oversight

The Lower Manhattan Development Corporation, New York, NY, Community Development Block Grant Disaster Recovery Assistance Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-02-07.

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

                                                                Issue Date
                                                                         February 7, 2011
                                                                Audit Report Number
                                                                         2011-NY-1005




TO:        Yolanda Chavez, Deputy Assistant Secretary for Grant Programs, DG



FROM:      Edgar Moore, Regional Inspector General for Audit, 2AGA

SUBJECT: The Lower Manhattan Development Corporation, New York, NY,
         Community Development Block Grant Disaster Recovery Assistance Funds

                                  HIGHLIGHTS

 What We Audited and Why

            This is the fifteenth in our continuous congressionally requested audits of the
            Lower Manhattan Development Corporation’s (LMDC) administration of the
            Community Development Block Grant (CDBG) Disaster Recovery Assistance
            funds awarded to New York State for the recovery and revitalization of Lower
            Manhattan after the September 11, 2001, terrorist attacks on the World Trade
            Center in New York City. During the audit period, October 1, 2009, through
            March 31, 2010, LMDC disbursed $206.9 million of the $2.783 billion being
            administered. The audit objective was to determine whether LMDC disbursed
            CDBG Disaster Recovery Assistance funds in accordance with the guidelines
            established in its action plans for the Economic Development and East River
            Waterfront Project programs.

 What We Found


            LMDC officials generally disbursed the CDBG Disaster Recovery Assistance
            funds reviewed in accordance with applicable action plans. However,
            documentation for the award of Small Firm Assistance Program grants,
            administered under the Economic Development Program, was not always
            adequate to ensure that grants were awarded in accordance with LMDC
           guidelines. This condition occurred because of weaknesses in processing
           controls. Further, additional program requirements could provide greater
           assurance that program objectives will be achieved.

What We Recommend


           We recommend that HUD’s Deputy Assistant Secretary for Grant Programs direct
           LMDC officials to (1) strengthen Small Firm Assistance Program processing
           controls to ensure that adequate documentation is maintained for the basis of
           awarding the grant, thus providing greater assurance that any grants awarded from
           the $3.1 million authorized under a subrecipient agreement but not yet expended
           will be adequately supported, and (2) consider administrative changes that might
           better ensure that program objectives will be met.

           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 discussed the results of our review during the audit and at an exit conference
           held on January 24, 2011. We provided a draft report to LMDC officials on
           January 5, 2011, and received a written response on February 2, 2011. LMDC
           officials generally agreed with the finding as well as with recommendation 1A
           and partially with recommendation 1B. The complete text of LMDC officials’
           response, along with our evaluation of that response, can be found in appendix A
           of this report.




                                            2
                           TABLE OF CONTENTS

Background and Objective                                                       4

Results of Audit
      Finding: LMDC Generally Administered CDBG Disaster Recovery Assistance   5
               Funds in Compliance With Regulations

Scope and Methodology                                                          9

Internal Controls                                                              10

Appendixes
   A. Auditee Comments and OIG’s Evaluation                                    12
   B. Schedule of Disbursements as of March 31, 2010                           16




                                           3
                          BACKGROUND AND OBJECTIVE

The State of New York designated the Lower Manhattan Development Corporation (LMDC) to
administer $2.783 billion1 of the $3.483 billion in Community Development Block Grant
(CDBG) Disaster Recovery Assistance funds appropriated by Congress following the September
11, 2001, terrorist attacks on the World Trade Center to assist with the recovery and
revitalization of Lower Manhattan. LMDC was created in December 2001 as a subsidiary of the
Empire State Development Corporation to function as a joint city-State development corporation.
A 17-member board of directors, appointed equally by the governor of New York and the mayor
of New York City, oversees LMDC’s affairs. The Empire State Development Corporation
performs all accounting functions for LMDC.

