            stated that it submitted a request for reconsideration of HUD’s ineligibility
            determination of the Estancias Del Rio housing project. Furthermore it stated that
            a write-off of $3.4 million of the HOME funds disbursed was needed to make the
            project feasible and reduce the sales price of the housing units to market value.

            We agree with HUD’s determination that the Estancias Del Rio housing project
            was inconsistent with HOME regulations, and therefore the activity was ineligible.
            While the Cranston Gonzalez Act does not specifically set time limits for the
            expenditure of HOME funds, HUD regulations at 24 CFR 95.500(d) provides
            specific timeframes for such expenditures. The Municipality had not been able to
            complete this housing project in more than 17 years since its initial funding date.
            Therefore, it is not consistent with HOME objectives. We are concerned with the
            viability of this activity since the Municipality proposes the write-off of HOME
            funds to make the project feasible and reduce the sales price of the housing units to
            market value. The Municipality did not provide adequate support that could
            substantiate their position. Accordingly, we did not modify the report finding and
            recommendations.

Comment 2   The Municipality contends that the Estancias del Rio project has not been
            terminated and regulations at 24 CFR 92.205(e) are therefore not applicable.

            In its letter dated October 27, 2010, HUD informed the Mayor of the Municipality
            of Mayaguez of its management decision to disallow all funds previously invested
            in the Estancias del Rio project and prohibited any future investments in the
            project. The letter instructed the Municipality to repay all HOME funds invested,
            or agree to a voluntary grant reduction. The project has therefore been effectively
            terminated by HUD. In addition, the Municipality recognizes that to make this
            project feasible it will require a write off of more than $3.4 million in HOME
            funds previously invested. As a result, we do not agree with the Municipality’s
            comments.

Comment 3   The Municipality informed that the Estancias del Rio project was not foreclosed by
            the bank.

            On August 31, 2007 the court entered a judgment in favor of Citibank for more
            than $1.8 million. With this decision the bank could have commenced foreclosure
            procedures on the mortgage note with the developer. For this reason, the
            Municipality used more than $400,000 in HOME funds to pay off the defaulted
            construction loan and avoid foreclosure. Nevertheless, we clarified the situation
            and removed the statement from the report.



                                             48
Comment 4   The Municipality contends that no statutes were violated when it used $400,000 in
            HOME funds to pay off the Estancias del Rio project defaulted construction loan.

            Under regulations at 2 CFR 225 Appendix B. Item 16, funds used for settlements
            resulting from violation or failure of the governmental unit to comply with federal
            or local laws are unallowable. During the audit we consulted with HUD on the
            propriety of using $400,000 to pay off the defaulted construction loan. As a result,
            HUD determined that all funds invested in the project are disallowed. The
            Municipality will need to work with HUD during the audit resolution process to
            demonstrate the propriety of using $400,000 to purchase the outstanding
            construction loan as well as the propriety of other funds invested in the project.

Comment 5   The Municipality stated it reimbursed the $10,000 withdrawn for activity #1141.
            However, the Municipality did not provide additional documentation that could
            demonstrate it cancelled the activity and reprogrammed the funds to other eligible
            efforts. It will need to provide documentation to HUD to show that the funds were
            properly reprogrammed.

Comment 6   The Municipality stated that it took appropriate measures to ensure that Villas de
            Felisa subsidized units were occupied by eligible participants. It stated that the
            HOME program supervisor incorrectly informed us that the eligibility
            determination was performed by the developer; it was done by HOME program
            personnel and provided electronic copies of 30 participant files.

            We eliminated this statement from the report. Also, the Municipality indicated
            that it had entered into HUD’s information system the required information of 115
            participants who received the HOME subsidies. The Municipality stated that of
            the $2.416 million in HOME funds disbursed, only $2.074 million were used on
            subsidies to participants, and requested that the difference of $341,716 not
            provided in direct assistance to participants be considered as a development
            subsidy pursuant to 24 CFR 92.206.

            The Municipality did not provide a list of all 115 participants that received HOME
            subsidies and the amount of assistance provided to each participant. The
            information provided was in summary form and could not be appropriately
            evaluated. HUD will need to review detailed information in order to ascertain that
            the data has been properly entered in HUD’s information system. In addition,
            according to the supporting documentation the Municipality provided during the
            audit, the HOME subsidy was for 272 participants/units, but the Municipality now
            states that subsidies were provided to 115 participants/units. The Municipality did
            not explain the discrepancy and whether HUD approved such reduction in scope.

            We examined two of the 30 case files provided and found deficiencies with the
            qualification of participants. In one case, the qualifying information appeared to
            be more than 6 months old at the time of loan closing, and file information was
            missing. In another case, the income of the participant was above the HOME


                                             49
            program income limits and absent of an explanation of how the income
            determination was made. Based on the deficiencies found, there is no assurance
            subsidized units were occupied by income eligible participants. A complete
            examination of the income eligibility of participants could not be performed
            because a review of the original documentation is necessary to properly assess the
            evidence in each file. The Municipality did not provide us adequate support that
            could demonstrate that all units were occupied by eligible participants. We
            therefore did not modify the finding and recommendation.

