oversight

The Community Development Programs Center of Nevada Did Not Fully Comply With Neighborhood Stabilization Program Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-12-21.

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

                                                               Issue Date
                                                                     December 21, 2010
                                                               Audit Report Number
                                                                        2011-LA-1004




TO:        Maria F. Cremer, Acting Director, San Francisco Office of Community Planning
           and Development, 9AD



FROM:      Tanya E. Schulze, Regional Inspector General for Audit, Region IX, 9DGA

SUBJECT: The Community Development Programs Center of Nevada Did Not Fully
         Comply With Neighborhood Stabilization Program Requirements

                                   HIGHLIGHTS

 What We Audited and Why

      We completed a review of the Community Development Programs Center of Nevada’s
      (Center) Neighborhood Stabilization Program (program). We performed the review
      because of the Office of Inspector General’s (OIG) mandate to provide oversight of
      Housing and Economic Recovery Act of 2008 (HERA) programs. We selected the
      Center because it received more than $4.9 million in program funds from Clark County
      and the City of Henderson. In addition, the Center has an agreement with the City of
      North Las Vegas to rehabilitate homes for resale and rental.

      Our objective was to determine whether the Center efficiently and effectively
      administered grant funds in compliance with HERA and other applicable program
      requirements, to include determining whether there were adequate controls and
      procedures in place to administer the program and program expenditures were eligible.
What We Found

     The Center did not always efficiently and effectively administer grant funds in
     compliance with HERA and other applicable program requirements. Specifically, it
     violated HUD requirements and its developer agreement with the City of North Las
     Vegas when it entered into a conflict-of-interest contract with a company that is 50
     percent owned by the Center’s executive director. In addition, the Center was unable to
     support rehabilitation costs for two projects and did not check the debarred status of
     subcontractors.


What We Recommend

     We recommend that the Acting Director of the San Francisco Office of Community
     Planning and Development require the grantee to ensure that the Center (1) stops
     awarding contracts to the general contractor that is 50 percent owned by its executive
     director unless granted a conflict-of-interest waiver, as permitted in 24 CFR (Code of
     Federal Regulations) 570.611; (2) provides documentation to support $10,831 in
     rehabilitation costs billed to the City of North Las Vegas or submits a new request for
     payment that reflects only the supported costs; (3) updates its policies and procedures to
     ensure that future rehabilitation costs are properly supported and procured in a cost-
     effective manner; and (4) follows its recently developed procedures to check the debarred
     status of all subcontractors.

     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 the Center and Clark County a draft report on December 2, 2010, and held
     an exit conference with Center and Clark County officials on December 9, 2010. The
     Center provided written comments on December 16, 2010. It generally agreed with our
     report.

     The complete text of the Center’s response, along with our evaluation of that response,
     can be found in appendix B of this report.




                                             2
                            TABLE OF CONTENTS

Background and Objective                                                         4

Results of Audit
   Finding: The Center Did Not Fully Administer Its Program in Compliance With   6
            HERA and Other Applicable Requirements

Scope and Methodology                                                            10

Internal Controls                                                                11

Appendixes

   A.   Schedule of Questioned Costs                                             13
   B.   Auditee Comments and OIG’s Evaluation                                    14
   C.   Schedule of Unsupported Costs                                            17
   D.   Criteria                                                                 18




                                            3
                       BACKGROUND AND OBJECTIVE

The Neighborhood Stabilization Program (program) was established by the Housing and
Economic Recovery Act of 2008 (HERA) in an effort to redevelop communities suffering from
foreclosure and abandonment. Program funds were allocated to State and local governments
with the greatest need to purchase and redevelop homes in order to sell or rent the homes to low-
and moderate-income individuals. HUD awarded more than $3.2 million in program funds to the
City of Henderson. Clark County, as the lead agency for the Urban County CDBG (Community
Development Block Grant) Consortium, received more than $29.6 million. The funds received
by Clark County include the City of North Las Vegas’ allocation of more than $6.8 million. As a
subrecipient of Clark County, the City of North Las Vegas received program funds for the
purpose of acquiring and/or redeveloping foreclosed-upon properties that might otherwise
become sources of abandonment and blight within its community.

The Community Development Programs Center of Nevada (Center) was organized under section
501(c)(4) of the Internal Revenue Code on May 15, 1997, as a nonprofit corporation as defined
by Nevada statutes. The Center’s mission is to facilitate access to credit within the State of
Nevada’s low-, moderate-, and medium-income communities, specifically affordable housing,
lending, consumer lending, small business lending, and community development initiatives. A
three-member board of directors governs the Center. The Center receives reimbursement from
program grants as a developer through Clark County, the City of Henderson, and the City of
North Las Vegas.

