Issue Date
June 3, 2011
Audit Report Number
2011-CH-1008
TO: Keith E. Hernandez, Director of Community Planning and Development, 5FD
FROM: Kelly Anderson, Acting Regional Inspector General for Audit, Region V, 5AGA
SUBJECT: The State of Michigan Lacked Adequate Controls Over Its Neighborhood
Stabilization Program Regarding Awards, Obligations, Subgrantees’
Administrative Expenses and Procurement, and Reporting Accomplishments
HIGHLIGHTS
What We Audited and Why
We audited the State of Michigan’s (State) Neighborhood Stabilization Program
(Program) administered by the Michigan State Housing Development Authority
(Authority). The audit was part of the activities in our fiscal year 2010 annual
audit plan. We selected the State based upon our designation of the Program as
high risk and a citizen’s complaint to our office. Our objectives were to
determine whether the State (1) complied with Federal requirements in its award,
obligation, and use of Program funds under the Housing and Economic Recovery
Act of 2008 (Act); (2) ensured that a subgrantee complied with the U.S.
Department of Housing and Urban Development’s (HUD) regulations when
procuring architectural services for its Program-funded rehabilitation projects
under the Act; and (3) complied with Federal requirements in its reporting of
Program accomplishments under the Act and the American Recovery and
Reinvestment Act of 2009 (Recovery Act).
What We Found
The State did not comply with Federal requirements in its award, obligation, and
use of Program funds under the Act, ensure that a subgrantee complied with
HUD’s regulations when procuring architectural services for its Program-funded
rehabilitation projects under the Act; and comply with Federal requirements in its
reporting of Program accomplishments under the Act and Recovery Act. It (1)
lacked sufficient documentation to support its award of Program funds under the
Act for a project, (2) reported Program obligations under the Act in HUD’s
Disaster Recovery Grant Reporting (Reporting) system that did not qualify as
obligations, (3) inappropriately disbursed Program funds under the Act for
Program obligations that did not qualify as obligations, (4) did not maintain
sufficient documentation to support the use of Program funds under the Act for
administrative expenses, (5) did not ensure that a subgrantee complied with
HUD’s regulations when procuring architectural services for its Program-funded
rehabilitation projects under the Act, (6) did not comply with Federal
requirements by posting the State’s quarterly performance reports for the Program
under the Act for the first through third quarters of 2010 on its official Web site
more than 30 days after the end of each quarter, and (7) did not maintain
sufficient documentation to support the number of jobs it reported as created or
retained from the use of Program funds under the Recovery Act for the first and
second quarters of 2010.
As a result, (1) HUD lacked assurance that the Authority awarded $1 million in
Program funds under the Act for eligible project costs, (2) the Authority
inappropriately reported Program obligations of more than $719,000 under the
Act in HUD’s Reporting system and disbursed Program funds for more than
$531,000 in Program obligations that did not qualify as obligations, (3) HUD
lacked assurance that the Authority used nearly $87,000 in Program funds under
the Act for eligible Program administrative costs, (4) HUD and the Authority lack
assurance that nearly $68,000 in Program funds under the Act was used
efficiently and effectively, (5) the public did not have timely access to the State’s
quarterly performance reports for the Program under the Act, and (6) HUD and
the public lacked assurance that the Authority accurately reported the number of
jobs that the use of Program funds under the Recovery Act created or retained.
What We Recommend
We recommend that the Director of HUD’s Detroit Office of Community
Planning and Development require the State to (1) provide sufficient
documentation to support that the fair market value of the properties was $1
million and that the Authority’s award of $1 million in Program funds under the
Act for the purchase of the properties was reasonable or cancel the Authority’s
award and award the $1 million in Program funds to an eligible project(s), (2)
reimburse HUD from non-Federal funds for the more than $531,000 in Program
funds under the Act inappropriately disbursed for Program obligations that did not
qualify as obligations, (3) deobligate in HUD’s Reporting system the more than
$719,000 in Program funds under the Act that did not qualify as Program
obligations, (4) provide sufficient supporting documentation or reimburse its
Program from non-Federal funds, as appropriate, for the nearly $87,000 in
2
Program funds under the Act used for unsupported administrative costs, (5)
perform a formal cost or price analysis to determine whether the nearly $68,000 in
Program funds under the Act was reasonable for the architectural services
provided for a subgrantee’s rehabilitation projects, (6) and implement adequate
procedures and controls to address the findings cited in this audit report.
We also recommend that the Director of HUD’s Detroit Office of Community
Planning and Development recapture the more than $188,000 in Program funds
under the Act, which the Authority obligated that did not qualify as Program
obligations but the Authority did not disburse, and reallocate the funds in
accordance with 42 U.S.C. (United States Code) 5306(c)(4).
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
executive director of the Authority, the chairman of the Authority’s board, and/or
HUD’s staff during the audit.
We asked the Authority’s executive director to provide comments to our
discussion draft audit report by April 29, 2011. The executive director provided
written comments, dated April 29, 2011. The executive director did not agree
with the findings.
The complete text of the written comments, except for 17 addresses included in
the comments and 289 pages of documentation that were not necessary to
understand the executive director’s comments, along with our evaluation of that
response, can be found in appendix B of this audit report. We provided the
Director of HUD’s Detroit Office of Community Planning and Development with
a complete copy of the Authority’s written comments plus the 289 pages of
documentation.
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TABLE OF CONTENTS
Background and Objectives 5
Results of Audit
Finding 1: The Authority Lacked Adequate Controls Over Its Award of Program
Funds Under the Act for a Project 7
Finding 2: The Authority Lacked Adequate Controls Over Program Obligations
Under the Act 11
Finding 3: The Authority’s Controls Over Subgrantees’ Program Administrative
Expenses Under the Act Had Weaknesses 15
Finding 4: The Authority’s Controls Over Subgrantee Program Procurement
Under the Act Had Weaknesses 18
Finding 5: The Authority Lacked Adequate Controls Over Posting Program
Quarterly Performance Reports for the Program Under the Act 21
Finding 6: The Authority Lacked Adequate Controls Over Reporting Jobs
Created or Retained From the Use of Program Funds Under the
Recovery Act 23
Scope and Methodology 26
Internal Controls 28
Appendix
A. Schedule of Questioned Costs and Funds To Be Put to Better Use 30
B. Auditee Comments and OIG’s Evaluation 31
C. Federal and Authority Requirements 52
4
BACKGROUND AND OBJECTIVES
The Program. Authorized under section 2301 of Title III of the Housing and Economic
Recovery Act of 2008 (Act), as amended, Congress appropriated $4 billion for the Neighborhood
Stabilization Program (Program) to provide grants to every State and certain local communities
to purchase foreclosed-upon or abandoned homes and rehabilitate, resell, or redevelop these
homes to stabilize neighborhoods and stem the decline in value of neighboring homes. The Act
states that amounts appropriated, revenues generated, or amounts otherwise made available to
States and units of general local government under section 2301 shall be treated as though such
funds were Community Development Block Grant (Block Grant) funds under Title I of the
Housing and Community Development Act of 1974. The U.S. Department of Housing and
Urban Development (HUD) allocated more than $3.9 billion in Program funds to more than 300
grantees.
Congress amended the Program and increased its funding as part of the American Recovery and
Reinvestment Act of 2009 (Recovery Act). The Recovery Act provided HUD an additional $2
billion in Program funds to competitively award to States, local governments, nonprofit
organizations, or consortia of nonprofit organizations, which could submit proposals in
partnership with for-profit organizations. The Recovery Act also states that HUD’s Secretary
may use up to 10 percent of the funds for capacity building of and support for local communities
receiving Program funding under the Act or the Recovery Act. Further, up to 1 percent of the
funds shall be available to HUD for staffing, training, providing technical assistance, technology,
monitoring, travel, enforcement, research, and evaluation activities. In January 2010, HUD
awarded 56 organizations more than $1.9 billion in funds through a competitive process.
The State. The Michigan State Housing Development Authority (Authority) administers the
State of Michigan’s (State) Program. The Authority was created by the Michigan Legislature in
1966 under the laws of the State. It is governed by an eight-member board consisting of the
State’s treasurer, the director of the State’s Department of Human Services, and the director of
the State’s Department of Transportation. The board includes five other members appointed to
4-year terms by the State’s governor and confirmed by the State Senate. The Authority’s
mission is to provide financial and technical assistance through public and private partnerships to
create and preserve decent and affordable housing for low- and moderate-income residents and
to engage in community economic development activities to revitalize urban and rural
communities. The Authority’s records are located at 735 East Michigan Avenue, Lansing, MI,
and 3028 West Grand Boulevard, Detroit, MI.
HUD allocated nearly $98.7 million in Program funds under the Act to the State based upon the
funding formula developed by HUD pursuant to the Act. On March 19, 2009, HUD entered into
a grant agreement with the Authority for the full amount allocated. The Authority reported in
HUD’s Disaster Recovery Grants Reporting (Reporting) system the following obligations for the
nearly $98.7 million in Program funds:
Nearly $41.9 million to its Rental Development and Homeless Initiatives Division for the
purchase and rehabilitation of abandoned or foreclosed-upon homes or residential
5
properties to sell, rent, or redevelop the homes or properties and the redevelopment of
demolished or vacant properties;
More than $29.8 million to its Office of Community Development for establishing
financing mechanisms for the purchase and redevelopment of foreclosed-upon homes and
residential properties; the purchase and rehabilitation of abandoned or foreclosed-upon
homes or residential properties to sell, rent, or redevelop the homes or properties;
establishing land banks for foreclosed-upon homes or residential properties; the
demolition of blighted structures; redevelopment of demolished or vacant properties; and
subgrantees’ planning and administrative costs;
Nearly $12.6 million to the Michigan Land Bank for the demolition of blighted
structures, redevelopment of demolished or vacant properties, and planning and
administrative costs;
Nearly $6.1 million to its Urban Revitalization Division for the demolition of blighted
structures;
Nearly $1.8 million to its Homeownership Division for the purchase and rehabilitation of
abandoned or foreclosed-upon homes or residential properties to sell, rent, or redevelop
the homes or properties; and
More than $6.5 million for planning and administration costs.
Further, as part of a consortium, the State submitted an application to HUD, dated July 13, 2009,
which totaled $290 million in additional Program funds under the Recovery Act. On January 14,
2010, HUD awarded nearly $224 million in Program funds to the consortium. The Authority
will serve as the lead agency to administer the Program.
The citizen’s complaint to our office alleged that the housing rehabilitation work that the City of
St. Clair Shores, a subgrantee, included in its Program-funded rehabilitation projects under the
Act was unnecessary and excessive. The citizen’s complaint was not substantiated. However,
we did find that the Authority did not ensure that the City complied with HUD’s regulations
when procuring architectural services for its Program-funded rehabilitation projects under the
Act (see finding 4 of this audit report).
Our objectives were to determine whether the State (1) complied with Federal requirements in its
award, obligation, and use of Program funds under the Act; (2) ensured that a subgrantee
complied with HUD’s regulations when procuring architectural services for its Program-funded
rehabilitation projects under the Act; and (3) complied with Federal requirements in its reporting
of Program accomplishments under the Act and Recovery Act.
6
RESULTS OF AUDIT
Finding 1: The Authority Lacked Adequate Controls Over Its Award of
Program Funds Under the Act for a Project
The Authority lacked sufficient documentation to support that it followed Federal requirements
in its award of $1 million in Program funds under the Act for a project. The weakness occurred
because the Authority lacked adequate procedures and controls to ensure that it maintained
adequate documentation to support that it awarded Program funds for a project in accordance
with Federal requirements. As a result, HUD lacked assurance that the Authority awarded $1
million in Program funds for eligible project costs.
The Authority Lacked
Sufficient Documentation To
Support That Its Award of $1
Million in Program Funds Was
Reasonable
The Authority budgeted $42 million in Program funds under the Act for 10
projects that were administered by its Rental Development and Homeless
Initiatives Division. We reviewed all 10 of the projects.
Contrary to Federal requirements, the Authority lacked sufficient documentation
to support that its award of $1 million in Program funds to University Cultural
Center Association (Association) for the purchase of 4216 and 4240 Cass Avenue,
Detroit, MI (Cass Avenue properties) was reasonable. The Authority could not
provide documentation to support that the fair market value of the Cass Avenue
properties was $1 million.
HUD’s regulations at 24 CFR 570.606(e) state that the acquisition of real property
for an assisted activity is subject to subpart B of 49 CFR Part 24, which begins at
49 CFR 24.101. Appendix A to 49 CFR Part 24 states that for program and
projects receiving Federal financial assistance described in 49 CFR 24.101(b)(2),
an agency is to inform the owner(s) in writing of the agency’s estimate of the fair
market value for the property to be acquired. While section 24.101(b)(2) does not
require an appraisal for these transactions, an agency must have some reasonable
basis for its determination of the fair market value. Further, attachment A, section
A.2., of Office of Management and Budget (OMB) Circular A-122 requires all
costs to be reasonable and adequately documented. Section A.3. states that a cost
is reasonable if, in its nature or 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 costs. In determining the reasonableness of a
7
given cost, consideration shall be given to whether the individuals concerned
acted with prudence in the circumstances, considering their responsibilities to the
organization; its members, employees, and clients; the public at large; and the
Federal Government.
