Issue Date December 23, 2010 Audit Report Number 2011-PH-1005 TO: Frances Bush, Director, Office of Community Planning and Development, Washington, DC, Field Office, 3GD FROM: John P. Buck, Regional Inspector General for Audit, Philadelphia Region, 3AGA SUBJECT: The District of Columbia, Washington, DC, Did Not Administer Its HOME Program in Accordance With Federal Requirements HIGHLIGHTS What We Audited and Why We audited the District of Columbia’s (grantee) administration of its HOME Investment Partnerships program (HOME) at the request of the U.S. Department of Housing and Urban Development’s (HUD) Office of Affordable Housing. This is our second and final of two reports issued in relation to the grantee’s administration of its HOME program. The objective addressed in this report was to determine whether the grantee’s Department of Housing and Community Development properly administered its HOME program by providing home ownership and rehabilitation assistance in accordance with Federal requirements, ensuring that its Community Housing Development Organizations (CHDO) were eligible and complied with HOME program requirements, and implementing sufficient controls over the receipt and expenditure of HOME funds. What We Found The grantee did not administer its HOME program in accordance with Federal requirements. It (1) obligated more than $2.5 million in HOME funds for an activity/project that was significantly delayed and not completed, (2) did not properly manage funds that it drew for downpayment assistance and financing of home repairs, (3) committed and disbursed CHDO operating funds for an ineligible CHDO, and (4) did not properly account for program administrative funds. These deficiencies occurred because the grantee did not have and/or implement sufficient procedures to ensure that it complied with program requirements. As a result, it charged more than $1.6 million in ineligible costs to its HOME program and could not support approximately $6.5 million in costs charged to the program. The grantee also accumulated more than $1.5 million in funds that it could have used to improve its administration of its HOME program and/or fund additional eligible HOME projects. What We Recommend We recommend that the Director of HUD’s Washington, DC, Office of Community Planning and Development require the grantee to recover more than $1.6 million that it spent on ineligible expenses and provide support for approximately $6.5 million in expenses or repay that amount to the HOME program. In addition, the grantee should use approximately $1.6 million in accumulated funds to improve its administration of the program and/or fund additional eligible HOME projects. Lastly, we recommend that the grantee create and implement procedures to ensure that HOME funds are disbursed and used in compliance with applicable 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 discussed the report with the grantee during the audit and at an exit conference on November 29, 2010. The grantee provided written comments to our draft report on December 10, 2010. The grantee generally concurred with our findings and stated that improvements would be implemented to address the management challenges noted in our report. The complete text of the auditee’s response, along with our evaluation of that response, can be found in appendix B of this report. 2 TABLE OF CONTENTS Background and Objective 4 Results of Audit Finding 1: The Grantee Obligated More Than $2.5 Million in HOME Funds for 5 an Activity That Was Significantly Delayed and Not Completed Finding 2: The Grantee Did Not Properly Manage Funds for Downpayment 10 Assistance and Financing of Home Repairs Finding 3: The Grantee Obligated and Disbursed Funds for an Ineligible CHDO 17 Finding 4: The Grantee Did Not Properly Account for Program Administrative 21 Funds Drawn Scope and Methodology 31 Internal Controls 32 Appendixes A. Schedule of Questioned Costs and Funds To Be Put to Better Use 34 B. Auditee Comments and OIG’s Evaluation 35 C. Schedule of Excessive CDBG Assistance 47 D. Analysis of HOME Funds Held Beyond 15 Days of Being Drawn 48 E. Schedule of Unsupported Rehabilitation Costs 49 3 BACKGROUND AND OBJECTIVE The HOME Investment Partnerships program (HOME) was created under Title II of the Cranston-Gonzalez National Affordable Housing Act, as amended, and is regulated by 24 CFR (Code of Federal Regulations) Part 92. The HOME program provides formula grants to States and localities that communities use- often in partnership with local nonprofit groups- to fund a wide range of activities that build, buy, and/or rehabilitate affordable housing for rent or home ownership or provide direct rental assistance to low-income people. HOME is the largest Federal block grant to State and local governments designed exclusively to create affordable housing for low-income households. Participating jurisdictions may choose among a broad range of eligible activities, using HOME funds to (1) provide home purchase or rehabilitation financing assistance to eligible homeowners and new home buyers; (2) build or rehabilitate housing for rent or ownership; or (3) for “other reasonable and necessary expenses related to the development of non-luxury housing,” including site acquisition or improvement, demolition of dilapidated housing to make way for a HOME-assisted development, and payment of relocation expenses. As a participating jurisdiction, the District of Columbia (grantee) administers its HOME program through its Department of Housing and Community Development. The grantee received the following HOME grants from the U.S. Department of Housing and Urban Development (HUD) over a 4-year period: Consolidated annual HOME funds action plan year received 2007 $8,664,762 2008 8,731,505 2009 8,452,914 2010 9,322,221 Total $35,171,402 The grantee spends its HOME funds on the following major programs/activities: • Affordable housing/real estate development • Home Purchase Assistance program • Single Family Residential Rehabilitation program • Community housing development organizations (CHDO) In addition, 10 percent of HOME funds are authorized for the grantee’s administrative costs. Our objective was to determine whether the grantee properly administered its HOME program by providing home ownership and rehabilitation assistance in accordance with Federal requirements, ensuring that its CHDOs were eligible and complied with HOME program requirements, and implementing sufficient controls over the receipt and expenditure of HOME funds. 4 RESULTS OF AUDIT Finding 1: The Grantee Obligated More Than $2.5 Million in HOME Funds for an Activity That Was Significantly Delayed and Not Completed The grantee did not ensure that funds provided to a subrecipient for a HOME activity/project were expended in a timely manner. The grantee obligated $2.5 million for the activity in 2001 but approved several modifications/extensions, which allowed the subrecipient to delay completion of the activity for more than 8 years. The grantee drew more than $767,600 for the activity from 2001 to 2008. In 2009, the grantee transferred most of the remaining funds to another HOME activity due to the project delays. However, it failed to determine or ensure that the new activity was eligible for HOME funds. The deficiencies occurred mainly because the grantee overlooked key HUD guidance and did not establish or implement sufficient policies or procedures to ensure that it complied with program requirements. As a result, it made more than $10,400 in ineligible disbursements and could not support more than $2.4 million in HOME funds disbursed. The Grantee Allowed Significant Delays Without Assessing the Feasibility of the Project The grantee entered into an agreement with Safe Haven Outreach Ministries, Inc. (subrecipient), to acquire and/or rehabilitate affordable rental housing properties at two sites in the southeast area of the District of Columbia in August 2001. The initial grant period was from August 2001 through August 2003. The grantee obligated $2.5 million in HOME funding for the activity in 2001; however, the subrecipient did not start construction in relation to the activity (project). Between August 2003 and February 2008, the grantee executed three modifications to the agreement, which allowed the subrecipient to delay completion of the project to August 2009. The agreement modifications indicated that the grantee allowed the extensions because the subrecipient stated that it faced various issues, including challenges with raising funding needed from additional sources, changing the initially planned project sites from two to one, reconfiguring the mix of initially proposed units, and issues with zoning as well as the building permit and competitive bidding (for general contractor) processes. In conjunction with the approval of the modification that allowed the initial 2-year extension from August 2003 to August 2005, a grantee official expressed the following in a memorandum, “While I do not endorse extensions over a one-year period, I have agreed to the 2-year extension you propose in the hopes