oversight

The City of Buffalo Did Not Always Administer Its Community Development Block Grant Program in Accordance With HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-04-15.

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

                                                                  Issue Date
                                                                      April 15, 2011
                                                                  Audit Report Number
                                                                        2011-NY-1010




TO:        William O’Connell, Director, Community Planning and Development, 2CD



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


SUBJECT: The City of Buffalo Did Not Always Administer Its Community Development
         Block Grant Program in Accordance With HUD Requirements

                                    HIGHLIGHTS

 What We Audited and Why

             We audited the City of Buffalo’s (City) Community Development Block Grant
             (CDBG) program. We selected the City based on a hotline complaint, Hotline
             Case Number HL-09-0960, received on July 2, 2009. The complaint alleged that
             the City, the Buffalo Urban Renewal Agency, and the Buffalo Economic
             Renaissance Corporation misused CDBG funds. The complaint expressed
             concerns pertaining to 19 findings identified in the U.S. Department of Housing
             and Urban Development’s (HUD) March 2009 monitoring report on the City’s
             administration of its CDBG program. The objectives of the audit were to
             determine whether the City (1) administered its CDBG program effectively,
             efficiently, and economically in accordance with applicable rules and regulations,
             and (2) expended CDBG funds for eligible activities that met a national objective
             of the program.

 What We Found
             The City did not always follow applicable HUD regulations in its administration of
             the CDBG program. In addition, it did not always ensure that CDBG funds were
             expended for eligible activities that met a national objective of the program.
             Specifically, the City (1) disbursed CDBG program funds for questionable street
           improvement expenditures, (2) did not adequately monitor its subrecipient-
           administered economic development program, and (3) charged ineligible and
           unsupported costs for clean and seal program activities to the CDBG program. As a
           result, program funds were used for ineligible and unsupported expenses and the
           City’s ability to administer its CDBG program effectively and efficiently and ensure
           that the program’s objectives were met was diminished. Consequently, the City is
           not able to demonstrate that it made the best use of CDBG funds to meet the
           community’s needs.

What We Recommend
           We recommend that the Director of HUD’s Buffalo Office of Community
           Planning and Development instruct the City to (1) reimburse from non-Federal
           funds $467,429 for ineligible costs pertaining to street improvement projects not
           done and clean and seal code enforcement, (2) provide documentation to justify
           the more than $22.8 million in unsupported costs for previously incurred general
           City maintenance expenses, transactions charged to the CDBG program income
           account, and unsupported clean and seal program costs, (3) reprogram the more than
           $4.7 million in remaining economic development project funds if there is a lack of
           capacity, to ensure that these funds are put to better use for other eligible program
           activities, and (4) ensure that $744,479 in fiscal year 2010 clean and seal program
           funds will be put to better use by developing administrative control procedures that
           will ensure compliance with CDBG program requirements. Any costs determined
           to be ineligible should be reimbursed from non-Federal funds.

           Further, we recommend that the Director of HUD’s Buffalo Office of Community
           Planning and Development require the City to suspend incurring costs and/or
           reimbursing itself for costs paid from the City’s municipal general expense account
           for public facilities, economic development, and clean and seal activities until HUD
           determines that the City has the capacity to carry out these activities in compliance
           with HUD 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 review during the audit, provided a copy of the
           draft report to City officials, and requested their comments on February 17, 2011.
           We held an exit conference on March 8, 2011, and City officials provided their
           written comments on March 10, 2011, at which time they generally disagreed
           with the findings. The complete text of the auditee’s response, excluding the
           exhibits, along with our evaluation of that response, can be found in appendix B
           of this report.

                                             2
                            TABLE OF CONTENTS

Background and Objectives                                                            4

Results of Audit
      Finding 1: The City Charged Questionable Street Improvement Expenditures to    5
                 Its CDBG Program

      Finding 2: The City Did Not Adequately Monitor Its Subrecipient-Administered   12
                 Economic Development Program

      Finding 3: The City Charged Ineligible and Unsupported Costs for Clean and     19
                 Seal Program Activities to Its CDBG Program

Scope and Methodology                                                                24

Internal Controls                                                                    26

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use                 28
   B. Auditee Comments and OIG’s Evaluation                                          29




                                            3
                           BACKGROUND AND OBJECTIVES

The Community Development Block Grant (CDBG) program was established by Title I of the
Housing and Community Development Act of 1974, Public Law 93-383 as amended, 42 U.S.C.
(United States Code) 5301. The program provides grants to State and local governments to aid
in the development of viable urban communities. Governments are to use grant funds to provide
decent housing and suitable living environments and to expand economic opportunities,
principally for persons of low and moderate income. To be eligible for funding, every CDBG-
funded activity must meet one of the program’s three national objectives. Specifically, every
activity, except for program administration and planning, must

               Benefit low- and moderate-income persons,
               Aid in preventing or eliminating slums or blight, or
               Address a need with a particular urgency because existing conditions pose a serious and
               immediate threat to the health or welfare or the community.

The City of Buffalo, NY (City) is a CDBG entitlement grantee. The U.S. Department of Housing
and Urban Development (HUD) awarded the City more than $15.8 million in CDBG funding in
fiscal year 2008, more than $16 million in 2009, and more than $17 million in 2010.1 In
addition, the City has received more than $4.3 million in funds under the American Recovery
and Reinvestment Act of 2009. These funds are available to support a variety of activities
directed at improving the physical condition of neighborhoods by providing housing
rehabilitation and public improvements and facilities, fostering economic development by
providing technical and financial assistance to local businesses and creating employment, or
improving services for low- and/or moderate-income households. The City operates under a
mayor-council form of government, and its CDBG activities are administered both in-house,
through the Buffalo Urban Renewal Agency (Agency) and the City’s Office of Strategic
Planning, and through outside nonprofit organizations like the Buffalo Economic Renaissance
Corporation (Corporation). The City is responsible for overseeing, monitoring, and supporting
the Corporation’s CDBG activities. The files and records related to the City’s CDBG program
are maintained in City Hall, located in Buffalo, NY.

The objectives of the audit were to determine whether the City (1) administered its CDBG
program effectively, efficiently, and economically in accordance with applicable rules and
regulations, and (2) expended CDBG funds for eligible activities that met a national objective of
the program.




1
    The City’s CDBG fiscal year is May 1 through April 30.

                                                         4
                                RESULTS OF AUDIT

Finding 1: The City Charged Questionable Street Improvement
           Expenditures to Its CDBG Program
The City charged questionable street improvement expenditures to its CDBG program.
Specifically, it used CDBG funds to reimburse its municipal general expense account for
ineligible and unsupported City street improvement expenses, did not use CDBG funds to
address the community’s needs, and did not maintain sufficient procurement records. As a
result, $162,923 in ineligible costs and more than $1.9 million in unsupported costs were charged
to the program. Consequently, the City’s ability to administer its CDBG program efficiently and
effectively and ensure that CDBG program objectives were met was diminished. We attribute
this deficiency to the City’s unfamiliarity with HUD regulations, and its circumvention of the
regulations and its own policies to expend CDBG funds quickly to prevent a reduction in future
funding.


 Ineligible and Unsupported
 Street Improvement Projects


              On January 13, 2010, HUD notified the City that its line-of-credit ratio was 1.7 in
              comparison with its 2009 grant amount. To meet the 1.5 timeliness test for 2009,
              the City needed to draw down an additional $3.3 million before March 2, 2010.
              Failure to meet this requirement would have resulted in a possible reduction in
              future funding by HUD. As a result, the City drew down just under $3.3 million
              from the entitlement fund during February 2010. Specifically, on February 23,
              2010, $2.1 million was reimbursed to the City from CDBG funds for street
              improvement projects through 11 entitlement draws. We reviewed each of the 11
              draws as part of our audit and determined that the drawdowns were for general
              City maintenance expenses that were incurred as early as June 2007.