On September 30, 2004, Auburn Lofts, LLC, entered into a line of credit loan
with Standard Federal Bank for nearly $1.6 million to purchase 4240 Cass
Avenue and redevelop the Cass Avenue properties; Detroit Investment Fund, LP,
loaned Auburn Lofts, LLC, $565,000 as gap financing for the project; and Auburn
Lofts, LLC, which already owned 4216 Cass Avenue, purchased 4240 Cass
Avenue for $600,000. The intercreditor agreement between Standard Federal
Bank, Detroit Investment Fund, LP, and Auburn Lofts, LLC, allowed Detroit
Investment Fund, LP, to acquire Standard Federal Bank’s interest in the Cass
Avenue properties. On August 31, 2007, Detroit Investment Fund, LP, paid
LaSalle Bank1 $334,116 to acquire LaSalle Bank’s interest in the Cass Avenue
properties. On March 27, 2008, Detroit Investment Fund, LP, purchased the Cass
Avenue properties for more than $677,000 through a sheriff’s sale. On December
22, 2009, Detroit Investment Fund, LP, filed a quit claim deed for the Cass
Avenue properties, granting its wholly owned subsidiary, Auburn REO, LLC, full
rights to the Cass Avenue properties for $1 and other good and valuable
consideration.
On September 15, 2010, the Association notified Auburn REO, LLC, that it
estimated the fair market value of the Cass Avenue properties at $1 million, and
the Authority awarded the Association $1 million in Program funds for a
repayable loan to be used to finance the acquisition of the Cass Avenue properties
for the redevelopment of a mixed-use apartment building with 58 units for rent.
Section 1 of the general terms of the Authority’s award to the Association stated
that the Authority expected the Association to enter into a development agreement
with The Auburn, LLC, or another development entity acceptable to the Authority
and transfer the Cass Avenue properties to the entity for a price to be approved by
the Authority. Further, the Association entered into a purchase option agreement
with Auburn REO, LLC, effective September 16, 2010, to purchase the Cass
Avenue properties for $1 million. The Authority provided documentation to
support that Detroit Investment Fund, LP, used nearly $1.2 million to acquire and
maintain the Cass Avenue properties from August 2007 through November 2010.
The expenses included acquisition costs, taxes, fees, and insurance payments.
However, the Authority could not provide documentation to support that the
Association had a reasonable basis for its estimate that the fair market value of the
Cass Avenue properties was $1 million. The total cost incurred by Detroit
Investment Fund, LP, for the Cass Avenue properties over the 3-year period does
not support that the fair market value of the Cass Avenue properties was $1
million or that the sales price of the Cass Avenue properties was reasonable. The
Association’s president said that the Authority’s estimate of the fair market value
of the Cass Avenue properties was based on the fair market value of comparable
1
Standard Federal Bank was renamed LaSalle Bank on September 12, 2005.
8
properties near the Cass Avenue properties, not Detroit Investment Fund, LP’s
cost in acquiring and maintaining the Cass Avenue properties. The president
provided summaries for three comparable properties for 4240 Cass Avenue. The
summaries stated that the properties were sold in 2007. However, the summaries
were not prepared by a third party and did not include documentation to support
the information contained within. Further, using the sales price of properties that
sold more than 2½ years before the Association notified Auburn REO, LLC that it
estimated the fair market value of the Cass Avenue properties at $1 million does
not provide a reasonable basis for the Authority’s determination of the fair market
value of the Cass Avenue properties.
The Authority Lacked
Adequate Procedures and
Controls
The weakness regarding the lack of sufficient documentation to support its award
of $1 million in Program funds under the Act occurred because the Authority
lacked adequate procedures and controls to ensure that it awarded Program funds
in accordance with Federal requirements.
The manager of the Authority’s Development Operations and Policy Division said
that the Authority quickly reviewed and approved the project to meet the required
18-month obligation deadline for Program funds. It verified that the minimum
amount of documentation was provided in order to properly obligate the Program
funds. It provided documentation to support that Detroit Investment Fund, LP,
used more than $1.2 million to acquire and maintain the Cass Avenue properties.
Therefore, the Authority’s position was that the award of $1 million in Program
funds to the Association for the acquisition of the Cass Avenue properties was
reasonable. The Authority planned to disburse the $1 million in Program funds to
the Association to reimburse Detroit Investment Fund, LP, for its cost. However,
as a result of the audit, it will not disburse the funds to the Association until it
makes a final determination on the eligibility of Detroit Investment Fund, LP’s
costs.
Conclusion
The Authority lacked adequate procedures and controls to ensure that it
maintained sufficient documentation to support that it awarded Program funds
under the Act in accordance with Federal requirements. As a result, HUD lacked
assurance that the Authority awarded $1 million in Program funds for eligible
project costs.
9
Recommendations
We recommend that the Director of HUD’s Detroit Office of Community
Planning and Development require the State to
1A. Perform a reasonable analysis to determine the fair market value of the
Cass Avenue properties. If the State does not perform a reasonable
analysis, it should award the $1 million in Program funds under the Act to
an eligible project(s). If the State performs a reasonable analysis and
determines that the fair market value of the Cass Avenue properties is less
than $1 million, it should award the amount of the $1 million in Program
funds in excess of the fair market value of the Cass Avenue properties to
an eligible project(s).
1B. Implement adequate procedures and controls to ensure that it maintains
sufficient documentation to support that the Authority’s awards of
Program funds under the Act are for eligible project costs.
10
Finding 2: The Authority Lacked Adequate Controls Over Program
Obligations Under the Act
The Authority did not comply with Federal requirements in its obligation of Program funds
under the Act. It reported Program obligations in HUD’s Reporting system that did not qualify
as obligations and inappropriately disbursed Program funds for Program obligations that did not
qualify as obligations. These weaknesses occurred because the Authority lacked adequate
procedures and controls to ensure that Program funds were obligated in accordance with Federal
requirements. As a result, it inappropriately reported Program obligations of more than $719,000
in HUD’s Reporting system and disbursed Program funds for more than $531,000 in Program
obligations that did not qualify as obligations.
The Authority Inappropriately
Reported to HUD Program
Obligations of More Than
$719,000
As of September 19, 2010, the Authority had obligated all of the nearly $98.7
million in Program funds under the Act HUD awarded the State. The Authority
reported in HUD’s Reporting system that it had obligated nearly $27.9 million in
Program funds to 41 of its Office of Community Development’s subgrantees. We
reviewed nearly $9.1 million of the reported Program obligations for 10 of the
subgrantees.
Contrary to the Act and Federal requirements, the Authority reported in HUD’s
Reporting system $719,499 in Program obligations for the Cities of Saginaw
($704,787) and Port Huron ($14,712), subgrantees, that did not qualify as
obligations. Further, the Authority inappropriately disbursed Program funds for
$531,130 of the City of Saginaw’s Program obligations that did not qualify as
obligations.
Section 2301(c)(1) of Title III of the Act states that a State must use Program
funds to purchase and redevelop abandoned and foreclosed-upon homes and
residential properties not later than 18 months after receipt of the Program funds.
According to the Federal Register, dated October 6, 2008, each grantee must
obligate its Program funds within 18 months of HUD signing the Program grant
agreement with the grantee. Program funds are used when a State, unit of general
local government, or any subrecipient thereof obligates the Program funds for a
specific Program activity. Program funds are obligated when orders are placed,
contracts are awarded, services are rendered, and similar transactions have
occurred that require payment by the State, unit of general local government, or
subrecipient. In addition, HUD’s Program policy alert, volume 3, dated April
2010, states that Program funds are not obligated for an activity when subawards
or grants to subrecipients or units of general local government are made. For
11
property owned by a grantee or subrecipient, Program funds may be reported as
obligated when a construction contract is awarded with respect to a specific
property or other action is taken with respect to a specific property that is legally
binding on the grantee/subrecipient. As previously stated, on March 19, 2009,
HUD entered into a grant agreement with the Authority for nearly $98.7 million
in Program funds.
The Authority entered into a subgrant agreement, effective March 17, 2009, with
the City of Saginaw for $957,000 in Program funds. The Authority also amended
the subgrant agreement, effective April 20, 2010, increasing the award to $1.6
million in Program funds. It reported in HUD’s Reporting system that the City
had obligated $1,440,000 in Program funds for projects as of September 19, 2011.
The Authority provided documentation to support $735,213 of the City’s Program
obligations. It also provided a rehabilitation agreement, dated April 5, 2010,
between the City and Saginaw Habitat for Humanity for $300,000 in Program
funds to rehabilitate up to four buildings as designated by the City. However, the
rehabilitation agreement did not include specific property addresses. On
September 21, 2010, the City amended the rehabilitation agreement with Saginaw
Habitat for Humanity to revise the amount of Program funds to $795,000 to
obligate the remainder of the Program funds the Authority awarded the City and
include specific property addresses for the properties the City had gained site
control of and wanted Saginaw Habitat for Humanity to rehabilitate. However,
the amendment was not executed until 2 days after the required 18-month
obligation deadline for Program funds. Therefore, the Authority reported
Program obligations of $704,787 ($1,440,000 less $735,213) for the City that did
not qualify as obligations. Further, the Authority inappropriately disbursed
$531,130 in Program funds to the City on January 31, 2011, for work performed
under the City’s rehabilitation agreement with Saginaw Habitat for Humanity.
The remaining $173,657 ($704,787 less $531,130) in Program funds that the
Authority obligated for the City that did not qualify as Program obligations had
not been disbursed as of March 7, 2011.
The Authority entered into a subgrant agreement, effective March 17, 2009, with
the City of Port Huron for $500,000 in Program funds. The Authority also had
amended the subgrant agreement three times as of June 18, 2010, increasing the
award to $1.25 million in Program funds. It reported in HUD’s Reporting system
that the City had obligated $1,125,000 in Program funds for projects as of
September 19, 2011. The Authority provided documentation to support
$1,110,288 of the City’s Program obligations. It also provided a residential
rehabilitation contract totaling $83,500 for a property that the City purchased on
July 6, 2010. However, the administrator of the City’s Program did not enter into
the residential rehabilitation contract with the contractor until October 5, 2010,
which was more than 10 days after the required 18-month obligation deadline for
Program funds. Therefore, the Authority reported Program obligations of
$14,712 ($1,125,000 less $1,110,288) for the City that did not qualify as
obligations.
12
The Authority Lacked
Adequate Procedures and
Controls
The weaknesses regarding the reporting of Program obligations under the Act that
did not qualify as obligations occurred because the Authority lacked adequate
procedures and controls to ensure that Program funds were obligated in
accordance with Federal requirements.
The planner of the Authority’s Program Policy and Market Research Division
said that since the City of Saginaw’s council approved the amendment between
the City and Saginaw Habitat for Humanity before the required 18-month
obligation deadline for Program funds, the City complied with the Federal
requirements regarding the obligation of Program funds.
The Block Grant and Program compliance specialist of the Authority’s Office of
Community Development said that the City of Port Huron had used more than
$14,712 in Program income on additional projects before the required 18-month
obligation deadline for Program funds. The planner also said the Authority will
provide documentation to support this as part of its response to this audit report.
Conclusion
The Authority lacked adequate procedures and controls to ensure that Program
funds under the Act were obligated in accordance with Federal requirements. As
a result, it inappropriately reported Program obligations of more than $719,000 in
HUD’s Reporting system and disbursed Program funds for more than $531,000 in
Program obligations that did not qualify as obligations.
Recommendations
We recommend that the Director of HUD’s Detroit Office of Community
Planning and Development require the State to
2A. Reimburse HUD from non-Federal funds for the $531,130 in Program
funds under the Act inappropriately disbursed to the City of Saginaw for
Program obligations that did not qualify as obligations.
2B. Deobligate in HUD’s Reporting system the $719,499 in Program funds
under the Act obligated for the Cities of Saginaw and Port Huron that did
not qualify as Program obligations.
13
2C. Implement adequate procedures and controls to ensure that Program funds
under the Act are obligated in HUD’s Reporting system in accordance
with Federal requirements.
We recommend that the Director of HUD’s Detroit Office of Community
Planning and Development
2D. Recapture the $188,369 in undisbursed Program funds under the Act that
the Authority obligated for the Cities of Saginaw ($173,657) and Port
Huron ($14,712) that did not qualify as Program obligations.
2E. Reallocate the $719,499 in Program funds obligated under the Act that did
not qualify as Program obligations in accordance with 42 U.S.C.
5306(c)(4).
14
Finding 3: The Authority’s Controls Over Subgrantees’ Program
Administrative Expenses Under the Act Had Weaknesses
The Authority did not comply with Federal requirements for maintaining sufficient
documentation to support the use of Program funds under the Act for administrative expenses.
These weaknesses occurred because the Authority lacked adequate procedures and controls to
ensure that sufficient documentation was maintained to support administrative costs and that
Federal requirements were followed. As a result, HUD lacked assurance that the Authority used
nearly $87,000 in Program funds for eligible Program administrative costs.
The Authority Lacked
Documentation To Support
Nearly $87,000 in
Administrative Expenses
We reviewed more than $1.5 million of the State’s more than $1.7 million in
Program funds under the Act used for administrative expenses for the period July
2009 through August 2010.
Contrary to Federal requirements, the Authority lacked sufficient documentation
to support that two of its subgrantees, Habitat for Humanity of Michigan and the
City of Benton Harbor, used $86,514 in Program funds from May through August
2010 for eligible administrative 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
provided for financially assisted activities. These records must contain
information pertaining to grant and subgrant awards and authorizations,
obligations, unobligated balances, assets, liabilities, outlays or expenditures, and
income. 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 570.506(h) require grantees to maintain evidence to support
how Block Grant funds are expended. Attachment A, paragraph C.1., of OMB
Circular A-87 requires all costs to be necessary, reasonable, and adequately
documented.
