oversight

The State of Montana Generally Used Its CDBG-R Funds in Compliance With Requirements but Improperly Negotiated and Serviced Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-09-26.

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

                                                                   Issue Date
                                                                            September 26, 2011
                                                                   
                                                                   Audit Report Number
                                                                                2011-DE-1005




TO:        LeRoy Brown, Director, Denver Office of Community Planning and
             Development, 8AD

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 8AGA

SUBJECT: The State of Montana Generally Used Its CDBG-R Funds in Compliance With
           Requirements but Improperly Negotiated and Serviced Loans

                                    HIGHLIGHTS

 What We Audited and Why

             We reviewed the State of Montana’s Community Development Block Grant-
             Recovery (CDBG-R) program. We selected the State for review based on the
             U.S. Department of Housing and Urban Development’s (HUD) concern with the
             State’s directly loaning CDBG-R funds to entities and because of our focus on the
             administration of American Recovery and Reinvestment Act funds. Our objective
             was to determine whether the State used its CDBG-R funds in accordance with the
             Recovery Act rules and regulations. We reviewed whether the funds were used for
             eligible activities, met the specified national objective, were adequately supported,
             and were properly distributed.

 What We Found
             The State generally used its CDBG-R funds in compliance with Recovery Act
             rules and regulations. However, it incorrectly negotiated and serviced loans with
             the final recipients of the funds. The State decided to directly handle these high-
             risk loans instead of placing the risk on the nonprofits with which the counties
             contracted for this function. Since the State serviced the loans, the nonprofits did
             not have direct access to the program income generated by the CDBG-R loans.
What We Recommend
           We recommend that the Director of HUD’s Denver Office of Community
           Planning and Development require the State to transfer the loan servicing of the
           CDBG-R loans to the pertinent nonprofits.

           For each recommendation in the body of the report without a management
           decision, please respond and provide status reports in accordance with HUD
           Handbook 2000.06, REV-3. Please furnish us copies of any correspondence or
           directives issued because of the audit.

Auditee’s Response
           We provided the draft report to the State on September 12, 2011. The State
           provided written comments on September 16, 2011 and decided an exit
           conference was not needed. State officials concurred with the recommendation.
           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix A of this report.




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                           TABLE OF CONTENTS

Background and Objective                                                      4

Results of Audit
      Finding: The State Generally Used Its CDBG-R Funds in Compliance With   5
      Requirements but Improperly Negotiated and Serviced Loans

Scope and Methodology                                                         8

Internal Controls                                                             9

Appendix
   A. Auditee Comments and OIG’s Evaluation                                   10




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                       BACKGROUND AND OBJECTIVE

The American Recovery and Reinvestment Act of 2009 became public law 111-5 on February 18,
2009. It provided for the creation and preservation of jobs, infrastructure investment, energy
efficiency and science, assistance to the unemployed, State and local fiscal stabilization for the
fiscal year ending September 30, 2009, and other purposes. Authorized under Title XII of the
Recovery Act, the U.S. Department of Housing and Urban Development (HUD) allocated $1 billion
in Community Development Block Grant (CDBG) funds to state and local governments to carry
out, on an expedited basis, eligible activities under the CDBG program. The CDBG program works
to ensure decent affordable housing, provide services to the most vulnerable, and create jobs
through the expansion and retention of businesses.

On August 14, 2009, the State of Montana and HUD signed a grant agreement for more than $1.8
million in CDBG funds under the Recovery Act (CDBG-R). The funds were provided to the State
with the understanding that CDBG-R program activities should meet the Recovery Act’s goal of
creating and preserving jobs. CDBG-R funds provide financing for infrastructure activities, housing
activities, economic development activities, public service activities, real property acquisition, and
administrative costs.

The State established the Department of Commerce to administer CDBG and other programs. The
governor appointed the Department’s director, who had oversight responsibility for the CDBG-R
program. The Department’s mission is to enhance and sustain a healthy economy so Montana
businesses, communities, and people can prosper.

Our objective was to determine whether the State used its CDBG-R funds in accordance with the
Recovery Act rules and regulations.




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                                 RESULTS OF AUDIT

Finding: The State Generally Used Its CDBG-R Funds in Compliance
With Requirements but Improperly Negotiated and Serviced Loans
The State generally used its CDBG-R funds in compliance with Recovery Act rules and
regulations. However, it incorrectly negotiated and serviced loans with the final recipients of the
funds. The State decided to directly handle these high-risk loans instead of placing the risk on
the nonprofits with which the counties contracted for this function. Since the State was servicing
the loans, the nonprofits did not have direct access to the program income generated by the
CDBG-R loans.


