oversight

The Municipality of San Juan Did Not Properly Manage Its HOME Investment Partnerships Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-09-28.

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

                                                                Issue Date
                                                                       September 28, 2011
                                                                Audit Report Number
                                                                       2011-AT-1018




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 San Juan, PR, Did Not Properly Manage Its HOME
           Investment Partnerships Program

                                   HIGHLIGHTS

 What We Audited and Why


             We audited the Municipality of San Juan’s HOME Investment Partnerships
             Program (HOME). We selected the Municipality for review as part of our
             strategic plan based on the large amount of HOME funds approved. The
             objectives of the audit were to determine whether the Municipality met HOME
             program objectives and its financial management system complied with U.S.
             Department of Housing and Urban Development (HUD) requirements.

 What We Found

             The Municipality disbursed more than $3.48 million for four activities that
             showed signs of slow progress without assurance that the activities would
             generate the intended benefits. In addition, it failed to ensure that more than
             $2.49 million of a community housing development organization’s proceeds was
             used for housing efforts. The Municipality also disbursed more than $766,000 for
             two activities that were not carried out and failed to reprogram more than $1.14
             million in unexpended HOME funds for these terminated activities. 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
         more than $2.3 million in disbursements and allowed the use of more than $2.2
         million for ineligible expenditures. In addition, it failed to disburse more than
         $2.8 million in HOME funds in a timely manner and did not account for $14,732
         in HOME receipts. As a result, HUD lacked assurance that funds were
         adequately accounted for, safeguarded, and used for authorized purposes and in
         accordance with HUD requirements.

         The Municipality did not monitor the accuracy of commitments and other
         information reported in HUD’s Integrated Disbursement and Information System.
         It reported to HUD more than $8.7 million in HOME commitments without
         executing written agreements and failed to reprogram and put to better use more
         than $1.6 million in unexpended HOME funds associated with terminated
         activities or for which additional disbursements were no longer needed. In
         addition, it provided inaccurate information on the amount of program income
         generated, amount of funding awarded, and program accomplishments. As a
         result, HUD had no assurance that the Municipality met HOME objectives,
         commitments, and disbursement requirements.

What We Recommend

         We recommend that the Director of the San Juan Office of Community Planning
         and Development determine the eligibility of more than $4.8 million disbursed
         from HOME funds on activities that showed signs of slow progress and for
         unsupported program costs. The Director should require the Municipality to
         reimburse the HOME program more than $3 million for ineligible project costs
         and activities that failed to meet program objectives. The Director should also
         require the Municipality to recapture or reprogram and put to better use more than
         $11.3 million in unexpended obligated funds, overstated commitments, and
         unexpended HOME funds maintained in its local bank account.

         We also recommend that the Director require the Municipality to develop and
         implement an internal control plan to ensure that (1) its HOME-funded activities
         meet the program objectives, (2) its HOME program has a financial management
         system that complies with HUD requirements, and (3) the program has controls
         and procedures which ensure that HOME requirements are followed and accurate
         information is reported to HUD. In addition, the Director should reassess the
         Municipality’s annual commitment compliance and recapture any amounts that
         have not been committed within HUD-established timeframes.

         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.




                                          2
Auditee’s Response


           We discussed the findings with HUD and the Municipality during the audit and at
           the exit conference on August 17, 2011. The Municipality provided its written
           comments to our draft report on August 19, 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.




                                           3
                             TABLE OF CONTENTS

Background and Objectives                                                             5

Results of Audit
        Finding 1: The Municipality Did Not Meet HOME Program Objectives              6
        Finding 2: The Municipality’s Financial Management System Did Not Comply     11
                   With HUD Requirements
        Finding 3: The Municipality Did Not Have Procedures and Controls Regarding   17
                   Information Entered Into HUD’s Information System

Scope and Methodology                                                                22

Internal Controls                                                                    24

Appendixes
   A.   Schedule of Questioned Costs and Funds To Be Put to Better Use               26
   B.   Auditee Comments and OIG’s Evaluation                                        27
   C.   List of Unsupported Project Disbursements                                    73
   D.   List of Ineligible Project Disbursements                                     74
   E.   List of Commitments To Reprogram and Put to Better Use                       75
   F.   List of Program Income and Recaptured Funds Reviewed                         76




                                             4
                     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. 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 San Juan is the second largest participating jurisdiction in Puerto Rico, for
which HUD has approved more than $11 million in HOME funds during the past 2 fiscal years.
HUD’s information system reflected expenditures exceeding $6 million during the fiscal year
ending June 30, 2010, for the following activities:

                                    Activity type                  Amount expended
               Construction and rehabilitation of housing            $3,766,649
               Community housing development organization (CHDO)        809,833
               Home-buyer direct assistance                             673,450
               Planning and administration                              614,736
               First-time home buyer                                    154,400
               Rehabilitation by owner                                   24,582
               Total                                                 $6,043,650

The Municipality’s Department of Housing and Community Development is responsible for
administering HOME funds. Its books and records are maintained at 1205 Ponce de León
Avenue, San Juan, PR. We audited the Municipality’s HOME program as part of the HUD
Office of Inspector General’s (OIG) strategic plan. The Municipality was selected for review
based on the amount of HOME funding provided.

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




                                                5
                                RESULTS OF AUDIT

Finding 1: The Municipality Did Not Meet HOME Program Objectives
The Municipality disbursed more than $3.48 million for four activities that showed signs of slow
progress without assurance that the activities would generate the intended benefits. In addition,
it failed to ensure that more than $2.49 million of a community housing development
organization’s (CHDO) proceeds were used for housing efforts. The Municipality also disbursed
more than $766,000 for two activities that were not carried out and failed to reprogram more
than $1.14 million in unexpended HOME funds for these terminated activities. This condition
occurred because the Municipality did not implement adequate procedures and controls to
monitor HOME-funded activities. As a result, HUD had no assurance that funds were used
solely for eligible purposes and that HOME program objectives were met.



 Slow Progress Activities



              The Municipality disbursed more than $3.48 million for four activities that reflected
              slow progress without assurance that the projects were feasible. HUD regulations at
              24 CFR (Code of Federal Regulations) 92.504(a) provide that the Municipality is
              responsible for managing the day-to-day operations of its HOME program, ensuring
              that HOME funds are used in accordance with all program requirements and written
              agreements, and taking appropriate action when performance problems arise.

              Gilberto Monroig housing project - The Municipality executed an agreement on
              March 13, 2006, for the acquisition and rehabilitation of an eight-unit housing
              project to be sold to low- and very low-income families. According to the
              agreement, the rehabilitation of the housing units should have ended on or before
              November 30, 2006. Although the rehabilitation work was completed in 2007,
              none of the units was occupied, and the developer had not been able to sell the
              completed units. The developer indicated that the housing project was located in
              a drug area that made it difficult to sell the units. Municipality officials informed
              us that the housing project had many housing quality standards violations and did
              not meet program requirements.

              More than 3 years had elapsed since the project’s acquisition and rehabilitation,
              and none of the units had been occupied by low- and very low-income families.
              Based on this condition, HUD had no assurance that the Gilberto Monroig
              housing project would fully meet HOME program objectives and provide the
              intended benefits. Therefore, more than $534,000 in disbursements was
              unsupported.



                                                6
Vistas del Horizonte II housing project - The Municipality executed an agreement
on August 30, 2004, for land acquisition and construction of a 15-unit housing
project to be sold to low- and very low-income families. According to the
agreement, the construction of the housing units should have ended on or before
August 30, 2006. Although the rehabilitation work was completed in 2006, only
10 of the 15 housing units were occupied, and the developer had not been able to
sell the remaining completed units. In addition, the developer sold five of the
housing units to non-HOME program participants.

