oversight

The City of Tulsa, OK, Mismanaged Its Recovery Act Funding

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-06-16.

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

                                                                Issue Date
                                                                         June 16, 2011
                                                                Audit Report Number
                                                                         2011-FW-1012




TO:        Jerry Hyden
           Acting Director, Community Planning and Development Division, 6ID

           Craig T. Clemmensen
           Director, Departmental Enforcement Center, CACB

           //signed//
FROM:      Gerald R. Kirkland
           Regional Inspector General for Audit, Fort Worth Region, 6AGA

SUBJECT: The City of Tulsa, OK, Mismanaged Its Recovery Act Funding


                                   HIGHLIGHTS

 What We Audited and Why


             In accordance with our goal to review funds provided under the American
             Recovery and Reinvestment Act of 2009 (Recovery Act) and based on the U. S.
             Department of Housing and Urban Development’s (HUD) concerns about the
             capacity of the City of Tulsa’s (City) subrecipient, we audited the City’s
             Community Development Block Grant Recovery (CDBG-R) program. Our
             objective was to determine whether the City complied with HUD’s CDBG-R
             obligation, procurement, expenditure, and reporting requirements.

 What We Found

             The City poorly managed its Recovery Act activities by selecting a subrecipient
             that did not have the capacity to complete the project within the required time
             limit. Further, the City did not adequately monitor the subrecipient, did not
             comply with federal requirements, and did not practice good financial controls.
           This condition occurred because the City did not ensure that a subrecipient had
           the capacity to complete an activity and lacked the required policies and
           procedures. As a result, it committed more than $3 million in federal funds for a
           project that it might not complete.

           Further, the City disregarded procurement requirements, did not have policies or
           procedures regarding the disposal of hazardous waste, and did not implement
           sound controls over the grant. As a result, it could not comply with regulations or
           ensure that its contractors followed requirements


What We Recommend

           We recommend that the Acting Director, Community Planning and Development
           Division, Oklahoma City, OK, require the City to select a subrecipient that has the
           capacity, both financially and administratively, to complete and operate the
           Shoppes on Peoria and to provide documentation by November 30, 2011. If the
           City cannot obtain a subrecipient that can complete the project, it should select
           another project that it can complete by September 30, 2012. Further, the City
           should support or repay more than $49,000 that it spent without a contract and
           improve its controls for its grants. Also, HUD should seek administrative
           sanctions against the Greenwood Community Development Corporation and its
           related entities to protect HUD and the City from future instances of
           noncompliance.

           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 a draft report to the City and HUD on May 26, 2011, and requested
           written comments by June 13, 2011. We held an exit conference with the City on
           June 2, 2011. The City provided written comments on June 10, 2011. It
           generally agreed with the report.

           The complete text of the City’s response, along with our evaluation of that
           response, can be found in appendix B of this report. We did not include the
           attachment submitted with the response. The attachment is available for review
           upon request.




                                            2
                            TABLE OF CONTENTS

Background and Objective                                               4

Results of Audit
      Finding: The City Mismanaged Its Recovery Act Funding            5

Scope and Methodology                                                  12

Internal Controls                                                      14

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use   16
   B. Auditee Comments and OIG’s Evaluation                            17




                                            3
                            BACKGROUND AND OBJECTIVE

The City of Tulsa (City) incorporated as a municipality on January 8, 1898. The City operates
under a mayor-council form of government with the city council serving as the legislative and
governing body. For the 2010 to 2011 program year, the City received almost $7 million in
community planning and development funding from the U. S. Department of Housing and Urban
Development (HUD) to provide support for low- and moderate-income households with
community development needs. The City’s Department of Grants Administration was
responsible for administering these grants.

On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (Recovery Act)
was enacted. The Recovery Act appropriated $1 billion for State and local governments to
complete eligible activities under the Community Development Block Grant Recovery (CDBG-
R) program. Due to the urgency, the Recovery Act required truncated deadlines for expending
funds and established strict standards of accountability and transparency. Therefore, Recovery
Act recipients must have demonstrated the capacity to administer funding quickly and provide
timely and reliable program data.

