Issue Date
October 13, 2010
Audit Report Number
2011-CH-1001
TO: Lana Vacha, Acting Director of Community Planning and Development, 5FD
FROM: Heath Wolfe, Regional Inspector General for Audit, 5AGA
SUBJECT: The City of Flint, MI, Lacked Adequate Controls Over Its HOME Program
Regarding Community Housing Development Organizations’ Home-Buyer
Projects, Subrecipients’ Activities, and Reporting Accomplishments in
HUD’s System
HIGHLIGHTS
What We Audited and Why
We audited the City of Flint’s (City) HOME Investment Partnerships Program
(Program). The audit was part of the activities in our fiscal year 2010 annual
audit plan. We selected the City based upon our analysis of risk factors relating to
Program grantees in Region V’s jurisdiction and a citizen complaint to our office.
Our objectives were to determine whether the City complied with Federal
requirements in its use of Program funds for community housing development
organizations’ (organization) home-buyer projects and subrecipients’ activities
and accurately reported Program accomplishments in the U.S. Department of
Housing and Urban Development’s (HUD) Integrated Disbursement and
Information System (System). This is the second of three planned audit reports
on the City’s Program.
What We Found
The City did not comply with Federal requirements in its use of Program funds
for organizations’ home-buyer projects. It (1) did not ensure that organizations
entered into lease-purchase agreements or entered into appropriate lease-purchase
agreements with households, (2) failed to ensure that an organization transferred
homes to home buyers within 42 months of project completion and did not
convert the home-buyer projects to rental projects, (3) did not reimburse its
HOME trust fund treasury account (treasury account) for terminated projects, (4)
inappropriately used Program funds for home-buyer project costs that were
administrative expenses, (5) did not prevent an organization from entering into a
land contract with a home buyer, (6) inappropriately used Program organization
reserve funds for an owner-occupied single-family rehabilitation project, (7) used
Program funds for unreasonable acquisition costs, and (8) did not decommit and
reprogram Program funds for a terminated project. As a result, the City drew
down and disbursed nearly $1.7 million in Program funds for organizations’
home-buyer projects that did not meet Federal requirements and inappropriately
drew down and disbursed more than $143,000 in additional Program funds.
The City also did not comply with Federal requirements in its use of Program
funds for subrecipients’ activities. It (1) inappropriately used Program funds for
costs that were not associated with an eligible project, were administrative
expenses, and were unrelated to the City’s Program activities; (2) lacked
sufficient documentation to support Program funds used for projects; and (3) did
not reprogram Program funds for a terminated project. As a result, the City
inappropriately drew down and disbursed nearly $427,000 in Program funds and
lacked sufficient documentation to support nearly $65,000 in Program funds.
Further, the City did not accurately report Program accomplishments in HUD’s
System. It (1) inappropriately entered activity data into HUD’s System for 61
properties under 2 or more activity numbers for a total of 130 activities, (2)
overreported Program units created by 79 units, (3) did not accurately report
completion dates for 35 home-buyer activities, and (4) inappropriately reported
the type of activity in HUD’s System for 2 activities.
What We Recommend
We recommend that the Acting Director of HUD’s Detroit Office of Community
Planning and Development require the City to (1) revise 12-month lease
agreements and 60-month purchase option agreements with households to 36-
month lease-purchase agreements, convert the home-buyer project to a rental
project, or reimburse its Program more than $843,000 from non-Federal funds; (2)
convert home-buyer projects to rental projects if it can support that the homes
meet property standards or reimburse its Program more than $607,000 from non-
Federal funds; (3) reimburse its treasury account nearly $164,000 from non-
Federal funds; (4) reimburse its Program nearly $406,000; (5) reimburse its
Program nearly $26,000 from non-Federal funds or reprogram the nearly $26,000
from Program organization reserve funds to Program entitlement or subrecipient
funds; (6) decommit more than $94,000 in Program funds; (7) reimburse its
Program nearly $112,000 from non-Federal funds or reprogram the nearly
$112,000 from homeowner and/or acquisition-only activity costs to administrative
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costs; (8) provide supporting documentation or reimburse its treasury account
nearly $65,000 from non-Federal funds; (9) reimburse its treasury account nearly
$14,000 from non-Federal funds or reprogram nearly $14,000 to the appropriate
project; (10) revise Program accomplishments in HUD’s System as appropriate;
and (11) implement adequate procedures and controls to address the findings cited
in this audit report.
For each recommendation without a management decision, please respond and
provide status reports in accordance with HUD Handbook 2000.06, REV-3.
Please furnish us copies of any correspondence or directives issued because of the
audit.
Auditee’s Response
We provided our discussion draft audit report and/or supporting schedules to the
director of the City’s Department, the City’s mayor, and HUD’s staff during the
audit. We held an exit conference with the City’s director on August 19, 2010.
We asked the City’s director to provide comments on our discussion draft audit
report by September 10, 2010. The director provided written comments, dated
September 10, 2010. The director agreed with our findings and recommendations.
The complete text of the written comments, except for three addresses included in
the comments and 31 pages of documentation that were not necessary to understand
the director’s comments, along with our evaluation of that response, can be found in
appendix B of this audit report. We provided the Acting Director of HUD’s Detroit
Office of Community Planning and Development with a complete copy of the City’s
written comments plus the 31 pages of documentation.
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TABLE OF CONTENTS
Background and Objectives 5
Results of Audit
Finding 1: The City Lacked Adequate Controls Over Organizations’ Home-
Buyer Projects 6
Finding 2: The City Lacked Adequate Controls Over Subrecipients’ Activities 18
Finding 3: The City’s Controls Over Reporting Program Accomplishments in
HUD’s System Had Weaknesses 24
Scope and Methodology 28
Internal Controls 30
Appendixes
A. Schedule of Questioned Costs and Funds To Be Put to Better Use 32
B. Auditee Comments and OIG’s Evaluation 33
C. Federal Requirements 43
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BACKGROUND AND OBJECTIVES
The Program. Authorized under Title II of the Cranston-Gonzalez National Affordable Housing
Act (Act), as amended, the HOME Investment Partnerships Program (Program) is funded for the
purpose of increasing the supply of affordable standard rental housing; improving substandard
housing for existing homeowners; assisting new home buyers through acquisition, construction, and
rehabilitation of housing; and providing tenant-based rental assistance.
The City. Organized under the laws of the State of Michigan, the City of Flint (City) is governed by
a mayor and a nine-member council, elected to 4-year terms. The City designated its Department of
Community and Economic Development (Department) as the lead agency to administer its
Program. The overall mission of the Department is to strengthen the economic well-being of the
City by promoting affordable housing, neighborhood revitalization, business development, and job
growth. The City did not renew its contract with the former director of the Department and hired a
new director on February 23, 2010. The City’s Program records are located at 1101 South Saginaw
Road, Flint, MI.
The following table shows the amount of Program funds the U.S. Department of Housing and
Urban Development (HUD) awarded the City for program years 2005 through 2009.
Program Program
year funds
2005 $1,299,639
2006 0
2007 1,027,094
2008 1,173,131
2009 1,306,202
Total $4,806,066
HUD did not award the City Program funds in program year 2006 and reduced the City’s award
of Program funds for program year 2007 by more than $100,000 due to the City’s failure to
commit nearly $156,000 in Program funds by June 30, 2005, to comply with HUD’s 24-month
commitment deadline and to disburse more than $1.2 million in Program funds by October 31,
2005, to comply with HUD’s 5-year disbursement deadline.
Our objectives were to determine whether the City complied with Federal requirements in its use
of Program funds for community housing development organizations’ (organization) home-
buyer projects and subrecipients’ activities and accurately reported Program accomplishments in
HUD’s Integrated Disbursement and Information System (System).
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RESULTS OF AUDIT
Finding 1: The City Lacked Adequate Controls Over Organizations’
Home-Buyer Projects
The City did not comply with Federal requirements in its use of Program funds for
organizations’ home-buyer projects. It (1) did not ensure that organizations entered into lease-
purchase agreements or entered into appropriate lease-purchase agreements with households, (2)
failed to ensure that an organization transferred homes to home buyers within 42 months of
project completion and did not convert the home-buyer projects to rental projects, (3) did not
reimburse its HOME trust fund treasury account (treasury account) for terminated projects, (4)
inappropriately used Program funds for home-buyer project costs that were administrative
expenses, (5) did not prevent an organization from entering into a land contract with a home
buyer, (6) inappropriately used Program organization reserve funds for an owner-occupied
single-family rehabilitation project, (7) used Program funds for unreasonable acquisition costs,
and (8) did not decommit and reprogram Program funds for a terminated project. These
weaknesses occurred because the City lacked adequate procedures and controls to ensure that
Program funds were used for organizations’ home-buyer projects in accordance with Federal
requirements. As a result, the City drew down and disbursed nearly $1.7 million in Program
funds for organizations’ home-buyer projects that did not meet Federal requirements and
inappropriately drew down and disbursed more than $143,000 in additional Program funds.