More than 5 years had elapsed since the project’s construction, and only five of
the units had been occupied by low- and very low-income families. Based on this
condition, HUD had no assurance that the Vistas de Horizonte II housing project
would fully meet HOME program objectives and provide the intended benefits.
Therefore, more than $720,000 in disbursements was unsupported.

Padre Colón housing project - The Municipality executed an agreement on
August 10, 2007, for land acquisition and construction of a 13-unit housing
project to be sold to low- and very low-income families. According to the
agreement, the construction of the housing units should have ended on or before
July 31, 2009. Although the rehabilitation work was completed in 2009, only 3 of
the 13 housing units were occupied, and the developer had not been able to sell
the remaining completed units.

More than 2 years had elapsed since the project’s construction, and only three of
the units had been occupied by low- and very low-income families. Based on this
condition, HUD had no assurance that the Padre Colón housing project would
fully meet HOME program objectives and provide the intended benefits.
Therefore, more than $1.3 million in disbursements was unsupported.

Los Portales II housing project - The Municipality executed an agreement on
August 15, 2002, for land acquisition and construction of an 18-unit housing
project to be sold to low- and very low-income families. According to the
agreement, the construction of the housing units should have ended on or before
August 15, 2004. Although the construction work was completed in 2005, only
14 of the 18 housing units were occupied by low- and very low-income families.
The developer sold three of the housing units to non-HOME program participants
and had not been able to sell one of the remaining completed units.

More than 6 years had elapsed, and only 14 of the units had been occupied by low-
and very low-income families. Based on this condition, HUD had no assurance that
the Los Portales II housing project would fully meet HOME program objectives and
provide the intended benefits. Therefore, more than $840,000 in disbursements was
unsupported.




                                7
            The Municipality did not adequately manage these activities to ensure that they
            were 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). As a result, HUD had
            no assurance that these activities provided the intended benefits and met HOME
            objectives.

            The Municipality also failed to ensure that more than $2.49 million of a CHDO’s
            proceeds was used for housing efforts. The grant agreement permitted the CHDO
            to retain the proceeds generated from the sale of units of a HOME-funded activity
            and be used in conformance with 24 CFR 92.300(a)(2) to develop new housing
            projects. According to a Municipality official, the CHDO disbanded around May
            2010 without developing new housing activities or transferring any of the unused
            funds back to the Municipality. The April 2011 bank statement reflected that
            more than $2.49 million in proceeds remained unexpended. As a result, more
            than $2.49 million in proceeds was not put to better use to generate the intended
            benefits.


Terminated Activities



            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 very low-income and
            low-income families. Regulations at 24 CFR 92.205(e) also 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, and it did not reimburse all of the funds to its
            treasury account. The Municipality disbursed more than $766,000 in HOME
            funds on two activities that were terminated in December 2009. According to the
            Municipality’s records, the two activities were for the acquisition of land and the
            construction of 96 dwelling units at two sites within San Juan. The following
            table shows the activity number, activity name, agreement date, funded and drawn
            amounts, and last draw date for the project developments that were terminated
            and for which the intended benefits were not provided.




                                             8
                                               Grant
                    Activity    Activity     agreement   Funded       Drawn        Last
                    number       name           date     amount1      amount     draw date        Comment
                                                                                             Developer defaulted
                                                                                             on loan and gave the
                               Rivieras de    Dec. 5,                             June 27,
                     1089                                $1,286,757   $474,980               project land in
                                Cupey I        2007                                 2008
                                                                                             payment in November
                                                                                             2010.
                                                                                             Developer defaulted
                                                                                             on loan and gave the
                               Rivieras de    Dec. 5,                             June 19,
                     1090                                  623,568     291,500               project land in
                                Cupey II       2007                                 2008
                                                                                             payment in November
                                                                                             2010.
                                   Total                 $1,910,325   $766,480

                   The Municipality did not take the appropriate measures to cancel the activities in
                   HUD’s information system. The information system reflected both as open
                   activities. In addition, both activities were shown as having unexpended
                   obligations of more than $1.14 million.


    Inadequate Monitoring Efforts



                   The Municipality did not take appropriate monitoring measures to ensure the
                   timely completion of activities and that funds were used in accordance with all
                   program requirements as required by 24 CFR 92.504(a).

                   The controls and procedures implemented by the Municipality were not adequate.
                   For example, the HOME program manager informed us that the activities were
                   monitored through site visits performed by its program inspector. However, the
                   inspector stated that the site visits were to verify the construction work and ensure
                   that units met housing quality standards and that no monitoring procedures had
                   been provided to him. Management must revise and implement its controls and
                   procedures to ensure the proper monitoring of HOME-funded activities.


    Conclusion



                   The Municipality failed to ensure that activities met HOME objectives. This
                   condition occurred because the Municipality did not implement adequate
                   procedures and controls to ensure compliance with HUD requirements. As a
                   result, HUD had no assurance that funds were used solely for their authorized
                   purposes and that HOME-funded activities provided the intended benefits. The
1
    Information obtained from HUD’s information system as of May 31, 2011


                                                          9
                 Municipality paid more than $4.2 million for projects that did not provide the
                 intended benefits or reflected slow progress. In addition, it failed to reprogram
                 and put to better use more than $3.6 million in CHDO proceeds and unexpended
                 HOME obligations.


    Recommendations



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

                 1A.      Determine the eligibility of the $2,399,428 disbursed for four projects with
                          signs of slow progress and reevaluate the feasibility of the activities.2 The
                          Municipality must reimburse its HOME program from non-Federal funds
                          for activities that HUD determines to have been terminated.

                 1B.      Require the Municipality to recapture, reprogram, and put to better use
                          $2,499,717 associated with the unused proceeds retained by the disbanded
                          CHDO.

                 1C.      Require the Municipality to reimburse its HOME program from non-
                          Federal funds $766,480 for disbursements associated with terminated
                          activities that did not meet HOME objectives.

                 1D.      Require the Municipality to reprogram and put to better use $1,143,845
                          associated with unexpended funds for the terminated activities.3

                 1E.      Require the Municipality to establish and implement adequate controls
                          and procedures for its HOME program to ensure that HUD requirements
                          and objectives are met.




2
  Total disbursements of $3,483,086 were adjusted to consider $713,008 questioned in recommendation 2C and
$370,650 in recommendation 2A.
3
  The two terminated activities had obligations of $1,910,325, and disbursements totaling $766,480 as of May 31,
2011. The unexpended balance of $1,143,845 ($1,910,325 - $766,480) needs to be reprogrammed and put to better
use.


                                                       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 more than
$2.3 million in disbursements and allowed the use of more than $2.2 million for ineligible
expenditures. In addition, it failed to disburse more than $2.8 million in HOME funds in a
timely manner and did not account for $14,732 in HOME receipts. These deficiencies occurred
because the Municipality disregarded HOME requirements and did not develop and implement
controls and procedures to ensure compliance with HUD financial requirements. As a result,
HUD lacked assurance that funds were adequately accounted for, safeguarded, and used for
authorized purposes and in accordance with HUD requirements.



 Unsupported Program
 Disbursements


              Project costs - Regulations at 24 CFR 92.206 and 92.508(a) allow disbursements
              for reasonable and allowable costs associated with HOME-funded projects that
              are supported with records that enable HUD to determine that HOME
              requirements were met.