On August 14, 2009, HUD authorized $989,720 in Recovery Act funding for the City 1 to carry
out the CDBG-R program. The Recovery Act required that the City use its CDBG-R program
funds to retain and create jobs, provide economic benefits, and promptly complete infrastructure
improvements. The City aimed to meet this requirement by completing two projects, each using
$445,374. 2

                               Table 1: City of Tulsa CDBG-R-funded projects
                    Recipient                                   Project                         Authorized funds
    Greenwood Community Development               The Shoppes on Peoria (Shoppes)                   $445,374
    Corporation (Corporation)
    City of Tulsa – Working in                    Neighborhood Revitalization Project                $445,374
    Neighborhoods Department (WIN)

•     The City planned to construct a retail building, the Shoppes, in North Tulsa and create
      minority-owned businesses and 62 permanent jobs for low-income persons. 3
•     The City planned to reduce the number of blighted properties in three low- to moderate-
      income neighborhoods by conducting code enforcement, rehabilitation, and demolition
      activities. The City would complete this project under three existing memorandums of
      understanding with WIN.

The audit objective was to determine whether the City complied with HUD’s CDBG-R
obligation, procurement, expenditure, and reporting requirements.

1
      For the purpose of this report, we did not differentiate between the City and its individual departments and
      subrecipients that carry out the programs.
2
      The remaining $98,972 in CDBG-R funds was for administrative costs.
3
      The City entered into a December 28, 2009 agreement with the Corporation that ended on January 31, 2011.

                                                           4
                                        RESULTS OF AUDIT

Finding: The City Mismanaged Its Recovery Act Funding
The City poorly managed its Recovery Act activities by selecting a subrecipient that did not have
the capacity to complete the project within the required time limit. Further, it did not adequately
monitor the subrecipient, did not comply with federal requirements, and did not practice valid
financial controls. These conditions occurred because the City did not ensure that a subrecipient
had the capacity to complete an activity and lacked the required policies and procedures. As a
result, it committed more than $3 million in federal funds for a project that it might not complete.


    The Corporation Lacked the
    Financial Capacity to Complete
    the Project

                  The City selected the Corporation as its subrecipient to construct the Shoppes.
                  The City relied upon the Corporation to manage the construction and complete the
                  Shoppes within the budget and according to federal requirements. However, the
                  Corporation did not have the capacity to complete the Shoppes. Initially, the
                  Corporation planned to fully fund the Shoppes with more than $3 million in
                  Community Development Block Grant (CDBG) funds. It had no other source of
                  funding in the event that it did not receive the CDBG funds that it anticipated. 4

                                  Table 2: Source of funds – City’s original estimate
                                                Source                            Amount
                           CDBG entitlement funds                                   $1,452,107
                           CDBG Section 108 loan guarantee 5                                         951,584
                           CDBG-R grant                                                              445,374
                           CDBG land gift                                                            270,000
                           Total CDBG funds 6                                                     $3,119,065


                  The Corporation could not fully fund the Shoppes. Specifically, HUD would not
                  authorize a Section 108 loan guarantee for the project because the Corporation
                  could not show that it had the capacity to complete the Shoppes 7 and repay the

4
     The Corporation entered into a grant agreement for the CDBG-R funds and a contract for the sale of land
     purchased with CDBG funds. The City allocated the other CDBG funds for this project.
5
     Section 108 is the loan guarantee provision of the CDBG program. Section 108 provides communities with a
     source of financing for economic development, housing rehabilitation, public facilities, and large-scale physical
     development projects. The City guarantees the Section 108 loan by pledging its CDBG funding.
6
     As of May 10, 2011, it had spent $237,358 CDBG-R funds on pre-construction services.
7
     The Corporation mismanaged the construction, which had not begun as of April 8, 2011.

