oversight

Oregon Housing and Community Services Allowed a Developer To Use Neighborhood Stabilization Program Funds for Ineligible Purposes

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-03-01.

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

                                                                 Issue Date
                                                                          March 1, 2011
                                                                 
                                                                 Audit Report Number
                                                                              2011-SE-1003




TO:        Douglas P. Carlson, Director, Portland Field Office, Office of Community
             Planning and Development, 0ED

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, Seattle, Region X,
               0AGA


SUBJECT: Oregon Housing and Community Services Allowed a Developer To Use
           Neighborhood Stabilization Program Funds for Ineligible Purposes


                                   HIGHLIGHTS

 What We Audited and Why

             We audited Oregon Housing and Community Services (OHCS) to determine
             whether it obligated Neighborhood Stabilization Program (NSP) funds in a timely
             manner, adequately monitored subgrantee and contractor performance, properly
             maintained NSP records, and reasonably ensured that NSP funds were spent for
             eligible activities. We selected OHCS because it received $19.6 million in NSP
             funds.

 What We Found

             OHCS generally obligated NSP funds in a timely manner, adequately monitored
             subgrantee and contractor performance, properly maintained NSP records, and
             reasonably ensured that NSP funds were spent for eligible activities. However, it
             allowed a developer to use $5,000 for ineligible reserve accounts.
What We Recommend

           We recommend that the Director, Portland Office of Community Planning and
           Development, require OHCS to reallocate or repay the funds, ensure that
           subgrantees and developers understand the program requirements for reserves,
           and check for similar issues in other projects.

           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 requested a response to the draft report on February 11, 2011. OHCS
           provided written comments on February 11, 2011 and generally agreed with the
           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: Oregon Housing and Community Services Allowed a Developer To Use   5
           NSP Funds To Fund Ineligible Reserve Accounts

Scope and Methodology                                                         7

Internal Controls                                                             8

Appendixes
   A. Schedule of Questioned Costs                                             9
   B. Auditee Comments and OIG’s Evaluation                                   10
   C. Subrecipient and Developer Project Sample Selection                     14




                                            3
                       BACKGROUND AND OBJECTIVE

Oregon Housing and Community Services

Oregon Housing and Community Services (OHCS) acts as Oregon’s housing finance agency and
works to create and preserve opportunities for quality, affordable housing for low- and moderate-
income families. Governed by a seven-member council, OHCS promotes affordable housing
through grants and tax credits, the construction or rehabilitation of multifamily developments,
and the financing of single-family homes. Additionally, OHCS manages Federal and State funds
for antipoverty, homelessness, energy assistance, and community service programs.

Neighborhood Stabilization Program

The Housing and Economic Recovery Act of 2008 (HERA) appropriated $4 billion to stabilize
communities through the purchase and redevelopment of foreclosed-upon and abandoned
residential properties. Commonly called the Neighborhood Stabilization Program (NSP), these
formula grant funds are considered to be Community Development Block Grant (CDBG) funds.
Eligible uses are

      Establishing financing mechanisms to purchase and redevelop foreclosed-upon homes
       and residential properties,
      Purchasing and rehabilitating abandoned or foreclosed-upon homes and residential
       properties,
      Establishing and operating land banks for foreclosed-upon homes and properties,
      Demolishing blighted structures, and
      Redeveloping demolished or vacant properties.

OHCS allocated its $19.6 million share of NSP funds to nine local government organizations
(subrecipients) and seven nonprofit organizations (developers). It also retained funds to assist
home buyers in areas not served by the subrecipients and developers. The subrecipients and
developers carry out NSP activities, and OHCS reimburses them upon receipt of adequate
documentation.

Our objective was to determine whether OHCS

      Obligated NSP funds in a timely manner,
      Adequately monitored subgrantee and contractor performance,
      Properly maintained NSP records, and
      Reasonably ensured that NSP funds were spent for eligible activities.