              The Municipality did not support the reasonableness and allowability of more
              than $2.3 million in HOME funds disbursed. For example, it paid more than $1.6
              million for land acquisitions associated with six housing projects but did not
              provide documentation supporting the reasonableness of the land value and did
              not provide documentation supporting the allowability of more than $700,000 in
              project costs charged to the HOME program. Therefore, HUD lacked assurance
              of the reasonableness and allowability of more than $2.3 million in project costs
              charged to the HOME program. Appendix C contains a list of the unsupported
              project disbursements.

              Administrative costs - Regulations at 24 CFR 92.207 allow disbursements for
              reasonable administrative and planning expenditures associated with the HOME
              program. In addition, 24 CFR 92.508(a)(3)(ii) requires participating jurisdictions
              to maintain records demonstrating the source and application of funds, including
              supporting documentation in accordance with 24 CFR 85.20.

              The Municipality did not provide documentation supporting the reasonableness,
              allowability, and allocability of more than $39,000 charged to the HOME
              program, associated with administrative salaries. It did not track its employees’
              time by program activity or implement a cost allocation plan to distribute payroll
              costs among HUD and other programs. The Municipality charged the full salary
              of three employees to the HOME program, although they performed additional
              functions not related to the program. The Municipality did not allocate payroll


                                              11
            costs based on the time spent by these employees on each of its programs.
            Therefore, HUD lacked assurance of the reasonableness, allowability, and
            allocability of more than $39,000 in administrative payroll costs disbursed
            between October 2009 and June 2010. The 2009 independent public accountant
            report included a similar deficiency; however, the deficiency continued to exist.


Ineligible Program
Disbursements


            The Municipality’s financial management system permitted the disbursement of
            more than $1.19 million in HOME funds for ineligible project costs. For
            example, the Municipality disbursed $854,930 in HOME funds for project costs
            incurred by developers before executing the grant agreements with the
            developers. This action was contrary to HOME regulations at 24 CFR 92.2 that
            require participating jurisdictions to execute a legally binding agreement with a
            contractor to use HOME funds to produce affordable housing. In addition, the
            Municipality disbursed $335,663 in HOME funds for duplicated or unrelated
            project costs. Appendix D contains a list of the ineligible project disbursements.

            The Municipality also allowed the use of program income to repay the HOME
            program $772,860 associated with ineligible program costs, including repayments
            for a CHDO’s terminated project that did not generate the intended benefits. In
            addition, it improperly disbursed $300,346 in HOME funds to pay for ineligible
            costs identified in a 2004 HUD monitoring report.


HOME Funds Not Disbursed in
a Timely Manner


            Regulations at 24 CFR 92.502(c)(3) require that HOME funds in the participating
            jurisdiction’s local bank account, including program income and recaptured
            funds, be disbursed before additional grant funds are requested.

            The Municipality consistently maintained a high cash balance in its local bank
            account. The Municipality’s April 2011 bank statement reflected a cash balance
            of more than $2.8 million, and the Municipality maintained a monthly average
            balance of more than $3.4 million during the 22-month period ending April 2011.




                                             12
                   This condition occurred because the Municipality did not use program income
                   and recaptured funds and withdrew additional funds from HUD without
                   disbursing the funds in its local bank account. For example, the Municipality
                   received more than $705,0004 associated with program income and recaptured
                   funds that were not used before making additional drawdowns from HUD. A
                   Municipality official informed us that the program income and recaptured funds
                   received during prior years were not used and remained unexpended in the local
                   bank account to avoid missing HUD commitment and expenditure deadlines.
                   Therefore, the Municipality disregarded HOME requirements.

                   The Municipality withdrew from its treasury account more than $6 million in
                   HOME funds between July 1, 2009, and October 31, 2010. HUD regulations at
                   24 CFR 92.502(c)(2) state that HOME funds drawn down from a participating
                   jurisdiction’s treasury account must be expended for eligible costs within 15 days.
                   Any unexpended drawdowns must be returned to the treasury account.

                   Contrary to HUD’s regulations, the Municipality failed to disburse drawdowns
                   totaling more than $1 million in HOME funds within 15 days. Further, it did not
                   return $66,000 in unexpended drawdowns to HUD. The following table shows
                   the voucher and activity number, date of drawdown, and the HOME funds for the
                   drawdowns that were not disbursed within 15 days.




4
    The Municipality received these proceeds between February 2010 and March 2011.


                                                       13
                                                      Date of                           Days elapsed
              Voucher      Activity                 drawdown          Date of        between deposit and
              number       number      Amount         deposit      disbursement disbursement dates
             5129751/2       1331      $293,902 July 01, 2010      July 22, 2010              21
             5129751/3       1348         85,000 July 01, 2010     July 22, 2010             21
             5129751/6       1350         84,000 July 01, 2010     July 22, 2010             21
             5129751/5       1351         78,000 July 01, 2010     July 22, 2010             21
             5129751/1       1257         70,470 July 01, 2010     July 22, 2010             21
             5129751/4       1349         50,000 July 01, 2010     July 22, 2010             21
             5129751/7       1280          1,177 July 01, 2010     July 22, 2010              21
             5124312/3       1331        197,841 June 22, 2010     Feb. 10, 2011             233
             5124312/2       1257         48,600 June 22, 2010     Feb. 10, 2011            233
             5124315/1       1091         32,280 June 22, 2010     Feb. 10, 2011            233
             5124312/5       1342         26,000 June 22, 2010     Feb. 10, 2011            233
             5124312/4       1170         13,964 June 22, 2010     Feb. 10, 2011            233
             5124312/6       1280          1,470 June 22, 2010     Feb. 10, 2011            233
             5124312/1        843            150 June 22, 2010     Feb. 10, 2011             233
             5129741/5       1343         66,000 July 01, 2010 Not disbursed*               298*
                     Total            $1,048,854
           * As of April 25, 2011, funds remained unexpended and were not returned to HUD.

           The Municipality lacked procedures and controls regarding its financial
           management system to ensure compliance with HUD requirements. As a result, it
           failed to disburse funds in a timely manner and put to better use for eligible
           efforts more than $2.8 million in HOME funds that remained unexpended in the
           local bank account.


Inadequate Accounting Records



           Regulations at 24 CFR 85.20(b) require participating jurisdictions to maintain
           financial records that are accurate, current, and complete and that adequately
           identify the source and application of funds provided for assisted activities.

           The Municipality’s accounting records were not accurate, current, and complete.
           They did not reflect complete financial information on HOME program activities
           and did not permit the adequate tracing of program expenditures and receipts. For
           example, the accounting records did not include more than $1 million in accounts
           receivable and $76,964 in program income. They also contained instances of
           transactions recorded with the incorrect amount or account.

           The expenditures shown in the Municipality’s accounting records for the fiscal
           year ending June 30, 2010, did not agree with amounts reflected in HUD’s
           information system.




                                               14
                                                                               HUD’s
                                                                            information
                             Activity type                  Trial balance      system     Difference
               Rehabilitation by owner                            $9,850        $24,582   $(14,732)
               Planning and administration                     $675,427        $614,736     $60,691
               Construction and rehabilitation of housing    $3,996,504      $3,766,649    $229,855
               CHDO
               Home-buyer direct assistance                  $2,135,646     $1,637,683    $497,963
               First-time home buyer

             The Municipality could not explain the discrepancies and could not account for
             $14,732 drawn from HUD for one of the HOME activity types. A Municipality
             official informed us that information in HUD’s information system was not
             reconciled with the accounting records. A similar deficiency was identified in the
             2009 independent public accountant report; however, the deficiency continued to
             exist.