Habitat for Humanity of Michigan’s unsupported disbursements included $82,314
for salaries and benefits, supplies, equipment, rent, and operating expenses. The
Authority could not provide the amount of Program funds disbursed for each
administrative cost category. The City of Benton Harbor’s unsupported
disbursements included salaries ($3,400) and supplies ($800).
15
The Authority Lacked
Adequate Procedures and
Controls
The weaknesses regarding the lack of documentation to support that
administrative costs were eligible occurred because the Authority lacked adequate
procedures and controls to ensure that sufficient documentation was maintained to
support subgrantees’ administrative costs and Federal requirements were
followed.
The Authority’s Office of Community Development’s Program procedures
manual states that subgrantees must itemize and maintain documentation to
support administrative expenses. The planner of the Authority’s Program Policy
and Market Research Division said that the Authority's main focus was ensuring
that its subgrantees awarded Program funds under the Act for eligible activities
and properly obligated Program funds. The interim director of the Authority’s
Office of Community Development said that the Authority's subgrantees did not
follow Federal requirements for maintaining sufficient documentation to support
administrative expenses. However, the Authority would have reviewed its
subgrantees’ administrative costs when it monitored the subgrantees. The Planner
said that the Authority had hundreds of subgrantees and administered many other
types of funds in addition to the Program. If the Authority required all of its
subgrantees to submit source documentation for administrative expenses, the
Authority’s staff would have been overwhelmed by the amount of documentation
it had to review.
Conclusion
The Authority lacked adequate procedures and controls to ensure that sufficient
documentation was maintained to support subgrantees’ administrative costs and
Federal requirements were followed. As a result, it was unable to support that its
use of nearly $87,000 in Program funds under the Act was for eligible
administrative costs.
Recommendations
We recommend that the Director of HUD’s Detroit Office of Community
Planning and Development require the State to
3A. Provide sufficient supporting documentation or reimburse its Program
from non-Federal funds, as appropriate, for the $86,514 in Program funds
under the Act used for unsupported administrative costs.
16
3B. Implement adequate procedures and controls to ensure that sufficient
documentation is maintained and Program funds under the Act are only
used for eligible administrative costs.
17
Finding 4: The Authority’s Controls Over Subgrantee Program
Procurement Under the Act Had Weaknesses
The Authority did not ensure that the City of St. Clair Shores complied with HUD’s regulations
when procuring architectural services for its Program-funded rehabilitation projects under the
Act. The City did not select one of the most qualified competitors, negotiate fair and reasonable
compensation for the services, or perform a cost or price analysis in connection with the
procurement and inappropriately used a percentage of construction cost method of contracting.
These weaknesses occurred because the Authority lacked adequate procedures and controls to
ensure that the City complied with HUD’s regulations for competitive proposals when procuring
architectural services for its Program-funded rehabilitation projects. As a result, HUD and the
Authority lacked assurance that nearly $68,000 in Program funds was used efficiently and
effectively.
The Authority Did Not Ensure
That a Subgrantee Procured
Architectural Services in
Accordance With HUD’s
Regulations
We reviewed the nine rehabilitation projects that the City of St. Clair Shores had
started as of August 2010. The Authority did not ensure that the City complied
with HUD’s regulations for competitive proposals when procuring architectural
services for its Program-funded rehabilitation projects under the Act.
HUD’s regulations at 24 CFR 85.36(d)(3)(iv) state that for procurement by
competitive proposals, awards will be made to the responsible firm with the
proposal that is most advantageous to the program, with price and other factors
considered. Section 85.36(d)(3)(v) states that grantees and subgrantees may use
competitive proposal procedures for qualifications-based procurement of
architectural/engineering professional services whereby competitors’
qualifications are evaluated and the most qualified competitor is selected, subject
to negotiation of fair and reasonable compensation. The method, when price is
not used as a selection factor, can only be used in procurement of
architectural/engineering professional services. Section 85.36(f)(1) states that
grantees and subgrantees must perform a cost or price analysis in connection with
every procurement action including contract modifications. The method and
degree of analysis is dependent on the facts surrounding the particular
procurement situation, but as a starting point, grantees must make independent
estimates before receiving bids or proposals. Section 85.36(f)(4) states that the
cost plus a percentage of cost and percentage of construction cost methods of
contracting shall not be used.
18
On December 21, 2009, the City of St. Clair Shores published a request for
proposals soliciting qualifications and prices, based on a percentage of the
construction costs, from architects or architecture firms to assist the City in
renovating and rehabilitating foreclosed-upon properties. The City received 25
proposals, which it reviewed using a 45-point checklist. Although the proposals
included architectural fees based on a percentage of the construction costs, the
City did not consider price in its evaluation of the proposals. The City selected
the 7 most qualified firms since it anticipated rehabilitating 12 to 15 homes with
Program funds and assumed that each firm would be able to design at least 2
homes. It submitted the seven firms to its council for approval. The council only
selected six of the seven firms as approved vendors for the Program-funded
rehabilitation projects. The six firms’ fees ranged from 6 through 12 percent of
the construction cost. The council did not select the remaining firm because its
fees were 15 percent of the construction costs. The City ranked the six firms
based on their fees and then assigned the rehabilitation projects to each firm,
starting with the firm with the lowest fee. Contrary to HUD’s regulations, the
City did not select one of the most qualified competitors, negotiate fair and
reasonable compensation for the services, or perform a cost or price analysis in
connection with the procurement and inappropriately used a percentage of
construction cost method of contracting. The City used $67,546 in Program funds
for the architectural services for eight of the nine rehabilitation projects from
March through November 2010.
The State Lacked Adequate
Procedures and Controls
The weaknesses regarding the City of St. Clair Shores’ procurement of
architectural services occurred because the Authority lacked adequate procedures
and controls to ensure that the City complied with HUD’s regulations for
competitive proposals when procuring architectural services for its Program-
funded rehabilitation projects under the Act.
The City of St. Clair Shores’ planner stated that the City relied on its procurement
process to find the most competitive proposals for architectural services and used
different architecture firms to create as many jobs as possible using Program
funds. The City did not perform a cost or price analysis before the procurement
of the architectural services or negotiate compensation with the firms because it
relied on industry standards for the services to determine the range of acceptable
compensation and believed that the architectural fees of the selected firms fell
within the industry standard for the services.
The planner of the Authority’s Program Policy and Market Research Division
said that the Authority's main focus was ensuring that its subgrantees awarded
Program funds for eligible activities and properly obligated Program funds.
Further, the Authority assumed that its subgrantees were familiar with cross-
19
cutting Federal requirements applicable to Program funds since the subgrantees
had administered other HUD funding for years. This assumption was an error in
judgment, and the Authority had implemented procurement training programs for
its subgrantees.
Conclusion
The Authority lacked adequate procedures and controls to ensure that the City of
St. Clair Shores complied with HUD’s regulations for competitive proposals
when procuring architectural services for its Program-funded rehabilitation
projects under the Act. As a result, HUD and the Authority lacked assurance that
nearly $68,000 in Program funds was used efficiently and effectively.
Recommendations
We recommend that the Director of HUD’s Detroit Office of Community
Planning and Development require the State to
4A. Perform a formal cost or price analysis to determine whether the $67,546
in Program funds under the Act was reasonable for the architectural
services provided for the City of St. Clair Shores’ rehabilitation projects.
If the State does not perform a formal cost or price analysis, it should
reimburse its Program from non-Federal funds for the nearly $68,000 in
Program funds used for the architectural services and not use Program
funds to pay for additional architectural services. If the State performs a
formal analysis and determines that a reasonable cost for the architectural
services was less than the nearly $68,000, it should reimburse its Program
from non-Federal funds for the excessive amount of Program funds used
for architectural services and limit its use of Program funds to pay for
additional architectural services to that which is reasonable.
4B. Implement adequate procedures and controls to ensure that the
procurement of architectural services by subgrantees for the Program
under the Act complies with HUD’s regulations.
20
Finding 5: The Authority Lacked Adequate Controls Over Posting
Quarterly Performance Reports for the Program Under the Act
The Authority did not comply with Federal requirements by posting the State’s quarterly
performance reports for the Program under the Act for the first through third quarters of 2010 on
its official Web site more than 30 days after the end of each quarter. This weakness occurred
because the Authority lacked adequate procedures and controls to ensure that it reported
accomplishments for the Program under the Act in a timely manner and in accordance with
Federal requirements. As a result, the public did not have timely access to the State’s quarterly
performance reports.
The Authority Did Not Post the
State’s Quarterly Performance
Reports in a Timely Manner
We reviewed the Authority’s posting of the State’s quarterly performance reports
for the Program under the Act for 2009 and 2010 on its official Web site.
The Federal Register, dated October 6, 2008, states that each grantee must submit
a quarterly performance report, as HUD prescribes, no later than 30 days
following the end of each quarter. Reports must be submitted using HUD’s Web-
based system and, at the time of submission, be posted prominently on the
grantee’s official Web site. The Authority posted the State’s quarterly
performance report for the fourth quarter of 2010 on its official Web site on
February 1, 2011. However, it did not post the State’s quarterly performance
reports for the Program under the Act for the first through third quarters of 2010
on its official Web site for more than 30 days after the end of each quarter. The
following table shows the quarter for the quarterly performance reports, the date
by which the Authority was required to post the quarterly performance reports,
the date the Authority posted the quarterly performance reports, and the number
of days late the Authority posted the quarterly performance reports.
Quarterly performance Required Days
report posting date Date posted late
First quarter of 2010 Apr. 30, 2010 Aug. 13, 2010 105
Second quarter of 2010 July 30, 2010 Sept. 28, 2010 60
Third quarter of 2010 Oct. 30, 2010 Dec. 7, 2010 38
Further, the Authority could not provide documentation to support the dates it
posted the State’s quarterly performance reports for the Program under the Act for
periods before January 1, 2010, to its official Web site.
21
The State Lacked Adequate
Procedures and Controls
The weakness regarding the Authority not posting the State’s quarterly
performance reports for the Program under the Act to its Web site in a timely
manner occurred because the Authority lacked adequate procedures and controls
to ensure that it reported Program accomplishments under the Act in a timely
manner and in accordance with Federal requirements.
The planner of the Authority’s Program Policy and Market Research Division
said that it was standard procedure to only post quarterly performance reports for
HUD programs after HUD had reviewed and approved the reports. The Authority
was under the impression that it should continue to follow this standard
procedure. It agreed that it did not comply with the requirements in the Federal
Register and had implemented a new process through which the reports are
simultaneously submitted to HUD and posted to its Web site.
Conclusion
The Authority lacked adequate procedures and controls to ensure that it reported
Program accomplishments under the Act in a timely manner and in accordance
with Federal requirements. As a result, the public did not have timely access to
the State’s quarterly performance reports for the Program under the Act.
Recommendations
We recommend that the Director of HUD’s Detroit Office of Community
Planning and Development require the State to
5A. Implement adequate procedures and controls to ensure that the Authority
posts the State’s quarterly performance reports for the Program under the
Act no later than 30 days following the end of each quarter.
22
Finding 6: The Authority Lacked Adequate Controls Over Reporting
Jobs Created or Retained From the Use of Program Funds Under the
Recovery Act
The Authority did not comply with Federal requirements by not maintaining sufficient
documentation to support the number of jobs it reported as created or retained from the use of
Program funds under the Recovery Act for the first and second quarters of 2010. This weakness
occurred because the Authority lacked adequate procedures and controls to ensure that it
reported Program accomplishments under the Recovery Act accurately and in accordance with
Federal requirements. As a result, HUD and the public lacked assurance that the Authority
accurately reported the number of jobs that the use of Program funds under the Recovery Act
created or retained.
The Authority Lacked
Documentation To Support the
Number of Jobs It Reported as
Created or Retained
We reviewed the State’s jobs created or retained data that the Authority reported
on federalreporting.gov for the Program under the Recovery Act for the first and
second quarters of 2010.
Section 1512(c) of Title XV of the Recovery Act requires each recipient that
receives Program funds under the Recovery Act from a Federal agency to submit,
no later than 10 days after the end of each calendar quarter, a report to that
Federal agency that contains a detailed list of all the projects or activities for
which Recovery Act funds were expended or obligated, including an estimate of
the number of jobs created and retained by the project or activity. OMB
Memorandum M-10-08, dated December 18, 2009, states that recipients will now
report job estimates on a quarterly basis rather than a cumulative basis.
The Authority reported in federalreporting.gov that the use of Program funds
under the Recovery Act created or retained 0 and 12.27 jobs in the first and
second quarters of 2010, respectively. However, the Authority lacked sufficient
documentation to support the number of jobs it reported as created or retained. It
did not request its consortium members to provide the number of jobs created and
retained for the quarterly performance report for the first quarter of 2010 and
requested its consortium members to provide the cumulative number of jobs
created and retained for the first and second quarters of 2010 for the quarterly
performance report for the second quarter of 2010. Further, (1) the consortium
members did not provide detailed records to be able to determine in which quarter
the jobs were created or retained, (2) the Authority verbally clarified
discrepancies with its consortium members without maintaining documentation to
23
support the changes that it made to the number of jobs the consortium members
provided as created or retained, and (3) the Authority did not provide
documentation to support its calculation of the number of jobs created or retained
within the Authority for the second quarter of 2010.
