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. 2 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 3 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. 4 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. 9 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. 11
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)