Planned expenditures of Disaster Recovery Assistance funds are documented in action plans that
receive public comment and are reviewed by the U.S. Department of Housing and Urban
Development (HUD). HUD had reviewed 31 partial action plans as of March 31, 2010, that
allocated the $2.783 billion to various programs and activities (see appendix C for amounts by
program). As of March 31, 2010, LMDC had disbursed approximately $1.9 billion, or 68
percent, of the $2.783 billion allocated. During this audit, we reviewed disbursements related to
the following programs:

Economic Development/Small Firm Assistance Program: This program, to which $7 million
was allocated,2 is designed to meet any of the following objectives (1) increase economic activity
in Lower Manhattan by spurring and promoting additional commercial and residential
development, (2) attract businesses and residents to locate in Lower Manhattan, and (3) provide
short-term or long-term jobs in Lower Manhattan. To date, one activity, the Small Firm
Assistance Program, is being conducted under the Economic Development Program. The Small
Firm Assistance Program was designed to compensate small businesses for sales or revenue
losses incurred because of street closures due to publicly funded construction projects. The
program is being administered through a subrecipient agreement with the New York City
Department of Small Business Services.

East River Waterfront Project: The program’s goal is to connect the East River Waterfront to its
closest Lower Manhattan neighborhoods of the South Street Seaport, Chinatown, the Lower East
Side, and East River Park. The program also involves the redevelopment of the East River
Waterfront Esplanade and Piers, north of Battery Park and south of Pier 42, and would revitalize
Lower Manhattan communities and the East River Waterfront. This project, to which $150
million was allocated,3 is being implemented through subrecipient agreements with the New
York City Department of Small Business Services and the Department of Parks and Recreation.

The audit objective was to determine whether LMDC disbursed CDBG Disaster Recovery
Assistance funds for the Economic Development and East River Waterfront programs in
accordance with the guidelines established under its action plans.
1
  The Empire State Development Corporation administers the remaining $700 million.
2
  The final action plan, amended August 18, 2010, reduced the allocation to $6.775 million.
3
  Partial action plan 10, amended July 30, 2010, reduced the allocation to $149 million.


                                                         4
                                      RESULTS OF AUDIT

Finding: LMDC Generally Administered CDBG Disaster Recovery
         Assistance Funds in Compliance With Regulations
LMDC generally administered CDBG Disaster Recovery Assistance funds for the Economic
Development and East River Waterfront Project programs in accordance with its action plans.
However, documentation for the award of Small Firm Assistance Program grants administered
under the Economic Development Program was not always adequate to ensure that grants were
awarded in accordance with LMDC guidelines. Further, additional program requirements could
provide greater assurance that program objectives will be achieved.



    File Documentation for Grants
    Not Always Adequate to Assure
    Award in Accordance With
    Program Guidelines

                 LMDC established the Small Firm Assistance Program to address the potential for
                 blight by assisting small firms that had suffered business disruption as a result of
                 the temporary closure of streets and sidewalks due to publicly funded construction
                 projects. Eligible firms must be located on a street designated by LMDC as
                 eligible and submit a complete application designed to demonstrate sales lost due
                 to the construction. An application consists of (1) either monthly operating, profit
                 and loss, or cashflow statements verifying the applicant’s estimate of
                 demonstrated impact or a completed and certified standardized financial
                 statement; (2) a written lease, deed, or permit for the eligible premises; (3) a City
                 of New York Substitute Form W-9,4 current payroll summary, or New York State
                 45-MN Form;5 and (4) an original utility bill covering the eligibility period.

                 The grant award was based upon the lesser of the demonstrated economic impact
                 of the street closure or $2.50 per square foot of space occupied6 Eligible
                 businesses could receive grants of up to $25,000. LMDC amended the program
                 guidelines in August 2010 to consider businesses above street level as eligible,
                 increase the maximum allowable grant to $35,000, and extend the program
                 through December 2015.

4
  The City of New York uses Substitute Form W-9 to obtain certification of taxpayers’ identification numbers to
ensure accuracy of information contained and avoid backup withholdings as mandated by the Internal Revenue
Service.
5
  A New York State 45-MN Form must be filed quarterly by employers that are subject to both unemployment
insurance contributions and withholding tax.
6
  The square footage allowance was increased to $5.00 in July 2009 and firms that had not previously been awarded
the maximum grant were awarded a supplemental grant based upon an additional $2.50 per square foot, up to the
$25,000 maximum.


