oversight

The City of East Orange Did Not Always Comply With HOME Program Requirements, Federal Regulations, and HOME Grant Agreements

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

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

                                                  U. S. Department of Housing and Urban Development
                                                                           Office of Inspector General
                                                                           New York/New Jersey Office
                                                                           26 Federal Plaza–Room 3430
                                                                            New York, NY 10278-0068


                                                                           Memorandum No. 2011-NY-1801

   April 7, 2011

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



   FROM: Edgar Moore, Regional Inspector General for Audit, New York/New Jersey, 2AGA

   SUBJECT: The City of East Orange Did Not Always Comply With HOME Program
            Requirements, Federal Regulations, and HOME Grant Agreements


                                               INTRODUCTION

   As part of our audit of the East Orange Revitalization and Development Corporation
   (Corporation)1, we reviewed the City of East Orange’s (City) compliance with the HOME
   Investment Partnerships Program (HOME) in regard to the eligibility of an awarded capacity
   building grant and developer fees awarded to the Corporation. This review raised issues that we
   wish to bring to your attention in regard to the City’s compliance with HOME program
   requirements, Federal regulations, and HOME grant agreements.

   During the audit of the Corporation, we found that the City did not always comply with HOME
   program requirements, Federal regulations, and HOME grant agreements. Specifically, City
   officials authorized the Corporation to use HOME program funds for (1) an ineligible capacity
   building grant, and (2) developer fees in excess of limits imposed by a HOME grant agreement
   between the City and the Corporation.

   For each recommendation without a management decision, please respond and provide status
   reports in accordance with U.S. Department of Housing and Urban Development (HUD) Handbook
   2000.06, REV-3. Please furnish us copies of any correspondence or directives issued because of
   the review.

   The draft memorandum report was provided to City officials on March 4, 2011, and City officials
   provided a written response on March 25, 2011. City officials generally disagreed with our
   findings and recommendations. The complete text of City officials’ response, along with our
   evaluation of that response, can be found in appendix B of this memorandum.

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    This memorandum will be issued in conjunction with an audit report on the operations of the East Orange
   Revitalization and Development Corporation’s compliance with HOME program requirements and Federal regulations.

Visit the Office of Inspector General on the World Wide Web at http://www.hud.gov/oig/oigindex.html
                                METHODOLOGY AND SCOPE

In determining whether the City had complied with HOME program requirements, Federal
regulations, and HOME grant agreements, we (1) reviewed relevant HOME program requirements
and Federal regulations; (2) interviewed staff from the New Jersey Office of Community Planning
and Development, the City, and the Corporation; (3) reviewed predevelopment loan and HOME
grant agreements between the City and the Corporation, as well as related documents such as the
resolutions associated with the Corporation’s board of trustees and the City Council; (4) examined
incomplete documents associated with the initial certification of the Corporation to become a
community housing development organization (CHDO); and (5) reviewed incomplete supporting
documents associated with all disbursements from the City’s HOME program grants to the
Corporation.

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

The review was not conducted in accordance with the generally accepted government auditing
standards because it was limited to issues noted during the audit of the Corporation. A full audit of
the City’s HOME program may be performed in the future. We believe that the evidence obtained
provides a reasonable basis for our findings and conclusions based on our review objectives.

                                         BACKGROUND

HUD allocated $793,684 and $882,374 in HOME program grants to the City during fiscal years
2008 and 2009, respectively. HOME program funds can be used as grants, direct loan guarantees,
or other forms of assistance to create affordable housing for low-income households.

On January 20, 2005, City officials granted City-wide CHDO status to the Corporation. On March
28, 2006, the City awarded the Corporation a predevelopment loan, an operating grant, and a
construction grant in the amounts of $35,000, $50,000, and $1 million, respectively, to construct the
Princeton Street Phase II homes, which consisted of 6 newly built affordable two-family homes
consisting of 12 units.

                                     RESULTS OF REVIEW

City officials did not always comply with HOME program requirements, Federal regulations, and a
HOME grant agreement. Specifically, City officials authorized the Corporation to use HOME
program funds for (1) an ineligible capacity building grant, and (2) developer fees in excess of
limits imposed by the HOME grant agreement between the Corporation and the City.

1. An Ineligible Capacity Building Grant

Contrary to 24 CFR (Code of Federal Regulations) 92.300, City officials authorized the
Corporation to use HOME program funds for an ineligible capacity building grant. According to 24
CFR 92.300(b), if during the first 24 months of its participation in the HOME program a
participating entity cannot identify a sufficient number of capable CHDOs, funds may be
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committed to develop the capacity of CHDOs in the jurisdiction. Therefore, program regulations
allow capacity building grants to be awarded within 24 months of the City’s initial participation in
the HOME program.

The City received its first HOME program grant in fiscal year 1992; therefore, it was not allowed to
issue a capacity building grant after the year 1995. Nevertheless, City officials awarded a capacity
building grant several years after this deadline. Specifically, on March 28, 2006, the Corporation
was awarded a capacity building grant of $200,000 to hire a consultant who assisted it in building
its capacity to develop housing. Based on information provided by City officials, $185,038 of the
$200,000 had been expended by Corporation officials on costs associated with the consultant; his
assistant; and other costs such as equipment, utilities, and audits. There is a remaining balance of
$14,962 in the undisbursed portion of the capacity building grant that is available for the
Corporation; however, this amount should be reprogrammed for other eligible HOME program
activities.

This deficiency occurred because City officials were not able to find a local qualified CHDO to
carry out the construction of the Princeton Street Phase II homes, and did not have adequate
controls to ensure that HOME funds were only used for eligible activities. Therefore, $200,000 in
HOME program grants was awarded for this ineligible capacity building grant instead of being used
for eligible HOME program activities.