                                                          5
                  loan from the Shoppes’ income. 8 Further, it could not show that it could borrow
                  funds needed to complete the project. As a result, the Corporation could not hire
                  a bonded contractor. 9 The Corporation did not provide evidence that it could
                  meet HUD requirements for a Section 108 loan and finance any shortfall.

                  Increasing its financial problems, the Corporation did not communicate clearly its
                  plans and federal requirements to its architect. Specifically, the architect wrongly
                  believed the construction budget to be $3.1 million and designed the building
                  accordingly. However, the planned construction budget was $500,000 less at $2.6
                  million. As a result, the construction bids were higher than the budget.
                  Therefore, the architect had to redesign the building. This effort not only delayed
                  the project, but also will increase the construction cost. The Corporation should
                  have communicated clearly its plans and budgets to the architect to avoid such
                  unnecessary delays and costs.

     The Corporation Did Not
     Originally Plan to Complete the
     Shoppes on Time


                  The Corporation initially did not plan to complete the Shoppes on time and did
                  not have the funding in place to complete it. In its agreement with HUD, the City
                  certified that it would select projects for which it could award contracts within
                  120 days from the date that HUD made the funds available to the City. Instead,
                  the City entered into a subrecipient agreement with the Corporation to complete
                  the Shoppes. HUD made funds available to the City on June 5, 2009. The City
                  did not enter into an agreement with the Corporation until December 28, 2009.
                  The Corporation needed to complete the Shoppes by September 30, 2012, to meet
                  its grant requirements. As of March 17, 2011, there was no contract for the
                  Shoppes’ development.

                  The Corporation did not plan to complete the Shoppes by the federal deadline.
                  On June 23, 2009, 10 the Corporation prepared a timeline showing that it would
                  not complete the Shoppes until January 2013, four months after the deadline. 11
                  The City may not have known that the Corporation planned to complete the
                  project after the deadline, as it did not have this timeline. The Corporation
                  changed its timeline in July 2010 but had not met any of the target dates. For
                  instance, according to the timeline, it should have started construction on
                  September 20, 2010. However, as of June 2, 2011, there was no visible evidence
                  that construction had started on the vacant land. As a result, it did not have a
                  viable plan to complete the project by September 30, 2012.

8
     The Corporation estimated that the Shoppes would have a negative cash flow during the first 5 years of
     operation.
9
     The contractor needed evidence that the Corporation could pay for the contract.
10
     Approximately 2 months before the City entered into its grant agreement with HUD.
11
     The timeline did not show when the Corporation planned to get businesses set up and ready to provide jobs.

                                                         6
     The Corporation Poorly
     Procured Sewer Work
                  Due to a lack of internal control, the Corporation did not perform a cost analysis of
                  the Shoppes’ sewer work or have a written contract with the contractor. Originally,
                  it used a competitive bidding process to select the lowest bidder at $34,865. After
                  the bids, the engineer changed the specifications. Instead of putting the revised work
                  scope out to bid or solicitation, the Corporation had the contractor resubmit its
                  proposal. The proposal increased the cost to $49,089,12 which was paid on
                  January 27, 2010. The Corporation effectively sole-sourced the contract and did not
                  know whether it paid a reasonable amount for the contract. Further, it did not have a
                  written agreement with the contractor. As a result, it did not document the
                  contractor’s duties as required by City law13 and federal regulations.14 The City
                  should determine whether the work was needed and the cost was reasonable.

The Corporation Lacked
Financial Controls

                  The Corporation lacked financial controls that would allow it to manage its
                  grants. As of April 22, 2011, the Corporation had not provided financial
                  statements for the CDBG-R program. Federal regulations 15 require the
                  Corporation to keep records that clearly identify the source and application of
                  funds. Those records must contain data on unobligated balances, assets, revenues,
                  and expenses. The president of the Corporation explained that the Corporation
                  did not have a balance sheet and income statement because the building was not
                  yet in service. 16 The Corporation should have been able to present the financials
                  at any time. However, it was not able to present statements that showed cash on
                  hand, accounts receivable, accounts payable, and income. Further, the
                  Corporation commingled CDBG-R program funds. It deposited and expended
                  CDBG-R program funds from a bank account used for other activities. The
                  general ledger used for CDBG-R contained financial transactions of other projects
                  and did not clearly describe the transactions. This condition occurred because the
                  Corporation did not understand the importance of effective control over and
                  responsibility for CDBG funds.

