Issue Date June 30, 2011 Audit Report Number 2011-PH-1012 TO: Nadab O. Bynum, Director, Office of Community Planning and Development, Philadelphia Regional Office, 3AD FROM: John P. Buck, Regional Inspector General for Audit, Philadelphia Region, 3AGA SUBJECT: The City of Reading, PA, Generally Complied With Neighborhood Stabilization Program 2 Requirements HIGHLIGHTS What We Audited and Why We audited the City of Reading, PA’s (City) Neighborhood Stabilization Program 2 (Program) as part of our annual audit plan to review activities funded by the American Recovery and Reinvestment Act of 2009 (Recovery Act) because the City received $5 million in Program funds under the Recovery Act. Our objective was to determine whether the City (1) met Program expenditure deadlines, (2) made Program expenditures that were eligible and adequately supported, (3) properly awarded contracts, (4) met appraisal requirements, and (5) adequately monitored its Program. What We Found The City met Program expenditure deadlines, and generally ensured expenditures were eligible and adequately supported and that contracts were properly awarded. Some improvements were needed, however, to ensure that some costs were adequately supported and to ensure that the City fully met property appraisal requirements and adequately monitored its Program. What We Recommend We recommend that the Director of HUD’s Philadelphia Regional Office of Community Planning and Development require the City to (1) provide documentation showing that $58,263 paid to four contractors without written contracts or detailed invoices was fair and reasonable or reimburse its Program from non-Federal funds, (2) provide documentation showing it reimbursed its Program $8,151 from non-Federal funds for ineligible vehicle expenses, (3) ensure all future contracts are in writing and adequately documented, (4) ensure all required clauses are included in future solicitations and contracts, (5) ensure it fully meets Program appraisal requirements, and (6) adequately document its Program monitoring and establish an internal audit function as required. 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 an initial discussion draft audit report to the City on May 16, 2011, and discussed it with the City at an exit conference on May 27, 2011. We provided an updated draft report to the City on June 9, 2011 and received its official written comments on June 16, 2011. The City generally agreed with the report. The complete text of the City’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: The City Generally Complied With Program Requirements 6 Scope and Methodology 10 Internal Controls 12 Appendix A. Schedule of Questioned Costs 14 B. Auditee Comments and OIG’s Evaluation 15 3 BACKGROUND AND OBJECTIVE The Neighborhood Stabilization Program 2 (Program) was established by Title XII of Division A of the American Recovery and Reinvestment Act of 2009 (Recovery Act) to stabilize neighborhoods, the viability of which has been and continues to be damaged by the economic effects of properties that have been foreclosed upon and abandoned. The U.S. Department of Housing and Urban Development (HUD) allocated $2 billion in program funds to assist in the redevelopment of abandoned and foreclosed-upon homes. This funding was allocated competitively to eligible entities1 that demonstrated the capacity to execute projects, leveraging potential, concentration of investment to achieve neighborhood stabilization, and additional factors as determined by HUD. HUD awarded a combined total of $1.93 billion in Program grants to 56 grantees nationwide. The Program is a component of the Community Development Block Grant (CDBG) program, and basic CDBG requirements govern it. However, the notice of funding availability2 outlines many additional requirements, including but not limited to requirements that recipients of grants (1) expend 50 percent of their Program funds 2 years from the date of the grant agreement (agreement) or by February 11, 2012; (2) expend 100 percent of their Program funds 3 years from the date of the agreement or by February 11, 2013; (3) submit quarterly reports using the Disaster Recovery Grant Reporting System to report quarterly achievements; (4) comply with 24 CFR (Code of Federal Regulations) Part 85 for State and local governments and 24 CFR Part 84 for nonprofit entities regarding procurement practices; and (5) comply with 24 CFR Part 58 for environmental reviews and requests for release of funds. The City of Reading (City) is a municipal corporation and a body corporate and politic duly existing under the laws of the Commonwealth of Pennsylvania. The City was awarded $5 million in Program funding on February 11, 2010. Under its agreement with HUD, the City serves as the lead member of a consortium and is responsible for monitoring its consortium members and ensuring compliance with HUD Program requirements. The consortium is comprised of the City, the City of Reading Housing Authority, and Our City Reading, Inc., a Pennsylvania nonprofit corporation. As shown below, activities focused on (1) the acquisition and rehabilitation of abandoned or foreclosed-upon properties for sale to persons of low and moderate income and rent to persons under 50 percent of median income in a rent-to-own program, (2) home ownership counseling, and (3) project administration. 1 Eligible entities include States, units of general local government, and nonprofit entities or consortia of nonprofit entities, which may submit proposals in partnership with for-profit entities. 2 Notice of Funding Availability, FR-5321-N-01. 4 Responsible Projected number Activity Program funds entity of units Acquisition and renovation of City of Reading $3,400,000 80 foreclosed-upon, abandoned, and Our City and vacant homes and home Reading, Inc. ownership counseling Acquisition and renovation of City of Reading 1,250,000 20 homes meeting the HUD and City of guidelines for rental Reading Housing renovation for families at 50 Authority percent or below median income and home ownership counseling Project administration All 350,000 Not applicable Totals $5,000,000 100 As of June 2, 2011, the City had expended $2.9 million of its award. Our objective was to determine whether the City (1) met Program expenditure deadlines, (2) made Program expenditures that were eligible and adequately supported, (3) properly awarded contracts, (4) met appraisal requirements, and (5) adequately monitored its Program. 