oversight

The City of Miami Gardens, FL, Did Not Adequately Support Salary Costs Charged to the Neighborhood Stabilization Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-04-12.

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

                                                               Issue Date
                                                                      April 12, 2011
                                                               Audit Report Number
                                                                     2011-AT-1007




TO:         Maria R. Ortiz, Director of Community Planning and Development, Miami Field
             Office, 4DD


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

SUBJECT: The City of Miami Gardens, FL, Did Not Adequately Support Salary Costs
          Charged to the Neighborhood Stabilization Program

                                   HIGHLIGHTS

 What We Audited and Why


             We reviewed the City of Miami Gardens, FL’s (City) Neighborhood Stabilization
             Program (program). Our objective was to determine whether the City
             administered its program in accordance with applicable U.S. Department of
             Housing and Urban Development (HUD) requirements. Specifically, we wanted
             to determine whether (1) expenditures were allowable and (2) activities met the
             program’s national objectives. We selected the City for review because it
             received approximately $6.9 million in program funds and as of September 30,
             2010, had spent $4.3 million in program funds. HUD ranked the City as high risk
             in its January 2010 annual risk assessment because it received more than three
             times its 2008 entitlement allocation and has not been monitored since becoming
             an entitlement grantee in 2006.

 What We Found


             The City met the national objective when it sold the eight program properties
             reviewed to qualified low-, moderate-, and middle-income persons. However, it
           did not adequately support salary expenditures allocated to the program. This
           condition occurred because the City did not have effective controls in place to
           ensure that salary allocations were properly documented. Without supporting
           documentation to substantiate the allocation of actual services performed by
           personnel, there was no assurance that the salary expenditures totaling $426,852
           were accurate and program related.

What We Recommend


           We recommend that the Director of the Miami Office of Community Planning
           and Development require the City to (1) provide supporting documentation or
           reimburse its program $426,852 for unsupported salary expenditures from non-
           Federal funds; (2) develop and implement a salary allocation method that
           complies with 2 CFR (Code of Federal Regulations ) Part 225; and (3) develop,
           implement, and enforce written procedures for salary allocation among program
           and other Federal and non-Federal programs to include documentation
           requirements for its employees.

           For each recommendation in the body of the report 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 finding with the City during the audit. We provided the draft
           report to City officials for their comments on February 23, 2011, and discussed
           the report with them at the exit conference on March 4, 2011. The City provided
           its written comments to our draft report on March 25, 2011. In its response, the
           City disagreed with finding 1.

           The complete text of the City’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




                                            2
                           TABLE OF CONTENTS

Background and Objective                                                              4

Results of Audit
      Finding 1: The City Did Not Adequately Support Salary Expenditures Allocated    5
                 to the Program

Scope and Methodology                                                                 8

Internal Controls                                                                    10

Appendixes
   A. Schedule of Questioned Costs                                                   11
   B. Auditee Comments and OIG’s Evaluation                                          12




                                            3
                      BACKGROUND AND OBJECTIVE

The Neighborhood Stabilization Program (program) was authorized under Title III of the
Housing and Economic Recovery Act of 2008 and was established for the purpose of stabilizing
communities that have suffered from foreclosures and abandonment. The goal of the program is
to purchase and redevelop foreclosed-upon and abandoned homes and residential properties.
The funding is provided through the U.S. Department of Housing and Urban Development
(HUD). HUD allocated $3.92 billion on a formula basis to States, territories, and local
governments.

On March 2, 2009, HUD awarded the City of Miami Gardens (City) approximately $6.9 million
in program funds. Organized under the assistant city manager, the City’s Department of
Community Development is responsible for administering the program and other grant funds it
receives from Federal, State, and local government sources to aid in the development of a viable
urban community. This department was formed and received its first allocation of HUD funds in
October 2006. The primary purpose of this department is to provide decent housing, a suitable
living environment, and the expansion of economic opportunities for persons and families of
low-, moderate-, and middle-income.