                  Additional evidence that the Corporation lacked financial controls was that it
                  attempted to incorrectly charge $5,900 in payroll costs to the grant based on an
                  undocumented procedure not approved by HUD. 17 The Corporation did not keep
12
      The increase in cost was 41 percent.
13
      City’s purchasing ordinance (title 6, chapter 4)
14
      24 CFR (Code of Federal Regulations) 85.36(i)
15
      24 CFR 84.21
16
      The Corporation had capitalized all costs into a building account until the end of construction.
17
      The Corporation applied the same method used by its apparent parent company, Greenwood Chamber of
      Commerce.

                                                       7
                   time sheets that clearly showed the time spent on each of its projects as required by
                   HUD.18 Instead, it used an estimated percentage of time to charge the costs. This
                   condition occurred because the Corporation did not have policies and procedures for
                   tracking and charging costs to federal programs.

     The Corporation Did Not
     Submit the Required Recovery
     Act Reports to the City

                   The Corporation did not submit the required progress reports to the City. Its
                   agreement with the City required it to submit monthly and quarterly reports.
                   Further, the Corporation was required to provide records to the City until project
                   completion to verify that it was constructing facilities according to Recovery Act
                   guidelines. However, as of December 2010, the Corporation had only submitted
                   to the City 2 of 20 required reports. Because of the Corporation’s noncompliance,
                   the City could not provide accurate reports to the Recovery.gov Web site as
                   required. 19 For example, the City’s December 31, 2009 quarterly Recovery.gov
                   report showed that the City would not use Recovery Act funds to finance the
                   sewer relocation. However, in January 2010, the City paid for the sewer
                   relocation using Recovery Act funds. The City also reported that it expected
                   construction to begin in January 2010.

     The Corporation Exposed the
     City to Significant Potential
     Liability

                   The Corporation’s actions could expose the City to significant potential liability.
                   As shown in table 3, the City revised its estimates 20 to show that the Shoppes
                   project would cost more than $3.7 million, of which at least $3.5 million would
                   come from the City’s CDBG funds. The City and Corporation did not explain
                   why the amount had increased by $600,000. 21

                   Additionally, the Corporation might default on its agreement with Tulsa
                   Development Authority (Authority) for the sale of land used for the Shoppes’
                   development if it cannot meet the conditions. The land contract would give the
                   Corporation ownership of the land previously purchased with CDBG funds.
                   According to the contract, the Authority would waive the $270,000 cost of the
                   land when the Corporation completed the project. If the Corporation did not carry
                   out urban renewal activities on the land, the agreement would not be enforceable.

18
      OMB (Office of Management and Budget) Circular A-122, attachment B, paragraph 8.m
19
      Recovery Act, Title XII of Division A, Section 1512, required the City to submit quarterly reports showing a
      detailed list of all projects for which it had expended recovery funds, including an assessment of the completion
      status of the project.
20
      As of April 5, 2011
21
      Refer to Table 2 for the original estimate of $3.1 million.

                                                           8
                   Further, the Corporation would be in default of its agreement with the Authority if
                   it did not provide evidence of adequate financing within 60 days after the
                   Authority approved the final construction plans. There was no evidence that the
                   Corporation had the funds to complete the construction. Further, the Corporation
                   must complete construction within 24 months after the Authority has approved
                   the construction plans. As of April 8, 2011, the Corporation had not started the
                   development of the Shoppes.

