oversight

The City of Buffalo, NY, Did Not Administer Its Community Development Block Grant-Recovery Act Program Funds in Accordance With HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-12-13.

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

                                                                       Issue Date
                                                                           December 13, 2011
                                                                       Audit Report Number
                                                                             2012-NY-1004




TO:              William O’Connell, Director, Community Planning and Development,
                                                           Buffalo, NY, 2CD



FROM:            Edgar Moore, Regional Inspector General for Audit, New York-New Jersey,
                                                            2AGA

SUBJECT: The City of Buffalo, NY, Did Not Administer Its Community Development Block
         Grant-Recovery Act Program Funds in Accordance With HUD Requirements



                                           HIGHLIGHTS

    What We Audited and Why

                   We audited the City of Buffalo’s administration of its supplemental Community
                   Development Block Grant (CDBG) program funded under the American
                   Recovery and Reinvestment Act of 2009. We selected the City based on concerns
                   identified in our completed audit report of the City’s CDBG program.1 The
                   objectives of the audit were to determine whether the City efficiently and
                   effectively administered its CDBG-Recovery Act (CDBG-R) program in
                   compliance with Recovery Act and other applicable requirements. Specifically,
                   we wanted to determine whether City officials had adequate policies and
                   procedures to ensure that (1) program funds drawn from HUD’s Line of Credit
                   Control System were supported with adequate documentation and (2) CDBG-R
                   program expenditures were for eligible activities that met a national objective of
                   the program.




1
    Audit Report Number 2011-NY-1010, issued April 15, 2011
What We Found
           City officials did not always administer the CDBG-R program in accordance with
           applicable rules and regulations. Specifically, City officials (1) disbursed CDBG-R
           program funds for questionable street repaving and curb and sidewalk replacement
           expenditures and (2) failed to administer the City’s housing rehabilitation loan
           program in accordance with its own procedures and subcontractor agreement. As a
           result, program funds were used for unsupported capital improvements and
           emergency rehabilitation loan expenditures. Consequently, City officials could not
           assure HUD that all CDBG-R disbursements complied with HUD rules and
           regulations and that the program’s objectives were met.

What We Recommend
           We recommend that the Director of HUD’s Buffalo Office of Community
           Planning and Development instruct City officials to (1) provide documentation to
           justify the more than $1.5 million in unsupported costs for questionable CDBG-R
           and fiscal year 2010 CDBG street repaving and curb and sidewalk replacement
           expenditures; (2) reprogram the remaining $159,388 in obligated and unobligated
           street repaving and curb and sidewalk replacement project funds if there is a lack
           of capacity, to ensure that these funds are put to better use for other eligible
           program activities; (3) provide documentation to justify the $249,312 in
           unsupported costs for housing rehabilitation repairs, and (4) suspend incurring
           costs for CDBG-R capital improvement activities until HUD determines whether
           City officials have the capacity to complete these activities in compliance with
           HUD regulations.

           For each recommendation in the body of the report without a management
           decision, please respond and provide status reports in accordance with HUD
           Handbook 2000.06, REV-4. Please furnish us copies of any correspondence or
           directives issued because of the audit.

Auditee’s Response
           We discussed the results of the review during the audit, provided a copy of the
           draft report to City officials, and requested their comments on November 2, 2011.
           We held an exit conference on November 9, 2011, and City officials provided
           their written comments on November 15, 2011, at which time they generally
           disagreed with the findings. 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 Objectives                                                         4

Results of Audit
      Finding 1: City Officials Charged Questionable Expenditures to the City’s   6
                 Supplemental CDBG-R Program

      Finding 2: City Officials Failed To Administer Their Emergency Housing      10
                 Rehabilitation Loan Program in Accordance With Their Own
                 Procedures and Subcontractor Agreement

Scope and Methodology                                                             14

Internal Controls                                                                 15

Follow-Up on Prior Audits                                                         17

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use              19
   B. Auditee Comments and OIG’s Evaluation                                       20
   C. Schedule of Emergency Rehabilitation Loan Administration Deficiencies       24




                                             3
                          BACKGROUND AND OBJECTIVES

The Community Development Block Grant (CDBG) program was established by Title I of the
Housing and Community Development Act of 1974, Public Law 93-383 as amended, 42 U.S.C.
(United States Code) 5301. The program provides grants to State and local governments to aid
in the development of viable urban communities. Governments are to use grant funds to provide
decent housing and suitable living environments and expand economic opportunities, principally
for persons of low and moderate income. To be eligible for funding, every CDBG-funded
activity must meet one of the program’s three national objectives. Specifically, every activity,
except for program administration and planning, must

               Benefit low- and moderate-income persons,
               Aid in preventing or eliminating slums or blight, or
               Address a need with a particular urgency because existing conditions pose a serious and
               immediate threat to the health or welfare of the community.

