oversight

The East Orange Revitalization and Development Corporation Did Not Always Comply With HOME Program Requirements and Federal Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-04-07.

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

                                                                   Issue Date
                                                                       April 7, 2011
                                                                   Audit Report Number
                                                                        2011-NY-1009




TO:        Anne Marie Uebbing, Director, Office of Community Planning and
                                 Development, 2FD



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


SUBJECT: The East Orange Revitalization and Development Corporation Did Not Always
         Comply With HOME Program Requirements and Federal Regulations


                                    HIGHLIGHTS

 What We Audited and Why

             We audited the East Orange Revitalization and Development Corporation
             (Corporation). We selected the Corporation based on a request for an audit from
             the Newark U.S. Department of Housing and Urban Development (HUD) Office
             of Community Planning and Development. The objective of the review was to
             determine whether the Corporation complied with HOME Investment
             Partnerships Program (HOME) requirements and Federal regulations.

 What We Found


             Corporation officials did not always comply with HOME program requirements and
             applicable Federal regulations. Specifically, they (1) did not repay the City of East
             Orange’s (City) HOME program $37,712 in principal and accumulated interest for
             an overdue predevelopment loan, and (2) expended $737,437 in HOME grants
             without maintaining adequate and complete documents to ensure its compliance
             with HOME program requirements and applicable Federal regulations.
What We Recommend

           We recommend that the Director of HUD’s New Jersey Office of Community
           Planning and Development instruct the City to (1) direct the Corporation to repay
           to the City’s HOME program a total of $37,712 in principal and accumulated
           interest for an overdue predevelopment loan, (2) direct the Corporation to provide
           documents to support its compliance with HOME program requirements and
           applicable Federal regulations or reimburse the City’s HOME program $737,437,
           (3) obtain and review documents associated with the Corporation’s qualifications
           to determine whether it is qualified to be designated as a community housing
           development organization, and (4) direct the Corporation to establish and
           implement internal controls that will ensure compliance with HOME program
           requirements and applicable Federal regulations.

           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 audit with the Executive Director of the
           Corporation prior to the exit conference. On March 4, 2011, we e-mailed an
           electronic copy of the draft audit report to the Executive Director and mailed a
           hardcopy of the draft audit report to the Corporation. However, the Director of
           Corporation did not attend our exit conference meeting on March 17, 2011 at the
           office of the Director of Policy, Planning and Development Department of the
           City of East Orange.




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                            TABLE OF CONTENTS

Background and Objective                                                   4

Results of Audit
      Finding 1: Corporation Officials Did Not Always Comply With HOME     5
                 Program Requirements and Applicable Federal Regulations

Scope and Methodology                                                      10

Internal Controls                                                          12

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use       14




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                      BACKGROUND AND OBJECTIVE

The East Orange Revitalization and Development Corporation (Corporation) is a private,
nonprofit corporation organized under the laws of the State of New Jersey to provide clean, safe,
and affordable housing and to further the provision of decent housing to moderate- and low-
income households in the County of Essex. The Corporation is tax exempt under section 501(c)
of the Internal Revenue Code of 1986 and is located at 160 Halsted Street, East Orange, NJ.

The Corporation is governed by a board of trustees consisting of seven members. The executive
director is appointed by the board to manage the daily operation of the Corporation. The
Corporation’s fiscal year begins on the first day of January and ends on the last day of December
of each year.

The HOME Investment Partnerships Program (HOME) is authorized under Title II of the
Cranston-Gonzalez National Affordable Housing Act. The HOME program regulations are at 24
CFR (Code of Federal Regulations) Part 92. The HOME program is the largest Federal block
grant to State and local governments designed exclusively to create affordable housing for low-
income households. The program’s flexibility allows States and local governments to use
HOME funds for grants, direct loans, loan guarantees or other forms of credit enhancement,
rental assistance and security deposits.

On January 20, 2005, the City of East Orange’s (City) Department of Policy, Planning, and
Development, Division of Neighborhood Housing and Revitalization, granted City-wide
community housing development organization (CHDO) status to the Corporation. On March 28,
2006, the City awarded the Corporation a predevelopment loan, an operating grant, and a
construction grant in the amounts of $35,000, $50,000, and $1 million, respectively, to construct
the Princeton Street Phase II homes, which consisted of six newly built, affordable two-family
homes.

The objective of the audit was to determine whether the Corporation complied with HOME
program requirements and applicable Federal regulations.