                                    Table 3: Source of funds –City’s new estimate
                                               Source                          Amount
                        CDBG entitlement funds                                   $1,452,107
                        CDBG Section 108 loan guarantee                           1,146,600
                        CDBG-R grant                                                445,374
                        Proposed letter of credit secured by the                    274,162
                        Corporation’s president (no evidence of
                        securitization)
                        CDBG land gift                                              270,000
                        CDBG carryover funds from program year 2008                 200,000
                        Total estimated costs                                    $3,788,243


                   Another concern for the City should be the Corporation’s capacity to operate the
                   Shoppes if it is completed. As previously mentioned, the City and Corporation did
                   not anticipate having a positive cash flow for the first 5 years.

                   Based upon the Corporation’s lack of capacity and progress on the Shoppes, the City
                   should terminate its agreements with the Corporation22 and attempt to find a
                   subrecipient that can access funding and complete the project in a timely manner.
                   The City should also ensure that it contracts with a capable entity to operate the
                   Shoppes when completed. If the City cannot find a subrecipient capable of
                   completing the Shoppes by the deadline and within budget, it should immediately
                   reprogram the CDBG-R funds to a project that it can complete by September 30,
                   2012. By either locating another subrecipient that can complete the Shoppes or
                   reprogramming the funds to another project, the City will put to better use
                   approximately $2.3 million in CDBG funds.23 Further, HUD should seek
                   administrative sanctions against the Corporation and its related entities to protect
                   HUD and the City from future instances of noncompliance and mismanagement of
                   federal funds.
The City’s WIN Department
Did Not Follow Requirements
for its Project
 22
      Including the agreement related to the land transfer
 23
      We computed the amount by adding CDBG-R funds ($445,374) with the CDBG land gift ($270,000) and
      CDBG funds allocated, both entitlement and carryover funds, ($1,452,107 and $200,000) for a total CDBG
      allocated amount of $2,367,481. We did not include the Section 108 loan guarantee as it was not approved and
      would not be reprogrammed. From the $2,367,481, we deducted questioned costs of $49,089 so as not to
      double count these funds for a total of $2,318,392.

                                                         9
                  WIN did not have policies and procedures for the proper disposal of hazardous
                  waste. WIN’s contracts for nuisance abatement required the contractor to comply
                  with federal regulations and State and local laws and regulations. However, the
                  contracts did not mention which specific requirements applied to the contractor’s
                  work. As a result, they did not specify what requirements the contractor needed
                  to comply with when disposing of hazardous waste. While the contract did
                  identify costs to dispose of tires, it did not contain costs for disposal of other
                  hazardous waste. WIN did not keep records tracking the disposal of hazardous
                  debris or unidentifiable waste. The City could not explain how the WIN
                  department ensured that its contractors disposed of debris in accordance with
                  applicable State and local requirements. The City should ensure that its contracts
                  on abatement and demolition contain abatement requirements and costs for all
                  hazardous materials.

                  Further, the City’s WIN department did not obtain independent estimates for
                  abatement and demolition work before receiving bids as required. 24 The WIN
                  department had not obtained independent estimates for this work since 1984.
                  However, it did properly bid the work, which would support the reasonableness of
                  the price that it paid. Nonetheless, the City needs to have procedures to ensure it
                  obtains independent estimates before receiving bids or proposals.

     Conclusion


                  The City mismanaged its Recovery Act activities by selecting a subrecipient that
                  did not have the capacity to complete the Shoppes within the required time limit.
                  The Corporation did not have the funding or ability to complete the Shoppes.
                  Further, the City did not adequately monitor its programs. It violated federal
                  requirements and practiced questionable financial controls. This condition
                  occurred because the City and its subrecipient either lacked adequate policies and
                  procedures or did not have systems in place to ensure that they followed those
                  policies and procedures. As a result, the City’s ability to complete its Recovery
                  Act project with this subrecipient is questionable.

                  Further, the City’s WIN department did not have procedures in place for the
                  disposal of hazardous wastes and compliance with procurement requirements.