              Regulations at 24 CFR (Code of Federal Regulations) 570.200(a)(2) require the
              City to ensure and maintain evidence that each of its CDBG-funded activities
              meets one of the broad national objectives of the CDBG program. However,
              since the street improvement activities reviewed were not initially CDBG
              activities, the City did not maintain evidence from the time incurred 2007 through
              2009 that the activities met a national objective and had a community benefit. In
              addition, work such as median and curb improvements and street-resurfacing
              projects were not performed on three different streets for which the City was
              reimbursed $134,711. Also, the City received a duplicate reimbursement of
              $28,212 in ineligible expenses for the resurfacing of a City street.




                                               5
Further, for a number of the streets, we could not determine how the CDBG
eligibility criteria were met. Although the City indicated that the work benefited
low- to moderate-income residents in the area where the work was performed,
some of the streets were in industrial or commercial business areas. As a result,
we question the City’s basis for determining the area served by certain street
improvement projects, and recommend submission of information to support their
service area determination. Federal requirements in 42 U.S.C. (United States
Code) 5301(c) provide that to meet CDBG eligibility criteria, the work must
principally benefit persons of low and moderate income. Further, since the
remainder of the drawdowns reviewed was for previously incurred general City
maintenance expenses that lacked monitoring documents to ensure compliance
with national objectives, more than $1.9 million is considered unsupported
pending an eligibility determination by HUD. City officials expressed confusion
in obtaining the proper paperwork from the Department of Public Works to
support the corresponding vouchers.

Shown below are two pictures of public improvements on Academy Road that
were not made.




The Agency reimbursed the City using CDBG funds for a median curb replacement project on Academy
Road that was not done. The picture above illustrates that the median curb was not replaced.




                                        6
Above is another picture of the Academy Road median, illustrating that the median curb was not replaced.



Shown below are two pictures of public improvements on West Parade Avenue
between Best and East North Street that were not made.




The Agency reimbursed the City using CDBG funds for a street repaving project on West Parade Avenue that
was not done. The picture above illustrates that the street was not repaved.




                                           7
          Above is another picture of West Parade Avenue, illustrating that the street was not repaved.




Improvement Projects Not
Based on Community Needs

          Contrary to CDBG regulations at 24 CFR Part 91, the City’s public improvement
          projects were not based on the established goals and needs of the community
          based on the consolidated plan. The City is divided into nine area districts, each
          headed by a City council member. Rather than use CDBG funding based on the
          City’s overall infrastructure needs, the City distributed the CDBG funds equally
          by the nine districts. For example, in fiscal year 2009, the City’s Lovejoy District
          and Delaware District each were allocated $57,778 for public improvements.
          However, the need for public improvements in the Lovejoy District may have
          been greater than that in the Delaware District. According to City officials, this
          distribution method was necessary to receive cooperation from the City’s
          common council in approving the City’s annual action plan. However, according
          to its own policies, the City’s common council is to be advisory only and does not
          have the authority to dictate how CDBG funds are to be used by the City’s
          Department of Public Works. As a result, it was questionable whether the public
          improvements expenditures reviewed were the most efficient and economical use
          of CDBG funds.

          Shown below are three photographs of a Delaware District neighborhood
          benefiting from public improvements that were questionable based on community
          need.




                                                      8
The Agency reimbursed the City using CDBG funds for a curb and sidewalk replacement project on West
Ferry Street, which was questionable based on community need. The picture above illustrates the
neighborhood benefiting from the curb and sidewalk replacement project.




Above is another picture of the West Ferry Street neighborhood. The curb and sidewalk replacement project
on this street was questionable based on community need.




                                          9
             Above is another picture of the West Ferry Street neighborhood. The curb and sidewalk replacement project
             on this street was questionable based on community need.



Procurement Records Not
Maintained

             Contrary to Federal procurement regulations at 24 CFR 85.36, the City did not
             maintain sufficient records to detail the procurement history for the
             reimbursements of the previously incurred City street improvement expenses.
             Since the City’s rationale for the method of procurement, selection of contract
             type, contractor selection or rejection, and basis for the contract price were not
             documented, the eligibility of the more than $1.9 million in costs is considered
             unsupported and is further questioned.


Conclusion

             The City disbursed CDBG program funds for questionable street improvement
             expenditures. Deficiencies identified included that the City used CDBG funds to
             reimburse its municipal general expense account for ineligible and unsupported
             City street improvement expenses, did not use CDBG funds to address the
             community’s needs, and did not maintain sufficient procurement records.
             Consequently, the City’s ability to administer its CDBG program efficiently and
             effectively and ensure that CDBG program objectives were met was diminished.
             As a result, $162,923 in ineligible costs and more than $1.9 million in
             unsupported costs were charged to the program. We attribute this deficiency to
             the City’s unfamiliarity with HUD regulations, and its circumvention of the
             regulations and its own policies to expend CDBG funds quickly to prevent a
             reduction in future funding by HUD.




                                                      10
Recommendations

          We recommend that the Director of HUD’s Buffalo Office of Community Planning
          and Development

          1A.     Require the City to suspend incurring costs and/or reimbursing itself for
                  costs paid from the City’s municipal general expense account for public
                  facilities activities until HUD determines whether the City has the capacity
                  to carry out its CDBG public facilities activities in compliance with HUD
                  regulations.


          We further recommend that the Director of HUD’s Buffalo Office of Community
          Planning and Development instruct the City to

          1B.     Reimburse from non-Federal funds $162,923 ($134,711+$28,212)
                  expended on ineligible costs pertaining to street improvement projects not
                  done and a duplicate reimbursement.

          1C.     Provide documentation to justify the $1,982,988 in unsupported costs
                  associated with street improvement expenditures incurred between June
                  2007 and October 2009. Any unsupported costs determined to be
                  ineligible should be reimbursed from non-Federal funds.

          1D.     Establish and implement controls to ensure adequate monitoring of the
                  public facilities/improvement activities.




                                            11
Finding 2: The City Did Not Adequately Monitor Its Subrecipient-
           Administered Economic Development Program
The City did not ensure that a subrecipient administering its economic development program had an
adequate financial management system and that the performance goals of the activities were
achieved. Specifically, the City (1) reported unsupported program income to HUD, (2) charged
questionable transactions to the CDBG program income account, (3) could not provide assurances
that program objectives were met, (4) failed to safeguard program assets, and (5) achieved minimal
progress in its economic development activities. We attribute these deficiencies to the City’s lack of
monitoring and oversight of its subrecipient. Therefore, it failed to provide fiscal and programmatic
monitoring to safeguard the assets of the program and did not take a proactive approach to its
oversight of the economic development activities. As a result, it could not provide assurance that
more than $20.1 million in transactions was properly accounted for, CDBG-funded activities met
program objectives, and economic development funds were spent in a timely manner, thus
depriving other activities of program resources.


 Background


               The City designated the Buffalo Urban Renewal Agency (Agency) as the entity
               responsible for the administration of the CDBG program. The Agency contracted
               with the Buffalo Economic Renaissance Corporation (Corporation) to administer
               economic development loans and grants. The Corporation was responsible for the
               development, management, and implementation of a variety of community
               economic development programs on behalf of the City, including commercial
               lending, real estate management, and other development projects. In addition to
               the CDBG program, the Corporation’s funding principally came from grants
               received from the City. The last subrecipient agreements that the Agency
               executed with the Corporation expired on April 30, 2009. In February 2010, the
               mayor called for the elimination of the Corporation and the unification of all
               neighborhood revitalization efforts within the Agency. The Agency’s new
               mission would be to support neighborhood economic development that builds
               around the commercial cores, with a concentrated effort in the areas of housing
               revitalization, demolitions, infrastructure improvements, and providing loans and
               grants to businesses to create strong neighborhoods. The dissolution of the
               Corporation and the transferring of economic development activities to the
               Agency were in process as of December 2010.

