oversight

Palm Beach County, FL, Did Not Fully Comply With Federal Requirements When Administering Its Neighborhood Stabilization Programs

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-04-22.

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

                                                                 Issue Date
                                                                        April 22, 2011
                                                                 Audit Report Number
                                                                        2011-AT-1008




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: Palm Beach County, FL, Did Not Fully Comply With Federal Requirements
          When Administering Its Neighborhood Stabilization Programs

                                   HIGHLIGHTS
 What We Audited and Why

             We audited Palm Beach County, FL’s (County) administration of its
             Neighborhood Stabilization Programs (NSP). We selected the County for review
             because it received $27.7 million in NSP1 funds, which is more than four times its
             2008 Federal fiscal year allocation of Community Development Block Grant
             (CDBG) funds and the third largest allocation to an entitlement community in the
             State. In addition, the U.S. Department of Housing and Urban Development
             (HUD) awarded the County $50 million in NSP2 funds. The audit objective was
             to determine whether the County’s administration of its NSPs complied with
             Federal requirements. Specifically, we determined whether (1) NSP1 activities
             met or will meet the low- and moderate-income national objective, (2) program
             income was properly accounted for, and (3) expended program funds were
             allowable. In addition, we determined whether expended NSP2 administrative
             costs were allowable.
What We Found


         The County did not fully comply with Federal regulations when administering its
         NSP1 activities. Specifically, it did not (1) obtain HUD’s approval to waive the
         conflict-of-interest provision, (2) purchase properties at the required purchase
         discount, and (3) ensure that NSP1 funds expended did not exceed the amounts
         authorized. In addition, the County did not execute an agreement between its
         housing department and the facilities department administering the redevelopment
         activity. The deficiencies resulted in ineligible costs of $1.75 million to the NSP1
         program.

         In addition, the County did not report accurate program income to HUD. Thus,
         HUD could not be assured that the County would use an appropriate amount of its
         program income before drawing down NSP1 funds. As a result, the County had
         program income of $211,952 that could be put to better use.

         The County also did not maintain documentation to sufficiently support the
         administrative expenditures recorded in its financial system. By not having
         effective controls, the County could not assure HUD that reviewed administrative
         expenditures were justified and that accurate program financial results were
         disclosed. As a result, the County drew down $10,000 in unsupported NSP2
         funds.

What We Recommend



         We recommend that the Director of the Miami Office of Community Planning
         and Development require the County to (1) reimburse the NSP1 program $1.75
         million from non-Federal funds for ineligible expenditures made from the
         program, (2) use the $211,952 in program income earned before drawing down
         additional NSP1 funds, (3) provide supporting documentation or repay the NSP2
         program from non-Federal funds for the $10,000 drawn down to reimburse the
         unsupported workers compensation, and (4) implement policies and procedures to
         prevent future occurrences of the conditions identified.

         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.




                                          2
Auditee’s Response

           We issued the draft audit report to the County for its comments on March 29,
           2011. On April 8, 2011, we met with County officials to discuss the report and
           obtained its written response. In its response, the County generally agreed with
           the three findings and recommendations, but requested reconsideration on two
           loans under the conflict-of-interest issue. The complete text of the County’s
           response, along with our evaluation of that response, can be found in appendix B
           of this report.




                                           3
                            TABLE OF CONTENTS

Background and Objective                                                         5

Results of Audit
      Finding 1: The County Did Not Fully Comply With Regulations When           7
                 Administering NSP1 Activities
      Finding 2: The County Did Not Report Accurate NSP1 Program Income to       12
                 HUD
      Finding 3: The County Did Not Sufficiently Support NSP2 Administrative     15
                 Expenditures

Scope and Methodology                                                            18

Internal Controls                                                                20

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use             21
   B. Auditee Comments and OIG’s Evaluation                                      22
   C. List of Loans Reviewed with Associated Deficiencies and Ineligible Costs   30




                                             4
                        BACKGROUND AND OBJECTIVE

On July 30, 2008, Title III of Division B of the Housing and Economic Recovery Act of 2008
(HERA) authorized $3.92 billion for the redevelopment of abandoned and foreclosed-upon
homes and residential properties. The U.S. Department of Housing and Urban Development
(HUD) established the grant amounts to the States and units of general local government based
on a funding formula. The funds are treated as Community Development Block Grant (CDBG)
funds. This grant program, referred to as the Neighborhood Stabilization Program (NSP),
provides targeted emergency assistance to State and local governments to acquire and redevelop
foreclosed-upon properties that might otherwise become sources of abandonment and blight
within their communities. NSP1 references the grant program authorized under HERA.

On February 17, 2009, Title XII of Division A of the American Recovery and Reinvestment Act
of 2009 (Recovery Act) authorized additional funding for the provision of emergency assistance
for the redevelopment of abandoned and foreclosed-upon homes as authorized under HERA.
Funds of $1.93 billion were awarded through competition. Eligible applicants included States,
units of general local government, nonprofits, and consortia of nonprofits. NSP2 references the
grant program authorized under the Recovery Act.

