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
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)