5 RESULTS OF AUDIT Finding: The City Generally Complied With Program Requirements The City met Program expenditure deadlines well ahead of the deadline and generally ensured expenditures were eligible and adequately supported and that contracts were properly awarded. The City needed to make some improvements, however, to ensure that all costs were adequately supported and to ensure that it fully met property appraisal requirements. Improved Program monitoring should help correct these problems. The City Met Program Expenditure Deadlines Appendix I.M of the notice of funding availability3 required the City to expend 50 percent of its Program funds 2 years from the date of the grant agreement or by February 11, 2012. The City had expended $2.9 million (58 percent) of the funds provided under the grant as of June 2, 2011, well ahead of the 2-year deadline. Expenditures Were Generally Eligible and Supported We reviewed 100 percent of 15 Program expenditures as of December 9, 2010, totaling more than $1.4 million and found that for the most part they were eligible expenses and supported with adequate documentation showing the acquisition of properties and the work that had been completed. One of the City’s consortium members (Our City Reading, Inc.) had acquired 31 properties. All of the 31 properties had either been foreclosed upon or abandoned and were therefore eligible for purchase with Program funds. Although expenditures were for the most part eligible and supported, the audit did show that Our City Reading, Inc., spent a relatively small amount of Program funds based solely on verbal agreements with four contractors and it failed to execute written contracts or purchase orders with these contractors. Regulations at 2 CFR Part 230, appendix A(A)(2)(g), provide that to be allowable under Federal awards, costs must be adequately documented. The City asserted that these expenditures totaling $58,263 were fair and reasonable based solely on verbal agreements a project manager made with the contractors. Although Our City Reading, Inc., provided paid invoices, the invoices included only a very 3 Notice of Funding Availability, FR-5321-N-01. 6 general description of the work that it paid for and did not include an itemized listing or breakdown of labor or material. Since there was no written contract or purchase orders showing the terms and conditions of the services provided, and only vague invoices showing a very general description of the work, these costs are currently classified as unsupported. The audit also identified that Our City Reading, Inc., purchased a vehicle with Program funds that it used an estimated 25 percent of time on non-Program activities. The City informed us it would reimburse the Program $8,151 from non-Federal funds for the time it used the vehicle for ineligible purposes. The City Generally Awarded Contracts Properly Of the 31 properties acquired, we non-statistically selected and reviewed 56 rehabilitation contract files for 17 properties. Section I.D.2.d of the notice of funding availability for the Program and 24 CFR 84.43 required that procurement transactions be conducted in a manner that provided, to the maximum extent practical, open and free competition. For the most part the City did ensure that its consortium member (Our City Reading, Inc.) followed the appropriate regulations when awarding contracts; and it provided assurance that prices paid were fair and reasonable. The audit identified that the City did not always ensure that its consortium member included the required contract provisions (i.e., Section 3 clause, Contract Work Hours and Safety Standards Act clause, and Drug-Free Workplace Requirements Act clause) in executed contracts and/or solicitations. During the audit, however, the City was proactive and took immediate action to ensure that the appropriate clauses were included in its contracts. The City Did Not Meet All Appraisal Requirements Appraisals did not always meet all of the requirements of the Uniform Relocation Assistance and Real Property Acquisition Act (Uniform Act) and other requirements. Specifically, 49 CFR 24.103, subpart B, sets forth the requirements for real property acquisition appraisals for Federal and federally-assisted programs. The Uniform Standards of Professional Appraisal Practice (USPAP) also set forth requirements for developing and reporting the results of appraisals. The notice of funding availability for the Program required that appraisals be performed for the acquisition of properties that meet the definition of foreclosed upon with values over $25,000. 7 We reviewed appraisals that Our City Reading, Inc., performed for 10 properties to determine whether the appraisals met program requirements. The 10 properties all had appraised values over $25,000, were purchased at a discount price, and met the definition of a foreclosed-upon property. However, the appraisals were not all performed according to all Program requirements. Specifically, the appraiser did not (1) develop a satisfactory scope of work as required by the USPAP and the Uniform Act, (2) follow standard rules 1 and 2 of the USPAP related to the development and reporting of the appraisal results, (3) develop and provide a supported highest and best use of the six income-producing properties, (4) use recognized appraisal techniques in developing the sales comparison approach, (5) support and make consistent adjustments in the sales comparison approach, (6) use sales that met the definition of market value or provide support that real estate-owned sales were market value sales in the sales comparison approach, (7) provide documentation to support excessive adjustments, and (8) provide support for the final value conclusions in the report. The City Plans To Improve Its Program Monitoring Section IV.A.3.f. of the notice of funding availability for the Program required the City to have a plan for monitoring program activities and ensuring the performance of its consortium members. The