                                                4
                                 RESULTS OF AUDIT


Finding:       Corporation Officials Did Not Always Comply With HOME
               Program Requirements and Applicable Federal Regulations
Corporation officials did not always comply with HOME program requirements and applicable
Federal regulations. Specifically, they (1) did not repay the City’s HOME program $37,712 in
principal and accumulated interest for an overdue predevelopment loan, and (2) expended $737,437
in HOME grants without maintaining adequate and complete documents to ensure the Corporation’s
compliance with HOME program requirements and applicable Federal regulations. Therefore, (1)
$37,712 in loan receipts was not available for eligible HOME program activities, and (2) there was
no assurance that $737,437 in HOME grants awarded to the Corporation was used for eligible
HOME program activities and expenses. These deficiencies occurred because Corporation officials
did not have the administrative capacity to establish and implement internal controls to ensure the
Corporation’s compliance with HOME program requirements and applicable Federal regulations.


 The Corporation Had Not
 Repaid a Predevelopment
 Loan’s Principal and
 Accumulated Interest


               Contrary to the provision of a predevelopment loan agreement between the City
               and the Corporation and regulations at 24 CFR 92.301, as of August 28, 2010,
               Corporation officials had not repaid $37,712 in loan receipts. This amount
               consisted of the loan’s principal of $35,000 and an accumulated interest balance
               of $2,712 that was supposed to be repaid to the City’s HOME program no later
               than January 28, 2008. This deficiency occurred because Corporation officials
               did not have proper administrative capacity to ensure the Corporation’s
               compliance with HOME program requirements.

               According to 24 CFR 92.301, HOME funds may be used by a participating
               jurisdiction to provide technical assistance and site control loans to CHDOs in the
               early stages of site development for an eligible project. The CHDO must repay
               the predevelopment loan to the participating jurisdiction from construction loan
               proceeds or other project income. The participating jurisdiction may waive
               repayment of the loan, in part or in whole, if there are impediments to project
               development that the participating jurisdiction determines are reasonably beyond
               the control of the borrower. However, the City did not waive the repayment of
               the loan due from the Corporation.

               According to a predevelopment loan agreement between the City and the
               Corporation, the principal sum and interest, if any, shall be payable in a single


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         lump-sum payment on a date no later than 22 months from the date of the passage
         of the developer designation by the City Council. If the principal is not paid when
         due, it shall bear interest after maturity at the rate of 3 percent per year. The date
         of the approval of the developer designation by the City Council was March 28,
         2006. Therefore, we calculated the interest due on the loan’s principal from
         January 28, 2008, through August 28, 2010, to be $2,712, using the interest rate
         cited in the loan agreement. Thus, a total of $37,712 consisting of loan principle
         and interest is due to the City’s HOME program and considered to be questioned.

The Corporation Lacked
Supporting Documents To
Ensure Compliance With
HOME Program Requirements

         Contrary to the provisions of the grant agreement between the City and the
         Corporation and applicable Federal regulations, the Corporation neither
         maintained nor provided adequate and complete documents to support its
         compliance with HOME program requirements and applicable Federal
         regulations. Specifically, documentation was not maintained or provided to
         support (1) the eligibility and reasonableness of costs paid from HOME grants
         awarded to the Corporation for the construction of the Princeton Street Phase II
         homes, (2) the initial certification and annual recertification of the Corporation to
         become and continue to operate as a CHDO, (3) compliance with procurement
         requirements for non-Federal entities, (4) compliance with environmental review
         requirements, (5) compliance with Davis-Bacon Act and overtime provisions, and
         (6) compliance with Office of Management and Budget (OMB) Circular A-133
         requirements for performing annual audits. Therefore, there was no assurance
         that the $737,437 disbursed was used for eligible HOME program activities and
         expenses. This deficiency occurred because the Corporation did not have proper
         administrative capacity to establish and implement internal controls to ensure its
         compliance with HOME program requirements and applicable Federal
         regulations. The details are as follows:

             1) The Corporation neither maintained nor provided adequate and complete
                documents to support the eligibility and reasonableness of costs paid from
                HOME grants awarded to it for the construction of the Princeton Street
                Phase II homes.