                                                 4
                                 RESULTS OF AUDIT

Finding 1: Oregon Housing and Community Services Allowed a
Developer To Use NSP Funds To Fund Ineligible Reserve Accounts
OHCS allowed a developer to use NSP funds to fund ineligible reserve accounts. This
noncompliance occurred because OHCS was unaware that the use of program funds for
operating deficit or capital needs reserves was ineligible. As a result, $5,000 was not available
for other program purposes.


 OHCS Provided Funds for
 Ineligible Operating and
 Replacement Reserves


               OHCS provided a small amount of NSP funds for ineligible operating and
               replacement reserves. An OHCS subgrantee provided NSP funds to a non-profit
               developer to purchase and rehabilitate a house to use the house as a rental unit.
               As part of the transaction, the developer requested and received $5,000 for
               replacement reserves “. . . to cover capital needs replacements as well as operating
               deficits.” However, program requirements prohibit using NSP money to fund
               reserve accounts.

               Appendix B, paragraph 9 of Office of Management and Budget Circular A-122,
               Cost Principles for Non-Profit Organizations prohibit contingency reserves or
               similar provisions made for events, the occurrence of which cannot be foretold
               with certainty as to time or intensity or with an assurance of their happening. In
               addition, section 2301(e)(1) of HERA provides that NSP funds be treated as
               CDBG funds under the Housing and Community Development Act of 1974 (1974
               Act). Neither HERA, the implementing NSP Federal Register notices, nor the
               1974 Act include operational deficit or replacement reserves as eligible activities.


OHCS Was Not Aware That
NSP Funds Could Not Be Used
for Reserves

               OHCS was unaware that using NSP funds for operating deficit or capital needs
               reserves was ineligible. The responsible OHCS manager stated that he considered
               the $5,000 reserve fund as reasonable and customary based on his experience in
               managing maintenance and capital improvements.




                                                 5
          Since OHCS permitted the developer to use the $5,000 for an ineligible reserve
          account, these funds were not available for other program purposes.


Recommendations


          We recommend that the Director, Portland Office of Community Planning and
          Development, require OHCS to

          1A. Require the developer to repay or reallocate the ineligible funds to an eligible
              NSP purpose.

          1B. Ensure that its subgrantees and developers are aware that using NSP funds
              for operating reserves is prohibited.

          1C. Determine whether similar instances of using NSP funds for operating
              reserves have occurred and correct them.




                                           6
                         SCOPE AND METHODOLOGY

Our audit period covered October 2008 through September 2010. We performed our fieldwork
in October and November 2010 at OHCS’ office located at 725 Summer Street NE, Salem, OR,
and at the following subrecipients and developers:

           Subrecipient/developer                                         City
           City of Portland – Portland Housing Bureau                     Portland
           Clackamas County – Office of Community Development             Oregon City
           Washington County – Office of Community Development            Hillsboro
           Community Connections of Northeast Oregon                      La Grande
           Umpqua Community Development Corporation                       Roseburg

To accomplish our objective, we interviewed OHCS’ staff and reviewed its contracts with
subrecipients, financial information, and individual NSP-funded project files at OHCS and
subrecipient and developer offices.

Sample Selections

We reviewed OHCS records for 6 of 54 randomly selected financing mechanism projects it
administered.

For projects administered by subrecipients and developers, we selected three of nine
subrecipients and four of seven developers on the basis of funding amount, number of units,
amount of program income, and distance from OHCS. Appendix C shows the sample selection
by entity and activity for our file review at OHCS for subrecipient and developer projects.

We reviewed files for NSP-funded projects at the offices of all three subrecipients and at two of
the four developers. We did not visit the Housing Authority of Jackson County and Habitat for
Humanity because of travel considerations.

We used HUD’s Line of Credit Control System and Disaster Recovery Grant Reporting system
for background information only and did not rely on the data to base our conclusions. We relied
on computer-processed data maintained by OHCS for tracking program activities. Based on our
assessment and testing of these data, we concluded that the data were sufficiently reliable for our
objective.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                 7
                              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 objective:

                  OHCS’ policies implemented to reasonably ensure that subgrantees and
                   developers follow NSP rules.
                  OHCS’ policies implemented to reasonably ensure that NSP funds are used in
                   accordance with HERA, Federal Register notices, and HUD guidance.