 Unsupported Program Income
 Amounts Reported to HUD

               The City’s recording of more than $4.9 million in economic development
               program income receipts and expenditures was unsupported. The Corporation
               maintained all of the program income generated from economic development

                                                 12
activities. In turn, it reported the receipt and expenditure of program income to
the City. The City then recorded the transactions in HUD’s Integrated
Disbursement and Information System (IDIS) and the annual performance reports.
However, it did not obtain adequate documentation supporting that the program
income had been properly recorded. Regulations at 24 CFR 570.504(a), and
570.501(b) require that receipt and expenditure of program income be recorded as
part of the financial transactions of the grant program. The recipient is
responsible for ensuring that CDBG funds are used in accordance with all
program requirements.

The amounts that the City recorded as program income receipts were
unsupported. For fiscal year 2008 receipts, the information submitted by the
Corporation to the City consisted of a spreadsheet with no supporting documents.
In addition, the Corporation removed the rents received from the program income
calculation without explanation. The City accepted the figures on the spreadsheet
and reported them to HUD. For fiscal year 2009, the City included an amount for
rental receipts after the deduction of rental expenses. However, it did not receive
the supporting documentation for the rental expenses to determine whether they
were eligible offsets to the rental receipts. Regulations at 24 CFR
570.489(e)(1)(iii) provide that program income includes gross income from the
use or rental of real or personal property acquired by the unit of general local
government or a subrecipient of a unit of general local government with CDBG
funds, less the costs incidental to the generation of the income.

In addition, the amounts that the City reported as expenditures paid with program
income were not supported. The majority of the expenditures related to payroll
and operations. For payroll, there was no documentation provided for the payroll
expenditures for fiscal year 2008 and only timesheets for fiscal year 2009. In
addition to the lack of support, there was evidence that unreasonable salary
expenditures were charged to the CDBG program during both fiscal years. The
CDBG program was charged many hours for unused vacation and sick time of
Corporation employees whose termination occurred during the fiscal year.
Regulations at 2 CFR 225, appendix B, 8a(1) and 8h, provide that total
compensation for individual employees has to be reasonable for the services
rendered and conform to the established policy of the governmental unit
consistently applied to both Federal and non-Federal activities and be properly
supported.

In addition, the City did not provide adequate support for operation costs. The
Corporation submitted a number of invoices in which the documentation provided
did not support how the cost was allowable. The CDBG program manager agreed
that certain expenditures, such as legal fees for personnel actions and expenditures
after the fiscal year should not have been charged to the CDBG program during
fiscal year 2009. Regulations at 2 CFR 225, appendix A, C(1), provide that to be
allowable under Federal awards, costs must be necessary and reasonable for
proper and efficient performance and administration of Federal awards. We

                                 13
          attribute the deficiency to the process by which the Corporation submitted
          invoices for approval by the City after the program income funds had been
          expended. None of the invoices was submitted to the City for approval until after
          the end of the fiscal year.

Questionable Transactions
Charged to the CDBG Program
Income Account

          The City could not provide assurance that all CDBG program income receipts
          were recorded and that only eligible expenditures were paid with program income
          funds. Specifically, the Corporation recorded more than $15.2 million in
          questionable transactions in its CDBG program income account. The transactions
          represented the receipts, expenditures, and transfers that were recorded during
          fiscal years 2008 and 2009. We attribute this deficiency to the fact that the
          Corporation’s financial management system did not accurately account for
          program income transactions and the City’s failure to adequately monitor the
          Corporation’s use of program income funds.

          The Corporation’s financial management system did not accurately account for
          program income transactions. A review of receipts recorded in the CDBG
          program income account indicated additional amounts that should have been
          reported as program income. For example, there was rental income, loan refunds,
          charge backs, and other miscellaneous revenue that the Corporation should have
          included as program income that were not reported to HUD during fiscal year
          2009. The Corporation’s chief financial officer acknowledged that the
          Corporation did not include all items because of its lack of knowledge of the
          accounting codes and how certain transactions represented CDBG program
          income. In addition, the City disallowed a portion of the expenditures paid with
          CDBG program income that the Corporation submitted to the City for approval in
          fiscal year 2009. Regulations at 2 CFR 225, appendix A, C(1), provide that to be
          allowable under Federal awards, costs must be necessary and reasonable for
          proper and efficient performance and administration of Federal awards. Also,
          regulations at 24 CFR 570.504(a) and 570.501(b) require that the receipt and
          expenditure of program income be recorded as part of the financial transactions of
          the grant program. The recipient is responsible for ensuring that CDBG funds are
          used in accordance with all program requirements. The use of designated public
          agencies, subrecipients, or contractors does not relieve the recipient of this
          responsibility.

          The City’s failure to adequately monitor the Corporation’s use of program income
          funds provided a lack of assurance that all program income funds were recorded
          properly and that the expenditures represented eligible costs under the CDBG
          program. Regulations at 24 CFR 85.40(a) provide that grantees are responsible
          for managing the day-to-day operations of grant- and subgrant-supported

                                          14
           activities. Grantees must monitor these activities to ensure compliance with
           applicable Federal requirements and that performance goals are achieved.
           Grantee monitoring must cover each program, function, or activity. The City
           could not provide an accurate accounting of the CDBG program income
           maintained by the Corporation. In turn, the Corporation failed to report monthly
           program income generated by activities carried out with CDBG funds.

           The City’s lack of adequate monitoring of the CDBG program income account led
           to concerns regarding transactions relating to commingled funds and expenditures
           for non-Federal costs on the Corporation’s books and records. The CDBG
           program income account was commingled with other receipts and disbursements
           such as CDBG grant drawdowns, Section 108 grant drawdowns, non-CDBG grant
           funds, and transfers to and from other accounts. In addition, the Corporation
           made payments from the CDBG program income account that did not relate to
           CDBG expenditures, raising concerns as to whether these ineligible expenditures
           were made with CDBG program income funds. For example, the Corporation
           transferred funds from the CDBG program income account to its payroll account.
           The transfers represented the total payroll for the Corporation. Likewise, the
           Corporation used funds from the CDBG program income account to pay the
           expenditures of its other programs. These expenditures would not be eligible
           CDBG costs because they related to other programs of the Corporation.

No Assurances That Program
Objectives Were Met


           The City could not provide assurance that the objectives of the economic
           development activities administered by the Corporation were achieved.
           Regulations at 24 CFR 570.501(b) provide that grantees are responsible for
           determining the adequacy of performance under subrecipient agreements. The
           City’s annual action plans presented performance objectives to be achieved by the
           Corporation during the respective fiscal year based on the number of businesses
           and individuals in the community that received assistance through the different
           programs offered. Specific objectives included job creation related to lending, the
           number of grants awarded to small, local businesses, and the number of residents
           that attended entrepreneurial training being offered.

           According to the corresponding annual performance report, these goals were not
           achieved during fiscal years 2008 and 2009. For example, the objective related to
           lending for both fiscal years 2008 and 2009 was to develop 60 jobs for low- and
           moderate-income persons by providing low-interest loans to small, local
           businesses. The Corporation reported that 42 full-time-equivalent positions were
           created in fiscal year 2008, with 33.5 of these held by low- to moderate-income
           individuals, and only 4 full-time-equivalent positions were created in fiscal year
           2009, with 51 percent of these jobs targeted for low- to moderate-income
           individuals. Therefore, we attribute the City’s inability to meet its goals to a

                                           15
           decline in the number of loans awarded and the lack of adequate oversight by the
           Corporation. For example, the Corporation closed 13 CDBG-funded loans during
           fiscal year 2008 and two CDBG-funded loans during fiscal year 2009, thus
           limiting the number of businesses able to create jobs in relation to loan funding
           received through the Corporation.

           Review of the files provided evidence that Corporation officials did not adequately
           oversee the activities they funded through the CDBG program. The Corporation’s
           subrecipient agreement, along with its procedures, detailed specific oversight of
           performance goals that was required to be performed by the Corporation. The
           majority of businesses with outstanding, active loans through the Corporation were
           reported as not having provided up-to-date employment creation data. Therefore,
           the City had no assurances that the loan program met its objective concerning job
           creation for low- and moderate-income persons. The City was provided activity
           summary reports for 2009 relating to 28 of 91 active loans in the Corporation’s
           portfolio. Further, nearly half of the active loans in the Corporation’s portfolio
           showed amounts that were more than 90 days delinquent. Thus, the loan files
           reviewed showed inadequate oversight by Corporation officials evidenced by the
           lack of required documentation, which in turn contributed to the lack of assurances
           that program objectives were met.