            Finally, HOME program regulations at 24 CFR 92.206 do not include provisions
            for granting development subsidies as an eligible expense for the HOME program.
            The Municipality did not provide us adequate support that could justify their
            actions for not providing $341,716 in HOME subsidy to participants. It will need
            to provide documentation to establish the allowability and feasibility of this action
            for HUD’s evaluation.

Comment 7   The Municipality believes that the disallowed amount for land acquired for the
            Villas de Felisa housing project was incorrectly determined and that it should be
            required to reimburse only $70,689.

            The disallowed amount was determined based on the acquisition price of $1.036
            million for 24.59 acres of land, and not 23.862 acres, (or 24.5717 “cuerdas”), as
            stated by the Municipality in its comments. According to the documentation
            provided, approximately 6.48 acres of land had remained unused since being
            acquired in 1998. This is the land that has remained with the developer and not the
            1.628 acres, (1.6766 “cuerdas”), as stated by the Municipality in its comments.
            The documentation also showed that the Municipality planned to utilize the unused
            land for the construction and widening of streets, which is not an eligible activity
            under the HOME program. The Municipality did not provide us adequate support
            that could substantiate their position. Accordingly, we did not modify the finding
            and recommendation.

Comment 8   The Municipality stated that it agreed with the recommendation and that the
            monitoring procedures will be improved. However, the Municipality did not
            provide us additional documentation that could demonstrate the monitoring
            procedures in place and that they were in compliance with HUD requirements. It
            will need to provide documentation to HUD to show the establishment and
            implementation of monitoring procedures.

Comment 9   The Municipality stated that the $1.5 million in questioned costs for the
            development of the Villas de Felisa housing project were properly supported and
            that the finding should be removed from the report.

            The supporting documentation did not provide details showing the work or
            services paid with each disbursement. The Municipality did not provide us



                                             50
              adequate support that could substantiate their position. Accordingly, we did not
              modify the report.

Comment 10 The Municipality stated that the finding should be removed because the solar
           powered street lights worked for a period that exceeded 2.5 years.

              The solar powered street lights did not provide the intended benefits and were
              replaced by regular lights. However, we removed the disallowance and related
              recommendation because these funds are part of the total Estancias del Rio
              housing project costs disallowed by HUD in its October 27, 2010, letter to the
              Municipality.

Comment 11 The Municipality stated that it reimbursed $11,668 in excessive drawdowns for
           Estancias Del Rio housing project. However, the Municipality did not provide us
           additional documentation that could demonstrate it reprogrammed the funds to
           other eligible efforts. It will need to provide documentation to HUD to show that
           the funds were properly reprogrammed.

Comment 12 The Municipality stated that the amount shown in HUD’s system for its home-
           buyers assistance activities was incorrect because of a misclassification of a
           withdrawal. Also, the Municipality indicated that the discrepancy was clarified
           and the finding should be removed from the report.

              The supporting documentation the Municipality provided during the audit did not
              explain the discrepancy and did not account for $11,402 drawn from HUD.
              Despite the misclassification, there is still a difference between HUD’s system and
              the accounting records. The Municipality did not provide us adequate support that
              could properly explain the discrepancy, show that HUD’s information system was
              accurate, and accounted for the $11,402 drawn. We therefore did not modify the
              report finding and recommendation.

Comment 13 The Municipality stated that the discrepancy was the result of a misclassification
           of two administrative expenditures recorded as tenant-based assistance costs, and a
           disbursement that was not recorded in the accounting records. Also, the
           Municipality indicated that the discrepancy was clarified and the finding should be
           removed from the report.

              Although the Municipality explained that it was a misclassification of accounting
              transactions, it did not provide us additional documentation showing the adjusting
              entries made in the accounting records reflecting the correct balances of all the
              accounts involved. It will need to provide documentation to show that the
              accounting records were properly adjusted.

Comment 14 The Municipality stated that it deobligated the $2,008 of the completed activities.
           However, the Municipality did not provide us additional documentation that could



                                               51
              demonstrate it reprogrammed the funds to other eligible efforts. It will need to
              provide documentation to show that the funds were properly reprogrammed.

Comment 15 The Municipality stated that it agreed with the recommendation and that it initiated
           corrective measure to ensure it disburses funds for eligible activities and within
           established timeframes. We acknowledge the Municipality’s efforts to address the
           issues of the finding.

Comment 16 The Municipality stated that it agreed with the recommendation and that it took
           corrective measure to ensure that accurate commitment and activity information is
           reported in HUD’s system.

Comment 17 The Municipality stated that it agreed with the recommendation and that it initiated
           corrective measures to review each activity entered into HUD’s information
           system to correct any inaccurate information.

Comment 18 The Municipality stated that it agreed with the recommendation. Also, the
           Municipality indicated that it had established a preliminary financial management
           system and provided a handbook with the system to be implemented.

              We commend the Municipality for its efforts in addressing the issues of this
              finding. However, the handbook fails to establish basic accounting controls
              necessary to maintain an adequate financial management system. For example, it
              does not require maintaining general ledgers by fiscal year. Also, the
              responsibility for the financial management system is placed on the monitoring
              unit personnel instead of the financial management personnel. In addition,
              procedures established in the handbook are targeted towards monitoring efforts
              that are unrelated to the financial management function. The Municipality needs
              to ensure that it establishes a financial system that is in compliance with HUD
              requirements.




                                               52