The City of Buffalo, NY, is a CDBG entitlement grantee. The U.S. Department of Housing and
Urban Development (HUD) awarded the City more than $15.8 million in CDBG funding in fiscal
year 2008, more than $16 million in 2009, and more than $17 million in 2010.2 These funds are
available to support a variety of activities directed at improving the physical condition of
neighborhoods by providing housing rehabilitation, providing public improvements, fostering
economic development by providing technical and financial assistance to local businesses,
creating employment, or improving services for low- and moderate-income households. The
City operates under a mayor-council form of government, and its CDBG activities are
administered through the Buffalo Urban Renewal Agency and the City’s Office of Strategic
Planning.

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act
of 2009. The purpose of the Recovery Act was to stimulate the Nation’s ailing economy, with a
primary focus on creating and saving jobs in the near term and investing in infrastructure that
will provide long-term economic benefits. This legislation included a $1 billion appropriation of
community development funds to carry out CDBG programs.

On August 14, 2009, the City received more than $4.3 million in supplemental CDBG funds
under the Recovery Act (CDBG-R). City officials planned to use the CDBG-R funds on the
following seven activities:




2
    The City’s Community Development Block Grant Program fiscal year is May 1 through April 30.

                                                        4
                                 Activity                             Amount
                                                                      obligated
        Street and sidewalk improvements - citywide                    $1,000,000
        Street and sidewalk improvements - neighborhood
        revitalization strategy area                                      500,000
        Emergency rehabilitation repairs - single family                  677,672
        Emergency rehabilitation repairs - multifamily                    677,673
        Jobs training program                                             531,149
        Demolitions - citywide                                            525,000
        General administration                                            400,000
        Total                                                          $4,311,494

The objectives of the audit were to determine whether the City efficiently and effectively
administered its CDBG-R program in compliance with the Recovery Act and other applicable
requirements. Specifically, we wanted to determine whether City officials had adequate policies
and procedures to ensure that (1) program funds drawn from HUD’s Line of Credit Control
System were supported with adequate documentation and (2) CDBG-R program expenditures
were for eligible activities that met a national objective of the program.




                                               5
                                 RESULTS OF AUDIT

Finding 1: City Officials Charged Questionable Expenditures to the
           City’s Supplemental CDBG-R Program
City officials charged questionable street repaving and curb and sidewalk replacement costs to its
supplemental CDBG-R program. Specifically, they did not perform independent cost estimates
for sealed bid contracts and did not prepare cost or price analyses for modifications to the street
repaving contract. Further, the City’s administrator, the Buffalo Urban Renewal Agency, did not
oversee the day-to-day operations of the contractors selected to perform these two capital
improvement projects. Consequently, there was no assurance that only necessary and reasonable
costs were charged to the CDBG-R program. We attribute this deficiency to the lack of
knowledge of HUD regulations by City Department of Public Works staff responsible for the
procurement of CDBG-R-funded capital improvement projects, and the Agency’s procedures,
which did not require its personnel to perform contract oversight for CDBG-R-funded capital
improvement projects. As a result, $964,110 in unsupported street repaving costs, and $364,544
in unsupported curb and sidewalk replacement costs were charged to the CDBG-R program. In
addition $213,331 in unsupported street repaving costs were charged to the fiscal year 2010
CDBG program.


 Inadequate Procurement of
 Capital Improvement Contracts


               Upon notification from HUD of the availability of supplemental CDBG-R funds,
               City officials prepared a substantial amendment to their 2008-2009 annual action
               plan. This document indicated to HUD the activities on which the City intended
               to expend its CDBG-R funds. City officials identified seven activities, and HUD
               approved the substantial amendment on August 14, 2009. Two activities
               pertaining to capital improvement projects, which comprised approximately 35
               percent of the City’s CDBG-R funding, were examined during the audit. One of
               the activities was for citywide street repaving for an initial contract amount of
               $878,268, and the other was for a curb and sidewalk replacement project for a
               contract amount of $431,117 in the City’s neighborhood revitalization strategy
               area.