As of September 30, 2010, the City had spent $4.3 million in program funds, which included
$202,604 in program income. It used the funds to acquire 50 properties. Of the 50 properties, 8
were acquired, rehabilitated, and sold to income-eligible households. In addition, the City had
spent $454,016 in program funds for salary expenditures as of November 30, 2010. These
expenditures accounted for the salaries of eight employees, four of whom are still employed by
the City.

Our audit objective was to determine whether the City administered its program funds in
accordance with applicable HUD requirements. Specifically, we wanted to determine whether
(1) expenditures were allowable and (2) the activities met the program’s national objectives.




                                               4
Finding 1: The City Did Not Adequately Support Salary Expenditures
Allocated to the Program
The City did not maintain adequate supporting documentation to demonstrate that it properly
allocated salaries to the program. This condition occurred because the City did not have
effective controls in place to ensure that salary allocations were properly documented. Without
supporting documentation to substantiate that the salary allocations related to actual services
performed by personnel, there was no assurance that the salary expenditures were accurate and
program related. Therefore, the $426,852 allocated to the program for salaries was unsupported.



    Unsupported Salary Allocation


                      The City did not maintain adequate supporting documentation to demonstrate that
                      it properly allocated salaries to the program. Regulations at 2 CFR (Code Federal
                      Regulations) Part 225, appendix B, paragraph 8h(4), require that when employees
                      work on multiple activities, a distribution of their salaries or wages be supported
                      by personnel activity reports or equivalent documentation.

                      As of November 30, 2010, HUD had reimbursed the City $454,016 in program
                      salary expenditures. The City charged these salary expenditures directly to the
                      applicable program activities in addition to the planning and administration
                      activity as permitted by HUD.1

                              Activity #                     Activity title                               Expenditures
                                001              Permanent Housing for Household                            $ 31,543
                                                 Earning <50% AMI [area median
                                                 income]
                                   003           Acquisition                                                 $116,309
                                   004           Housing Rehabilitation Single                               $ 81,608
                                                 Family
                                   005           Homeownership Assistance                                    $ 21,455
                                   006           Program Administration                                      $203,101
                                                                               Total                         $454,016

                      Based on the City’s allocation plan, salary expenditures accounted for the salaries
                      of four employees who worked solely for the program and four employees who
                      worked on multiple programs. In one instance, the City indicated that one
                      employee was charged 100 percent to the program, although the employee
                      worked with multiple programs.

1
 Community Development Block Grant Program – Guide to National Objectives & Eligible Activities for Entitlement Communities, section 2-
77, Program Administration Costs, requires that when an employee works in multiple activities that are eligible as administration costs under 24
CFR 570.206 and 570.201 through 570.204, the grantee must maintain appropriate time distribution records.


                                                                        5
                      The City charged these salary expenditures based on an estimated percentage. It
                      did not require its employees to maintain timesheets or other documents2 to
                      support the actual time spent among the program activities and other Federal and
                      non-Federal programs. Regulations at 2 CFR Part 225, appendix B, paragraph
                      8h(5)(e), state that budget estimates or other distribution percentages determined
                      before the services are performed do not qualify as support for charges to Federal
                      awards but may be used for interim accounting purposes.

                      During the audit, the City was able to provide some documentation to support a
                      portion of the hours worked and charged to the program. Therefore, we reviewed
                      the documents and reduced our questioned costs by $27,164 (see table below).

                                                   Salary expenditures allocated to program funds
                        Employee       Percentage      Activity        Activities    Supported       Total
                                        allocated         006          001-005         salary     unsupported
                                       to program                                   adjustment        cost
                            1*              40         $120,955            -         ($ 8,594)      $112,361
                            2               70              -          $ 66,699          -          $ 66,699
                            3*              70              -          $ 21,563      ($ 6,622)      $ 14,941
                            4               20         $ 8,109             -             -          $ 8,109
                            5              100         $ 24,274        $ 24,274          -          $ 48,548
                            6*             100              -          $ 49,357      ($ 2,467)      $ 46,890
                            7              100              -          $ 14,380          -          $ 14,380
                            8*             100         $ 49,762        $ 74,643      ($ 9,481)      $114,924
                                          Total        $203,100        $250,916      ($27,164)      $426,852
                        * Current City employees administering the program