Lack of Controls and
Procedures

             The lack of program controls and procedures also contributed to the deficiencies
             in the Municipality’s financial management system. For example, the
             Municipality did not maintain written procedures for accounting for HOME funds
             and establishing responsibilities among its personnel. In addition, it did not
             maintain a proper system that permitted the tracking of HOME-assisted activities
             that could result in the payment of program income or recaptured funds. Further,
             the Municipality did not provide adequate segregation of duties by permitting
             officials that authorized or recorded transactions to collect HOME funds
             associated with program income, repayments, and recaptured funds. Therefore,
             the Municipality’s internal controls were not sufficient and adequate to provide
             HUD assurance that HOME funds were adequately accounted for, safeguarded,
             and used for authorized purposes and in accordance with HUD requirements.
             Management must establish and implement adequate controls and procedures to
             permit the proper accountability for all HOME funds to ensure that they are used
             solely for authorized purposes.

Conclusion



             The Municipality maintained a financial management system that permitted
             program charges for ineligible and unsupported costs, allowed its HOME local
             bank account to maintain a high cash balance, did not reflect the full history of all
             financial transactions, and did not properly identify the source and application of
             HOME funds. This condition occurred because the Municipality disregarded
             HOME requirements and did not develop and implement effective controls and



                                                  15
          procedures to ensure compliance with the financial requirements of HUD
          programs. As a result, HUD lacked assurance that funds were only used for
          eligible purposes. The Municipality must improve its internal controls to
          safeguard, use, and properly account for HOME program funds.

Recommendations


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

          2A.     Require the Municipality to submit supporting documentation showing the
                  reasonableness and allowability of $2,355,889 charged to the HOME
                  program for project costs or reimburse the program from non-Federal
                  funds.

          2B.     Require the Municipality to submit supporting documentation showing the
                  allocability of $39,338 and any additional payroll costs charged to the
                  HOME program between July 1, 2009, and June 30, 2011, associated with
                  the three employees performing other functions not related to the program,
                  or reimburse the program from non-Federal funds.

          2C.     Require the Municipality to reimburse the HOME program from non-
                  Federal funds $2,263,799 paid for ineligible costs.

          2D.     Require the Municipality to put to better use $2,854,395 associated with
                  unexpended funds maintained in its local bank account.

          2E.     Require the Municipality to submit all supporting documentation showing
                  the eligibility and propriety of $14,732 drawn from its treasury account or
                  reimburse the HOME program from non-Federal funds.

          2F.     Require the Municipality to update its accounting records and ensure that
                  receipts and expenditures are properly accounted for, are reconciled with
                  HUD’s information system, and comply with HUD requirements.

          2G.     Require the Municipality to develop and implement a financial
                  management system in accordance with HUD requirements, including that
                  HOME funds can be traced 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 disbursed in a timely manner.

          2H.     Increase monitoring of the Municipality’s performance in the
                  administration of its HOME program.




                                           16
Finding 3: The Municipality Did Not Have Procedures and Controls
Regarding Information Entered Into HUD’s Information System
The Municipality did not monitor the accuracy of commitments and other information reported
in HUD’s information system. It reported to HUD more than $8.7 million in HOME
commitments without executing written agreements and failed to reprogram and put to better use
more than $1.6 million in unexpended HOME funds associated with terminated activities or for
which additional disbursements were no longer needed. In addition, it provided inaccurate
information on the amount of program income generated, the amount of funding awarded, and
program accomplishments. These deficiencies occurred because the Municipality lacked
procedures and internal controls regarding the reporting of information in HUD’s information
system. As a result, HUD had no assurance that the Municipality met HOME program
objectives, commitments, and disbursement requirements.



 Commitments Without
 Agreements


              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 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
              having met the 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 also requires that the signatures of all parties be dated to
              show the execution date.

              HUD’s information system reflected that the Municipality committed more than
              $10.7 million in HOME funds between July 1, 2009, and October 31, 2010. We
              examined commitments totaling more than $9.3 million that the Municipality
              entered into HUD’s information system.

              The Municipality reported in HUD’s information system that it had committed
              more than $8.7 million in HOME funds, although it did not have executed
              agreements with the recipients. The actual commitments occurred between 10
              and 97 days after the funding date, and in one of the activities, no agreement had
              been executed as of December 15, 2010. Therefore, the funds were improperly
              reported as committed and not in accordance with HUD requirements.




                                               17
                            Reported                                                   Days elapsed
                       commitment amount Initial funding date                             between
             Activity       in HUD’s               in HUD’s              Actual        reporting and
             number information system information system agreement date              agreement dates
              1364          $2,696,072           June 30, 2010        No agreement            *
              1332           1,673,070           Sept. 04, 2009       Dec. 10, 2009          97
              1331           3,212,070           Sept. 01, 2009       Nov. 12, 2009          72
              1352           1,160,000           June 21, 2010        July 01, 2010          10
              Total         $8,741,212
           * No grant agreement had been executed as of December 15, 2010.

           We also found nine instances in which the Municipality reported in HUD’s
           information system the commitment of more than $1.2 million in HOME funds
           between 7 and 121 days after the grant agreement was executed. The
           Municipality also did not implement adequate controls by not requiring that the
           signatures of all parties be dated to show the execution date as required by HUD.
           As a result, HUD had no assurance that the Municipality met HOME commitment
           requirements.


Unexpended Commitments Not
Reprogrammed


           The Municipality did not reprogram and put to better use more than $1.6 million
           in unexpended obligations associated with nine activities that were terminated or
           for which the construction work was completed or additional disbursements were
           no longer needed or expected. For example, HUD’s information system reflected
           unexpended obligations of more than $1.02 million for the projects Barriada
           Figueroa and Plaza Garden, activities that were terminated after HUD disallowed
           them in a 2004 monitoring review. As a result, obligations in HUD’s information
           system were overstated, and more than $1.6 million in HOME funds was not
           available for other eligible efforts. The Municipality should reprogram these
           funds and put them to better use. Appendix E contains a list of the activities with
           unreprogrammed commitments.


Program Income and Other
Receipts Not Properly Reported


           HUD regulations at 24 CFR 92.503 provide that program income, recaptured
           funds, and repayments received be deposited into the participant jurisdictions’
           HOME account to carry out eligible activities. These receipts must be reported in
           HUD’s information system and used before additional HOME withdrawals are
           made.




                                                18
                 Contrary to HUD requirements, the Municipality did not report the proceeds of
                 $705,287 in program income and recaptured funds in HUD’s information system.5
                 In addition, it had not reassigned or transferred $467,723 in HOME repayments in
                 HUD’s information system.6 Consequently, HUD had no assurance of the
                 accuracy of the amount that the Municipality received from such receipts and its
                 compliance with HUD requirements.

                 Program income and recaptured funds - The Municipality failed to report in
                 HUD’s information system program income and recaptured funds totaling
                 $705,287 that were received between February 2010 and March 2011. The
                 Municipality records also showed that receipts totaling $726,471 were not
                 reported in a timely manner in HUD’s information system. These HOME
                 proceeds were reported to HUD between 54 and 282 days after they were
                 received. Appendix F contains a list of the program income and recaptured funds
                 reviewed.

