oversight

The City of Scranton, PA, Did Not 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 2010-11-08.

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

                                                               Issue Date
                                                                     November 8, 2010
                                                               Audit Report Number
                                                                     2011-PH-1002




TO:        Nadab O. Bynum, Director, Office of Community Planning and Development,
            Philadelphia Regional Office, 3AD

            //signed//
FROM:      John P. Buck, Regional Inspector General for Audit, Philadelphia Region,
             3AGA

SUBJECT:   The City of Scranton, PA, Did Not Administer Its Community Development
            Block Grant Program in Accordance With HUD Requirements

                                 HIGHLIGHTS

 What We Audited and Why

           We audited the City of Scranton, PA’s (City), Community Development Block
           Grant (CDBG) program. We selected the City for audit because of the size of its
           program, its high U.S. Department of Housing and Urban Development (HUD)
           risk analysis score, and a citizen’s complaint alleging misuse of HUD funds. The
           objectives of the audit were to determine whether the City (1) maintained records
           and documentation to identify the source and application of funds to demonstrate
           that funded activities were eligible and met program requirements, (2) established
           and maintained an effective system of budget controls for proper management of
           its CDBG program, and (3) properly monitored its subrecipients, in accordance
           with applicable HUD requirements.

 What We Found


           The City failed to adequately administer its CDBG funds and could not
           demonstrate that it used more than $11.7 million in CDBG funds in accordance
           with applicable HUD requirements. Specifically, it (1) failed to maintain
           adequate records identifying the source and application of funds for its HUD-
             sponsored activities, (2) did not maintain required documentation and budget
             controls demonstrating that its expenditures complied with program requirements,
             (3) did not use proper subrecipient agreements, and (4) failed to adequately
             monitor its subrecipients. Additionally, it did not ensure that its activities
             complied with program requirements and allowed an apparent conflict-of-interest
             situation to exist.


What We Recommend

             We recommend that the Director of HUD’s Philadelphia Office of Community
             Planning and Development (1) perform additional monitoring and provide
             technical assistance to the City, as needed, to ensure that the City properly
             administers the CDBG funding in accordance with applicable requirements; and
             (2) evaluate issues in this report and if appropriate, initiate appropriate
             administrative action against responsible officials.

             We further recommend that the Director direct the City to (1) provide
             documentation to demonstrate that more than $11.7 million was used for eligible
             activities that met the intent of its HUD-approved budget line items or repay HUD
             from non-Federal funds; and (2) improve its financial management system and
             implement improved accounting procedures to ensure that it meets the
             requirements of regulations at 24 CFR (Code of Federal Regulations) 85.20,
             Office of Management and Budget Circular A-87, and 24 CFR 570.506. At a
             minimum, the financial management system should maintain accounting records
             and other supporting documents that (1) distinguish expenses paid by HUD from
             those paid through other funding sources; (2) demonstrate that expenditures paid
             were for eligible activities; (3) determine and adequately document the
             reasonableness, allocability, and allowability of costs; and (4) demonstrate that
             expenditures meet HUD-approved budget line items. We also recommend that
             the Director direct the City to (1) develop and implement controls to ensure that it
             monitors its subrecipients as required and maintains adequate documentation to
             support its monitoring efforts, and (2) revise its subrecipient agreement to comply
             with HUD requirements.

             For each recommendation without a management decision, please respond and
             provide status reports in accordance with HUD Handbook 2000.06, REV-3.
             Please furnish us copies of any correspondence or directives issued because of the
             audit.

  Auditee’s Response


             We provided a discussion draft audit report to the City on September 23, 2010,
             and discussed it with the City at an exit conference on October 4, 2010. The City
             provided a written response to the draft audit report on October 12, 2010. It



                                              2
disagreed with some conclusions and recommendations in the report. The written
response consisted of a 5-page letter and 6 exhibits that were an additional 77
pages. We considered the exhibits in our evaluation of the City’s response. The
complete text of the City’s response, without the exhibits, along with our
evaluation of that response, can be found in appendix B of this report.




                               3
                          TABLE OF CONTENTS

Background and Objectives                                                        5

Results of Audit
      Finding: The City Did Not Administer Its CDBG Program in Accordance With   6
      HUD Requirements

Scope and Methodology                                                            13

Internal Controls                                                                14

Appendixes
   A. Schedule of Questioned Costs                                               16
   B. Auditee Comments and OIG’s Evaluation                                      17
   C. CDBG Activities                                                            25




                                          4
                            BACKGROUND AND OBJECTIVES

The Community Development Block Grant (CDBG) program provides annual grants on a
formula basis to entitled cities and counties to develop viable urban communities by providing
decent housing and a suitable living environment and by expanding economic opportunities,
principally for low- and moderate-income persons. The program is authorized under Title 1 of
the Housing and Community Development Act of 1974, Public Law 93-383 as amended, 42
U.S.C. (United States Code) 5301.

The U.S. Department of Housing and Urban Development (HUD) awards grants to entitlement
community grantees to carry out a wide range of community development activities directed
toward revitalizing neighborhoods, economic development, and providing improved community
facilities and services. Entitlement communities develop their own programs and funding
priorities. To be eligible for funding, every CDBG-funded 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 of the community.

