oversight

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)

                                                                  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



                                          2
           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.




                                            3
                            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




                                            4
                      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).




                                                 5
                                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



                                               6
           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



                                            7
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.


                                     8
           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.




                                             9
                  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


                                    10
           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).




                                12
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



                                            13
           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.




                                             14
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