Failure To Safeguard Program
Assets

           The City failed to safeguard program assets by not adequately monitoring the
           efficiency or effectiveness of the Corporation’s administration of the economic
           development activities. As part of its administration of the CDBG program, the City
           is responsible for the monitoring of its subrecipients. Regulations at 24 CFR
           85.40(a) provide that grantees are responsible for managing the day-to-day
           operations of grant- and subgrant-supported activities. Grantees must monitor these
           activities to ensure compliance with applicable Federal requirements and that
           performance goals are achieved. Grantee monitoring must cover each program,
           function, or activity. The lack of fiscal and programmatic monitoring provided no
           assurances that CDBG funds were expended in ways that furthered overall program
           objectives. City officials attributed its lack of oversight over the Corporation to a
           lack of checks and balances caused by inadequate segregation of duties among its
           management staff.

           The City was unable to provide evidence that it performed fiscal monitoring of
           the Corporation. Thus, it was unable to ensure the efficiency of the Corporation’s
           administration of economic development activities. The fiscal year 2008 annual
           performance report referenced that fiscal monitoring of the Corporation had
           begun during the year but did not continue based upon the absence of a chief
           financial officer at the Corporation. According to the City’s procedures, high-risk
           subrecipients such as the Corporation are required to be subjected to fiscal and

                                            16
             programmatic monitoring on an annual basis. HUD also expressed the need to
             monitor high-risk subrecipients during a technical assistance meeting with the
             City in June 2009. The City provided some evidence of programmatic
             monitoring, but it did not adequately ensure the effectiveness of the economic
             development activities administered by the Corporation. Further, comprehensive
             programmatic monitoring of the Corporation had not been performed by the City
             since March 2004.

Minimal Progress Achieved in
Economic Development


             The City achieved minimal progress in its economic development activities.
             Specifically, it could not ensure that more than $4.7 million in economic
             development funds was spent in a timely manner. The City’s economic
             development program was suspended until the City completes the dissolution of
             the Corporation, implements the revised policies and procedures, and hires
             personnel capable of providing the neighborhood economic development program
             that the mayor announced in February 2010. Therefore, as of December 2010, the
             majority of the CDBG funds for fiscal years 2008, 2009, and 2010 earmarked for
             economic development projects had gone unspent. Thus, the City should consider
             reprogramming the remaining funds to put these funds to better use for other
             eligible program activities.

Conclusion

             The City did not ensure that a subrecipient administering its economic
             development program had an adequate financial management system and that the
             performance goals of the activities were achieved. Deficiencies identified
             included that the City (1) reported unsupported program income to HUD, (2)
             charged questionable transactions to the CDBG program income account, (3)
             could not provide assurances that program objectives were met, (4) failed to
             safeguard program assets, and (5) achieved minimal progress in its economic
             development activities. As a result, it could not provide assurance that more than
             $20.1 million in transactions was properly accounted for. In addition, more than
             $4.7 million in unexpended funds would result in a cost savings if this amount
             were reallocated to other eligible activities. We attribute these deficiencies to the
             City’s lack of monitoring and oversight of its subrecipient.

Recommendations

             We recommend that the Director of HUD’s Buffalo Office of Community Planning
             and Development



                                              17
2A.    Require the City to suspend incurring costs and/or reimbursing itself for
       costs paid from the City’s municipal general expense account for economic
       development activities until HUD determines whether the City has the
       capacity to carry out its CDBG economic development activities in
       compliance with HUD regulations. If it is determined that the City lacks the
       capacity, the $4,739,829 in economic development projects funds remaining
       for fiscal years 2008, 2009, and 2010 should be reprogrammed so the City
       can assure HUD that these funds will be put to better use.


We further recommend that the Director of HUD’s Buffalo Office of Community
Planning and Development instruct the City to

2B.    Provide documentation to justify the $20,143,219 ($4,902,754 +
       $15,240,465) in unsupported transactions recorded in the CDBG program
       income account. Any receipts determined to be unrecorded program income
       should be returned to the CDBG program, and any expenditures determined
       to be ineligible should be reimbursed from non-Federal funds.

2C.    Certify and provide support that the proper amount of CDBG assets was
       returned to the City from the subrecipient by performing an audit of the
       accounts that the Corporation maintained.

2D.    Establish and implement controls that will ensure adequate monitoring of
       subrecipient-administered activities, that CDBG funds are properly
       safeguarded, the achievement of performance goals in subrecipient
       supported activities, and that corrective actions are taken for nonperforming
       subrecipients.




                                 18
Finding 3: The City Charged Ineligible and Unsupported Costs for
           Clean and Seal Program Activities to its CDBG Program
Contrary to HUD requirements, the City did not establish adequate administrative controls to
ensure that costs associated with its clean and seal program were allowable and supported by
sufficient documentation before being charged to the CDBG program. Specifically, it could not
demonstrate that more than $1 million in CDBG funds spent to board vacant buildings and clear
vacant lots under its clean and seal program were properly supported or represented eligible
activities that met a national objective. We attribute these deficiencies to the City’s general
unfamiliarity with HUD’s regulations pertaining to clearance activities. As a result, ineligible
and unsupported costs were incurred, and the City’s ability to ensure that CDBG program
objectives were met was diminished.



 Background

              The primary purpose of the City’s clean and seal program is to board up vacant
              buildings and clean properties of debris throughout Buffalo. Requests for a vacant
              building board up or cleanup comes from various sources, including the City’s court
              judge, housing inspectors, citizen complaints, council members, and/or the police
              and fire department.

              City officials expended more than $1 million in fiscal year 2008 and 2009 funds on
              its clean and seal program for employees’ salaries and material/supply costs during
              the review period. Therefore, we examined all of these activities to determine the
              reasonableness of the costs and the City’s compliance with applicable program
              requirements. For each of the fiscal years reviewed, administrative weaknesses were
              identified that resulted in costs having been incurred that were ineligible and/or
              unsupported. Particulars regarding the review of each fiscal year are discussed
              below.

Fiscal Year 2008 Clean and Seal
Program

              Review of the project activity files for the City’s fiscal year 2008 clean and seal
              program in which employee payroll and material/supply costs were charged to the
              program revealed that City officials expended $545,607 on the City’s 2008 clean
              and seal program, having incurred $518,779 for employee payroll and $26,828 for
              material/supply costs.

              The City classified its fiscal year 2008 clean and seal program as a clearance
              activity, thus eligible for funding under CDBG program regulations at 24 CFR
              570.201(d). However, to qualify as a clearance activity under the program
              regulations, the City would be required to demonstrate that the properties affected

                                               19
             were later demolished. Contrary to this requirement, the City provided a list of
             1,503 property addresses for which a board up or cleanup had occurred. While
             the City maintained supporting documentation to show that a property boarded up
             or vacant lot cleanup had occurred at the addresses included on the list, it was
             unable to provide documentation to show that any of the properties included on
             the list had been or were planned to be demolished within a reasonable timeframe.
             Moreover, there was no coordination between the City’s demolition department,
             which is responsible for all demolition activity throughout the City, and the clean
             and seal program. City officials stated that when a vacant property was boarded
             up under the clean and seal program, it did not mean or require that the property
             would be demolished. Further, examination of the list determined that many
             addresses appeared on the list more than once, indicating that the clean and seal
             employees were sent to some properties more than once during the fiscal year to
             perform a board up and/or cleanup.