Clark County and the City of Henderson set aside more than $4.9 million in funding to reimburse
the Center for eligible program activities. The Center is responsible for purchasing program-
eligible homes, providing rehabilitation services, and reselling the homes to eligible participants.
To be a developer, an entity must demonstrate ownership or control of the property for
rehabilitation or development purposes. A developer is not generally required to follow a
competitive procurement process; however, Clark County and City of Henderson agreements
require the Center to competitively procure contractors for rehabilitation.

The City of North Las Vegas purchased 28 homes and transferred the properties to the Center to
rehabilitate for either resale or rental purposes. It did not set aside a specific amount of funding
for the Center but promised to transfer at least three homes to the Center. The City treats the
Center as a developer and does not require it to follow procurement regulations. The Center’s
development team includes a construction company in which the Center’s executive director is a
50 percent owner. This construction company is responsible for the rehabilitation of the City’s
homes.

The Center is responsible for rehabilitating, selling, or renting 65 homes. It completed two
homes from purchase to resale for the City of North Las Vegas and one home for Clark County.
The Center pays all rehabilitation costs before it sells a home to eligible participants. The Center
can receive reimbursement for actual costs plus a developer fee on all contracts.




                                                 4
Jurisdiction                    Program rental or resale         Number of homes
Clark County                    Resale                           35
The City of North Las Vegas     Resale                           11
The City of North Las Vegas     Rental                           17
The City of Henderson           Resale                           2
Total                                                            65

Our objective was to determine whether the Center efficiently and effectively administered grant
funds in compliance with HERA and other applicable program requirements, to include
determining whether there were adequate controls and procedures in place to administer the
program and program expenditures were eligible.




                                               5
                                 RESULTS OF AUDIT

Finding: The Center Did Not Fully Administer Its Program in
           Compliance With HERA and Other Applicable
           Requirements

The Center did not comply with HUD and City of North Las Vegas (City) requirements when it
violated conflict-of-interest requirements, could not support rehabilitation costs, and did not
check the debarred status for subcontractors. This condition was due to an oversight of conflict-
of-interest requirements. In addition, the Center did not have policies in place to ensure that it
maintained supporting documentation and checked the debarred status for all subcontractors. As
a result, if the Center continues to contract with the same contractor for the remaining 26 homes,
it will continue to violate conflict-of-interest requirements. In addition, HUD had no assurance
that more than $10,800 was used for eligible program expenses and that all subcontractors
working on program projects were eligible to receive Federal funds.



 The Center Violated Conflict-
 of-Interest Requirements

       We reviewed the files for 10 homes and determined that the Center followed program
       requirements when it procured and sold each home. The Center ensured that each home it
       purchased was located in targeted areas and home buyers that purchased the homes from the
       Center were eligible. However, it violated conflict-of-interest requirements for the two
       homes it rehabilitated for the City.

       HUD’s conflict-of-interest regulations at 24 CFR (Code of Federal Regulations) 570.611
       state that no person who is an employee or officer of any subrecipient, who is in a position
       to participate in a decision-making process or gain inside information with regard to such
       activities, may have a financial interest in any contract, subcontract, or agreement with
       respect to a CDBG-assisted activity, either for themselves or those with whom they have
       business. In addition, the agreement with the City specifically states that the developer
       cannot have any interest in any contract, subcontract, or agreement with respect to projects
       administered by the developer.

       The Center overlooked the conflict-of-interest regulations when it entered into two contracts
       with a construction company that was 50 percent owned by its executive director. The
       executive director made all decisions regarding the projects for both the Center and the
       construction company. As a 50 percent owner of the construction company, the Center’s
       executive director had a financial interest in any contract between the two companies,
       violating HUD’s conflict-of-interest regulations and the agreement with the City. This
       condition occurred because the Center and the City overlooked HUD’s conflict-of-interest


                                                 6
    requirements and the requirements found in the agreement. The Center’s ethics policy states
    that no employee, officer, or agent shall participate in the selection, award, or administration
    of a contract supported by program funds if a real or apparent conflict of interest would be
    created unless approved by its board of directors and the local government. The Center
    stated that it had disclosed all relationships to the City in the proposal process. Because the
    City approved the proposal and awarded the agreement, the Center believed that there were
    no conflict-of-interest issues.

    The Center is responsible for the rehabilitation of 28 homes for the City. If the Center
    continues to contract with the same contractor for the rehabilitation of the remaining 26
    homes, in which the executive director has a financial interest, it will continue to violate its
    agreement with the City and HUD’s conflict-of-interest regulations.