The City of Scranton, PA (City), is a CDBG entitlement grantee. HUD awarded the City $3.4
million in CDBG funding in fiscal years 2008 and 2009 and $3.7 million in 2010.1 The City
operates under a mayor-council form of government and provides the following services: public
safety, roads, sanitation, health, culture and recreation, and general government services. The City
administers its CDBG program through its Office of Economic and Community Development. In
addition to the programs administered in-house, the City works with a number of outside
nonprofit organizations to carry out its CDBG-funded programs. The director manages the daily
operations of the office, which maintains its records at 538 Spruce Street, Scranton, PA.

Our audit objectives were to determine whether the City (1) maintained records and
documentation to identify the source and application of funds to demonstrate that funded
activities were eligible and met program requirements, (2) established and maintained an
effective system of budget controls for proper management of its CDBG program, and (3)
properly monitored its subrecipients, in accordance with applicable HUD requirements.




1
    The City’s fiscal year is January 1 through December 31.


                                                           5
                                            RESULTS OF AUDIT

Finding: The City Did Not Administer Its CDBG Program in
Accordance With HUD Requirements

The City (1) failed to maintain adequate accounting records identifying the source and
application of funds for its HUD-sponsored activities, (2) did not maintain adequate
documentation and budget controls to demonstrate that its expenditures complied with program
requirements, (3) failed to execute proper agreements with its subrecipients, and (4) did not
adequately monitor its subrecipients. Additionally, it did not ensure that its activities complied
with program requirements and allowed an apparent conflict-of-interest situation to exist. These
problems occurred because responsible City officials did not fully understand HUD
requirements. Therefore, HUD had no assurance that more than $11.7 million in CDBG funds
the City drew down from its grants was used for eligible activities that met the intent of the
program.



    The City Failed To Support
    $11.7 Million in CDBG
    Expenditures


                     The City did not maintain adequate accounting records and supporting
                     documentation showing that its expenditures of CDBG funds complied with
                     program requirements. HUD’s Integrated Disbursement and Information System
                     showed that the City drew down more than $11.7 million in funds for 150 CDBG
                     activities (see appendix C) during its fiscal years 2008, 2009, and 2010. Contrary
                     to HUD and Federal requirements, however, the City’s own accounting records
                     and supporting documents did not distinguish expenses paid by HUD from those
                     paid through other funding sources such as the State of Pennsylvania and other
                     non-Federal sources. Additionally, the City’s accounting records for 2008 and
                     20092 showed disbursements of more than $10.6 million for its CDBG program,
                     which was nearly $2.8 million more than the amount of CDBG funds that the City
                     drew down during this period. This overstatement occurred because the City’s
                     CDBG accounting records included funding from sources other than HUD, which
                     were not separately identifiable in its accounting records.

                     Regulations at 24 CFR 85.20 require the City to maintain records which
                     adequately identify the source and application of HUD funds provided for its
                     CDBG activities. These records should contain information pertaining to each
                     grant or subgrant award and authorization, obligations, unobligated balances,

2
    The CDBG activity report audited was for the period January 1, 2008, through September 10, 2009.


                                                                6
           assets, liabilities, outlays or expenditures, and income. The regulations also state
           that accounting records must be supported by such source documentation as
           cancelled checks, paid bills, payrolls, time and attendance records, and contract
           and subgrant award documents. Additionally, 24 CFR 570.506 requires the City
           to maintain documentation to demonstrate compliance with program
           requirements. Such records should include but not be limited to records providing
           a full description of each activity undertaken and records demonstrating that each
           activity undertaken met one of the national objectives of the CDBG program.
           Office of Management and Budget (OMB) Circular A-87, attachment A(C)(1)(j),
           further requires that to be allowable under Federal awards, costs must be
           adequately documented. As shown by the audit, the City failed to adequately
           maintain support for its CDBG expenditures with accounting records detailing
           expenditures and failed to maintain adequate supporting documents such as
           invoices, receipts, canceled checks, and employee payroll records tied to these
           expenditures.

The City Did Not Maintain
Required Budget Controls

           The City failed to prepare the required budget for its CDBG-funded activities with
           a comparison of budgeted with actual expenditures for each category.
           Regulations at 24 CFR 85.20(b)(4) state that actual expenditures or outlays must
           be compared with budgeted amounts for each grant or subgrant. To compare and
           control expenditures against approved budgets, the City must

                  Maintain records of the amounts budgeted for eligible activities.

                  Include unexpended/unobligated balances for budgeted categories.

                  Compare planned versus actual obligations and expenditures.

           To efficiently manage its CDBG program, the City should document and maintain
           effective budget controls. An effective system of budget controls requires a
           periodic comparison of actual obligations and expenditures against planned
           obligations and expenditures and against projected accomplishments for such
           outlays.

The City Did Not Execute
Proper Subrecipient
Agreements


           The City’s standard subrecipient agreement did not comply with HUD
           requirements. Regulations at 24 CFR 570.503 require that subrecipient
           agreements include a description of the work to be performed, a schedule for



                                            7
           completing the work, and a budget. These items must be in sufficient detail to
           provide a sound basis for the recipient to effectively monitor performance under
           the agreement. Our review of nine standard agreements the City signed with its
           subrecipients showed that the City’s subrecipient agreements and files did not
           contain adequate statements of work, schedules for completing the work, or
           required budgets. Additionally, two agreements did not contain the same national
           objective as those the City reported to HUD and were not updated with change
           orders and HUD requirements for each program year. Moreover, since the City’s
           record keeping was inadequate, it could not demonstrate the exact amount of
           CDBG funds that it disbursed to its subrecipients. The City estimated that about
           $2.8 million of the $11.7 million in CDBG funds it drew down went to nine
           subrecipients during fiscal years 2008, 2009, and 2010.