                 Repayments - The Municipality failed to reassign or transfer $467,723 in HOME
                 repayments associated with three terminated activities in HUD’s information
                 system. Although the Municipality returned the repayments to its treasury account,
                 it had not reassigned the funds in HUD’s information system. For example, the
                 Municipality received on May 12, 2009, $167,377 in repayments associated with
                 activity number 360 and returned the funds to HUD on August 12, 2009. As of
                 April 25, 2011, the appropriate entries in HUD’s information system had not been
                 made to reassign the funds and use them for other eligible efforts.

                 The Municipality did not take the appropriate measures to ensure that repayments
                 were properly recorded in HUD’s information system. As a result, $467,723 was
                 not available to be put to better use for HOME-eligible efforts.


    Other Inaccurate Reporting



                 HUD’s information system contained additional inaccurate information
                 concerning the Municipality’s HOME activities. This information included
                 incorrect funding amounts and other inaccurate information on HOME program
                 accomplishments.

                 Incorrect funding amount - In three activities, the awarded amount of HOME
                 funds shown in HUD’s information system was incorrect. These activities
                 included two in which the funding amount was overstated (activities 1352 and

5
  Program income and recaptured funds may result from the resale and recapture requirements imposed by HUD and
the Municipality to the participants to ensure affordability during predetermined periods, depending on the
assistance amount provided.
6
  Repayments may result from termination of activities before their completion, either voluntarily or otherwise.


                                                      19
             1332) and one in which the funding amount was understated (activity number
             1257).

                                   Funded amount
                      Activity   according to HUD’s    Agreement
                      number     information system     amount         Difference
                       1352           $1,160,000       $1,098,100        $61,900
                       1332           $1,673,070       $1,673,000            $70
                       1257           $1,322,772       $1,403,976      $(81,204)

             Inaccurate reporting of accomplishments - The Municipality improperly reported
             to HUD in its 2010 consolidated annual performance and evaluation report
             inaccurate information associated with its HOME program accomplishments. For
             example, the Municipality reported that its HOME-funded activities did not
             generate program income during the reporting period, although it received more
             than $700,000. It also reported that all of the 15 units of the Vistas del Horizonte
             II housing project were occupied by eligible participants, although 5 were vacant
             and an additional 5 were sold to ineligible participants. As a result, HUD had no
             assurance of the accuracy of the reported HOME program accomplishments.


Conclusion



             Because the Municipality lacked adequate controls, it did not ensure the accuracy
             of commitments and other information entered into HUD’s information system.
             There was no assurance that the Municipality met HUD commitment and
             disbursement requirements and that program objectives were met. 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 develop
             and implement internal controls to ensure the accuracy of its reported
             accomplishments and that it complies with HUD requirements.


Recommendations



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

             3A.    Require the Municipality to deobligate in HUD’s information system the
                    $2,696,072 associated with an activity reported as committed but for
                    which no agreement was executed.



                                              20
3B.   Require the Municipality to deobligate, reprogram, and put to better use
      $1,608,619 in commitments for activities that were terminated or for
      which assistance was no longer needed.

3C.   Require the Municipality to reprogram and put to better use $467,723 in
      repayments.

3D.   Require the Municipality to deobligate, reprogram, and put to better use
      $61,970 associated with two activities in which the funding amount was
      overstated.

3E.   Require the Municipality to review all grant agreements for each activity
      entered into HUD’s information system and correct any inaccurate
      information, including funding date and amount and activity status.

3F.   Reassess the Municipality’s annual commitment compliance and recapture
      any amounts that have not been committed within HUD-established
      timeframes.

3G.   Require the Municipality to establish and implement adequate controls
      and procedures to ensure the timely and accurate reporting in HUD’s
      information system of commitment and activity information and receipts
      associated with program income, recaptured funds, and repayments.




                               21
                         SCOPE AND METHODOLOGY

The objectives of the audit were to determine whether the Municipality met HOME program
objectives and its financial management system complied with HUD requirements. The
financial requirements included (1) reporting accurate and supported information in HUD’s
information system, (2) disbursing HOME funds within established timeframes, and (3)
disbursing HOME funds for eligible and supported costs.

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 and Municipality officials;

       Reviewed monitoring 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 69 open HOME-funded activities
as of October 31, 2010. We selected and reviewed 11 activities for which the last draw was
more than a year earlier and had unexpended commitments with withdrawals totaling more than
$5.21 million. We reviewed the 11 activities to determine the status of activities for which
HOME funds were disbursed but which reflected slow progress. We reviewed the status of one
additional activity with withdrawals totaling more than $3.8 million because the amount was
significant.

The Municipality withdrew more than $7.9 million in HOME funds between July 1, 2009, and
October 31, 2010. We selected and reviewed 14 withdrawals greater than $100,000. We
reviewed 10 additional withdrawals based on the activity or purpose of the payment. A total of
24 withdrawals totaling more than $3.5 million (44 percent) were reviewed to determine whether
the Municipality expended grant funds in accordance with HUD eligibility requirements.

We also reviewed 11 payments the Municipality made totaling $1.9 million, based on the nature
of the payment or the vendor name. We reviewed the expenditures to determine whether the
payments were supported and made for eligible efforts.




                                                22
The Municipality’s records reflected that it expended more than $675,000 for planning and
administrative costs between July 1, 2009, and June 30, 2010. We reviewed disbursements
totaling more than $246,000, based on the purpose and amount of the payment. We reviewed the
expenditures and the related supporting documents to determine whether the payments met
HOME requirements, including allowability and allocability of the costs.

HUD’s information system reflected that the Municipality drew down more than $7.9 million in
HOME funds between July 1, 2009, and October 31, 2010. We selected and reviewed
withdrawals greater than $100,000, which resulted in 10 withdrawals totaling more than $1.7
million.7 We reviewed 13 additional withdrawals totaling more than $557,000, based on
deficiencies noted over the timeliness of the funds disbursed. A total of 23 withdrawals were
reviewed to determine whether HOME funds were disbursed within HUD-established
timeframes.

The Municipality deposited into its local bank account more than $1.43 million associated with
program income and recaptured funds between July 1, 2009, and April 30, 2011. We reviewed
all 37 receipts associated with these proceeds. We reviewed 24 additional receipts totaling more
than $772,000, pertaining to repayments the Municipality received before July 1, 2009. A total
of 61 receipts were reviewed to determine whether the Municipality administered these proceeds
in accordance with HOME requirements.

HUD’s information system reflected that the Municipality committed more than $10.7 million in
HOME funds between July 1, 2009, and October 31, 2010. We selected for review the top 15
activities with the largest commitment amounts totaling more than $9.3 million (87 percent). We
reviewed these activities to determine whether the commitments reported to HUD were accurate
and supported.

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, 2009, through October 31, 2010, and we extended
the period as needed to accomplish our objectives. We conducted our fieldwork from December
2010 through June 2011 at the Municipality’s offices in San Juan, 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.




7
    We excluded from the review four withdrawals related to program income.


                                                        23
                              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.

                   Relevance and reliability of information - Policies, procedures, and practices
                   that officials of the audited entity have implemented to provide themselves with
                   reasonable assurance that operational and financial information they use for
                   decision making and reporting externally is relevant and reliable and fairly
                   disclosed in reports.


               We assessed the relevant controls identified above.


                                                24
             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 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).

                    The Municipality did not develop and implement controls and procedures
                    to ensure that accurate information on HOME activities was reported to
                    HUD (see finding 3).