                                                        5
Documentation for the basis for awarding the grants was not always adequate to
ensure that grants were awarded in accordance with program guidelines. The
inadequacies related to incorrect periods used to calculate economic impact,
comparing profit instead of revenue, expired leases, and conflicting sales
amounts. For instance,

    In four cases, the proper period was not used when calculating the
     economic loss based upon documentation in the file. Program guidelines
     provide that sales or revenue during the eligible street closure period be
     compared to sales or revenue for the same period in the prior year. While
     not in the program guidelines, LMDC officials said that they allowed
     some small businesses to base their calculation on periods 2 years before
     the subject period if streets were closed more than 1 year. While we
     acknowledge that this measure would be reasonable if the street closure
     had been for more than 1 year, in these four cases, although the street was
     closed more than a year, the grant was calculated as if the closures were
     less than a year.

    In two cases, the economic impact was demonstrated using profit variance
     between the eligibility period and the prior period as opposed to sales or
     revenue as provided in the program guidelines. While profit and loss
     could be a valid comparison, any comparisons made should be consistent
     with the program guidelines and among applicants.

    In two cases, the files contained expired written leases. LMDC officials
     stated that the applicants were subsequently operating under month to
     month leases; however, this assertion was not documented.

    In two cases, monthly sales figures for the same months differed between
     initial and subsequent applications submitted by the applicants.

Although these inadequacies were noted, there was no monetary impact because
during the exit conference, LMDC officials provided supplemental documentation
to demonstrate that grantees had appropriately been awarded the maximum grant.
For instance, if the awarded amount was based upon square footage or the
maximum grant had been received, which would have been the lesser amount; an
increase in the demonstrated economic impact would have no effect upon the
award. In addition, while firms with expired leases received an award, LMDC did
obtain utility bills that demonstrated the business was operating at the time the
grant was received.




                                6
Options to Provide Greater
Assurance that Program
Objectives are Met

            Office of Management and Budget Circular A-87 provides that governmental
            units are responsible for the efficient and effective administration of Federal
            awards through application of sound management practices. While past audits
            have documented that LMDC has generally implemented effective financial and
            management controls, opportunities exist to provide greater assurance that the
            Small Firm Assistance Program objectives will be met. Specifically, procedures
            to require a promise to continue in business for a specified period after the grant
            award and to randomly verify self-certified information should be considered.

            The Small Firm Assistance Program is part of LMDC’s overall Economic
            Development Program, which was designed to meet any of the following
            objectives (1) increase economic activity in Lower Manhattan by spurring and
            promoting additional commercial and residential development, (2) attract
            businesses and residents to locate in Lower Manhattan, and (3) provide short-term
            or long-term jobs in Lower Manhattan. The specific design of the Small Firm
            Assistance Program appeared to be limited to compensating businesses for
            reported losses in sales or revenue due to construction activity; however, without
            assurance that the businesses would continue to be viable, the greater objective of
            the Economic Development Program to provide short-term or long-term jobs may
            not have been addressed. While LMDC had established some controls in this area
            by requiring that a grantee be in business when the grant was received, 2 of the 20
            businesses we reviewed were no longer operating less than a year after receipt of
            the grant.

            Program guidelines require that an applicant submit monthly operating, profit and
            loss, or cashflow statements verifying the applicant’s estimate of demonstrated
            impact or a completed and certified standardized financial statement, among other
            items. Review of 20 grants disclosed that they were awarded based upon self-
            certified information from the applicants. In addition, while LMDC’s internal
            audit department had sampled awards made to ensure compliance with program
            guidelines, this review did not include verification of the self-certified
            information submitted. Therefore, greater assurance of the integrity of
            information submitted under self-certification could be assured by including a
            statement that makes reference to imposing civil monetary penalties under the
            False Claims Act for anyone providing false information, and including a process
            to selectively verify submitted information within the scope of LMDC’s internal
            audit reviews.




                                              7
Conclusion

             While, LMDC generally administered CDBG Disaster Recovery Assistance funds
             for the Economic Development and East River Waterfront Project programs in
             accordance with its action plans, documentation for the award of grants awarded
             under the Small Firm Assistance Program was not always adequate to ensure that
             awards were made consistent with LMDC program guidelines. This condition
             occurred because of weaknesses in processing controls. In addition, opportunities
             exist to strengthen program controls to provide greater assurance that the overall
             Economic Development Program objectives will be met.

