oversight

The City of Compton Did Not Administer Its HOME Program in Compliance With HOME Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-08-18.

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

                                                                Issue Date
                                                                         August 18, 2011
                                                                Audit Report Number
                                                                             2011-LA-1016




TO:        William Vasquez, Director, Los Angeles Office of Community Planning and
           Development, 9DD




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

SUBJECT: The City of Compton Did Not Administer Its HOME Program in Compliance
         With HOME Requirements

                                 HIGHLIGHTS

 What We Audited and Why

            We audited the City of Compton‟s (City) HOME Investment Partnerships
            Program (HOME) in response to a citizen complaint generally alleging misuse
            of HOME funds by the Community Redevelopment Agency (subrecipient)
            administering the program, including allegations stating that more than $4
            million in HOME funds was missing and that program objectives were not
            met.

            Our audit objective was to determine the validity of the complaint allegations,
            whether program objectives were met, and if program activities complied with
            HOME requirements.

 What We Found


            Although we found nothing to support allegations that funds were missing
            from HOME funding, we determined that the City and its subrecipient did not
            properly administer the program in accordance with HUD requirements.
           Required completion data were not always entered to close out funded
           activities, and appropriate source documentation had not been maintained to
           support activity costs or salary and wages charges. In addition, home-buyer
           eligibility was not correctly determined, and HOME affordability
           requirements were not always maintained. Finally, HOME funds were not
           always used within the required timeframe, and program income was not
           always processed in such a way to ensure compliance with HOME
           requirements.

What We Recommend


           We recommend that the Director of HUD‟s Los Angeles Office of
           Community Planning and Development require the City to support or repay
           more than $2.2 million in HOME withdrawals for unsupported activity
           expenditures and unsupported salaries and wages. The City should also repay
           $193,420 for two home buyers who were ineligible to receive assistance,
           $100,000 in HOME funds used for a property that did not maintain
           affordability standards, and $72,397 that was drawn for a cancelled activity.
           Policies and procedures should be established or revised as necessary for the
           administration of the program, and the City should implement regular
           monitoring of its subrecipient.

           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 City the draft report on June 10, 2011, and held an exit
           conference with the City on June 15, 2011. The City generally disagreed with
           our report.

           We received the City‟s response on June 27, 2011. The complete text of the
           auditee‟s response, along with our evaluation of that response, can be found in
           appendix B of this report. The auditee also included some additional
           schedules with its response; however, we did not include these in the report
           and they are available upon request.




                                          2
                           TABLE OF CONTENTS

Background and Objective                                                          4

Results of Audit
Finding 1: Required Completion Data Were Not Entered in a Timely Manner and       6
           Adequate Drawdown Source Documentation Was Not Provided

Finding 2: The Allocation of HOME Salaries and Wages Did Not Comply With OMB      13
           Circular A-87

Finding 3: Home Buyers‟ Income Eligibility Was Not Adequately Determined,         16
           Affordability Requirements Were Not Maintained, and Key Agreement
           Provisions Were Not Documented

Finding 4: Funds Were Not Expended for Eligible Costs Within 15 Days of Drawing   21
           Down Funds From the U.S. Treasury

Finding 5: Program Income Was Not Processed in Accordance With HOME               23
           Requirements

Scope and Methodology                                                             28

Internal Controls                                                                 30

Appendixes
   A.   Schedule of Questioned Costs and Funds To Be Put to Better Use            32
   B.   Auditee Comments and OIG‟s Evaluation                                     34
   C.   Schedule of Deferred Equity and First-Time Home Buyer Loan Deficiencies   47
   D.   Schedule of Missing Loan Agreement Provisions                             48
   E.   Criteria                                                                  49




                                           3
                     BACKGROUND AND OBJECTIVE

The HOME Program

The HOME Investment Partnerships Program (HOME) is authorized under Title II of the
Cranston-Gonzalez National Affordable Housing Act. The program regulations are
contained in 24 CFR (Code of Federal Regulations) Part 92 and the HOME Investment
Partnerships Program Final Rule. HOME funds are awarded annually as formula grants to
participating jurisdictions and used to fund a wide range of activities that build, buy, or
rehabilitate affordable housing for rent or home ownership or provide direct rental assistance
to low-income households. According to 24 CFR 92.500 (a)(b)(c), HUD establishes a
HOME Investment Trust Fund United States Treasury account, which houses the funds that
are allocated to each participating jurisdiction. The participating jurisdiction may use a
separate local HOME account to house deposits disbursed from the Treasury account. The
program allows State and local governments to use HOME funds for grants, direct loans,
loan guarantees or other forms of credit enhancement, rental assistance, or security deposits.
Further, a participating jurisdiction may invest HOME funds as equity investments, interest-
bearing loans or advances, non-interest-bearing loans or advances, interest subsidies,
deferred payment loans, grants, or other forms of assistance that U.S. Department of Housing
and Urban Development (HUD) determines to be consistent with the regulation. Households
must meet certain low-income limit criteria published by HUD to receive HOME assistance.
HOME funds are managed through HUD‟s Integrated Disbursement and Information System
(IDIS), which disburses funds that are allocated or reallocated and reports information on the
use of HOME funds in the U.S. Treasury account.

The City of Compton

The City of Compton, CA (City), was officially incorporated on May 14, 1888. The City‟s
elected officials include the mayor, four city council members, city attorney, city treasurer,
and city clerk. The City‟s administration is comprised of a city manager and two assistant
city managers.

As a participating jurisdiction, the City is responsible for the overall administration and
oversight of Community Development Block Grant (CDBG), Emergency Shelter Grant
(ESG), and HOME program funds, as well as Neighborhood Stabilization Program (NSP)
and Homelessness Prevention and Rapid Re-Housing Program funds. Between 2009 and
2010, the City was awarded more than $4 million in CDBG funds, $1.7 million in HOME
funds, and nearly $200,000 in ESG funds. The City also received CDBG Recovery Act
grants totaling $1.4 million and more than $3 million in NSP funds. The City‟s HOME and
NSP programs are managed through its Community Redevelopment Agency.

The Community Redevelopment Agency

The mission of the Community Redevelopment Agency (subrecipient) is to support the
City‟s mission of creating a viable, affluent, self-reliant, and safe community by causing the


                                               4
resurgence of Compton‟s physical, economic, and social development through dynamic
growth achieved by commercial, industrial, and residential progress. The subrecipient serves
as the economic development arm of the City for rebuilding and generating economic vitality
in the community. The overriding objective of the subrecipient is to implement the council‟s
policy of fostering growth by using tax increment revenues, in combination with State and
Federal resources; providing physical and social infrastructure to stimulate growth; and
providing gap financing options to attract private investment for retail and residential
development, as well as job development, in the community.

As a subrecipient to the City, it administers the HOME-funded First Time Home Buyer
(FTHB) program, which provides homeownership assistance, and the Residential
Rehabilitation (RR) program (comprised of its Emergency Assistance, Deferred Equity Loan,
and Fix-It Programs), which provides assistance to homeowners by eliminating property code
violations and unsafe living conditions. To ensure that homebuyer properties remain
affordable, HUD requires participating jurisdictions to impose either resale or recapture
provisions, at its option. Resale requires the assisted housing to be made available for
purchase by another family who qualifies as low income and will use the property as their
principal residence, if the original family does not continue to reside in the property.
Recapture provisions must ensure the participating jurisdiction recoups all or a portion of the
HOME assistance to home buyers, if the housing does not continue to be the principal
residence of the family. The time period the assisted family must remain in the property is
based upon the amount of assistance provided.

The above programs may also generate program income, which can include, but is not
limited to, proceeds from repayment of loans provided to participants and any interest earned
on program income in interest bearing accounts. According to CPD Notice 97-9, Section
III.E, earned program income must be disbursed on eligible activities before requesting
HOME entitlement funds, which are received by the participating jurisdiction as part of its
original allocation.

In a 2008 single audit report, the City‟s independent auditor made 13 findings related to the
City‟s HOME program. Eight findings were fully implemented, two were partially
implemented, and three were not implemented. A 2009 single audit report contained four
HOME-related findings. In addition, HUD performed a 2009 monitoring review of the
City‟s HOME, ESG, and NSP programs, which resulted in four findings related to the
HOME program. HUD closed out all four findings in June 2010. The findings generally
stated that there were deficiencies in the City‟s income verifications, determination of
maximum property rehabilitation values, and maintenance of adequate source documentation
for its activities.

We initiated the review in response to a citizen complaint alleging misuse of more than $4
million in HOME funding and nonachievement of program objectives. The objective of our
audit was to determine the validity of the allegations, whether program objectives were met,
and if program activities complied with HOME requirements.




                                              5
                                   RESULTS OF AUDIT

Finding 1: Required Completion Data Were Not Entered in a Timely
           Manner and Adequate Drawdown Source Documentation
           Was Not Provided
The City‟s subrecipient did not enter required completion data into IDIS in a timely manner
for 15 of its program activities. In addition, one of its activities needs to be cancelled, and
the balances for two of its activities need to be reallocated to current activities. The
subrecipient also could not provide adequate source documentation to support 10 open
activities, totaling more than $2.2 million for funds that were committed in IDIS between
1993 and 2005. This deficiency was due to the subrecipient‟s lack of understanding of
HOME requirements and a lack of an adequate quality control system to ensure that required
project completion data were complete, accurate, entered into IDIS in a timely manner, and
supported. In addition, the subrecipient had not been routinely monitored by the City.
Failure to enter project completion data negatively affects the City‟s score on several
program performance indicators and may negatively impact future funding for the program.
In addition, there was insufficient information available to determine whether more than $2.2
million in program funds was expended for eligible HOME activities.


    Final Draw Activities Overdue


                 The subrecipient did not maintain an adequate quality control system to
                 ensure that required project completion information and beneficiary data were
                 complete, accurate, and entered into IDIS within 120 days of final draw in
                 accordance with 24 CFR 92.502(d)(1). The IDIS Report C04PR22, Status of
                 HOME Activities, dated January 2011, listed 12 activities with a status of
                 “final draw,1” 2 were more than 11 years overdue to be completed, and 3 were
                 more than 10 years overdue. All funds that were committed were drawn for
                 each activity listed in the below table.




1
 “Final draw” status means that all committed funds have been drawn but financial and beneficiary information
has not yet been entered. Entering the required financial and beneficiary information would result in
“complete” status.


                                                      6
                                 Status
     IDIS                                     120-day project
                  Commit2         /final                              Days         Years
    activity                                    completion                                      Drawn amount
                    date          draw                               overdue      overdue
      no.                                        due date
                                   date
        53         4/21/97       9/26/06           1/24/07            1,457          3.99              $118,950
        55        10/27/93       8/20/97         12/18/1997           4,781         13.10              $151,800
        56          4/3/95       7/30/03          11/27/03            2,611          7.15              $412,000
        57        10/22/96       8/20/97         12/18/1997           4,781         13.10              $107,000
       173          7/1/97       6/23/99          10/21/99            4,109         11.26              $269,876
       275          7/1/98       8/26/99          12/24/99            4,045         11.08              $299,406
       347          7/1/99       6/29/00          10/27/00            3,737         10.24              $616,643
       606         7/31/03       8/31/04          12/29/04            2,213          6.06               $40,487
       633         7/31/03       8/31/04          12/29/04            2,213          6.06               $40,000
       832          8/3/06      10/24/07           2/21/08            1,064          2.92              $136,000
       917          2/8/07       11/4/09            3/4/10             322            .88              $855,000
      1080          2/2/10        2/2/10            6/2/10             232            .64              $800,000


                    After the completion of our fieldwork, the auditee updated the “status/final
                    draw dates” for Activities 55 and 57 and changed the status of Activity 53 to
                    “completed.” After reviewing documentation provided by the auditee, we
                    determined that the Activity 53 documents only supported a portion of the
                    funds that were drawn.

    Overdue Open Activities


                    The City also had three activities with “open” status in IDIS that need to have
                    completion information entered into HUD‟s system and one activity with
                    “open” status that needs to be cancelled. HOMEfires, Volume 6, No.1,
                    August 2005 states, “Participating Jurisdictions must report HOME project
                    completion and beneficiary data for initial occupants timely by entering it in
                    IDIS on a regular basis, and periodically review the status of all projects in the
                    system to identify those that need to be cancelled (see appendix E).” The
                    following table identifies the four activities that need to be completed or
                    cancelled.