                                               25
                                       APPENDIXES

Appendix A

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


     Recommendation                                                          Funds to be put to
         number               Ineligible 1/          Unsupported 2/            better use 3/
           1A                                          $2,399,428
           1B                                                                     $2,499,717
           1C                    $766,480
           1D                                                                      1,143,845
           2A                                            2,355,889
           2B                                               39,338
           2C                    2,263,799
           2D                                                                      2,854,395
           2E                                               14,732
           3A                                                                     2,696,072
           3B                                                                     1,608,619
           3C                                                                       467,723
           3D                  _________                _________                    61,970
          Total                $3,030,279               $4,809,387              $11,332,341


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 the Municipality implements recommendations 1B, 1D, 2D, 3A, 3B, 3C, and
        3D, funds will be available for other eligible activities consistent with HOME
        requirements.



                                                26
      Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         27
Comment 1




Comment 2




Comment 3




            28
29
30
Comment 3




            31
Comment 3




Comment 4




            32
33
34
Ref to OIG Evaluation   Auditee Comments




Comment 5




                         35
36
37
Comment 6




            38
Comment 7




Comment 7




            39
Comment 8




            40
Comment 9




            41
42
43
44
45
Comment 10




             46
47
Comment 11




Comment 12

Comment 13




             48
Comment 14




             49
50
51
Comment 15




             52
Comment 15




             53
Comment 16




             54
Comment 17




Comment 18




             55
Comment 18




Comment 19




             56
57
58
59
60
61
62
Comment 20




             63
64
Comment 21




Comment 22




             65
66
                         OIG Evaluation of Auditee Comments

Comment 1   The Municipality stated that some of the conditions identified in the audit report
            do not comply with the definition of a finding as established by HUD monitoring
            handbook. It requested that finding 1A be reclassified as a “concern” and not as a
            finding.

            We conducted the audit in accordance with generally accepted government
            auditing standards, not HUD’s monitoring handbook. The evidence obtained
            provides a reasonable basis for our findings and conclusions based on our audit
            objectives. We do not agree with the Municipality’s comments and did not
            modify the report finding and recommendations.

Comment 2   The Municipality believes that comments made by its employees were not
            supported or validated and did not reflect the official opinion of the Municipality.
            It requested that all employee comments included in the report be eliminated if
            they were not validated by the auditors.

            We interviewed various Municipality officials that were responsible for the
            administration of the HOME program including the program manager, project
            inspector, accounting manager, and the Federal funds manager. The statements
            made by the employees corroborated the conditions cited in the report. The
            Municipality did not provide additional information to indicate the information
            provided by the employees was incorrect.

Comment 3   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 occupying HOME funded housing units. The Municipality
            contends that the report failed to mention that 56 percent of the developed units
            were occupied, and that the slow progress was attributed to the current housing
            market conditions. The Municipality also stated that it will take additional efforts
            to promote the occupancy of the units and offer additional subsidies and
            incentives to assist low income homebuyers to acquire the units.

            While the Cranston Gonzalez Act does not specifically set time limits for the
            occupancy of HOME funded projects, HUD regulations at 24 CFR 92.504(a)
            provides that the Municipality is responsible for managing the day-to-day
            operations of its HOME program, ensuring that HOME funds are used in
            accordance with all program requirements and written agreements, and taking
            appropriate action when performance problems arise. The vacant units of HOME
            funded projects did not meet program objectives of providing decent, safe,
            sanitary, and affordable housing to low- and very low-income families. The
            Municipality also failed to mention that 27 percent of the occupied units were not
            sold to HOME program participants in violation of grant agreements signed with
            the developers. The Municipality will need to work with HUD during the audit




                                             67
            resolution process to demonstrate the eligibility and feasibility of the activities
            with signs of slow progress.

Comment 4   The Municipality stated that the total development cost for the CHDO activity
            was $16.7 million and partially funded with $4 million in HOME funds, about
            23.95 percent of the total development costs. It also stated that the sale of the
            units for this activity generated gross proceeds totaling more than $4.9 million.
            The Municipality contends that $1.19 million (23.95 percent) are HOME proceeds
            and that the funds were reimbursed by the former CHDO and reported in HUD’s
            system as program income. It claimed that it took proper corrective action and
            requested the elimination of the finding.

            The Municipality’s position is not consistent with the grant agreement signed with
            the CHDO. The grant agreement permitted the CHDO to retain 90 percent of the
            proceeds generated from the sales of the units to develop new housing projects.
            However, the Municipality only required the CHDO to reimburse about 23.95
            percent of the gross proceeds for new housing projects and not the 90 percent
            stated in the agreement.

            The $4.9 million in gross sales proceeds the Municipality claims the project
            generated is not consistent with information provided. The grant agreement
            established a maximum selling price of $90,000 for the three bedroom units and
            $65,000 for the one bedroom units. Based on this information, the gross proceeds
            from the sale of the units should have been $9,080,000. It should be noted, that
            the independent accountant report dated July 8, 2011, stated that the mortgage
            deed of 98 units reflected a sales price that exceeded what was established in the
            grant agreement. Therefore, the gross proceed amount could be higher.

            The Municipality did not explain why the terms of the grant agreement were not
            followed and required the former CHDO to reimburse a much smaller amount. In
            addition, it did not provide any documentation that could explain the basis for the
            gross proceeds it claimed the activity generated. The Municipality will need to
            provide adequate documentation to HUD during the audit resolution process that
            could clarify and support the claims, and demonstrate that funds recuperated were
            properly reprogrammed for eligible efforts. We therefore did not modify the
            finding and recommendations.

Comment 5   The Municipality informed us that it initiated legal proceeding to recuperate the
            HOME funds in March 2010, and requested HUD to debar the developer.

            The Municipality initiated legal action against the developer in March 2010.
            However, in November 2010, the Municipality ceased collection efforts and
            released the developer of any responsibility. It was not until we asked about the
            status of these activities that the Municipality re-opened its lawsuit against the
            developer in January 2011.




                                              68
Comment 6     The Municipality stated it deobligated $1,143,845 for the terminated activities.
              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 HUD documentation to show that the funds were properly reprogrammed.

Comment 7     The Municipality stated that it will revise its internal controls and procedures to
              address the issues associated with the finding. It also stated that it has an annual
              monitoring plan that is included in the Consolidated and Annual Action Plan. The
              Municipality requested that the report be corrected since it has a monitoring plan.

              We acknowledge the Municipality’s efforts to improve its controls and procedures
              associated with the HOME program. The statement related to the lack of a
              monitoring plan was eliminated from the report.

Comment 8     The Municipality stated that the amount paid for the acquisition of the properties
              were reasonable, and that it provided a copy of the appraisals to demonstrate that
              the acquisition price was either at or below the market price. Therefore, it
              requested the elimination of this part of the finding.

              The appraisals submitted were incomplete and the information provided did not
              demonstrate the reasonableness of the costs. In addition, in one of the properties
              the sales price was $30,000 higher than the appraised value. The Municipality did
              not provide us adequate support that could show the reasonableness of the
              charges. We therefore did not modify the report finding and recommendation.

Comment 9     The Municipality stated that the original supporting documents were available for
              review. However, the Municipality did not provide us with the documentation for
              our review. It will need to provide documentation showing the reasonableness
              and allowability of the expenditures for HUD’s evaluation.

Comment 10 The Municipality stated that it will make an analysis to determine the cost that is
           allocable to HOME and other programs.

Comment 11 The Municipality believes that CPD Notice-01-11 allows the reimbursement of
           costs incurred before the execution of a grant agreement with the developer. It
           stated that the disbursements were related to soft costs and requested that the
           questioned costs be reclassified as unsupported.