The City Failed To Adequately
Monitor Its Subrecipients

           The City could not demonstrate that it properly monitored its subrecipients as
           required. Subrecipient monitoring is required by regulations found at 24 CFR
           85.40, which state that grantees are responsible for managing the day-to-day
           operations of grant- and subgrant-supported activities. The City was further
           required to carry out its responsibility to review its subrecipient performance by
           24 CFR 570.501. Our review of the City’s onsite monitoring of its nine reported
           subrecipients showed that the monitoring was not sufficient. The City was able to
           provide some evidence that it performed some limited monitoring reviews during
           March and April 2009. However, for three of the nine subrecipients, it could not
           provide a monitoring checklist. The six completed checklists lacked
           documentation to support the monitoring conclusions. For three of the nine
           subrecipients, the City could not provide a completion letter. For two of the nine
           subrecipients, no monitoring information was provided by the City. City officials
           acknowledged that for one of these two subrecipients, they did not know what
           services the subrecipient performed with the CDBG funds. The City provided an
           internal written procedure which required it to carry out its statutorily mandated
           responsibility to review subrecipient performance as cited in the CDBG
           regulations at 24 CFR 570.501. However, the audit results showed that the City
           apparently did not fully understand its own internal written policy.

CDBG Activities Did Not
Comply With Program
Requirements

           We reviewed six of the City’s CDBG activities shown in HUD’s Integrated
           Disbursement and Information System to determine whether activities contained
           documentation to demonstrate compliance with national objective and eligibility
           criteria and eligibility and support for disbursements. We found problems with all
           six activities. The following paragraphs provide details.


                                            8
Four of the six activities were missing required documentation to
demonstrate that the City completed required environmental reviews. The
City must reevaluate its environmental findings to determine whether the
original findings are still valid as required by 24 CFR 58.47 for each
CDBG-assisted activity. The City did not determine the level of
environmental review and designate whether it was exempt, the project
required an environmental statement only, or an environmental review was
necessary. As part of the environmental review, the City could not
provide all of the letters from the Pennsylvania State Historical
Preservation Office for the addresses acquired, rehabilitated, or
demolished with CDBG funding. Section 106 of the National Historic
Preservation Act requires the City to take into account the effects of its
undertakings on historic properties and afford the council a reasonable
opportunity to comment on such undertakings.

Three of six activities had a national objective of addressing slum and
blight on a spot basis. Documentation requirements are described at 24
CFR 570.506(b)(10) (i) and (ii) and include (1) a description of the
specific condition of blight or physical decay treated; (2) for rehabilitation
carried out under this category, a description of the structure, including the
specific conditions detrimental to public health and safety that were
identified; and (3) details and scope of the CDBG-assisted rehabilitation.
The City’s files did not adequately demonstrate how this national
objective was being met.

For two of the six activities, it was noted that during construction, damage
occurred to two adjacent buildings. OMB Circular A-87, attachment B,
section 22(c) states that actual losses, which could have been covered by
permissible insurance (through a self-insurance program or otherwise), are
unallowable. The City paid the owners $49,500 each without adequate
documentation to support the payments in its files.

For one activity, there was no evidence of approval for a $50,000 change
order transaction between the City and the subrecipient. The City
indicated that it was an error and proactively started processing the
required documentation during our review. The City also provided a 2004
subrecipient agreement for this activity, but the agreement was out of date
and incomplete.

For one economic development initiative grant, the City did not obtain
required appraisals before the purchase and demolition of eight residential
properties. Regulations at 24 CFR 570.606(e) reference 49 CFR part 24,
subpart B for the acquisition of real property for an assisted activity.
Regulation 49 CFR 102(d), requires that for real property, the (1) offer of
compensation be no less than the appraisal amount, (2) the closing
statement identify all incidental expenses, and (3) there is evidence that


                          9
                    the owner received all of the net proceeds due from the sale. The City’s
                    files contained no documentation to demonstrate that the value of the
                    properties was appraised.

The City Allowed an Apparent
Conflict-of-Interest Situation
To Exist


             The audit identified an apparent conflict-of-interest situation, whereby the
             executive director of the Scranton Redevelopment Authority, who was
             responsible for administering its CDBG funds, was also the president of a
             consulting company that did business with the redevelopment authority. The
             consulting company received more than $130,000 in CDBG funds from the
             redevelopment authority. As a subrecipient, the redevelopment authority was
             required to comply with the provisions of 24 CFR 570.611 with regard to conflicts
             of interest, but it did not do so. Contrary to the regulations, the executive director
             had a significant financial interest in the consulting firm while also serving as the
             executive director of the redevelopment authority. The regulations at 24 CFR
             570.489(h)(4) do allow, upon written request, an exception to the of conflict-of-
             interest provisions when approved by HUD on a case-by-case basis. However,
             neither the City nor the redevelopment authority contacted HUD to request an
             exception.

The City Informed Us It Was
Working To Correct Problems
Identified

             Officials in the City’s Office of Economic Community Development informed us
             that the conditions identified by the audit occurred because responsible City
             employees did not fully understand all of the HUD requirements and, therefore,
             did not follow them. They informed us that going forward, they intended to
             ensure that the City’s records properly identified CDBG funding and funding
             from sources other than HUD, which were not separately identifiable during the
             audit period. Officials also agreed that they needed to maintain adequate
             supporting documentation tied to the accounting records and adequately monitor
             their subrecipients. Officials also stated that they were hopeful that this audit
             report would help responsible personnel understand the importance of these
             requirements.