2
    The commit date represents the date on which program funds were first committed to the activity.



                                                         7
                       Status
                                                                                 Percentage
 IDIS                   date       Committed
           Commit                                    Drawn                        completed
activity              (Date of      amount                        Balance
            date                                     amount                   (Drawn/committed
  no.                    last
                                                                                   amount
                       action)
   46       5/13/96    8/20/97       $56,720          $31,407     $25,313              55%
   48      10/29/96    8/20/97      $300,000         $296,555      $3,445              99%
  631       7/30/03    8/16/10         $0               $0           $0                 0%
  810       6/23/05   10/24/07      $368,250        $368,249.50     $0.50             100%


                Activities 46 and 48
                The last draw for both activities 46 and 48 was on August 20, 1997.
                Therefore, the City‟s subrecipient needs to reallocate the $28,758 ($25,313 +
                $3,445) total remaining balance to other current activities. In addition, the
                subrecipient needs to enter completion information into IDIS.

                Activity 631
                Activity 631 reflects a commit date of July 30, 2003, but showed $0
                committed or drawn as of August 16, 2010. Since the activity remained
                inactive for 7 years and no funds were committed or drawn, the subrecipient
                should cancel this activity. After the completion of our fieldwork, the
                subrecipient stated the activity should not be cancelled and provided
                additional documentation. However, the documents provided did not support
                this position, as the same information had also been furnished as support for
                Activity 53.

                Activity 810
                The subrecipient had not updated activity 810‟s status since the date of the last
                draw, October 24, 2007. IDIS showed the activity as 100 percent complete;
                therefore, the subrecipient needs to enter completion information into IDIS.
                After the completion of audit fieldwork, the subrecipient provided additional
                documentation to support the draw down for this activity and changed the
                status to “completed.” However, the new information did not support the
                draw down. Therefore, this activity should not be closed until sufficient
                documentation is available.

   Inadequate Support for More
   Than $2.2 Million Drawn

                The 15 open activities also included 10 activities that did not have adequate
                support documentation. Further, 9 of the 10 activities had a commit date
                before 2000 and either had no name identified or did not clearly indicate what
                IDIS activity was funded. Therefore, we reviewed those nine activities to
                determine whether the City‟s subrecipient maintained adequate financial


                                                8
documentation to support the charges in IDIS and whether program funds
were used for eligible HOME activities. In addition, we reviewed a tenth
activity that had been reopened during fiscal year 2009-2010 after the
subrecipient completed its final draw in fiscal year 2008-2009.

During our fieldwork, the subrecipient provided documentation for 8 of the 10
activities reviewed; however, the information in the files was not sufficient to
support the amounts shown as committed and drawn in IDIS. Further,
although some of the files included IDIS drawdown screens, vouchers, or
invoices from a community housing development organization, the majority
of the files did not contain source documentation to support the amount paid,
including cancelled checks, paid bills, receipts, etc., in accordance with HUD
requirements. In addition, invoices provided for one activity were
questionable because they appeared to have been produced from the same
source, although they were supposed to have been from multiple vendors and
did not appear to be the original documents. After the completion of
fieldwork, the subrecipient provided additional documentation for 8 of 10
activities reviewed; however, the new information still did not fully support
the draw downs made for the activities. In some cases, the expenditure
amounts on the documentation did not reconcile to the IDIS draws, appeared
applicable to different IDIS activity numbers, or the same documentation was
provided to support more than one activity number.

Given that the subrecipient did not provide adequate source documentation for
the majority of the 10 IDIS activities and related commitments and draws
reviewed, we were unable to determine whether program funds were used for
eligible HOME activities, and more than $2.2 million drawn in IDIS was
unsupported, as detailed in the table below.




                               9
          IDIS
                                    Commit      Drawn       Unsupported
         activity   Activity type
                                     date       amount        amount
           no.
                     Acquisition    5/13/96   $31,407          $31,407
           46
                        only
           48       Rehabilitation 10/29/96 $296,555           $296,555
                     Acquisition    4/21/97  $118,950          $109,630
           53
                        only
                        New        10/27/93 $151,800           $124,572
           55
                     construction
                        New          4/3/95  $412,000          $271,461
           56
                     construction
                        New        10/22/96 $107,000           $23,238
           57
                     construction
                        New          7/1/97  $269,876          $269,876
           173
                     construction
           275      Rehabilitation 7/1/98    $299,407          $299,407
           347      Rehabilitation 7/1/99    $616,643          $475,471
           810      Rehabilitation 6/23/05   $368,250          $368,250
                        Totals              $2,671,888        $2,269,867


Subrecipient Not Monitored

            The City informed us that it had established procedures and had been
            monitoring other organizations receiving HUD funding; however, the City
            acknowledged that as of September 2010, no HOME program monitoring of
            its subrecipient had yet occurred. 24 CFR 92.504 (a) states that participating
            jurisdictions are responsible for managing the day-to-day operations of their
            HOME program and that each contractor and subrecipient must be reviewed
            annually. HUD Handbook 6509.2, Community Planning and Development
            Monitoring Handbook, Exhibit 7-19 advises participating jurisdictions to
            monitor subrecipients to ensure that they maintain adequate records to comply
            with program requirements such as record retention. Although the activity in
            question occurred a number of years ago, the City should monitor the status of
            the activities and the subrecipient‟s efforts to close or adjust them.

            In addition, there was no agreement between the City and the subrecipient
            outlining program requirements. 24 CFR 92.504 (c)(2)(iii) requires that the
            agreement between the City and subrecipient comply with Uniform
            Administrative Requirements documented in 24 CFR 92.505(a). The
            requirements state that 24 CFR Part 85.20, which contains specific source
            documentation requirements, applies to participating jurisdictions receiving
            HOME funds. By the end of our fieldwork, the City and its subrecipient had


                                          10
             established an agreement. However, we did not review the individual
             provisions to determine whether the agreement referenced all necessary
             provisions or whether they had been implemented.

Conclusion

             Failure to enter project completion data into HUD‟s IDIS negatively affects a
             participating jurisdiction‟s score on several HOME performance reports,
             understating actual accomplishments and reducing the participating
             jurisdiction‟s statewide and national overall rankings. The widespread failure
             of participating jurisdictions to enter data in a timely manner results nationally
             in underreporting of actual HOME program accomplishments to Congress and
             the Office of Management and Budget (OMB), which may negatively impact
             future funding for the program. In addition, delays in entering project
             completion data impact and extend the record retention requirement for the
             activities. The subrecipient was unable to support more than $2.2 million in
             HOME expenditures in open IDIS activity to demonstrate whether program
             funds were spent for eligible activities. The subrecipient acknowledged that
             the missing documentation made it more difficult to enter reliable and
             accurate data into IDIS to close the activities. If satisfactory project
             completion data are not provided, HOME regulations allow HUD to suspend
             further project setups or take other corrective actions. According to HUD
             regulations, participating jurisdictions are responsible for managing day-to-
             day operations of their programs. Therefore, the City must monitor the
             subrecipient to ensure that data are complete, accurate, and supported.

Recommendations


             We recommend that the Director of HUD‟s Los Angeles Office of
             Community Planning and Development

             1A.    Require the subrecipient to enter project completion information into
                    IDIS for activities 46, 48, 55, 56, 57, 173, 275, 347, 606, 633, 832,
                    917, and 1080 and cancel activity 631. In addition, Activities 53 and
                    810 should be reopened until the subrecipient provides sufficient
                    documentation to support the draw downs for these activities.

             1B.    Require the subrecipient to reallocate the remaining balance for
                    activities 46 ($25,313) and 48 ($3,445) to other current activities
                    immediately.

             1C.    Require the subrecipient to support the $2,269,867 drawn from the
                    U.S. Treasury or reimburse its HOME program from non-Federal
                    funds.



                                            11
1D.   Require the City and subrecipient to establish and implement effective
      policies and procedures to ensure that an adequate quality control
      system is maintained and required project completion information and
      beneficiary data are complete, accurate, entered into IDIS in a timely
      manner, and supported.

1E.   Require the City to regularly monitor the subrecipient, to ensure that
      project data are complete, accurate, timely, and supported.

1F.   Require the City to conduct training for subrecipient personnel on
      HOME program requirements pertaining to entry of activity
      completion data and maintenance of supporting documentation for
      HOME projects and activities.




                             12
Finding 2: The Allocation of HOME Salaries and Wages Did Not
           Comply With OMB Circular A-87
The City‟s method of allocating program salaries and wages to the HOME program was not
supported by employee timesheets breaking out time spent on each program as required by
OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments,
Attachment B, Selected Items of Cost, Paragraph 8, Compensation for Personal Services.
The City‟s noncompliance was due to its lack of understanding of the OMB time
documentation requirements. As a result, there was no assurance that these charges were
accurate.



 Time Charged to Program
 Based on Predetermined
 Estimates

              We identified $61,959 in salaries and wages that was charged to the HOME
              program using transaction listings from July 2008 through December 2010.
              The City and its subrecipient prepared annual budgets that estimated the
              percentage of time their employees were expected to work on various
              programs during the year, including the HOME program. The percentages
              were then entered into the City‟s accounting system annually to calculate the
              amounts that were allocated to the program. The budget estimates did not
              reflect all of the staff working on the programs and were not regularly updated
              to reflect changes that may have occurred during the year to the number of
              staff members working on programs or their work assignments. However,
              OMB Circular A-87, Attachment B, Selected Items of Cost, paragraphs 8
              (h)(4) and (5), states that when employees work on multiple activities, time
              worked must be supported by personnel activity reports or equivalent
              documentation. Budget estimates or other distribution percentages
              determined before services are performed do not qualify as support for
              charges to Federal awards (see appendix E).

              The City used the same methodology to charge HOME program salaries
              during fiscal years 2008-09 and 2009-10. The City‟s 2008 and 2009 single
              audit reports contained a finding which stated that personnel costs allocated to
              the HOME program were not supported by personnel activity reports or
              equivalent documentation. Since then, the City had attempted to obtain
              compliance by distributing sample timecard formats to each department.
              However, full compliance had not yet occurred.




                                             13
Distribution of Time Worked
Not Reflected on All Employee
Timesheets

             Our discussions with City and subrecipient management confirmed that
             employees worked on more than one program. We sampled timesheets for
             fiscal years 2009 through 2011 and found that not all employees identified
             time worked by program. As a result, there was insufficient documentation to
             determine whether the amounts charged to HOME funds were reasonable
             compared to the actual hours spent on HOME activities.


City Maintained Annual
Administrative Cap Not
Exceeded

             The City maintained that although it used annual budgeted estimates, it still
             did not exceed the 10 percent HOME program funding cap that it is allowed to
             charge annually. The City explained that an accountant reviewed total
             administrative program charges near the end of the fiscal year and made
             adjustments to the total, charging any amounts exceeding the cap to the City
             or its subrecipient. Regulations at 24 CFR 92.207 allows a participating
             jurisdiction to charge up to 10 percent of the HOME formula allocations for
             administrative costs such as necessary salaries, wages, and related costs, and
             the City did not exceed this threshold. However, 24 CFR 92.505(a) requires
             the charges to be supported in compliance with OMB time and attendance
             records requirements.


Conclusion


             The salaries of the City‟s employees were not properly tracked and charged to
             the HOME program in compliance with OMB Circular A-87. The charges
             were based on annual, predetermined percentages, which do not qualify for
             support for charges to Federal awards. This was due to the City‟s lack of
             understanding of OMB Circular A-87 time documentation requirements. As a
             result, the City needs to discontinue its method of allocating salaries and
             wages and replace it with a method that is based on the actual time charged by
             its personnel as required by OMB Circular A-87. The City should also
             conduct regular monitoring to ensure that the subrecipient maintains the
             appropriate time distribution records and makes appropriate charges to its
             HOME program.




                                           14
Recommendations



           We recommend that the Director of the Los Angeles Office of Community
           Planning and Development

           2A.    Require the City to support or repay from non-Federal funds the
                  $61,959 in salaries and wages charged to the HOME program between
                  July 2008 and December 2010.

           2B.    Require the City and its subrecipient to establish and implement a
                  timekeeping methodology that accurately reflects charges made to the
                  program and written policies and procedures to ensure compliance
                  with OMB Circular A-87.

           2C.    Require the City to conduct regular monitoring of its subrecipient to
                  ensure that appropriate time distribution records are maintained.