               Based on correspondence and interviews with City personnel, the City’s
               Department of Public Works was given procurement responsibility for the
               CDBG- and CDBG-R-funded capital improvement projects to achieve better
               economies of scale and avoid duplication of work between the Buffalo Urban
               Renewal Agency and the Department. However, neither the Agency nor the
               Department prepared independent cost estimates for the street repaving contract
               or the curb and sidewalk replacement contract. As a result, there was no

                                                6
           assurance that these contracts were procured in an efficient and economical
           manner that was beneficial to the City. Regulations at 24 CFR (Code of Federal
           Regulations) 85.36 provide that grantees must make independent estimates before
           receiving bids and perform a cost or price analysis in connection with every
           procurement action, including contract modifications; however, this was not done.

           In addition, regarding the initial $878,268 contract executed for the street
           repaving work, an additional $510,062 (consisting of $213,331 in fiscal year 2010
           CDBG funds and $296,731 in City operating funds) was paid for contract
           modifications not procured in accordance with regulations at 24 CFR 85.36,
           which provide that grantees must perform a cost or price analysis in connection
           with every procurement action, including contract modifications. The two change
           orders, which increased the original contract by 58 percent, were not supported by
           cost or price analyses to justify cost reasonableness of the contract modifications.

           Further, the contract terms for the street repaving work noted that the project
           would be completed within 180 days of the notice to proceed date of June 16,
           2010; however, as of July 31, 2011, the contract remained open, and City officials
           had paid more than $1.5 million (consisting of $964,110 in unsupported CDBG-R
           funds, $213,331 in unsupported fiscal year 2010 CDBG funds, and $403,638 in
           City operating funds) to the contractor, with an additional $92,815 owed through
           contract completion. The amounts paid were well above the contracted amount,
           which indicated that City officials did not have controls in place to prevent
           making payments over and above those contracted. As a result, the $964,110 in
           CDBG-R and $213,331 in fiscal year 2010 CDBG funds was questioned because
           City officials did not prepare independent cost or price estimates to ensure that the
           price paid for the repaving services was reasonable or maintain controls to ensure
           that only contracted amounts were paid. If HUD determines that the contract was
           not reasonable, the $92,815 in additional funds allocated for this activity should
           be reprogrammed to other eligible activities.

           Regarding the curb and sidewalk replacement contract of $431,117, expenditures
           totaled $364,544 and were considered unsupported for the same reasons.
           Therefore, the remaining $66,573 in contingency, retention, and unobligated
           contract funds should be reprogrammed for other eligible purposes and put to
           better use.

Inadequate Contract Oversight


           The Buffalo Urban Renewal Agency did not oversee the day-to-day operations of
           the contractors selected to perform the two capital improvement projects.
           Regulations at 24 CFR 570.501 provide that an entity designated to undertake
           CDBG grant administration responsibilities is subject to the requirements
           applicable to subrecipients. These requirements include the regulations at 24 CFR
           85.40, which require monitoring of the day-to-day activities of the designated

                                             7
             entity. Thus, while HUD regulations allow City officials to hand over the
             procurement function for CDBG-R-funded capital improvement projects to the
             City’s Department of Public Works, Agency and City officials are subject to the
             same requirements as a subrecipient. Agency personnel did not monitor or
             perform inspections, verify materials and quantities used, or track the progress of
             the work being performed onsite by the contractors. Although Agency and City
             officials relied on the Department of Public Works for this oversight, there was no
             assurance that Department officials had adequate knowledge of HUD regulations
             to protect the CDBG-R funds. As a result, Agency and City officials could not
             assure HUD that only necessary, eligible costs were charged to the CDBG-R
             program.


Conclusion

             City officials charged questionable street repaving and curb and sidewalk
             replacement contract expenditures to the City’s supplemental CDBG-R program.
             Further, the City’s administrator, the Buffalo Urban Renewal Agency, did not
             oversee the day-to-day operations of the contractors selected to perform the
             capital improvement projects. Deficiencies identified included the lack of
             independent cost estimates for sealed bid contracts, no cost or price analyses for
             modifications to the street repaving contract, and no controls to ensure that only
             contracted amounts were paid. Consequently, there was no assurance that only
             necessary and reasonable costs were charged to the CDBG-R program.

             We attribute these deficiencies to the lack of knowledge of HUD regulations by
             Department of Public Works staff responsible for the procurement of CDBG-R-
             funded capital improvement projects and the Buffalo Urban Renewal Agency’s
             procedures, which did not require its personnel to perform contract oversight for
             CDBG-R-funded capital improvement projects. As a result, more than $1.3
             million, consisting of $964,110 in unsupported street repaving costs and $364,544
             in unsupported curb and sidewalk replacement costs, was charged to the CDBG-R
             program. An additional $213,331 in unsupported street repaving costs was also
             charged to the fiscal year 2010 CDBG program. The remaining $159,388,
             consisting of $92,815 in obligated funds pertaining to the street repaving contract
             and $66,573 in contingency and unobligated funds pertaining to the curb and
             sidewalk replacement contract, should be reprogrammed for other eligible
             purposes and put to better use.

