oversight

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)

                                                              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




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                            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.




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