                                         15
Finding 3: Home Buyers‟ Income Eligibility Was Not Adequately
           Determined, Affordability Requirements Were Not
           Maintained, and Key Agreement Provisions Were Not
           Documented
The City‟s subrecipient did not ensure that income for 13 HOME program participants was
determined and supported in accordance with program requirements. Also, the subrecipient
did not ensure that HOME-assisted properties met the required affordability period or that
funds were applied to the property. Finally, written agreements with participants did not
contain clear affordability provisions to document the disposition of assisted properties if
they no longer remained in the properties. This condition occurred because the subrecipient
lacked the necessary procedures and controls regarding the administration of the program.
As a result, ineligible persons received assistance, and HOME affordability objectives were
not met.




 Income Eligibility Not Always
 Determined or Supported in
 Accordance With HOME
 Requirements

              Our review of 13 loan participant files disclosed that 2 participants that
              received assistance to purchase homes did not meet the definition of a low-
              income family as defined by 24 CFR 92.2. The HOME program requires
              HOME funds to be targeted to households that are low and very low income.
              However, the participants had incomes that exceeded 80 percent of median
              income for the area, as determined by HUD. The two home buyers were
              inappropriately qualified using 120 percent moderate income limits, which
              was not applicable to the HOME program. The home buyers received a total
              of $193,420 in HOME downpayment assistance. Because the two
              participants‟ income exceeded the allowable limit, they were ineligible to
              participate in the program and should not have received assistance.

              In addition, income for participants was not determined in accordance with
              HOME Income Eligibility requirements documented in Chapters 1 and 2 of
              the Technical Guide for Determining Income and Allowances for the HOME
              program (see appendix C).

                      Ten participant files did not indicate what income definition was used
                      to qualify participants, and the subrecipient did not have written
                      policies



                                             16
                          and procedures at that time to otherwise identify which income
                          definition was used.3
                          Seven participant files did not contain the minimum amount of
                          documentation needed to make a complete assessment of income.
                          Four home buyers‟ incomes were incorrectly calculated. The
                          frequency of two home buyers‟ pay was not correctly determined,
                          causing income to be incorrectly calculated. The income
                          determinations for the third and fourth home buyers did not consider
                          all pay documentation in their files.
                          Overtime income for four participants was not separately analyzed for
                          continuance.4

                 With the exception of two participants wrongfully qualified for assistance
                 (above), we recalculated the remaining incomes and determined the
                 participants to be eligible to receive assistance.


    HOME Affordability
    Requirements Not Met and Not
    Clarified in Written
    Agreements

                 We confirmed that one property of six reviewed had been foreclosed on and
                 was no longer owned or occupied by the HOME-assisted participant. The
                 property was purchased in September 2006 with $100,000 in HOME
                 assistance. It was sold to a banking institution in November 2009 and
                 purchased by new owners in September 2010 with no recovery of the HOME
                 investment. According to 24 CFR 92.254 (a)(4), if more than $40,000 in
                 assistance is provided, the property must remain the principal residence of the
                 family for a minimum of 15 years; otherwise, the participating jurisdiction
                 must repay the HOME investment (see appendix E). This requirement is
                 applicable to termination of affordability restrictions due to foreclosure or
                 transfer in lieu of foreclosure. HOMEfires Policy Newsletter Volume 5, No.
                 2, June 2003, states that participating jurisdictions should regularly review
                 projects and intervene before default. If the property goes into default, the
                 participating jurisdiction must work with the project owner and primary
                 lenders to maintain the project as affordable housing throughout the
                 affordability period or the participating jurisdiction must repay the HOME
                 account.

3
  The HOME program requires participating jurisdictions to use one of three definitions of annual income to
determine income eligibility of applicants (annual income as defined by 24 CFR 5.609, annual income as
reported by the U.S. Census long form, or adjusted gross income as defined by the Internal Revenue Service
Form 1040).
4
  Chapter 2 of the Technical Guide for Determining Income and Allowance for the HOME program requires
earned overtime to be analyzed to determine whether the income will continue to be a regular part of the
participant‟s income.


                                                      17
            However, the written agreement for the HOME assisted purchase of the
            property did not clearly specify whether the property would be resold to
            another eligible low-income participant or whether the City would recapture
            all or a portion of the HOME investment in the event that the participant did
            not remain in the property. HOMEfires, Volume 5, No. 5, November 2003,
            states that either resale or recapture provisions must be selected at the time
            assistance is provided. However, the home-buyer agreements contained
            language pertaining to both resale and recapture options and did not clearly
            state which recovery method would be used to ensure that the property
            remained affordable.

One Property Never Occupied
by Owner


            We confirmed that another property was never occupied by the home buyer.
            The subrecipient told us that the loan was cancelled. However, the $125,329
            in HOME funds that was drawn to fund the purchase was not cancelled in
            IDIS or used to fund other eligible activities. In addition, the check was
            outstanding for 2 years. Since our inquiry, the subrecipient had taken steps to
            reallocate the $125,329 to other activities. However, the funds remained
            unused for nearly 2 years, and a balance of $72,397 in drawn funding
            remained listed as available in IDIS. HOME requires repayment of drawn
            funds, plus applicable interest, not expended within 15 days, to the U.S.
            Treasury account of the HOME Investment Trust Fund.


Annual Recertifications Not
Timely and Accurate

            The annual recertification letter provided by the subrecipient was dated 3
            years after the initial property purchase for the foreclosed-on property. In
            addition, 3 annual recertification letters were sent to the property address of
            the cancelled home buyer who never occupied the property.


All HOME Provisions Not in
Agreements


            Ten agreements for homeowners and home buyers assisted between fiscal
            years 2006-07 and 2008-09 did not contain all minimum required HOME
            provisions documented in 24 CFR 92.504(c)(5)(see appendix D).

                   Two homeowner agreements did not describe the rehabilitation work
                   to be undertaken. Files contained many bid proposal forms but did not



                                           18
                     incorporate a final bid or estimate in the agreement. In addition,
                    specific property standards were not detailed, and the estimated value
                    of the assisted property after rehabilitation was not included in the
                    agreement.
                    Eight home-buyer agreements did not include a deadline for
                    acquisition of the assisted housing and did not identify the assisted
                    housing as low-income. An assessment to determine whether the
                    assisted property exceeded the 95 percent of median purchase price for
                    the area was included in the file but not incorporated into the
                    agreement.
                    Seven home-buyer agreements included both resale and recapture
                    provisions and did not specify which option would be used to ensure
                    continued affordability of the assisted property.
                    Amounts of assistance identified on the agreements were inconsistent
                    and sometimes varied greatly from the actual amount of assistance
                    provided, as reflected in IDIS. The actual amount of assistance
                    provided to one participant was $49,690. However, the agreements in
                    the file stated that the participant would receive a maximum of
                    $25,000.

Conclusion


             Income determinations performed for 13 home buyers did not always comply
             with HOME program requirements, and HOME long-term affordability
             requirements were not met. In addition, HOME funds remained unused and
             were not available to fund other eligible HOME activities for nearly 2 years.
             The subrecipient lacked the necessary procedures and controls to assist in
             making income determinations, to maintain affordability, and to ensure that
             HOME funds were used in an effective and timely manner. Most of the
             deficiencies occurred during the City‟s fiscal years 2006-07 through 2008-09,
             when the subrecipient did not have written policies and procedures for its
             HOME program. Since that time, a written procedure had been established,
             and loans issued after that timeframe contained fewer errors. However, the
             HOME account must be reimbursed for the two ineligible participants and the
             foreclosed-on property that did not maintain affordability. The subrecipient is
             also required to reimburse the HOME account for the remaining loan balance
             for the property that was never occupied by the home buyer. Since HOME
             funds were drawn but not expended within the required 15-day timeframe,
             interest, if applicable, would also be due.

Recommendations

             We recommend that the Director of HUD‟s Office of Community Planning
             and Development require the City to


                                           19
3A.   Repay from non-Federal funds $193,420 for two households that were
      wrongfully qualified for assistance (see appendix C, loans 3 and 4).

3B.   Repay to the HOME account $100,000 for the foreclosed-on property
      for which HOME affordability requirements were not maintained.

3C.   Repay to the HOME account the remaining $72,397 balance of the
      cancelled $125,329 loan, plus applicable interest, for which HOME
      funds were drawn but not expended within the required 15-day
      timeframe. The $52,932 reallocated to other activities based on Office
      of Inspector General (OIG) inquiries is considered funds put to better
      use.

3D.   Establish and implement procedures and controls to assist in
      preventing future instances of noncompliance with HOME income
      determination, affordability, and written agreement requirements.




                            20
Finding 4: Funds Were Not Expended for Eligible Costs Within 15
           Days of Drawing Down Funds From the U.S. Treasury
The City and subrecipient did not, in a timely manner, reallocate HOME funds withdrawn
from the U.S. Treasury to other activities after program expenses were cancelled. This
occurred because their procedure of drawing down funds to reimburse the City for HOME
expenses was inadequate to ensure that the program funds were expended for eligible costs
within 15 days of drawdown. Therefore, the subrecipient may continue to draw down and
hold HOME funds instead of using them for eligible expenses, increasing the risk the City
may earn interest on HOME funds and not remit it to HUD.


  Voucher Revision Delays

              The City‟s subrecipient drew down HOME funds, on a reimbursement basis,
              after the City had paid for the program expense. This process should ensure
              that any HOME funds drawn down from the City‟s U.S. Treasury account are
              expended for eligible costs within 15 days as required by 24 CFR 95.502(c)(2)
              (see appendix E).

              Although the funds were drawn immediately or shortly after a check was
              issued for the program expense, the check had not necessarily cleared. As a
              result, in the case of unforeseen obstacles such as a voided check or a property
              falling out of escrow, the City and the subrecipient may not have become
              aware of this situation and reallocated the voucher to another eligible expense
              within the 15-day timeframe.

              The two vouchers we reviewed demonstrated that it could take as many as 343
              days to successfully reallocate a voucher to eligible costs after initial
              drawdown. In one case, the City issued a check for $115,969 for a first-time
              home buyer applicant on April 13, 2009, and program funds were drawn down
              from the U.S. Treasury and deposited into the City‟s bank account on April
              29, 2009. The City voided the original check on June 1, 2009, and ultimately
              reallocated the funds to multiple activities between September 2009 and April
              7, 2010, which was 153 to 343 days after final draw, far exceeding the 15-day
              requirement. In addition, $85 remained unexpended as of April 1, 2011, 702
              days after the draw, although it was reflected in IDIS as reallocated.

              Although it was the City‟s and subrecipient‟s practice to reallocate the funds
              to other activities, HUD regulations require any funds that are drawn down
              and not expended for eligible costs within 15 days of the disbursement to be
              returned to HUD for deposit into the participating jurisdiction‟s U.S. Treasury
              account.



                                             21
              Therefore, the City and subrecipient need to revise their procedures and
              controls to ensure that HOME funds exceeding the 15-day expenditure period
              are immediately returned to HUD for deposit into the U.S. Treasury account.

Interest Earned on Delays


              HUD regulations allow for the participating jurisdiction to retain any interest
              earned on program funds drawn from the U.S. Treasury within the 15-day
              expenditure period. However, any interest earned after 15 days belongs to the
              United States and must be remitted promptly to HUD. Therefore, by not
              expending its HOME funds within 15 days of drawdown, the City may have
              earned interest on HOME funds, which it may not have remitted to HUD.

              In the case of the specific vouchers reviewed, the funds were either in the
              City‟s non-interest-bearing account, or the City did not earn interest on its
              interest-bearing accounts during the periods in question due to insufficient
              fund balances. Therefore, the City did not earn interest on those funds;
              however, this may not be the case with future revisions.

 Conclusion

              The City and subrecipient did not reallocate HOME funds to other eligible
              activities in a timely manner after they were cancelled. Their procedure was
              inadequate to ensure that funds were expended for eligible costs within 15
              days of draw down from the U.S. Treasury. Therefore, the City and
              subrecipient may continue to draw down HOME funds and hold them for
              extended periods instead of returning them to HUD, increasing the risk that
              the City may earn interest on HOME funds and not remit it to HUD.

Recommendations


              We recommend that the Director of HUD‟s Los Angeles Office of
              Community Planning and Development

              4A.    Require the City and subrecipient to establish and implement effective
                     policies and procedures to ensure that the subrecipient expends funds
                     for eligible costs within 15 days of drawing down funds from the U.S.
                     Treasury or returns the funds to HUD.

              4B.    Require the subrecipient to reallocate the $85 outstanding for voucher
                     1666597 to an eligible HOME expense and immediately remit any
                     accrued interest to HUD.