Recommendations

             We recommend that the Director of HUD’s Buffalo Office of Community
             Planning and Development instruct City officials to




                                              8
1A.   Suspend incurring costs for CDBG-R capital improvement projects until
      HUD determines whether City officials have the capacity to carry out
      these activities in compliance with HUD regulations. If it is determined
      that City officials lack that capacity, the remaining $159,388 ($92,815 and
      $66,573) in obligated and unobligated street repavement and curb and
      sidewalk replacement project funds should be reprogrammed so that City
      officials can assure HUD that these funds will be put to better use.

1B.   Provide documentation to justify the reasonableness of $1,328,654 in
      unsupported street improvement costs ($964,110 in street repaving costs
      and $364,544 in curb and sidewalk replacement costs) charged to the
      CDBG-R program so that HUD can make an eligibility determination.
      Any unsupported costs determined to be ineligible should be reimbursed
      from non-Federal funds.

1C.   Provide documentation to justify $213,331 in unsupported street repaving
      costs charged to the fiscal year 2010 CDBG program so that HUD can
      make an eligibility determination. Any unsupported costs determined to
      be ineligible should be reimbursed from non-Federal funds.

1D.   Establish and implement policies and procedures to ensure that the
      procurement responsibilities of CDBG- and CDBG-R-funded projects are
      adequately defined.

1E.   Establish and implement policies and procedures to ensure proper
      monitoring of CDBG- and CDBG-R-funded projects, including the day-
      to-day oversight, reconciliation, and certification of contractor material
      use, cost sheets, and contract registers, to ensure that only contracted
      amounts are expended.




                                9
Finding 2: City Officials Failed To Administer Their Emergency
           Housing Rehabilitation Loan Program in Accordance With
           Their Own Procedures and Subcontractor Agreement
City officials failed to administer their emergency housing rehabilitation loan program in
accordance with their own procedures and subcontractor agreement. Specifically, they made
payments to contractors without monitoring and inspecting repair work, made payments for
repairs that lacked the appropriate documentation to support adequate classification as an
emergency, and failed to ensure that their subcontractor maintained a clear separation of duties in
the administration of the program. These deficiencies can be attributed to City officials’
inadequate implementation of controls and lack of oversight of program expenditures. As a
result, it is questionable whether $249,312 in completed repair work, as part of the emergency
rehabilitation loan program, was for eligible CDBG-R program expenditures.


 Background

               The primary purpose of the City’s emergency housing rehabilitation loan program
               is to provide low- and moderate- income homeowners partially forgivable, no
               interest loans for emergency repairs on single or multiunit residences. Eligible
               emergency repairs include those to specific house systems that are in poor or
               dangerous condition.

               City officials subcontracted with Belmont Shelter Corp., through the Buffalo
               Urban Renewal Agency, for the administration of the program. Belmont received
               applications for assistance from local community-based organizations and was
               responsible for the repair process through the submission of a request for payment
               to City officials. This process included the verification of income eligibility,
               preparation of work specifications, requests for bids and review of those bids, and
               inspection of all work performed by the contractors. Regulations at 24 CFR
               570.501 provide that the recipient of CDBG funds is responsible for ensuring that
               funds are used in accordance with all program requirements and that the use of
               subrecipients or contractors does not relieve the recipient of this responsibility.
               Thus, City officials were responsible for ensuring that the program was
               administered efficiently and effectively. As of July 31, 2011, City officials had
               awarded 83 CDBG-R-funded emergency housing rehabilitation loans with
               disbursements totaling $677,777.

 City Officials’ Own Procedures
 Not Always Followed


               City officials did not always follow their own procedures in the administration of
               the emergency housing rehabilitation loan program. For example, they failed to
               inspect completed repairs, verify emergency conditions, and ensure a sufficient

                                                10
number of bids. Consequently, there was no assurance that the objective of the
program was met.

According to the City’s procedures, all grant-funded construction projects must be
inspected by a construction monitor upon completion. Monitors verify that
completed work complies with all contractual obligations, including the approved
specifications, before the issuance of payments to the contractor. Inspections
were required at the time of periodic payment requests or at the time of
completion. Also, all work items for which payment was requested must have
been completed and in place.