             Based on analysis, the costs incurred appeared to characterize general government
             and maintenance expenses. According to CDBG program regulations at 24 CFR
             570.207(a)(2), expenses required to carry out the regular responsibilities of the
             unit of general local government are not eligible for assistance under this part.
             Since the City could not demonstrate that it’s clean and seal program represented
             a clearance activity, as required by the program regulations, and instead appeared
             to be a program that was part of the City’s regular responsibility, we considered
             the use of $545,607 in CDBG funds used for clean and seal salary and
             material/supply costs to be unsupported.

Fiscal Year 2009 Clean and Seal
Program

             As part of its review of the City’s 2009 annual action plan, HUD advised the City
             that for the clean and seal program to be eligible as a clearance activity, the property
             would later have to be demolished. Further, HUD requested that the City submit
             additional information to clarify whether the program was tied to property
             demolition and if not, explain how it would fit into another CDBG eligibility
             category. While the City responded to HUD, it did not directly address how its
             clean and seal program was tied to property demolition and continued to administer
             its program as it had during the previous year.

             Initially, the City had classified its fiscal year 2009 clean and seal program as a
             clearance activity and produced a list of 1,422 properties for which a board up or
             cleanup had occurred. However, to comply with HUD’s directive, the City
             reclassified its clean and seal program as qualifying under other CDBG-eligible
             categories. Specifically, properties were reclassified to qualify under code
             enforcement, rehabilitation, or clearance (slums/blight and low/mod). Moreover,
             based on reclassifying the eligibility criteria, the City determined that 187 properties



                                                20
             no longer qualified for the program, resulting in $78,962 in salary and material
             costs’ being reimbursed to the CDBG program from non-Federal funds.

Ineligible Costs Charged for
Code Enforcement Activities

             City officials determined that $304,506 in clean and seal program expenditures
             qualified as a code enforcement activity under CDBG program regulations at 24
             CFR 570.202(c). According to City officials, these were properties for which the
             request for a board up or cleanup was made by one of the City’s housing inspectors
             and the board up or cleanup was performed in conjunction with a code enforcement
             activity. In addition, the properties were located in targeted areas in which the City
             had other improvements underway.

             On May 14, 2009, HUD issued a memorandum outlining the provision that boarding
             up vacant buildings may also be classified as code enforcement under CDBG
             program regulations at 24 CFR 570.202(c), provided this activity is carried out as
             part of a code enforcement effort and along with other activities such as public
             improvements, rehabilitation, and services which are expected to arrest the decline
             of the area. CDBG program regulations at 24 CFR 570.202(c) detail requirements
             regarding code enforcement activities and provide that CDBG funds can be used for
             costs incurred for inspection for code violations and enforcement of codes,
             specifically, the salaries and related expenses of code enforcement inspectors and
             legal proceedings, but not including the cost of correcting the violations.

             Based on our review, the costs incurred for the clean and seal code enforcement
             activity represent the salary and material costs of the clean and seal crew to board
             vacant buildings and clean vacant lots, in other words, the cost of correcting the code
             violations. Accordingly, the $304,506 charged to the CDBG program for the clean
             and seal code enforcement activity to correct code violations was considered
             ineligible.

Unsupported Rehabilitation and
Clearance Costs

             City officials reclassified 57 properties for which a board up had occurred as an
             eligible rehabilitation activity under CDBG program regulations at 24 CFR
             570.202(a). These 57 properties were occupied and represented properties for which
             some form of building permit had been applied for from the City’s Department of
             Permit and Inspection Services. However, City officials stated that none of the
             properties was included in the City’s CDBG-funded rehabilitation program, and
             there was no documentation to show what type of rehabilitation, if any, had been
             completed on the properties. Accordingly, we considered the $24,069 in clean and
             seal program expenditures for rehabilitation activities to be unsupported since the

                                               21
             reclassified code enforcement activities were not carried out along with other
             activities in accordance with CDBG program regulations at 24 CFR 570.202(a) as
             noted above.

             In addition, City officials determined that $146,947 in fiscal year 2009 clean and
             seal program expenditures still qualified as a clearance activity. The City had the
             properties added to its demolition department’s list of properties to be demolished.
             While approximately 45 of the properties were already included on the demolition
             department’s list, approximately 300 more were added. Although there were 345
             properties included on the list, we were told by City officials that there was no
             assurance that these additional properties would all be demolished. Therefore, as
             with the City’s fiscal year 2008 clean and seal program, City officials did not
             adequately demonstrate that the program represented an eligible clearance activity as
             required by the program regulations. Accordingly, we considered the use of
             $146,947 in CDBG funds used for clean and seal salary and material/supply costs
             associated with these properties to be unsupported. According to City officials, the
             questionable clean and seal program activity costs were attributed to a lack of
             clarity amongst the Agency and various City departments that demolition was to
             be the ultimate goal of properties that were boarded and/or cleaned up.


Conclusion

             Review of the City’s administration of its clean and seal program activities revealed
             that adequate controls were not established to ensure that costs were eligible and
             necessary before being charged to the CDBG program. Consequently, the City
             expended $304,506 for ineligible purposes and $716,622 ($545,607 + $24,069
             +$146,946) for unsupported costs, thus diminishing its ability to ensure that its
             program was administered in an effective and efficient manner. We attribute these
             deficiencies to the City’s general unfamiliarity with HUD’s regulations pertaining
             to clearance activities.

             The City also allocated $744,479 in fiscal year 2010 CDBG funds for its clean and
             seal program. However, if it cannot demonstrate how its clean and seal program will
             comply with program requirements, these funds should be reprogrammed for other
             eligible purposes and put to better use.


Recommendations

             We recommend that the Director of HUD’s Buffalo Office of Community Planning
             and Development

             3A.    Require the City to suspend incurring costs and/or reimbursing itself for
                    costs paid from the City’s municipal general expense account for clean and
                    seal activities until HUD determines whether the City has the capacity to

                                              22
       carry out its CDBG clean and seal activities in compliance with HUD
       regulations. If it is determined that the City lacks the capacity, $744,479 in
       fiscal year 2010 clean and seal program funds should be reprogrammed so
       the City can assure HUD that these funds will be put to better use.

We further recommend that the Director of HUD’s Buffalo Office of Community
Planning and Development instruct the City to

3B. Reimburse from non-Federal funds the $304,506 related to ineligible clean and
    seal code enforcement costs.

3C. Provide documentation to justify the $716,622 ($545,607 + $24,069 +
    $146,946) in unsupported clean and seal costs incurred so that HUD can make
    an eligibility determination. Any costs determined to be ineligible should be
    reimbursed from non-Federal funds.

3D. Develop administrative control procedures that will ensure compliance with
    CDBG program requirements, including ensuring that costs are eligible and
    necessary before being charged to the program.




                                 23
                         SCOPE AND METHODOLOGY

We performed onsite audit work at the City’s offices in City Hall, located in Buffalo, NY, between
June and December 2010. The audit scope covered the period May 1, 2008, through April 30,
2010, and was extended as necessary. We relied in part on computer-processed data primarily for
obtaining background information on the City’s expenditure of CDBG funds. We performed a
minimal level of testing and found the data to be adequate for our purposes. To accomplish the
objectives, we

       Reviewed relevant HUD regulations, guidebooks, and files.

       Interviewed HUD officials to obtain an understanding of and identify HUD’s concerns with
       the City’s operations.

       Reviewed HUD’s March 2009 monitoring report, which was the basis for the complaint.
       The report identified 19 findings including a lack of operating procedures and a clear
       organizational structure for the CDBG program, and questionable costs charged to the
       CDBG program of more than $4 million.

       Reviewed the City’s policies, procedures, and practices.

       Interviewed key personnel responsible for the administration of the City’s CDBG program.

       Tested expenditures in the public facilities and improvements, economic development, and
       clearance program areas. Specifically, we used nonstatistical sampling for our selection of
       (1) public facilities and improvements, (2) economic development, and (3) clearance
       program area transactions. For fiscal years 2008 through 2010, the City received
       approximately $49.3 million in CDBG funding. HUD’s Integrated Disbursement and
       Information System reports reflect that more than $28.4 million in CDBG funds was
       disbursed for 566 activities for fiscal years 2008 and 2009. These program areas
       represented more than 42 percent of the City’s CDBG funds budgeted in these 2 years.
       Therefore,

        1. For the public facilities and improvements program area, we reviewed each of the 11
           expenditures occurring on February 23, 2010, the date $2.1 million was reimbursed to
           the City from CDBG funds for street improvement projects.