Conclusion


             As discussed above, the City could not demonstrate that it used more than $11.7
             million in CDBG funds for eligible activities that met the intent of the program.



                                               10
          Although HUD regulations and its grant agreements required the City to
          adequately maintain records to demonstrate that funds were spent on eligible
          activities, execute proper subrecipient agreements, and adequately monitor its
          subrecipients, it did not fully understand these requirements. It also failed to
          maintain budget controls and accounting procedures to support the
          reasonableness, allocability, and allowability of costs charged to the grants.
          Therefore, HUD had no assurance that CDBG funds, totaling more than $11.7
          million, met the intent of its CDBG program. By improving its financial
          management system and adequately supporting CDBG expenditures and
          complying with HUD requirements, the City can ensure that future funds will be
          used for the purposes intended.

Recommendations


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

          1A.     Perform additional monitoring and provide technical assistance to the
                  City, as needed, to ensure that the City properly administers its CDBG
                  funding in accordance with applicable requirements.

          1B.     Evaluate issues in this report, including the apparent conflict-of-interest
                  issue, and if appropriate, initiate appropriate administrative action against
                  responsible officials.

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

          1C.     Provide documentation to demonstrate that $11,735,924 was used for
                  eligible activities that met the intent of its HUD-approved budget line
                  items or repay HUD from non-Federal funds.

          1D.     Improve its financial management system and implement improved
                  accounting procedures to ensure that it meets the requirements of
                  regulations at 24 CFR 85.20, OMB Circular A-87, and 24 CFR 570.506.
                  At a minimum, the financial management system should maintain
                  accounting records and other supporting documents that (1) distinguish
                  expenses paid by HUD from those paid through other funding sources; (2)
                  demonstrate that expenditures paid were for eligible activities; (3)
                  determine and adequately document the reasonableness, allocability, and
                  allowability of costs; and (4) demonstrate that expenditures meet HUD-
                  approved budget line items.




                                            11
1E.   Develop and implement controls to ensure that it monitors its
      subrecipients as required and maintains adequate documentation to
      support its monitoring efforts.

1F.   Revise its subrecipient agreement to comply with HUD requirements.




                              12
                         SCOPE AND METHODOLOGY

We conducted our onsite work from January through August 2010 at the City’s office located at 538
Spruce Street, Scranton, PA, and at our offices located in Pittsburgh, PA. The audit covered the
period January 2008 through December 2009 but was expanded when necessary to include other
periods. We relied in part on computer-processed data in the City’s computer system. Although
we did not perform a detailed assessment of the reliability of the data, we did perform a minimal
level of testing and found the data to be adequate for our purposes.

To accomplish our objectives, we

       Obtained relevant background information.

       Reviewed applicable HUD regulations and Federal guidelines.

       Reviewed the applicable City policies, financial records, subrecipient agreements,
       subrecipient monitoring reports, environmental reviews, and reports from its independent
       auditors.

       Interviewed officials from HUD’s Philadelphia Office of Community Planning and
       Development and members of the City’s staff.

       Reviewed HUD files including Integrated Disbursement and Information System reports
       and grantee monitoring reports.

       Obtained a listing of CDBG-funded activities administered by the City from January 2008
       through September 2009. Nonstatistically selected and reviewed 6 of the 119 CDBG
       activities listed to verify compliance with national objective and eligibility criteria and
       eligibility and support for disbursements. We selected the six activities because they
       either had a large amount of disbursements or were associated with the Scranton
       Redevelopment Authority. The total dollar value of disbursements for the 6 activities
       during our audit period was $908,000, of the 119 activities valued at $7.8 million.

       Analyzed general ledger and disbursement information from the City’s computer system.

       Obtained a legal opinion from the Office of Inspector General’s (OIG) Office of General
       Counsel regarding the apparent conflict-of-interest situation involving the Scranton
       Redevelopment Authority. Counsel opined that that a conflict of interest existed.

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
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective. The audit included tests of internal controls that
we considered necessary under the circumstances.


                                                13
                              INTERNAL CONTROLS

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

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

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



 Relevant Internal Controls


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

                      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


                                                 14
             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 ensure compliance with applicable laws and regulations
                    concerning record-keeping requirements, budget controls, and supporting
                    source documentation that is to be maintained in its activity files.

                    The City did not ensure compliance with applicable laws and regulations
                    regarding subrecipient monitoring and procurement of services based on full
                    and open competition by its subrecipients, allowing a conflict of interest to
                    exist.




                                              15
                                    APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                            Recommendation
                                number            Unsupported 1/
                                   1C                $11,735,924




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




                                             16
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION



Ref to OIG Evaluation   Auditee Comments




                         17
Comment 1




Comment 2




            18
Comment 3




Comment 4




            19
Comment 5




Comment 6




Comment 7




            20
Comment 8




            21
                         OIG Evaluation of Auditee Comments

Comment 1   As stated in the audit report, we concluded that the City could not demonstrate
            that it used more than $11.7 million in CDBG funds in accordance with applicable
            HUD requirements because its accounting records did not distinguish between
            expenses paid by HUD funds and those paid by other funds. The City did not
            dispute that it failed to maintain adequate accounting records and did not develop
            procedures to track expenses paid by HUD versus expenses paid through other
            funding sources. We commend the City for taking action to improve controls by
            discontinuing the practice of commingling funds and opening two additional bank
            accounts to segregate funds, modifying its Quick Book system to track
            expenditures by activity, and pledging to provide documentation to HUD for each
            activity identified in the audit report.