However, a review of 20 emergency rehabilitation loan files found that payments
were made to contractors without the prior inspection and approval of City
officials. Specifically, four of the loans reviewed had final payments disbursed
without the proper approval. Two of these loans also had prior partial payments
for a total of $51,010 disbursed in six payments without approval. Further,
although there were four additional emergency housing rehabilitation loans that
each had one partial payment disbursed without the proper approval, the final
payment requests for these four loans, which were significantly less than the
partial payment requests, were signed and approved by the City’s monitor.
Nevertheless, funds were expended before City officials approved the repairs
performed. Although the four properties relating to the partial payments were
inspected later, the majority of the total payment was disbursed before the
inspection. Thus, City officials could not provide HUD assurance that $51,010 in
repairs completed without adequate monitoring fully complied with the City’s
procedures.

According to the City’s procedures, the intent of the emergency housing
rehabilitation program was to address emergencies such as utility service
interruption and the repair of specific house systems that were in poor or
dangerous condition. The emergency verification form that must accompany the
application for emergency assistance indicated the nature of the emergency. The
procedures further added that conditions noted with each request for emergency
assistance would be verified by a representative of the City’s Office of Strategic
Planning.

However, a review of 20 emergency housing rehabilitation loan files found that
neither Belmont nor City officials verified the emergency nature of $249,312 in
completed repairs. Of the 20 files reviewed, 5 did not contain an emergency
verification form, and the remaining 15 contained the emergency verification
form signed only by the homeowner and were missing the verification signature
of the construction analyst. Therefore, no one attested to the emergency nature of
the repairs requested for 5 properties, and only the homeowner attested to the
emergency nature of the repairs requested for the other 15 properties. Thus, City
officials could not provide HUD assurance that an additional $198,302 in
completed repairs, which lacked evidence of proper certification, complied with

                                11
            the City’s procedures. In addition, there were roofing system repairs performed
            on 19 of the 20 properties reviewed, yet none of the loan files contained evidence
            that both significant deterioration and water infiltration, indicating an emergency,
            were verified as required by the City’s procedures.

            According to the City’s procedures for its emergency housing rehabilitation loan
            program, all projects expected to exceed $1,999 must have a minimum of three
            bids from qualified sources. If an adequate number of bids is not received, efforts
            taken to ensure an open competition must be documented. However, of the 20
            emergency housing rehabilitation loan files reviewed, 9 files documented that
            only 2 bids were received for the work performed. The loan files contained
            handwritten documentation listing the contractors that were sent bid requests but
            did not contain adequate justification as to why the required three bids were not
            received. Therefore, City officials could not provide adequate assurance that the
            bidding on the repairs for nine properties was open and competitive.

Provisions of Subcontractor
Agreements Not Always
Followed

            City officials did not always follow the provisions of their subcontractor
            agreement with Belmont regarding the administration of the emergency housing
            rehabilitation loan program. Specifically, City officials failed to ensure an
            adequate separation of duties and that bid review reports were completed as
            required by the subcontractor agreement. The agreement executed with Belmont
            provided that to maintain a clear separation of duties, bids were not to be
            reviewed by the same construction analyst who prepared the specifications. The
            agreement further required that to ensure the impartial review of contractor work,
            the construction analyst who conducted the job inspections for any single property
            would not be the same individual who prepared the specifications or reviewed the
            contractor bids for that property.

            However, of the 20 loan files reviewed, 19 documented that the individual who
            prepared the work specifications performed the job inspections of the properties.
            Further, 8 of the 20 loan files reviewed contained a bid review report identifying
            the individual who performed the bid review as the individual who prepared the
            work specifications and performed the job inspections. The remaining 12 loan
            files did not contain a bid review report as required. Thus, there was not an
            adequate separation of duties at Belmont concerning the administration of this
            program. This lack of separation of duties further diminished City officials’
            ability to assure HUD that Belmont performed the subcontracted tasks impartially
            and with integrity.




                                             12
Conclusion

             City officials did not follow their own procedures and subcontractor agreement
             with Belmont for the administration of the emergency housing rehabilitation loan
             program. The deficiencies identified during the review of the rehabilitation loan
             files are summarized in appendix C. These deficiencies make it questionable
             whether program objectives were met. Consequently, City officials expended
             $249,312 ($51,010 in repairs completed without adequate monitoring and
             $198,302 in repairs that lacked proper certifying documentation) for unsupported
             repair costs, thus diminishing the City’s ability to ensure that its emergency housing
             rehabilitation loan program was administered in an effective and efficient manner.
             We attribute these deficiencies to City officials’ inadequate implementation of
             controls and lack of oversight of program expenditures.