On March 9, 2009, HUD granted Palm Beach County, FL (County), $27.7 million in NSP1
funds, and on February 11, 2010, HUD awarded the County $50 million in NSP2 funds. The
County’s Department of Housing and Community Development (housing department) is the lead
department for both programs. The housing department administers Federal-, State-, and
County-funded programs. This responsibility includes administering programs that provide
affordable housing, a better living environment, and economic opportunities for county residents,
emphasizing lower income residents, the homeless, and special needs populations.

For NSP1, the County uses the funds to administer three activities and for administration and
planning. As of December 31, 2010, 60 percent of the funds had been expended.

 #   Project/activity                      Description                        NSP1 funds    NSP1 funds
          title                                                                budgeted      expended
                        The provision of first and second mortgages to
     Financing
 1                      income-eligible home buyers to acquire and            $12,845,811   $ 8,873,396
     mechanism
                        rehabilitate foreclosed-upon single-family homes.
     Redevelopment      The acquisition and rehabilitation of a facility to
 2                                                                            $ 7,500,000   $ 3,035,333
     of vacant land     be redeveloped as a homeless resource center.
                        The acquisition and rehabilitation of vacant,
     Purchase &         abandoned, and foreclosed-upon residential
 3                                                                            $ 5,000,000   $ 3,494,937
     rehabilitation     properties by subrecipients to be resold or rented
                        to eligible home buyers or tenants.
     Administration
 4                                                                            $ 2,354,529   $ 1,281,924
     and planning
           Total                                                              $27,700,340   $16,685,590




                                                     5
For NSP2, the County uses the funds to administer three activities to stabilize a 25-square-mile
area of unincorporated central Palm Beach County and for administration and planning. As of
January 10, 2011, about 1 percent of the funds had been expended.

 #   Project/activity                    Description                     NSP2 funds     NSP2 funds
          title                                                           budgeted       expended
                        The provision of forgivable second mortgages to
   Financing            income-eligible home buyers to subsidize the
 1                                                                        $ 9,150,000      $-
   mechanism            acquisition of foreclosed-upon single-family
                        housing units for owner occupancy.
                        The provision of grant funds to subrecipients to
                        purchase and rehabilitate abandoned, vacant, or
   Residential
                        foreclosed-upon residential properties to be
 2 Redevelopment                                                         $20,130,000       $-
                        resold, rented, or redeveloped to provide
   Program
                        affordable housing. The revenues generated will
                        be considered program income.
                        The provision of loan funds to subrecipients to
   Neighborhood
                        redevelop demolished or vacant properties as
 3 Redevelopment                                                         $16,470,000       $-
                        affordable rental housing. The revenues
   Program
                        generated will not be considered program income.
     Administration
 4                                                                       $ 4,250,000    $328,404
     and planning
          Total                                                          $50,000,000    $328,404

As of January 2011, the County had requested approval from HUD to change the scope of the
financing mechanism activity to also provide first mortgages to eligible home buyers. HUD had
not agreed to the change, and the County was waiting for technical assistance to move forward
with the activity. For the residential and neighborhood rental redevelopment programs, the
County had received requests for proposals from interested entities and was making its selection.

The audit objective was to determine whether the County’s administration of its NSPs complied
with Federal requirements. Specifically, we determined whether (1) NSP1 activities met or will
meet the low- and moderate-income national objective, (2) program income was properly
accounted for, and (3) expended program funds were allowable. In addition, we determined
whether expended NSP2 administrative costs were allowable.




                                                  6
                                RESULTS OF AUDIT

Finding 1: The County Did Not Fully Comply With Regulations When
Administering NSP1 Activities
The County did not fully comply with Federal regulations when administering its financing
mechanism and redevelopment of vacant land activities. Specifically, it did not (1) obtain
HUD’s approval to waive the conflict-of-interest provision, (2) purchase properties at the
required purchase discount, and (3) ensure that NSP1 funds expended did not exceed the
amounts authorized. In addition, the County did not execute an agreement between the housing
department and the department administering the redevelopment activity. These conditions
occurred because the County did not have adequate controls to ensure its compliance with
Federal regulations. The deficiencies resulted in ineligible costs of $1.75 million to the NSP1
program.



 The Financing Activity Did Not
 Comply With Requirements


              The County used NSP1 funds to provide first and second mortgages to eligible home
              buyers. The first mortgage loan amount was determined by the home buyer’s
              financial condition and was payable to the County in monthly mortgage payments.
              The second mortgage grant amount was determined by the home buyer’s income
              status and did not have to be repaid unless the property was sold or transferred
              within 30 years. A home buyer who was very low income qualified for up to
              $100,000 in subsidy, a low-income home buyer qualified for up to $75,000, and a
              moderate-income home buyer qualified for up to $25,000. The two mortgages
              assisted the home buyer with the purchase of the property, closing costs, and repair
              costs. As of November 8, 2010, the County had provided mortgages to 68 home
              buyers. We reviewed 26 of the 68 loan files and found that the County did not fully
              comply with Federal requirements when administering the activity. See appendix C
              for a list of the 18 loans reviewed with deficiencies and the ineligible costs
              associated with each loan.