              Notice 01-11 provides guidance on the environmental review process required
              under the HOME program. Contrary to the Municipality’s statement, the notice
              does not make reference of the reimbursement of costs incurred by a developer
              prior to the execution of the grant agreement. The Municipality did not provide
              us adequate support that could show the allowability and allocability of the
              disbursements. We therefore did not modify the report finding and
              recommendation.




                                               69
Comment 12 The Municipality stated that it agreed that $335,000 were used for duplicate or
           unrelated project costs. It will need to provide HUD documentation to show that
           the funds were properly reimbursed.

Comment 13 The Municipality stated that the developers were reimbursed $617,327 for
           ineligible acquisition costs because the HOME funds were provided as interim
           construction loans, and that these will be returned when the units are sold.

              The HOME funds cannot be used to defray ineligible expenditures, or provide
              financing for ineligible efforts. The Municipality should not wait for the sale of
              the properties and must immediately reimburse the ineligible costs to the HOME
              program.

Comment 14 The Municipality informed us that the $472,514 was non-HOME proceeds
           reimbursed by a CHDO associated with the sale of the Paseo del Conde housing
           project. It also stated that $300,346 in HOME funds was incorrectly used and that
           its HOME program bank account was reimbursed with local funds.

              The report stated that $772,860 in program income was used to repay the HOME
              program. However, the Municipality claims that $472,514 of these were non-
              HOME proceeds. The Municipality did not comment on the remaining balance
              and did not provide us additional documentation that could demonstrate that the
              funds were not used for the ineligible efforts. As mentioned in comment four, the
              Municipality’s claim is not consistent with the agreement signed with the CHDO.
              In addition, it will need to provide proper documentation to show that the funds
              were properly reimbursed from non-Federal funds.

Comment 15 The Municipality believes that it complied with program requirements and that all
           HOME obligations were incurred and disbursed before Federal funds were
           drawdown from HUD. It stated that all disbursements are made from its general
           fund account and then seeks reimbursement from HOME bank account. The
           Municipality claimed that all corrective actions were taken and requested the
           elimination of the finding.

              Despite the Municipality’s claim, HOME funds were not disbursed in a timely
              manner in violation of HUD requirements. It failed to disburse HOME funds in
              its local bank account before requesting additional grant funds. As a result, it
              consistently maintained a high cash balance in its local bank account, maintaining
              a monthly average balance of $3.4 million during the 22-month period ending
              April 2011. The Municipality did not provide adequate support that could
              substantiate their position. Accordingly, we did not modify the report finding and
              recommendations.

Comment 16 The Municipality believes that the differences were the result of accounting
           methods used. It stated that its accounting records are accurate, current, and
           complete. However, it did not provide us additional documentation that could



                                               70
              explain the discrepancy or the disposition of the $14,732 drawn from HUD.
              Accordingly, we did not modify the report finding and recommendations.

Comment 17 The Municipality stated that during the audit it updated its accounting records to
           ensure that receipts and expenditures were properly recorded and requested the
           elimination of the finding. However, the municipality did not provide us
           additional documentation that could substantiate their claim. Therefore, we did
           not modify the finding and recommendations.

Comment 18 The Municipality believes that its financial system complies with requirements
           and the deficiencies disclosed are associated to program income and only require
           a revision to the internal controls and procedures. The Municipality requested to
           revise the corrective action to indicate the need for establishing controls and
           procedures.

              The Municipality’s financial management system did not comply with HUD
              requirements since it did not support the eligibility of disbursements, allowed the
              use of funds for ineligible purposes, did not use funds in a timely manner, and did
              not account for program receipts. Contrary to the Municipalities belief, the
              deficiencies found are not limited to program income and do affect all aspects
              associated with the administration of the HOME program. The Municipality did
              not provide us additional documentations that could substantiate its claim. We
              therefore did not modify the report finding and recommendation.

Comment 19 The Municipality believes that it complied with all commitment requirements
           established by HUD. It stated that it had signed conditional commitment
           agreements with the developers and requested that the finding be eliminated from
           the report.

              Contrary to the Municipality’s claim, the conditional commitment letters
              submitted by the Municipality do not comply with HUD requirements. In a 2005
              HUD monitoring review, the Municipality was advised that such type of
              agreements were not acceptable for the obligation of HOME funds. In addition,
              the Municipality did not address the issue of inaccurate dates entered into HUD’s
              system. The Municipality did not provide us additional documentations that
              could substantiate its claim. Therefore, we did not modify the report finding and
              recommendation.

Comment 20 The Municipality sated that in a 2004 monitoring review HUD requested the
           reimbursement of HOME funds invested in the terminated projects, and that the
           funds were returned with local funds. It stated that in February 2011 it requested
           HUD assistance to reprogram the reimbursed funds, but HUD denied their request
           until the OIG audit was completed.

              The Municipality’s request to HUD was associated with the reprogramming of
              funds reimbursed to the HOME program. It was not related to the reprogramming



                                              71
              of the unexpended obligations for activities that were terminated or for assistance
              that was no longer needed. Contrary to the Municipality’s claim, the restriction
              imposed by HUD did not affect its ability to deobligate and reprogram the
              unexpended obligations. The Municipality did not provide us additional
              documentations that could substantiate its claim. Therefore, we did not modify
              the report finding and recommendation.

Comment 21 The Municipality sated that in February 2011 it requested HUD assistance to
           reprogram the $467,723 repayments, but HUD denied their request until the OIG
           audit was completed.

              Although HUD restricted the reprogramming of the repayments, the Municipality
              was not diligent in the administration of the repayments. The Municipality
              initiated the reprogramming process about three years after HUD instructed the
              reimbursement of HOME funds and after we asked about the status of these
              activities. The Municipality must work with HUD to deobligate and reprogram
              the $467,723 in repayments.

Comment 22 The Municipality stated it deobligated $61,970 for the activities in which the
           funding amount was overstated. 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 reprogrammed to other eligible efforts.




                                               72
Appendix C

   LIST OF UNSUPPORTED PROJECT DISBURSEMENTS


   Activity
   number          Project name          Amount                       Comments
                                                      Land acquisition costs of $550,000 were
                                                      not supported. Supporting documentation
    1331           Tapia’s Court          $630,207
                                                      for an additional disbursement of $80,207
                                                      was not provided by the Municipality.
                                                      Supporting documentation for the
     546           Los Portales II         491,022    disbursement of $491,022 was not
                                                      provided by the Municipality.
                                                      Land acquisition costs of $400,000 were
                                                      not supported. Supporting documentation
    1259           Cataluña Court          470,743
                                                      for an additional disbursement of $70,743
                                                      was not provided by the Municipality.
                                                      Land acquisition costs of $366,000 were
    1088      Padre Colón Apartments       366,000
                                                      not supported.
                                                      Land acquisition costs of $175,000 were
    1352      San Miguel Apartments II     175,000
                                                      not properly supported.
                                                      Land acquisition costs of $135,000 were
    1257         Chalets de Landrau        135,000
                                                      not supported.
                                                      Supporting documentation for the
    1332           D’Río Project            73,095    disbursement of $73,095 was not provided
                                                      by the Municipality.
                                                      Supporting documentation for the
    1255           Participant A            14,822    disbursement of $14,822 was not provided
                                                      by the Municipality.
                 Total                   $2,355,889