The Center Could Not Support
All Rehabilitation Costs


    According to the developer agreement with the City, the Center should only receive
    reimbursement of actual work performed based on the actual expense paid for the
    rehabiliation of the homes. All work should be supported with canceled checks, payrolls,
    time records, invoices, contracts, vouchers, orders, and other accounting documents. Also,
    the developer agreement requires the Center to establish written procurement procedures to
    ensure that it obtains materials and services in a cost-effective manner.

    The Center did not have policies and procedures in place to ensure that it maintained proper
    documentation to support rehabilitation costs. As a result, it billed the City more than
    $10,800 for unsupported rehabilitation costs for two homes. For example, the City was
    billed $2,610 for the installation of carpet and linoleum. The supporting documents showed
    that the actual cost was $1,570, leaving an unsupported amount of $1,040. Another example
    was that the City was billed $1,000 to have a new garage door installed. The supporting
    documents showed that the actual cost of the services was $644, leaving an unsupported
    amount of $356. The details of unsupported amounts are in the table found in appendix C.
    During our review, the Center submitted its final invoice, but has not yet received
    reimbursement from the City.

    The Center believed that the only documentation required was the final invoice that it
    received from the general contractor. However, in accordance with the developer
    agreement, it should have supporting documentation, including invoices and time sheets, to
    support all expenditures incurred by both companies to ensure that it procured materials and
    services in a cost-effective manner.




                                               7
The Center Did Not Verify the
Debarred Status of
Subcontractors

     The agreement between the Center and the City states that the Center will submit a
     certification that none of the contractors or subcontractors used in the construction of any
     unit is on the HUD list of debarred contractors.

     The Center checked the debarred status of all contractors; however, it did not follow the
     developer agreement when it failed to check the status of subcontractors on the General
     Services Administration’s Excluded Party List System. This error occurred because the
     Center’s policies only required debarred checks for contractors and not subcontractors.
     Although the subcontractors were not debarred or suspended, the Center placed itself at risk
     of providing Federal funds to contractors that might not have been eligible to receive them.
     As a result of our review, the Center updated its policies to include a debarment check on all
     subcontractors.

Conclusion


     The Center did not fully administer its program in compliance with applicable
     requirements. It overlooked conflict-of-interest requirements and did not have sufficient
     controls to ensure that materials and services were procured in a cost-effective manner
     and subcontractors working on projects were not debarred. As a result, if the Center
     continues to contract with the same contractor for the rehabilitation of the remaining 26
     homes, in which the executive director has a financial interest, it will continue to violate
     its agreement with the City and HUD’s conflict-of-interest regulations. In addition, the
     Center was unable to provide support for more than $10,800 in rehabilitation costs and
     placed itself at risk of providing Federal funds to contractors not eligible to receive them.
     Collectively, HUD lacked full assurance that the program funds were used in the most
     efficient and effective manner.

Recommendations

     We recommend that the Acting Director of the San Francisco Office of Community
     Planning and Development require the grantee to ensure that the Center

     1A. Stops awarding contracts to the general contractor that is 50 percent owned by its
         executive director unless granted a conflict-of-interest waiver, as permitted in 24 CFR
         570.611.




                                                8
1B. Provides documentation to support $10,831 in rehabilitation costs that were billed to
    the City of North Las Vegas or submit a new request for payment which reflects only
    supported costs.

1C. Updates its policies and procedures for the rehabilitation of homes for the City of
    North Las Vegas to ensure that future rehabilitation costs are properly supported and
    procured in a cost-effective manner.

1D. Follows its recently developed procedures to check the debarred or suspended status of
    all subcontractors.




                                         9
                             SCOPE AND METHODOLOGY

Our audit period covered the period September 2009 to July 2010. We performed our review at
the Center’s office located in Las Vegas, NV, from July 8 to October 5, 2010.

To accomplish our audit objective, we

        Reviewed relevant Federal regulations, HUD guidance, program developer agreements,
        and the Center’s policies and procedures.

        Gained an understanding of the Center’s background, including but not limited to its
        mission statement, organizational charts, financial statements, and by-laws.

        Interviewed staff from HUD, Clark County, the City of Henderson, the City of North Las
        Vegas, and the Center.

        Reviewed 10 of 65 project files from the Center’s program resale program for
        compliance with the terms of the developer agreements.

        Performed site visits to 7 of the 10 homes selected to determine the reasonableness of
        proposed rehabilitation costs.