              Conflict of Interest
              The County did not obtain HUD’s approval to waive the conflict-of-interest
              provision in 24 CFR (Code of Federal Regulations) 570.611(b) and (c) before
              providing mortgages to nine County employees and the daughter of one County
              employee who worked in the housing department. HUD regulations state that no
              persons defined as a covered person, who exercise or have exercised any functions
              or responsibilities or are in a position to gain inside information with respect to
              CDBG activities, may obtain a financial interest or benefit from a CDBG-assisted



                                                7
activity for themselves or those with whom they have business or immediate family
ties, during their tenure or for 1 year thereafter. A covered person is defined as a
person who is an employee, agent, consultant, officer, or elected or appointed
official of the grantee, designated public agencies, or subrecipients. Further, 24 CFR
570.611(d) states that upon the grantee’s written request, HUD may grant an
exception to the provision on a case-by-case basis when it has satisfactorily met the
threshold requirements.

For six home buyers, documentation in the loan files showed that the County
obtained the Board of County Commissioners’ approval before providing them with
mortgages. However, the files did not contain evidence that the County received
HUD’s approval to waive the conflict-of-interest provision for all 10 home buyers.
The County stated that it did not know it had to obtain approval from HUD. By not
advising HUD and obtaining its approval, the County could not assure HUD that the
home buyers who were provided NSP1 funding did not possess a conflict of interest.
Therefore, in the absence of HUD’s waiver, the mortgages for the 10 home buyers,
totaling $1.7 million, were ineligible costs to the program.

Purchase Discount
HERA, Section 2301(d)(1), states that any purchase of a foreclosed-upon home or
residential property shall be at a discount from the current market appraised value,
taking into account its current condition, and such discount shall ensure that
purchasers are paying below market value for the property. The June 19, 2009,
Federal Register, 74 FR 29225 requires the discount to be at least 1 percent from
the current market appraised value.

The County did not purchase seven properties at a 1 percent discount from the
current market appraised value as required by Federal regulations. The County
explained that it had previously applied the 1 percent discount to the property’s
appraised value subject to repairs. In April 2010, it changed the policy to apply
the discount to the current market appraised value. However, the County
reasoned that its previous policy of applying the 1 percent discount on the subject-
to-repair value was not an incorrect interpretation of the regulations, with the
rationale that the property’s value was not changed by bringing the property up to
code or making it habitable.

As stated by the Federal requirements, the 1 percent discount should be applied to
the property’s current market appraised value, considering its current condition.
By not purchasing a property at a discount, the home buyer and/or the County
unnecessarily paid more for the property. Therefore, the excess amount paid on
the seven properties was an ineligible cost to the program. We did not question
the excess costs paid for three properties. For one property, the County
transferred the expenditures related to the property out of the NSP1 fund and used
another funding source to pay for them. For the other two properties, the excess
costs were not questioned because the home buyers were County employees and
their mortgages were questioned under the conflict-of-interest issue above.



                                  8
           Consequently, the excess amount paid of $24,090 for the remaining four home
           buyers was an ineligible cost to the program.

           Excess Disbursed Funds
           The County did not ensure that the NSP1 funds disbursed for four home buyers did
           not exceed the amount authorized by the mortgage agreements. The excess
           disbursements occurred when the County approved and disbursed additional repair
           costs without also increasing the home buyer’s mortgage amount. For example, in
           one loan, the County authorized $140,730 in first and second mortgages to the home
           buyer but disbursed $8,836 more than the authorized amount for the additional
           repair costs. HUD regulations at 24 CFR 85.20(b) state that the grantee must
           maintain effective control and accountability for all grant cash, real and personal
           property, and other assets. In addition, grantees must maintain accounting records
           that adequately identify the source and application of funds provided.

           The County was unaware of the issue. It remedied three of the four loans once the
           issue was disclosed during our review. For one loan, the County used State funds to
           repay the NSP1 program, thereby paying the $4,170 excess amount with the State
           funds. For another loan, it increased the amount on the home buyer’s first mortgage
           to cover the $850 excess amount. The home buyer’s financial condition supported
           the increase to the mortgage. For the third loan, the County increased the amount on
           the home buyer’s second mortgage to cover the $2,825 excess amount. Since the
           County qualified the home buyer as low-income and it allowed low-income home
           buyers to receive up to $75,000 in second mortgage subsidies, the County was able
           to increase the home buyer’s second mortgage amount from $58,500 to $61,325.