Comment 2   As stated in the audit report, regulations at 24 CFR 85.20 state that grantees and
            subgrantees must maintain records which adequately identify the source and use
            of funds provided for financially-assisted activities. Actual expenditures or
            outlays must be compared with budgeted amounts for each grant or subgrant. To
            compare and control expenditures against approved budgets, the City must
            maintain records of the amounts budgeted for eligible activities, include
            unexpended/unobligated balances for budgeted categories, and compare planned
            versus actual obligations and expenditures. We determined that the City did not
            prepare and process a $50,000 change order for additional
            architectural/engineering costs that increased the total CDBG funding for a 2008
            subrecipient activity. The City acknowledged this discrepancy and took
            immediate action to prepare the missing change order during the audit. However,
            this occurrence illustrates the City’s need to improve its budget controls. Further,
            on numerous occasions during the audit, we requested the City provide
            documentation to support expenditures. Documentation such as invoices,
            employee timesheets, property appraisals, receipts, or canceled checks to support
            expenditures were not located in the files.

Comment 3   The subrecipient agreement the City provided as an attachment to its written
            response does not comply with HUD requirements. As stated in the audit report,
            regulations at 24 CFR 570.503 require subrecipient agreements to include a
            description of the work to be performed, a schedule for completing the work, and
            a budget. These items must be in sufficient detail to provide a sound basis for the
            City to effectively monitor performance under the agreement. The subrecipient
            agreement did not identify how the subrecipient planned to use the CDBG funds
            to assist 10 homeless families to move to apartments, when the assistance would
            be completed, and how much the subrecipient planned to spend for the type of
            assistance provided. Further, the agreement references a “grantee policy”
            concerning the purchase of equipment and maintenance of inventory records of all
            non-expendable personal property. However, the policy is not included as an
            addendum to the agreement and the City did not provided a copy of it to us when
            we requested it during the audit.



                                             22
Comment 4   As stated in the audit report, the City could not demonstrate that it properly
            monitored its subrecipients. Regulations at 24 CFR 85.40 and 24 CFR 570.501
            require the City to monitor its subrecipients. The City was able to provide some
            evidence that it performed some limited monitoring reviews during March and
            April 2009. However, for three of the nine subrecipients, it could not provide a
            monitoring checklist. The six completed checklists lacked documentation to
            support the monitoring conclusions. For two of the nine subrecipients, no
            monitoring information was provided by the City. The monitoring plan and
            HOME monitoring correspondence that the City provided as an attachment to its
            written response does not demonstrate adequate monitoring of its CDBG
            subrecipients.

Comment 5   We commend the City for taking immediate action to create and process the
            change order. Although the change order has been processed, the City lacked
            documentation to demonstrate that the payment was made for only eligible
            expenses, that the expenses were reasonable in relation to the actual performance,
            and that the funds were not in excess of immediate needs. This lack of
            documentation is critical in light of the fact that the City made another $50,000
            payment for another activity to the same contractor within 2 days without
            supporting documentation.

Comment 6   The City provided copies of the HUD-1, deed, and notes from the files of the
            Scranton Redevelopment Authority for three of eight properties. However, there
            was no evidence demonstrating how the City took possession of the remaining
            five properties. Also, for activities determined to meet a community development
            need having a particular urgency, regulations at 24 CFR 507.506(b) require that
            the following records be maintained: documentation concerning the nature and
            degree of seriousness of the condition requiring assistance, evidence that the
            grantee certified that the CDBG activity was designed to address the urgent need,
            information on the timing of the development of the serious condition, and
            evidence confirming that other financial resources to alleviate the need were not
            available. The City’s files did not contain this documentation.

Comment 7   Because the individual has a financial interest in his company, serves as the
            executive director of the redevelopment authority, and did not obtain an exception
            from HUD, an apparent conflict of interest arises from his submission of invoices
            from his company to the redevelopment authority for reimbursement with CDBG
            funds. Even if the vacant property reviews were authorized and were services
            independent from his role as the executive director at the redevelopment
            authority, to be compliant with the requirements of redevelopment authority’s
            agreement with the City, the individual, as the executive director of the
            redevelopment authority, should have solicited competitive proposals for the
            reviews pursuant to regulations at 24 CFR Part 570. Those rules require
            compliance with regulations at 24 CFR 85.36, which, in relevant part, require
            open competitive bidding in negotiation. This step does not appear to have been
            taken by the individual while he was acting as the redevelopment authority’s



                                            23
            executive director. In addition, an open competitive bidding process is one of the
            factors to be considered by HUD in determining whether to grant an exception
            under 24 CFR Part 570. Finally, assuming that the individual’s consultancy work
            was otherwise permissible under 24 CFR Part 570, here, the conflict rules take
            precedence over the consultancy rules and operate as a bar to the consulting
            activity at issue.