                According to 24 CFR 92.2, “community housing development
                organization” means a private nonprofit organization that has standards of
                financial accountability that conform to 24 CFR 84.21 (b) (2) and (6),
                Standards for Financial Management Systems. The regulation states that
                recipients’ financial management systems shall provide records that
                identify adequately the source and application of funds for federally
                sponsored activities and accounting records, including cost accounting



                                           6
   records that are supported by source documentation. However,
   Corporation officials did not provide adequate and complete documents to
   support the eligibility and reasonableness of costs paid. For example, the
   City submitted its first check to the Corporation for $52,098 to reimburse
   it for different payments, including a payment to ARTEX Studio, LLC, for
   architectural services. However, Corporation officials did not provide us
   with supporting documents, including a vendor invoice and copies of the
   front and back of cancelled checks, which would have shown that ARTEX
   Studio, LLC, had been paid and that the costs were eligible and related to
   the funded activity.

2) According to 24 CFR 92.2, the Corporation was required to meet legal,
   capacity, and organizational structure criteria to become and continue to
   operate as a CHDO. However, Corporation officials did not provide
   documents to support the Corporation’s initial certification and annual
   recertification to become and continue to operate as a CHDO.

3) According to a grant agreement between the Corporation and the City, the
   Corporation was required to comply with 24 CFR 84.44 and 43, which
   require establishing written procurement procedures and conducting its
   procurement transactions in a manner to provide, to the maximum extent
   practical, open and free competition. However, Corporation officials did
   not provide procurement policy or documents to support compliance with
   these procurement requirements.

4) According to a grant agreement between the Corporation and the City,
   Corporation officials agreed to comply with all requirements of the
   HOME program as stated in 24 CFR Part 92, including but not limited to
   the following: No HOME project funds will be advanced, and no costs
   can be incurred until the City has conducted an environmental review of
   the proposed project site as required under 24 CFR Part 58. The
   environmental review may result in a decision to proceed with, modify, or
   cancel the project. However, Corporation officials did not provide
   complete documents to show that the environmental reviews had been
   properly completed before expending HOME grant funds on the
   construction of the Princeton Street Phase II project.

   Corporation official provided a preliminary environmental review for
   three of the six lots used for the construction of the six new two-family
   homes. Yet, although the provided preliminary environmental review
   cited several environmental issues associated with two of the three
   examined lots, Corporation officials provided neither environmental
   review documents associated with the other three lots nor documents to
   support further investigation or cleanup and remediation of the two
   contaminated lots.




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                 5) According to a grant agreement between the Corporation and the City,
                    Corporation officials were required to comply with the provisions of the
                    Davis-Bacon Act, as supplemented by 29 CFR Part 5, if the housing
                    project under the grant agreement involved the construction or
                    rehabilitation of 12 or more HOME-assisted units. However, Corporation
                    officials did not provide documents to support the Corporation’s
                    compliance with the Davis-Bacon Act, although its housing project
                    consisted of constructing six new two-family homes consisting of 12
                    units.

                 6) According to OMB Circular A-133 (Subpart B, section 200(a)), (for fiscal
                    years ending after December 31, 2003) a non-Federal entity such as the
                    Corporation that expends $500,000 or more per year in Federal awards
                    shall have a single or program-specific audit conducted for that year.
                    Based on information included in financial statements and an independent
                    compilation report prepared by a certified public accountant, the
                    Corporation received and expended more than $500,000 during the fiscal
                    year ending December 31, 2008. However, Corporation officials did not
                    provide documents to support that a single or program-specific audit was
                    conducted for its fiscal year ending December 31, 2008.

             According to a grant agreement between the Corporation and the City, the
             Corporation was required to provide the City, the U.S. Department of Housing
             and Urban Development (HUD), or any of their duly authorized representatives
             immediate access to any books, documents, papers, and records of the
             Corporation or its contractors, which are directly pertinent to the Corporation’s
             housing project, for the purpose of conducting audits and examinations.
             However, Corporation officials were unable to provide us with many of the
             requested documents and records.

Conclusion

             Corporation officials did not always comply with HOME program requirements
             and applicable Federal regulations. Specifically, Corporation officials neither
             repaid an overdue predevelopment loan’s principal and accumulated interest to
             the City’s HOME program, nor maintained adequate and complete documents to
             ensure its compliance with HOME program requirements and applicable Federal
             regulations. In particular, documentation was not maintained or provided to
             support (1) the eligibility and reasonableness of costs paid from HOME grants
             awarded to the Corporation for the construction of the Princeton Street Phase II
             homes, (2) the eligibility of the Corporation to become and continue to operated
             as a CHDO, (3) the adequacy and fairness of the Corporation’s procurement
             process, (4) its compliance with environmental review requirements, (5) its
             compliance with provisions of the Davis-Bacon Act, and (6) its compliance with
             OMB Circular A-133 requirements for performing annual audits. These



                                              8
          deficiencies occurred because Corporation officials did not have adequate
          administrative capacity to establish and implement internal controls to ensure the
          Corporation’s compliance with HOME program requirements and Federal
          regulations. Therefore, a predevelopment loan’s principal and accumulated
          interest of $37,712 had not been repaid to the City’s HOME program to be used
          for eligible HOME program activities, and $737,437 had been expended on
          activities and expenses that were not adequately supported.