        2. For the economic development program area, we performed a detailed review of
           program income transactions occurring during two 2-month periods, May through June
           2009 and March through April 2010. We performed a comprehensive review of
           program delivery and administrative expenditures relating to economic development
           activities. Also, we reviewed 10 active loans from the Corporation’s commercial
           lending portfolio. The Corporation had an active portfolio of 91 loans with a balance of
           more than $6.6 million as of May 31, 2010.


                                                24
        3. For the clearance program area, we reviewed all 2008 and 2009 expenditures occurring
           during our audit period.

       The results of our testing only apply to the transactions reviewed and cannot be projected to
       the total population of CDBG transactions.

       Reviewed all documentation supporting the economic development program delivery and
       administration transactions for fiscal years 2008 and 2009.

       Reviewed the transactions charged to the CDBG program income account maintained by the
       Corporation.

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 objectives.




                                                 25
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

         Effectiveness and efficiency of operations,
         Reliability of financial reporting, and
         Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls

               We determined that the following internal controls were relevant to our audit
               objectives:

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

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

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

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

               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


                                                 26
             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 adequate controls over the effectiveness and efficiency
                    of program operations when it did not establish adequate administrative
                    controls to ensure that costs associated with public improvement, economic
                    development, and clearance activity were supported and eligible under the
                    CDBG program (see findings 1, 2, and 3).

                    The City did not have adequate controls over compliance with laws and
                    regulations, as it did not always comply with HUD regulations while
                    disbursing CDBG funds (see findings 1, 2, and 3).

                    The City did not have adequate controls over safeguarding of resources
                    regarding its economic development subrecipient that retained and expended
                    program income (see finding 2).




                                              27
                                   APPENDIXES

Appendix A

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

 Recommendation          Ineligible 1/    Unsupported      Funds to be put
        number                                     2/       to better use 3/

              1B            $162,923
              1C                            $1,982,988
              2A                                               $4,739,829
              2B                           $20,143,219

              3A                                                 $744,479
              3B            $304,506
              3C                             $716,622
                           ________       __________           _________
           Total            $467,429      $22,842,829          $5,484,308


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.

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.

3/   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 the City implements our
     recommendations to (1) reprogram the remaining economic development project funds if
     it is determined that the City does not have the capacity to carry out its economic
     development activities, and (2) develop control procedures to ensure program compliance
     for future clean and seal activities, it can assure HUD that these funds will be properly
     put to better use.


                                             28
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1


Comment 2


Comment 3


Comment 4




Comment 5




                         29
Ref to OIG Evaluation   Auditee Comments




Comment 5


Comment 6



Comment 6



Comment 7


Comment 8



Comment 9



Comment 10




Comment 11




                         30
Ref to OIG Evaluation   Auditee Comments




Comment 12


Comment 13




Comment 14




Comment 15




                         31
Ref to OIG Evaluation   Auditee Comments




Comment 16




Comment 17




Comment 18




                         32
Ref to OIG Evaluation   Auditee Comments




Comment 18




                         33
Ref to OIG Evaluation   Auditee Comments




Comment 18




Comment 18




                         34
Ref to OIG Evaluation   Auditee Comments




Comment 18




Comment 19




                         35
Ref to OIG Evaluation   Auditee Comments




Comment 19




Comment 20




                         36
Ref to OIG Evaluation   Auditee Comments




Comment 20




Comment 21




Comment 22


Comment 23




                         37
Ref to OIG Evaluation   Auditee Comments




Comment 23




Comment 24




Comment 25




Comment 26

Comment 27




                         38
Ref to OIG Evaluation   Auditee Comments




Comment 27


Comment 28



Comment 29



Comment 30




Comment 31




                         39
Ref to OIG Evaluation   Auditee Comments




Comment 31




Comment 32




Comment 33




                         40
Ref to OIG Evaluation   Auditee Comments




Comment 34




Comment 35




                         41
Ref to OIG Evaluation   Auditee Comments




Comment 35




                         42
Ref to OIG Evaluation   Auditee Comments




                         43
                         OIG Evaluation of Auditee Comments

Comment 1   Officials for the City contend that OIG has reached subjective, and in some
            instances, unsupported conclusions. However, contrary to the officials’
            contention, the conclusions reached are fully supported by documentation
            requested and reviewed during the audit. Further, the results of the review were
            discussed throughout the course of the audit, and also at the meeting held on
            December 17, 2010 denoting the end of the onsite fieldwork, and at the exit
            conference. Thus, the contention of the officials is unwarranted.

Comment 2   Officials for the City contend that the reorganization that the City has already
            performed is not fully recognized in the audit report. Although we recognize the
            corrective actions implemented by the officials, City officials have not made any
            organizational changes that would affect finding 1 or finding 3. In regard to
            finding 2 and the dissolution of the Buffalo Economic Renaissance Corporation
            (Corporation), the background section of the finding chronologically details the
            actions of the mayor to eliminate the Corporation and unify all of the
            neighborhood revitalization efforts under the Buffalo Urban Renewal Agency
            (Agency).

Comment 3   Officials for the City contend that they were advised to limit their response to
            three pages per finding and that such a limitation doesn’t allow for a full and fair
            review of the matters under review. However, City officials misinterpreted the
            auditors; at the exit conference, City officials were informed that their comments
            would be attached to the final report. It was fully explained that there were only
            three findings and that the Regional Inspector General for Audit (RIGA) reserves
            the right to summarize voluminous comments. It was further explained that
            sensitive or inappropriate information may also be redacted, and if that was to
            occur and explanatory statement would be included in the report as to why
            information was redacted.

Comment 4   Officials for the City state that the report does not appear to adequately address
            the fact that there has been substantial operating and staff changes, including the
            removal of prior administrators, and the dissolution of the City’s primary
            economic development agent (Corporation). As noted in the report, the audit
            scope covered the period May 1, 2008, through April 30, 2010, and was extended
            as necessary. The audit disclosed issues in the City’s administration of its CDBG
            program during this time period, regardless of administrators in place. Regarding
            the dissolution of the Corporation, as stated above in comment 2, the background
            section of finding 2 chronologically details the dissolution.

Comment 5   Officials for the City assert that its review of the Corporation’s dissolution is
            ongoing, comprehensive, and methodical, and that they are committed to assuring
            compliance with HUD regulations. However, at no time during or after the audit
            were we provided with any evidence of such a review. Nevertheless, if such a



                                             44
              review was indeed performed by the City, it does not supersede HUD
              requirements of the Agency (BURA) to monitor the Corporation (BERC).

Comment 6     Officials for the City submitted exhibits referenced in their response under
              separate cover. We reviewed the additional documentation and exhibits
              submitted subsequent to the audit and determined that they still do not adequately
              support the deficiencies identified. Refer to the applicable comments below.

Comment 7     Officials for the City request reconsideration for finding 1, citing that all of the
              street improvements questioned were associated with eligible areas, including
              those claimed to be located in substantially industrial or non-low income census
              tracts. However, the street improvements in question were not deemed only
              ineligible because they are located in substantially industrial or non-low income
              census tracts, but also because the expense was charged against the CDBG
              program in order to meet HUD’s 1.5 timeliness test for 2009. Specifically, the
              City reimbursed previously incurred general City maintenance expenses in order
              to expend CDBG funds quickly to prevent a reduction in future funding. Further,
              the street improvements in question were found to be unsupported because the
              City did not maintain, at the time the expenditures were incurred going back as far
              as June 2007, documents that showed that the expenditures met a national
              objective and had a community benefit.