Comment 8   The multi-year environmental review for demolition clearance that the City
            provided was not sufficient because it did not provide details. That is, it did not
            relate to a specific CDBG activity identified in the City’s 5-year plan and did not
            identify specific properties. CDBG-funded activities must comply with the
            environmental review requirements in 24 CFR Part 58. Environmental review
            guidance on HUD’s Web site states that a complete and clear project description
            is the first step in the environmental review process. The project description
            should provide location-specific information and geographic boundaries, as well
            as a delineation of all activities included in the overall scope of the project.




                                             24
Appendix C

                                   CDBG ACTIVITIES


Activity                         Nat. Funds drawn Funds drawn Funds drawn
             Activity name                                                   Total
number                           obj.*  in 2008     in 2009     in 2010
           NHS – home buyer
  527      counseling            LMC        $3,417                             $3,417
           Celtic Arms/W.T.
  677      Hackett’s             LMJ                      $809      $4,244      5,053
  889      Jo Ellen Exeter       LMH         7,577                              7,577
           East Mountain         SBA
           Road
 1087      reconstruction                    4,900                              4,900
           Paving and
           reconstruction of
 1236      streets               LMA         6,584                              6,584
           Reconstruction of
           Lackawanna
 1371      Avenue bridges        LMA                    67,395                 67,395
           Redevelopment of
           the 500 block of
           Lackawanna
 1399      Avenue                LMJ       129,879      10,588       5,786    146,253
           Lackawanna
 1426      Avenue garage         LMJ        19,774       8,619                 28,393
           Northern Light
 1430      Espresso Bar, Inc.    LMJ           305         588                   893
           410-412 Spruce
 1435      Street                LMJ         3,896       5,318         83       9,297
 1438      Knitney Lines, Inc.   LMJ         1,685         525                  2,210
           119 Jefferson
 1439      Associates, LLC       LMJ                     2,011                  2,011
 1456      K & A Imports         LMJ         1,255                              1,255
           Cross the Pond,
 1458      LLC                   LMJ            53          42                       95
           Redevelopment of
           500 Lackawanna
 1473      Avenue                LMJ        50,000                             50,000
           Preferred Produce
           and Food Service,
 1505      Inc.                  LMJ                       758                   758



                                              25
Activity                         Nat. Funds drawn Funds drawn Funds drawn
             Activity name                                                   Total
number                           obj.*  in 2008     in 2009     in 2010
           Lackawanna
 1508      Avenue bridge         LMA       $77,879     $78,762               $156,641
           Rockwell Avenue
 1509      bridge                LMA        10,792                   $419      11,211
           West Lackawanna
 1510      Avenue bridge         LMA                     5,000                  5,000
 1514      Johnson College       LMC        41,200                             41,200
           DJK Ventures,
 1538      LLP                   LMJ                     1,827                  1,827
           North Scranton
           Junior High
 1547      (Goodwill)            LMJ         4,342         184        770       5,296
           ED project
 1559      delivery costs        LMJ        24,485                             24,485
           Demolition of
           former Scranton
 1560      Lace building         LMJ           113                                113
 1562      Facade grants         SBS        30,000      29,600                 59,600
           Lackawanna
 1564      Avenue garage         SBA                    15,821                 15,821
           Providence Square
 1566      phase II              LMA         9,460       2,540                 12,000
 1581      Mr. James Gerrity     LMH                       825                    825
           UNC transitional/
 1602      condemnation          LMC         2,143                              2,143
           Connell Park -
 1606      restoration           LMA        44,770      29,171                 73,941
           North Scranton
 1608      little league         LMC                    59,400                 59,400
 1610      Blight initiative     SBS         2,757                              2,757
           UNC permanent
           housing/
 1624      chronically ill       LMC        19,196                             19,196
           Community
           development
 1634      delivery cost                    11,702                             11,702
           National Pastry
 1638      bake shop             LMJ           210         662                    872
 1652      Ipanema Grill, Inc.   LMJ         1,270       1,334       4,796      7,400
           Alexander’s Salon
 1664      and Day Spa, Inc.     LMJ           315       4,658       3,163      8,136




                                              26
Activity                       Nat. Funds drawn Funds drawn Funds drawn
         Activity name                                                     Total
number                         obj.*     in 2008     in 2009     in 2010
         Program
 1666 administration                    $315,548     $32,582               $348,130
 1667 Hyde Park baseball       LMA        15,113         600                 15,713
         Connell Park little
 1668 league                   LMA        19,515                              19,515
         Reconstruction of
         Rockwell Avenue
 1669 bridge                   LMA         1,985                               1,985
         UNC-Bellevue
 1671 Center                   LMC        14,201                              14,201
         Salvation Army -
         emergency fuel
 1677 assistance               LMC         3,225                               3,225
         NEPA
 1679 Philharmonic             LMC        12,500                              12,500
         Healthy Northeast
         Pennsylvania
 1680 Initiative               LMC                    10,000                  10,000
         Catherine
 1685 McAuley Center           LMC         2,000                               2,000
        North Scranton
        Neighborhood
 1688   Association            LMC        18,000       9,950      $1,265      29,215
        West Scranton
        Neighborhood
 1689   Association            LMA         1,450      28,300        939       30,689
        South Scranton
 1690   junior football        LMC                     4,700                   4,700
        Westen Park senior
 1693   league                 LMA         8,567                               8,567
        Weston Field/
        Department of
        Parks and
 1695   Recreation             LMA         8,504                               8,504
        Neighborhood
 1697   police patrol          LMA       117,047     144,493      20,632    282,172
        Scranton Mall
 1699   Association                       15,395     123,632                139,027
        Scranton Hotel,
 1700   LLP                               93,539      17,488                111,027