The State Lacked Adequate
Procedures and Controls
The weaknesses regarding the Authority’s lack of documentation to support the
number of jobs that the Authority reported were created or retained through the
use of Program funds under the Recovery Act occurred because the Authority
lacked adequate procedures and controls to ensure that it reported Program
accomplishments under the Recovery Act accurately and in accordance with
Federal requirements.
The department analyst of the Authority’s Office of Community Development’s
Operations and Technical Assistance Division stated that the Authority did not
request its consortium members to provide the number of jobs created and
retained for the quarterly performance report for the Program under the Recovery
Act for the first quarter of 2010. The Authority requested its consortium members
to provide the cumulative number of jobs created and retained for the first and
second quarters of 2010 for the quarterly performance report for the Program
under the Recovery Act for the second quarter of 2010 since most of the funding
agreements for the Program under the Recovery Act were not signed until the
middle of February and the Authority and its consortium members were not
prepared to document jobs before April of 2010. The planner of the Authority’s
Program Policy and Market Research Division said that the Authority made a
mistake when it requested its consortium members to provide the cumulative
number of jobs created and retained for the first and second quarters of 2010 for
the quarterly performance report for the Program under the Recovery Act for the
second quarter of 2010.
Conclusion
The Authority lacked adequate procedures and controls to ensure that it reported
Program accomplishments for the Program under the Recovery Act accurately
and in accordance with Federal requirements. As a result, HUD and the public
lacked assurance that the Authority accurately reported the number of jobs that
the use of Program funds under the Recovery Act created or retained.
24
Recommendations
We recommend that the Director of HUD’s Detroit Office of Community
Planning and Development require the State to
6A. Implement adequate procedures and controls to ensure that sufficient
documentation is maintained to support the number of jobs that the
Authority reports as created or retained in the State’s quarterly
performance reports for the Program under the Recovery Act.
25
SCOPE AND METHODOLOGY
To accomplish our objectives, we reviewed
Applicable laws; the Federal Register, dated October 6, 2008, June 19, 2009, and
April 9, 2010; HUD’s regulations at 24 CFR Parts 85 and 570; the U.S.
Department of Transportation’s regulations at 49 CFR Part 24; OMB Circulars A-
87 and A-122; OMB Memorandums M-10-08, M-10-17, and M-10-34; HUD’s
grant agreements with the Authority for the Program under the Act and Recovery
Act; HUD’s Detroit Office of Community Planning and Development’s
monitoring report for the State’s Block Grant and HOME Investment Partnerships
programs from 2008 through 2009; HUD’s Program policy alert, volume 3, dated
April 2010; and the Program’s explanation of property types under each eligible
use.
The State’s 2008 action plan substantial amendment for the Program under the
Act; consolidated plans for 2005 and 2010; annual reports for 2008 and 2009;
annual performance reports for 2007 and 2008; and Program data from HUD’s
Reporting system, Recovery.gov, and the Authority’s Web site.
The Authority’s audited financial statements, annual reports, accounting records,
policies and procedures, contracts and agreements, Program applications,
Program obligations, project and procurement files, staffing plans and allocations,
job descriptions, organizational chart, and budget.
Subgrantees’ accounting records, contracts and agreements, project and
procurement files, and budgets.
We interviewed the Authority’s employees; subgrantees’ and Detroit Investment Fund, LP’s,
personnel; and HUD’s staff.
We also conducted visits of the Authority’s project sites for the Program under the Act.
As previously stated, on March 19, 2009, HUD entered into a grant agreement with the State’s
Authority for nearly $98.7 million in Program funds under the Act.
Finding 1
We reviewed all 10 of the Authority’s Rental Development and Homeless Initiatives Division’s
projects for which the Authority budgeted $42 million in Program funds under the Act to
determine whether the State awarded Program funds for eligible projects.
Finding 2
We randomly selected for review all of the obligations the Authority had reported in HUD’s
Reporting system as of September 19, 2010, for 10 of its Office of Community Development’s
41 subgrantees to determine whether the Authority obligated Program funds under the Act in
26
accordance with HUD’s requirements. The reported obligations totaled nearly $9.1 million in
Program funds.
Finding 3
We reviewed all of the Authority’s Program administrative expenses under the Act and randomly
selected for review all of the Program administrative expenses for 8 of the Authority’s Office of
Community Development’s 16 subgrantees for the period June 2009 through August 2010 to
determine whether the State used Program funds for eligible administrative costs. The
administrative expenses totaled more than $1.5 million in Program funds.
Finding 4
We reviewed all nine of the rehabilitation projects that the City of St. Clair Shores started as of
August 2010, to determine whether the City used Program funds under the Act for eligible
Program costs and followed HUD’s regulations when procuring architectural services. The
Authority provided more than $1 million in Program funds for the nine rehabilitation projects
from March 2009 through February 2011.
Finding 5
We reviewed the Authority’s posting of the State’s quarterly performance reports for the
Program under the Act for 2009 and 2010 on its official Web site to determine whether the
Authority posted the State’s quarterly performance reports for the Program under the Act on its
official Web site in accordance with Federal requirements.
Finding 6
We reviewed the State’s jobs created or retained data for the Program under the Recovery Act
that the Authority reported on federalreporting.gov from the first and second quarters of 2010 to
determine whether the State accurately reported its jobs created or retained accomplishments for
the Program under the Recovery Act to HUD.
In addition, we relied in part on data maintained in HUD’s Reporting system and the Authority’s
online project administration link system. Although we did not perform a detailed assessment of
the reliability of the data, we performed a minimal level of testing and found the data to be
adequately reliable for our purposes.
We performed our onsite audit work from August through December 2010 at the Authority’s
office located at 735 East Michigan Avenue, Lansing, MI. The audit covered the period July
2008 through July 2010 and was expanded as determined necessary.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our finding 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.
27
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.
28
Significant Deficiency
Based on our review, we believe that the following item is a significant
deficiency:
The Authority lacked adequate procedures and controls to ensure that (1) it
awarded and obligated Program funds under the Act in accordance with
Federal requirements, (2) sufficient documentation was maintained to support
subgrantees’ administrative costs for the Program under the Act and Federal
requirements were followed, (3) a subgrantee complied with HUD’s
regulations for competitive proposals when procuring architectural services
for its Program-funded rehabilitation projects under the Act, and (4) it
reported Program accomplishments under the Act and Recovery Act in a
timely manner, accurately, and/or in accordance with Federal requirements.
29
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/
2A $531,130
2D $188,369
3A $86,514
4A 67,546
Totals $531,130 $154,060 $188,369
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
polices 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, HUD will recapture Program funds
under the Act and reallocate the funds in accordance with 42 U.S.C. 5306(c)(4).
30
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
April 27, 2011
Kelly Anderson
Acting Regional Inspector General for Audit, Region V
HUD Office of Inspector General
Brent G. Bowen
Assistant Regional Inspector General for Audit, Region V
HUD Office of Inspector General
Thomas O. McManigal
Auditor, Region V
HUD Office of Inspector General
DELIVERED VIA E-MAIL ONLY
Re: Michigan State Housing Development Authority Response to HUD’s Office of Inspector
General Draft Audit Report of the Michigan State Housing Development Authority’s
Neighborhood Stabilization Program
Dear Sirs and Madam:
The Office of the Inspector General recently conducted and completed an audit of the State of
Michigan's Neighborhood Stabilization Program (NSP) administered by the Michigan State
Housing Development Authority (MSHDA) covering the period July 2008 through July 2010.
MSHDA has a long history of administering a variety of U.S. Department of Housing & Urban
Development (HUD) programs. During the past four decades, MSHDA has established a strong
track record with respect to its capacity to administer federal grant and programmatic awards.
As we all are aware, the Neighborhood Stabilization Program was created by Congress as an
emergency response to address the catastrophic impacts of the financial crisis impacting
countless seniors and families in large cities and small towns across the nation. As an
emergency response program, the NSP was launched with very tight programmatic timeframes
and very little program guidance. As you already know, HUD and its grantees were tasked with
the monumental project of developing the program guidance concurrent with the program
implementation. Although our partners at HUD have made tremendous efforts and strides in
providing appropriate guidance and regulatory "fixes", as the program continues to be rolled-out
and as program actions are taken, NSP at its core is still best describes as a work in progress.
MSHDA implemented the NSP within this environment of immediate need and scant regulatory
Comment 1 guidance. We believe that we have fully met both the spirit and the letter of the law, regulation
and guidance with regard to the launch, roll-out and implementation of the program. MSHDA
continuously responds to HUD updates and clarifications by immediately updating processes
and protocols as we move forward with the NSP implementation to assure to the extent possible
that the program funds are spent appropriately and with full transparency to the taxpayer and
pubic.
735 EAST MICHIGAN AVENUE • P.O. BOX 30044 • LANSING. MICHIGAN 48909
michigan.gov/mshda • 517.373.8370 • FAX 517.335.4797 • TTY 800.382.4568
31
Ref to OIG Evaluation Auditee Comments
Kelly Anderson, Brent G. Bowen, Thomas O. McManigal
Page Two
April 27, 2011
As I am sure you are already aware, MSHDA administers much of its NSP through
subrecipients, including local units of government. Many of the OIG draft findings were related
to our local units of government subrecipients who also have significant experience in
administering direct awards of federal block grant and other programs. While our due diligence
process specifically reviewed recent HUD program monitoring and OIG audits of these
subrecipients to ensure adequate capacity was in place, it is important to recognize that
extraordinary fiscal pressures on local governments, when combined with the aforementioned
short timeframes and changing programmatic guidance, exacerbated the pressures and
demands being place on local capacity to implement the program. All in all given both our
significant experience and history of administering programs like NSP, and our knowledge of
our local governmental partners' capabilities and experience with dealing with similar programs,
we believe our subrecipients met a pressure filled challenge and performed admirably in
providing a much needed resource to their local communities.
Comment 2 We also would note that the scope and timing of the OIG audit process relative to the NSP is
somewhat premature. NSP is a new and active program and, as such, can not be reviewed as
Comment 1 a completed program might be reviewed. In many cases, as noted in our comments, the OIG
prejudges the actual procedures and protocols MSHDA has in place to assure compliance with
federal requirements before those procedures and protocols have had a chance to be
completed and been able to ensure the quality results that both we and HUD seek to achieve
and often achieve through the implementation of this and other similar programs.
In conclusion, we have provided our complete written response and comments to the Draft Audit
Report in the attached document. We thank you for your time and counsel throughout this audit
process and the professionalism of your staff. We look forward to concluding the audit process
with you at your earliest convenience.
Sincerely,
/signed/
Gary Heidel
Executive Director
Michigan State Housing Development Authority
32
Ref to OIG Evaluation Auditee Comments
MSHDA RESPONSES TO HUD OIG AUDIT REPORT
Finding #1: The Authority lacked adequate controls over its award of Program funds
under the Act for a project.
The HUD OIG Audit Report finds that MSHDA lacked procedures and controls to ensure
that it maintained sufficient documentation to support that it awarded Program funds
under the Act in accordance with Federal requirements.
Comment 3 The Authority disagrees with Audit Finding #1. The Authority has adequate procedures
in place to fulfill its requirements under NSP, OMB Circular A-87 and the Uniform
Relocation Act.
Finding #1 is related to the obligation of funds to a project known as “The Auburn,”
located at 4216/4240 Cass Avenue, Detroit, Michigan. The Finding can be distilled to
OIG’s assertion that there is not a basis to conclude that the sales price of $1 million is
Comment 3 “reasonable.” However, the OIG’s conclusions prejudge the end result of an
intentionally and explicitly incomplete underwriting process.
As detailed in the Authority’s obligation agreement with the University Cultural Center
Association, the commitment of NSP funds was specifically conditioned upon both
successful completion of the Authority’s underwriting process and final approval of the
award of program funds. The obligation agreement also outlines in specificity many
other federal regulatory issues that would need to be addressed as part of that review.
In keeping with its obligations under NSP, the Authority is in the process of reviewing not
only the proposed purchase price of the property but all of the projected sources and
uses as represented in the project proforma and regulatory obligations required by the
obligation agreement and program related to the project.
The Authority agrees that it is responsible for determining the reasonableness of costs
Comment 3 and the amount of funding provided to the project under NSP. However, OIG asserts
that such a cost reasonableness determination must be made prior to the obligation of
Neighborhood Stabilization Program funds. The Authority believes that conclusion is
both premature and inconsistent with HUD guidance, OMB principles and long-standing
public program underwriting practice.
Comment 3 The finding is premature because the Authority believes it can only make a final
determination of funding level and appropriateness when all project costs are known.
Not only must the acquisition cost be determined to be reasonable (since acquisition is
the specific activity to which the NSP funds were awarded), but all costs within the
development budget must be determined reasonable and necessary so that a final
determination of the NSP assistance amount can be made. Long standing public
underwriting practice requires a full review of all project costs to determine the “gap” to
be filled by public funding. $1 Million could be a reasonable cost for the property, but $1
Million may or may not be the “reasonable and necessary” amount of NSP assistance.
Absent a full underwriting of the project and all known costs, the Authority risks providing
more federal funding than would be necessary to complete the project, even if the line
item is determined to be reasonable.