                      The condition described above occurred because the City did not maintain
                      effective management controls to ensure that salary allocations were properly
                      documented. Specifically, it did not have written procedures for salary allocation
                      among the program and other Federal and non-Federal programs. The City
                      agreed with our finding and explained that it believed the methodology it used to
                      allocate salary expenditures was adequate. It indicated that upon learning of our
                      finding, it had begun to account for the hours worked among the programs and
                      activities and would formally implement a system to keep track of hours worked.

                      Without supporting documentation to substantiate salary allocations in relation to
                      actual services performed by personnel or some type of quantifiable measure of
                      employee effort, there was no assurance that salary expenditures were accurate
                      and program related. As a result, the City allocated $426,852 in unsupported
                      salaries to the program.




2
  Regulations at 2 CFR Part 225, appendix B, paragraph 8h(3), require that when employees are expected to work solely on a single Federal
award or cost objective, charges for their salaries and wages will be supported by periodic certifications that the employees worked solely on that
program for the period covered by the certification. These certifications will be prepared at least semiannually and will be signed by the
employee or supervisory official having firsthand knowledge of the work performed by the employee.
                                                                         6
Conclusion



             The City did not have adequate records to support that it properly allocated
             salaries to the program. This condition occurred because the City did not have
             effective controls in place to ensure that salary allocations were properly
             documented. As a result, there was no assurance that salary expenditures totaling
             $426,852 charged to the program were accurate.


Recommendations


             We recommend that the Director of the Miami Office of Community Planning
             and Development require the City to

             1A.    Provide supporting documentation or reimburse its program $426,852 for
                    unsupported salary expenditures from non-Federal funds.

             1B.    Develop and implement a salary allocation method that complies with 2
                    CFR Part 225.

             1C.    Develop, implement, and enforce written procedures for salary allocation
                    among the program and other Federal and non-Federal programs to
                    include documentation requirements for its employees.




                                             7
                                         SCOPE AND METHODOLOGY

Our audit objective was to determine whether the City administered its program funds in
accordance with applicable HUD requirements. Specifically, we wanted to determine whether
(1) expenditures were allowable and (2) the City met the program national objectives. To
accomplish the audit objective, we

                     Reviewed relevant HUD regulations,

                     Reviewed relevant City policies and procedures,

                     Interviewed HUD and City officials,

                     Reviewed City financial records related to program expenditures,

                     Reviewed reports from HUD’s Disaster Recovery Grant Reporting System, and

                     Reviewed City recipient and property files and records.

The City was selected for review because it received approximately $6.9 million in program
funds and as of September 30, 2010, had spent $4.3 million in program funds. In addition, HUD
ranked the City as high risk in its January 2010 annual risk assessment3 because (a) since
becoming an entitlement grantee in 2006, the City was not monitored; (b) it may not meet its
obligation deadline; and (c) it received more than three times its 2008 CDBG allocation. In
2008, the City received $1.3 million in CDBG funds.

Based on the City’s quarterly performance report, as of September 30, 2010, the City had
expended $4.3 million in program funds, which included $202,604 in program income. The
report indicated that the City had progressed with activities related to the acquisition and
rehabilitation of single-family properties. The City had acquired 50 properties, 8 of which were
acquired, rehabilitated, and sold to income-eligible households. As a result, to capture the whole
process from acquisition to resale of the property, we focused on reviewing these eight
properties. To determine whether the City met the program’s national objectives, we reviewed
the eight properties that had expenditures of more than $1 million, which represents 25 percent
of the total program funds expended.

In addition, from the eight property files selected for national objective testing, we selected the
four properties with the largest dollar amounts to review for compliance with cost allowability
requirements. These four properties represented approximately $577,396 of the total $4.3
million expended or 13.4 percent. Due to the volume of transactions for each property, we
selected the three largest dollar transactions from each property totaling approximately $490,139.