The City Did Not Ensure That
Court Street Village Entered
Into Lease-Purchase
Agreements or Appropriate
Lease-Purchase Agreements
We reviewed all of the organizations’ home-buyer projects that the City had
reported in HUD’s System for its Program as of April 7, 2010. The City provided
more than $6 million in Program funds for the organizations’ home-buyer projects
through June 2010.
The City drew down and disbursed $1,325,000 in Program funds from September
2006 through June 2008 to Court Street Village Nonprofit Housing Corporation
(Court Street Village) for acquisition and rehabilitation costs associated with one
home-buyer project, project numbers 1763 and 1795. The City inappropriately
entered data into HUD’s System for the project under two different project
numbers. Of the project’s 22 units, 11 were floating Program units.
HUD’s regulations at 24 CFR (Code of Federal Regulations) 92.254(a) state that
housing that is for acquisition by a household must meet the affordability
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requirements in 24 CFR 92.254(a). Section 92.254(a)(5)(ii)(A)(7) states that
Program funds may be used to assist home buyers through lease-purchase
programs for existing housing. The housing must be purchased by a home buyer
within 36 months of signing the lease-purchase agreement. The Program
affordability requirements for rental housing in 24 CFR 92.252 shall apply if the
housing is not transferred to a home buyer within 42 months after project
completion.
On October 20, 2008, the former director of the City’s Department requested that
for home-buyer project numbers 1763 and 1795, HUD waive its requirement that
housing be purchased by a home buyer within 36 months of signing a lease-
purchase agreement and allow Court Street Village to enter into 5-year lease-
purchase agreements with households. On January 16, 2009, the former Director
of HUD’s Detroit Office of Community Planning and Development denied the
City’s request.
Contrary to HUD’s regulations, Berridge Place, LLC, which is owned by Court
Street Village, initially entered into 12-month lease agreements and 60-month
purchase option agreements with households for four units (numbers 105, 201,
301, and 303) from December 30, 2008, through October 3, 2009, and 12-month
lease agreements with households for five units (numbers 4, 103, 106, 202, and
206) from December 16, 2008, through May 6, 2010. As of August 3, 2010,
Berridge Place, LLC, had 12-month lease agreements and 60-month purchase
option agreements with households for two units (numbers 301 and 303) and 12-
month lease agreements with households for five units (numbers 4, 103, 106, 202,
and 206). In addition, five of the 22 units were vacant.
The City Did Not Ensure That
Salem Transferred Homes to
Households or Convert Home-
Buyer Projects to Rental
Projects
The City drew down and disbursed nearly $669,000 in Program funds from June
1997 through September 2009 to Salem Housing Development Corporation
(Salem) for acquisition and rehabilitation costs associated with 15 home-buyer
projects. The 15 projects were for 10 homes. The City inappropriately entered
project data into HUD’s System for five of the homes under two different project
numbers.
Salem entered into month-to-month lease agreements with households for eight of
the homes, a 24-month lease agreement with a household for one home, and a no-
term lease agreement with a household for one home. Salem also entered into
purchase option agreements with eight households ranging from 12 through 24
months, and one household with no term in which to purchase the home. The
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purchase option agreement for the remaining home was not signed by the
household. The eight households did not purchase the homes within the agreed-
upon purchase option period. Further, contrary to HUD’s regulations, the 10
households did not purchase the homes within 36 months of signing their lease
and/or purchase option agreements, Salem did not transfer 9 of the homes to a
household within 42 months of project completion, and the City did not convert
the 9 home-buyer projects to rental projects. The following table shows the
project numbers, the effective dates of the initial lease and purchase option
agreements, the number of months the households had to purchase the homes
under the initial purchase option agreements, the number of months since the
effective dates of the initial lease and purchase option agreements, and the amount
of Program funds used for each project number as applicable.
Date of initial agreements Months
Project Purchase Months to since Program
number Lease option purchase initial lease funds
72 Feb. 1, 2000 Feb. 3, 2000 24 126 $7,062
616 Feb. 1, 2000 Feb. 3, 2000 24 126 50,203
617 Feb. 7, 2000 Feb. 7, 2000 24 126 70,000
800 May 25, 2000 May 25, 2000 No term 122 35,346
619 June 24, 2000 June 24, 2000 24 121 42,031
801 Aug. 1, 2000 July 25, 2000 24 120 40,876
936 July 1, 2002 June 28, 2002 23 97 50,000
1253 July 1, 2002 June 28, 2002 23 97 59,455
935 Mar. 20, 2003 Mar. 20, 2003 18 88 50,000
1252 Mar. 20, 2003 Mar. 20, 2003 18 88 63,269
934 June 1, 2005 June 2, 2005 12 62 60,730
1255 June 1, 2005 June 2, 2005 12 62 16,205
1393 Dec. 14, 2006 Not signed Not applicable 43 62,177
1206 June 15, 2007 June 14, 2007 13 37 7,978
1254 June 15, 2007 June 14, 2007 13 37 53,530
Total $668,862
* The City inappropriately entered project data into HUD’s System for five homes
under two different project numbers. The project numbers were 72 and 616, 936 and
1253, 935 and 1252, 934 and 1255, and 1206 and 1254.
Further, Salem entered into a lease agreement with a new household for the home
under project number 617 nearly 77 months after the date of the initial lease and
purchase option agreements. It also entered into lease and purchase option
agreements with three new households for the homes under project numbers 619,
800, and 801, when the options to purchase the homes exceeded 42 months after
the dates of the initial lease and purchase option agreements by more than 9
through 22 months.
Two of the four new households (project numbers 619 and 801) and the
households that entered into the initial lease and purchase option agreements for
three homes (project numbers 935 and 1252, 1393, and 1206 and 1254) were still
leasing the homes from Salem as of July 30, 2010. The homes for project
numbers 72 and 616, 617, 800, 934 and 1255, and 936 and 1253 were vacant as of
July 30, 2010.
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In addition, neither the City nor Salem had provided documentation to support
that the homes met applicable housing standards after the 42nd month or as of
September 10, 2010.
The City Did Not Reimburse Its
Treasury Account for Program
Funds Used for Terminated
Projects
The City drew down and disbursed more than $169,000 in Program funds from
April 2003 through September 2009 to four organizations—Salem, Flint West
Village Community Development Organization (Flint West Village), Greater
Eastside Community Association (Greater Eastside), and Court Street Village—
for acquisition and/or rehabilitation costs associated with 10 home-buyer projects.
The 10 projects were for 7 homes. The City inappropriately entered project data
into HUD’s System for three of the homes under two different project numbers.
HUD’s regulations at 24 CFR 92.503(b)(2) state that any Program funds invested
in a project that is terminated before completion, either voluntarily or otherwise,
must be repaid by a participating jurisdiction in accordance with section
92.503(b)(3). Section 92.503(b)(3) states that if the Program funds were
disbursed from the participating jurisdiction’s treasury account, the funds must be
repaid to the participating jurisdiction’s treasury account. If the Program funds
were disbursed from the participating jurisdiction’s HOME trust fund local
account (local account), the funds must be repaid to the participating jurisdiction’s
local account.
Contrary to HUD’s regulations, the City reported in HUD’s System that eight of
the projects had been completed, although none of the homes had been fully
rehabilitated and sold or rented to low- or moderate-income households. The
following table shows the project numbers, the name of the organization, the type
of home-buyer project, the completion date, and the amount of Program funds
used for each project number as applicable.
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Project Completion Program
Organization number Type of home-buyer project date funds
Salem 1209 Acquisition and rehabilitation Not applicable $26,300
1223 Acquisition and rehabilitation Jan. 29, 2007 26,631
1224 Acquisition and rehabilitation Jan. 29, 2007 3,095
Flint West 1385 Acquisition and rehabilitation Sept. 30, 2006 1,172
Village 1387 Acquisition and rehabilitation Sept. 30, 2006 14,302
1409 Acquisition Apr. 16, 2004 22,412
Greater 1410 Acquisition Apr. 16, 2004 26,142
Eastside 1411 Acquisition and rehabilitation Apr. 16, 2004 32,997
Court Street 1986 Acquisition and rehabilitation Sept. 22, 2009 13,539
Village 2100 Acquisition and rehabilitation Not applicable 2,623
Total $169,213
* The City inappropriately entered project data into HUD’s System for three homes under two
different project numbers. The project numbers were 1223 and 1387, 1224 and 1385, and
1986 and 2100.