that I will 5 not have to approve a third extension, which should raise some serious questions about this project.” Nevertheless, the grantee approved two more 2-year extensions, which extended the timeframe to complete the project to August 2009. As of August 2009, 8 years after the initial agreement was executed, the subrecipient had not completed the project. The grantee failed to properly assess the feasibility of the project and did not demonstrate a sense of urgency in relation to the completion of the project, leading to significant delays in completing affordable housing and program funds’ being tied up for more than 8 years. The grantee should have considered reprogramming the HOME funds obligated for the project to other feasible HOME-eligible projects. The Grantee Overlooked HUD Requirements The grantee overlooked HUD policy (HOMEfires Volume 3, Number 5), which states that a grantee must have immediate plans to produce housing when it commits funds to a project and that construction or rehabilitation must be reasonably expected to start within 12 months. According to HUD policy, failure to begin construction within 12 months due to unforeseen circumstances does not automatically necessitate the cancellation of the project or render it ineligible. Grantees with projects experiencing significant delays must document causes for the delays and assess the likelihood of the project’s going forward. A grantee should consider cancelling a construction project nearing the end of the 12-month period if it does not appear that construction is likely within a reasonable period thereafter and should keep HUD informed of its concerns. As stated above, the grantee failed to assess the feasibility of the project, leading to significant delays in completing affordable housing and program funds’ being tied up for more than 8 years. The grantee did not have policies or procedures for addressing project delays and, thereby, ensuring compliance with HUD requirements. Also, the grantee did not have documentation indicating that it had informed HUD of the significant project delays. The grantee needs to develop and implement policies and procedures that outline a process for dealing with project delays. Project Acquisition Funds Were Not All Eligible or Supported The grantee disbursed more than $767,600 for property acquisition and other related activities. Documentation supporting the funds drawn disclosed that the 6 grantee charged approximately $10,400 in ineligible costs, which consisted of a duplicate cost of $6,000 and about $4,400 for a property at a site that was eliminated from the grant agreement in conjunction with the August 2003 modification. The grantee also could not support approximately $368,260 of the amount disbursed. It could not provide contractor invoices and/or cancelled checks to show that the expenses were valid. The grantee stated that it would obtain documentation for the unsupported costs from the applicable vendors. However, it disagreed that the funds related to the property at the eliminated site were ineligible. It stated that the costs were included in costs for the original architectural designs and assessments for the initially planned project and that those designs and assessments were then used to determine that the elimination of one site would result in a project that would better meet the housing mission of the subrecipient. Therefore, the architectural designs and assessments were legitimate predevelopment expenses that helped to determine that it would be better to develop affordable housing at only one of the two initially planned sites. We disagreed with the grantee’s assessment because the two sites in question were 3 miles apart. In addition, one invoice, totaling $3,800, was for the cleaning of trash and rug removal for properties at both sites. If the grantee does not complete the initially planned project, it must repay the entire disbursement of approximately $767,000 to HUD. The grantee stated that it would repay HUD the amount by December 31, 2010. However, HUD must ensure that the grantee repays the funds. The Grantee Lacked Adequate Support for Funds Recommitted to a New Project During our audit, the grantee drew about $1.7 million of the obligated HOME funds for the subrecipient’s project and transferred it to a new HOME activity. However, it failed to determine or ensure that the new activity was eligible for HOME funds. The grantee drew the funds to provide acquisition financing for the purchase of 18 affordable cooperative home ownership units. The grantee accepted an income certification from the cooperative development’s consultant, stating that the income from the cooperative members was true and accurate. The certification indicated that income was unknown for two cooperative members. The grantee failed to verify the cooperative members’ income by obtaining and examining source documents evidencing annual income as required by 24 CFR 92.203(a)(1)(i). Also, the tenant income schedule indicated that 9 of the 18 units were occupied as shown below. 7 Number of Number in Bedroom size cases household 5 1 4 4 1 3 According to 24 CFR 92.251(a)(2), properties assisted with HOME funds must meet all applicable local housing quality standards and code requirements, and if there are no such standards or code requirements, the housing must meet the housing quality standards in 24 CFR 982.401. District of Columbia Municipal Regulations, title 14, part 402.3, states that each room used for sleeping by two or more occupants shall be a habitable room containing at least 50 square feet of habitable room area for each occupant. Also, 24 CFR 982.401(d)(2)(ii) requires dwelling units to have at least one bedroom or living/sleeping room for each two persons. The grantee did not verify income for all of the cooperative members and did not ensure that the cooperative units complied with HOME property standards. Consequently, approximately $1.7 million in HOME funds that it recommitted to provide acquisition financing for the purchase of the cooperative units was unsupported. The Grantee Needs To Reprogram $30,100 in HOME Funds Of the $2.5 million in HOME funds that the grantee obligated in 2001 for the subrecipient’s project, about $30,100 remained after it drew approximately $767,600 for the acquisition costs associated with the original project and transferred approximately $1.7 million to the new HOME activity. The grantee should reprogram the remaining funds for other eligible HOME activities. Conclusion Contrary to HUD requirements, the grantee did not ensure completion of its subrecipient’s project in a reasonably timely manner. The grantee tied up $2.5 million obligated for the project for more than 8 years; however, the subrecipient did not complete the project. The grantee tried to correct the situation by transferring at least $1.7 million to a new HOME activity. However, it failed to determine whether that activity met HOME requirements. These deficiencies occurred mainly because the grantee overlooked key HUD guidance and did not establish or implement sufficient policies or procedures to ensure that it complied with program requirements. As a result, it made more than $10,400 in ineligible 8 disbursements and could not support more than $2.4 million in HOME funds disbursed. Recommendations We recommend that the Director of the Washington, DC, Office of Community Planning and Development require the grantee to 1A. Repay the HOME program from non-Federal funds $10,404 for the HOME funds disbursed for ineligible costs. 1B. Provide supporting documents for $368,260 spent on the acquisition of the initially planned project or reimburse the HOME program that amount from non-Federal funds. 1C. Complete the initially planned project or reimburse the HOME program from non-Federal funds $389,000 1 for funds disbursed toward project acquisition costs. 1D. Provide documentation to show that the new project meets HOME requirements or reimburse the HOME program from non-Federal funds $1,702,205 for funds disbursed for the acquisition of the project. 1E. Establish and implement policies and procedures to assess the feasibility of pending or delayed projects to ensure that HOME funds are used in a reasonably timely manner to meet the intent of the HOME program. 