        Reviewed all supporting documentation for the only three homes that had been
        rehabilitated at the time of the review. The rehabilitation costs for the two City of North
        Las Vegas homes totaled $43,007, and the total for the Clark County home was $15,806.

We chose a sample from a universe of 65 homes with total obligated funds of over $8.8 million1.
Using data mining software, we determined that the Center received deeds and a notice to proceed
with rehabilitation for 17 homes. From this list, we chose the three homes rehabilitated and sold by
the Center, two homes that appeared not to have had an environmental review2, and the remaining
five homes based on the highest acquisition amount. The amount obligated for the 10 homes
selected totaled more than $2.2 million.

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.




1
  The $8.8 million includes the $4.9 million from Clark County and the City of Henderson agreements, and $3.9
million obligated by the City of North Las Vegas.
2
  It was determined the required environmental reviews were completed on time during our review.

                                                       10
                              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 objectives:

           Effectiveness and efficiency of operations – Policies and procedures that management
           has implemented to reasonably ensure that program resale and rental contracts meet their
           objectives.
           Compliance with applicable laws and regulations – Policies and procedures management
           has implemented to reasonably ensure that resource use complies with applicable laws
           and regulations.

       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.




                                                11
Significant Deficiencies


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

             The Center’s controls were not sufficient to ensure compliance with conflict-of-
             interest requirements found in HUD regulations and its developer agreement with
             the City of North Las Vegas.
             The Center lacked policies and procedures to ensure that rehabilitation costs were
             supported and were obtained in a cost-effective manner.
             The Center lacked policies and procedures to ensure that subcontractors were
             checked against the Excluded Party List System to determine debarred status.




                                              12
                                    APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                   Recommendation         Unsupported
                          number                   1/

                                  1B           $10,831
                               Totals          $10,831


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. In this instance, it represents the rehabilitation
     costs for which the Center did not have supporting documentation.




                                              13
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         14
Comment 2




Comment 3



Comment 4




            15
                 OIG Evaluation of Auditee Comments

Comment 1   We acknowledge that the Center provided information disclosing all
            relationships. However an exception to the conflict of interest
            requirements found in the developers agreement was not requested in
            writing and not granted by the City. Also, HUD has not received a request
            for an exemption as required by 24 CFR 570.611(c).

Comment 2   The report was updated to state that the Center had not received payment
            for bills that it has submitted. The review identified approximately
            $10,800 of unsupported costs the auditee needs to be aware of when it
            performs its review.

Comment 3   We acknowledge that the Center took prompt action. It can be provided to
            HUD during the audit resolution process to support that corrective action
            has been taken to address the recommendation.

Comment 4   We updated the report to state that the Center was organized as a 501(c)4
            organization.




                                    16
Appendix C

               SCHEDULE OF UNSUPPORTED COSTS


                                      City of North Las Vegas home one

                                      Amount billed to       Supporting
                                          City             documentation      Unsupported amount
     Electrical items                         $1,485                   $905                 $580
     Flooring                                 $2,610                 $1,570                $1,040
     Heating, ventilating, and air
     conditioning                               $2,850              $1,918                    $932
     Subcontractor labor and
     supplies                                   $3,640              $2,462                  $1,178
     Plumbing                                   $1,375              $1,200                   $175
     Garage door                                $1,295               $939                    $356
     Appliances                                 $3,353              $2,772                   $581
     Insulation                                  $440                $395                      $45
     General contractor labor
     and supplies                              $4,920               $4,270                   $650
                            Totals            $21,968              $16,431                  $5,537


                                      City of North Las Vegas home two

                                        Amount billed to          Supporting            Unsupporte
                                            City                documentation            d amount
     Flooring                                     $2,400                      $ 2,260         $140
     Subcontractor general labor
     and supplies                                 $6,745                       $3,701       $3,044
     Appliances                                   $4,105                       $3,788        $317
     General contractor general
     labor and supplies                          $7,789                        $5,996       $1,793
                             Totals             $21,039                       $15,745       $5,294


                                           Summary of both homes
                            Total billed for both homes                  $43,007
                            Total supporting documentation               $32,176
                            Total unsupported amount                     $10,831
                            Percentage unsupported                          25%


                                                17
Appendix D

                                         CRITERIA
The following sections of HUD rules and regulations and the City of North Las Vegas developer
agreement requirements were relevant to our review of the Center’s administration of the program:

A. Regulations at 24 CFR 570.611 for Conflict of Interest.

   (b) Conflicts prohibited. The general rule is that no persons described in paragraph (c) of this
   section who exercise or have exercised any functions or responsibilities with respect to CDBG
   activities assisted under this part, or who are in a position to participate in a decision making
   process or gain inside information with regard to such activities, may obtain a financial interest
   or benefit from a CDBG assisted activity, or have a financial interest in any contract,
   subcontract, or agreement with respect to a CDBG-assisted activity, or with respect to the
   proceeds of the CDBG-assisted activity, either for themselves or those with whom they have
   business or immediate family ties, during their tenure or for one year thereafter. For the Urban
   Development Action Grant (UDAG) program, the above restrictions shall apply to all activities
   that are a part of the UDAG project, and shall cover any such financial interest or benefit during,
   or at any time after, such person's tenure.