The City drew down and disbursed $15,306 in Program funds from April 2003
through September 2009 to Salem for rehabilitation cost associated with project
number 1209. The City reported the activity as complete as of January 29, 2007.
Further, the City reported the project as open, committed an additional $64,334 in
Program funds for the project since September 22, 2009, and drew down and
disbursed an additional $10,994 in Program funds from September 2009 through
February 2010 to Salem for soft costs for the project. However, Salem’s acting
director said that Salem would not continue to rehabilitate the home due to a
collapsing foundation.
The City drew down and disbursed $45,200 in Program funds from April 2003
through April 2004 to Flint West Village for rehabilitation and soft cost
associated with project numbers 1223, 1224, 1385, and 1387. As stated above,
the four projects were for two homes. Flint West Village filed for Chapter 7
bankruptcy on March 31, 2005, and was dissolved on October 1, 2006. On May
23, 2008, the home for project numbers 1223 and 1387 was sold to a private party
as part of the bankruptcy. Flint West Village did not complete the projects, and
the City did not recapture any of the $40,933 in Program funds used for
rehabilitation of the home for project numbers 1223 and 1387. As of September
2010, the deed for the home for project numbers 1224 and 1385 showed Flint
West Village as the owner of the home. The City’s program manager said that the
City had not received project records from Flint West Village. Further, the City
did not plan to rehabilitate the home for project numbers 1224 and 1385.
The City drew down and disbursed $81,551 in Program funds from February
through April 2004 to Greater Eastside for acquisition and soft costs associated
with project numbers 1409 through 1411. In February 2002, Greater Eastside
purchased the home for project number 1411 through a land contract. In July
2006, Greater Eastside filed a quit claim deed for the home, granting the original
owner full rights to the home. As the result of a June 2006 civil judgment,
Greater Eastside transferred the homes for project numbers 1409 and 1410 to the
City on July 26, 2006, and repaid the City $20,083 for the two projects on
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October 16, 2006. However, the City placed the repaid Program funds into its
self-insurance fund rather than returning the funds to its treasury account. The
repaid Program funds had not been used through July 2010. Further, the City did
not allocate more than $1,100 in interest earned on the repaid Program funds to its
local account. The City’s Program manager said that the City had not received
project records from Greater Eastside. Further, Greater Eastside no longer does
business with the City’s Program. In addition, the City did not plan to rehabilitate
the two homes for project numbers 1409 and 1410.
The City committed $75,334 and drew down and disbursed $13,539 in Program
funds to Court Street Village from June 2008 through June 2009 for various costs
associated with project number 1986. In September 2008, Court Street Village
informed the City that the cost to rehabilitate the home was not reasonable. Of
the nearly $14,000 in Program funds the City disbursed to Court Street Village,
$450 was disbursed in June 2009 for capping water and sewer lines in preparing
the home for demolition. On September 22, 2009, the City decommitted the
remaining $61,795 in Program funds for the project and reported the project as
completed in HUD’s System. However, on the same date, the City committed,
drew down, and disbursed an additional $490 in Program funds for a foundation
inspection and City taxes associated with project number 2100, which was for the
same home as the home under project number 1986. The City committed an
additional $2,135 and drew down and disbursed an additional $2,133 in Program
funds for project number 2100 after April 7, 2010. On January 20, 2010, Court
Street Village’s director said that Court Street Village stopped the project because
damage to the home was more extensive than anticipated. Further, there were no
plans to rehabilitate the home. However, on June 3, 2010, the director said that
the City had recently informed her that if Court Street Village did not complete
the home associated with project numbers 1986 and 2100, it would have to repay
the Program funds. The director said that the home would be completed.
However, project number 1986 was closed, and project number 2100 was not
sufficiently funded.
On August 18, 2010, and as a result of our audit, the City reimbursed its treasury
account $21,258 for the repaid Program funds and interest earned on the repaid
Program funds associated with project numbers 1409 and 1410. The City did not
cancel any of or reimburse its treasury account for any of the remaining $149,130
in Program funds drawn down and disbursed for the 10 projects.
The City Inappropriately Used
Program Funds for Home-
Buyer Project Costs That Were
Administrative Expenses
HUD’s regulations at 24 CFR 92.207 state that a participating jurisdiction may
expend, for payment of reasonable administrative and planning costs of the
11
Program, an amount of Program funds that is not more than 10 percent of its fiscal
year Program basic formula allocation. A participating jurisdiction may also
expend, for payment of reasonable administrative and planning costs of the
Program, up to 10 percent of the program income deposited into its local account
or received and reported by its subrecipients during the program year. Chapter
IV, paragraph A, of HUD’s Office of Community Planning and Development
(CPD) Notice 06-01 states that general management, oversight, and coordination
costs are always categorized as administrative costs.
Contrary to HUD’s requirements, the City drew down and disbursed more than
$105,000 in Program funds to Flint Neighborhood Improvement and Preservation
Project (Flint Project), an organization, for home-buyer project costs that were
general management, oversight, and coordination expenses. The City drew down
and disbursed the funds from September 2006 through April 2010 to Flint Project
for administrative salaries of its director and bookkeeper and its accounting and
auditing fees. The City inappropriately included the general management,
oversight, and coordination expenses as project costs associated with home-buyer
project numbers 1730 through 1733, 1964, 1972, 1983, 1984, 2048, and 2049,
rather than administrative costs. However, the City could not provide
documentation to support the amount of administrative salaries and accounting
and auditing fees it applied to each of the projects. The following table shows the
contract numbers, the amount of Program funds used for administrative salaries
and/or accounting and auditing fees, and the total amount of Program funds used
for general management, oversight, and coordination expenses for each contract
number.
Contract Administrative Accounting and Total Program
number salaries auditing fees funds
06-033 $33,650 $8,390 $42,040
07-077 13,174 852 $14,026
07-078 24,056 24,056
08-059 25,000 25,000
Totals $95,880 $9,242 $105,122
As of August 5, 2010, the City had $111,999 in Program administrative funds
available for disbursement for eligible administrative costs. However,
recommendation 2B includes the reprogramming of $111,999 from homeowner
and/or acquisition and new construction project costs and/or acquisition-only
activity costs to administrative costs (see finding 2).
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The City Did Not Prevent Flint
Project From Entering Into a
Land Contract With a Home
Buyer
The City drew down and disbursed $48,866 in Program funds from May 2004
through September 2005 to Flint Project for acquisition and rehabilitation costs
associated with home-buyer project number 1415. HUD’s regulations at 24 CFR
92.2 state that homeownership means ownership in fee simple title or a 99-year
leasehold interest in a one- to four-unit dwelling or condominium unit or
equivalent form of ownership approved by HUD. Chapter 5, part I, of HUD’s
“Building HOME: A Program Primer,” states that land contracts are not
approved by HUD as an eligible form of ownership. Contrary to HUD’s
requirements, Flint Project entered into a land contract with the home buyer on
April 3, 2007.
On September 1, 2010, and as a result of our audit, Flint Project converted the
land contract for home-buyer project number 1415 to a conventional mortgage.
The City Inappropriately Used
Program Organization Reserve
Funds for an Owner-Occupied
Single-Family Rehabilitation
Project
HUD’s regulations at 24 CFR 92.300(a)(1) state that participating jurisdictions
must reserve not less than 15 percent of their Program allocation for investment
only in housing to be developed, sponsored, or owned by organizations. Chapter
8 of HUD’s “Building HOME: A Program Primer” states that homeowner
rehabilitation is an ineligible set-aside activity.
Contrary to HUD’s regulations, the City drew down and disbursed $25,724 in
Program organization reserve funds in March 2001 to Flint Project for owner-
occupied single-family rehabilitation project number 888. Flint Project was not
the developer, sponsor, or owner of the home. Therefore, the project did not
qualify to be funded with Program organization reserve funds.
The City Used Program Funds
for Unreasonable Acquisition
Costs
HUD’s regulations at 24 CFR 85.20(b)(2) require grantees and subgrantees to
maintain records that adequately identify the source and application of funds
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provided for financially assisted activities. Section 85.20(b)(6) states that
accounting records must be supported by such source documentation as cancelled
checks, paid bills, payrolls, time and attendance records, and contract and
subgrant award documents. Attachment A, section C.1., of Office of
Management and Budget (OMB) Circular A-87 requires that all costs to be
necessary, reasonable, and adequately documented. Attachment A, section
A.2.7., of OMB Circular A-122 requires all costs to be adequately documented.
Section A.3. states that a cost is reasonable if, in its nature and amount, it does not
exceed that which would be incurred by a prudent person under the circumstances
prevailing at the time the decision was made to incur the cost. Section A.3.4.
states that in determining the reasonableness of a given cost, consideration shall
be given to significant deviations from the established practices of the
organization, which may unjustifiably increase the award costs.