1F. Establish and implement policies and procedures to ensure that applicable grantee staff is properly trained and fully aware of HUD requirements to ensure that the intent of the HOME program is met. 1G. Deobligate $30,131 in funds associated with the $2.5 million initially obligated in 2001 and reprogram the funds for other eligible HOME activities, thereby putting the funds to better use. 1 $767,664 less ineligible costs of $10,404 and unsupported costs of $368,260 9 Finding 2: The Grantee Did Not Properly Manage Funds for Downpayment Assistance and Financing of Home Repairs The grantee did not properly manage funds that it drew and/or provided for downpayment assistance and financing of home repairs. Contrary to HUD requirements, it provided HOME funds for the purchase or rehabilitation of properties with property values that exceeded allowable limits. It also used Community Development Block Grant (CDBG) funds to provide supplementary downpayment assistance that exceeded allowable amounts. In addition, the grantee improperly held HOME funds in excess of 15 days of being drawn and could not support some of its disbursements for rehabilitation costs without required documentation. Because it failed to properly manage assistance that it provided for home purchases or rehabilitation, the grantee made ineligible HOME and CDBG draws or payments of approximately $1.3 million and could not support about $42,000 in HOME payments. The Grantee Provided $699,538 in Ineligible Assistance Through Its Single Family Residential Rehabilitation Program Contrary to HUD requirements, the grantee provided HOME funds for properties with after-rehabilitation values that exceeded the maximum allowable limits. The grantee provided the funds through its Single Family Residential Rehabilitation program which provides financing to existing homeowners for home repairs. According to regulations at 24 CFR 92.254(a)(2) and (b)(1), neither the purchase price for housing nor the estimated value of a property after rehabilitation may exceed 95 percent of the median purchase price for the area as described in paragraph 92.254(a)(2)(iii). Based on paragraph 92.254(a)(2)(iii), the grantee could have either used the single-family mortgage limits under Section 203(b) of the National Housing Act or 95 percent of the median price of single-family homes in an area as the price limit when awarding HOME funds for downpayment assistance. The Economic Stimulus Act of 2008 (Public Law 110- 185) provided temporary increased Section 203(b) limits; however, in March 2008, HUD issued guidance via HOMEfires Volume 9, Number 3, indicating that using the higher limits would constitute a violation of the HOME statute. HUD provided its own limits, as shown below, for our audit period. Maximum purchase price or after- rehabilitation value Period 1 unit 2 unit 3 unit 2006 to 5/1/2008 $362,790 $464,449 $561,411 2008 (effective 5/2/2008) 427,500 547,292 661,549 10 Data from HUD’s Integrated Disbursement and Information System (IDIS) indicated that the grantee provided approximately $699,500 in HOME funds through its Single Family Residential Rehabilitation program for 13 ineligible properties or activities as shown in the table below. After- IDIS activity After- rehabilitation number rehabilitation value from file HOME funds (identifier) value from IDIS documentation drawn 929 $809,592 $603,980 $155,592 891 579,888 418,870 98,046 892 425,000 385,060 97,151 977 2 512,570 759,500 75,000 758 440,000 431,570 69,485 982 463,539 404,520 63,539 890 501,534 392,430 62,613 984 515,610 515,610 20,698 979 575,043 442,020 15,043 901 447,666 432,810 14,856 883 400,000 364,030 9,515 894 553,640 505,030 9,350 761 360,000 364,030 8,650 Total $699,538 Activities 977, 984, and 979 in the table above were subject to the property limits effective May 2, 2008, and the rest of the activities were subject to the limits before that date. None of the properties was eligible for HOME funds because the after-rehabilitation values exceeded the limits established by HUD. Also, we noted some other issues in relation to four of the draws. The draws for activities 761 and 883 were for the same rehabilitation costs at the same property. Therefore, although the draws were for slightly different amounts, the grantee apparently made a duplicate draw. Also, for activity 890, the grantee received a payoff of the HOME funds but erroneously credited the funds to the CDBG program. In addition, the grantee did not perform a final inspection for the rehabilitation work performed for activity 982 to ensure that the property complied with standards required by regulations at 24 CFR 92.251. The data we obtained also indicated that there were discrepancies between the after-rehabilitation values in IDIS and the after-rehabilitation values in the project files as shown in the table above. We requested but did not receive an explanation from the grantee for the discrepancies. The grantee must ensure that it enters accurate financial data into IDIS as HUD relies on the information in the system for reports to Congress and grantee monitoring. 2 The property for this IDIS activity number had three units. 11 Because it did not comply with HUD requirements, the grantee improperly awarded more than $699,500 in program funds for ineligible properties. The grantee must repay these funds to the HOME program. The Grantee Provided $324,733 in Ineligible Funds Through Its Home Purchase Assistance Program Based on information from IDIS, we determined that the grantee provided HOME funds for the purchase of nine properties with prices that exceeded the maximum allowable limits. As shown above, in March 2008, HUD provided maximum limits for the purchase price or after-rehabilitation values of properties eligible for HOME funds. Contrary to HUD requirements, the grantee provided about $324,700 in HOME funds through its Home Purchase Assistance Program for nine ineligible properties or activities as shown in the table below. IDIS activity number Purchase price HOME funds drawn (identifier) 741 $377,000 $ 75,540 909 420,000 40,097 823 370,184 35,000 824 419,684 35,000 841 398,000 34,975 822 396,140 30,550 574 560,000 28,748 852 382,000 24,973 777 422,733 19,850 Total $324,733 Based on HUD’s established maximum purchase prices or after-rehabilitation values, the properties above were not eligible for HOME funds. CDBG Funds Were Used for $159,840 in Ineligible Payments For six of the nine HOME activities above, the grantee used CDBG funds to provide supplementary home purchase assistance that exceeded the allowable amounts. According to HUD guidance in Office of Community Planning and 12 Development (CPD) Notice 07-08, CDBG funds may be used for direct home ownership assistance to facilitate and expand home ownership for low- and moderate-income households and may be used to pay any or all of the reasonable closing costs associated with the home purchase on behalf of the home buyer. CDBG funds may also be used to pay up to 50 percent of the downpayment required by the lender for the purchase on behalf of the home buyer. The grantee’s policy for its Home Purchase Assistance program did not address the 50 percent limit on downpayments. The grantee’s policy was to provide the lesser of 4 percent of the purchase price or $7,000 for closing costs and up to $70,000 in downpayment assistance based on household income by household size. Based on the HUD requirements, the grantee provided approximately $159,800 in excess CDBG assistance for the six properties (see appendix C). For each property, we calculated the maximum CDBG assistance by allowing the maximum of $7,000 in closing costs plus half of the downpayment and closing costs required from the home buyer. The grantee stated that the home buyers needed the CDBG assistance provided to be able to afford the properties and that it had reduced its limits to a maximum of $4,000 for closing costs and $40,000 for downpayment assistance. Nevertheless, for the six properties identified, the grantee paid more than $159,800 in ineligible CDBG assistance because it overlooked HUD requirements. The Grantee Needs To Implement Subsidy-Layering Guidelines For activity 909 from the table above, the grantee gave more HOME assistance than was necessary to provide affordable housing. In this case, the home buyer did not make a downpayment, and apart from approximately $40,000 in HOME assistance provided, the home buyer also received a $250,000 home ownership credit funded through HUD’s Section 5(h) home ownership program. In addition, the home purchase was funded with seller financing of about $76,700 from the District of Columbia Housing Authority (Authority). The Authority received about $93,000 in cash from the property sale. According to subsidy-layering requirements at 24 CFR 92.250(b), the grantee was required to evaluate the project in accordance with its established guidelines for subsidy layering to ensure that the HOME funds provided in combination with other governmental assistance were not more than necessary to provide affordable housing. Also, the grantee certified each year, as part of its consolidated annual plan submission that it would evaluate projects in accordance with its subsidy layering guidelines and would not invest any more HOME funds in combination with other Federal assistance than necessary to provide affordable housing. The grantee would or should not have committed HOME funding for the activity if it 13 had performed an adequate review of subsidy layering. The grantee was drafting subsidy-layering guidelines during the audit. It needs to establish and implement subsidy-layering guidelines to ensure that it does not award more HOME funds than necessary to provide affordable housing. The Grantee Held HOME Funds in Excess of 15 Days of Being Drawn The grantee held HOME draws in excess of the allowed timeframe for 18 properties that were