Comment 8     Officials for the City contend that the City is an older industrial city, thus the
              street improvements should be reconsidered as part of their efforts to make the
              streets safe. We recognize the fact that the City, along with many other cities
              throughout the country, faces such dilemmas in an ever-changing landscape.
              However, in accordance with HUD regulations, such public improvement
              expenditures must be the most efficient and economical use of CDBG funds,
              benefitting persons of low and moderate income based on community needs. The
              City was unable to provide evidence of how the CDBG eligibility criteria were
              met.

Comment 9     Officials for the City request that the draft audit recommendations related to the
              monitoring of the Corporation (BERC) be reconsidered based on the substantial
              corrective action initiated prior to the audit fieldwork. However, during the audit
              the officials were unable to provide evidence of monitoring its subrecipeint
              administered economic development program.

Comment 10 Officials for the City acknowledge that they were made aware of the reported
           deficiencies during a pre-exit conference held on December 20, 2010, but
           believed that we did not consider the additional information that they provided.
           We considered the additional documentation provided by the officials subsequent
           to the pre-exit conference only in the context of the audit scope when preparing
           the draft audit report. Nevertheless, the reportable deficiencies remained
           unchanged.



                                               45
Comment 11 Officials for the City state that the activities of the Corporation (BERC) were
           actively monitored in 2008 and 2009, and based on this monitoring, officials
           decided to end its subrecipient agreement with the Corporation (BERC) in
           February 2010. However, at the time of our review, officials were unable to
           provide evidence of such monitoring. Further, the review performed by the
           officials regarding the dissolution of the Corporation (BERC) does not supersede
           the HUD requirements for the Agency (BURA) to monitor the Corporation
           (BERC).

Comment 12 Officials for the City contend that all of the Corporation’s (BERC’s) program
           income was returned to the City and they provided supporting evidence of such
           action. We have reviewed the documentation and determined that the returning of
           program income was subsequent to our audit period, and thus does not negate the
           significant concerns identified in the finding, which occurred prior to the
           commencement of the dissolution process.

Comment 13 Officials for the City contend they have maintained sufficient documentation as
           evidence of the eligibility of its clean and seal program activities in accordance
           with federal regulations, which provide that the boarding up of vacant buildings
           may be classified as code enforcement. However, the officials need to further
           recognize that the guidance also provides that the boarding up must be carried out
           as part of a code enforcement effort along with other activities such as public
           improvements, rehabilitation, and services which are expected to arrest the
           decline of the area. The audit work determined that the board up was not
           accompanied with the other activities, i.e. public improvements, as identified in
           the guidance. In addition, it was determined that the code enforcement
           expenditures were for the cost of correcting code violations, which is contrary to
           HUD regulations.

Comment 14 Officials for the City state that the conclusions in the draft report are premature in
           light of the volume of data not considered during the audit. As a courtesy, we
           allowed the City to submit additional documentation subsequent to the completion
           of the audit fieldwork. We reviewed the additional documentation, some of
           which was the same documentation reviewed onsite, and determined that it still
           did not adequately support the reportable deficiencies identified. Thus, the
           conclusions reached in the draft report are fully supported based on the
           documentation reviewed onsite and subsequent to the fieldwork, and therefore,
           are not premature. Nevertheless, we have taken into consideration HUD’s
           comments on the draft report and have revised the last sentence in the “What We
           Found” section of the report to reflect that the City was not able to demonstrate
           that it made the best use of CDBG funds to meet the community’s needs.

Comment 15 Officials for the City disagree that the BURA (Agency) paid for the same work
           twice on Courtland Avenue based on the fact that Courtland Avenue lies on the
           border of two districts and the cost of the repaving work was apportioned between
           the two districts. However, although the street appears to lie on the border of two

                                               46
              districts, the documentation provided by the officials subsequent to the audit
              (Exhibit B) does not support the apportionment between the districts. Thus, it
              cannot be determined how much this particular street project cost in relation to the
              two districts based on the source contractor invoices. Further, one of the districts
              reimbursed the City $28,680 from CDBG funds, while the other district
              reimbursed $28,211, nevertheless, the documentation provided also does not
              support how or why the east half of the street would cost more than the west half,
              considering both halves are equal in length.

Comment 16 Officials for the City concede that a typographical error was made on the support
           provided which indicated West Parade Avenue was repaved from Northampton
           Street to East North Street. Our review of documentation maintained by the
           BURA (Agency) detailed that the City was reimbursed $14,982 for work
           performed only on the section from Best Street to East North Street. The officials
           admit that an error was made and that the reimbursement was for mill and overlay
           work on West Parade Avenue from the Kensington Expressway to Best Street.
           However, the fact remains that the section of West Parade Avenue reimbursed
           with CDBG funds was not repaved as indicated by the support maintained by the
           BURA (Agency). Further, it could not be determined from the support
           maintained by the City’s Department of Public Works (DPW) as to what section
           of the West Parade Avenue was to be reimbursed from CDBG funds and what
           section was not. Since the amount of $14,513 paid by the City could not be traced
           to the contractors’ invoiced amount, it is still considered unsupported.

Comment 17 Officials for the City again concede that another error had occurred, whereby
           Academy Road was inadvertently included in a list of projects deemed to be
           completed. Officials claim that the CDBG funds for the Academy Road curb
           replacement project were withheld until the work was completed and that the
           $114,000 has been fully repaid to the BURA (Agency). To prevent such errors
           from occurring in the future, officials have revised its policy manuals to require
           photographic evidence of all physical development projects prior to payment.
           The corrective actions taken by the officials are responsive to our finding and do
           not negate the fact that the City disbursed $114,000 in CDBG program funds for
           work that was not performed. Accordingly, this deficiency is reportable.

Comment 18 Officials for the City disagree that the street improvements on Urban and Amherst
           Streets only primarily benefit an industrial area, and object to the use of
           photographs used to support that premise. Contrary to the officials’ disagreement,
           the street repaving projects are questionable since a factory occupies Urban Street
           and a railroad viaduct occupies Amherst Street. The photographs of the factory
           on Urban Street and the vacant land and railroad tracks on Amherst Street calls
           into question how street improvements in these areas met HUD’s primarily
           residential criteria in accordance with regulations at 24 CFR 570.208(a). For
           example, while 40 percent of Urban Street consists of private residences and a
           school, the remaining 60 percent is non-residential, consisting of several factories
           and other industrial-use sites. According to 24 CFR 570.208, an area that is not

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              primarily residential in character does not qualify to meet the area-wide CDBG
              national objective of benefiting low- and moderate- income persons. Although
              we have removed the photographs in question from the draft report, we are still
              questioning the City’s basis for determining the area served by certain street
              improvement projects, and recommend submission of information to support their
              service area determination and why these costs were not charged as general City
              maintenance expenses instead of CDBG expenses.

Comment 19 Officials for the City provided census data to support that the street improvements
           on West Ferry Street benefitted low- and moderate- income persons. However,
           the benefit of the improvements is not the point of contention. The process of
           how improvement projects are selected amongst the City’s nine districts is
           questionable. Rather than use CDBG funding based on the City’s overall
           infrastructure needs, officials distributed the CDBG funds equally among the
           City’s nine districts without any corresponding method or basis. Thus, it is
           questionable as to whether the expenditures were the most efficient and
           economical use of CDBG funds.

Comment 20 Officials for the City state that its consolidated plan lists infrastructure
           improvements as a high priority need and provides for use of CDBG funding for
           street and sidewalk improvements in low and moderate income areas of the City.
           Officials contend that street improvements were bid out and then reimbursed by
           the CDBG program to obtain greater economies of scale. The reimbursement
           method is the City’s preferred method for expending CDBG funds in compliance
           with HUD regulations. However, the reimbursements for the CDBG expenditures
           reviewed during the audit were for City expenses incurred as far back as June
           2007. In addition, at the time the expenditures were incurred, the City did not
           maintain documentation to support that the expenditures met a national objective
           and had a community benefit. Thus, the corrective action taken by the City to
           change its policy manual to include photographic documentation and onsite
           monitoring before reimbursement of any future work is responsive to our finding
           and recommendation.