                                             22
Finding 5: Program Income Was Not Processed in Accordance With
           HOME Requirements
The City and its subrecipient had a $220,772 discrepancy in the program income balance. In
addition, the City did not record interest on program income funds as program income
received, and the City‟s subrecipient‟s methods of processing program income did not ensure
that the City disbursed program income before making cash withdrawals from the U.S.
Treasury. This problem is due to the City‟s and its subrecipient‟s lack of understanding of
HOME requirements, a lack of adequate policies and procedures, and infrequent monitoring.
Therefore, additional program income may have been attributable to the program, and there
is a risk that entitlement funds will be expended before program income.



Program Income Balance
Discrepancy


              As of December 2010, the City‟s accounting records indicated that there was
              $220,772 in program income remaining to be used, while its subrecipient and
              IDIS indicated that there was no available program income. 24 CFR
              92.508(a)(5)(iv) set forth that each participating jurisdiction must establish
              and maintain sufficient records to enable HUD to determine whether the
              participating jurisdiction has met its requirements, which include financial
              records demonstrating adequate budget control and evidence of periodic
              account reconciliations (see appendix E). However, the City did not regularly
              perform complete account reconciliations with its subrecipient, increasing the
              risk that the subrecipient might not report all program income to IDIS and the
              City would ultimately expend entitlement funds before program income.

              A 2008 single audit finding stated that the City had not accurately reported
              receipt of program income and did not accurately record it in the City‟s
              financial records and in IDIS. In approximately February 2009, the
              subrecipient started updating its program income within IDIS. According to
              the subrecipient, it reconciled program income receipts in the City‟s general
              ledger with program income entries within IDIS and added adjusting entries
              as necessary. Previously, subrecipient staff had not realized that program
              income needed to be entered into IDIS and, therefore, only maintained
              internal program income logs to track the amount of program income
              obtained.

              We found other discrepancies between the accounting department‟s
              spreadsheet and the information entered into IDIS. Most of the discrepancies
              arose from the accounting department‟s practice of recording cancelled



                                            23
                 HOME expenditures as program income if HOME funds had already been
                 drawn down from IDIS.

                 Since the subrecipient was revising the voucher and not entering it into IDIS
                 as program income, the process automatically created a discrepancy between
                 the City‟s and subrecipient‟s records. As a result, the City risked reporting
                 inaccurate program income totals. Therefore, the City needs to implement
                 alternate methods of tracking these amounts. However, our review of these
                 items did not explain the December 2010 discrepancy of $220,647.5 Until the
                 City can explain how that discrepancy arose, we have to conclude that the
                 subrecipient did have an additional $220,647 unrecorded program income
                 available for use.

    Interest on Program Income
    Not Recorded


                 The City did not record interest allocated on program income funds as
                 program income received, as required by 24 CFR 92.2, Definitions, and CPD
                 Notice 97-9, Section III.A. In response to a finding in its 2008 single audit
                 report, the City developed procedures to ensure that interest income received
                 was allocated equitably to the HOME general ledger fund account. The City
                 allocated interest to HOME funds for fiscal year 2008 through July 2009,
                 totaling $56,853. Although a portion of this interest was earned on City funds
                 that had been drawn from the U.S. Treasury to reimburse the City for HOME
                 expenses it had already incurred, the remaining portion of the interest was
                 earned on $463,010 in program income that was maintained in the City‟s
                 interest-bearing account at various points since fiscal year 2008. Although the
                 City initially deposited HOME program income into its non-interest-bearing
                 account, it then moved the program income to its interest-bearing account.
                 However, the City did not record the interest earned on the program income as
                 additional program income, as it incorrectly considered everything in the
                 interest-bearing account as City funds. HUD regulations state that program
                 income includes interest earned on program income. The city controller‟s
                 staff agreed that program income was going into the interest-bearing account
                 and that the balance was not only representative of HUD reimbursements.
                 Therefore, a portion of the $56,853 total interest allocated to HOME general
                 ledger account funds should have been recorded as available program income
                 received and available for eligible HOME program activities.




5
 We identified two transactions, totaling $125, missing from the City‟s spreadsheet that reduced the
discrepancy balance to $220,647.


                                                      24
Program Income Procedures
Increasing Risk to Program

                     The subrecipient‟s methods of processing program income did not ensure that
                     the City disbursed program income to pay HOME program costs before
                     making cash withdrawals from the U.S. Treasury. The subrecipient‟s method
                     included

                              The subrecipient‟s consultant provided notification when there was a
                              “large balance” of program income. The subrecipient completed a
                              substantial amendment identifying what activities it would apply its
                              program income to, which was presented to the city council. Prior
                              substantial amendments totaled $2 million, $1.2 million, and $93,926
                              in accumulated program income, which was then incorporated into the
                              budgets for fiscal years 2006-2007, 2008-2009, and 2010-2011,
                              respectively.
                              The subrecipient notified the consultant of the city council-approved
                              activities to fund.
                              The consultant funded those activities until the program income was
                              all committed.

                     24 CFR 92.504(c)(2)(vi) states “Program income must be disbursed before the
                     subrecipient requests funds from the participating jurisdiction.” CPD Notice
                     97-9, Section III.E explains, “A participating jurisdiction may not draw down
                     HOME allocation funds while allowing program income to accumulate in its
                     local account. Available program income must be used to pay the next
                     eligible program cost (or portion thereof).” In addition, 24 CFR 92.502(c)(3)
                     states, “HOME funds in the local account of the HOME Investment Trust
                     Fund must be disbursed before requests are made for HOME funds in the
                     United States Treasury account.” However, the subrecipient‟s method
                     increased the risk that entitlement funds would be drawn from the U.S.
                     Treasury when program income was available, either because the subrecipient
                     accumulated the program income for a substantial amendment or the funds
                     were later committed to specific activities.6 Once the subrecipient committed
                     the program income to an activity, it did not reallocate and commit the
                     program income to another activity even if that activity needed a disbursement
                     of funds before the originally committed activity. Therefore, although the
                     subrecipient ensured that it committed program income before committing
                     entitlement funds, it did not ensure that it disbursed program income before
                     drawing funds from the U.S. Treasury.

                     CPD Notice 97-9, Section III.B states that the participating jurisdiction must
                     be able to reasonably predict anticipated program income during the next

6
    We did not test for or identify instances of these issues occurring in the past.


                                                           25
         program year. Thus, the participating jurisdiction's financial management
         system should enable the participating jurisdiction to track program income
         receivable.

         According to HUD, most cities add anticipated program income to their
         allocation of entitlement funds and identify how they are going to spend the
         overall balance, which allows them to use program income as needed.

         However, the City did not consistently record estimated program income in its
         annual action plans. In fiscal year 2011, the City estimated no program
         income for all programs, despite having regular sources of program income
         and annually accruing significant program income in the past. When the City
         estimated program income, such as for fiscal years 2009 and 2010, the action
         plan specified which projects and programs the income would be allocated to,
         instead of including that amount in its total allocation available for the year
         and allowing the City to use the funds as needed.


Conclusion


         The City and subrecipient did not process program income in accordance with
         HOME requirements because they lacked an understanding of HOME
         requirements. The City lacked adequate policies and procedures, and no
         recent monitoring had been performed to identify discrepancies between the
         City‟s and the subrecipient‟s records. As a result, there may have been
         additional program income due to the program, and the City risked drawing
         entitlement funds before disbursing all program income.

Recommendations

         We recommend that the Director of HUD‟s Los Angeles Office of
         Community Planning and Development

         5A.    Require the City to reconcile the accounting department‟s program
                income spreadsheet to the subrecipient‟s program income logs to
                determine the origin of the $220,647 discrepancy and make any
                necessary adjustments to program income in IDIS.

         5B.    Require the City to track entitlement funds that have been drawn for
                cancelled activities separately from program income.

         5C.    Require the City to determine the amount of interest applicable to
                program income while in the interest-bearing account and record it as
                program income funds in IDIS.



                                       26
5D.   Require the City and subrecipient to establish and implement effective
      policies and procedures to ensure that the City disburses program
      income to pay HOME program costs before making cash withdrawals
      from the U.S. Treasury.

5E.   Require the City and its subrecipient to obtain training on HOME
      program requirements pertaining to tracking and recording of program
      income.

5F.   Require the City to conduct regular monitoring to identify and resolve
      discrepancies among program income records.




                             27
                      SCOPE AND METHODOLOGY

We performed our onsite audit work at the City, located in Compton, CA, between August
2010 and March 2011. Our audit generally covered the period July 2006 through June 2010.
To accomplish our audit objectives, we reviewed

       IDIS Report C04PR22, Status of HOME Activities, covering program years 1993
       through 2010 to determine whether activities were supported with adequate
       documentation and to determine whether completion data was entered into IDIS
       within the required timeframe. After reviewing the City‟s IDIS Draw Down policies
       and procedures and verifying selected IDIS data in Line of Credit and Control System
       (LOCCS) reports, we determined the data was reliable for our use during the audit.
       We obtained the following information regarding the 27 activities identified with a
       status of “final draw” (20) or “open” (7):

              Twelve “final draw” and 3 “open” activities exceeded HUD‟s 120-day
              deadline for entering completion data into IDIS.
              15 “final draw” activities had funds that were partially drawn down, and had
              no activity for more than 6 months.
              Nine of the 15 had commitment dates between 1993 and 1999 and did not
              clearly identify what type of activity was funded. We selected those nine
              activities for further review. In addition, we selected one additional activity
              for further review because it was reopened after the final draw down.

       IDIS Report C04PR09, Program Income Detail Report, as of December 2010, to
       assist in determining whether the amount of program income identified in the City‟s
       accounting records agreed to amounts reported in IDIS and to determine proper
       allocation of interest income. We further reviewed two reconciling amounts to
       determine if the funds were expended for eligible costs within HUD‟s 15-day
       timeframe.
       FYs 2008-09, 2009-10, and 2010-11 Departmental Budgeted Estimates and tested 34
       corresponding timesheets for 6 employees who work on the HOME program to
       determine whether the employees were reflected on the estimates and to determine
       whether the employees were identifying time worked by program as required by
       OMB Circular A-87.
       A nonstatistical sample of 13 loans out of a universe of 72 loans (35 home buyer and
       37 homeowner). Ten of the loans were issued during the City‟s fiscal years 2006-07
       through 2008-09, and 3 were issued during fiscal years 2009-10 and 2010-11. Our
       sample primarily included loans that were issued during the timeframe of the citizen
       complaint (the City‟s fiscal year 2008-09) and loans where applicants‟ income
       appeared to exceed the HUD income limit. Our results apply to the items selected
       and were not projected to the entire universe of loans.
       The ten written agreements for homeowners and home buyers assisted between fiscal
       years 2006-07 and 2008-09.



                                             28
       Public search information for the 35 home buyer loans and selected 6 who were no
       longer listed as owners of their assisted properties for further review.
       Applicable HUD regulations, including 24 CFR Part 92; HOME Investment
       Partnerships Program Final Rule; 24 CFR Part 85; Administrative Requirements for
       Grants and Cooperative Agreements to State, Local, and Federally Recognized Indian
       Tribal Governments; and OMB Circular A-87, Cost Principles for State, Local, and
       Indian Tribal Governments.
       The City and subrecipient‟s internal policies and procedures, including HOME
       program and financial procedures related to administration of the program.
       Transaction listings for the City‟s fiscal years 2007-08 through 2009-10.
       The City‟s single audit reports for fiscal years 2008 and 2009.
       The City‟s 2008-09 through 2010-11 action plans and fiscal years 2005-2010 and
       2010-2014 consolidated plans. We also reviewed fiscal years 2008-09 and 2009-10
       consolidated annual performance and evaluation reports.
       The City‟s 2008, 2009, and 2010 grant agreements.
       The City‟s organization charts, agendas, meeting minutes, and resolutions.
       2008 HUD program review letter and 2009 and 2010 HUD monitoring reports.

We also interviewed appropriate HUD, City, and subrecipient management and staff.

We conducted the review 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
finding and conclusion based on our audit objective.




                                             29
                            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 to ensure that program activities meet
                      established objectives.
                      Policies and procedures to ensure that program activities comply with
                      applicable 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.

 Significant Deficiencies

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

               The City did not have sufficient policies and procedures to ensure that

                      Funded activities were supported with adequate documentation
                      (finding 1).


                                              30
Program activities complied with program requirements (findings 2, 3,
4, and 5).
Program objectives were met (finding 3).