rehabilitated under its Single Family Residential Rehabilitation program. Regulations at 24 CFR 92.502(c)(2) require that funds drawn from the United States Treasury account be expended on eligible costs within 15 days. Interest earned beyond 15 days of a disbursement belongs to the United States and must be promptly remitted. Funds not expended for eligible costs within 15 days of a disbursement must be returned to HUD for deposit into the grantee’s United States Treasury account of the HOME Investment Trust Fund. For 18 properties, the grantee drew but did not disburse about $507,800 for eligible costs within 15 days of draws as required (see appendix D). About $254,500 of the total draw had not been expended. Approximately $183,200 of that amount was associated with 10 properties that were included in the 13 ineligible Single Family Residential Rehabilitation program activities discussed above. The remaining $71,300 was associated with eight eligible activities; however, the funds must be returned to HUD since they were not expended within 15 days of being drawn. The grantee must also remit interest related to the total draw of about $507,800 that was not expended within 15 days. The Grantee Could Not Support About $42,000 in Rehabilitation Costs The grantee could not support $42,295 in program funds that it provided through its Single Family Residential Rehabilitation program for the rehabilitation of five properties/units (see appendix E). The missing documentation included cancelled checks and/or paid invoices for expenses, adequate justification for temporary relocation expenses, and evidence that it secured HOME funds for the minimum affordability period. According to regulations at 24 CFR 92.508(a)(3)(ii), the grantee should have maintained supporting documentation for each project in accordance with 24 CFR 85.20(b)(6), which requires that accounting records be supported by source documentation such as cancelled checks and paid bills, etc. Also, 24 CFR 14 92.254(a)(5)(ii)(A) requires recapture provisions to ensure that HOME assistance to home buyers will be recouped if the housing does not remain the principal residence of the buyer(s) for the minimum required period or period of affordability. The grantee violated these requirements by not maintaining adequate documentation for the program funds it spent. Also, based on regulations at 24 CFR 92.251(a)(2), one of the five units was potentially overcrowded because the file documentation indicated a family size of eight in a three-bedroom property. The Grantee Was Unaware of or Overlooked Requirements The grantee was not aware of the limits on maximum purchase price or after- rehabilitation values provided by HUD via its HOMEfires policy issuances. Therefore, it improperly capped the allowable sales price or postrehabilitation value at the single-family mortgage limits under the Section 203(b) program. The grantee’s limits as of March 17, 2008, were as follows: Maximum purchase price or after-rehabilitation value 1 unit 2 unit 3 unit $729,750 $934,200 $1,129,250 The grantee’s limits significantly exceeded the HUD limits (shown in section above on $699,538 in ineligible assistance provided through the grantee’s Single- Family Residential Rehabilitation program). In certain instances, the grantee overlooked HUD requirements. For example, it did not expend funds drawn within the required timeframe and did not maintain sufficient documentation to support its expenditures. Conclusion The grantee provided HOME funds for the purchase or rehabilitation of ineligible properties. It also used CDBG funds to provide supplementary home purchase assistance that exceeded allowable amounts. In addition, the grantee improperly held program funds in excess of 15 days of being drawn and could not support some of its disbursements for rehabilitation costs. These deficiencies occurred mainly because the grantee was unaware of or overlooked HUD requirements. Because it failed to properly manage its program funds, the grantee made ineligible HOME and CDBG draws and/or payments of approximately $1.3 million and could not support approximately $42,000 in HOME funds. 15 Recommendations We recommend that the Director of the Washington, DC, Office of Community Planning and Development require the grantee to 2A. Repay the HOME program $1,024,271 from non-Federal funds for assistance paid in cases in which the value of property exceeded the allowed limits. 2B. Repay the CDBG program $159,840 from non-Federal funds for assistance paid in cases in which the amount provided exceeded 50 percent of the downpayment required. 2C. Repay the HOME program $71,325 from non-Federal funds for funds drawn but not expended on eligible costs within 15 days. 2D. Determine the interest on $507,854 in HOME draws held in excess of 15 days and remit that amount to HUD. 2E. Provide adequate supporting documents to substantiate the eligibility of $42,295 spent on rehabilitation costs or repay that amount from non- Federal funds. 2F. Establish and implement policies and procedures to ensure that HOME funds drawn for purchase and rehabilitation assistance are disbursed in accordance with applicable requirements related to property value limits, subsidy layering, timeframes for expending funds drawn, and associated return of funds and/or interest when appropriate. 2G. Establish and implement procedures to ensure that CDBG funds provided for downpayment assistance do not exceed HUD limits. 16 Finding 3: The Grantee Obligated and Disbursed Funds for an Ineligible CHDO The grantee set up HOME program activities for an organization, Mi Casa, Inc. (Mi Casa), as a CHDO although it did not meet HUD’s CHDO eligibility requirements. The grantee reserved and committed HOME funds, totaling more than $708,500, for Mi Casa. This violation occurred because the grantee’s former staff approved Mi Casa as a CHDO in error and the grantee lacked controls to ensure its compliance with the applicable requirements. As a result, the grantee made ineligible draws of more than $429,300 for Mi Casa, leaving a balance of about $279,200 that should not have been reserved for Mi Casa for CHDO activities. CHDO Did Not Meet Eligibility Requirements Mi Casa did not meet the definitions of a CHDO provided at 24 CFR 92.2. According to the regulations, a CHDO must have among its purposes the provision of decent housing that is affordable to low-income and moderate- income persons as evidenced in its charter, articles of incorporation, resolutions, or by-laws. In addition, it must maintain accountability to low-income community residents by (1) maintaining at least one-third of its governing board’s membership for residents of low-income neighborhoods, other low-income community residents, or elected representatives of low-income neighborhood organizations and (2) providing a formal process for low-income program beneficiaries for advising the organization in its decisions regarding the design, siting, development, and management of affordable housing. HUD CPD Notice 97-11, Attachment A, section III, paragraphs A and B mirror these requirements. Also, according to the notice, a CHDO’s governing documents must reflect the one-third low-income board requirement. Mi Casa had a board resolution which indicated that its purpose was to provide decent, affordable housing to low- and moderate-income persons. However, it did not have the one-third low-income board requirement in any of its governing documents and did not provide adequate documentation to show that it maintained at least one-third of its governing board’s membership for residents of low-income neighborhoods, other low-income community residents, or elected representatives of low-income neighborhood organizations. The Grantee Certified an Ineligible CHDO The grantee improperly certified Mi Casa as a CHDO in July 2004, although it did not meet the eligibility requirements. Before certifying Mi Casa, the grantee’s 17 special assistant requested that it provide documents to show that at least one- third of its elected representatives were residents of low-income neighborhoods. The documents submitted by Mi Casa showed that only two, or 28 percent, of its seven board members certified that their home address was in a low- income neighborhood. One of the two was the executive director whose listed address was the same as Mi Casa’s. Nevertheless, the grantee certified Mi Casa as a CHDO. The grantee’s special assistant left in 2006, and the grantee gave the responsibility of certifying CHDOs to its Office of Program Monitoring (OPM). In January 2007, an OPM coordinator recertified Mi Casa as a CHDO. Our review of Mi Casa’s board member directories for 2005, 2006, and 2007 indicated that Mi Casa did not have the board member certifications necessary to show that at least one- third of its elected representatives were residents of low-income neighborhoods. Therefore, the grantee improperly recertified Mi Casa as a CHDO. The Grantee Reserved/ Committed and Disbursed Funds for an Ineligible CHDO Between 2004 and 2008, the grantee reserved and committed more than $708,500 in HOME funds for Mi Casa and disbursed more than $429, 300 of the amount committed as shown in the table below. CHDO Reserved and Fiscal year fund type committed Disbursed Remaining 2004 Operating $154,926 $154,926 2005 Operating 167,396 167,396 2006 Operating 168,169 107,033 $ 61,136 2007 Reserved 165,390 165,390 2008 Operating 52,719 52,719 Totals $708,600 $429,355 $279,245 The disbursements were made in relation to three operating grants that the grantee set up for Mi Casa between July and September 2008. The grantee set up the first two grants on July 18, 2008, and the third grant on September 9, 2008. However, the grantee had not entered into an agreement with Mi Casa for housing to be developed, sponsored, or owned by Mi Casa as required by 24 CFR 92.300(e). Therefore, Mi Casa was not eligible for CHDO operating funds. The grantee acknowledged that Mi Casa should not have been certified as a CHDO. It stated that the funds were provided to Mi Casa in anticipation of the organization’s being approved for a HOME-eligible project but that Mi Casa never qualified for such a project. It also stated that it had established sufficient controls to ensure that CHDO operating funds would not be disbursed unless the CHDO had been approved for a HOME-eligible project. However, in this case, Mi Casa did not 18 qualify as a CHDO. Therefore, the grantee must also establish and implement procedures to ensure that it certifies CHDOs in accordance with HUD requirements. The Grantee Lacked Controls The grantee did not have sufficient controls in place to ensure that it certified CHDOs properly. Based on discussions with grantee staff, we determined that the grantee lacked adequate controls because it did not (1) have employee position descriptions for staff responsible for monitoring and certifying CHDOs, (2) provide training for employees responsible for certifying CHDOs, and (3) establish and implement policies and procedures related to the awarding of CHDO operating grants. Also, our review of a compliance checklist for the third operating grant to Mi Casa disclosed that grantee staff certified in 2008 that the organization met the CHDO qualification requirements discussed above. There were no documents available to support this assertion. In addition, the grantee conducted a monitoring review of Mi Casa in October 2008 and reported no deficiencies or findings. Therefore, the grantee needs to establish the controls described above to ensure that it certifies CHDOs in accordance with HUD requirements. Conclusion The grantee reserved, committed, and disbursed HOME program funds for Mi Casa, an ineligible CHDO, because it had failed to establish and implement sufficient controls to ensure that it certified CHDOs in accordance with HUD requirements. As a result, it reserved and made more than $429,300 in ineligible disbursements and improperly reserved about $279,200 in program funds. The grantee must repay the HOME program for the ineligible disbursements, reprogram the improperly reserved funds to eligible HOME activities, and implement adequate controls to ensure that it only certifies eligible CHDOs for participation in the HOME program. Recommendations We recommend that the Director of the Washington, DC, Office of Community Planning and Development require the grantee to 3A. Repay the HOME program $429,355 from non-Federal funds for the HOME funds disbursed to an ineligible CHDO. 19 3B. Deobligate $279,245 in available funds associated with the ineligible CHDO and reprogram the funds for other eligible HOME activities, thereby putting the funds to better use. 3C. Establish and/or implement controls such as employee position descriptions, relevant employee training, and policies and procedures regarding the proper certification and management of CHDOs. 20 Finding 4: The Grantee Did Not Properly Account for Program Administrative Funds Drawn The grantee did not account for administrative funds that it drew for its HOME program as required. It could not provide required supporting documentation, such as approved cost allocation plans and timesheets, to support its administrative costs. These problems occurred because the grantee lacked key controls needed to ensure its compliance with program requirements for record keeping. Consequently, it could not support more than $3.9 million in funds that it drew to administer its HOME program. The grantee also accumulated more than $1.5 million in administrative funds that could have been used to improve the administration of its program and fund additional eligible HOME projects. The Grantee Did Not Follow Record-Keeping Requirements The grantee failed to maintain the necessary records to support more than $3.9 million in funds that it drew for the administration of its HOME program. More than $2.8 million of the funds was allocated to various categories of administration. The remaining $1.1 million was allocated to a subrecipient (Greater Washington Urban League) for the administration of the grantee’s Home Purchase Assistance program. Regulations at 24 CFR 92.508 require grantees to maintain sufficient records to show their compliance with record-keeping requirements for the HOME program. Paragraph 92.508(a)(3)(ii) provides that grantees must maintain records on the source and application of funds for each project in accordance with 24 CFR 85.20, which states that grantees must follow applicable Office of Management and Budget (OMB) cost principles in determining the reasonableness, allowability, and allocability of costs (paragraph (b)(5)). Paragraph (b)(6) further states that accounting records must be supported by such source documentation as cancelled checks, paid bills, payrolls, time and attendance records, contract and subgrant award documents, etc. In addition, regulations at 24 CFR 92.207(e) provide that indirect costs may be charged to the HOME program under a cost allocation plan prepared in accordance with OMB requirements as applicable. Based on OMB requirements, grantees are required to obtain certified and approved cost allocation plans from the Federal Government. 3 Each grantee must submit a cost allocation plan to the Federal Government for each year in which it claims central service costs under Federal awards. 4 OMB provides that the Federal agency with the largest dollar value of awards with an organization will 3 OMB Circular A-87, attachment A, section H 4 OMB Circular A-87, attachment C, section D, paragraph 1 21 serve as the cognizant agency for the negotiation and approval of the indirect cost rates and other rates such as fringe benefit and computer charge-out rates. 5 OMB also provides that personnel activity reports or equivalent documentation must be maintained to support the salaries or wages for employees working on multiple activities or cost objectives. 6 As discussed below, the grantee did not comply with the requirements above and, therefore, could not support more than $3.9 million in program funds. The Grantee Could Not Support $2.8 Million Used for Various Administrative Categories Contrary to HUD requirements, the grantee lacked appropriate supporting documents for $2.8 million in funds that it allocated to various categories of administration for the HOME program. The grantee could not specify how much it charged to indirect costs. However, records from IDIS indicated that it charged about $55,800 to general administration/overhead. The grantee also could not provide supporting documents for two sample administrative draws selected totaling about $1.1 million. We asked the grantee to provide related supporting documents, such as payrolls and time and attendance records, for the two sample draws. The grantee stated that the employee (agency fiscal officer) responsible for analyzing the supporting documents for the draws in question was no longer with the organization and that attempting to get the related timesheets could prove cumbersome and time consuming and might not produce the required support. Based on the lack of documentation for the two sample draws and the grantee’s response to our request for the supporting documentation, we classified the entire $2.8 million as unsupported. The grantee must provide supporting documents for these draws as required or repay the amount drawn to the HOME program. The Grantee Could Not Support $1.1 Million Allocated to a Subrecipient The grantee used HOME funds to pay the Greater Washington Urban League (subrecipient) to administer its Home Purchase Assistance program. The grantee drew HOME funds in November 2008 and September 2009, totaling about $1.1 million, for the subrecipient. Neither the grantee nor its subrecipient maintained 5 OMB Circular A-122, attachment A, section E, paragraph 2a 6 OMB Circular A-87, attachment B, paragraphs 8h(4) and (5) 22 adequate supporting documents for the funds drawn. As stated above, HUD requirements provide that OMB cost principles must be followed and that accounting records must be supported by such source documentation as cancelled checks, paid bills, payrolls, time and attendance records, contract and subgrant award