3
 HUD performed its Risk Assessment in January 2010 prior to conducting a monitoring review of the City in March 2010. In addition, as of
September 2010, the City had obligated all of its Program funds.
                                                                     8
The results of this audit apply only to the items reviewed and cannot be projected to the universe
of activities.

Based on interviews with City officials, we found that the City charged salary expenditures to
program administration and applicable program activities based on an estimate. Therefore, we
selected 100 percent of salary expenditures for review. The City provided a list of salary
expenditures totaling $454,016 as of November 30, 2010. We assessed the reliability of this list
by (1) interviewing City officials about the data, (2) reviewing existing documentation related to
the data source, and (3) tracing data to HUD’s Disaster Recovery Grant Reporting System for
accuracy and completeness. We assessed that the list was unreliable because the City did not
have records to support its salary allocation percentages. Without supporting documentation to
substantiate the salary allocations as they related to the actual services performed by personnel,
the allocated percentages and related salary expenditures may have been inaccurately charged to
the program. Since the total salary expenditures contained in the list were recorded in HUD’s
Disaster Recovery Grant Reporting System; we consider these expenditures in HUD’s system as
unreliable. We used the list for purposes of determining questioned costs and recommended that
the City ensure that it properly supports its salary allocation percentages.

Our review generally covered the period March 1, 2009, through September 30, 2010, and was
extended as necessary during the audit. Our review was conducted from November 2010
through February 2011 at the City’s Community Development Department located at 1515
Northwest 167 Street, Building 4-190, Miami Gardens, FL.

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 objective.




                                                9
                              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:

                  Controls over program operations;
                  Controls over the reliability of data;
                  Controls over compliance with laws and regulations; and
                  Controls over the safeguarding of resources 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.


 Significant Deficiency

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

                  The City did not maintain adequate supporting documentation to demonstrate
                  that it properly allocated salaries to the program (see finding 1).


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                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS


                           Recommendation
                                  number          Unsupported 1/

                                  1A                    $426,852

1/   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.




                                             11
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         12
Comment 2




Comment 3




            13
Comment 3




Comment 4




Comment 3




            14
                         OIG Evaluation of Auditee Comments

Comment 1   The City indicated that HUD awarded the City $6,866,119.02 rather than $6.9
            million as stated in the report. In addition, it requested that OIG clarify why HUD
            ranked the City as “high risk.” The City also believed that the finding should be
            categorized as a concern as opposed to a finding.

            The award amount of $6.9 million stated in the report was the rounded amount of
            $6,866.119. We clarified in the highlights and scope and methodology sections of
            the report why HUD ranked the City as “high risk”. The basis for the finding is
            appropriate since the City did not adequately support salary expenditures of
            $426,852 in accordance with regulations 2 CFR Part 225, appendix B.

Comment 2   The City justified the methodology it used to support its salaries expenditures by
            citing 2 CFR Part 225, appendix B, paragraph 8h(4) which allows grantees to
            support its employees’ salaries by using a statistical sampling system or other
            substitute system approved by the Cognizant Federal Agency. According to the
            City, it provided HUD with its Annual Action Plan amendment and an
            organizational table that reflected the staff that would be working on
            administering the grant. The City explained that HUD indicated that the
            submission of the amended action plan and the organization table served to show
            that the City had the personnel in place to carry out the NSP activities. However,
            HUD did not notify the City that it needed to approve the methodology it used to
            allocate its salary expenditures. Moreover, during HUD’s monitoring no findings
            were identified; rather HUD had two concerns that were not related with the
            methodology used to charge salary expenditures.
            The purpose of the submission of the action plan and organization table was to
            determine whether the City had the capacity to administer the program. These
            documents did not serve as approval of the City’s allocation plan or support the
            City’s salary expenditures in accordance with 2 CFR Parts 225 paragraph 8h. If
            the City chose to do a cost allocation plan, as program administrator, it was
            required to submit a cost allocation plan to HUD. In addition, the budget cost
            allocation plan provided to the OIG during the audit to support salary
            expenditures was not sufficient. Regulations at 2 CFR Part 225, paragraph
            8h(5)(e) specifically states that budget estimates or other distribution percentages
            determined before the services are performed do not qualify as support for
            charges to Federal awards.