The City drew down and disbursed $24,600 in Program funds in March 2009 to
reimburse Flint Project for the acquisition of a property associated with home-
buyer acquisition and rehabilitation project number 1984. Flint Project purchased
the property in July 2008. The purchase price of the property was based on
approximately twice the state equalized value of the property for 2007. However,
an independent appraisal, dated May 2, 2008, valued the property at $12,000.
Further, the City’s established practice for the reimbursement of the acquisition of
property was limited to the amount of the independent appraisals. Therefore, it
was not reasonable to use an additional $12,600 in Program funds to acquire the
property.
The City Did Not Decommit
and Reprogram Program
Funds or Reimburse Its
Treasury Account for Program
Funds Used for a Terminated
Project
The City committed $100,451 and drew down and disbursed $6,095 in Program
funds from June 2008 through March 2009 to Flint Project for home-buyer
acquisition and rehabilitation project number 1983. The Program funds were used
for administrative salaries ($4,000) and soft costs ($2,095). Flint Project
terminated the project in April 2008 since it could not purchase the property from
its owner due to a potential conflict of interest between the City and the owner of
the property. However, the City did not cancel the project in HUD’s System,
decommit the more than $94,000 in Program funds remaining for the project,
reprogram the $4,000 in Program funds used for administrative salaries as
administrative costs, or reimburse its treasury account for the more than $2,000 in
Program funds used for soft costs.
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The City Lacked Adequate
Procedures and Controls
The weaknesses regarding the City’s inappropriate use of Program funds for
organizations’ home-buyer projects occurred because the City lacked adequate
procedures and controls to ensure that Program funds were used for
organizations’ home-buyer projects in accordance with Federal requirements.
The Department’s Program manager said that she was not aware that (1) Court
Street Village and Salem had not entered into lease-purchase agreements and/or
had entered into inappropriate lease-purchase agreements with households; (2)
Salem had leased homes for more than 42 months; (3) the City had reported the
home-buyer projects for Salem, Flint West Village, Greater Eastside, and Court
Street Village as complete in HUD’s System although none of the homes had
been fully rehabilitated and sold or rented to low- or moderate-income
households; and (4) Flint Project had entered into a land contract with the home
buyer.
The Program manager also said that Flint Project was informed that it could not
include the director and bookkeeper salaries as project costs. However, project
budgets that Flint Project provided to the City showed that the salaries were included
in planned and actual project soft costs.
The files for project number 1984 showed that Flint Project requested permission
from the City to disregard the independent appraisal and acquire the property based
on the City-assessed taxable value of the property. The Program manager said that
she did not remember authorizing Flint Project to acquire the property based on the
City-assessed taxable value. However, the City authorized the disbursement of
nearly $25,000 for the acquisition of the property.
The City administrator said that the current administration did not know what the
problems were with the City’s Program and to correct the problems and ensure
that they did not continue, the City would need to know what went wrong and
who did not do what they were supposed to do. Further, problems had been
occurring with current staff, and the administration wanted to be able to correct
the problems.
Conclusion
The City lacked adequate procedures and controls to ensure that Program funds
were used for organizations’ home-buyer projects in accordance with Federal
requirements. The City drew down and disbursed nearly $1.7 million in Program
funds (more than $843,000 to Court Street Village for 7 of the 11 units associated
with home-buyer project numbers 1763 and 1795, more than $607,000 to Salem
15
for the home-buyer projects for 9 of the 10 homes, more than $169,000 to 4
organizations for acquisition and/or rehabilitation costs associated with 10 home-
buyer projects, nearly $49,000 to Flint Project for home-buyer project number
1415, and more than $6,000 to Flint Project for home-buyer acquisition and
rehabilitation project number 1983) for organizations’ home-buyer projects that
did not meet HUD’s requirements.
Further, the City inappropriately drew down and disbursed more than $143,000 in
additional Program funds (more than $105,000 to Flint Project for home-buyer
project costs that were general management, oversight, and coordination
expenses; nearly $26,000 to Flint Project for owner-occupied single-family
rehabilitation project number 888; and nearly $13,000 to Flint Project for home-
buyer acquisition and rehabilitation project number 1984).
As a result, HUD and the City lacked assurance that Program funds were used
effectively and efficiently.
Recommendations
We recommend that the Acting Director of HUD’s Detroit Office of Community
Planning and Development require the City to
1A. Revise Berridge Hotel, LLC’s 12-month lease agreements and 60-month
purchase option agreements with the households for the 2 units to 36-month
lease-purchase agreements and lease agreements with the households for the
5 units to 36-month lease-purchase agreements and convert the home-buyer
project to a rental project and void Berridge Hotel, LLC’s 60-month lease-
purchase agreements with the households for the 2 units or reimburse its
Program from non-Federal funds for the $843,182 ($1,325,000 used for the
project divided by 11 units times 7 units) in Program funds used for the 7
units of the home-buyer project.
1B. Implement adequate procedures and controls to ensure that Berridge Hotel,
LLC, enters into appropriate lease-purchase agreements or lease agreements
as applicable to the decision made for recommendation 1A for the remaining
four Program units of the project. This measure will ensure that $481,818 in
Program funds ($1,325,000 used for the project divided by 11 units times 4
units) is used in accordance with HUD’s requirements.
1C. Provide documentation to support that Salem’s home-buyer projects for the
nine homes, in which the initial households did not purchase the homes
within 36 months of signing their lease and purchase option agreements and
Salem did not transfer the homes to a household within 42 months of project
completion, meet property standards and convert the home-buyer projects to
rental projects or reimburse its Program from non-Federal funds for the
16
$607,354 in Program funds used for the home-buyer projects for the nine
homes.
1D. Implement adequate procedures and controls to ensure that Salem sells and
transfers the remaining home (project numbers 1206 and 1254) to an eligible
home buyer within 42 months of project completion.
1E. Reimburse its treasury account $163,825 from non-Federal funds for the
remaining $149,130 in Program funds used for acquisition and/or
rehabilitation costs associated with the 4 organizations’ 10 home-buyer
project numbers, $12,600 in Program funds used to acquire the property for
home-buyer acquisition and rehabilitation project number 1984, and $2,095
in Program funds used for soft cost associated with home-buyer acquisition
and rehabilitation project number 1983.
1F. Reimburse its Program from non-Federal funds for the $105,122 in Program
funds inappropriately used for Flint Project’s general management,
oversight, and coordination expenses associated with home-buyer project
numbers 1730 through 1733, 1964, 1972, 1983, 1984, 2048, and 2049.
1G. Reimburse its Program $25,724 from non-Federal funds or reprogram
$25,724 from Program organization reserve funds to Program entitlement or
subrecipient funds for the $25,724 in Program organization reserve funds
inappropriately used for Flint Project’s owner-occupied single-family
rehabilitation project number 888.
1H. Decommit the $94,356 ($100,451 obligated minus $6,095 used) in Program
funds remaining for home-buyer acquisition and rehabilitation project
number 1983.
1I. Implement adequate procedures and controls to ensure that Program funds
are used for organizations’ home-buyer projects that comply with Federal
requirements and Program funds are used in accordance with Federal
requirements.
We recommend that the Acting Director of HUD’s Detroit Office of Community
Planning and Development
1J. Ensures that the City uses the $21,258 it reimbursed its treasury account
for the repaid Program funds and earned interest associated with project
numbers 1409 and 1410 only for eligible Program costs.
1K. Ensures that the City does not permit Flint Project to convert the
conventional mortgage for home-buyer project number 1415 back to a
land contract to assure that the City’s use of $48,866 in Program funds for
home-buyer project number 1415 continues to meet HUD’s requirements.
17
Finding 2: The City Lacked Adequate Controls Over Subrecipients’
Activities
The City did not comply with Federal requirements in its use of Program funds for subrecipients’
activities. It (1) inappropriately used Program funds for costs that were not associated with an
eligible project, were administrative expenses, and were unrelated to the City’s Program
activities; (2) lacked sufficient documentation to support Program funds used for projects; and
(3) did not reprogram Program funds for a terminated project. These weaknesses occurred
because the City lacked adequate procedures and controls to ensure that Program funds were
used for subrecipients’ activities in accordance with Federal requirements. As a result, the City
inappropriately drew down and disbursed nearly $427,000 in Program funds and lacked
sufficient documentation to support nearly $65,000 in Program funds.
The City Inappropriately Used
Program Funds for Costs That
Were Not Associated With an
Eligible Project
We reviewed all of the subrecipients’ activities that the City had reported in
HUD’s System for its Program as of February 3, 2010, that did not appear to
include appropriate addresses. The City provided more than $945,000 in Program
funds from December 2001 through June 2009 for these activities.