                                            27
Activity                       Nat. Funds drawn Funds drawn Funds drawn
             Activity name                                                Total
number                         obj.*  in 2008     in 2009     in 2010
           SPA - Lackawanna
           Avenue parking
 1701      garage              LMJ       $31,000      $7,279     $6,281    $44,560
           Benjamin Franklin
           Fire Fighters and
 1703      Police              LMA                               40,135      40,135
           Plot Neighborhood
 1704      Association         LMA        37,309                             37,309
           Scranton
           Redevelopment
 1705      Authority           SBS       171,615                           171,615
           ARC of
           Lackawanna
 1707      County              LMC        18,500                             18,500
           Paul M. Nardone
 1723      D/B/A/ Outrageous   LMJ          205         420                       625
           Kelbri
 1724      Development, LLC    LMJ         1,491         79                  1,570
 1726      Blight Initiative   SBS       247,987                           247,987
           Vida Tapas Bar
 1728      and Grill, Inc.     LMJ          914        4,204      1,797       6,915
           Electric City
 1729      Roasting Company    LMJ          210         530                       740
           Parker Street
 1731      bridge              LMA        75,000                            75,000
 1737      SECCAS, LLC         LMJ           263         578                   841
 1742      Bethel AMC          LMC        87,484      24,525               112,009
           Friendship House
           energy
 1748      improvements        LMC                   163,885    127,750    291,635
      Clover Field junior
 1757 football                 LMA         9,325                              9,325
      Cedar Avenue
      revitalization area
 1759 study                    SBS        90,000                             90,000
      Downtown senior
 1760 center                   LMC        53,000                             53,000
      Sloan baseball
 1761 association              LMC        19,850                             19,850




                                            28
Activity                    Nat. Funds drawn Funds drawn Funds drawn
            Activity name                                              Total
number                      obj.*  in 2008     in 2009     in 2010
           Tree planting
 1763      project          LMA       $18,488     $34,540     $7,673    $60,701
           Purchase of fire
 1766      truck            LMA                   399,999               399,999
           MTM Real Estate
 1768      Company, LLC     LMJP      252,394                           252,394
           Rejuven Essence
           Management
 1771      Services, LLC    LMJP      153,449       $609                154,058
           Program
 1780      administration             422,792     292,574               715,366
           UNC
 1782      condemnation     LMC       115,409      54,591               170,000
 1783 Friends of the Poor   LMC        20,000                             20,000
      UNC - Bellvue
 1784 Center                LMC                     9,000                  9,000
      UNC - Project
 1785 HOPE                  LMC        67,500                             67,500
      Boys and Girls
 1786 Club “Park-it”        LMC        26,000                             26,000
 1787 Deutsch Institute     LMC        50,000                             50,000
      UNC - Arts in the
 1791 Park                  LMC         6,000                              6,000
      Scranton Comm.
 1792 Concerts BBBS         LMC         9,000                              9,000
      Scranton Public
 1793 Theatre               LMC         1,710       5,040                  6,750
      Healthy NEPA
 1794 Initiative            LMC                               51,340      51,340
      Salvation Army
      emergency fuel
 1795 assistance            LMC         9,000                              9,000
      Catholic Social
      Services – Perm.
 1798 Housing               LMC                     4,500                  4,500
      Community
      Intervention Center
      permanent
 1800 supervisor            LMC        12,000       6,000                 18,000
      Catherine
 1801 McAuley Center        LMC        13,500                             13,500
      UNC – permanent
 1802 housing               LMA         5,287      16,520      5,193      27,000



                                         29
Activity                   Nat. Funds drawn Funds drawn Funds drawn
           Activity name                                              Total
number                     obj.*  in 2008     in 2009     in 2010
      Scranton Park
 1804 enhancement         LMA        $45,000      $7,730               $52,730
      Connell Park little
 1805 league              LMA         14,059       7,854                 21,913

 1806 Hyde Park baseball   LMA                    54,476     $9,333      63,809
      Economic
      development
 1807 projects             LMJP       27,779                             27,779
      Architectural
      Heritage
 1808 Association          SBS       150,473      59,710               210,183
      South Scranton
 1810 little league        LMC        36,628      23,139      4,990      64,757
      Weston Park senior
 1811 little league        LMA                    22,500                 22,500
      West Scranton
 1812 little league        LMA                     3,858      1,938      5,796
 1813 Blight initiative    SBS        73,041     326,959               400,000
      Paving and
 1815 handicap curb cuts   LMA       379,024       4,902               383,926
      Scranton Hotel,
 1818 LLP                            330,000     276,671               606,671
      Scranton Mall
 1819 Association                     68,330                             68,330
      It’s Outrageous,
 1822 LLC                  LMJP       63,614                             63,614
      Cartegna Family
 1824 Wines, LLC           LMJP       37,764        772       3,288      41,824
      Electric City
 1842 Television           LMJ        92,515        572          83      93,170
      Weston Field fence
 1843 and lights           LMA        16,988                             16,988
      Weston Park pool
 1844 lighting             LMA         1,238                              1,238
      Capouse Avenue
 1845 pool                 LMA         1,238                              1,238