           The excess disbursements occurred because the County did not have a process in
           place to ensure that the disbursements expended on behalf of the home buyer did not
           exceed the authorized mortgage amount for the home buyer. By not maintaining
           effective controls, the County disbursed more for the home buyer than it
           encumbered for the home buyer. For the remaining loan, the excess amount
           disbursed of $8,836 was an ineligible cost to the program.

The Redevelopment Activity
Did Not Have an Agreement

           The County used NSP1 funds to acquire and rehabilitate a facility to be
           redeveloped as a homeless resource center. Our review indicated that the
           County’s Facilities Development and Operations Department (facilities
           department) had primary responsibility for this project in that it had the authority
           to make decisions that affected the outcome of the project and to authorize
           payments to the contractors. The housing department had no direct oversight. It
           reported the activity’s progress to HUD and reimbursed the facilities department
           after it made the payments.




                                             9
             HUD regulations at 24 CFR 570.501(b) state that when a unit of general local
             government is participating with or as part of an urban county or as part of a
             metropolitan city, the recipient is responsible for applying to the unit of general
             local government the same requirements as are applicable to subrecipients.
             Chapter 1-7 of Managing CDBG: A Guidebook for Grantees on Subrecipient
             Oversight further clarifies that because 24 CFR 570.501(a) provides that local
             governments are subject to the same requirements as subrecipients, interagency or
             interdepartmental agreements should include the same provisions as those
             required in a subrecipient agreement that is described in 24 CFR 570.503(b).

             The County did not execute an agreement between the housing department and the
             facilities department. Housing department officials did not believe that an
             agreement between the two departments was necessary and confirmed that no
             agreement existed between the departments that complied with 24 CFR 570.503(b).
             By not having a written agreement to delineate the responsibilities of each
             department, the housing department, as the designated department, may not have
             had adequate control over or accountability for the decisions made by the facilities
             department, which may negatively impact the project’s program objective.


Conclusion


             The County did not fully comply with Federal regulations when administering its
             financing mechanism and redevelopment of vacant land activities. For the
             financing mechanism activity, the County did not (1) obtain approval from HUD to
             waive the conflict-of-interest provision in HUD requirements, thereby not assuring
             HUD that the home buyers did not have a conflict of interest; (2) purchase properties
             at the required 1 percent discount, thereby unnecessarily paying more for the
             property; and (3) ensure that funds disbursed for the home buyer did not exceed the
             amount authorized for the home buyer, resulting in the disbursements recorded in
             the County’s financial system being more than the amounts obligated for the home
             buyer. For the redevelopment of vacant land activity, the County did not execute
             an agreement between the lead department and the administering department,
             which may have resulted in the housing department’s not having adequate control
             over or accountability for the activity. The County did not have adequate controls
             in place to ensure its compliance with Federal regulations. The deficiencies
             resulted in ineligible costs of $1.75 million to the NSP1 program.

             Although this finding relates to the NSP1 program, the County also uses NSP2
             funds to provide mortgages to eligible home buyers. Thus, the County needs to
             implement controls to prevent the deficiencies identified in the NSP1 financing
             mechanism activity from occurring in its NSP2 program.




                                              10
Recommendations



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

          1A. Reimburse the NSP1 program $1,719,021 from non-Federal funds for the
              mortgages provided to the nine County employees and one home buyer
              related to the housing department employee.

          1B. Reimburse the NSP1 program $24,090 from non-Federal funds for the
              excess amount paid on four properties that were not purchased at the
              required 1 percent discount of the current market appraised value.

          1C. Implement corrective measures to remedy the one loan in which the
              disbursed NSP1 funds for the home buyer exceeded the authorized mortgage
              amount or reimburse the NSP1 program $8,836 from non-Federal funds for
              the excess amount.

          1D. Develop and implement policies and procedures for its NSP programs to
              ensure that it will (a) obtain HUD’s waiver before approving mortgages for
              County employees, (b) purchase foreclosed-upon properties for at least a 1
              percent discount from the current market appraised value, and (c) not
              disburse funds in excess of the authorized mortgage amount.

          1E. Execute an agreement, which complies with 24 CFR 570.503(b), between
              the housing department and the facilities department for the activity to
              redevelop the vacant land into a homeless resource center.




                                         11
Finding 2: The County Did Not Report Accurate NSP1 Program Income
to HUD
The County did not report accurate program income in HUD’s Disaster Recovery Grant
Reporting system (system) as required by Federal regulations. This condition occurred because
the County had inadequate controls to ensure that it reported accurate and timely program
income. By not reporting accurate and timely program income to the HUD system, the County
could not assure HUD that it would use an appropriate amount of its program income before
using additional NSP1 funds. As a result, the County had program income of $211,952 that
could be put to better use.