                      31
                                  APPENDIXES

Appendix A

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

        Recommendation             Ineligible 1/    Unsupported        Funds to be
               number                                        2/        put to better
                                                                              use 3/
              1B                                                           $28,758
              1C                                      $2,269,867
              2A                                         $61,959
              3A                      $193,420
              3B                      $100,000
              3C                       $72,397                             $52,932
              4B                                                               $85
              5A                                        $220,647
             Totals                   $365,817        $2,552,473           $81,775

1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or
     activity that the auditor believes are not allowable by law; contract; or Federal, State,
     or local policies or regulations. These costs consist of the HOME assistance provided
     to two home buyers who did not meet program income requirements, plus HOME
     funds that were used for a cancelled activity and a property that did not maintain
     affordability.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured
     program or activity when we cannot determine eligibility at the time of the audit.
     Unsupported costs require a decision by HUD program officials. This decision, in
     addition to obtaining supporting documentation, might involve a legal interpretation
     or clarification of departmental policies and procedures. These costs include HOME
     activity expenditures and program salaries and wages for which documentation was
     not sufficient to support eligibility. In addition, the $220,647 discrepancy is
     considered unsupported until the City and subrecipient reconcile their program
     income records.

3/   Recommendations that funds be put to better use are estimates of amounts that could
     be used more efficiently if an 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. The $28,758 in outstanding committed funds will result in funds put to
     better use when reassigned to other activities. Also, the $52,932 reassigned from a


                                            32
cancelled activity to other HOME activities as a result of our audit is considered
funds to be put to better use. Finally, the $85 should be reallocated to another eligible
expense.




                                       33
Appendix B

      AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                        34
Comment 2




Comment 1




            35
Comment 3




Comment 4




Comment 5




            36
Comment 6




Comment 7




            37
Comment 8




Comment 8



Comment 9




Comment 10


Comment 11

Comment 12



Comment 13




             Names were redacted for privacy reasons.




                           38
Comment 14




             39
Comment 15




             40
                       OIG Evaluation of Auditee Comments

Comment 1   The OIG disagrees that the recommendation to HUD requiring the
            subrecipient to support or repay over $2 million in HOME funds withdrawn is
            unreasonable. 24 CFR 92.508(a)(3) outlines specific recordkeeping
            requirements for HOME assisted projects. The criteria states that project
            records must provide a full description of each project assisted with HOME
            funds, including the location, form of HOME assistance, and the units or
            tenants assisted with HOME funds. In addition, project records must show the
            source and application of funds, including supporting documentation in
            accordance with 24 CFR 85.20. The projects discussed in our report are still
            considered by HUD to be open activities, as they either had a status of “open”
            or “final draw” and had not been recorded as completed in HUD‟s Integrated
            Disbursement and Information System (IDIS). Therefore, the subrecipient
            was obligated to retain records through the applicable period commencing
            after project completion as outlined in 24 CFR 92.508 (c ). Whether or not
            the transactions initially occurred when the City or its subrecipient had
            different management has no bearing on the City and subrecipient‟s
            responsibility to maintain supporting documentation. In addition, HUD
            advised the City in June 2008 and May 2009 to review its “HOME PJs Open
            Activities Report” to identify open activities in IDIS that needed to be closed
            or cancelled.

Comment 2   The OIG acknowledged in the report that HUD performed monitoring reviews
            of the City‟s HOME program, and has since closed out the findings and
            deficiencies discussed in its monitoring report. We also acknowledged that
            our review of more recent loans issued during the City‟s fiscal years 2009-10
            and 2010-11, revealed that the subrecipient‟s income verification process had
            improved. However, this statement was meant to apply to the recent
            improvement in the subrecipient‟s income eligibility determination process,
            not to other aspects of the HOME program. We found other deficiencies
            during our review including a property that did not maintain affordability and
            funds that were drawn and remained outstanding for a homebuyer who did not
            occupy the property. The deficiencies in these areas were due to a lack of
            procedures and controls to ensure that only eligible persons received
            assistance (loans issued during the City‟s fiscal years 2006-07 through 2008-
            09), and that HOME affordability objectives were met. We therefore
            recommend the subrecipient obtain training in the areas where deficiencies
            still exist, including timely entry of activity completion data and maintenance
            of adequate supporting documentation (Finding 1) and tracking and recording
            of program income (Finding 5).

Comment 3   The OIG took care to ensure that all roles and responsibilities of the relevant
            parties were clearly and specifically identified. The report does not contain
            “generalizing statements” regarding the subrecipient‟s performance. If the
            City had responsibility for a particular transaction, we identified it as such.



                                           41
            Accordingly, if the subrecipient was responsible, we identified it as the
            responsible party. This is particularly evident in Findings 4 and 5, where the
            roles that the City and the subrecipient played with regard to deficiencies in
            drawing down funds and processing program income are discussed in detail.

Comment 4   The OIG ensured that all findings were based on the evidence that was made
            available by the auditee. Although the unsupported costs span back to prior
            years, the lack of support is not solely the responsibility of or due to inaction
            of previous administrations, as the subrecipient‟s response contends. Written
            HUD communications show that the subrecipient was notified of open
            activities in IDIS as recently as 2008 and 2009, which was under the current
            administration (see Comment 1). In addition to a lack of documentation to
            support charges made in IDIS, we found deficiencies in other areas including
            lack of timeliness for expenditure of HOME funds and processing of program
            income. The foregoing deficiencies existed under the current administration
            and have not been rectified as the response states.

            Although the subrecipient had begun the process of cleaning up activities
            within HUD‟s IDIS system, the process was far from complete. OIG
            reviewed the additional documentation provided by the subrecipient after the
            completion of fieldwork; however, the documentation only supports an
            additional $234,254 of the $2,504,121 million previously reported as
            unsupported. Accordingly, we reduced our total unsupported amount to
            $2,269,867. Much of the documentation provided could not be reconciled to
            the amounts charged to the activities, as it either far exceeded the amounts
            identified in IDIS or were far less, with no documentation linking the
            expenditures to the activity numbers in question. In other cases, information
            indicated that the documentation actually applied to different activity
            numbers. We also noted that Activities 53 and 810 had been changed to a
            “completed” status in IDIS after the completion of audit field work. However,
            the documentation provided did not support this change in status. The
            subrecipient also stated that Activity 631 should not be cancelled, and
            documentation showed expenditures had been made under this activity.
            However, the support did not substantiate that the activity should remain
            open, as the same documents had also been provided as the support for
            Activity 53. The subrecipient will need to continue its cleanup process to
            reconcile inconsistencies and to fully support the charges that were made in
            IDIS.

Comment 5   The OIG acknowledges that subrecipient staff was in the process of
            researching and closing out its open activities in IDIS. However, activities
            917 and 1080 showed a status of “final draw” on HUD‟s IDIS Report
            C04PR22, Status of HOME Activities (Entitlement). The last draws for these
            activities were completed in November 2009 and February 2010, respectively.
            24 CFR 92.502(d)(1) states that “complete project completion information
            must be entered into the disbursement and information system, or otherwise



                                           42
            provided, within 120 days of the final project drawdown. If satisfactory
            project completion information is not provided, HUD may suspend further
            project set-ups or take other corrective actions.” Although neither activity is
            complete, the subrecipient should expedite its process as necessary to ensure
            this information is entered as soon as possible.

            OIG disagrees that the subrecipient has submitted adequate source
            documentation to “validate and substantiate” the $2.3 million in unsupported
            charges in IDIS (see Comment 4).

            The subrecipient‟s response stated it provided a copy of its HOME Policies
            and Procedures Manual to OIG. Further, it stated that the manual was
            reviewed and edited by various consultants from the HUD Los Angeles Field
            Office, and that the manual includes a 10 percent retention to be withheld
            from projects until completion. However, this does not appear to address the
            lack of timely entry of completion data for open projects identified in our
            report; nor does it address the lack of adequate documentation to close out the
            projects in IDIS or support project expenditures. The subrecipient should
            ensure that its policies and procedures are amended to include measures to
            address these issues.

            In consideration of points brought forward by the subrecipient during the exit
            conference we have removed recommendation 1G.

Comment 6   The OIG acknowledges the subrecipient is attempting to provide the necessary
            documentation to support salaries and wages charged to the HOME program.
            However, as stated in the report and in subsequent discussions, budget
            estimates do not comply with OMB Circular A-87 requirements, which state
            that time worked must be supported by personnel activity reports. Budget
            estimates are unallowable for time worked charged to federal awards. The
            estimates used by the City also lack accuracy, as they do not include all
            personnel who work on the HOME program. Only actual time records
            evidencing hours worked along with supporting salary and wage computations
            will comply with OMB Circular A-87 requirements.

Comment 7   We disagree with the subrecipient‟s response. The HOME program
            participant referenced in our report did not remain in the assisted property for
            a minimum of 15 years as required for HOME assistance over $40,000 (see 24
            CFR 92.254 (a) (4)). The agreement for the homebuyer did not clearly
            specify which option, resale or recapture, would be exercised in the event the
            participant did not remain in the property for the required time period.
            Further, the conclusions and recommendations of past reviews, whether from
            HUD or another entity, do not pertain to conclusions and recommendations
            obtained during our review, as the basis, scope, and approach of our audits
            vary significantly from HUD reviews. Our audit report does state the
            subrecipient‟s performance recently improved with respect to its income



                                           43
              verification process for participants. However, this statement does not apply
              to other areas reviewed and does not negate the fact that the assisted property
              did not fulfill the affordability requirement of 24 CFR 92.254(a) (4).


Comment 8     The $193,420 was used to fund loans for two participants whose incomes
              exceeded the 80 percent HOME income limit. Therefore, the funds must be
              repaid, as they were used for ineligible HOME activities. The participants
              were qualified using a higher moderate income limit of 120 percent. The
              subrecipient‟s response states that HOME funds were used due to incorrect
              coding of the transaction. However, inter-office correspondence found in
              each of the files states that the applicants were qualified using 120 percent
              income limits and that HOME funds should be used to fund the respective
              loans.

Comment 9     The $100,000 that was used to assist the foreclosed property should be repaid
              because the property did not meet HUD‟s affordability requirement. HOME
              regulations at 24 CFR 92.254(a)(4) state that HOME-assisted housing must
              meet affordability requirements for at least 15 years if assistance exceeded
              $40,000. 24 CFR 92.503(b)(1) states “any HOME funds invested in housing
              that does not meet the affordability requirements for the period specified in
              92.252 or 92.254, as applicable, must be repaid by the participating
              jurisdiction in accordance with paragraph (b)(3) of this section.”

              The subrecipient‟s response indicates the funds should not have to be repaid
              due to the net proceeds limitation available under the recapture option. The
              criteria states “that the amount of HOME funds subject to recapture should be
              based on the amount of net proceeds (if any) from the foreclosure sale” and
              that “in the event of foreclosure sale where net proceeds are zero, the HOME
              subsidy cannot be recovered.” There are several problems with the
              subrecipient‟s use of the criteria. First, the agreement between the
              homebuyers and the subrecipient did not specify which of the two options,
              resale or recapture, would be used should the homebuyers fail to occupy the
              property throughout the required affordability period. The agreement
              contained language pertaining to both resale and recapture options. Second,
              the City‟s 2006-2007 Action Plan, which covered the time period of the loan,
              references resale restrictions, not recapture. Third, if the recapture option
              applied, the only way that the City would be limited to net proceeds (if any) is
              if it had specifically stated this in the agreement with the homebuyers (see
              HOMEfires, Volume 5, No. 2, June 2003, “Homebuyer Housing with a
              Recapture Agreement”). However, since the homebuyer agreement did not
              clearly specify a method of recovery, including a limitation to net proceeds,
              the City is required to repay the $100,000 HOME investment.

Comment 10 The criteria referenced in the report, 24 CFR 92.254(a)(4), is contained in the
           HOME Investment Partnerships Program Final Rule, 24 CFR Part 92, dated



                                             44
              September 16, 1996, and updated through December 22, 2004. Therefore, the
              requirement existed prior to the referenced 2006 loan. We also verified the
              existence of the criteria in the 2005 and 2006 versions of the Code of Federal
              Regulations. Therefore, OIG is not punitively applying the rule retroactively
              against the City.

Comment 11 In addition to adding 24 CFR 92.254(a)(4) to its FY 2011-2012 Annual
           Action Plan, the City and its subrecipient should ensure that future agreements
           with participants identify which option, resale or recapture, will be used if the
           property does not remain affordable. If the City chooses to use the recapture
           option, it should ensure that the agreement includes the treatment of any net
           proceeds from the voluntary or involuntary sale of the property.