24
      24 CFR 85.36(f)1

                                                  10
     Recommendations


                   We recommend that the Acting Director, Office of Community Planning and
                   Development, Oklahoma City, OK, require the City to

                   1A. Terminate its agreements, including the transfer of the land, with the
                       Corporation and either contract with a subrecipient that can complete the
                       Shoppes or reprogram the funds to projects that it can complete within
                       Recovery Act timeframes and according to Recovery Act requirements. By
                       doing so, the City can put to better use approximately $2,318,400 in CDBG
                       funds that it committed to this project. 25

                   1B. Support or repay from non-federal funds $49,089 that the Corporation paid
                       on an agreement without a formal written contract.

                   1C. Ensure that the Corporation does not incorrectly charge labor costs to the
                       grant.

                   1D. Improve its process for selecting and monitoring subrecipients.

                   1E. Implement procedures to ensure that it complies with all relevant
                       procurement requirements.

                   1F. Implement policies and procedures for independent estimates and proper
                       disposal of hazardous waste, which would include steps to follow up on
                       hazardous waste disposal and contract provisions that require contractors to
                       comply with State and local laws and regulations.

                   We recommend that the Director of HUD’s Departmental Enforcement Center

                   1G. Seek administrative sanctions against the Corporation and its related
                       entities, including its current president, to protect HUD and the City from
                       future instances of noncompliance.




25
      We computed the amount by adding CDBG-R funds ($445,374) with the CDBG land gift ($270,000) and
      CDBG funds allocated, both entitlement and carryover funds, ($1,452,107 and $200,000) for a total CDBG
      allocated amount of $2,367,481. We did not include the Section 108 loan guarantee as it was not approved and
      would not be reprogrammed. From the $2,367,481, we deducted the questioned costs of $49,089 so as not to
      double count these funds for a total of $2,318,392.

                                                        11
                            SCOPE AND METHODOLOGY

We conducted the audit at the City’s grant department, the Corporation’s office in Tulsa, OK,
and our office in Oklahoma City, OK, from January 24 to April 22, 2011. The scope of the audit
was the City’s CDBG-R obligations, procurements, expenditures, program results, and reporting
made between June 1, 2009, and January 15, 2011. We expanded the scope to February 16,
2011, for WIN activities. We reviewed the proposed source of funds for the Shoppes and the
WIN timeline prepared in April 2011. The methodology included these procedures:

     •   Reviewed relevant laws, regulations, and HUD guidance.
     •   Reviewed Corporation audited financial statements, bank records, general ledger,
         invoices, and checks.
     •   Reviewed City and Corporation policies and procedures to carry out its activities.
     •   Reviewed grant agreements, memorandums of understanding, and contracts.
     •   Reviewed the City’s board meeting minutes, dated March 13, 2008, and May 28, 2009.
     •   Reviewed the City’s monitoring report of the Corporation, dated November 18, 2010.
     •   Interviewed HUD, City, and Corporation staff, contractors, engineers, and the architect.
     •   Reviewed and analyzed 100 percent of the Corporation’s requests for funds for the period
         December 31, 2009, to February 28, 2011. 26
     •   Reviewed and analyzed the City’s and Corporation’s project timelines and budgets.
     •   Conducted site visits and photographed the WIN abatement and demolition properties in
         North Tulsa and the planned Shoppes’ tract.

We reviewed a sample of the City’s abatement and demolition cases. As of February 16, 2011,
WIN had completed 159 abatements and 3 demolitions for a total of 162 cases. We selected a
sample of 11 cases, which included 8 abatements and all 3 demolitions. The eight abatements
consisted of the five most recently completed projects and three projects with the highest invoice
amounts. The sample totaled $18,427 and was 27 percent of the $67,461 in expenditures. We
did not project the results of procedures applied to items selected under this method to the
population that was not tested.