HUD’s regulations at 24 CFR 92.2 state that a commitment of Program funds
occurs when a participating jurisdiction has (1) executed a legally binding
agreement with a State recipient, subrecipient, or contractor to use a specific
amount of Program funds to produce affordable housing or provide tenant-based
rental assistance, (2) executed a written agreement reserving a specific amount of
Program funds to an organization, or (3) met the requirements to commit Program
funds to a specific local project. If the project consists of rehabilitation or new
construction, a commitment of Program funds to a specific local project occurs
when the participating jurisdiction and project owner have executed a written,
legally binding agreement under which Program assistance will be provided to the
project owner for an identifiable project under which construction can reasonably
be expected to start within 12 months of the agreement date. If the project is
owned by the participating jurisdiction, the project has been set up in HUD’s
System, and construction can reasonably be expected to begin within 12 months
of the project setup date.
Contrary to HUD’s regulations, the City inappropriately drew down and disbursed
$155,312 in Program funds to Rowe Incorporated (Rowe), a for-profit
professional services company, from July 2007 through June 2008 for
topographical survey and replatting services at the Smith Village Neighborhood
Redevelopment and associated with new construction project number 1879.
18
However, the City did not execute a written, legally binding agreement with
Rowe or any other entity to produce affordable housing before it committed and
used the Program funds for project number 1879. Further, the City did not own
and was not the developer of the property for the Smith Village Neighborhood
Redevelopment. Therefore, the Smith Village Neighborhood Redevelopment did
not qualify as a specific local project.
The City Inappropriately Used
Program Funds for Homeowner
Project Costs That Were
Administrative Expenses
The City drew down and disbursed nearly $192,000 in Program funds from
January 2005 through May 2010 to Flint Project and Metro Housing Partnership
(Metro), subrecipients, for homeowner project costs and acquisition-only activity
numbers 1477 and 1478, respectively.
HUD’s regulations at 24 CFR 92.207 state that a participating jurisdiction may
expend, for payment of reasonable administrative and planning costs of the
Program, an amount of Program funds that is not more than 10 percent of its fiscal
year Program basic formula allocation. A participating jurisdiction may also
expend, for payment of reasonable administrative and planning costs of the
Program, up to 10 percent of the Program income deposited into its local account
or received and reported by its subrecipients during the program year. Chapter
IV, paragraph A, of CPD Notice 06-01 states that general management, oversight,
and coordination costs are always categorized as administrative costs.
Contrary to HUD’s requirements, the City drew down and disbursed more than
$133,000 in Program funds to Flint Project for homeowner project costs that were
general management, oversight, and coordination expenses. The City drew down
and disbursed the funds from September 2006 through May 2010 to Flint Project
for the administrative salaries of its director and bookkeeper as project costs
associated with 41 homeowner projects rather than administrative costs. Further,
the City could not provide sufficient documentation to support the amount of
administrative salaries it applied to each of the projects. The following table
shows the contract numbers and the amount of Program funds used for
administrative salaries.
19
Contract Program
number funds
05-043 $23,800
06-049 14,923
06-075 22,101
06-076 11,170
07-076 28,194
07-160 10,210
08-057 23,084
Total $133,482
In addition, the City inappropriately drew down and disbursed $58,046 in
Program funds to Metro on January 4, 2005, for acquisition-only activity numbers
1477 and 1478. The City drew down and disbursed the funds to Metro for staff
salaries associated with its downpayment assistance program. However,
acquisition-only activity numbers 1477 and 1478 were not related to specific
activities. Therefore, since the staff salaries were not allocated to specific
acquisition-only activities, they must be treated as general management,
oversight, and coordination expenses, which are administrative costs. Further, the
City could not provide documentation showing which acquisition-only activities
the staff worked on.
As previously stated, as of August 5, 2010, the City had $111,999 in Program
administrative funds available for disbursement for eligible administrative costs.
The City Lacked Sufficient
Documentation To Support the
Use of Program Funds for Two
Homeowner Projects
HUD’s regulations at 24 CFR 85.20(b)(2) require grantees and subgrantees to
maintain records that adequately identify the source and application of funds
provided for financially assisted activities. Section 85.20(b)(6) states that
accounting records must be supported by such source documentation as cancelled
checks, paid bills, payrolls, time and attendance records, and contract and
subgrant award documents. Attachment A, section C.1., of OMB Circular A-87
requires all costs to be necessary, reasonable, and adequately documented.
Attachment A, section A.2.7., of OMB Circular A-122 requires all costs to be
adequately documented. Section A.3. states that a cost is reasonable if, in its
nature and amount, it does not exceed that which would be incurred by a prudent
person under the circumstances prevailing at the time the decision was made to
incur the cost. Section A.3.4. states that in determining the reasonableness of a
given cost, consideration shall be given to significant deviations from the
established practices of the organization which may unjustifiably increase the
award costs.
20
The City could not provide sufficient documentation to support $63,141 in
Program funds that it drew down and disbursed to Flint Project from September
2006 through November 2008 for homeowner project numbers 1900 and 1901.
Flint Project took control over activities from the Genesee County Community
Action Response Department (Genesee). The City’s documentation stated that
the costs for homeowner project numbers 1900 and 1901 were associated with
activities of which Flint Project had taken control from Genesee. However, the
documentation did not specify which activities the costs were related to and what
the costs were.
The City Inappropriately Used
and Lacked Sufficient
Documentation To Support Its
Use of Program Funds for an
Acquisition and New
Construction Project
The City drew down and disbursed $75,000 in Program funds to Greater Eastside,
a subrecipient, from December 2001 through June 2002 for acquisition and new
construction project numbers 930 and 931. However, contrary to HUD’s
requirements, the City drew down and disbursed $48,697 of the funds for costs
unrelated to the City’s Program activities, $13,983 of the funds for costs
associated with acquisition and new construction project number 1449, and
$10,700 of the funds for office expenses. In addition, the City lacked sufficient
documentation to support that the remaining $1,620 in Program funds was used
for eligible Program costs.
The City Did Not Reprogram
Program Funds for a
Terminated Project
HUD’s regulations at 24 CFR 92.503(b)(2) state that any Program funds invested
in a project that is terminated before completion, either voluntarily or otherwise,
must be repaid by a participating jurisdiction in accordance with section
92.503(b)(3). Section 92.503(b)(3) states that if the Program funds were
disbursed from the participating jurisdiction’s treasury account, the funds must be
repaid to the participating jurisdiction’s treasury account. If the Program funds
were disbursed from the participating jurisdiction’s local account, the funds must
be repaid to the participating jurisdiction’s local account.
The City drew down and disbursed $6,534 to Flint Project from December 2006
through July 2007 for homeowner project number 1734. The City drew down and
disbursed the funds to Flint Project for administrative salaries and intake costs.
Although Flint Project informed the City on April 12, 2007, that the homeowner
21
had passed away and that it had terminated the project, the City did not cancel the
project and reprogram the funds from homeowner project costs to administrative
costs. The project was still open in HUD’s System as of July 2010.
The City Lacked Adequate
Procedures and Controls
The weaknesses regarding the City’s inappropriate use of Program funds for
subrecipients’ projects occurred because the City lacked adequate procedures and
controls to ensure that Program funds were used for subrecipients’ projects in
accordance with Federal requirements.
The Department’s Program manager said that she did not know why the activity
was set up for Rowe and that because multiple persons had access to entering data
into HUD’s System for the City, she did not know who set up the project.
The Program manager said that she did not know why the City lacked sufficient
documentation to support Program funds that it drew down and disbursed for
subrecipients’ projects. She also said that the City did not cancel project number
1734 and reprogram the Program funds since the City may move forward with the
project in the future. However, since the homeowner passed away, the City
cannot continue with the project. If the City were to provide rehabilitation
assistance for the property, it would have to create a new project in HUD’s
System.
Conclusion
As previously mentioned, the City lacked adequate procedures and controls to
ensure that Program funds were used for subrecipient projects in accordance with
Federal requirements.
The City inappropriately drew down and disbursed nearly $427,000 in Program
funds (more than $155,000 to Rowe for new construction project number 1879,
more than $133,000 to Flint Project for 74 homeowner projects, more than
$58,000 to Metro for acquisition-only activity numbers 1477 and 1478, more than
$73,000 to Greater Eastside for acquisition and new construction project numbers
930 and 931, and nearly $7,000 to Flint Project for project number 1734) and
lacked sufficient documentation to support nearly $65,000 in Program funds
(nearly $2,000 to Greater Eastside for acquisition and new construction project
numbers 930 and 931 and more than $63,000 to Flint Project for homeowner
project numbers 1900 and 1901). As a result, HUD and the City lacked assurance
that Program funds were used effectively and efficiently.