Comment 12 24 CFR 92.502 (c) (2) states “Any funds that are drawn down and not
           expended for eligible costs within 15 days of the disbursement must be
           returned to HUD for deposit in the participating jurisdiction‟s United States
           Treasury account of the HOME Investment Trust Fund. Interest earned after
           15 days belongs to the United States and must be remitted promptly, but at
           least quarterly, to HUD, except that a local participating jurisdiction may
           retain interest amounts up to $100 per year for administrative expenses and
           States are subject to the Intergovernmental Cooperation Act (31 U.S.C. 6501
           et seq.).” Therefore, the subrecipient must repay the $72,397 balance of the
           cancelled $125,329 loan to the HOME account.

Comment 13 The City has not rectified all deficiencies in its administration of the HOME
           program. The subrecipient‟s income verification process has improved (as
           stated in the report). However, the existence of written policies and
           procedures does not mean that the entire program is in compliance with
           HOME program rules. During our fieldwork, the subrecipient only became
           aware that the homebuyer no longer lived in the foreclosed property after our
           inquiries. In addition, annual recertification notices were sent out to verify
           continued residency three years after the initial purchase of the property. In
           addition, three annual recertification letters were sent to the property address
           of the cancelled home buyer who never occupied the property. We do not
           consider the recommendation to be “null and void” just because the
           subrecipient submitted its policies and procedures manual to OIG, as we
           found that some program deficiencies still exist and need to be corrected.

Comment 14 Although the subrecipient submitted it HOME Program Policies and
           Procedural Manual to OIG, this does not render OIG‟s recommendation for
           the City and subrecipient to establish and implement effective policies and
           procedures “null and void.” Further, the subrecipient‟s HOME Manual does
           not include guidance covering expenditure of HOME funds within the
           required 15-day time period, nor do the City and subrecipient‟s IDIS
           Drawdown Policies and Procedures. The vouchers that we reviewed
           demonstrated that it could take as many as 343 days to successfully reallocate



                                             45
              a voucher to another eligible expense after the initial drawdown. Funds for
              one activity were drawn in April 2009; however, the check was voided in June
              2009. The funds were reallocated to other activities between September 2009
              and April 2010, which far exceeded the 15-day requirement. In addition,
              HOME funds that were drawn to assist a homebuyer who never occupied the
              property remained outstanding for two years, until OIG inquired about the
              status of the funds. Our report never indicated that the funds were used for
              ineligible activity, but rather, the funds were not used within the required
              timeframe. Accordingly, the subrecipient should establish new procedures or
              improve its current procedures to address this issue. Although the
              subrecipient states the OIG‟s recommendation should be eliminated, we noted
              its response stated its intention to “revise current policies and procedures that
              will ensure that checks have cleared the bank for proposed eligible HOME
              project prior to requesting a drawdown from the US Treasury.” We agree that
              the subrecipient should continue revising its procedures to better ensure that
              funds are expended within the required 15-day timeframe. Therefore, the OIG
              recommendation will stand.

              Finally, as mentioned in the subrecipient‟s response, the $85 was reflected in
              IDIS as reallocated to another expense. However, the subrecipient should
              coordinate with the Controller‟s office as the City‟s financial transaction
              listings reflected the amount was still outstanding at the time of our review.

Comment 15 The City and subrecipient need to resolve the $220,647 discrepancy between
           the accounting department‟s spreadsheet and the subrecipient‟s program
           income logs and make any necessary adjustments to program income in IDIS.
           In addition, the City should ensure that entitlement funds drawn for cancelled
           activities are tracked separately from program income. Any interest earned on
           program income in interest bearing accounts should be recorded as program
           income in IDIS. The City should regularly monitor the subrecipient to
           identify and resolve present and any future discrepancies among program
           income records.




                                             46
           Appendix C

                    SCHEDULE OF DEFERRED EQUITY AND FIRST-TIME HOME BUYER LOAN
                                           DEFICIENCIES
                                                                            Annual
                                                                         income per
                                                 Total                       OIG               Income      Income        3 months’
                Program                           loan                   calculation   HUD      < or =    definition      income
                  /loan           Funds        amount         No. in      (excluding income      HUD        used       documentation   Overtime    Correct annual income
  Loan no.         type         committed      per IDIS household Overtime)            limit    limit?   identified?       in file?    analyzed?     calculation used?
Deferred equity and first-time home buyer loans (fiscal years 2006-07 through 2008-09)
      1         DEL                 3/22/2007    $49,690        3            $18,000 $49,900     Y           N              N            N/A                Y
      2         DEL                  8/8/2007    $24,893        3            $20,717 $53,300     Y           N              N             N                 N
      3         FTHB                2/28/2009    $93,530        3            $62,500 $54,600     N           N              N            N/A                Y
      4         FTHB                2/28/2009    $99,890        1            $48,880 $42,450     N           N              N             N                 Y
      5         FTHB                2/28/2009 $150,000          6            $42,719 $70,350     Y           N              Y            N/A                Y
      6         FTHB                2/28/2009 $149,909          2            $48,036 $48,500     Y           N              Y             N                 N
      7         FTHB                2/28/2009 $148,564          3            $41,600 $54,600     Y           N              N            N/A                Y
      8         FTHB                2/28/2009 $125,283          1            $38,304 $42,450     Y           N              Y            N/A                Y
      9         FTHB                2/28/2009 $144,915          3            $37,098 $54,600     Y           N              Y            N/A                Y
     10         FTHB                 3/2/2009 $125,329          1            $24,232 $42,450     Y           N              N             N                 N
Fiscal years 2006-07 through 2008-09 total deficiencies (sum of all “N”s                         2           10             6             4                 3
Sum of all “Y” answers                                                                           8            0             4             0                 7
Sum of all “N/A”                                                                                 0            0             0             6                 0
First-time home buyer loans (fiscal years 2009-10 through 2010-11)
      11         FTHB              10/28/2009 $108,548            2        $45,760   $50,750     Y           Y              N            N/A                Y
      12         FTHB                 1/4/2010    $85,650         2        $50,478   $50,750     Y           Y              Y            N/A                N
      13         FTHB                 7/1/2010    $22,770         2        $23,568   $53,000     Y           Y              Y            N/A                Y
Fiscal years 2009-10 and 2010-11 total deficiencies (sum of all “N”s)                            0           0              1             0                 1
Sum of all “Y” answers                                                                           3           3              2             0                 2
Sum of all “N/A”                                                                                 0           0              0             3                 0




                                                                                     47
        Appendix D
                                  SCHEDULE OF MISSING LOAN AGREEMENT PROVISIONS
                                                                                                                  Loan Nos.7
                                                                                                                                                         Total   Total
                              Required provision                                   1            2       3    4      5     6    7     8      9      10     Ys      Ns
24 CFR 92.504 (c)(5) - Required Provisions in Written Agreements -
Homeowners/Homebuyers
If homeowner agreement, must specify
Amount of assistance                                                              Y             Y                                                            2    0
Form of assistance                                                                Y             Y                                                            2    0
Rehabilitation work to be done                                                    N             N                                                            0    2
Date for completion (if homeowner agreement)                                      Y             Y                                                            2    0
Property standards to be met                                                      N             N                                                            0    2
Must also conform to 24 CFR 92.254(b)(1) & (2) and specify
Housing is principal residence at time of funds commitment.                       N             N                                                            0    2
Purchase price does not exceed 95% of the median purchase price for the area.     N             N                                                            0    2
If home buyer agreement, must specify
Amount of assistance                                                                                    Y    Y      Y     Y    Y     Y      Y      Y         8    0
Form of assistance (grant, amortizing loan, deferred payment loan)                                      Y    Y      Y     Y    Y     Y      Y      Y         8    0
Use of funds (e.g., downpayment, closing costs, rehabilitation)                                         Y    Y      Y     Y    Y     Y      Y      Y         8    0
Deadline by which housing must be acquired                                                              N    N      N     N    N     N      N      N         0    8
         Must also conform to 24 CFR 92.254(a) (2), (3), & (5) and specify
         The housing is single family.                                                                  Y    Y      Y     Y    Y     Y      Y      Y         8    0
         The purchase price does not exceed 95% of the median purchase price
                                                                                                        N    N      N     N    N     N      N      N         0    8
         for the area.
         The family is low income.                                                                      N    N      N     N    N     N      N      N         0    8
         The housing will be principal residence of family.                                             Y    Y      Y     Y    Y     Y      Y      Y         8    0
         Applicable affordability period                                                                Y    Y      Y     Y    Y     Y      Y      Y         8    0
         Either resale or recapture provisions                                                          N    N      N     N    Y     N      N      N         1    7
                                                                           Ys          3            3    6    6      6     6    7     6       6      6
                                                                           Ns          4            4    4    4      4     4    3     4       4      4
                                                                        Total          7            7   10   10     10    10   10    10      10     10

        7
            Loans 1 and 2 are homeowner agreements and loans 3 through 10 are home buyer agreements. Blank boxes are due to non-applicability of criteria.


                                                                                           48
Appendix E

                                       CRITERIA
  24 CFR 85.20(b)(6), states, “Accounting records must be supported by such source
  documentation as cancelled checks, paid bills, payrolls, time and attendance records, contract
  and subgrant award documents, etc.”

  24 CFR 92.2, Definitions, states that program income includes “interest earned on program
  income pending its disposition.”

  24 CFR 92.203(a), Income Determinations, states, “the HOME program has income
  targeting requirements for the HOME program and for HOME projects. Therefore, the
  participating jurisdiction must determine each family is income eligible by determining the
  family‟s annual income.”

  24 CFR 92.203(a)(2), Income Determinations, explains that for families other than those
  who are tenants in HOME-assisted housing and not receiving HOME tenant-based rental
  assistance, the participating jurisdiction must determine annual income by examining the
  source documents evidencing annual income (e.g., wage statement, interest statement,
  unemployment compensation statement) for the family.

  24 CFR 92.203(b), Income Determinations, states, “When determining whether a family is
  income eligible, the participating jurisdiction must use one of the following three definitions
  of „annual income‟:
      (1) „Annual income‟‟ as defined at 24 CFR 5.609 (except when determining the income
      of a homeowner for an owner-occupied rehabilitation project, the value of the
      homeowner‟s principal residence may be excluded from the calculation of Net Family
      Assets); or
      (2) Annual Income as reported under the Census long-form for the most recent available
      decennial Census.
      (3) Adjusted gross income as defined for purposes of reporting under Internal Revenue
      Service (IRS) Form 1040 series for individual Federal annual income tax purposes.”

  24 CFR 92.207, Eligible Administrative and Planning Costs, states, “A participating
  jurisdiction may expend, for payment of reasonable administrative and planning costs of the
  HOME program and ADDI [American Dream Downpayment Initiative], an amount of
  HOME funds that is not more than ten percent of the sum of the Fiscal Year HOME basic
  formula allocation plus any funds received in accordance with § 92.102(b) to meet or exceed
  participation threshold requirements that Fiscal Year.”

  24 CFR 92.254, Qualification as Affordable Housing: Homeownership

     a. Acquisition with or without rehabilitation, states that housing that is for acquisition
        by a family must meet the below affordability requirements.
        1. The housing must be single-family housing.


                                              49
2. The housing must be modest housing as follows:

       i. In the case of acquisition of newly constructed housing or standard
            housing, the housing has a purchase price for the type of single family
            housing that does not exceed 95 percent of the median purchase price for
            the area, as described in paragraph (a)(2)(iii) of this section.
       ii. In the case of acquisition with rehabilitation, the housing has an estimated
            value after rehabilitation that does not exceed 95 percent of the median
            purchase price for the area, described in paragraph (a)(2)(iii) of this
            section.
       iii. If a participating jurisdiction intends to use HOME funds for homebuyer
            assistance or for rehabilitation of owner-occupied single-family properties,
            the participating jurisdiction may use the Single Family Mortgage Limits
            under Section 203(b) of the National Housing Act (12 U.S.C. [United
            States Code] 1709(b)) (which may be obtained from the HUD Field
            Office) or it may determine 95 percent of the median area purchase price
            for single family housing in the jurisdiction, as follows. The participating
            jurisdiction must set forth the price for different types of single family
            housing for the jurisdiction. The 95 percent of median area purchase price
            must be established in accordance with a market analysis which ensured
            that a sufficient number of recent housing sales are included in the survey.
            Sales must cover the requisite number of months based on volume: For
            500 or more sales per month, a one-month reporting period; for 250
            through 499 sales per month, a two-month reporting period; for less than
            250 sales per month, at least a three-month reporting period. The data
            must be listed in ascending order of sales price. The address of the listed
            properties must include the location within the participating jurisdiction.
            Lot, square and subdivision data may be substituted for the street address.
            The housing sales data must reflect all, or nearly all, of the one-family
            house sales in the entire participating jurisdiction. To determine the
            median, take the middle sale on the list if an odd number of sales and if an
            even number, take the higher of the middle numbers and consider it the
            median. After identifying the median sales price, the amount should be
            multiplied by .95 to determine the 95 percent of the median area purchase
            price. This information must be submitted to the HUD Field Office for
            review.