City provided us with dates when informal monitoring meetings took place; however, it did not provide documentation showing what program performance it reviewed. After we brought our concerns to its attention, the City provided an example of a record of discussion which it plans to use at future monitoring meetings. In addition, the City provided documentation showing a Program monitoring review it recently performed. In addition to a monitoring plan, Section IV.A.3.f. of the notice of funding availability for the Program required the City to have an internal audit function to examine potentially risky areas of program operations and management. As part of its internal audit function, the consortium members were required to submit a worksheet to the City with backup documentation. The City was to evaluate the data and prepare a narrative describing its successes and challenges in meeting the Program requirements. After we raised our concerns about its lack of compliance with this requirement, the City assured us it would now comply with the requirement. Recommendations We recommend that the Director of HUD’s Philadelphia Regional Office of Community Planning and Development require the City to 8 1A. Provide documentation showing that $58,263 paid to four contractors without written contracts or detailed invoices was fair and reasonable or reimburse its Program from non-Federal funds. 1B. Provide documentation showing it reimbursed its Program $8,151 from non-Federal funds for its ineligible vehicle expenses. 1C. Ensure all future contracts are documented in writing and work performed is adequately itemized and documented on invoices. 1D. Ensure all required clauses are included in future solicitations and contracts. 1E. Ensure it fully meets appraisal requirements. 1F. Adequately document its Program monitoring and establish an internal audit function as required. 9 SCOPE AND METHODOLOGY We conducted the audit from December 2010 to April 2011 at the City’s office located at 815 Washington Street, Reading, PA, and its consortium member’s office (Our City Reading, Inc.) located at 2561 Bernville Road, Reading, PA. The audit covered the period February 2009 through December 2010 but was expanded when necessary to include other periods. To accomplish our audit objective, we reviewed The Recovery Act, the Program notice of funding availibility, and related HUD documents. The CFR, applicable HUD guidance, and other directives that govern the Program. The City’s approved Program application, budgets, agreements, consortium member agreements, and other program records. Policies and procedures related to the City’s and its consortium members’ expenditures, disbursements, procurement, and monitoring plans. Program appraisal and monitoring requirements. Public databases and census tract data to assess whether properties met eligibility criteria. We conducted interviews with the City, its consortium members, and HUD staff. We reviewed 100 percent of 15 drawdown expenditures as of December 9, 2010, totaling more than $1.4 million. One of the City’s consortium members had acquired 31 properties as of January 2011. Of the 31 properties acquired, we non-statistically selected 17 properties that went through the procurement process and reviewed 56 rehabilitation contract files associated with the 17 properties. We non-statistically selected and reviewed appraisals for 10 of the 31 acquired properties that met the appraised values over $25,000 and met the Program definition of a foreclosed-upon property. We also performed site visits to these same 10 appraised properties to determine whether eligibility requirements were met. To achieve our audit objective, we relied in part on computer-processed data. The computer- processed data included the City’s expenditure data, HUD’s Line of Credit Control System and other computer generated data. 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. 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 10 objective(s). We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. 11 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: Policies and procedures that were implemented to reasonably ensure that the City’s grant administration, appraisal reviews, monitoring, financial management, and procurement activities were conducted in accordance with the Recovery Act and applicable HUD requirements. 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: The City did not always 12 Ensure that all of its Program expenditures were eligible and supported. Fully comply with all Program regulations and/or its written policies and procedures with respect to monitoring. 13 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS Recommendation Ineligible 1/ Unsupported 2/ number 1A $58,263 1B $8,151 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. 14 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 15 16 17 18 19 20 Comment 1 21 Comment 1 22 23 OIG Evaluation of Auditee Comments Comment 1 Appendix I.A of Notice of Funding Availability, FR-5321-N-01, states that if the anticipated value of the proposed acquisition is estimated at $25,000 or less, the current market appraised value of the property may be established by a valuation of the property that is based on a review of available data and is made by a person the grantee determines is qualified to make the valuation. Our City Reading, Inc., (OCR) should have established a value based on a review of data, however, it provided no documentation, support or justification that the anticipated values were less than $25,000. Information OCR provided during the audit indicated that the asking price for 7 of the 10 properties was greater than $25,000. Further, despite its position that appraisals were not required due to the anticipated value being less than $25,000, OCR obtained appraisals from a certified appraiser for all 10 properties and they all indicated the value of the property was greater than $25,000. We question why OCR would pay for appraisals if they were not needed. 24
The City of Reading, PA, Generally Complied With Neighborhood Stabilization Program 2 Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-06-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)