Comment 3 The finding is inconsistent with HUD NSP guidance, which does not dictate that a full
underwriting review be completed prior to obligating funds. To the contrary, various
33
Ref to OIG Evaluation Auditee Comments
Comment 3 Questions and Answers in the online NSP Resource Exchange specifically note that an
obligation can be made once: (a) a specific site has been identified and site control
obtained; (b) a detailed scope of work and cost estimate based upon actual inspection of
the site has been prepared; and (c) if the cost estimate is included within the written
agreement with the developer. In other places, the Resource Exchange specifically
notes that due diligence reviews such as the Part 58 Environmental Review process
may be completed after funds are initially obligated.
As previously reported to OIG, the Auburn project relies on a multi-tiered financing
structure that includes state Brownfield redevelopment tax credits, federal New Market
Tax Credits, conventional bank financing, and philanthropic investment, all in addition to
the NSP investment. Several elements of the overall financing are still being
Comment 3 determined. Pending the finalization of these other elements, the Authority accepted
information on the seller’s cost basis as the basis for an obligation, but will not rely on
that alone in its final underwriting.
Comment 3 In sum, the Authority believes that Finding #1 is inconsistent with NSP requirements and
is premature. The Authority has adequate procedures in place to ensure that its
obligations to HUD are properly carried out, and will ensure that project costs funded by
NSP will be reasonable before commitments are finalized and funds are advanced.
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Ref to OIG Evaluation Auditee Comments
Finding # 2: The Authority lacked adequate controls over Program obligations under the
Act.
The HUD OIG Audit Report finds that MSHDA reported in HUD’s reporting system
$719,499 in Program obligations for the Cities of Saginaw ($704,787) and Port Huron
($14,712), subgrantees, that did not qualify as obligations. Further MSHDA
inappropriately disbursed Program funds for $531,130 of the City of Saginaw’s Program
obligations that did not qualify as obligations.
City of Saginaw
The Authority disagrees with Finding #2 regarding the City of Saginaw. We are not
disputing that a technical issue may have occurred based on the signature date on the
amended development agreement between the City of Saginaw and Saginaw Habitat for
Comments 4 Humanity. However, we believe that MSHDA and the City of Saginaw substantially
complied with HUD requirements in this regard. Based on the circumstances we believe
and 5 that the City of Saginaw’s actions stand up to a reasonable interpretation of the program
obligation requirement. Therefore we strongly believe that it would be unreasonable for
our office to issue a disallowance of costs due to the issue raised by OIG based on all of
the information examined and the totality of the circumstances as outlined below.
The City set up the following street addresses on OPAL, MSHDA’s on-line grant
management system:
Address Setup Original Original Revised Balance Leverage Current
Date Setup Cost Est. NSP Setup to Draw d Funds Project
Amt Amt Cost Amt
Set Up
1109 Chestnut 9/30/09 25000 112128 45103 45103 78290 123393
1815 N 7/29/10 94130 122890 2002 2002 102128 104130
Woodbridge
2282 S Michigan 7/30/10 90870 74787.7 3502 3502 92498 96000
525 Alexander 7/30/10 103000 84963.4 126593 41593 2407 129000
705 S Wheeler 9/30/09 25000 110236 116251 14726 35489 151740
713 N Harrison 7/29/10 43130 94401.3 4132 4132 134998 139130
809 S Charles 7/29/10 86630 83,635 86631 3631 9999 96630
722 S Wheeler 9/30/09 25000 112307 130915 88286 0 130915
1659 Stanley 9/30/09 25000 84894.7 126461 35485 6 126467
517760 880243 641590 238460 455815 1097405
Four addresses, 1109 Chestnut, 705 S. Wheeler, 722 S. Wheeler and 1659 Stanley
were originally set up on OPAL on 9/30/09 for $25,000 each and then modified to reflect
rehabilitation costs totaling $418,730. This amount exceeded the first rehabilitation
agreement between the City and Saginaw Habitat for Humanity, executed on April 5,
2010 for four properties for $300,000. Five addresses, 1815 N Woodbridge, 2282 S
Michigan, 525 Alexander, 713 N Harrison, and 809 S Charles, part of the subsequent
amendment, were entered on OPAL prior to the obligations deadline and were originally
set up for $417,760.
Based on cost estimates developed prior to the obligations deadline for the addresses
listed within the development agreement (not including 917 N. Woodbridge) the total
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Ref to OIG Evaluation Auditee Comments
amount was $880,243.30, which reflects $795,000 in NSP funding with the remaining
amount funded from leveraged funds. It should be noted that MSHDA’s NSP funding is
still in active status. Consequently, actions have occurred after the obligations deadline.
On the amended agreement, 917 N. Woodbridge was indicated as an NSP1 project
location with a cost estimate of $77,960.04 prepared on 9/08/10. This address has
subsequently been moved to NSP2.
Comments 4 The four addresses, 1109 Chestnut, 705 S. Wheeler, 722 S. Wheeler and 1659 Stanley
originally set up on OPAL on 9/30/09 were the four addresses that the City and Saginaw
and 5 Habitat for Humanity entered into an agreement for on 5/05/10. The City implemented
procedures to modify the agreement and acted in good faith to properly execute an
amended agreement prior to the obligation deadline (see attached council minutes).
However, the Executive Director of the Saginaw Habitat for Humanity was out of the
country from 9/08/10-9/17/10 and did not return to work until after the 9/19/10 deadline
(see attached memo). He executed the agreement upon his return and the amended
agreement was dated 9/21/10.
Comment 4 Based on the council approval taking place prior to the deadline and the inability of the
city to secure a signature until after the deadline due to the extended absence of the
and 5 Habitat executive director, we acknowledge a technical issue as to whether or not a
signature was obtained prior to the deadline. However, we believe the City acted in good
faith to meet the obligation deadline and that adequate information was provided to
justify MSHDA allowing the city to move forward. We base this justification on the
following:
1. Street addresses were identified and entered on OPAL system prior to deadline;
2. NSP dollars were targeted towards these street addresses through a city council
approved partnership between the City and Habitat;
3. Formal rehabilitation cost estimates were prepared by Terry Collier and Chad Lyons
prior to the obligation deadline for each property;
4. Circumstances beyond the City’s control resulted in a delay of formal obligation of
the amended agreement by 12:00 midnight on Monday, September 20, 2010.
Please note that HUD Guidance indicates if the last day for completing a specific
action falls on a Saturday, Sunday, or legal holiday, the last day for completing that
act is the next regular work day.
City of Port Huron
Comment 4 The Authority disagrees with Finding #2 regarding the City of Port Huron. We have
attached documentation verifying that an earnest money check was issued on 9/01/10 in
and 6 the amount of $500 for the purchase of 2625 Peavey Street by the St. Clair County Non-
Profit Housing Corporation. The purchase agreement had been prepared by Dianna
Maxwell of Joann Wine and Associates for the purchase of 2625 Peavey Street by St.
Clair County Non-Profit Housing. There was a counter offer and subsequent negotiation
took place on 9/22/10 resulting in the final offer being accepted on 9/27/10. Based on
the documentation provided, a purchase agreement obligating the St. Clair Non Profit’s
program income was underway prior to the deadline. The purchase agreement
identified that program income would be utilized in an amount of $35,000 which exceeds
the $14,712 that the OIG is indicating as unobligated prior to the 9/19/10 deadline.
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Ref to OIG Evaluation Auditee Comments
Finding #3: The Authority’s controls over subgrantees’ Program administrative
expenses under the Act had weaknesses.
The HUD OIG Audit Report finds that MSHDA lacked sufficient documentation to
support that two of its subgrantees, Habitat for Humanity of Michigan and the City of
Benton Harbor, used $86,514 in program funds from May through August 2010 for
eligible administrative costs.
Comment 7 The Authority disagrees with Finding #3. The Authority has adequate procedures in
place to fulfill its requirements under NSP that sufficient documentation is maintained to
support subgrantees’ administrative costs and to ensure federal requirements are
followed. As explained to the OIG auditors, MSHDA requires certain (but not all) source
documentation be submitted to MSHDA with a subgrantees’ Financial Status
Report/Payment Request (FSR). Documentation submitted with an FSR is sufficient in
nature to determine the basic reasonableness and eligibility of the requested payment.
MSHDA requires that all source documentation be kept in the subgrantees file for review
by MSHDA through and during monitoring visits. Source documentation is reviewed by
MSHDA staff during monitoring visits to determine completeness and accuracy. The
OIG’s conclusions prejudge the end result of MSHDA’s standardized monitoring
process.
Comment 8 Given the number of grantees that MSHDA has under supervision with respect to the
various HUD programs under administration, it would be unreasonable and inefficient to
look at all source documentation for every disbursement request, as the OIG seems to
Comment 7 recommend. The approach to source documentation described above is a standard
practice for state and county HUD grantees. It mimics the system used by HUD to
disburse funding to its grantees through DRGR and IDIS with follow up on-site
monitoring visits.
The OIG’s review of support documentation was basically a truncated review of what
MSHDA staff review during on-site monitoring. Because the OIG’s audit occurred so
early in the Program implementation, its review occurred prior to any formal monitoring
review by MSHDA. MSHDA acknowledges Habitat for Humanity and the City of Benton
Harbor made errors in its documentation of administrative costs, however, these errors
Comment 7 would have been discovered during a MSHDA monitoring and, MSHDA believes, upon
full review of overall source documentation of incurred administrative costs, that the
subgrantees have adequate documentation to support the questioned disbursements as
reasonable reimbursement for actual costs incurred.
Habitat for Humanity of Michigan
MSHDA reviewed the administrative expenses that consisted of salaries, rent, and
computer equipment rental/server costs associated with the percentage of time that
each staff person has allocated towards NSP1 for the Habitat for Humanity of Michigan
within the timeframe of 7/01/09 – 11/18/10.
Comment 9 MSHDA’s review of the Providence Invoices (computer equipment/server charges), Rent
Invoices, and Employee Payroll Reports found all costs to be necessary, reasonable,
and adequately documented. There are four persons within the Habitat for Humanity of
Michigan’s office that are responsible for NSP1 activities. A table has been provided
breaking down salaries, rent, and computer equipment/server charges prorated by the
37
Ref to OIG Evaluation Auditee Comments
Comment 9 percentage associated with the administrative plan provided by Habitat for Humanity of
Michigan (see Table A).
Comment 9 The amount of staff time, rent, and computer related charges being billed and reported
seems reasonable and justifiable based on each persons role and responsibilities of
coordinating and managing the compliance, obligations and progress of the 10 Habitat
affiliates who have received a total of $1,888,000 in NSP1 funds through the Habitat for
Humanity of Michigan’s office.
Comment 10 MSHDA acknowledges that the current reporting periods of the Financial Status Report
(FSR) do not accurately reflect the actual timeframe within which the administrative
costs were incurred. We believe that this is an oversight on the part of the Habitat for
Humanity of Michigan’s office due to their lack of understanding regarding the amount of
administrative funding they could request per FSR. Below is a table identifying what the
actual FSR identified as the current report periods and what the FSR should have
actually identified as the report periods:
FSR # FSR Reported Actual Report Period: Check Date:
Period:
4 3/13/10 – 4/22/10 7/1/09 – 10/22/09 5/4/10
6 6/1/10 – 6/30/10 10/23/09 – 6/2/10 7/8/10
8 8/11/10 – 8/31/10 6/3/10 – 8/3/10 9/13/10
9 9/1/10 – 9/27/10 8/4/10 – 11/18/10 10/11/10
Comments 9 Based on review of the actual data versus reported data, the only issue that arises is the
fact that Habitat requested dollars and received a check for FSR #9 on 10/11/10 but did
and 10 not actually incur all of the administrative costs until 11/18/10. Technically, Habitat for
Humanity of Michigan’s office should have requested an advance for all dollars
expended between 9/27/10 and 11/18/10 and then reported the dollars as expended on
the next FSR. MSHDA allows grantees to draw up to 20% as an advance and the
amount is well within that limit.
Comments 9 Therefore, despite the fact that the FSR reporting periods identified were inaccurate,
based on the information provided above and the supporting documentation that has
and 10 been attached to this response, we believe that all of the Habitat for Humanity of
Michigan’s NSP1 administrative dollars were requested and/or disbursed appropriately.
In the normal course of the Program this discrepancy between the actual supporting
documentation and the NSP1 FSR reported expenditures would have been found at the
point of an on-site monitoring review. The on-site monitoring report would result in a
comment being placed within the grant outlining the data reporting errors and corrective
actions but indicating that the errors themselves do not actually impact the Habitat of
Michigan’s accessibility, availability, and entitlement to these administrative dollars.
City of Benton Harbor
MSHDA reviewed documentation from the City of Benton Harbor outlining the roles and
responsibilities of three staff persons (Al Miranda, Regina Sistrunk, and Nicole Brown)
who were administering the NSP1 program on behalf of the city. Careful review of the
payroll reports indicated the following:
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Ref to OIG Evaluation Auditee Comments
Comment 11 In total Al Miranda was paid $1,080.73 for NSP1.
Between 5/28/10 and 6/3/10: he worked 14 hours on NSP1 at $17.43 per hour =
$244.10
Between 6/4/10 and 6/10/10: he worked 19.5 hours on NSP1 at $17.43 per hour =
$305.02
Between 6/11/10 and 6/17/10: he worked 17.5 hours on NSP1 at $17.43 per hour =
$339.88
Between 6/18/10 and 6/24/10: he worked 11 hours on NSP1 at $17.43 per hour =
$191.73
Comment 11 In total Nicol Brown was paid $1,516.74
Between 9/03/10 and 9/16/10: she worked 34 hours on NSP1 at $29.74 per hour =
$1,011.16
Between 9/17/10 and 9/30/10: she worked 17 hours on NSP1 at $29.74 per hour =
$505.58
Comment 11 Between 5/28/10 – 7/20/10: Regina Sistrunk reported no actual hours by date that we
could apply to MSHDA administration at $19.49 per hour however she did indicate some
of the tasks she was responsible for based on the bi-weekly administration report she
completed. We believe that a minimum of 10% of her time was spent on NSP1 within
this timeframe as she serves as the main point of contact and the city’s administrator for
NSP1. Therefore, we believe that the following calculation should have been used:
$19.49 x 37.5 = $730.87 x .10 - $73.08/day x 38 workdays = $2,777.32
Total Administrative Costs identified for staff time = $5,374.79 through 9/30/10.