   (c) Persons covered. The conflict of interest provisions of paragraph (b) of this section apply to
   any person who is an employee, agent, consultant, officer, or elected official or appointed
   official of the recipient, or of any designated public agencies, or of subrecipients that are
   receiving funds under this part.

   (d) Exceptions. Upon the written request of the recipient, HUD may grant an exception to the
   provisions of paragraph (b) of this section on a case-by-case basis when it has satisfactorily met
   the threshold requirements of (d)(1) of this section, taking into account the cumulative effects of
   paragraph (d)(2) of this section.

B. City of North Las Vegas Developer Agreement, City General Conditions, Sections Q and W for
       Conflict of Interest

   Section Q: Developer agrees that no officer, employee or consultant of Developer may use his
   or her position to secure or grant any unwarranted privilege, preference, exemption or advantage
   for himself or herself, any member of his or her household, any business entity in which he or
   she has a financial interest or any other person. This prohibition includes the following;

   1. Any interest in any contract, subcontract or agreement with respect to NSP [Neighborhood
   Stabilization Program]-assisted project or program administered by the Developer, or the
   proceeds thereunder.

   Section W: The Developer warrants and covenants that it presently has no interest and shall not
   acquire any interest, directly or indirectly, which could conflict in any manner or degree with the


                                                 18
   performance of its services hereunder. The Developer further warrants and covenants that in the
   performance of this Agreement, no person having such interest shall be employed. Conflict of
   interest provisions apply to the award of any contracts under the Agreement and the selection of
   households to occupy NSP assisted units.

C. City of North Las Vegas Developer Agreement, Exhibit A, Project Eligibility for Cost
       Reasonableness.

   The Developer will establish written procurement procedures to ensure that materials and
   services are obtained in a cost effective manner and that there is no undue enrichment to any
   provider of materials or services. The City will approve all rehabilitation scopes of work and
   estimated costs for rehabilitation prior to commencement of work.

D. City of North Las Vegas Developer Agreement, Financial Management, Sections A and C for
       Cost Reasonableness.

   Section A: Compensation for services will be based upon actual work performed.
   Reimbursement of rehabilitation costs will be paid based upon actual expenses paid. Requests
   for payment must be submitted by Developer using the Request for Payment Form (to be
   provided to Developer by the City staff after execution of the Agreement) with progress
   narrative as well as adequate and proper documentation of eligible costs incurred in compliance
   with 24 CFR 92.206 and necessary for HUD DRGR [Disaster Recovery Grant Reporting
   system] disbursement requirements. All such expenses will be in conformance to the Project
   Budget. Budget revision and approval shall be required prior to payment of any expenses not
   conforming to the Project Budget. Approved invoices must be dated post the date of execution
   of the Agreement. Samples of invoices and other backup items shall be provided to the
   Developer by the City staff after execution of the Agreement.

   Section C: Developer agrees that all costs of the Project shall be recorded by budget line items
   and be supported by cancelled checks, payrolls, time records, invoices, contracts, vouchers,
   orders and other accounting documents evidencing in proper detail the nature and propriety of
   the respective charges, and that all cancelled checks, payrolls, time records, invoices, contracts,
   vouchers, orders or other accounting documents which pertain, in whole or in part, to the Project
   shall be thoroughly identified and readily accessible to the City. Expenditures submitted for
   reimbursement by Developer to the City from the NSP Funds will be accounted for by
   Developer in a ledger separate from all other revenue sources. NSP costs must be directly
   attributable to the NSP assisted units by specific address.

E. City of North Las Vegas Developer Agreement, Financial Management, Section H for Use of
       Debarred Contractors.

   At the discretion of the City, an amount not to exceed the lesser of ten percent (10%) or $10,000
   of the funds allocated under this Agreement will be retained until the project is completed and
   the Developer submits the following:
       Certification that none of the contractors or subcontractors used in the construction of any
       unit are on the HUD list of debarred contractors.

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