 Accurate Program Income Was
 Not Reported to HUD


              HUD regulations at 24 CFR 570.500 define program income as gross income
              received by the grantee directly generated from the use of program funds.
              Regulations at 24 CFR 570.504(a) require that the receipt and expenditure of
              program income be recorded as part of the financial transactions of the grant
              program. The October 6, 2008, Federal Register, FR-5255-N-01, Section II.O1.b.,
              requires that each grantee report its NSP funds to HUD using the HUD system and
              submit a quarterly performance report. Section II.N3. of the same Federal Register
              further states that all program income must be disbursed for eligible NSP activities
              before additional cash withdrawals are made.

              The County’s NSP1 activities have generated and will continue to generate program
              income. For the redevelopment activity, the County earned program income when
              tenants made lease payments for the few months they stayed before moving out of
              the acquired facility. For the financing mechanism activity, the County earned
              program income when the home buyer paid the principal and interest payments on
              the mortgage. In addition, for the purchase and rehabilitation activity, the County
              will earn program income when the subrecipient resells the property it acquired and
              rehabilitated and can earn program income when the subrecipient rents the property
              and the rental income exceeds the operating expenses of the property.

              The County had earned and recorded in its financial system $211,952 in program
              income as of December 31, 2010. However, it reported only $73,319 in program
              income in the HUD system. This discrepancy resulted in a $138,633 difference in
              program income that was not reported to the system. The table below lists the
              amount of program income recorded in the County’s financial system and reported
              to the HUD system for the past four quarters.




                                               12
                       Quarter                County financial   HUD system      Difference*
                                                  system
                January-March 2010                   $ 22,622       $      0        $ 22,622
                   April-June 2010                   $ 44,565       $ 61,999       ($ 17,435)
                July-September 2010                  $ 66,715       $ 5,187         $ 61,527
              October-December 2010                  $ 78,051       $ 6,132         $ 71,919
                        Total*                       $211,952       $ 73,319        $138,633
              * Difference due to rounding.

             The County did not report accurate and timely program income in the HUD system
             as required by Federal regulations. It did not have adequate controls in place to
             ensure that program income was reported accurately and in a timely manner to the
             HUD system. A housing department official, who was responsible for reporting
             program income to the system, stated that he was not sure how to report the program
             income information to the system and was not sure he had access to do so. By not
             reporting accurate and timely program income to the HUD system, the County could
             not assure HUD that it would use an appropriate program income amount before
             drawing down additional NSP1 funds. The County did not use the program income
             before drawing down additional funds. The HUD system indicated that although the
             County drew down program funds in the October 1 to December 31, 2010, quarter,
             it did not use any of its earned program income. Thus, the program income of
             $211,952 that the County earned up to December 31, 2010, would be funds to be put
             to better use.

Conclusion


             The County did not report accurate and timely program income in the HUD system
             and did not use its earned program income before drawing down additional NSP1
             funds. By not having adequate controls, it had program income of $211,952 that
             could be put to better use.

             Although this finding relates to the NSP1 program, the County uses funds for
             NSP2 activities that will generate program income. Thus, it needs to implement
             controls to ensure that accurate program income will be reported in the HUD
             system and will be used before drawing down NSP2 funds.

Recommendations


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

             2A. Use the $211,952 in program income earned before drawing down additional
                 NSP1 funds.


                                                 13
2B. Develop and implement policies and procedures to ensure that it will report
     accurate program income information in the HUD system and use the
     program income before drawing down additional NSP funds.




                                14
Finding 3: The County Did Not Sufficiently Support NSP2
Administrative Expenditures
The County did not maintain documentation to sufficiently support the administrative
expenditures recorded in the County’s financial system. Specifically, it did not have
documentation to support workers compensation and indirect cost and did not ensure that
documentation supported the salary and benefit charges. This condition occurred because the
County did not have adequate controls to ensure that it maintained sufficient documentation to
support program expenditures and reported accurate program expenditures. By not having
effective controls, the County could not assure HUD that reviewed administrative expenditures
were justified and that accurate program financial results were disclosed. In addition, the County
drew down $10,000 in NSP2 funds for unsupported workers compensation costs.


Given the program’s limited progress, the County had expended funds for only administrative
costs. We reviewed administrative costs in the areas of workers compensation, indirect cost, and
salaries and benefits due to their relative high dollar amounts.

The County did not maintain documentation to sufficiently support the reviewed expenditures
recorded in the County’s financial system. HUD regulations at 24 CFR 85.20(b) state that the
grantee must maintain records which adequately identify the source and application of funds
provided and these accounting records must be supported by source documentation. Further, the
grantee must maintain effective control and accountability for all grant and subgrant cash, real
and personal property, and other assets.


 Administrative Expenditures
 Were Not Supported

               Workers Compensation
               The County charged $10,000 in workers compensation to the NSP2 program.
               County officials stated that they did not know why the $10,000 was charged to the
               program and had no documentation to support the charge. The $10,000 had been
               drawn down and reimbursed by NSP2 funds. Therefore, since the amount was
               not sufficiently supported, the $10,000 was an unsupported cost to the program.