                                             73
Appendix D

     LIST OF INELIGIBLE PROJECT DISBURSEMENTS


    Activity
    number          Project name           Amount                      Comments
                                                       Project costs of $302,900 were incurred
      546           Los Portales II        $302,900    before the grant agreement with the
                                                       Municipality was executed.
                                                       The Municipality used $300,000 in
                                                       HOME funds for the acquisition of a
     1003          William’s Court          300,000    foreclosed-upon property that was
                                                       previously acquired with HOME funds,
                                                       resulting in a duplication of costs.
                                                       Project costs of $241,477 were incurred
                                                       before the grant agreement with the
     1016         Gilberto Monroig          241,477    Municipality was executed. This amount
                                                       included $25,663 for land acquisition
                                                       that did not relate to the program.
                                                       Project costs of $168,631 were incurred
      877       Vistas del Horizonte II     168,631    before the grant agreement with the
                                                       Municipality was executed.
                                                       Project costs of $80,000 were incurred
     1332           D’Río Project            80,000    before the grant agreement with the
                                                       Municipality was executed.
                                                       Project costs of $38,505 were incurred
     1257         Chalets de Landrau         38,505    before the grant agreement with the
                                                       Municipality was executed.
                                                       Project costs of $34,080 were incurred
     1259           Cataluña Court           34,080    before the grant agreement with the
                                                       Municipality was executed.
                                                       Project costs of $15,000 were incurred
     1352      San Miguel Apartments II      15,000    before the grant agreement with the
                                                       Municipality was executed.
                                                       A penalty was paid for not executing a
     1331           Tapia’s Court            10,000    sales option contract within the
                                                       prescribed timeframe.
                  Total                   $1,190,593




                                              74
Appendix E

                   LIST OF COMMITMENTS TO REPROGRAM
                           AND PUT TO BETTER USE


                                                                           Days
                                                                          elapsed
                                                                        from last
                                                                       drawdown
                      IDIS*        IDIS          Last        IDIS       date as of
Activity Activity funding committed drawdown                amount       May 31,
number      name       date      amount         date**    unexpended        2011                       Comments
                            Terminated activities with unexpended balances in HUD’s information system
                                                                                   HUD questioned the activity in a 2004 monitoring.
         Barriada     July 1,                   Dec. 2,
  20                               $622,300                  $529,591       4563   However, the Municipality did not reprogram the
         Figueroa      2006                      1998
                                                                                   unexpended commitments.
         Plaza                                                                     HUD questioned the activity in a 2004 monitoring.
                     Apr. 15,                  June 11,
  242    Garden                     874,000                    494,359      4372   However, the Municipality did not reprogram the
                       1999                      1999
         Apartments                                                                unexpended commitments.
                                                                                   The Municipality terminated this activity because it
         Pepe         Oct. 9,                   May 7,
  360                               614,740                     39,080       754   was not feasible. However, it did not reprogram the
         Santana       2000                      2009
                                                                                   unexpended commitments.
                               Other activities with unexpended balances in HUD’s information system
                                                                                   The construction work was completed in 2005.
         Los         Sept. 17,                 Aug. 27,
  546                             1,080,000                    239,245      2468   However, unexpended commitments were not
         Portales II   2002                      2004
                                                                                   reprogrammed.
         Península
                                                                                   HUD’s deadline for completing the activity was
         de Cantera July 16,                   Mar. 24,
 1091                             4,000,000                    157,085       68    March 31, 2011. However, the Municipality did not
         - Paseo del   2007                      2011
                                                                                   reprogram the unexpended commitments.
         Conde
         Vistas del                                                                The construction work was completed in 2006.
                     Nov. 24,                  Oct. 30,
  877    Horizonte                  800,000                     79,972       578   However, the Municipality did not reprogram the
                       2004                      2009
         II                                                                        unexpended commitments.
                                                                                   The construction work was completed in 2007.
         Gilberto    Mar. 31,                  Apr. 16,
 1016                               587,473                     53,135       775   However, the Municipality did not reprogram the
         Monroig       2006                      2009
                                                                                   unexpended commitments.
                                                                                   The construction work was completed in 2000.
         Sector      May 19,                    Mar. 4,
  248                               207,600                      9,033      3375   However, the Municipality did not reprogram the
         Figueroa      1999                      2002
                                                                                   unexpended commitments.
         Padre                                                                     The construction work was completed in 2009.
                     July 13,                  Oct. 22,
 1088 Colón                      1,395,083                       7,119       586   However, the Municipality did not reprogram the
                       2007                      2009
         Apartments                                                                unexpended commitments.
            Total              $10,181,196                  $1,608,619
* IDIS = HUD’s Integrated Disbursement and Information System
** As of May 31, 2011, activities were reported in IDIS as open.




                                                                  75
Appendix F

                  LIST OF PROGRAM INCOME
              AND RECAPTURED FUNDS REVIEWED


       Receipt                                         Reported date in      Days elapsed from
       number         Amount      Receipt date    HUD’s information system     receipt date
                                         Unreported receipts
        923060         $19,998    Feb. 18, 2010               *                    431
        923063          53,220     Oct. 4, 2010               *                    203
        923064          31,830     Oct. 4, 2010               *                    203
        923065          65,611     Oct. 4, 2010               *                    203
        923070          15,000    Nov. 9, 2010                *                    167
        923071          50,000    Nov. 9, 2010                *                    167
        923072          33,500    Nov. 9, 2010                *                    167
        923073          39,200    Nov. 12, 2010               *                    164
        923074          44,000    Nov. 12, 2010               *                    164
        923075          57,200    Jan. 12, 2011               *                    103
        923076          41,600    Jan. 12, 2011               *                    103
        923077          61,776    Jan. 12, 2011               *                    103
        923079          61,776    Jan. 12, 2011               *                    103
        923080          69,276    Jan. 12, 2011               *                    103
        923082          30,000    Mar. 30, 2011               *                    26
        923083          31,300    Mar. 31, 2011               *                    25
         Total        $705,287
                                           Reported receipts
        923041          $8,250    Sept. 3, 2009           June 12, 2010            282
        923042          10,154    Sept. 3, 2009           June 12, 2010            282
        923043          40,337     Oct. 6, 2009           June 12, 2010            249
        923044          51,000     Oct. 6, 2009           June 12, 2010            249
        923045          36,397     Oct. 6, 2009           June 12, 2010            249
        923046          31,050     Oct. 6, 2009           June 12, 2010            249
        923047          49,000     Oct. 6, 2009           June 12, 2010            249
        923048          47,317     Oct. 6, 2009           June 12, 2010            249
        923049          34,300     Oct. 6, 2009           June 12, 2010            249
        923050          22,862     Oct. 6, 2009           June 12, 2010            249
        923051          45,965     Oct. 6, 2009           June 12, 2010            249
        923052          42,312     Oct. 6, 2009           June 12, 2010            249
        923053          48,102     Oct. 6, 2009           June 12, 2010            249
        923054          37,225     Oct. 6, 2009           June 12, 2010            249
        923055          11,460    Nov. 4, 2009            June 12, 2010            220
        923056          13,865    Nov. 4, 2009            June 12, 2010            220
        923057          45,211    Nov. 4, 2009            June 12, 2010            220
        923058          31,753    Nov. 4, 2009            June 12, 2010            220
        923059          60,607    Jan. 27, 2010           June 12, 2010            136
        923061          46,000    Mar. 1, 2010            June 16, 2010            107
        923062          13,304    Apr. 23, 2010           June 16, 2010            54
         Total        $726,471
     * Program income and recaptured funds had not been reported in HUD’s information system
     as of April 25, 2011.




                                                76