22
Recommendations
We recommend that the Acting Director of HUD’s Detroit Office of Community
Planning and Development require the City to
2A. Reimburse its Program $204,009 from non-Federal funds for the Program
funds inappropriately used for new construction project number 1879
($155,312) and acquisition and new construction project numbers 930 and
931 ($48,697).
2B. Reimburse its Program $96,763 ($208,762 in Program funds inappropriately
used for homeowner and acquisition and new construction project costs and
acquisition-only activity costs minus $111,999 in Program administrative
funds available for disbursement for eligible administrative costs) from non-
Federal funds and reimburse its Program $111,999 from non-Federal funds
or reprogram $111,999 from homeowner and/or acquisition and new
construction project costs and/or acquisition-only activity costs to
administrative costs for the (1) $133,482 in Program funds inappropriately
used for Flint Project’s general management, oversight, and coordination
expenses associated with 41 homeowner projects; (2) $10,700 in Program
funds inappropriately used for office expenses associated with acquisition
and new construction project numbers 930 and 931; (3) $58,046 in Program
funds inappropriately used for staff salaries associated with acquisition-only
activity numbers 1477 and 1478; and (4) $6,534 in Program funds
inappropriately used for administrative salaries and intake costs associated
with homeowner project number 1734.
2C. Provide supporting documentation or reimburse its treasury account $64,761
from non-Federal funds, as appropriate, for the Program funds used for
unsupported costs associated with acquisition and new construction project
numbers 930 and 931 ($1,620) and homeowner project numbers 1900 and
1901 ($63,141).
2D. Reimburse its treasury account $13,983 from non-Federal funds or
reprogram $13,983 in Program funds from acquisition and new construction
project numbers 930 and 931 to acquisition and new construction project
number 1449.
2E. Implement adequate procedures and controls to ensure that Program funds
are used in accordance with Federal requirements and to maintain
documentation to sufficiently support its subrecipient project costs.
23
Finding 3: The City’s Controls Over Reporting Program Accomplishments
in HUD’s System Had Weaknesses
The City did not accurately report Program accomplishments in HUD’s System. It (1)
inappropriately entered activity data into HUD’s System for 62 properties under 2 or more
activity numbers for a total of 130 activities, (2) overreported Program units created by 79 units,
(3) did not accurately report completion dates for 35 home-buyer activities, and (4)
inappropriately reported the type of activity for 2 activities in HUD’s System. These weaknesses
occurred because the City lacked adequate procedures and controls to ensure that it reported
Program accomplishments in HUD’s System in accordance with HUD’s requirements. As a
result, HUD and the City lacked assurance regarding the accuracy of the City’s Program
accomplishments reported in HUD’s System.
The City Overreported
Activities and Program Units
Created in HUD’s System
We reviewed the Program accomplishments that the City had reported in HUD’s
System as of April 7, 2010, for all of its 865 new construction, rehabilitation,
acquisition, acquisition and rehabilitation, and acquisition and new construction
activities. The City provided more than $18.6 million in Program funds and
reported that 971 Program units had been created for the 865 activities.
HUD’s regulations at 24 CFR 92.2 state that project completion means that all
necessary title transfer requirements and construction work have been performed;
the project complies with the requirements of 24 CFR Part 92, including the
property standards under 24 CFR 92.251; the final drawdown has been disbursed
for the project; and the project completion information has been entered into
HUD’s System. HUD’s regulations at 24 CFR 92.502(d)(1) state that complete
project completion information must be entered into HUD’s System or otherwise
provided within 120 days of the final project drawdown. If satisfactory activity
completion information is not provided, HUD may suspend further activity setups
or take other corrective actions.
The City inappropriately entered activity data into HUD’s System for 62
properties under 2 or more activity numbers for a total of 130 activities. Further,
it reported that 153 Program units had been created for 130 properties when only
74 Program units had been created for 62 properties. The following table shows
the type of activity, the number of activities and Program units created that the
City reported in HUD’s System, and the actual number of properties and Program
units created for each of the activities.
24
Reported in HUD’s System Actual
Activity type Activities Program units Properties Program units
Homeowner rehabilitation 33 30 16 16
Home-buyer acquisition 28 28 14 14
Home-buyer acquisition
and rehabilitation 26 33 13 18
Rental rehabilitation 5 22 2 2
Multiple activities 38 40 17 24
Totals 130 153 62 74
The City Did Not Accurately
Report Activity Completion
Dates in HUD’s System
The City inaccurately reported completion dates in HUD’s System for 35 home-
buyer activities in which the City used nearly $1.2 million in Program funds from
June 1997 through September 2009. The City did not report 26 of the activities as
completed until 7 to 117 months after the final drawdown of Program funds
occurred for the activities. Further, the home buyers purchased their homes from
7 to 121 months before the City reported the activities as completed. The
completion dates for the 26 activities were from April 1998 through September
2009. The City reported another six activities as completed from 9 to 71 months
before the home buyers purchased their homes. Further, the final drawdown of
Program funds for two of the six activities did not occur until 8 months after the
City reported the activities as completed. The completion dates for the six
activities were from November 1997 through September 2005. In addition, as of
July 14, 2010, the City had not reported three activities as completed, although the
final drawdown of Program funds occurred for the activities in September 2009.
Further, one home buyer purchased his home in November 2005, and the other
two home buyers purchased their homes in October 2009.
The City inappropriately reported in HUD’s System that 23 home-buyer activities
were completed, although home buyers had not purchased the homes. The City
used more than $926,000 in Program funds from June 1997 through June 2009 for
the 23 activities. Of the 23 activities, homes for 16 of the activities were leased to
households but not purchased. Further, the activities were not converted to rental
projects. The completion dates for the 16 activities were from November 1997
through September 2009. The homes for the remaining seven activities had not
been leased to households or purchased as of July 2010. The completion dates for
the seven activities were from April 2004 through September 2009.
25
The City Inappropriately
Reported Activity Types in
HUD’s System
The City inappropriately reported in HUD’s System the type of activity for
activity numbers 617 and 888. It used nearly $96,000 in Program funds from
June 1999 through March 2001 for the two activities. The City reported activity
number 617 as a home-buyer acquisition activity rather than a home-buyer
acquisition and rehabilitation project and project number 888 as a home-buyer
acquisition and rehabilitation project rather than a homeowner rehabilitation
project.
The City Lacked Adequate
Procedures and Controls
The weaknesses regarding the City’s inaccurate reporting of Program
accomplishments in HUD’s System occurred because the City lacked adequate
procedures and controls to ensure that it reported Program accomplishments in
HUD’s System in accordance with HUD’s requirements.
The Department’s Program manager said that because multiple persons had
access to entering Program activity data into HUD’s System for the City, she did
not know who entered the inaccurate activity data. In April 2009, we informed
the Program manager of inaccurate reporting of Program accomplishments that
we noted during the first phase of our audit of the City’s Program but stated that
we would not review the accuracy of the City’s reporting of Program
accomplishments until the second phase of our audit of the City’s Program. The
Program manager said that although she had begun correcting the activity data in
HUD’s System more than a year ago, she was not able to correct all of the activity
data. Therefore, she requested assistance from HUD’s Technical Assistance Unit
(Unit) on March 20, 2010. HUD’s Unit provided the City technical assistance on
correcting the activity data in HUD’s System. However, the City had not
corrected the activity data as of July 2010.
Conclusion
The City lacked adequate procedures and controls to ensure that it reported
Program accomplishments in accordance with HUD’s requirements. It
inappropriately entered activity data into HUD’s System for 62 properties under 2
or more activity numbers for a total of 130 activities, overreported Program units
created by 79 units, did not accurately report completion dates for 35 home-buyer
activities, and inappropriately reported the type of activity for 2 activities in
HUD’s System. As a result, HUD and the City lacked assurance regarding the
26
accuracy of the City’s Program activity accomplishments reported in HUD’s
System.
Recommendations
We recommend that the Acting Director of HUD’s Detroit Office of Community
Planning and Development require the City to
3A. Cancel 69 of the 130 activities in which it inappropriately entered activity
data into HUD’s System for 62 properties under 2 or more activity numbers.
3B. Cancel 79 of the 153 Program units that it inappropriately reported in
HUD’s System for the 62 properties.
3C. Revise the completion dates that it reported in HUD’s System for 32 home-
buyer activities for which it inaccurately reported the completion dates for
26 activities more than 120 days after the final drawdown of Program funds
and for 6 activities before the home buyers purchased the properties.
3D. Report accurate completion dates for the three home-buyer activities, which
it had not reported as completed, although the final drawdown of Program
funds occurred for the activities in September 2009 and the home buyers
had purchased their homes as of October 2009.