Recommendations

             We recommend that the Director of HUD’s Buffalo Office of Community
             Planning and Development instruct City officials to

             2A.    Provide documentation to justify $249,312 in unsupported repair costs so
                    that HUD can make an eligibility determination. Any unsupported costs
                    determined to be ineligible should be reimbursed from non-Federal funds.

             2B.    Revise and strengthen existing housing procedures to include that
                    emergency housing rehabilitation repairs must be inspected by the City’s
                    monitor before all payments, partial and final.




                                               13
                         SCOPE AND METHODOLOGY

We performed onsite audit work at the City’s offices in Buffalo City Hall, located in Buffalo,
NY, between April and August 2011. The audit scope covered the period August 1, 2009,
through March 31, 2011, and was extended as necessary. We relied in part on computer-
processed data primarily for obtaining background information on the City's expenditure of
CDBG-R funds. We performed a minimal level of testing and found the data to be adequate for
our purposes.

To accomplish the objectives, we

       Reviewed relevant HUD regulations, guidebooks, and files.

       Interviewed HUD Office of Community Planning and Development officials to obtain an
       understanding of and identify HUD’s concerns with the City’s operations.

       Reviewed the City’s policies, procedures, and practices pertaining to its CDBG-R program.

       Interviewed key personnel responsible for the administration of the City’s CDBG-R
       program.
We selected a nonstatistical sample of transactions pertaining to public improvements and housing
rehabilitation program activities. The City was awarded more than $4.3 million in CDBG-R
funding in 2009. HUD’s Integrated Disbursement and Information System reports reflect that more
than $2.78 million in CDBG-R funds had been disbursed for 88 different activities as of July 31,
2011. These activities all fall under the seven broader activities defined in the substantial
amendment to the 2008-09 annual action plan. The two program activities selected for testing
represent more than 66 percent of the City’s CDBG-R funds budgeted. Therefore,
 1. For the public improvements program area, we reviewed all expenditures occurring during the
    audit period.
 2. For the housing rehabilitation program area, we reviewed 20 emergency housing
    rehabilitation loans that were expended during the audit period. These loans were selected to
    ensure that the sample consisted of loans awarded in the beginning, middle, and end of the
    audit period. The City had awarded 83 CDBG-R-funded emergency housing rehabilitation
    loans with disbursements totaling $677,777 as of July 31, 2011.
The results of the testing apply only to the transactions reviewed and cannot be projected to the
total population of CDBG-R transactions.
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 objectives.


                                                14
                              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
               objectives:

                      Effectiveness and efficiency of operations – Policies and procedures that
                      management has implemented to reasonably ensure that a program meets its
                      objectives.

                      Reliability of financial data – Policies and procedures that management has
                      implemented to reasonably ensure that valid and reliable data are obtained,
                      maintained, and fairly disclosed in reports.

                      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.

                      Safeguarding of resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

               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.
                                                 15
Significant Deficiencies


             Based on our review, we believe that the following items are significant deficiencies:


                    City officials did not have adequate controls over the efficiency and
                    effectiveness of program operations when they did not establish adequate
                    administrative controls to ensure that costs associated with public
                    improvement and housing rehabilitation activities were supported (see
                    findings 1 and 2).

                    City officials did not have adequate controls over compliance with laws and
                    regulations when they did not always comply with HUD regulations while
                    disbursing program funds (see findings 1 and 2).

                    City officials did not have an adequate system to ensure that resources were
                    properly safeguarded when they did not maintain adequate supporting
                    documentation for costs charged to their public improvement and housing
                    rehabilitation activities (see findings 1 and 2).




                                              16
                  FOLLOW-UP ON PRIOR AUDITS

Audit Report Number
2011-NY-1010

          HUD OIG issued an audit report on April 15, 2011, relating to the City of
          Buffalo, NY’s CDBG program (2011-NY-1010). The audit found that the City
          did not always follow applicable HUD regulations in its administration of the CDBG
          program. In addition, the City did not ensure that CDBG funds were expended for
          eligible activities that met a national objective of the program. The report contained
          3 findings and 12 recommendations. The findings involved the public facilities
          and improvements, economic development, and clearance program areas. As of
          December 2, 2011, 10 of the recommendations remained open and unresolved.
          Similar deficiencies were found during this audit, as discussed throughout the
          report. The 10 recommendations are listed below.

          HUD OIG recommended that the Director of HUD’s Buffalo Office of Community
          Planning and Development

             Require the City to suspend incurring costs or reimbursing itself for costs paid
             from the City’s municipal general expense account for economic development
             activities until HUD determines whether the City has the capacity to carry out its
             CDBG economic development activities in compliance with HUD regulations.
             If it is determined that the City lacks the capacity, the $4,739,829 in economic
             development project funds remaining for fiscal years 2008, 2009, and 2010
             should be reprogrammed so the City can assure HUD that these funds will be put
             to better use.