               Indirect Costs
               The County charged $75,000 in indirect cost to the NSP2 program. County
               officials stated that they did not know how the $75,000 amount was determined
               and did not have the documentation to support the amount. After our inquiry, the
               County reversed the $75,000 charge to the NSP2 program. The expenditure had
               not been used to support a drawdown.




                                               15
Salaries and Benefits Were Not
Accurately Recorded

             The County did not accurately charge salaries and benefits to the NSP2 program.
             Unless an employee whose salary and benefits are charged to the NSP2 program
             works his/her full hours on the program, 100 percent of his/her salary and benefits
             will not be charged to the program. When the employee works on both the NSP2
             and other programs, the applicable percentage of the employee’s salary and
             benefits is charged to the program on which he/she worked based on timesheets.
             The County made the adjustments to the salaries and benefits at the end of the
             quarter.

             For the July to September 2010 quarter, the County did not accurately distribute
             an employee’s salary and benefits among the programs on which the employee
             worked because it erroneously calculated them using the wrong percentages.
             Although the timesheet showed that the employee worked 60 percent on NSP2
             and 40 percent on other programs, the County charged 60 percent of the salary
             and benefits to the other programs. In addition, the County did not charge another
             employee’s salary and benefits to the applicable programs on which the employee
             worked because it had not obtained the employee’s timesheet when it made the
             salary and benefit adjustments for the quarter. Our review of the salary and
             benefit information prompted the County to correct the salary and benefit
             amounts reported in the financial system. It provided journal vouchers to show
             that adjustments were made to the NSP2 program for the quarter.

             For the October to December 2010 quarter, the County did not accurately
             distribute an employee’s salary and benefits among the programs worked on
             because the employee had not submitted the timesheets when the County made
             the adjustment. By not having the employee’s timesheets to appropriately
             distribute the salary and benefits among the programs worked on, the County
             recorded inaccurate information in the financial system, which may have resulted
             in inaccurate drawdown amounts of NSP2 funds.


Conclusion


             The County did not maintain documentation to sufficiently support the
             administrative expenditures recorded in its financial system. Specifically, it did
             not have documentation to support workers compensation and indirect cost and
             did not ensure that documentation supported the salary and benefit charges. The
             conditions occurred because the County did not have adequate controls in place to
             ensure that it maintained sufficient documentation to support NSP2 administrative
             expenditures and reported accurate NSP2 administrative expenditures. By not
             maintaining documentation to support the workers compensation and indirect



                                             16
          cost, the County could not assure HUD that these expenditures were justified. In
          addition, the County’s financial system did not disclose accurate financial results
          of the NSP2 program. This condition also resulted in a $10,000 drawdown of
          unsupported NSP2 funds.

          Although our review of the NSP2 program was limited to the administrative costs,
          the deficiencies identified with the County’s administration of the NSP1 program
          may affect its administration of its NSP2 program if adequate controls are not
          implemented to prevent such deficiencies. For example, the County uses both
          NSP1 and NSP2 funds to provide mortgages to eligible home buyers. Thus, it
          needs to ensure that HUD approval is obtained before NSP funds are awarded to a
          County employee or that a foreclosed-upon property is purchased at a 1 percent
          discount from the current market appraised value (refer to finding 1). In addition,
          both NSP1 and NSP2 activities will generate program income. Thus, the County
          needs to ensure that accurate program income is reported in HUD’s system (refer
          to finding 2).

Recommendations


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

          3A. Provide documentation to support the $10,000 used to pay for workers
              compensation or reimburse the NSP2 program from non-Federal funds.

          3B. Provide documentation to support the fiscal year 2011 indirect cost
              expenditure before it draws down NSP2 funds for reimbursement.

          3C. Determine the salary and benefit amounts for the applicable programs
              worked on by the employees and take corrective measures to report the
              accurate salary and benefit amounts for the period.

          3D. Develop and implement policies and procedures to ensure that (1) sufficient
              documentation is maintained to support budgeted cost items like indirect
              costs and workers compensation and (2) accurate salary and benefit amounts
              are charged to the NSP2 program.




                                           17
                         SCOPE AND METHODOLOGY

Our objective was to determine whether the County complied with Federal requirements when
administering its NSPs.

To accomplish our objective, we

   Reviewed relevant Federal regulations and HUD handbooks;

   Reviewed the County’s applications for the NSP1 and NSP2 grants, the County’s and housing
   department’s organizational structure, published audit reports from the County’s Internal Audit
   Office, and published single audit reports;

   Interviewed HUD officials to clarify HUD requirements and discuss findings;

   Interviewed County officials to understand the policies and procedures staff follow to carry out
   the NSP1 activities and to obtain clarifications during the fieldwork;

   Reviewed the County’s programmatic and fiscal files related to the NSP1 financing mechanism,
   redevelopment of vacant land, and purchase and rehabilitation activities;

   Analyzed the expenditure and revenue reports from the County’s financial system; and

   Analyzed the journal vouchers used to charge off an employee’s salary and benefits to and from
   the NSP2 program.