3E. Revise the type of activity for activity numbers 617 and 888 to a home-
buyer acquisition and rehabilitation project and homeowner rehabilitation
project, respectively.
3F. Implement adequate procedures and controls to ensure that it enters Program
accomplishments into HUD’s System accurately and in a timely manner.
27
SCOPE AND METHODOLOGY
To accomplish our objectives, we reviewed
Applicable laws; OMB Circulars A-87, A-110, and A-122; HUD’s regulations at 24
CFR Parts 84, 85, and 92; CPD Notice 06-01; HUD’s “Building HOME: A
Program Primer”; and HUD’s HomeFires, volume 6, number 1.
The City’s accounting records, annual audited financial statements for 2008 and
2009, data from HUD’s System, Program and activity files, computerized
databases, policies, procedures, organizational chart, consolidated community
development and annual plans, and consolidated annual performance and
evaluation reports.
Genesee County records of deeds.
HUD’s files for the City.
We also interviewed the City’s employees, Flint Project’s director, Salem’s director, Court Street
Village’s director, and HUD’s staff.
Finding 1
We reviewed all of the organizations’ home-buyer projects that the City had reported in the
HUD’s System for its Program as of April 7, 2010. The City provided more than $6 million in
Program funds for the organizations’ home-buyer projects through June 2010. The
organizations’ home-buyer projects were selected to determine whether the City complied with
Federal requirements in its use of Program funds for organizations’ home-buyer projects.
Finding 2
We reviewed all of the subrecipients’ activities that the City had reported in HUD’s System for
its Program as of February 3, 2010, that did not appear to include appropriate addresses. The
City provided more than $945,000 in Program funds from December 2001 through June 2009 for
these activities. The subrecipients’ activities were selected to determine whether the City
complied with Federal requirements in its use of Program funds for subrecipients’ activities.
Finding 3
We reviewed the Program accomplishments that the City had reported in HUD’s System as of
April 7, 2010, for all of its 865 new construction, rehabilitation, acquisition, acquisition and
rehabilitation, and acquisition and new construction activities. The City provided more than
$18.6 million in Program funds and reported that 971 Program units had been created for the 865
activities. The Program accomplishments were selected to determine whether the City
accurately reported its Program accomplishments in HUD’s System.
28
We performed our onsite audit work from September 2009 through August 2010 at the City’s
offices located at 1101 South Saginaw Road, Flint, MI. The audit covered the period July 2007
through August 2009 and was expanded as determined necessary.
We performed our 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.
29
INTERNAL CONTROLS
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about 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:
Effectiveness and efficiency of operations - Policies and procedures that
management has implemented to reasonably ensure that a program meets
its objectives.
Reliability of financial reporting - Policies and procedures that
management has implemented to reasonably ensure that valid and reliable
data are obtained, maintained, and fairly disclosed in reports.
Compliance with applicable laws and regulations - Policies and
procedures that management has implemented to reasonably ensure that
resource use is consistent with laws and regulations.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does
not allow management or employees, in the normal course of performing their
assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
impairments to effectiveness and efficiency of operations, (2) misstatements in
financial or performance information, or (3) violations of laws or regulations on a
timely basis.
30
Significant Deficiency
Based on our review, we believe that the following item is a significant
deficiency:
The City lacked adequate procedures and controls to ensure that Program
funds were used for organizations’ home-buyer projects and subrecipients’
activities in accordance with Federal requirements and that it reported
Program accomplishments in HUD’s System in accordance with HUD’s
requirements (see findings 1, 2, and 3).
31
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Funds to be put
number Ineligible 1/ Unsupported 2/ to better use 3/
1A $843,182
1B $481,818
1C 607,354
1E 163,825
1F 105,122
1G 25,724
1H 94,356
1J 21,258
1K 48,866
2A 204,009
2B 208,762
2C $64,761
2D 13,983
Totals $2,171,961 $64,761 $646,298
1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
that the auditor believes are not allowable by law; contract; or Federal, State, or local
policies or regulations.
2/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
or activity when we cannot determine eligibility at the time of the audit. Unsupported
costs require a decision by HUD program officials. This decision, in addition to
obtaining supporting documentation, might involve a legal interpretation or clarification
of departmental policies and procedures.
3/ Recommendations that funds be put to better use are estimates of amounts that could be
used more efficiently if an Office of Inspector General (OIG) recommendation is
implemented. These amounts include reductions in outlays, deobligation of funds,
withdrawal of interest, costs not incurred by implementing recommended improvements,
avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
that are specifically identified. In these instances, if the City implements our
recommendations, it will ensure that its use of Program funds meets HUD’s
requirements.
32
Appendix B
AUDITEE COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
Comment 1
Comment 2
33
Ref to OIG Evaluation Auditee Comments
Comment 3
Comment 4
Comments 5
and 6
Comment 1
Comment 5
34
Ref to OIG Evaluation Auditee Comments
Comment 5
Comment 5
Comment 5
Comment 4
Comment 5
Comments 5
and 6
Comment 4
35
Ref to OIG Evaluation Auditee Comments
Comment 7
Comment 8
Comment 9
Comment 5
Comment 5
Comment 5
Comment 3
Comment 5
36
Ref to OIG Evaluation Auditee Comments
Comment 5
Comment 10
Comment 5
Comment 1
Comment 1
Comment 1
37
Ref to OIG Evaluation Auditee Comments
Comment 5
Comment 1
Comments 5
and 11
Comment 5
Comment 5
38
Ref to OIG Evaluation Auditee Comments
Comment 1
Comment 1
Comment 5
Comment 5
Comment 5
Comment 1
39
Ref to OIG Evaluation Auditee Comments
Comment 5
Comment 1
40
OIG’s Evaluation of Auditee Comments
Comment 1 The City’s commitment to new approaches in its use of Federal funds,
addressing personnel issues, and revising its procedures and controls, if fully
implemented, should improve the City’s management of its Program.
Comment 2 The City did not provide specifics regarding its statement that many of the
recommendations refer to actions as far back as 1995. However, although some
of the recommendations may involve issues where initial actions occurred as far
back as 1995, the projects and activities were still active as of the scope of our
audit and the incorrect reporting of past Program accomplishments in HUD’s
System caused current Program accomplishments to be inaccurate.
Comment 3 We added to this report that on September 1, 2010, and as a result of our audit,
Flint Project converted the land contract for home-buyer project number 1415 to
a conventional mortgage.
We removed from this report the recommendation that the Acting Director of
HUD’s Detroit Office of Community Planning and Development require the City
to reimburse its Program from non-Federal funds for the $48,866 in Program
funds Flint Project used for home-buyer project number 1415.
We also added to this report the recommendation that the Acting Director of
HUD’s Detroit Office of Community Planning and Development ensures that the
City does not permit Flint Project to convert the conventional mortgage for
home-buyer project number 1415 back to a land contract to assure that the City’s
use of $48,866 in Program funds for home-buyer project number 1415 continues
to meet HUD’s requirements.
Comment 4 The City would also need to provide documentation to support that the home-
buyer projects for the five homes meet property standards before converting the
home-buyer projects to rental projects and then obtain approval from HUD to
convert four of the rental projects back to home-buyer projects.
Comment 5 The City’s planned corrective actions, if fully implemented, should resolve the
issues and recommendations cited in this audit report, as applicable.
Comment 6 Note that Salem must sell and transfer the remaining home (project numbers
1206 and 1254) to an eligible home buyer by December 15, 2010.
Comment 7 If the City repairs the collapsing foundation for project number 1209, it should
ensure that the Program funds used for the project were only for necessary and
reasonable costs and that the home meets property standards when the project is
completed. The City did not include the source of the $28,000 that might be
used to repair the collapsing foundation. If the City uses Program funds to repair
the collapsing foundation, it should also ensure that the Program funds are not
41
used for items that were previously completed using Program funds. If the City
reimburses its treasury account $26,300 from non-Federal funds for
rehabilitation costs associated with project number 1209, this should resolve the
issue and recommendation cited in this audit report applicable to the project.
Comment 8 If the City sufficiently funds and completes the project, it should ensure that the
Program funds used for the project were only for necessary and reasonable costs,
the additional Program funds are not used for items that were previously
completed using Program funds, and that the home meets property standards
when the project is completed.
Comment 9 HUD’s regulations at 24 CFR 92.503(b)(2) state that any Program funds invested
in a project that is terminated before completion, either voluntarily or otherwise,
must be repaid by a participating jurisdiction. None of the homes had been fully
rehabilitated and sold or rented to low- or moderate-income households.