             Require the City to suspend incurring costs or reimbursing itself for costs paid
             from the City’s municipal general expense account for clean and seal activities
             until HUD determines whether the City has the capacity to carry out its CDBG
             clean and seal activities in compliance with HUD regulations. If it is determined
             that the City lacks the capacity, $744,479 in fiscal year 2010 clean and seal
             program funds should be reprogrammed so the City can assure HUD that these
             funds will be put to better use.

          HUD OIG further recommended that the Director of HUD’s Buffalo Office of
          Community Planning and Development instruct the City to

             Reimburse from non-Federal funds $162,923 ($134,711 + $28,212) expended on
             ineligible costs pertaining to street improvement projects not done and a
             duplicate reimbursement.

             Provide documentation to justify the $1,982,988 in unsupported costs associated
             with street improvement expenditures incurred between June 2007 and October
                                           17
2009. Any unsupported costs determined to be ineligible should be reimbursed
from non-Federal funds.

Provide documentation to justify the $20,143,219 ($4,902,754 + $15,240,465) in
unsupported transactions recorded in the CDBG program income account. Any
receipts determined to be unrecorded program income should be returned to the
CDBG program, and any expenditures determined to be ineligible should be
reimbursed from non-Federal funds.

Certify and provide support that the proper amount of CDBG assets pertaining to
Buffalo Economic Renaissance Corporation program income was returned to the
City from the subrecipient by performing an audit of the accounts that the
Corporation maintained.

Establish and implement controls that will ensure adequate monitoring of
subrecipient-administered activities, that CDBG funds are properly safeguarded,
the achievement of performance goals in subrecipient supported activities, and
that corrective actions are taken for nonperforming subrecipients.

Reimburse from non-Federal funds the $304,506 related to ineligible clean and
seal code enforcement costs.

Provide documentation to justify the $716,622 ($545,607 + $24,069 + $146,946)
in unsupported clean and seal costs incurred so that HUD can make an eligibility
determination. Any costs determined to be ineligible should be reimbursed from
non-Federal funds.

Develop administrative control procedures that will ensure compliance with
CDBG program requirements, including ensuring that costs are eligible and
necessary before being charged to the program.




                             18
                                    APPENDIXES

Appendix A

              SCHEDULE OF QUESTIONED COSTS
             AND FUNDS TO BE PUT TO BETTER USE

                   Recommendation        Unsupported      Funds to be put
                          number                  1/      to better use 2/

                                  1A                            $159,388
                                  1B       $1,328,654
                                  1C         $213,331
                                  2A         $249,312          ________

                                Total      $1,791,297           $159,388



1/   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.

2/   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 this instance, if City officials implement our
     recommendations to reprogram the remaining $159,388 in obligated and unobligated
     street improvement project funds, they can assure HUD that these funds will be properly
     put to better use.




                                             19
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         20
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3

Comment 4

Comment 5




                         21
                         OIG Evaluation of Auditee Comments

Comment 1   Officials for the City disagree with finding 1, stating that they can provide
            evidence of public procurement. Further, City officials contend that (1) a preexit
            conference was not held to address the issues identified in the draft report, (2)
            their request for more organized communication between the auditors was
            declined, and (3) the requested information was provided. Throughout the course
            of the audit, OIG requested all documentation pertaining to the procurement and
            monitoring of the capital improvement contracts under review. The conclusions
            reached are fully supported by documentation requested and reviewed during the
            audit. Regarding the preexit conference, City officials opted to receive our
            written finding outlines in lieu of a face-to-face meeting, which we submitted to
            City officials on August 8, 2011. Since that time, City officials have not provided
            feedback or voiced their concerns. In addition, we accommodated the request for
            organized communication with the officials in the same manner as for the
            previous two audits to the extent feasible. The audit process allows us to formally
            request documentation through a point of contact unless it becomes tedious, time
            consuming, and an impediment to the audit. Requests for documentation were
            made through email correspondence and discussions with the appropriate City
            officials. City officials were given ample opportunity to provide the supporting
            documentation during the audit. Supporting documentation provided after the
            audit will be reviewed as part of the audit resolution process with the local HUD
            office. Accordingly, the contention of the officials is unwarranted.