documents, etc. We reviewed 12 files associated with the $1.1 million in HOME funds drawn and determined that the documentation was not sufficient to show that the funds were spent on administrative and planning costs for the HOME program. For example, the subrecipient’s employees charged time on their timesheets for the Home Purchase Assistance program using a generic job category code “HPAP.” However, the grantee’s consolidated annual action plan, as well as the grant agreement executed by the subrecipient, stated that the Home Purchase Assistance program was funded with HOME, CDBG, and local funds. The subrecipient provided the following information regarding Home Purchase Assistance program activities and the related funding for the period October 2007 through September 2008. Funding source Number of loans Amount Repay 344 $13,630,427 CDBG 217 7,153,448 HOME 160 6,296,175 Totals 721 $27,080,050 According to the subrecipient, the “repay” category represented loans funded with local funds. Based on the information above, about 50 percent of the Home Purchase Assistance program activity was funded with local funds, and only 23 percent was funded with HOME funds. Also, the subrecipient charged other items to the Home Purchase Assistance program including costs for housing counseling and indirect costs. Therefore, the employee timesheets should have included a breakdown of activities by the different funding sources as required by OMB. Neither the grantee nor the subrecipient could provide a breakdown of the time charged by the subrecipient’s employees to the Home Purchase Assistance program. Because the grantee failed to maintain records as required, we could not determine the validity of approximately $1.1 million in costs charged to the HOME program. The Grantee Did Not Have an Approved Cost Allocation Plan The grantee did not have approved cost allocation plans for each year during the audit period as required by OMB. The grantee prepared cost allocation plans for fiscal years 2007, 2008, and 2009. HUD did not review the 2007 and 2008 plans because the grantee did not provide the distribution of salaries or wages supported by personal activity reports or equivalent documentation when HUD monitored 23 the grantee in 2008. The grantee’s cost allocation plan for fiscal year 2009 is currently under review by HUD. The Grantee Lacked an Effective Process for Tracking Payroll Costs The grantee did not have a mechanism for determining payroll costs charged to various funding sources as required by OMB guidance, which states that personnel activity reports or equivalent documentation must be maintained to support the salaries or wages for employees working on multiple activities or cost objectives. Grantee staff could not tell us whether (1) any employees charged 100 percent of their time to the HOME program, (2) employees charged time to indirect costs on their timesheets, and (3) any employees were not required to fill in timesheets. We tested whether the grantee maintained the appropriate records by requesting time sheets for two employees that worked on an activity under its Single-Family Residential Rehabilitation program that was funded with both HOME and local funds. The time sheets provided only indicated hours worked and did not allocate the hours to funding sources. The grantee stated that employee hours were allocated in its in-house PeopleSoft Human Resources/Payroll System; however, it did not provide related evidence or supporting documents. One of the time sheets reviewed indicated that the employee was a motor vehicle operator. This information was consistent with the grantee’s employee listing. We requested the employee’s personnel file because it did not make sense for a motor vehicle operator to be tasked with processing a single-family residential rehabilitation case. The grantee could not provide the employee’s personnel file. Because the grantee failed to implement a process for maintaining adequate time records for its employees that worked on activities with multiple funding sources, it lacked the necessary controls to ensure that payroll costs were properly allocated to the appropriate funding sources. Subrecipient Monitoring Was Not Adequate The grantee did not perform adequate or effective monitoring of its subrecipients in accordance with HUD requirements and its own monitoring policy as stated in its annual action plans for fiscal years 2008 through 2010. Based on regulations at 24 CFR 92.504(a), the grantee is responsible for managing the day-to-day operations of its HOME program, ensuring that program funds are used in accordance with all requirements, and taking appropriate action when performance problems arise. The use of subrecipients or contractors does not relieve the grantee of this responsibility. The performance of each contractor and 24 subrecipient must be reviewed at least annually. Paragraph (d)(1) states that during the period of affordability, the grantee must perform onsite inspections of HOME-assisted rental housing to determine compliance with the property standards of 24 CFR 92.251 and verify the information submitted by the owners in accordance with the requirements of 24 CFR 92.252 no less than every 3 years for projects containing 1 to 4 units, every 2 years for projects containing 5 to 25 units, and every year for projects containing 26 or more units. In its annual action plans for fiscal years 2008 through 2010, the grantee stated that components of its project monitoring included monitoring for compliance with HUD program rules and administrative requirements and financial monitoring to ensure compliance with all Federal regulations governing financial operations. In the case of the Greater Washington Urban League, the grantee did not perform effective monitoring of the subrecipient. The grantee performed six monitoring reviews of the subrecipient during fiscal years 2007 through 2009 but failed to identify or determine the problems with the subrecipient’s record keeping and recommend corrective action. During one of the reviews, the grantee noted that the subrecipient maintained appropriate time distribution records for employees working on Federal and non-Federal activities. Based on our review of the monitoring report, it appeared that the grantee accepted and documented the subrecipient’s responses to interview questions from a financial records checklist. Also, the grantee noted in its 2008 monitoring that the subrecipient had not submitted cost allocation plans since fiscal year 2005; however, there was no evidence to show that it took any action to address the issue. The grantee did not receive a cost allocation plan for fiscal year 2008 from the subrecipient until February 2008. The grantee also did not comply with the requirements for annual monitoring of subrecipients and onsite inspections for HOME-assisted rental housing. The grantee’s stated monitoring activities for fiscal years 2007 (beginning October 1, 2006) through 2010 were as follows: Active CHDOs Fiscal year Number Monitoring reviews performed 2007 15 11 2008 15 6 2009 15 1 2010 11 4 25 Completed projects under affordability requirements Fiscal year Number Monitoring reviews performed 2007 No data provided by grantee 2008 22 14 2009 22 11 2010 22 0 The information provided indicated that the grantee did not monitor all of its active CHDOs at least annually between fiscal years 2007 and 2010. For the completed projects under affordability requirements, 13 of the 22 projects had more than 25 HOME units each. Therefore, the grantee, at a minimum, should have performed onsite inspections annually for the 13 projects based on HUD requirements. The grantee did not provide evidence of any type of monitoring in fiscal year 2007. For fiscal year 2008, the grantee monitored 14 projects but only performed desk reviews and no onsite inspections for the projects. For fiscal year 2009, the grantee reviewed 11 projects but only provided support for onsite inspections of 9 projects. We asked the grantee why it did not perform monitoring as required. The grantee stated only that it was not done. Therefore, the grantee appeared to have overlooked HUD requirements. The Grantee Must Implement Needed Communication The grantee needs to implement an effective communication process between its staff and staff assigned to its office from the DC Office of the Chief Financial Officer (OCFO). During the audit period, seven OCFO staff members were assigned to the grantee’s office. These staff members reported to an agency fiscal officer (AFO). According to the grantee, the AFO was responsible for analyzing supporting documents for the fund draws questioned. A review of the AFO position description indicated that the incumbent was also responsible for maintaining regular contacts with program managers and advising and assisting management officials by supplying financial management data. However, the grantee failed to ensure an effective communication process between its staff and the AFO as evidenced by its failure or inability to provide the required documentation for the fund draws questioned. As stated above, the grantee indicated that the AFO responsible for analyzing the documentation was no longer with the organization and that it likely would not be able to provide the support requested. 