For the financing mechanism activity, the County provided a spreadsheet listing the 68 home
buyers who closed as of November 8, 2010, with mortgages totaling more than $9.98 million.
During the audit, we reviewed 26 of the 68 closed loans, totaling about $4 million, or 40 percent
of the total mortgages. We selected the loans based on (1) the large dollar amount of NSP funds
disbursed for the home buyer, (2) home buyers identified as County employees, (3) comparing
the appraised value of the property listed on the County-provided spreadsheet with the sales price
recorded on the County’s property appraiser Web site, and (4) comparing the NSP1 amount
funded to the home buyer as listed on the County-provided spreadsheet with the disbursement for
the home buyer as recorded in the County’s financial system.

For the redevelopment of vacant land activity, we reviewed the activity as a whole and also
reviewed the more than $2.7 million it had disbursed as of September 30, 2010. For the purchase
and rehabilitation activity, we selected 10 of the 25 properties acquired by the 8 subrecipients for
review; 1 property each from 6 subrecipients, and 2 properties each from 2 subrecipients. The
acquisition cost of the selected properties total $1.3 million, or 45 percent of the $2.9 million
expended on the properties as of November 19, 2010. Generally, the properties were selected
based on the high dollar amount of their acquisition cost. We did not perform a 100 percent
review of the loans/properties for the financing mechanism or purchase and rehabilitation



                                                18
activities. The results of the audit apply only to the items reviewed and were not projected to the
universe of loans/properties.

In addition, we determined whether the County maintained sufficient documentation to evidence
that program income was properly accounted for by assessing whether (1) the activity generated
program income; (2) the income was remitted to the County and if so, how much and when; (3)
the income was recorded in the County’s financial system, and (4) the income was reported to
HUD’s system.

We also obtained a status of the County’s NSP2 program. Given the program’s limited progress,
the County only expended funds for administrative costs. As of January 10, 2011, the County
had expended $328,404 in administrative costs. We selected the administrative expenditures of
salaries and benefits, indirect cost, and workers compensation due to their relative high dollar
amounts. The selected expenditures totaled $129,273 or 39 percent of the expended
administrative costs.

We tested the reliability of the computer-processed data reported in the County’s financial
system as they related to our audit objective. Specifically, we assessed whether the expenditure
and revenue amounts were accurate and complete. We compared and reviewed the source
documents in the loan files and fiscal files to assess the reliability of the expenditures and
revenues reported in the County’s financial system. We found that the expenditures and
revenues reported in the County’s financial system were sufficiently supported, and, thus, were
accurate and could be relied upon for our audit purposes.

Our review generally covered the period October 1, 2008, to September 30, 2010, and was
extended as needed. The work was performed from October 2010 to March 2011 at the housing
department located at 100 Australian Avenue, Suite 500, West Palm Beach, FL, and our Miami
office.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                19
                              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:

                  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 Deficiencies

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

                  The County did not fully comply with Federal regulations when administering
                  two NSP1 activities (finding 1).
                  The County did not report accurate program income to the HUD system (finding
                  2).
                  The County did not sufficiently support NSP2 administrative expenditures
                  (finding 3).


                                                 20
                                   APPENDIXES

Appendix A

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

     Recommendation            Ineligible 1/        Unsupported 2/      Funds to be put to
            number                                                           better use 3/
           1A                   $1,719,021
           1B                      $24,090
           1C                       $8,836
           2A                                                                    $211,952
           3A                                             $10,000

          Total                 $1,751,947                $10,000                $211,952


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 Office of Inspector General (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 the County implements
     recommendation 2A, funds will be used for other eligible activities consistent with HUD
     requirements.




                                               21
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Refer to OIG Evaluation   Auditee Comments




Comment 1




                           22
Comment 2




            23
Comment 2




Comment 2




            24
Comment 2




            25
Comment 3


Comment 2

Comment 2



Comment 2




            26
Comment 2




            27
                           OIG Evaluation of Auditee Comments


Comment 1: The County agreed with the conflict-of-interest issue for 8 of the 10 loans and
           agreed to refund the NSP1 program for the $1,335,310 associated with the 8 loans
           by August 1, 2011. It asked OIG to reconsider its position on two loans (#1-
           0600-00920101 and #1-0600-01125091) totaling $393,711. For loan #1-0600-
           00920101, the County reasoned that the borrower is not an employee of the Board
           of County Commissioners, but an employee of the Clerk and Comptroller. For
           loan #1-0600-01125091, the County reasoned that the co-borrower was not a
           County employee at the time of loan application and funding approval.