                                        30
Activity                     Nat. Funds drawn Funds drawn Funds drawn
           Activity name                                                Total
number                       obj.*  in 2008     in 2009     in 2010
 1846 Connell Park pool      LMA        $1,238                             $1,238
         Keyser Village,
 1847 LLC                    LMJ       187,394                           187,394
         Jay’s Commons,
 1859 LLP                    LMJ        88,321      $1,019                 89,340
 1864 John’s Signs           LMJ                    25,315                 25,315
         Danielle &
 1876 Company                LMJP                   27,032                 27,032
         Gleason Custom
 1888 Kitchens, Inc.         LMJP                   52,525     $1,315      53,840
         Backyard Ale
 1889 House, LLC             LMJP                   38,822                 38,822
         West Side Falcons
 1897 field lighting         LMC                     2,500                  2,500

      CDBG
 1902 administration                               490,956    142,027    632,983
      SRA Connell
 1904 Building               LMJP                  501,236        853    502,089
      Paving of streets
      and handicap curb
 1910 cuts                   LMA                   407,917               407,917
      West Side Falcons
 1911 junior football        LMC                    87,594                 87,594
      Neighborhood
 1912 Polic Patrol           LMA                               35,679      35,679
      United
      Neighborhood
 1921 Centers                LMC                     3,500      7,500      11,000
      United
      Neighborhood
      Centers-Project
 1922 Hope                   LMC                    67,500                 67,500
      Boys and Girls
      Club -“Park- it”
 1923 Program                LMC                    25,000                 25,000
 1924 Friends of the Poor    LMC                               11,000      11,000
 1925 Deutsch Institute      LMC                    35,000                 35,000
      Community
 1927 Intervention Center    LMC                    15,000      5,000      20,000




                                          31
Activity                        Nat. Funds drawn Funds drawn Funds drawn
             Activity name                                                 Total
number                          obj.*  in 2008     in 2009     in 2010
           UNC-Permanent
           Supportive
 1928      Housing              LMC                              $10,000    $10,000
           Catherine Mcauley
           Center-Perm Supp
 1929      Housing              LMC                    18,000      3,244      21,244
           Salvation Army –
 1930      Utility Services     LMC                     6,756     73,784      80,540
           Condemnation –
 1931      City of Scranton     LMC                    17,969     29,705      47,674
           Lackawanna
 1933      Avenue Bridge        LMA                    63,753     53,567    117,320
 1934      Blight initiative    SBS                    93,545                93,545
 1936      Scranton Hotel, LP                                    278,291    278,291
           Scranton Mall
 1937      Associates                                            170,000    170,000
           Sidewalk & Period
 1938      Lighting             LMA                     4,645     34,375      39,020
           Connell Little
 1945      League               LMA                     4,054      1,019       5,073
 1967      Fitness 53, Inc.     LMJ                    25,000      1,680      26,680
           Diversified
           Disaster Recovery
 1982      Services, Inc.       LMJ                    50,000      3,275      53,275
           Administration-
 1996      CDBG                                                  370,874    370,874
           Sidewalks at
           Washington &
 2012      Linden               LMA                                1,741       1,741
 2024      Deutsch Institute    LMC                               23,761      23,761
           United
           Neighborhood
           Centers Permanent
           Supportive
 2027      Housing              LMC                                5,000       5,000
           Scranton Mall
 2032      Associates                                              8,238       8,238
           Center for
           Independent
 2044      Living Sidewalks     LMC                                1,322       1,322




                                             32
Activity                   Nat. Funds drawn Funds drawn Funds drawn
         Activity name                                                       Total
number                     obj.* in 2008           in 2009    in 2010
         Repayment of
 2052 Section 108 – 2010                                     $733,778    $733,778
         Project Delivery
         Costs – Sordoni v
 2053 OECD                                                      3,300        3,300
         500 Lackawanna
 2055 Avenue - Park        LMJ                                 49,000       49,000
 Totals                              $4,797,874 $4,576,836 $2,361,226 $11,735,9363


*National objective codes:
    Code    Description                                                                           24 CFR citation
    LMC    Low/mod limited clientele benefit. Activities that benefit a limited clientele, at     570.208(a)(2)
           least 51 percent of whom are low/mod income. LMC activities provide benefits to a
           specific group of persons rather than to all the residents of a particular area.

    LMJ    Low/mod job creation and retention. Activities undertaken to create or retain          570.208(a)(4)
           permanent jobs, at least 51 percent of which will be made available to or held by
           low/mod persons.

    LMJP   Low/mod job creation, location-based. Activities in which a job is held by or          570.208(a)(4)(iv)
           made available to a low/mod person based on the location of the person’s residence
           or the location of the assisted business.

           Slum/blight area benefit. Activities undertaken to prevent or eliminate slums or
    SBA    blight in a designated area.                                                           570.208(b)(1)

    SBS    Slum/blight, spot basis. Activities undertaken on a spot basis to address conditions   570.208(b)(2)
           of blight or physical decay not located in designated slum/blight areas.

    LMA    Low/mod area benefit. Activities providing benefits that are available to all the      570.208(a)(1)
           residents of a particular area, at least 51 percent of whom are low/mod income. The
           service area of an LMA activity is identified by the grantee and need not coincide
           with census tracts or other officially recognized boundaries.

    LMH    Low/mod housing benefit. Activities undertaken to provide or improve permanent         570.208(a)(3)
           residential structures that will be occupied by low/mod income households.




3
 This amount is $12 more than the amount of unsupported costs shown in recommendation 1C due to the rounding
of amounts for the 150 activities listed in the chart.


                                                         33