Comment 3   The City disagreed that it lacked controls with respect to salary expenditures.
            However, it agreed that it would present a modified salary allocation schedule to
            HUD going forward as required by 2 CFR 225 and begin to track the expenditure
            of staff time to ensure accuracy with the percentage allocation. The City
            explained that its salary allocation method was based on a percentage since it had
            to budget salaries over a four year period not taking in consideration additional
            staff members’ time needed to carry out the program. This budget was adjusted

                                             15
                    as necessary. In addition, the City stated that its level of activity with the
                    Program should be an indication that the eight employees that charged the
                    program worked on the program at the rates reflected in the salary allocation. The
                    fact that in some instances some staff works on other programs is undergirded by
                    the fact that the majority of the Community Development staff works in excess of
                    40 hours. The City noted that staff that was charged 100% to the program did not
                    charge to other programs despite any work done on these programs. It further
                    noted that the other programs the City administered were federally funded.
                    Furthermore, the City stated that its 2009 Single Audit report did not reveal a
                    problem with its method of allocating salary expenditures.
                    The City did not have timesheets or other documents to substantiate the time
                    charged to the Program in accordance with 2 CFR 225. The City provided the
                    OIG with a budget cost allocation plan. Since a budget is a projection and it does
                    not reflect the actual time spent on the Program, the budget cannot be used as
                    support. In addition, although the City’s allocation plan indicated that one
                    employee worked 100 percent on the program, the City stated that the employee
                    worked with multiple programs. Without supporting documentation to
                    substantiate the budgeted salary allocations in relation to actual services
                    performed by personnel, there was no assurance that salary expenditures were
                    accurate and program related. As a result, the City lacked controls with respect to
                    salary expenditures and did not have written procedures for salary allocation
                    among the program and other federal and non federal programs. Thus, the City
                    needs to strengthen its controls over salary expenditures. As administrator of
                    other federally funded programs, the City should be aware of the salary
                    requirements according to 2 CFR 225. Additionally, it is required to maintain
                    records, which adequately identify each grant separately according to 24 CFR
                    85.20.

Comment 4           The City disagreed with recommendation 1A requiring repayment of $426,852 in
                    unsupported salary costs. The City believed that it provided the required
                    documentation to HUD as part of the Program agreement. It is the City’s
                    contention that if additional documentation was warranted it should have been a
                    condition of the grant agreement or further, should have been identified by HUD
                    in its monitoring review.
                    The City did not provide HUD with a salary cost allocation plan. The Federal
                    Register4 explained that to receive program funding, each grantee was required to
                    submit an action plan substantial amendment. In addition, since the City received
                    three times its 2008 CDBG allocation, it was required to submit a management
                    plan describing how it determined that it possessed adequate staff and other
                    resources necessary to administer the program funds. The documentation
                    provided to HUD did not serve as support for its salary costs. The grant
4
 Federal Register Notice 73 FR 58330, Notice of Allocations, Application Procedures, Regulatory Waivers Granted to and Alternative
Requirements for Emergency Assistance for Redevelopment of Abandoned and Foreclosed Homes Grantees Under the Housing and Economic
Recovery Act, 2008 [Docket no. FR-5255-N-01] (issued October 6, 2008).


                                                                16
agreement signed by the City refers to 24 CFR 570, which explains that as grant
administrator, the City must abide by Circular A-87, “Cost Principles for State,
Local, and Indian Tribal Governments,” which has been relocated to 2 CFR 225.
Since the City did not have adequate records to support that it properly allocated
salaries to the program, there was no assurance that salary expenditures totaling
$426,852 charged to the program were accurate.




                                 17