              HUD regulations at 24 CFR 570.611(b), (c), and (d) state that no persons defined
              as a covered person, who exercise or have exercised any functions or responsibilities
              or are in a position to gain inside information with respect to CDBG activities, may
              obtain a financial interest or benefit from a CDBG-assisted activity for themselves or
              those with whom they have business or immediate family ties, during their tenure or
              for 1 year thereafter. A covered person is defined as a person who is an employee,
              agent, consultant, officer, or elected or appointed official of the grantee, designated
              public agencies, or subrecipients. HUD may grant an exception to the provision on a
              case-by-case basis when the grantee’s written request has satisfactorily met the
              threshold requirements. For loan #1-0600-00920101, the homebuyer is an
              employee of the Clerk and Comptroller, which is an entity of the County. Thus,
              the home buyer is a County employee and is defined as a covered person under 24
              CFR 570.611(c). For loan #1-0600-01125091, the loan closing occurred
              November 25, 2009. The loan file contained a verification of employment from
              the County dated November 10, 2009, verifying that the co-borrower was a
              County employee. Given that the co-borrower was a County employee before
              loan closing, the co-borrower is a covered person under 24 CFR 570.611(c). In
              addition, since the County became aware that the co-borrower was a County
              employee before closing, it should not have proceeded to close until HUD granted
              a waiver.

              HUD agreed that the home buyers in both loans are considered covered persons
              under HUD regulations and therefore the County needed to obtain HUD’s waiver
              of the conflict of interest provision. The County did not request the required
              waiver from HUD and therefore must reimburse the NSP1 program the costs
              associated with the 10 loans, totaling $1,719,021.

Comment 2: The County agreed with the findings and recommendations to (1) repay the NSP1
           program for the identified ineligible costs, (2) amend the difference between the
           disbursed and the funded amount for one home buyer, (3) execute an agreement
           between the housing department and the facilities department, (4) use program
           income before drawing down additional NSP1 funds, (5) ensure that all requests
           for NSP2 reimbursements are supported by detailed documentation, (6) correct




                                                28
              the reporting for the NSP2 salaries and benefits, and (7) implement policies and
              procedures to address the identified conditions.

              By taking the above measures and implementing procedures to address the
              recommendations, the conditions identified in the findings will be corrected and
              future incidents may be prevented.

Comment 3: The County indicated that it had reimbursed the NSP2 program $10,000 for the
           unsupported workers compensation cost on March 2, 2011, and provided
           documentation to the OIG. In addition, it will develop and implement policies
           and procedures to ensure that sufficient documentation is maintained to support
           budgeted cost items like workers compensation.

              The County provided documentation which supported that $10,000 was refunded
              to the NSP2 program in the County’s financial accounts. Additional
              documentation is required to support that the entries in the financial system are
              correct and the $10,000 refund came from non-Federal funds.




                                              29
Appendix C

          LIST OF LOANS REVIEWED WITH ASSOCIATED
             DEFICIENCIES AND INELIGIBLE COSTS


  #         Loan number           Date closed      Conflict of       Property       Excess        Ineligible costs
                                                    interest        purchased      disbursed            (a)
                                                                     without         funds
                                                                     discount
   1      1-0600-00630102          06/30/2010          X                                               $ 208,000
   2      1-0600-00520101          05/20/2010                                         X (c)
   3      1-0600-00520101          05/20/2010           X                                              $ 163,400
   4      1-0600-00409101          04/09/2010           X                                              $ 184,090
   5      1-0600-00726101          07/26/2010                                          X               $   8,836
   6      1-0600-01128091          12/28/2009                         X (b)
   7      1-0600-01125091          11/25/2009           X                                              $ 196,098
   8      1-0600-01124092          11/24/2009                           X                              $ 10,420
   9      1-0600-01029101          10/29/2010           X                                              $ 150,000
  10      1-0600-01217091          12/17/2009                          X              X (c)            $   1,900
  11      1-0600-01214091          12/14/2009          X              X (d)                            $ 117,713
  12      1-0600-00920101          09/20/2010          X                                               $ 197,613
  13      1-0600-00630101          06/30/2010          X                                               $ 189,000
  14      1-0600-00330102          03/30/2010                           X                              $   3,850
  15      1-0600-00129101          01/29/2010           X                                              $ 212,800
  16      1-0600-00210101          02/10/2010                          X                               $   7,920
  17      1-0600-01210091          12/10/2009          X              X (d)                            $ 100,307
  18      1-0600-00505101          05/05/2010                                         X (c)            _________

                Total                                  10               7               4              $1,751,947

Notes:
(a) Costs were calculated using the expenditure report from the County’s financial system as of December 7, 2010.
(b) There was no questioned cost associated with the deficiency since the County transferred the related
    expenditures from the NSP1 fund to another funding source to address an audit finding cited by the County’s
    Internal Audit Office for the same issue.
(c) There was no questioned cost associated with the deficiency since the County provided documentation to
    remedy the discrepancy after we disclosed the issue during our audit.
(d) There was no questioned cost associated with the deficiency since we questioned the entire expended amount
    because the home buyer was one of the County employees identified during the audit.




                                                      30