 The State Generally Used Its
 CDBG-R Funds According to
 Requirements
               The State generally used its CDBG-R funds in compliance with Recovery Act
               rules and regulations. We reviewed all six projects established with the $1.8
               million CDBG-R grant. The six projects consisted of one community
               development grant and five economic development loans to for-profit entities.
               The State granted funds to the counties for economic development loans, and the
               counties paid the loan amounts to for-profit entities but did not have the
               nonprofits negotiate or service the loans.

               The CDBG-R funds were used for eligible activities, which met the specified
               national objective. The expenditures were adequately supported. Therefore, there
               were no questionable or ineligible costs. The State required the counties to
               submit quarterly reports showing the expenditure of the loan funds and draw
               requests for disbursement of the grant funds. It met HUD and Recovery Act
               reporting requirements.

  The State Improperly
  Negotiated and Serviced Loans


               The State improperly negotiated and serviced the loans with the for-profit entities.
               The purpose of the State CDBG program was for the State to grant funds to units
               of general local government (counties), which then would grant or loan funds to
               entities for eligible CDBG activities. The State used a different procedure for the
               CDBG-R loans than for the regular CDBG loans without obtaining HUD
               approval. HUD required the State to prepare a consolidated plan, which included
               a method of distribution for CDBG funds. For major changes, such as the CDBG-
               R grant, HUD required the State to submit a substantial amendment to the



                                                 5
            consolidated plan. The State provided the substantial amendment but did not
            change the method of distribution to show its intent to negotiate and service the
            loans. Therefore, HUD did not approve this procedure.

            Montana had mainly rural counties with limited administrative capabilities, so the
            State established Certified Regional Development Corporation regions with a
            nonprofit for each region to help the counties in each region. The counties
            contracted with the nonprofits to help them prepare applications and administer
            the CDBG revolving loan funds.

            The State’s regular CDBG economic development procedure was to have the
            county work with the nonprofit to prepare an application for the for-profit entity
            seeking a loan. The county submitted the application to State officials, who
            reviewed and approved the application. The State then granted the CDBG funds
            to the county to pass through to the nonprofit, which negotiated and serviced the
            loan with the for-profit entity. The nonprofit maintained a revolving loan fund in
            which the program income from the loan was deposited and later used for other
            loans. The State followed the same procedure for the CDBG-R grant with the
            exception of the loan negotiation and servicing. The State signed the loan
            documents and collected the loan payments, which were deposited into a State
            revolving loan fund.

The State Wanted
Responsibility for the Loans It
Considered High Risk

            The State decided to negotiate and service these loans because the entities
            receiving the loans were distressed; therefore, the loans were high risk. The State
            did not want the nonprofits to be responsible if problems arose with any of the
            loans.


The Nonprofits Did Not Have
Direct Access to the Program
Income

            The nonprofits did not have direct access to the program income generated by the
            CDBG-R loans. For the regular CDBG loans, the nonprofits received the
            program income directly, to be used for like purposes. Since the State received
            the program income for the CDBG-R loans, HUD required the State to distribute
            the income in compliance with CDBG requirements. Therefore, the nonprofits
            did not have the funds available for other loans without submitting an application
            request to the State.




                                             6
Recommendation



          We recommend that the Director of HUD’s Office of Community Planning and
          Development

          1A. Require the State to transfer the loan servicing of the CDBG-R loans to the
              pertinent nonprofits.




                                           7
                        SCOPE AND METHODOLOGY

Our review period was from August 1, 2009, through May 31, 2011. We performed our onsite
review work during June 2011 at the State’s Department of Commerce offices at 301 South Park
Avenue, Helena, MT.

To accomplish our review objective, we reviewed the Recovery Act, applicable HUD regulations,
HUD handbooks, HUD notices, and State policies. We did not rely on computer-processed data to
complete the review work. To evaluate the controls over the State’s administration of the CDBG-
R funds, we interviewed pertinent HUD and State employees, reviewed the State’s documentation
for all six of the grants and loans established with CDBG-R funds, and reviewed the accounting
records and related documents pertaining to the CDBG-R grant and related activities.

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




                                                8
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

      Effectiveness and efficiency of operations,
      Reliability of financial reporting, and
      Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls
               We determined that the following internal controls were relevant to our audit
               objective:

                     Controls over the use of CDBG-R funds in compliance 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 or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.

               We evaluated internal controls related to the audit objective in accordance with
               generally accepted government auditing standards. Our evaluation of internal
               controls was not designed to provide assurance on the effectiveness of the internal
               control structure as a whole. Accordingly, we do not express an opinion on the
               effectiveness of the State’s internal controls.




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                        APPENDIX

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation     Auditee Comments




Comment 1




                           10
                        OIG Evaluation of Auditee Comments

Comment 1   State officials concurred with the recommendation and will work with HUD on
            the resolution.




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