Therefore, the City is required to reimburse its treasury account for the entire
$126,751 in Program funds used for acquisition and/or rehabilitation costs
associated with the Flint West Village and Greater Eastside projects.
Comment 10 The City did not provide documentation to support that it cancelled home-buyer
acquisition and rehabilitation project number 1983 in HUD’s System and
decommitted $94,356 in Program funds remaining for the project.
Comment 11 The oldest disbursement associated with the City’s inappropriate use of the
$88,943 in Program funds occurred in December 2001.
42
Appendix C
FEDERAL REQUIREMENTS
Findings 1 and 2
HUD’s regulations at 24 CFR 84.27 state that allowable costs for nonprofit organizations will be
determined in accordance with cost principles contained in OMB Circular A-122.
HUD’s regulations at 24 CFR 85.20(b)(2) require grantees and subgrantees to maintain records
that adequately identify the source and application of funds provided for financially assisted
activities. Section 85.20(b)(6) states that accounting records must be supported by such source
documentation as cancelled checks, paid bills, payrolls, time and attendance records, and
contract and subgrant award documents.
HUD’s regulations at 24 CFR 85.22(b) state that allowable costs for State, local, or Indian tribal
governments will be determined in accordance with cost principles contained in OMB Circular
A-87.
HUD’s regulations at 24 CFR 92.205(e) state that a Program-assisted project that is terminated
before completion, either voluntarily or otherwise, constitutes an ineligible activity and any
Program funds invested in the project must be repaid.
HUD’s regulations at 24 CFR 92.207 state that a participating jurisdiction may expend, for
payment of reasonable administrative and planning costs of the Program, an amount of Program
funds that is not more than 10 percent of its fiscal year Program basic formula allocation. A
participating jurisdiction may also expend, for payment of reasonable administrative and
planning costs of the Program, up to 10 percent of the program income deposited into its local
account or received and reported by its subrecipients during the program year.
HUD’s regulations at 24 CFR 92.503(b)(2) state that any Program funds invested in a project
that is terminated before completion, either voluntarily or otherwise, must be repaid by a
participating jurisdiction in accordance with section 92.503(b)(3). Section 92.503(b)(3) states
that if the Program funds were disbursed from the participating jurisdiction’s treasury account,
the funds must be repaid to the participating jurisdiction’s treasury account. If the Program
funds were disbursed from the participating jurisdiction’s local account, the funds must be repaid
to the participating jurisdiction’s local account.
HUD’s regulations at 24 CFR 92.505(a) state that the requirements of OMB Circular A-87 and
sections 85.20 and 85.22 of 24 CFR Part 85 are applicable to a participating jurisdiction that is a
government entity. Section 92.505(b) states that the requirements of OMB Circular A-122 and
24 CFR 84.27 are applicable to nongovernmental nonprofit subrecipients that receive Program
funds.
43
HUD’s regulations at 24 CFR 92.508(a)(5) state that a participating jurisdiction must establish
and maintain sufficient records to enable HUD to determine whether the participating
jurisdiction has met the requirements of 24 CFR Part 92. Section 92.508(a)(6) states that the
participating jurisdiction must maintain records demonstrating compliance with the applicable
uniform administrative requirements in section 92.505.
Attachment A, section C.1., of OMB Circular A-87, revised May 10, 2004, requires that all costs
to be necessary, reasonable, and adequately documented.
Attachment A, section A.2.7., of OMB Circular A-122, revised May 10, 2004, requires all costs
to be adequately documented. Section A.3. states that a cost is reasonable if, in its nature and
amount, it does not exceed that which would be incurred by a prudent person under the
circumstances prevailing at the time the decision was made to incur the cost. Section A.3.4.
states that in determining the reasonableness of a given cost, consideration shall be given to
significant deviations from the established practices of the organization which may unjustifiably
increase the award costs.
Chapter IV, paragraph A, of CPD Notice 06-01 states that general management, oversight, and
coordination costs are always categorized as administrative costs.
Finding 1
HUD’s regulations at 24 CFR 92.2 state that homeownership means ownership in fee simple title
or a 99-year leasehold interest in a one- to four-unit dwelling or in a condominium unit or
equivalent form of ownership approved by HUD and project completion means that all necessary
title transfer requirements and construction work have been performed; the project complies with
the requirements of 24 CFR Part 92, including the property standards under 24 CFR 92.251; the
final drawdown has been disbursed for the project; and the project completion information has
been entered into HUD’s System.
HUD’s regulations at 24 CFR 92.205(c) state that the minimum amount of Program funds that
must be invested in a project involving rental housing or homeownership is $1,000 times the
number of Program-assisted units in the project.
HUD’s regulations at 24 CFR 92.251 state that an owner of rental housing assisted with Program
funds must maintain the housing in compliance with all applicable State and local housing
quality standards and code requirements. If there are no such standards or code requirements,
the housing must meet the housing quality standards of 24 CFR 982.401.
HUD’s regulations at 24 CFR 92.254(a) state that housing that is for acquisition by a household
must meet the affordability requirements in 24 CFR 92.254(a). Section 92.254(a)(5)(ii)(A)(7)
states that Program funds may be used to assist home buyers through lease-purchase programs
for existing housing. The housing must be purchased by a home buyer within 36 months of
signing the lease-purchase agreement. The home buyer must qualify as a low-income household
at the time the lease-purchase agreement is signed. The Program affordability requirements for
rental housing in 24 CFR 92.252 shall apply if the housing is not transferred to a home buyer
44
within 42 months after project completion. Section 92.254(c) states that the ownership in
housing assisted under 24 CFR 92.254 must meet the definition of homeownership in 24 CFR
92.2.
HUD’s regulations at 24 CFR 92.300(a)(1) state that participating jurisdictions must reserve not
less than 15 percent of their Program allocation for investment only in housing to be developed,
sponsored, or owned by organizations. The funds are reserved when a participating jurisdiction
enters into a written agreement with an organization.
HUD’s regulations at 24 CFR 92.502(d)(2) state that additional Program funds may be
committed to a project up to 1 year after project completion.
Chapter 5, part I, of HUD’s “Building HOME: A Program Primer,” dated March 2008, states
that land contracts are not approved by HUD as an eligible form of ownership.
Chapter 8, of HUD’s “Building HOME: A Program Primer,” dated August 2002, states that
homeowner rehabilitation is an ineligible set-aside activity.
Finding 2
HUD’s regulations at 24 CFR 92.2 state that a commitment of Program funds occurs when a
participating jurisdiction has (1) executed a legally binding agreement with a State recipient,
subrecipient, or contractor to use a specific amount of Program funds to produce affordable
housing or provide tenant-based rental assistance; (2) executed a written agreement reserving a
specific amount of Program funds to an organization, or (3) met the requirements to commit
Program funds to a specific local project. If the project consists of rehabilitation or new
construction, a commitment of Program funds to a specific local project occurs when the
participating jurisdiction and project owner have executed a written, legally binding agreement
under which Program assistance will be provided to the project owner for an identifiable project
under which construction can reasonably be expected to start within 12 months of the agreement
date. If the project is owned by the participating jurisdiction, the project has been set up in
HUD’s System, and construction can reasonably be expected to begin within 12 months of the
project setup date.
Finding 3
HUD’s regulations at 24 CFR 92.2 state that project completion means that all necessary title
transfer requirements and construction work have been performed; the project complies with the
requirements of 24 CFR Part 92, including the property standards under 24 CFR 92.251; the final
drawdown has been disbursed for the project; and the project completion information has been
entered into HUD’s System.
HUD’s regulations at 24 CFR 92.502(d)(1) state that complete project completion information
must be entered into HUD’s System or otherwise provided within 120 days of the final project
drawdown. If satisfactory activity completion information is not provided, HUD may suspend
further activity setups or take other corrective actions.
45
HUD’s regulations at 24 CFR 92.504(a) state that a participating jurisdiction is responsible for
managing the day-to-day operations of its Program, ensuring that Program funds are used in
accordance with all Program requirements and written agreements.
HUD’s HOMEfires, volume 6, number 1, states that a participating jurisdiction must report
activity completion and beneficiary data for initial occupants in a timely manner by entering the
data into HUD’s System on a regular basis. HUD’s regulations at 24 CFR 92.502(d)(1) require
participating jurisdictions to enter project completion information into HUD’s System within 120
days of making a final activity drawdown. Failure to do so is a violation of HUD’s regulations at
24 CFR 92.502(d)(1) and 92.504(a).
46
The City of Flint, MI, Lacked Adequate Controls Over Its HOME Program Regarding Community Housing Development Organizations' Home-Buyer Projects, Subrecipients' Activities, and Reporting Accomplishments in HUD's System
Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-10-13.
Below is a raw (and likely hideous) rendition of the original report. (PDF)