Recommendations

          We recommend that the Director of the New Jersey Office of Community Planning
          and Development instruct the City to


          1A. Direct Corporation officials to repay to the City’s HOME program a total of
              $37,712 in principal and accumulated interest for an overdue
              predevelopment loan.

          1B. Direct Corporation officials to provide documents to support the $737,437
              in unsupported expenses incurred to ensure the Corporation’s compliance
              with HOME program requirements and applicable Federal regulations or
              reimburse this amount to the City’s HOME program from non-Federal
              funds.

          1C. Obtain and review documents associated with the Corporation’s qualifications
              to determine whether it is qualified to be designated as a CHDO.

          1D. Direct Corporation officials to establish and implement internal controls that
              will ensure the Corporation’s compliance with HOME program requirements
              and Federal regulations.




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                        SCOPE AND METHODOLOGY

The audit focused on the Corporation’s compliance with HOME program requirements and
applicable Federal regulations. To accomplish our objectives, we

      Reviewed relevant HOME program requirements and applicable Federal regulations.

      Interviewed staff from the New Jersey Office of Community Planning and Development,
      the City, and the Corporation.

      Obtained an understanding of the Corporation’s management controls and procedures
      through analyzing its and the City’s responses to internal control questionnaires.

      Analyzed reports from HUD’s computer systems, including the Integrated Disbursement
      and Information System (IDIS), Line of Credit Control System, and LexisNexis.

      Reviewed the Corporation’s financial statements such as its balance sheet and income
      statements.

      Reviewed HUD’s monitoring reports and independent accountant audit reports.

      Reviewed a predevelopment loan agreement and a HOME grant agreement between the
      City and the Corporation, as well as related documents such as resolutions associated
      with the Corporation’s board of trustees and the City Council.

      Reviewed a joint venture agreement between the Corporation and the Open Eye
      Innovators, LLC.

      Examined incomplete documents associated with the initial certification of the
      Corporation to become a CHDO and preliminary environmental reviews.

      Traced disbursements listed in IDIS reports to incomplete Corporation supporting
      documents.

      Selected all financial transactions such as disbursements and nonfinancial transactions such
      as a preliminary environmental review associated with the operations of the Corporation for
      testing. This testing was based on (1) the materiality of HOME grant awards to the
      Corporation in comparison to the average annual HOME grants awarded to the City and (2)
      the assessed risk level of noncompliance with HOME program requirements and applicable
      Federal regulations.

      Traced computerized data in HUD’s e-LOCC’s system to the City’s records of
      disbursements to the Corporation, which was sufficiently reliable for our audit purposes, and


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       traced all disbursements of the City’s HOME funds to the Corporation for the construction
       of the Princeton Street Phase II homes to copies of cancelled checks issued by the City to
       the Corporation.

The audit generally covered the period from September 1, 2005, through December 31, 2009,
and was extended as needed to accomplish our objective. We performed the audit fieldwork
from July through November 2010 at the City’s Department of Policy, Planning, and
Development located at 44 City Hall Plaza, East Orange, NJ.

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.




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                              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.


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Significant Deficiency


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

                   Adequate controls were not developed to properly safeguard resources, as
                   Corporation officials did not repay the City’s HOME program the principal
                   and accumulated interest for a predevelopment loan (see finding).

                   Corporation officials neither established nor implemented internal controls to
                   ensure compliance with laws and regulations including HOME program
                   requirements and applicable Federal regulations, as disbursements were not
                   adequately supported (see finding).




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                                   APPENDIXES

Appendix A

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


              Recommendation                                  Funds to be put
                  number             Unsupported 1/           to better use 2/
                     1A                                           $37,712
                     1B                   $737,437
                    Total                 $737,437                $37,712



1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.

2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this instance, if Corporation officials repay the
     predevelopment loan’s principal and accumulated interest to the City’s HOME program,
     the City can use these proceeds for eligible HOME program activities, and HUD could be
     assured that these proceeds would be put to better use.




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