For administrative expenditures, we compared drawdowns reported in HUD’s Integrated
Disbursement and Information System (System) 27 to the City’s general ledger, which agreed.
We concluded the City’s System data was reliable as it related to our audit objective and
procedures. We reviewed the City’s drawdowns as reported in the System for costs that occurred
through January 15, 2011. We identified the drawdowns that had the highest dollar amounts,
which we considered high risk. We selected the four largest drawdowns totaling $9,260, which
were 80 percent of the $11,510 in total drawdowns for the audit period. We did not project the
results of procedures applied to items selected under this method to the population that was not
tested.



26
     The expenditures reported on the requests for funds occurred within the audit scope period.
27
     The drawdown and reporting system used by HUD for its community planning and development programs.

                                                    12
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. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                              13
                              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:

                  •   Policies and procedures that the City’s management implemented to
                      reasonably ensure that its program met its objectives.
                  •   Procurement policies and procedures established and followed by the City
                      including monitoring subrecipients and contractors for compliance with laws
                      and regulations.
                  •   Policies and procedures that the City’s management implemented to
                      reasonably ensure that its resource use was consistent with laws and
                      regulations and that its resources were safeguarded against waste, loss, and
                      misuse.

               We assessed the relevant controls identified above.

               A deficiency in internal controls 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.




                                                14
Significant Deficiencies


             Based on our review, we believe that the following items are significant deficiencies:

                •   The City did not have controls in place to ensure the completion of its
                    project or that it would meet program objectives (finding).
                •   The City lacked controls to ensure that it followed its monitoring policies by
                    ensuring that its subrecipient met Recovery Act requirements (finding).
                •   The City did not have a system in place to ensure that it followed federal and
                    City requirements (finding).




                                              15
                                       APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS
               AND FUNDS TO BE PUT TO BETTER USE

                   Recommendation       Unsupported 1/    Funds to be put to
                       number                                  better use 2/
                               1A                               $2,318,392
                               1B             $49,089

                              Totals          $49,089           $2,318,392




1/ 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.

2/ 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. If HUD implements the recommendations, there will be $2,318,392 in funds and
   resources available to the City to provide support for low- and moderate-income households
   with community development needs. We computed the amount by adding CDBG-R funds
   ($445,374) with the CDBG land gift ($270,000) and CDBG funds allocated, both entitlement
   and carryover funds, ($1,452,107 and $200,000) for a total CDBG allocated amount of
   $2,367,481. We did not include the Section 108 loan guarantee as it was not approved and
   would not be reprogrammed. From the $2,367,481, we deducted the questioned costs of
   $49,089 so as not to double count these funds for a total of $2,318,392.




                                              16
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                        Auditee Comments




            June 10, 2011

            Gerald R. Kirkland
            Regional Inspector General for Audit
            U.S. Department of Housing and Urban Development
            Office of Inspector General, Region VI
            819 Taylor Street, Suite 13A09
            Fort Worth, Texas 76102

            Dear Mr. Kirkland:

            Please find attached the City of Tulsa's response to HUD's Office of Inspector General,
            Region VI draft audit report. We are in process of developing procedures and taking
            corrective action to address each of the recommendations.

            We appreciate the constructive approach and thoroughness the OIG staff demonstrated
            in their review. Their recommendations will make our CDBG-R program stronger.

            Should you have any questions or require additional information, please contact me at
            (918) 596-7849.

            Sincerely,



            Cathy Criswell, Interim Director
            Department of Grants Administration
            City of Tulsa

            Enclosures

            cc: William Nixon, Assistant Regional Inspector General
                Jerry Hyden, Director, HUD OKC
                Hillard Berry, CPD Representative, HUD OKC
                Jim Twombly, Director of Administration, City of Tulsa

                             CITY HALL AT ONE TECHNOLOGY CENTER
                              175 E. 2nd St. Suite 480 • Tulsa, OK 74103
                                Email: GrantsAdmin@cityoftulsa.org
                                         www.cityoftulsa.org