3. The housing must be acquired by a homebuyer whose family qualifies as a low-
   income family and the housing must be the principal residence of the family
   throughout the period described in paragraph (a)(4) of this section.

4. Periods of affordability. The HOME-assisted housing must meet the affordability
   requirements for not less than the applicable period specified in the following
   table, beginning after project completion.




                                    50
        5. Resale and recapture. To ensure affordability, the participating jurisdiction must
           impose either resale or recapture requirements, at its option.
              i. Resale. Resale requirements must ensure, if the housing does not continue
                  to be the principal residence of the family for the duration of the period of
                  affordability, that the housing is made available for subsequent purchase
                  only to a buyer whose family qualifies as a low-income family and will
                  use the property as its principal residence.
              ii. Recapture. Recapture provisions must ensure that the participating
                  jurisdiction recoups all or a portion of the HOME assistance to the
                  homebuyers, if the housing does not continue to be the principal residence
                  of the family for the duration of the period of affordability.

   b.    Rehabilitation not involving acquisition. Housing that is currently owned by a
        family qualifies as affordable housing only if:

        1. The estimated value of the property, after rehabilitation, does not exceed 95
           percent of the median purchase price for the area, described in paragraph
           (a)(2)(iii) of this section; and

        2. The housing is the principal residence of an owner whose family qualifies as a
           low-income family at the time HOME funds are committed to the housing.

   c. Ownership interest. The ownership in the housing assisted under this section must
      meet the definition of “homeownership‟‟ in § 92.2.

   d. New construction without acquisition. Newly constructed housing that is built on
      property currently owned by a family which will occupy the housing upon
      completion, qualifies as affordable housing if it meets the requirements under
      paragraph (a) of this section.

24 CFR 92.500(a)(b)(c), The HOME Investment Trust Fund

   a.      General. A HOME Investment Trust Fund consists of the accounts described in
   this section solely for investment in accordance with the provisions of this part. HUD will
   establish a HOME Investment Trust Fund United States Treasury account for each
   participating jurisdiction. Each participating jurisdiction may use either a separate local
   HOME Investment Trust Fund account or, a subsidiary account within its general fund
   (or other appropriate fund) as the local HOME Investment Trust Fund account.


                                            51
   b. Treasury Account. The United States Treasury account of the HOME Investment
   Trust Fund includes funds allocated to the participating jurisdiction under § 92.50
   (including for a local participating jurisdiction, any transfer of the State‟s allocation
   pursuant to § 92.102(b)(2)) and funds reallocated to the participating jurisdiction, either
   by formula or by competition, under subpart J of this part; and

   c. Local Account.

           1. The local account of the HOME Investment Trust Fund includes deposits of
           HOME funds disbursed from the Treasury account; the deposit of any State funds
           (other than HOME funds transferred pursuant to § 92.102(b)(2)) or local funds
           that enable the jurisdiction to meet the participating threshold amount in § 92.102;
           any program income (from both the allocated funds and matching contributions in
           accordance with the definition of program income); and any repayments or
           recaptured funds as required by § 92.503.

           2. The participating jurisdiction may establish a second local account of the
           HOME Investment Trust Funds if:

                   i. The participating jurisdiction has its own affordable housing trust fund
                   that the participating jurisdiction will use for matching contributions to the
                   HOME program;

                   ii. The statute or local ordinance requires repayments from its own trust
                   fund to be made to the trust fund;

                   iii. The participating jurisdiction establishes a separate account within its
                   own trust fund for repayments of the matching contributions; and

                   iv. The funds in the account are used solely for investment in eligible
                   activities within the participating jurisdiction‟s boundaries in accordance
                   with the provisions of this part, except as provided under § 92.201(a)(2).

           3. The funds in the local account cannot be used for the matching contribution and
           do not need to be matched.

24 CFR 92.502(c)(2), Program Disbursement and Information System, General,
Disbursement of HOME funds, states, “HOME funds drawn from the United States
Treasury account must be expended for eligible costs within 15 days. Any interest earned
within the 15 day period may be retained by the participating jurisdiction as HOME funds.
Any funds that are drawn down and not expended for eligible costs within 15 days of the
disbursement must be returned to HUD for deposit in the participating jurisdiction‟s United
States Treasury account of the HOME Investment Trust Fund. Interest earned after 15 days
belongs to the United States and must be remitted promptly, but at least quarterly, to HUD,
except that a local participating jurisdiction may retain interest amounts up to $100 per year
for administrative expenses and States are subject to the Intergovernmental Cooperation Act
(31 U.S.C. 6501 et seq.).”


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24 CFR 92.502(c)(3), Program Disbursement and Information System, Disbursement of
HOME Funds, states, “HOME funds in the local account of the HOME Investment Trust
Fund must be disbursed before requests are made for HOME funds in the United States
Treasury account.”

24 CFR 92.502(d)(1), Program Disbursement and Information System, Project
Completion, states, “Complete project completion information must be entered into the
disbursement and information system, or otherwise provided, within 120 days of the final
project drawdown. If satisfactory project completion information is not provided, HUD may
suspend further project set-ups or take other corrective actions.”

24 CFR 92.503(b)(1), Program Income, Repayments, and Recaptured Funds, states,
“Any HOME funds invested in housing that does not meet the affordability requirements for
the period specified in § 92.252 or § 92.254, as applicable, must be repaid by the
participating jurisdiction in accordance with paragraph (b)(3) of this section.”

24 CFR 92.504, Participating Jurisdiction Responsibilities; Written Agreements; Onsite
Inspection, Executing a Written Agreement

   (a) Responsibilities. The participating jurisdiction is responsible for managing the day to
       day operations of its HOME program, ensuring that HOME funds are used in
       accordance with all program requirements and written agreements, and taking
       appropriate action when performance problems arise. The use of State recipients,
       subrecipients, or contractors does not relieve the participating jurisdiction of this
       responsibility. The performance of each contractor and subrecipient must be
       reviewed at least annually.

   (b) Executing a written agreement. Before disbursing any HOME funds to any entity,
       the participating jurisdiction must enter into a written agreement with that entity.
       Before disbursing any HOME funds to any entity, a State recipient, subrecipient, or
       contractor which is administering all or a part of the HOME program on behalf of the
       participating jurisdiction, must also enter into a written agreement with that entity.
       The written agreement must ensure compliance with the requirements of this part.

   (c) Provisions in written agreements. The contents of the agreement may vary
       depending upon the role the entity is asked to assume or the type of project
       undertaken. This section details basic requirements by role and the minimum
       provisions that must be included in a written agreement.

          (2) Subrecipient. A subrecipient is a public agency or nonprofit selected by the
              participating jurisdiction to administer all or a portion of the participating
              jurisdiction‟s HOME Program. The agreement between the participating
              jurisdiction and the subrecipient must include:

              i. Use of the HOME funds. The agreement must describe the use of the
                 HOME funds, including the tasks to be performed, a schedule for



                                           53
                  completing the tasks, a budget, and the period of the agreement. These
                  items must be in sufficient detail to provide a sound basis for the
                  participating jurisdiction effectively to monitor performance under the
                  agreement.

               ii. Program income. The agreement must state if program income is to be
                   remitted to the participating jurisdiction or to be retained by the
                   subrecipient for additional eligible activities.

               iii. Uniform administrative requirements. The agreement must require the
                    subrecipient to comply with applicable uniform administrative
                    requirements, as described in § 92.505(a).

           (5) Homebuyer, homeowner or tenant receiving tenant-based rental or security
               deposit assistance. When a participating jurisdiction provides assistance to a
               homebuyer, homeowner or tenant the written agreement may take many forms
               depending upon the nature of assistance. As appropriate, it must include as a
               minimum:

               i. For homebuyers, the agreement must conform to the requirements in §
                  92.254(a), the value of the property, principal residence, lease-purchase, if
                  applicable, and the resale or recapture provisions. The agreement must
                  specify the amount of HOME funds, the form of assistance, e.g., grant,
                  amortizing loan, deferred payment loan, the use of the funds (e.g., down-
                  payment, closing costs, rehabilitation) and the time by which the housing
                  must be acquired.

               ii. For homeowners, the agreement must conform to the requirements in §
                   92.254(b) and specify the amount and form of HOME assistance,
                   rehabilitation work to be undertaken, date for completion, and property
                   standards to be met.

               iii. For tenants, the rental assistance contract or the security deposit contract
                    must conform to §§ 92.209 and 92.253.

24 CFR 92.504(c)(2)(vi), Participating Jurisdiction Responsibilities; Written
Agreements; Onsite Inspection, Subrecipient, states, “Program income must be disbursed
before the subrecipient requests funds from the participating jurisdiction.”

24 CFR 92.505(a), Applicability of Uniform Administrative Requirements, states, “the
requirements of OMB Circular No. A-87 and the following requirements of 24 CFR part 85
apply to the participating jurisdiction, State recipients, and any governmental subrecipient
receiving HOME funds: §§ 85.6, 85.12, 85.20, 85.22, 85.26, 85.32-85.34, 85.36, 85.44,
85.51, and 85.52.




                                             54
24 CFR 92.508(a)(3)(ii), Recordkeeping, General, Project Records, states, “each
participating jurisdiction must establish and maintain sufficient records to enable HUD to
determine whether the participating jurisdiction has met the requirements of this part.” At a
minimum, records including “the source and application of funds for each project, including
supporting documentation in accordance with 24 CFR 85.20, are needed.”

24 CFR 92.508(a)(5)(iv), Recordkeeping, General, Financial Records, states, “each
participating jurisdiction must establish and maintain sufficient records to enable HUD to
determine whether the participating jurisdiction has met the requirements of this part.” At a
minimum, records demonstrating adequate budget control, in accordance with 24 CFR 85.20,
including evidence of periodic account reconciliations, are required.

CPD (Office of Community Planning and Development) Notice 97-9, HOME Program
Income, Recaptured Funds, Repayments, and CHDO [community housing development
organization] Proceeds, Section III.B, states, “The participating jurisdiction must also be
able to reasonably predict anticipated program income during the next program year. Thus,
the participating jurisdiction's financial management system should enable the PJ
[participating jurisdiction] to track program income receivable (such as the amount and date
of principal and interest due on a HOME loan).”

CPD Notice 97-9, HOME Program Income, Recaptured Funds, Repayments, and
CHDO Proceeds, Section III.A, states, “HOME program income is defined in the
Definitions section of the HOME Final Rule at 24 CFR 92.2. Program income means gross
income received by the participating jurisdiction, subrecipient or State recipient which is
directly generated from the use of HOME funds (including HOME program income) and
matching contributions. When program income is generated by housing that is only partially
assisted with HOME funds or matching funds, the income shall be prorated to reflect the
percentage of HOME funds or match used. Following is a list of examples. Please note that
this is not an exclusive list.

   (1) Proceeds from the disposition by sale or long-term lease of real property acquired,
       rehabilitated, or constructed with HOME funds or matching contributions;

   (2) Gross income from the use or rental of real property, owned by the participating
       jurisdiction, State recipient, or a subrecipient, that was acquired, rehabilitated, or
       constructed with HOME funds or matching contributions, less costs incidental to
       generation of the income (Note: rental income from property owned by entities other
       than the participating jurisdiction, a State recipient or a subrecipient does not
       constitute program income);

   (3) Payments of principal and interest on loans made using HOME funds or matching
       contributions;

   (4) Proceeds from the sale of loans made with HOME funds or matching contributions;




                                            55
   (5) Proceeds from the sale of obligations secured by loans made with HOME funds or
       matching contributions;

   (6) Interest earned on program income pending its disposition; and

   (7) Any other interest or return on the investment permitted under §92.205(b) of HOME
       funds or matching contributions (Note: this does not include recaptured funds,
       repayments or CHDO proceeds).

CPD Notice 97-9, HOME Program Income, Recaptured Funds, Repayments, and
CHDO Proceeds, Section III.B, states, “the participating jurisdiction is not required to
identify program income by program funding year. However, the participating jurisdiction
must be able to identify which projects generated program income and which projects
received program income, including the amount. The participating jurisdiction must also be
able to reasonably predict anticipated program income during the next program year. Thus,
the participating jurisdiction's financial management system should enable the PJ to track
program income receivable (such as the amount and date of principal and interest due on a
HOME loan).”