Comment 12 MSHDA carefully reviewed the supplies ordered and, after getting verbal clarification
from Regina Sistrunk, believe the costs are reasonable and necessary. There were three
staff persons assigned to NSP1 as identified above and each one has their own black
and white printer and share a color printer. Upon review of www.nextag.com price
histories for each ink cartridge it appears that all costs incurred were reasonable.
Regarding the issue of whether the ink cartridges were necessary, MSHDA fully
recognizes that NSP1 is paper intensive and that ink cartridges are not an optional item
and are vital to the operation of any grant program. Therefore, of the supplies listed on
the order form, we approved the payment for the ink cartridges totaling $408.90.
Comment 12 The other items identified on the Staples™ order form also appear to also be reasonable
and necessary based on the city’s staff need for calculators to complete required
proformas/feasibility analysis, and the following items to ensure accurate file creation
and maintenance: binders, report covers, dividers, file folders, writing pads, and ink
pens. Therefore, of the non-ink cartridge supplies listed on the order form, we approved
the remainder of the invoiced amount totaling $390.55.
Total Supplies = $799.45
39
Ref to OIG Evaluation Auditee Comments
In summary, upon review of all of the submitted documentation, the city did not request
as much administrative expense reimbursement as they were actually entitled to based
on program activity. The city’s lack of a formal structured administrative tracking system
is demonstrated primarily by each person using their own method to account for their
Comments 7 NSP1 hours instead of establishing a system used by all three. Fortunately two out of
the three staff persons accounted for their time both by activity and hours as required by
and 11 MSHDA, however, the third person did not. We believe that this may be a result of the
enormous time pressures imposed upon this staff person and their inability to dedicate
time and attention to this task based on it being out prioritized by other pressing matters.
We strongly contend that all grant administrators of NSP1 are working very hard to
ensure that their projects are compliant and completed within the timeframes allowed. A
total of $4,200 was requested and drawn down via FSR #2 for all administrative
expenses through July 20, 2010. No additional administrative funds were requested for
the time period ending September 30, 2010 even though additional staff time was
tracked and provided to us as part of our review. We believe that the city’s
administrative billing was reasonable and that no issue of unreasonableness can be
determined.
At a monitoring review, MSHDA staff would have recommended corrective action to
ensure that all administrative time is tracked by activity and hours spent on a per person
basis and that adequate documentation was maintained to justify all administrative
requests, analyzed the requests to date, determined reasonable and necessary
expenses had been charged, and required the city to take corrective action measures.
Due to the timing of the OIG audit, this issue was found prior to a monitoring visit. Since
being notified of this issue, the city has structured its administrative tracking system and
is moving forward with implementation of its NSP1 projects.
40
Ref to OIG Evaluation Auditee Comments
Finding #4: The Authority’s controls over Subgrantee Program procurement under the
Act had weaknesses.
The HUD OIG Audit Report finds MSHDA did not ensure that the City of St. Clair Shores
complied with HUD regulations for competitive proposals when procuring architectural
services for its Program funded rehabilitation projects under the Act.
Comment 13 The Authority acknowledges that the City did not fully follow appropriate procurement
procedures but believes the City was substantially compliant with the intent of the
procurement regulations. MSHDA staff reviewed the procedures used by the City of St.
Clair Shores and determined that the process utilized may not technically meet the four
methods (small purchase, competitive sealed bid, competitive proposal, non-
competitive/sole source) that are typically used for procuring contracts and/or services
Comment 14 by HUD grantees. However, it appears the city opted to blend an RFQ (architectural
engineering services without price) process and a competitive bid process (including
price). The procurement was structured in a method that enabled the city to obtain
proposals from multiple entities and evaluate the proposals from a qualifications
standpoint that also included pricing as one of their 45 point selection checklist items.
The city received 25 proposals in response to the RFQ/RFP which is a significantly
higher response rate than what we typically see. The City used a structured review
process and selected 7 firms that had varied fee schedules. Their selection process
gave the city council final approval authorization and the council rejected one of the firms
with the highest percent rate of 15%. We believe that the city staff and council were
Comments 13 trying to ensure that good stewardship of grant funds was being exhibited. We believe
that the statement, “contrary to HUD’s regulations, the City did not select one of the most
and 14 qualified competitors” is inaccurate. The City had the option to select just one entity but
instead elected to implement a shared responsibility model and selected six architects.
HUD regulations do not require that only the lowest responsible bidder be selected.
Comment 15 We contend, based upon a review of the information provided, that reasonable fees
were being charged by all six of the firms; that all firms met qualification thresholds and
Comments 13 therefore they were all equally responsible bidders; price was considered as a factor
and 14 within the review process; and that all processes and procedures surrounding the
procurement of the architects’ was acceptable despite the fact that it did not fit into one
of the four procurement methods but instead was a hybrid; incorporating the positive
features of both the competitive bid and RFQ/RFP processes.
Comment 15 MSHDA has prepared a cost analysis outlining a typical MSHDA underwritten
professional service contract for architectural fees in 2010:
Billings for services will be based on an hourly rate not to exceed:
$125 per hour for Principal, Senior Partner
$100 per hour for Project Manager, Associates
$70 per hour for Professional Personnel
$60 per hour for Arch/Eng/Draftsmen/CAD Technicians
$355/4 = $88.75 average hourly rate
Comment 15 We have reviewed all six executed architectural contracts (see attached). Based on our
analysis, we believe that the costs being charged by all six architects were actually all
within a + one (1%) percent margin when evaluated based on an average project cost
range between $50,001 - $75,000.
41
Ref to OIG Evaluation Auditee Comments
The City awarded a total of nine properties. Three architects (Krieger Associates
Interiors, LLC, KI – Quinlan Associates, and George J. Hartman Architects, P.C.)
received one project each; the remaining six projects were awarded as follows:
Based on the service agreement, Sauriol Bohde Wagner Architects & Associates Inc.
Comment 15 was awarded the following projects: 20009 Rosedale and 20613 Sunnyside. According
to the bid information they were technically the lowest responsible bidder if all bids are
evaluated looking at an average project cost range between $50,001 - $75,000.
Based on the service agreement, Stucky Vitale Architects was awarded the following
Comment 15 projects: 20319 Avalon and 20315 Avalon. According to the bid information they were
technically the second lowest responsible bidder if all bids are evaluated looking at an
average project cost range between $50,001 - $75,000.
Based on the service agreement, Hamilton Anderson Associates was awarded the
Comment 15 following projects: 21907 Colony and 21704 Colony. According to the bid information
they were technically the third lowest responsible bidder if all bids are evaluated looking
at an average project cost range between $50,001 - $75,000.
In summary, MSHDA’s response to the OIG’s conclusion that the Authority lacked
adequate procedures and controls to ensure that the City of St. Clair Shores complied
with HUD’s regulations for competitive proposals when procuring architectural services
for its Program funded rehabilitation projects under the Act is as follows:
a) Typically architectural services are procured through an RFP/RFQ process not a
competitive proposal process therefore if we had been consulted prior to the bid letting
we would have advised the city that they were going above and beyond what was
necessary to meet HUD procurement regulations and recommended that they modify
their process;
Comment 15 b) Upon careful evaluation of the bid documents it appears that there is a consistent and
reasonable payment structure being used for all six architects; and
c) As a result of the extremely short, regulated NSP timeframe within which the City had
to secure professional services, obtain cost estimates, prepare contracts, and obligate
the NSP1 funds we understand why the city selected a hybrid procurement process; the
Comments 13 City believed it was actually a better method to ensure NSP funding stimulated the local
economy by sharing the work and that it was prudent “stimulus funding” decision
and 14 making.
42
Ref to OIG Evaluation Auditee Comments
Finding #5: The Authority lacked adequate controls over posting quarterly performance
reports for the program under the Act.
The HUD OIG Audit Report finds MSHDA lacked adequate procedures and controls to
ensure that it reported program accomplishments under the Act in a timely manner and
in accordance with federal requirements. As a result, the public did not have timely
access to the State’s quarterly performance reports for the Program under the Act.
Comment 16 The Authority disagrees with Finding #5. MSHDA believes it has adequate procedures
and controls to ensure that it reports Program accomplishments in a timely manner and
in accordance with federal requirements. The issue is what constitutes timeliness under
NSP. As discussed with the OIG auditors, MSHDA acknowledges that it used previous
HUD standards for posting performance reports, that is to say reports were posted only
after HUD approved the submitted reports. The reports were all submitted to HUD for
approval within required NSP timelines. MSHDA had sufficient procedures in place to
immediately change the report posting dates on its Web site once the OIG identified the
Comment 17 requirement to post within 30 days of the end of the quarter. MSHDA’s procedure is as
follows:
1. The QPR is to be posted at the same time MSHDA submits the QPR for HUD
review.
2. The QPR submission automatically triggers an e-mail notification to be sent to
the HUD Detroit Office. Immediately following the submission of that e-mail,
the submitter will send a second e-mail to the Web site coordinator with a
downloaded copy of the submission attached. Then the coordinator will initiate
the addition of the QPR to the MSHDA Web site in a prominent location.
3. If the QPR is sent back for revisions by HUD then a replacement posting will be
issued at the time of receipt of the HUD approval. This posting will be triggered
by the submitter who receives the approval notification from HUD. Once the
approval e-mail is received, an e-mail will be immediately sent to the Web site
coordinator with a downloaded copy of the approved QPR attached. Then the
coordinator will initiate the addition of the QPR to our Web site in a prominent
location.
4. Once the posting is completed, a screen shot print out verifying that the QPR
was posted will also be collected and maintained by our Web site coordinator.
In addition, the Web site coordinator will also attach a copy of the Edit Asset
Printout for completion date verification.
43
Ref to OIG Evaluation Auditee Comments
Finding # 6: The Authority lacked adequate controls over reporting jobs created or
retained from the use of program funds under the Recovery Act.
The HUD OIG Audit Report finds MSHDA lacked adequate procedures and controls to
ensure that it reported Program accomplishments for the Program under the Recovery
Act accurately and in accordance with federal requirements.
Comment 18 The Authority disagrees with Finding #6. We are not disputing that a technical violation
may have occurred, however, we believe that MSHDA substantially complied with HUD
requirements in this regard. The NSP2 grant agreement was sent to MSHDA for
signature in March 2010 and was executed by MSHDA on March 18, 2010. Given the
grant agreement was not signed by MSHDA until thirteen days prior to the end of the
first ARRA NSP2 reporting period, MSHDA had no activity to report and consequently,
submitted a report with all zeros.
Pursuant to the execution of the HUD/MSHDA grant agreement, MSHDA was required
to enter into formal NSP2 Funding Agreements with each of the 19 NSP2 consortium
partners. The Funding Agreements were executed and submitted to HUD on April 8,
2010.
MSHDA followed guidance per the “Recovery Frequently Asked Questions,”
(http://www.whitehouse.gov/omb/recovery_faqs/#g2). This guidance directed ARRA
grantees to report job created and retained on a cumulative basis. Unaware of updated
guidance at the time of the June 2010 report, MSHDA felt that it was acting responsibly
Comment 18 by reporting all jobs in both quarters cumulatively. Although it is true the 12.27 jobs that
were reported in the June 30, 2010 report were cumulative, MSHDA believes it
substantially accurate as the Funding Agreements with the consortium partners were not
signed until the first month of that quarter.
Although MSHDA had an initial misstep by reporting cumulatively in the June 30, 2010
report, the need to report on a quarterly basis was identified and corrected by MSHDA
for the September 30, 2010 report. MSHDA made expanded efforts to provide accurate
and updated guidance to the consortium partners on the reporting requirements and to
accurately report the quarterly jobs and contractor information for the entire NSP2
Consortium beginning with the September 30, 2010 report. MSHDA’s process for
gathering consortium partner reporting information improved greatly after the June 2010
reporting period, with updated reporting forms and technical assistance materials.
Furthermore, due to the complexity of ARRA reporting OMB has implemented
Continuous QA periods on FederalReporting.gov that allow Prime Recipients such as
MSHDA to further review their submissions and make corrections as needed after the
reporting period deadline. The new OMB Continuous QA period greatly improves the
Michigan NSP2 Consortium’s effectiveness in meeting the reporting requirements and
assuring HUD and the public receive accurate data regarding jobs created.
44
OIG’s Evaluation of Auditee Comments
Comment 1 The State did not comply with Federal requirements in its award, obligation, and
use of Program funds under the Act; ensure that a subgrantee complied with
HUD’s regulations when procuring architectural services for its Program-funded
rehabilitation projects under the Act; and comply with Federal requirements in its
reporting of Program accomplishments under the Act and Recovery Act. It
lacked adequate procedures and controls to ensure that (1) it awarded and
obligated Program funds under the Act in accordance with Federal requirements;
(2) sufficient documentation was maintained to support subgrantees’
administrative costs for the Program under the Act and Federal requirements were
followed; (3) a subgrantee complied with HUD’s regulations for competitive
proposals when procuring architectural services for its Program-funded
rehabilitation projects under the Act; and (4) it reported Program
accomplishments under the Act and Recovery Act in a timely manner, accurately,
and/or in accordance with Federal requirements.