                                                17
                      City of Tulsa's Response to OIG Findings and Recommendations

            We agree with the following findings:
              • The Corporation Lacked the Financial Capacity To Complete the Project
              • The Corporation Did Not Originally Plan to Complete the Shoppes on Time
              • The Corporation Poorly Procured Sewer Work
              • The Corporation Lacked Financial Controls
              • The Corporation Did Not Submit the Required Recovery Act Reports to the City
              • The Corporation Exposed the City to Significant Potential Liability

            We have provided additional documentation in Attachment A for the following finding:
              • The City's WIN Department Did Not Follow Requirements for its Project

            Responses to recommendations:

Comment 1   1 A (summarized) - Terminate agreement with Corporation and either contract
            with a subrecipient that can complete the project or reprogram the funds.

            The contract with the Corporation has expired and will not be renewed. We agree with
            the OIG's recommendation to either contract with a subrecipient that can complete the
            project or reprogram the funds. The City Council will discuss options during a meeting
            scheduled for June 16, 2011. Due diligence will be performed on alternative
            subrecipients and/or projects selected by the City Council.

Comment 2   1 B - Support or repay from non-Federal funds $49,089 that the Corporation paid
            on an agreement without a formal written contract.

            The City of Tulsa will repay $49,089 no later than September 30, 2011.

            1C - Ensure that the Corporation does not incorrectly charge labor costs to the
            grant.

            The contract with the Corporation has expired. No payments were made for
            Corporation's salaries and no payments will be made.

Comment 3   1D - Support or repay from non-Federal funds $42,221 that it paid for demolition
            and nuisance abatement without an independent estimate.

            We request the Acting Director, Office of Community Planning and Development,
            Oklahoma City, OK consider the information in Attachment A in making a determination
            of adequate support or repayment.

Comment 4   1 E -Improve its process for selecting and monitoring subrecipients.

            To improve the process for selecting sub recipients, we will ensure the City Council is
            informed of all subrecipient capacity and performance concerns during its selection




                                                18
            process. We will request the City Council consider additional process improvements
            during a discussion scheduled for June 16, 2011.

            To improve the process for monitoring subrecipients, technical assistance to
            subrecipients, especially any new or high risk agencies, will begin soon after
            subrecipients have been identified through the selection process. This process change
            will help to correct potential noncompliance issues before funds have been expended.
            Policies and procedures will be updated to reflect these changes no later than
            September 30, 2011.

Comment 2   1F - Implement procedures to ensure it complies with all relevant procurement
            requirements.

            Contracts with subrecipients will be changed to require preapproval of their procurement
            processes before they take any procurement action. Additional technical assistance
            with procurement will be provided to subrecipients. Policies and procedures will be
            updated to reflect these changes no later than September 30, 2011.

Comment 2   1G (summarized) - Implement policies and procedures for independent estimates
            and proper disposal of hazardous waste.

            Policies and procedures revisions will be completed no later than September 30, 2011.




                                               19
                         OIG Evaluation of Auditee Comments

Comment 1   The City concurred with the finding. However, the City's response did not
            address the land contract between the Corporation and Tulsa Development
            Authority if the City continues with the Shoppes. The City will need to address
            the land as it moves forward on the Shoppes or reprograms the land.

            To protect HUD and the City from future instances of noncompliance, we added a
            recommendation for HUD to seek administrative sanctions against the
            Corporation and its related entities.

Comment 2   We appreciate the City’s actions toward addressing the recommendation.

Comment 3   We revised the finding based upon the City’s comments including removing the
            recommendation requiring the City to support or repay funds spent on the
            abatement and demolition work.

Comment 4   The City concurred with the finding. We commend the City for making plans to
            revise its policies and procedures for selecting and monitoring subrecipients. The
            City plans to inform city council concerning capacity and performance concerns
            during its subrecipient selection process. This action would be a good start to
            selecting capable subrecipients. However, informing city council alone will not
            improve the selection process. The City will need to take further action to ensure
            that it selects qualified subrecipients.




                                            20