2. Developer Fees in Excess of Limit Imposed by HOME Program Requirements

Contrary to a HOME grant agreement between the City and the Corporation, City officials
authorized the Corporation to receive a developer fee of $240,085, although its developer fee was
not supposed to exceed $108,500. Officials from the City and the Corporation incorrectly believed
that the Corporation’s developer fee was a percentage of total development costs instead of the total
HOME funds awarded to the Corporation. The Corporation was awarded $1.085 million in HOME
funds; therefore, the total developer fee was limited to 10 percent of HOME funds awarded or
$108,500. Nevertheless, City officials awarded the Corporation a developer fee of $240,085, which
was $131,585 in excess of the maximum allowed developer fee. City officials disbursed developer
fees of $203,327, which was $94,827 in excess of limit imposed by the HOME grant agreement
between the Corporation and the City and, therefore, ineligible. There is a remaining balance of
$36,758 in undistributed excess developer fees available for the Corporation; however, this amount
should be reprogrammed for other eligible HOME program activities.

                                          CONCLUSION

Contrary to HOME program requirements, Federal regulations, and HOME grant agreements, City
officials authorized the Corporation to use (1) $200,000 in HOME program funds for an ineligible
capacity building grant, and (2) $131,585 in HOME program funds for developer fees in excess of
the limits imposed by a HOME grant agreement between the City and the Corporation. These
deficiencies occurred because City officials (1) were not able to find a qualified CHDO to carry out
the construction of the Princeton Street Phase II homes, (2) improperly awarded a HOME grant to
an unqualified CHDO, (3) did not have adequate controls to ensure that HOME funds were only
used for eligible activities, and (4) mistakenly thought that developer fees were a percentage of total
development construction costs instead of HOME funds awarded to the Corporation.

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                                   RECOMMENDATIONS

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

    1A. Reimburse the HOME program’s line of credit $185,038 from non-Federal funds for the
        disbursed portion of the capacity building grant that should not have been awarded to the
        Corporation.

     1B. Reprogram $14,962 associated with the undisbursed portion of the capacity building
         grant to other eligible HOME program activities.

     1C. Reimburse the HOME program’s line of credit $94,827 from non-Federal funds for the
         disbursed portion of the excessive developer fees.

     1D. Reprogram $36,758 associated with the undisbursed portion of the excessive developer
         fees.

     1E. Establish and implement procedures to ensure that City officials comply with HOME
         program requirements, Federal regulations, and contractual agreements.




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                                      APPENDIXES

Appendix A

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


                Recommendation                                   Funds to be put
                    Number             Ineligible 1/             to better use 2/
                       1A                   $185,038
                       1B                                            $14,962
                       1C                    $94,827
                       1D                                            $36,758
                      Total                 $279,865                 $51,720



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/   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 City officials cease making ineligible
     disbursements, these funds could be used for other eligible HOME program activities and
     HUD could be assured that these funds would be put to better use.




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Appendix B

            AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation       Auditee Comments




Comment 1




                               6
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 2


Comments 2


Comments 2




                           7
Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 3




                           8
Ref to OIG Evaluation   Auditee Comments




Comments 3




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                           OIG Evaluation of Auditee Comments

Comment 1   City officials disputed the finding and stated that the term “capacity building grant”
            does not appear in the regulations at 24 CFR 92 and that participating jurisdictions
            are not required to request HUD approval of a capacity building grant. However,
            regulations at 24 CFR Part 92.208 provide that HOME funds may be used for
            capacity building costs under the limitations noted in section 92.300(b). Also,
            documents provided by officials from the City of East Orange and East Orange
            Revitalization and Development Corporation(Corporation), show that the City
            awarded the Corporation a capacity building grant of $200,000 to pay for the
            consultant's salary and other administrative costs. Therefore, the funds awarded did
            not comply with the restrictions in 24 CFR 92.300(b).

Comment 2   City officials stated that the use of HOME funds for an experienced consultant to
            train key staff of the CHDO was an appropriate and eligible expenditure and that the
            OIG finding is a misinterpretation and misapplication of HOME Final Rules.
            However, program regulations only allow capacity building grants to be awarded
            within 24 months of the City’s initial participation in the HOME program. The City
            received HOME program funds for the first time in 1992; therefore, the City was no
            longer authorized to issue a capacity building grant or a grant to develop the capacity
            of community housing development organizations in the City after the year 1995.
            Further, documents provided by the City and the Corporation showed that the
            $200,000 was awarded to the Corporation as a capacity building grant and was not
            included as part of the construction costs for the Princeton Street Phase II project.
            The $200,000 was used to qualify a nonprofit entity, which would not have become
            a qualified CHDO without the training provided by the consultant. Therefore, the
            use of $200,000 of HOME funds to develop the capacity of CHDO in the City of
            East Orange is in violation of the requirements at 24 CFR 92.300(b).

Comment 3   City officials indicate the OIG finding related to the intent of the City to award
            developer fees in excess of limits imposed by HOME program funding is incorrect
            and unsupported. City officials stated that there was a typographical error in the
            CHDO agreement and their intent was to make available ten percent of the
            construction budget as a developer fee. However, City officials have not provided a
            revised HOME grant agreement, authorized by the City council, to show that they
            used the total construction budget instead of the total HOME funds as a base for
            determining the Corporation's developer fees. Also, program guidance in the
            “CHDO Toolbox” indicates that the developer fees should be based on total HOME
            funds and not construction costs. In addition, the ten percent limitation on developer
            fees was required by the HOME grant agreement; therefore, the report is correct in
            that there were excessive developer fees, which must be reimbursed to the HOME
            program.




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