Comment 2 As of September 2010, the Authority had awarded and obligated all of the State’s
nearly $98.7 million in Program funds under the Act. As of August 2010, more
than $1.7 million in Program funds under the Act had been used for
administrative expenses. Further, the Authority was required to post the State’s
quarterly performance reports for the Program under the Act on its official Web
site beginning July 2009 and submit quarterly performance reports to HUD
beginning April 2010 that contained a detailed list of all of the projects or
activities for which Recovery Act funds were expended or obligated, including an
estimate of the number of jobs created and retained by the project or activity.
Therefore, our audit of the State’s Program was not premature.
Comment 3 We agree that a full underwriting was not required prior to the obligation of
Program funds. However, the Association was required to have a reasonable
basis for its estimate of the fair market value of the Cass Avenue properties when
it notified Auburn REO, LLC, of its estimate of the fair market value of the Cass
Avenue properties.
HUD’s regulations at 24 CFR 570.606(e) state that the acquisition of real property
for an assisted activity is subject to subpart B of 49 CFR Part 24, which begins at
49 CFR 24.101. Appendix A to 49 CFR Part 24 states that for programs and
projects receiving Federal financial assistance described in 49 CFR 24.101(b)(2),
an agency is to inform the owner(s) in writing of the agency’s estimate of the fair
market value for the property to be acquired. While section 24.101(b)(2) does not
require an appraisal for these transactions, an agency must have some reasonable
basis for its determination of the fair market value. Further, attachment A, section
A.2., of OMB Circular A-122 requires all costs to be reasonable and adequately
documented. Section A.3. states that a cost is reasonable if, in its nature or
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
45
costs. In determining the reasonableness of a given cost, consideration shall be
given to whether the individuals concerned acted with prudence in the
circumstances, considering their responsibilities to the organization; its members,
employees, and clients; the public at large; and the Federal Government.
On September 15, 2010, the Association notified Auburn REO, LLC, that it
estimated the fair market value of the Cass Avenue properties at $1 million, and
the Authority awarded the Association $1 million in Program funds for a
repayable loan to be used to finance the acquisition of the Cass Avenue properties
for the redevelopment of a mixed-use apartment building with 58 units for rent.
However, the Authority could not provide documentation to support that the
Association had a reasonable basis for its estimate that the fair market value of the
Cass Avenue properties was $1 million.
The Authority lacked adequate procedures and controls to ensure that it
maintained sufficient documentation to support that it awarded Program funds
under the Act in accordance with Federal requirements. As a result, HUD lacked
assurance that the Authority awarded $1 million in Program funds for eligible
project costs.
Comment 4 Section 2301(c)(1) of Title III of the Act states that a State must use Program
funds to purchase and redevelop abandoned and foreclosed-upon homes and
residential properties not later than 18 months after receipt of the Program funds.
According to the Federal Register, dated October 6, 2008, each grantee must
obligate its Program funds within 18 months of HUD signing the Program grant
agreement with the grantee. HUD’s Program policy alert, volume 3, dated April
2010, states that for property owned by a grantee or subrecipient, Program funds
may be reported as obligated when a construction contract is awarded with respect
to a specific property or other action is taken with respect to a specific property
that is legally binding on the grantee/subrecipient. Program funds may also be
reported as obligated when a developer’s agreement is executed and the developer
has identified specific properties to be acquired and/or rehabilitated. HUD will
consider Program funds obligated for a specific activity only when the developer
furnishes the grantee/subrecipient with information identifying specific properties
and provides documented cost estimates for acquisition, construction, and related
costs, such as appraisal fees, for each identified property. On March 19, 2009,
HUD entered into a grant agreement with the Authority for nearly $98.7 million
in Program funds. Therefore, the State was required to obligate its Program funds
by September 19, 2010.
Comment 5 The City of Saginaw and Saginaw Habitat for Humanity entered into a
rehabilitation agreement, dated April 5, 2010, for $300,000 in Program funds to
rehabilitate up to four buildings as designated by the City. However, the
rehabilitation agreement did not include specific property addresses. On
September 21, 2010, the City amended the rehabilitation agreement with Saginaw
Habitat for Humanity to revise the amount of Program funds to $795,000 to
46
obligate the remainder of the Program funds the Authority awarded the City and
include specific property addresses for the properties the City had gained site
control of and wanted Saginaw Habitat for Humanity to rehabilitate. However,
the amendment was not executed until 2 days after the required 18-month
obligation deadline for Program funds. Therefore, the Authority reported
Program obligations of nearly $705,000 for the City that did not qualify as
obligations.
Comment 6 The Authority provided a residential rehabilitation contract totaling $83,500 for a
property that the City of Port Huron purchased on July 6, 2010. However, the
administrator of the City’s Program did not enter into the residential rehabilitation
contract with the contractor until October 5, 2010, which was more than 10 days
after the required 18-month obligation deadline for Program funds. In its
response, the Authority provided a purchase agreement between St. Clair County
Nonprofit Housing Corporation, a developer, and an owner for the purchase of a
property using $35,000 in Program income. However, the developer did not enter
into the purchase agreement with the owner until September 27, 2010, which was
8 days after the required 18-month obligation deadline for Program funds.
Further, the Authority did not provide a developer’s agreement between the City
and the St. Clair County Nonprofit Housing Corporation or a cost estimate for the
acquisition of the property. Therefore, the Authority reported Program
obligations of nearly $15,000 for the City that did not qualify as obligations.
Comment 7 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. These records must contain
information pertaining to grant and subgrant awards and authorizations,
obligations, unobligated balances, assets, liabilities, outlays or expenditures, and
income. 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 570.506(h) require grantees to maintain evidence to support
how Block Grant funds are expended. Attachment A, paragraph C.1., of OMB
Circular A-87 requires all costs to be necessary, reasonable, and adequately
documented.
Contrary to Federal requirements, the Authority lacked sufficient documentation
to support that two of its subgrantees, Habitat for Humanity of Michigan and the
City of Benton Harbor, used nearly $87,000 in Program funds from May through
August 2010 for eligible administrative costs. The weaknesses regarding the lack
of documentation to support that administrative costs were eligible occurred
because the Authority lacked adequate procedures and controls to ensure that
sufficient documentation was maintained to support subgrantees’ administrative
costs and Federal requirements were followed.
47
Comment 8 We did not recommend that the Authority review all source documentation for
every disbursement request. We recommended that the Director of HUD’s
Detroit Office of Community Planning and Development require the State to
implement adequate procedures and controls to ensure that sufficient
documentation is maintained and Program funds under the Act are only used for
eligible administrative costs.
Comment 9 The Authority provided many documents to support Habitat for Humanity of
Michigan’s administrative costs. However, the documentation was insufficient
and required additional information and/or documentation to support the
administrative costs.
Comment 10 The Authority did not provide sufficient documentation to support that Habitat for
Humanity of Michigan included an inaccurate reporting period on financial status
report number 9 in the Authority’s online project administration link system.
Comment 11 The Authority used $3,400 in Program funds to pay administrative salaries for the
former rehabilitation coordinator, the director, and the deputy director of the City
of Benton Harbor’s Department of Community/Economic Development for the
reporting period June 1 through July 20, 2010.
The Authority provided summary timesheets for the periods June 11 through 24,
2010; June 25 through July 8, 2010; and July 9 through 22, 2010, for the former
rehabilitation coordinator, the director, and the deputy director. However, the
summary timesheets only included the amount of salaries that were paid using
Program funds. The timesheets did not detail the number of hours each employee
worked on Program activities. The Authority also provided activity reports for
the former rehabilitation coordinator, director, and deputy director for the period
June 11 through 24, 2010. It did not provide activity reports for the employees
for the period June 25 through July 22, 2010. The activity reports for the former
rehabilitation coordinator for the period June 11 through 24, 2010, showed that
the former rehabilitation coordinator worked 7.5 hours per day totaling 75 hours
for the period. This amount included 28.5 hours for Program activities.
However, the summary timesheet for the period included 7.5 vacation hours for
the former rehabilitation coordinator. The activity reports did not include
vacation hours. The activity reports for the director and deputy director did not
identify the number of hours the director and deputy director worked on Program
activities.
Therefore, due to the discrepancy between the summary timesheet and the activity
reports for the period June 11 through 24, 2010, for the former rehabilitation
coordinator and the Authority not being able to provide sufficient documentation
to support the number of hours the former rehabilitation contractor, the director,
and the deputy director, as applicable, worked on Program activities for the period
June 11 through July 22, 2010, we were unable to determine whether $3,400 in
48
wages for the rehabilitation coordinator, director, and deputy director was eligible
administrative expenses for the Program.
Comment 12 According to the summary timesheets for the former rehabilitation coordinator,
the director, and the deputy director of the City of Benton Harbor’s Department of
Community/Economic Development for the period June 11 through July 22,
2010, the three employees worked on activities not involving Program funds.
Further, the Authority did not provide documentation to support how the supplies
were allocable to the Program. Therefore, due to the lack of sufficient
documentation, we are unable to determine whether the $800 in supplies was an
eligible administrative expense under the Program.
Comment 13 HUD’s regulations at 24 CFR 85.36(d)(3)(iv) state that in procurement by
competitive proposal, awards will be made to the responsible firm with the
proposal that is most advantageous to the program, with price and other factors
considered. Section 85.36(d)(3)(v) states that grantees and subgrantees may use
competitive proposal procedures for qualifications-based procurement of
architectural/engineering professional services whereby competitors’
qualifications are evaluated and the most qualified competitor is selected, subject
to negotiation of fair and reasonable compensation. Section 85.36(f)(1) states that
grantees and subgrantees must perform a cost or price analysis in connection with
every procurement action including contract modifications. Section 85.36(f)(4)
states that the cost plus a percentage of cost and percentage of construction cost
methods of contracting shall not be used. Contrary to HUD’s regulations, the
City of St. Clair Shores did not select one of the most qualified competitors,
negotiate fair and reasonable compensation for the services, or perform a cost or
price analysis in connection with the procurement and inappropriately used a
percentage of construction cost method of contracting.
Comment 14 The City of St. Clair Shores received 25 proposals, which it reviewed using a 45-
point checklist. Although the proposals included architectural fees based on a
percentage of the construction costs, the City did not consider price in its
evaluation of the proposals. As a result, the City was required to evaluate the
competitors’ qualifications and select the most qualified competitor(s). The City
selected the 7 most qualified firms since it anticipated rehabilitating 12 to 15
homes with Program funds and assumed that each firm would be able to design at
least 2 homes. It submitted the seven firms to its council for approval. The
council only selected six of the seven firms as approved vendors for the Program-
funded rehabilitation projects. The six firms’ fees ranged from 6 through 12
percent of the construction cost. The council did not select the remaining firm
because its fees were 15 percent of the construction costs. Therefore, the City did
not evaluate all of the proposals based on the same factors and did not select one
of the seven most qualified competitors.
Comment 15 The Authority provided a one-page analysis of the fees contained within the City
of St. Clair Shores’ contracts with the six architecture firms and generally stated
49
that the fees were within the Authority’s acceptable rates for architectural
services. However, the Authority did not provide, for the six architecture firms,
its calculation or documentation to support its calculation of the fees for
architectural services based on an averaged project cost range between $50,001
and $75,000 and documentation to support its acceptable rates for architectural
services. Therefore, the Authority did not provide sufficient documentation to
support that the nearly $68,000 in Program funds under the Act was reasonable
for the architectural services provided for the City’s rehabilitation projects.
Comment 16 The Federal Register, dated October 6, 2008, states that each grantee must submit
a quarterly performance report, as HUD prescribes, no later than 30 days
following the end of each quarter. Reports must be submitted using HUD’s Web-
based system and, at the time of submission, be posted prominently on the
grantee’s official Web site. The Authority posted the State’s quarterly
performance report for the fourth quarter of 2010 on its official Web site on
February 1, 2011. However, it did not post the State’s quarterly performance
reports for the Program under the Act for the first through third quarters of 2010
on its official Web site for more than 30 days after the end of each quarter.
Further, the Authority could not provide documentation to support the dates on
which it posted the State’s quarterly performance reports for the Program under
the Act for periods before January 1, 2010, to its official Web site. The Authority
lacked adequate procedures and controls to ensure that it reported Program
accomplishments under the Act in a timely manner and in accordance with
Federal requirements.
Comment 17 The Authority’s revised procedures for posting the State’s quarterly performance
reports for the Program under the Act should assist the Authority in reporting
Program accomplishments in a timely manner and in accordance with Federal
requirements.
Comment 18 Section 1512(c) of Title XV of the Recovery Act requires each recipient that
receives Program funds under the Recovery Act from a Federal agency to submit,
no later than 10 days after the end of each calendar quarter, a report to that
Federal agency that contains a detailed list of all the projects or activities for
which Recovery Act funds were expended or obligated, including an estimate of
the number of jobs created and retained by the project or activity. OMB
Memorandum M-10-08, dated December 18, 2009, states that recipients will now
report job estimates on a quarterly basis rather than a cumulative basis.