               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.

               We assessed the relevant internal controls above and found no significant
               deficiencies.




                                                 8
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS

 Recommendation          Ineligible 1/
       Number

             1A               $5,000



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.




                                             9
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         10
Comment 2
Comment 3

Comment 4



Comment 4



Comment 4



Comment 5




Comment 4




            11
Comment 6


Comment 7




            12
                         OIG Evaluation of Auditee Comments

Comment 1   OHCS states it based its decision to allow the developer to establish a
            replacement reserve in compliance with industry practices and guidance from
            HUD. However, OHCS does not give any examples of guidance on the use of
            NSP funds for reserves from HUD that was available prior to the November 2009
            closing of the purchase of the house in the finding.

Comment 2   24 CFR 570.207, Ineligible Activities, states "The general rule is that any activity
            that is not authorized under the provisions of §§ 570.201–570.206 is ineligible to
            be assisted with CDBG funds." Neither operating nor replacement reserves are
            authorized in §§ 570.201–570.206.

Comment 3   24 CFR 570 201, Basic Eligible Activities, states that "CDBG funds may be used
            for the following activities." Neither operating nor replacement reserves are listed
            among these activities.

Comment 4   The 2 Frequently Asked Questions, the Open Forum question, and the Webinar all
            refer to operating reserves required by a lender. All of this guidance was dated
            after the November 2009 closing of the purchase of the house in the finding. The
            lender for the purchase of the house in the finding is the NSP subgrantee. In its
            grant agreement with OHCS, this subgrantee agreed to comply with Office of
            Management and Budget cost principles. Office of Management and Budget
            Circular A-122, Cost Principles for Non-Profit Organizations, prohibit
            contingency reserves or similar provisions made for events, the occurrence of
            which cannot be foretold with certainty as to time or intensity or with an
            assurance of their happening.

Comment 5   This manual states that it is not an official HUD document.

Comment 6   OHCS states it followed customary industry practice with respect to the
            replacement reserves in the midst of ambiguous guidance and pressure to obligate
            its NSP grant funds. However, as noted above, OHCS does not give examples of
            any ambiguous guidance that was available when the property in the finding was
            purchased with NSP funds. NSP funds are considered to be CDBG funds and
            CDBG funds cannot be used for reserves.

Comment 7   Office of Inspector General audit reports inform HUD program officials of,
            among other things, ineligible costs arising from alleged violations of
            requirements governing program funds. In the case of ineligible costs, the reports
            also recommend action to program officials to require repayment of the ineligible
            costs. The program officials then make the management decisions regarding the
            recommendation, including whether to require repayment of ineligible costs.




                                             13
Appendix C

     SUBRECIPIENT AND DEVELOPER PROJECT SAMPLE
                     SELECTION

Entity              Activity         Number in   Number in Selection method
                                     sample      universe
City of Portland    Financing        3           17        Randomly
                    mechanism
City of Portland    Purchase and     2           5          Amount of funds
                    rehabilitation
City of Portland    Redevelopment    1           1          100 percent
Clackamas County    Financing        3           12         Randomly
                    mechanism
Clackamas County    Purchase and     2           6          Amount of funds
                    rehabilitation
Washington County   Financing        3           10         Randomly
                    mechanism
Washington County   Purchase and     3           9          Amount of funds
                    rehabilitation
Community           Purchase and     2           2          100 percent
Connections of      rehabilitation
Northeast Oregon
Housing Authority   Land bank        1           1          100 percent
of Jackson County
Habitat for         Purchase and     2           8          Amount of funds
Humanity            rehabilitation
Habitat for         Redevelopment    1           1          100 percent
Humanity
Umpqua Community    Purchase and     2           7          Amount of funds
Development         rehabilitation                          and program
Corporation                                                 income




                                         14