Recommendations

             We recommend that HUD’s Deputy Assistant Secretary for Grant Programs direct
             LMDC officials to

             1A.    Strengthen Small Firm Assistance Program processing controls to ensure
                    that adequate documentation is maintained for the basis of awarding the
                    grants, thus providing greater assurance that any grants awarded from the
                    $3.1 million authorized under a subrecipient agreement but not yet
                    expended will be adequately supported.

             1B.    Consider amending the Small Firm Assistance Program guidelines to (1)
                    require a timeframe during which firms awarded grants must remain in
                    business to provide greater assurance that the objectives of the Economic
                    Development Program will be met, (2) include a reference on the
                    application regarding imposing civil monetary penalties under the False
                    Claims Act for anyone providing false information, and (3) include a
                    process for verifying grant recipients’ self-certified information within the
                    scope of LMDC’s internal audit reviews.




                                               8
                         SCOPE AND METHODOLOGY

To achieve the audit objectives, we reviewed applicable laws, regulations, and program
requirements; HUD-approved partial action plans; and LMDC’s accounting books and records.
We documented and reconciled disbursements recorded during the audit period in HUD’s
Disaster Recovery Grant Reporting system.

During the audit period, October 1, 2009, through March 31, 2010, LMDC disbursed $206.9
million of the $2.783 billion in Disaster Recovery Assistance funds for activities related to the
rebuilding and revitalization of Lower Manhattan. We obtained a general understanding of
LMDC’s system of internal controls for the programs reviewed and tested $9.6 million,
representing 4.6 percent of the amount disbursed for the period as follows:

                                    Amount disbursed from October 1,
                                   2009, through March 31, 2010                Amount tested
       Program area                        (in millions)                        (in millions)

Economic Development                          $ 1.0                                   $ 0.4

East River Waterfront Project                   14.2                                    6.5

General planning and administration               2.7                                   2.7

           Total                              $ 17.9                                  $ 9.6

LMDC made one drawdown of $1.013 million from the Economic Development Program for the
Small Firm Assistance Program during the audit period to reimburse the subrecipient for grants
disbursed to 60 small businesses. We selected a sample of 20 of the 60 grantees (33 percent) to
review the extent to which grant award processing complied with HUD regulations and LMDC
guidelines. The sample was selected based upon various attributes including 1) the number of
times small firms applied for the program, 2) variances of time and awards between applications,
and 3) those applications with missing application and check delivery dates. LMDC made 14
drawdowns for the East River Waterfront Project, from which we selected a sample of 4
drawdowns representing $6.5 million (45 percent) of the total amount drawn. The results of our
sample cannot be projected over the universe of items tested.

We performed our onsite work at LMDC’s office in Lower Manhattan from July through
November 2010.

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



                                                 9
                              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:

                      Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

                      Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

                      Safeguarding resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

                      Validity and reliability of data – Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

               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.


                                                 10
Significant Deficiency


            There were no significant deficiencies identified. Nevertheless, the following item is
            a reportable weakness:

                   Compliance with laws and regulations – Adequate documentation was not
                   always maintained in grant files to document the basis for awarding the
                   grants.




                                             11
Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         12
Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




Comment 3




                         13
Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 4



Comment 3

Comment 5




                         14
                         OIG Evaluation of Auditee Comments

Comment 1   It was not until LMDC officials had provided documentation at the exit
            conference to support grants whose documentation was not adequate that we
            determined that there was no monetary impact. A lack of monetary impact was
            due primarily to the fact that most grantees’ awards were based upon a flat square
            footage rate and had received the maximum amount allowed. Therefore, the
            resulting recommendation is made to ensure that grant files for any future grants
            are adequately documented to support the award amount if the square footage rate
            or the maximum grants is not applicable. LMDC responded that it has already
            taken action responsive to the recommendation.

Comment 2   The options we are recommending for consideration are not meant to change
            program objectives, but rather, to better ensure that one or more of the objectives
            of the Economic Development Program, under which the Small Firm Assistance
            Program is approved, are achieved. We do not believe that the options we are
            recommending would adversely affect the Small Firm Assistance Program
            objectives. The report was changed on page 4 and 7 to reflect that the Economic
            Development Program is intended to meet any of the objectives listed.

Comment 3   LMDC actions already taken are responsive to the recommendation.