CPD Notice 97-9, HOME Program Income, Recaptured Funds, Repayments, and
CHDO Proceeds, Section III.E, states, “a participating jurisdiction may not draw down
HOME allocation funds while allowing program income to accumulate in its local account.
Available program income must be used to pay the next eligible program cost (or portion
thereof).”

HUD Handbook 6509.2, Community Planning and Development Monitoring
Handbook, Exhibit 7-19, Guide for Review of Subrecipient Management, provides
guidance on participating jurisdictions‟ evaluation of subrecipients.

HOMEfires Policy Newsletter Volume 5, No. 2, June 2003, Preserving Affordability,
states, “To preserve affordability, PJs should negotiate as part of the original financing
agreement, purchase options, rights of first refusal or other preemptive rights to purchase the
housing before foreclosure or transfer in lieu of foreclosure. PJs should regularly review the
management and financial condition of projects so that they can intervene before projects
reach the point of default. If a project goes into default, the PJ must work with the project
owner and primary lenders to maintain the project as affordable housing for the remaining
affordability period or the PJ must repay the HOME account.”

HOMEfires Policy Newsletter Volume 5, No. 2, June 2003, Homebuyer Housing with a
Resale Agreement, states, “Section 92.254(a)(5)(i)(A) of the HOME Rule provides that the
affordability restrictions for homebuyer housing subject to a resale agreement may terminate
upon foreclosure, transfer in lieu of foreclosure or assignment of an FHA insured mortgage
to HUD. However, this does not terminate the long-term affordability requirements. The
affordability requirements would be met if the housing is sold to another HOME-eligible
low-income family and the new homebuyer agrees to enter into a resale agreement for the
remaining affordability period. Homebuyer housing with a resale agreement that is



                                            56
presumed to meet the affordability requirements pursuant to § 92.254(a)(5)(i)(B) continues to
meet the affordability requirements even after a foreclosure.

“If the PJ provides additional HOME funds to the new homebuyer or invests additional
HOME funds in a property, the original affordability period is terminated and a new
affordability period starts. The length of the new affordability period is determined by the
amount of HOME funds invested.”

HOMEfires Policy Newsletter Volume 5, No. 2, June 2003, Homebuyer Housing with a
Recapture Agreement, states, “Homebuyer housing with a recapture agreement is not
subject to the affordability requirements after the PJ has recaptured the HOME funds in
accordance with its written agreement. If the ownership of the housing is conveyed pursuant
to a foreclosure sale, the family may or may not have a recapture obligation, depending upon
the option the PJ has chosen in accordance with §92.254(a)(5)(ii)(A). Unlike rental housing
and homeownership housing under resale restrictions, the amount of HOME funds required
to be repaid in the event of foreclosure is the amount that would be subject to recapture under
the terms of the written agreement with the homebuyer. If the recapture agreement provides
for shared net proceeds, the amount subject to recapture is based on the amount of net
proceeds (if any) from the foreclosure sale. If the recapture agreement requires the entire
amount of the HOME investment from the homebuyer or an amount reduced prorata based
on the time the homebuyer has owned and occupied the housing measured against the
affordability period, the amount required by the agreement is the amount that must be
recaptured by the PJ for the HOME program. If the PJ is unable to recapture the funds from
the family, the PJ must repay the HOME account in the amount due pursuant to the recapture
agreement. [Please note that in the case of noncompliance other than foreclosure (e.g.,
homebuyer is no longer using the property as a principal residence), the amount the PJ must
repay is the entire HOME investment rather than the amount due under the written
agreement.] Regardless of the terms of its written agreements, it is important that the PJ
establish mechanisms that ensure that it will be notified of pending foreclosures so that it can
attempt to recoup some or all of the HOME subsidy.”

HOMEfires, Volume 5, No.5, November 2003, states, “a A PJ must select either the resale
or recapture option for its HOME assisted homebuyer projects at the time the assistance is
provided. The PJ may select one option for all of its HOME-assisted homebuyer projects or
choose on a case-by-case basis depending upon market conditions and/or the buyer's
preference. In addition, all options that the PJ will employ must be identified in its
Consolidated Plan and approved by HUD.

HOMEfires, Volume 6, No.1, August 2005, states, “PJs must report HOME project
completion and beneficiary data for initial occupants timely by entering it in IDIS on a
regular basis, and periodically review the status of all projects in the system to identify those
that need to be cancelled. The HOME final rule at 24 CFR 92.502(d)(1) requires PJs to enter
project completion information into IDIS within 120 days of making a final draw for a
project. Failure to do so is a violation of this provision and of 24 CFR 92.504(a), which
states that PJs are responsible for managing day-to-day operations of its program. The final




                                             57
rule states that HUD may suspend further project set-ups or take other corrective actions, if
satisfactory project completion data is not provided.

HUD Technical Guide for Determining Income and Allowances for the HOME
Program, January 2005, Chapter 2, Assessing Information, Variations in Pay, states,
“For applicants whose jobs provide steady employment (e.g., 40 hours a week, 50 weeks a
year), it can be assumed that there will only be slight variations in the amount of earnings
reflected in monthly or bi-weekly pay stubs. In such cases, three consecutive month‟s worth
of income documentation is an appropriate amount upon which to base a projection of
income over the following 12-month period.

“For those whose annual employment is less stable or does not conform to a twelve-month
schedule (e.g., seasonal laborers, construction workers, teachers), PJs should examine income
documentation that covers the entire previous twelve-month period. Such workers can
experience substantial variations in earned income over the course of a year. As such, an
examination of three month‟s worth of income documentation may not provide an accurate
basis upon which to project the applicant‟s income over the following 12 months.”

HUD Technical Guide for Determining Income and Allowances for the HOME
Program, January 2005, Chapter 2, Assessing Information, Sources of Earned Income,
states, “In addition to hourly earnings, PJs must account for all earned income. In addition to
the base salary, this will include annual cost of living adjustments (COLAs), bonuses, raises,
and overtime pay. In the case of overtime, it is important to clarify whether overtime is
sporadic or a predictable component of an employee‟s income. If it is determined that an
applicant has earned and will continue to earn overtime pay on a regular basis, PJs should
calculate the average amount of overtime pay earned by the applicant over the pay period the
PJ is using to calculate income eligibility (3 months or 12 months). This average amount is
then to be added to the total amount of projected earned income over the following 12-month
period.”

HUD Technical Guide for Determining Income and Allowances for the HOME
Program, January 2005, Chapter 2, General Requirements, Anticipating Income, states,
“The HOME regulations at 24 CFR 92.203(d)(1) require that, for the purpose of determining
eligibility for HOME assistance, a PJ must project a household‟s income in the future. To do
so, a “snapshot” of the household‟s current circumstances is used to project future income.
In general, a PJ should assume that today‟s circumstances will continue for the next 12
months, unless there is verifiable evidence to the contrary. For example, if a head of
household is currently working for $7.00 per hour, 40 hours per week, the PJ should assume
that this family member will continue to do so for the next year. Thus, estimated earnings
will be $7.00 per hour multiplied by 2,080 hours, or $14,560 per year.

“This method should be used even when it is not clear that the type of income received
currently will continue in the coming year. For example, assume a family member has been
receiving unemployment benefits of $100 per month for 16 weeks at the time of income
certification. It is unlikely that the family member will continue on unemployment for
another 52 weeks. However, because it is not known whether or when the family member



                                            58
will find employment, the PJ should use the current circumstances to anticipate annual
(gross) income. Income would therefore be calculated as follows: $100 per week x 52
weeks, or $5,200.

“The exception to this rule is when documentation is provided that current circumstances are
about to change. For example, an employer might report that an employee currently makes
$7.50 an hour, but a negotiated union contract will increase this amount to $8.25 an hour
eight weeks from the date of assistance. In such cases, income can be calculated based on
the information provided.”

OMB Circular A-87, Cost Principles for State, Local and Indian Tribal Governments,
Attachment B, Selected Items of Cost

8. Compensation for personal services.
   a. General. Compensation for personnel services includes all remuneration, paid
      currently or accrued, for services rendered during the period of performance under
      Federal awards, including but not necessarily limited to wages, salaries, and fringe
      benefits. The costs of such compensation are allowable to the extent that they satisfy
      the specific requirements of this Circular, and that the total compensation for
      individual employees:
           (1) Is reasonable for the services rendered and conforms to the established policy
               of the governmental unit consistently applied to both Federal and non-Federal
               activities;
           (2) Follows an appointment made in accordance with a governmental unit‟s laws
               and rules and meets merit system or other requirements required by Federal
               law, where applicable; and
           (3) Is determined and supported as provided in subsection h.
   h. Support of salaries and wages. These standards regarding time distribution are in
      addition to the standards for payroll documentation.
           (1) Charges to Federal awards for salaries and wages, whether treated as direct or
               indirect costs, will be based on payrolls documented in accordance with
               generally accepted practice of the governmental unit and approved by a
               responsible official(s) of the governmental unit.
           (2) No further documentation is required for the salaries and wages of employees
               who work in a single indirect cost activity.
           (3) Where employees are expected to work solely on a single Federal award or
               cost objective, charges for their salaries and wages will be supported by
               periodic certifications that the employees worked solely on that program for
               the period covered by the certification. These certifications will be prepared
               at least semi-annually and will be signed by the employee or supervisory
               official having first hand knowledge of the work performed by the employee.
           (4) Where employees work on multiple activities or cost objectives, a distribution
               of their salaries or wages will be supported by personnel activity reports or
               equivalent documentation which meets the standards in subsection (5) unless a
               statistical sampling system (see subsection (6)) or other substitute system has




                                           59
been approved by the cognizant Federal agency. Such documentary support will
    be required where employees work on:
        (a) More than one Federal award,
        (b) A Federal award and a non-Federal award,
        (c) An indirect cost activity and a direct cost activity,
        (d) Two or more indirect activities which are allocated using different
            allocation bases, or
        (e) An unallowable activity and a direct or indirect cost activity.
(5) Personnel activity reports or equivalent documentation must meet the
    following standards:
        (a) They must reflect an after-the-fact distribution of the actual activity of
            each employee,
        (b) They must account for the total activity for which each employee is
            compensated,
        (c) They must be prepared at least monthly and must coincide with one or
            more pay periods, and
        (d) They must be signed by the employee.
        (e) Budget estimates or other distribution percentages determined before
            the services are performed do not qualify as support for charges to
            Federal awards but may be used for interim accounting purposes,
            provided that:
                (i) The governmental unit's system for establishing the estimates
                produces reasonable approximations of the activity actually
                performed;
                (ii) At least quarterly, comparisons of actual costs to budgeted
                distributions based on the monthly activity reports are made. Costs
                charged to Federal awards to reflect adjustments made as a result
                of the activity actually performed may be recorded annually if the
                quarterly comparisons show the differences between budgeted and
                actual costs are less than ten percent; and
                (iii) The budget estimates or other distribution percentages are
                revised at least quarterly, if necessary, to reflect changed
                circumstances.
(6) Substitute systems for allocating salaries and wages to Federal awards may be
    used in place of activity reports. These systems are subject to approval if
    required by the cognizant agency. Such systems may include, but are not
    limited to, random moment sampling, case counts, or other quantifiable
    measures of employee effort.
        (a) Substitute systems which use sampling methods (primarily for
            Temporary Assistance to Needy Families (TANF), Medicaid, and
            other public assistance programs) must meet acceptable statistical
            sampling standards including:
                (i) The sampling universe must include all of the employees whose
                salaries and wages are to be allocated based on sample results
                except as provided in subsection (c);




                                 60
                 (ii) The entire time period involved must be covered by the
                sample; and
                (iii) The results must be statistically valid and applied to the period
                being sampled.
        (b) Allocating charges for the sampled employees' supervisors, clerical
            and support staffs, based on the results of the sampled employees, will
            be acceptable.
        (c) Less than full compliance with the statistical sampling standards noted
            in subsection (a) may be accepted by the cognizant agency if it
            concludes that the amounts to be allocated to Federal awards will be
            minimal, or if it concludes that the system proposed by the
            governmental unit will result in lower costs to Federal awards than a
            system which complies with the standards.
(7) Salaries and wages of employees used in meeting cost sharing or matching
    requirements of Federal awards must be supported in the same manner as
    those claimed as allowable costs under Federal awards.




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