Comment 2   Officials for the City contend that the construction was monitored by the Buffalo
            Urban Renewal Agency’s consultant, an engineering firm hired by the City to
            monitor, perform inspections, verify materials and quantities used, and track the
            progress of the work being performed on site. Further, the officials disagree that
            regulations at 24 CFR 85.36 require the procurement of contract modifications.
            Nevertheless, in accordance with regulations at 24 CFR 85.40, it is the ultimate
            responsibility of the grantee (the Agency) to monitor the day-to-day operations of
            the contractor to ensure compliance with applicable Federal requirements and that
            performance goals are achieved. However, we were not provided adequate
            assurance that City officials complied with these regulations. Further, regulations
            at 24 CFR 85.36 clearly provide that a cost or price analysis is required in
            connection with every procurement action, including contract modifications. Yet
            at the time of our review, City officials could not provide the supporting
            documentation pertaining to the procurement and monitoring of the capital
            improvement contracts under review. Thus, the contention of the officials is
            unwarranted.

Comment 3   Officials for the City state that the Belmont contract is renewed and revised over
            18-month periods and includes provisions to ensure proper completion of eligible
            work and that the Buffalo Urban Renewal Agency monitored and inspected the
            completed repairs pursuant to its policies and procedures. However, audit work
            found that the contract with Belmont was revised only once, in late 2010, and

                                            22
            since the contract was originally executed in 2004, this is far greater than an 18-
            month period. In addition, the provisions to the contract to ensure proper
            completion of eligible work were not always followed. The City’s policies and
            procedures state that all work performed must be inspected by the monitor before
            final payment to the contractor. However the inspections that were to be
            performed by the Agency’s supervisor of building construction before final
            payment did not always occur.

Comment 4   City officials state that appendix C was recently received and still under review;
            however, for loan number 7460, the inspector signed on the wrong line. The draft
            report, which included appendix C, was provided to the officials on November 2,
            2011; thus, the officials had ample opportunity to complete their review. Further,
            loan number 7460 had the signature of the lead hazard inspector on the wrong
            line, not Buffalo Urban Renewal Agency’s supervisor of building construction,
            who was in charge of inspecting the work performed upon completion.
            Nonetheless, the payment was processed by Agency officials, although the
            monitor’s approval signature line was blank.

Comment 5   Officials for the City commented that the bid review report forms were changed,
            which may have led to confusion, and that there may have been a difference of
            understanding as to the importance of some of the forms because the emergency
            verification form was not required. Regardless of its format, the lack of bid
            review reports further supported the lack of a separation of duties deficiency at
            Belmont. According to the contract, the Belmont official responsible for
            reviewing the bids should not be the individual who prepared the work
            specifications or performed the job inspection. The bid review report was the
            only document that identified the individual who reviewed the bids. Thus, for the
            loan files that were missing the form, the City did not ensure a separation of
            duties. In addition, according to the City’s procedures, the emergency verification
            form was required with all applications for assistance, and the conditions
            identified on them would be verified. Nevertheless, without the written
            attestation of an Agency or Belmont official, the City had no assurance as to the
            validity of the homeowners’ claims of emergency conditions. Therefore, the
            officials have no assurance that the emergency objective of the program was met.




                                             23
Appendix C

         SCHEDULE OF EMERGENCY REHABILITATION
            LOAN ADMINISTRATION DEFICIENCIES


                                   Emergency rehabilitation loan administration deficiencies
                            Lack of
                           monitor Lack of      Lack of      Lack of                         Lack of
    IDIS*                  approval monitor emergency emergency Insufficient Inadequate        bid
   activity     Rehab loan – final approval – verification verification number of separation review
   number        amount      pmt    partial pmt  form form signature      bids     of duties report
     7446           $5,550                         X                                   X       X
     7447          $18,221                                        X        X                   X
     7458           $7,650                                        X                   X        X
     7459           $9,650                                        X                   X        X
     7460           $5,050    X                                   X                   X        X
     7467          $11,550                                        X        X          X        X
     7475           $3,930                                        X        X          X        X
     7476          $14,730                X        X                                  X        X
     7477          $15,000                                        X                   X        X
     7519          $12,975                                        X                   X        X
     7531          $13,350                X        X                       X          X        X
     7555          $13,400                                        X        X          X        X
     7574          $16,800    X           X                       X                   X
     7576          $18,660    X           X        X                                  X
     7583          $15,225                X                       X        X          X
     7612          $10,500    X                                   X        X          X
     7618          $14,188                                        X        X          X
     7766          $14,458                X                       X                   X
     7767          $14,500                         X                       X          X
     7837          $13,925                                        X                   X
        Total     $249,312     4          6        5              15       9         19        12

  * IDIS = HUD’s Integrated Disbursement and Information System




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