Comment 4   While it is not our intent to recommend specific program procedures, we do not
            believe that an option, such as requiring a waiting period after grant approval to
            ensure the viability of the business, would increase administrative costs.

Comment 5   The option for consideration that LMDC internal audit include a process for
            verifying grant recipient’s self-certified information does not intend that internal
            audit be part of grant operations, but rather that it exercise discretion when
            conducting reviews of grants awarded and consider verifying grantee self-
            certified information if warranted. LMDC guidelines for the Small Firm
            Assistance Program provide that LMDC may audit applications on a random
            basis, as well as reserves the right to contact government agencies to confirm
            information included in any application. Permitting such an option by LMDC’s
            internal audit department would be consistent with this guideline. During our
            review, we noted grant award files that contained inconsistent information for the
            same time periods on different applications, which may have warranted additional
            review by LMDC.




                                             15
    Appendix B

          SCHEDULE OF DISBURSEMENTS AS OF MARCH 31, 2010

                                                                       Audit period
                                                                                           Cumulative          Balance
                                                    Budget as of      disbursements
                    Program                                                              disbursed as of    remaining as of
                                                    Mar. 31, 2010     Oct. 1, 2010 –
                                                                                         Mar. 31, 2010       Mar. 31, 2010
                                                                      Mar. 31, 2010
Business Recovery Grant Program                         218,946,000          (19,021)         218,820,895            125,105
Job Creation and Retention                              143,000,000           875,000         105,998,340         37,001,660
Small Firm Attraction                                    29,000,000            (1,800)         27,721,190          1,278,810
Residential Grant (Housing Assistance Program)          236,180,809                           236,057,064            123,745
Employment Training Assistance                              346,000                               337,771              8,229
Memorial Design & Installation                              309,969                               309,969                  0
Columbus Park Renovation                                    998,571                                     0            998,571
Marketing History and Heritage Museums                    4,612,619                             4,612,619                  0
Downtown Alliance Streetscape                             4,000,000                             4,000,000                  0
NYSE Area Improvements                                   25,255,000                             5,477,869         19,777,131
Parks and Open Space                                     46,981,689            81,539          17,874,751         29,106,938
Hudson River Park Improvements                           72,600,000         7,419,366          71,709,716            890,284
West Street Pedestrian Connection                        22,955,811                            18,746,315          4,209,496
LM Communications Outreach                                1,000,000                             1,000,000                  0
Green Roof Project                                          100,000                                     0            100,000
Chinatown Tourism & Marketing                             1,160,000                             1,159,835                165
Lower Manhattan Information Program                       2,570,000                             1,752,391            817,609
WTC Memorial and Cultural Program                       706,618,783       72,739,399          548,068,425        158,550,358
Lower Manhattan Tourism                                   3,950,000                             3,950,000                  0
East River Waterfront Project                           149,000,000       14,178,448           15,803,901        133,196,099
Local Transportation and Ferry Service                    9,000,000          195,062            4,191,122          4,808,878
East Side K-8 School                                     23,000,000                                28,703         22,971,297
Fitterman Hall Reconstruction                            15,000,000                                 1,784         14,998,216
Chinatown Local Development Corporation                   7,000,000           383,888           2,572,755          4,427,245
Affordable Housing                                       54,000,000         1,800,000          24,281,578         29,718,422
Public Services Activities                                7,891,900                             6,497,721          1,394,179
Administration & Planning                               114,892,005         2,756,145          93,619,463         21,272,542
Disproportionate Loss of Workforce                       33,000,000                            32,999,997                  3
Utility Restoration and Infrastructure Rebuilding       680,000,000       96,176,472          366,722,087        313,277,913
LM Enhancement Fund                                      87,855,844        8,860,132           36,519,474         51,336,370
Drawing Center                                            2,000,000                                     0          2,000,000
Fulton Corridor Revitalization                           39,000,000          315,449            1,161,687         37,838,313
Economic Development – Other (Small Firm
Assistance Program)                                       6,775,000         1,013,967           1,016,007          5,758,993
Transportation Improvements                              31,000,000           117,983             131,893         30,868,107
Education – Other                                         3,000,000                                     0          3,000,000
                      Total                           2,783,000,000      206,892,029        1,853,145,322        929,854,678




                                                            16