Comment 21 Officials for the City state that construction contracts are bid through a formal
           bidding procedure and that all records and personnel related to procurement were
           made available during the review. Further, the officials detail how public
           improvements funded by the CDBG program will be bid out in the future. We
           reviewed documentation onsite during the audit and the documentation provided
           by City officials subsequent to the audit (Exhibit J), and determined that sufficient
           records were not maintained to support the procurement history for the street
           improvement projects reviewed. While we recognize that the policy changes
           pertaining to the future bidding process is responsive to our finding, the changes
           do not negate the procurement weaknesses identified. Thus, the eligibility of the
           more than $1.9 million in costs remains unsupported, pending further review by
           HUD as recommended.



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Comment 22 Officials for the City contend that that during the audit access to all records
           necessary to review alleged unsupported transactions was provided. Officials
           request that the draft report reflect this fact. During the audit, we reviewed and
           considered the records and documentation provided in relation to the context of
           the audit scope as explained in the Scope and Methodology section of the report.
           As a courtesy, we allowed the City to submit additional documentation
           subsequent to the completion of the audit fieldwork. We reviewed the additional
           documentation, some of which was the same documentation reviewed onsite, and
           determined that it still did not adequately support the reportable deficiencies
           identified. Thus, the draft report stands.

Comment 23 Officials for the City request that the draft report reflect that for 2008 the BURA
           (Agency) and the BERC (Corporation) operated as one entity through its common
           CFO and access to the Laser fiche document scanning system, therefore any
           findings pertaining to the lack of records maintained by the BURA (Agency)
           should be removed. Regardless of the systems implemented by the City, the
           relationship between the BURA (Agency) and the BERC (Corporation) was
           contractual. Further, it was determined that unsupported program income
           amounts were reported to HUD and that questionable transactions were charged
           to the CDBG program income account as identified in finding 2. Thus, since the
           documentation provided did not negate the identified concerns, the findings
           remain as detailed in the draft report.

Comment 24 Officials for the City request that the draft report acknowledge its reorganization
           and separation of the BURA (Agency) and BERC (Corporation) administrations
           in July 2009 and the end of the City’s subrecipient relationship with the BERC
           (Corporation) in February 2010. The background section of finding 2 in the draft
           report chronologically details the actions of the mayor to eliminate the BERC
           (Corporation) and unify all of the neighborhood revitalization efforts under the
           BURA (Agency). Nevertheless, as mentioned above, since the documents
           provided by the City did not negate the identified concerns, finding 2 will not be
           removed.

Comment 25 Officials for the City disagree that $4.9 million of economic development
           program income and receipts were unsupported. Contrary to the disagreement by
           the officials, we reviewed all documentation provided and determined that the
           City did not obtain adequate documentation supporting that program income had
           been properly recorded. Specifically, as detailed in finding 2, (1) information
           submitted by the BERC (Corporation) to the City consisted merely of a
           spreadsheet with no supporting documents, (2) the City included rental receipts
           after the deduction of rental expenses without support, (3) expenditures related to
           payroll and operations were unsupported, and (4) the BERC (Corporation)
           submitted a number of invoices in which the documentation did not support how
           the cost was allowable. Even the CDBG program manager agreed during the
           audit that certain expenditures, such as legal fees and expenditures after the fiscal
           year should not have been charged to the CDBG program during fiscal year 2009.

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               The concerns identified in the report support the conclusion that the BURA
               (Agency) did not provide sufficient evidence that they reviewed the
               documentation or assessed the validity of documentation prior to reimbursement
               with CDBG program funds.

Comment 26 Official for the City state that the BERC (Corporation) is now required to provide
           the BURA (Agency) copies of necessary documentation. Thus, the actions taken
           by the officials are responsive to our finding and are in concurrence with our
           results that the necessary documentation was not provided by the BERC
           (Corporation) to the BURA (Agency).

Comment 27 Officials for the City request that the finding pertaining to payroll be removed
           since access to payroll records which supports the expenditures was provided.
           Hence, we reviewed and considered the payroll records referred to in the context
           of the audit scope during the review, and although many documents were
           provided, they were not relevant to the audit objective. Thus, the BURA
           (Agency) did not provide evidence that they reviewed the documentation or
           assessed its validity.

Comment 28 Officials for the City indicate that the BERC (Corporation) provided
           reimbursement from non-federal funds an amount paid to a former employee for
           accrued time owed at the time of separation. The officials acknowledge that some
           amounts were to be returned to the BURA (Agency). Thus, the actions taken by
           the officials, although pertaining to transactions subsequent to our audit period,
           are responsive to our finding and recommendations.

Comment 29 Officials for the City request that the questionable eligibility pertaining to other
           invoices be reconsidered. Based on the scope of the audit, these additional
           invoices were reviewed during and subsequent to the audit and found to be
           insufficient; therefore, these items are still questionable.

Comment 30 Officials for the City contend that the methodology used by the auditors to arrive
           at a total of $4.9 million in reported economic development program income is
           unsupported and based on the unconventional method of combining both debits
           and credits. The methodology followed takes into consideration both program
           income receipts and program income expenditures as reported to HUD. HUD
           regulations require subrecipients to ensure that both program income receipts and
           expenditures are in accordance with program requirements, and since the
           documentation provided was not sufficient to support these items; the City’s
           exposure is $4.9 million in transactions pertaining to its economic development
           program.

Comment 31 Officials for the City disagree with the finding that the BERC (Corporation)
           recorded more than $15.2 million in questionable transactions in its CDBG
           program income account. While the officials’ disagreement is noted, the fact
           remains that we reviewed all documentation provided and considered such

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              documentation in the context of the audit scope prior to preparing the draft report.
              The concerns identified in the report are factual and the conclusions are
              supported. We are questioning both program income receipts recorded and
              program income expenditures paid during fiscal years 2008 and 2009. HUD
              regulations require the City to provide assurance that all CDBG program income
              receipts were recorded and expenditures were eligible to be paid with program
              income funds. As mentioned above, since the information provided was not
              sufficient to answer our concerns, these items have been questioned and now
              require further review and explanation to HUD.

Comment 32 Officials for the City state that additional information was provided subsequent to
           the audit regarding the funding source of the unsupported transactions and other
           supplemental information. As mentioned earlier, all documentation provided
           during and subsequent to the audit fieldwork was reviewed, and found to be
           insufficient for the removal of the issues from this report.

Comment 33 Officials for the City state that corrective actions were taken to safeguard the
           assets in control of the BERC (Corporation) and that the report fails to recognize
           the mayor’s reorganization of its economic development programs, that were the
           result of extensive monitoring in 2009. However, actions taken by the officials
           were subsequent to the audit and did not safeguard the assets reviewed as part of
           the audit scope from May 1, 2008 through April 30, 2010, and extended as
           necessary. Further, officials did not provide documented evidence of the
           monitoring that supposedly occurred in 2009 (i.e. monitoring reports, etc.).
           Nevertheless, the review performed by the City regarding the dissolution of the
           BERC (Corporation) does not supersede HUD requirements of the BURA
           (Agency) to document its monitoring of the BERC (Corporation).

Comment 34 Officials for the City contend that a clear plan toward implementing a new
           economic development program has begun. However, while the City attempts to
           reorganize, it continues to have more than $4.7 million dollars in economic
           development funds not being used for its intended purposes.

Comment 35 Officials for the City provide details on their working relationship with the HUD
           Buffalo Field Office in order to resolve concerns relating to the clean and seal
           program. The officials provide a May 14, 1990 memorandum to support the
           questioned clean and seal program costs. While this guidance indicates that
           boarding up vacant buildings may be classified as code enforcement, it also states
           that the boarding up must be carried out along with other activities such as public
           improvements, rehabilitation, and services which are expected to arrest the
           decline of the area. However, the results of the audit determined that the board up
           was not accompanied with the other activities, i.e. public improvements, as
           identified in the guidance.




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