26 We noted that there was frequent turnover associated with the AFO position during the audit period and that there had been five AFOs since October 2006. Two of the five AFOs were acting in that position as shown in the table below. AFO/acting AFO Period AFO October 2006 to middle of 2007 Acting AFO Middle of 2007 to May 2009 AFO May 2009 to December 2009 Acting AFO December 2009 to August 2010 AFO August 2010 to present While the high turnover associated with the critical AFO position may have contributed to the grantee’s documentation problems, the grantee is ultimately responsible for ensuring that sufficient documentation exists to show its compliance with record-keeping requirements for the HOME program. Therefore, it must implement a formal communication process with OCFO staff assigned to its office to ensure that documentation for its fund draws is maintained in accordance with program requirements. HUD Monitoring Disclosed Deficiencies HUD monitoring disclosed issues with the grantee’s administration of its HOME program. In its 2005 monitoring report, HUD noted that the grantee did not have an approved cost allocation plan and that its personnel did not maintain time sheets that showed the hours spent on programs administered. HUD also noted that the grantee did not review the performance of program participants at least annually in accordance with 24 CFR 92.504(a). In its 2008 monitoring review, HUD noted the same issue regarding the personnel time sheets. HUD also noted various issues relating to the grantee’s overall administration of its HOME program, including its failure to comply with certain program requirements and take sufficient action to address program performance deficiencies. Single Audit Reports Disclosed Deficiencies The fiscal year 2007 single audit of the grantee disclosed that it did not have an approved cost allocation plan and did not perform the annual onsite inspections required by regulations at 24 CFR 92.504(d). The cost allocation plan finding remained an issue in the fiscal year 2008 single audit. The 2008 audit stated that most grantee employees did not use the enhancements of the PeopleSoft Human Resources/Payroll System, designed to allow employees to charge hours directly to specific grant programs or other locally funded projects requiring specific allocation of costs. 27 The Grantee Had Begun To Take Corrective Action During the audit, the grantee began to take action to address some of the issues identified. It developed a time sheet to track employee hours by fund type and project starting in October 2009. It also submitted its fiscal year 2009 cost allocation plan to HUD, and HUD stated in a letter, dated September 30, 2010, that the plan was under review. The Grantee Can Improve Program Oversight With Its Administrative Funds The grantee reserved and disbursed administrative funds between fiscal years 2007 and 2009 as shown below. Fiscal Amount Available to Total disbursed year reserved disburse 2007 $1,238,417 $1,121,656 $ 116,761 2008 840,850 414,683 426,167 2009 932,222 0 932,222 Total $1,475,150 As the table above shows, the grantee had almost $1.5 million in undisbursed funds available for its administration of the HOME program. The funds represented about 1½ years’ worth of unspent administrative funds. Also, the grantee’s annual action plan for fiscal year 2010 indicated that it added an additional $100,000 in program income to HOME administrative funds. The undisbursed administrative funds could be used to strengthen the grantee’s administration of the HOME program. Part of the strengthening should include the grantee’s (1) performing annual monitoring of all the subrecipients and applicable HOME projects (see above), (2) setting up a system to adequately account for HOME administrative funds, and (3) improving communication with the AFO or appropriate OCFO staff. Any excess funds could be used to fund other eligible HOME projects. Therefore, any funds the grantee does not use to strengthen the administration of the HOME program should be reprogrammed for the use of HOME-eligible projects. This measure would help the grantee ensure that the HOME program’s main goal of providing affordable housing for low- income households is accomplished more efficiently. 28 Conclusion The grantee could not support more than $3.9 million in funds that it drew for the administration of its HOME program. It failed to maintain adequate documentation to support its administrative costs mainly because it lacked key controls needed to ensure its compliance with record-keeping requirements for the HOME program. The grantee also accumulated more than $1.5 million in administrative funds that it could have used to improve the administration of its HOME program and fund additional eligible HOME projects. Doing so would have enabled the grantee to better meet the main HOME program goal of providing affordable housing for low-income households. Recommendations We recommend that the Director of the Washington, DC, Office of Community Planning and Development require the grantee to 4A. Provide adequate documentation to support the $3,977,925 or repay that amount from non-Federal funds to the HOME program. 4B. Obtain approved cost allocation plans from HUD to use as a basis for charging indirect costs to the HOME program. 4C. Approve Greater Washington Urban League’s cost allocation plans as required by OMB so that the subrecipient has a proper basis for charging indirect costs to the HOME program. 4D. Require its subreceipent, Greater Washington Urban League, to implement a system for maintaining time records that track employee time charges to the HOME program as required by OMB. 4E. Implement an effective communication process with the appropriate OCFO staff to ensure compliance with record-keeping requirements for the HOME program. 4F. Identify at least annually its universe of HOME program recipients and applicable projects to be reviewed and monitor this universe including required onsite visits. 4G. Establish a procedure, on an annual basis, on which to base future funds obligated for administrative costs on actual administrative expenses. This 29 procedure will ensure that any amount in excess of actual expenditures is recommitted for use on eligible HOME projects. 4H. Recommit any portion of the $1,575,150 7 not used by the grantee to improve its administration of the HOME program for use on eligible HOME projects. 7 The grantee added $100,000 in program to the $1,475,150, bringing the total available to $1,575,150. 30 SCOPE AND METHODOLOGY We performed the onsite fieldwork for the second audit of the grantee between November 2009 and June 2010 at the office of the grantee located at 1800 Martin Luther King, Jr. Avenue, SE, Washington, DC. The audit covered the period October 1, 2006, through April 30, 2009, but was expanded when necessary. To accomplish our audit objective, we • Reviewed applicable Federal regulations. • Reviewed grantee documents including but not limited to its 5-year consolidated plan, consolidated annual action plans, consolidated annual performance evaluation reports, single audit reports of Federal awards programs, organization charts, employee listing, CHDO monitoring reports, cost allocation plans, and grant agreements with subreceipents. • Analyzed IDIS for relevant data tables and preformatted reports. • Reviewed applicable HOME program reports from HUD’s Web site. • Communicated with officials and employees of the appropriate HUD CPD divisions as well as officials and employees of grantee subreceipents. • Reviewed HUD’s monitoring reports on the grantee. • Reviewed Home Purchase Assistance program case files, Single Family Residential Rehabilitation program case files, CHDO files, settlement statements, invoices, checks, timesheets, and other documents to ensure that HOME funds were expended for eligible activities. • We evaluated the entire universe of home activities (847) at the beginning of the audit and made selections for review based on risk indicators including high property values and draw amounts. We reviewed grantee files and other related documents for the selections made as discussed in the audit findings. In certain instances, we found that data in IDIS did not reconcile with related file documentation. Therefore, in those instances, we relied on information from supporting documents in program case files and not the data in IDIS. We conducted the audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. 31 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. • 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. We assessed the relevant controls identified above. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, the reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or efficiency of operations, (2) misstatements in financial or performance information, or (3) violations of laws and regulations on a timely basis. Significant Deficiencies Based on our review, we believe that the following items are significant deficiencies: 32 • The grantee did not ensure that program funds were expended within the required timeframe (findings 1 and 2). • The grantee did not ensure that program funds were only spent on eligible activities (findings 1, 2, and 3). • The grantee did not implement adequate policies and/or procedures to ensure compliance with record-keeping requirements (findings 2 and 4). • The grantee did not comply with requirements for subrecipient monitoring (finding 4). 33 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Ineligible 1/ Unsupported 2/ Funds to be put number to better use 3/ 1A $ 10,404 1B $ 368,260 1C 389,000 1D 1,702,205 1G $ 30,131 2A 1,024,271 2B 159,840 2C 71,325 2E 42,295 3A 429,355 3B 279,245 4A 3,977,925 4H 1,575,150 Totals $1,695,195 $6,479,685 $1,884,526 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 these instances, if the grantee implements our recommendations, it will use (1) $30,131 obligated in 2001for eligible HOME activities, (2) $279,245 in reprogrammed funds to support additional eligible HOME activities, and (3) $1,575,150 in excess administrative funds to improve monitoring of the HOME program and recommit any unused portion for eligible HOME projects. 34 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 35 Comment 1 Comment 2 36 Comment 3 Comment 3 Comment 3 Comment 4 37 Comment 4 Comment 4 Comment 5 Comment 1 38 Comment 6 Comment 4 Comment 4 Comment 1 Comment 1 Comment 4 39 Comment 7 Comment 7 Comment 7 40 Comment 7 Comment 7 Comment 4 Comment 1 41 Comment 1 Comment 4 Comment 1 Comment 1 42 Comment 8 Comment 9 Comment 4 43 44 OIG Evaluation of Auditee Comments Comment 1 The grantee’s response included 11 enclosures containing additional documentation to support its position on the audit findings. Due to volume, these documents were not included in the report. The documentation provided was not sufficient to change our conclusions. In certain instances, the grantee stated it was working on obtaining additional documentation. The grantee must provide the information along with any other additional documentation it locates or prepares to HUD for assessment during the audit resolution process. Comment 2 The grantee contends that all funds disbursed were eligible with the exception of $6,000. However, due to its failure to complete the project it has agreed to repay the total disbursement of $767,600 which we considered ineligible, making its argument on the component funds moot. Comment 3 The additional documentation provided by the grantee is not sufficient to change our conclusions. For example the documentation indicates overcrowding in several units; and, for one unit, the tenant’s income verification form was not signed. In one case, the tenant’s income exceeded the allowable limit for the unit size. Further, the grantee is in the process of finalizing additional documentation. Therefore, we maintain that it lacked adequate support for funds it recommitted to the new project. Comment 4 We are encouraged by the procedures/steps that the grantee has stated it has planned or in progress to address the audit findings and recommendations. Comment 5 Our audit conclusions and related recommendations are supported by work performed in accordance with generally accepted government auditing standards, as well as our operations policy. The grantee did not award the program funds in accordance with related requirements; therefore, we maintain our position, and cannot waive the audit finding. The grantee must work with HUD to appropriately resolve the issue. Comment 6 The grantee asserts that it provided funds through its Home Purchase Assistance program for the acquisition of the properties as well as the related closing costs, and seeks to make a distinction between providing assistance for acquisition and providing assistance for reasonable closing costs. However, its program policies state that the amount of financial assistance provided to eligible households will be based on the sum of downpayment and closing cost assistance. Accordingly, we evaluated the funds it provided based on the requirements related to downpayments and closing costs, and found that it provided about $159,800 in excess assistance for the properties in question. Also, feedback from the Entitlement Communities Division in HUD’s Office of Community Planning and Development indicated that the CDBG assistance provided appeared excessive. 45 Comment 7 Based on the documentation provided by the grantee, we have updated the report to show that Mi Casa’s resolution reflects that its purpose is to provide decent, affordable housing to low- and moderate-income persons. The purpose of CPD Notices pertaining to the HOME program is to explain how HOME program regulations should be interpreted and applied. The checklist in the CPD Notice 97-11, Attachment A is a tool for grantees to determine the documents they must receive from a nonprofit before it may be certified or recertified as a CHDO. Therefore, we maintain that the CHDO was improperly certified. Also, HUD’s Office of Affordable Housing disagrees with the grantee’s position. The grantee provided an undated amended board resolution for Mi Casa after the audit. The amended resolution states that Mi Casa will amend its by-laws to reflect the one-third low-income board requirement. The grantee must ensure that Mi Casa amends its by-laws to reflect the requirement. The other additional documentation provided is not sufficient to prove that the CHDO maintained at least one-third of its governing board’s membership for residents of low-income neighborhoods, other low-income community residents, or elected representatives of low-income neighborhood organizations. Comment 8 The grantee stated that it was only required to perform onsite inspections for 11 projects; however, the additional documentation it provided shows that it was required to perform inspections for 12 projects. The grantee’s position is based on an updated project listing. However, for the period of our review, the grantee had 13 projects that should have been reviewed annually. Therefore we maintain that it did not monitor all of its active CHDOs at least annually between fiscal years 2007 and 2010. Comment 9 We have updated the report to show that the grantee provided support for onsite inspections of nine projects instead of the seven originally reported. 46 Appendix C SCHEDULE OF EXCESSIVE CDBG ASSISTANCE IDIS activity number Maximum assistance Assistance program Housing Purchase Funds required at according to OIG Closing cost limit Excessive CDBG Downpayment HOME funds CDBG funds assistance assistance closing 841 $76,950 $34,975 $41,975 $7,000 $ 500 $ 1 $ 7,250 $ 34,725 823 77,000 35,000 42,000 7,000 2,500 45 8,272 33,727 824 77,000 35,000 42,000 7,000 4,030 2,500 10,265 31,735 822 68,100 30,550 37,550 7,000 11,880 4 12,942 24,608 852 56,945 24,973 31,973 7,000 5,000 6,566 12,783 19,190 777 46,700 19,850 26,850 7,000 4,000 3,990 10,995 15,855 Total excessive CDBG assistance $159,840 47 Appendix D ANALYSIS OF HOME FUNDS HELD BEYOND 15 DAYS OF BEING DRAWN Balance of draws not expended for rehabilitation costs Amount expended IDIS after 15 days activity Date of Total Eligible Ineligible of being Number number draw drawn activity activity drawn 1 665 4/12/2007 $136,814 $ 1,770 4/12/2007 2 666 and 62,096 3,731 5/3/2007 3 889 7/22/2008 140,056 52,790 4 890 7/22/2008 62,613 $ 2,798 $ 54,439 5 891 7/22/2008 98,046 18,416 6 892 7/22/2008 97,151 4,204 84,848 7 894 7/22/2008 9,350 50 8 901 7/22/2008 14,856 100 9 902 7/22/2008 8,162 8,162 10 932 7/22/2008 10,288 3,170 11 929 7/22/2008 155,592 97,865 44,361 12 896 7/24/2008 6,864 624 13 976 10/21/2008 21,230 205 21,025 14 977 10/21/2008 75,000 9,000 15 979 10/21/2008 15,043 15,043 16 982 10/21/2008 63,539 15,102 17 984 10/21/2008 20,698 20,698 18 987 10/21/2008 49,453 873 48,580 Totals $71,325 $183,276 $253,253 Balance of draws not expended for $254,601 rehabilitation costs Amount of draws not expended within 15 days $507,854 48 Appendix E SCHEDULE OF UNSUPPORTED REHABILITATION COSTS IDIS activity Unsupported number amount Required support/documentation 976 $15,949 Cancelled checks supporting rehabilitation costs. 889 13,500 Justification for relocation costs. Documentation to show that HOME funds will be recaptured if the housing does not continue to be the principal residence of the family for the duration of the period of affordability as required by 24 CFR 932 7,118 92.254(a)(5)(ii)(A). 987 3,000 Support (e.g., invoice) for relocation costs. Support (e.g., invoices) for $1,022 and $933 included in the unsupported amount and a cancelled check for the $1,022 cost. The grantee must also provide justification for $773 in 665 2,728 storage costs. Total $42,295 49
The District of Columbia, Washington DC, Did Not Administer Its HOME Program in Accordance With Federal Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-12-23.
Below is a raw (and likely hideous) rendition of the original report. (PDF)