The Authority reported in federalreporting.gov that the use of Program funds
under the Recovery Act created or retained 0 and 12.27 jobs in the first and
second quarters of 2010, respectively. However, the Authority lacked sufficient
documentation to support the number of jobs it reported as created or retained. It
did not request its consortium members to provide the number of jobs created and
retained for the quarterly performance report for the first quarter of 2010.
Further, it requested its consortium members to provide the cumulative number of
50
jobs created and retained for the first and second quarters of 2010 for the quarterly
performance report for the second quarter of 2010. In addition, (1) the
consortium members did not provide detailed records to determine in which
quarter the jobs were created or retained, (2) the Authority verbally clarified
discrepancies with its consortium members without maintaining documentation to
support the changes that it made to the number of jobs the consortium members
provided as created or retained, and (3) the Authority did not provide
documentation to support its calculation of the number of jobs created or retained
within the Authority for the second quarter of 2010.
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Appendix C
FEDERAL AND AUTHORITY REQUIREMENTS
Findings 1, 2, 3, 4, and 5
HUD’s grant agreement with the Authority for the Program under the Act, dated March 19,
2009, states that the following are part of the grant agreement: the Federal Register, dated
October 6, 2008; the Act, the State’s submission for Program assistance; HUD’s regulations at
24 CFR Part 570; and the funding approval.
Findings 1, 2, 3, and 4
HUD’s regulations at 24 CFR 570.501(b) state that a recipient is responsible for ensuring that
Block Grant funds are used in accordance with all program requirements. The use of designated
public agencies, subrecipients, or contractors does not relieve the recipient of this responsibility.
The recipient is also responsible for determining the adequacy of performance under subrecipient
agreements and procurement contracts and for taking appropriate action when performance
problems arise.
Findings 1, 3, and 4
The Federal Register, dated October 6, 2008, states that except as described in the Federal
Register, statutory and regulatory provisions governing the Block Grant program, including the
provisions in subparts A, C, D, I, J, K, and O of 24 CFR Part 570, as appropriate, shall apply to
the use of Program funds.
Findings 1 and 3
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 and private nonprofit organizations will be determined in accordance with cost principles
contained in OMB Circular A-122.
HUD’s regulations at 24 CFR 570.502(a) state that recipients and subrecipients that are
governmental entities, including public agencies, shall comply with OMB Circular A-87.
Section 570.502(a)(6) states that recipients and subrecipients that are governmental entities shall
comply with 24 CFR 85.22. HUD’s regulations at 24 CFR 570.502(b) state that subrecipients,
except subrecipients that are governmental entities, shall comply with the requirements and
standards of OMB Circular A-122.
HUD’s regulations at 24 CFR 570.506 state that recipients shall establish and maintain sufficient
records to enable HUD to determine whether the recipients have met the requirements of 24 CFR
Part 570. Section 570.506(a) states that recipients need to maintain records providing a full
description of each activity assisted with Block Grant funds; the amount of Block Grant funds
budgeted, obligated, and expended for the activities; and the provisions under which the
activities are eligible. Section 570.506(h) states that recipients need to maintain financial records
in accordance with the applicable requirements in section 570.502. Recipients shall maintain
evidence to support how Block Grant funds are expended. The documentation must include
52
invoices, schedules containing comparisons of budgeted amounts and actual expenditures,
construction progress schedules signed by appropriate parties, and/or other documentation
appropriate to the nature of the activity as applicable.
Attachment A, section C.1., of OMB Circular A-87, revised May 10, 2004, requires all costs to
be necessary, reasonable, and adequately documented. Section C.2. states that a cost is
reasonable if, in its nature or 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. In determining reasonableness of a given cost, consideration shall be given to the restraints
or requirements imposed by such factors as sound business practices, arms-length bargaining,
and market prices for comparable goods or services.
Attachment A, section A.2., of OMB Circular A-122, revised May 10, 2004, requires all costs to
be reasonable and adequately documented. Section A.3. states that a cost is reasonable if, in its
nature or 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 costs. In determining the
reasonableness of a given cost, consideration shall be given to whether the individuals concerned
acted with prudence in the circumstances, considering their responsibilities to the organization;
its members, employees, and clients; the public at large; and the Federal Government.
Finding 1
The Federal Register, dated October 6, 2008, states that HUD does not have the authority to
provide alternative requirements for the Uniform Relocation Act of 1970 (Relocation Act).
Unless the Federal Register describes how the Act supersedes the statutes in the Relocation Act,
these statutes in the Relocation Act will apply as in the Block Grant program.
HUD’s regulations at 24 CFR 570.606(e) state that the acquisition of real property for an assisted
activity is subject to subpart B of 49 CFR Part 24. Section 570.606(g)(1) states that a grantee is
responsible for ensuring compliance with the requirements of 24 CFR 570.606, notwithstanding
any third party’s contractual obligation to the grantee to comply with the provisions of 24 CFR
570.606. For purposes of the State Block Grant program, the State shall require recipients to
certify that they will comply with the requirements of this section.
The U.S. Department of Transportation’s regulations at 49 CFR 24.101(b)(2) state that the
requirements of subpart B do not apply to acquisitions for programs or projects undertaken by an
agency or person that receives Federal financial assistance but does not have authority to acquire
property by eminent domain, provided that such agency or person shall before making an offer
for the property, clearly advise the owner that the agency or person is unable to acquire the
property if negotiations fail to result in an agreement and inform the owner in writing of what the
agency or person believes to be the market value of the property. Appendix A to 49 CFR Part 24
states that for programs and projects receiving Federal financial assistance described in 49 CFR
24.101(b)(2), an agency is to inform the owner(s) in writing of the agency’s estimate of the fair
market value for the property to be acquired. While section 24.101(b)(2) does not require an
appraisal for these transactions, an agency may still decide that an appraisal is necessary to
support its determination of the fair market value of these properties, and in any event, an agency
must have some reasonable basis for its determination of the fair market value.
53
Paragraph 1 of the general terms of the Authority’s award to the Association, dated September
15, 2010, stated that the Authority intended to provide a repayable loan to the Association to be
used to finance the acquisition of the Cass Avenue properties and that the Authority expected the
Association to enter into a development agreement with The Auburn, LLC, or another
development entity acceptable to the Authority and transfer the Cass Avenue properties to the
entity for a price to be approved by the Authority. The Authority would enter into a regulatory
agreement with the Association that imposed Program restrictions as covenants running with the
land. Paragraph 2 stated that the amount of the Program award should not exceed $1 million in
Program funds. Paragraph 13 stated that the Association must also agree to comply with all
applicable Program, Block Grant, and other regulations and requirements applicable to the use of
Program funds and enter into a regulatory agreement as described in paragraph 1 of the general
terms.
Finding 2
Section 2301(c)(1) of Title III of the Act states that any State or unit of general local government
that receives amounts pursuant to this section shall, not later than 18 months after receipt of such
amounts, use such amounts to purchase and redevelop abandoned and foreclosed-upon homes
and residential properties.
The Federal Register, dated October 6, 2008, states that each grantee must use its Program funds
within 18 months of HUD signing its Program grant agreement with the grantee. Program funds
are used when a State, unit of general local government, or any subrecipient thereof obligates the
Program funds for a specific Program activity. Program funds are obligated when orders are
placed, contracts are awarded, services are rendered, and similar transactions have occurred that
require payment by the State, unit of general local government, or subrecipient. If a State or unit
of general local government fails to use its Program funds within 18 months, HUD will recapture
any unused funds and reallocate the funds in accordance with 42 U.S.C. 5306(c)(4).
HUD’s Program policy alert, volume 3, dated April 2010, states that Program funds are not
obligated for an activity when subawards or grants to subrecipients or units of general local
government are made. Program funds may be reported as obligated when (1) the grantee or
subrecipient makes an offer and it is accepted by a seller, (2) a construction contract is awarded
with respect to a specific property or other action is taken with respect to a specific property that
is legally binding on the grantee or subrecipient, (3) rehabilitation assistance is awarded to an
individual who will rehabilitate and occupy the property as a primary residence, (4) a
developer’s agreement is executed and the developer has identified specific properties to be
acquired and/or rehabilitated, (5) a construction contract is awarded with respect to a demolished
or vacant property, (6) an agreement is executed with a community-based development
organization or developer that has control of the demolished or vacant property and furnished
cost estimates, (7) a contract is signed for disposition costs, (8) an agreement is executed with a
provider of counseling services, or (9) an instrument is executed that awards home-ownership
assistance to an individual who will purchase a property.
Finding 3
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
54
activities. These records must contain information pertaining to grant and subgrant awards and
authorizations, obligations, unobligated balances, assets, liabilities, outlays or expenditures, and
income. 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 570.502(a)(4) state that recipients and subrecipients that are
governmental entities shall comply with 24 CFR 85.20, except for section 85.20(a).
HUD’s regulations at 24 CFR 570.506(h) require grantees to maintain evidence to support how
Block Grant funds are expended.
Finding 4
HUD’s regulations at 24 CFR 85.36(d)(3)(iv) state that in procurement by competitive proposal,
awards will be made to the responsible firm with the proposal that is most advantageous to the
program, with price and other factors considered. Section 85.36(d)(3)(v) states that grantees and
subgrantees may use competitive proposal procedures for qualifications-based procurement of
architectural/engineering professional services whereby competitors’ qualifications are evaluated
and the most qualified competitor is selected, subject to negotiation of fair and reasonable
compensation. The method, when price is not used as a selection factor, can only be used in
procurement of architectural/engineering professional services. Section 85.36(f)(1) states that
grantees and subgrantees must perform a cost or price analysis in connection with every
procurement action including contract modifications. The method and degree of analysis is
dependent on the facts surrounding the particular procurement situation, but as a starting point,
grantees must make independent estimates before receiving bids or proposals. Section
85.36(f)(4) states that the cost plus a percentage of cost and percentage of construction cost
methods of contracting shall not be used.
HUD’s regulations at 24 CFR 570.502(a)(12) state that recipients and subrecipients that are
governmental entities shall comply with 24 CFR 85.36.
Finding 5
The Federal Register, dated October 6, 2008, states that each grantee must submit a quarterly
performance report, as HUD prescribes, no later than 30 days following the end of each quarter.
The quarterly performance reports must be submitted using HUD’s Web-based system and, at
the time of submission, be posted prominently on the grantee’s official Web site.
Finding 6
Section 1512(c) of Title XV of the Recovery Act states that each recipient that receives Program
funds under the Recovery Act from a Federal agency shall submit, no later than 10 days after the
end of each calendar quarter, a report to that Federal agency that contains a detailed list of all of
the projects or activities for which Recovery Act funds were expended or obligated, including an
estimate of the number of jobs created and retained by the project or activity.
HUD’s grant agreement with the Authority for the Program under the Recovery Act, dated
February 11, 2010, states that the following are part of the grant agreement: the Recovery Act;
55
the Act, the State’s application for Program assistance under the Recovery Act; HUD’s
regulations at 24 CFR Part 570; and the funding approval.
Section 1.1 of OMB Memorandum M-09-21, dated June 22, 2009, states that the purpose of the
memorandum is to provide Federal agencies and funding recipients with information necessary
to effectively implement the reporting requirements included in section 1512 of Title XV of the
Recovery Act. Section 2.5 states that beginning October 10, 2009, prime recipients must submit
their data through federalreporting.gov no later than 10 days after each quarter. Section 2.6
states that prime recipients are required to collect and maintain all relevant information
responsive to the reporting requirements outlined in section 1512 of Title XV of the Recovery
Act and guidance since the enactment of the Recovery Act, including activities for the quarter
ending June 30, 2009.
OMB Memorandum M-10-08, dated December 18, 2009, states that part 2 of the memorandum
updates section 5 of OMB Memorandum M-09-21. The update reflects important simplifications
to the manner in which job estimates are calculated and reported. Specifically, recipients will
now report job estimates on a quarterly basis rather than cumulative basis. Section 3.1 of part 1
states that the data fields in the quarterly performance reports that are of major concern for
significant errors are the Federal amount of the award, number of jobs retained or created,
Federal award number, and recipient name. Section 5.1 of part 2 states that this updated
guidance changes the job estimate calculation in that the recipient will now report job estimate
totals by dividing the hours worked in the reporting quarter by the hours in a full-time schedule
in that quarter. Recipients will no longer be required to sum across multiple quarters of data as
part of the formula. Section 5.2 states that recipients should be prepared to justify their
estimates. Recipients must use reasonable judgment in determining how best to estimate the job
impact of recovery dollars, including appropriate sources of information used to generate such an
estimate. Section 5.3 states that to perform the calculation for the number of jobs created or
retained, a recipient will need the total number of hours worked by employees in jobs that meet
the definition of a job created or a job retained for the quarter being reported. The recipient will
also need the number of hours in a full-time schedule for the quarter. The reporting formula can
be represented as total number of hours worked and funded by the Recovery Act within the
reporting quarter divided by the quarterly hours in a full-time schedule. The reporting period
quarters are defined as (1) first quarter, January 1 – March 31; (2) second quarter, April 1 – June
30; (3) third quarter, July 1 – September 30; and (4) fourth quarter, October 1 – December 31.
The full-time-equivalent formula is intended to prevent overcounting of short-term or part-time
jobs.
56
The State of Michigan Lacked Adequate Controls Over Its Neighborhood Stabilization Program Regarding Awards, Obligations, Subgrantees' Administrative Expenses and Procurement, and Reporting Accomplishments
Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-06-03.
Below is a raw (and likely hideous) rendition of the original report. (PDF)