oversight

Healthy Neighborhoods, Inc., Baltimore, MD, Generally Ensured That Its Consortium Members Met Recovery Act Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-10-24.

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

                                                               Issue Date
                                                                   October 24, 2011
                                                               Audit Report Number
                                                                   2012-PH-1001




TO:        Charles E. Halm, Director, Office of Community Planning and Development,
            Baltimore Field Office, 3BD

           //signed//
FROM:      John P. Buck, Regional Inspector General for Audit, Philadelphia Region,
             3AGA

SUBJECT:   Healthy Neighborhoods, Inc., Baltimore, MD, Generally Ensured That Its
           Consortium Members Met Recovery Act Requirements


                                  HIGHLIGHTS

 What We Audited and Why

           We audited Healthy Neighborhoods, Inc.’s Neighborhood Stabilization Program 2
           based on a complaint received by our office and as part of our annual audit plan to
           review activities funded by the American Recovery and Reinvestment Act of
           2009. The grantee received $26 million in Program funds under the Recovery
           Act. Our objective was to determine whether the grantee ensured that its
           consortium members properly awarded Program contracts and resold homes
           according to the requirements of the Recovery Act and applicable U.S.
           Department of Housing and Urban Development (HUD) regulations.

 What We Found


           The grantee generally ensured that its consortium members properly awarded
           Program contracts and resold homes according to the requirements of the
           Recovery Act and applicable HUD regulations. The grantee ensured home buyers
           met income eligibility requirements and that resale values were appropriate. The
           grantee needed to provide additional documentation and improved monitoring;
           however, to ensure that consortium members awarded Program contracts in
           accordance with Federal requirements.

What We Recommend


           We recommend that the Director of HUD’s Baltimore Office of Community
           Planning and Development require the grantee to develop and implement controls
           to make sure that it (1) adequately monitors its developers to ensure that Program
           requirements are followed, and (2) establishes an internal audit function as
           required.

           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-3. Please furnish us copies of any correspondence or
           directives issued because of the audit.


Auditee’s Response


           We provided a discussion draft audit report to the grantee on September 15, 2011,
           and discussed it with the grantee during the audit and at an exit conference on
           October 3, 2011. Following the exit conference, we provided an updated draft
           report to the grantee on October 12, 2011. The grantee provided written
           comments to our draft audit report on October 18, 2011. The grantee generally
           agreed with the conclusions in the report. The complete text of the grantee’s
           response, along with our evaluation of that response, can be found in appendix A
           of this report.




                                            2
                           TABLE OF CONTENTS

Background and Objective                                                       4

Results of Audit
      Finding: The Grantee Generally Ensured That Its Consortium Members Met   6
      Recovery Act Requirements

Scope and Methodology                                                          10

Internal Controls                                                              11

Appendix
   A. Auditee Comments and OIG’s Evaluation                                    13




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                            BACKGROUND AND OBJECTIVE

The Neighborhood Stabilization Program 2 was established by Title XII of Division A of the
American Recovery and Reinvestment Act of 2009 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 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.

Healthy Neighborhoods, Inc., is a nonprofit entity organized in 2004. Its mission is to assist
undervalued neighborhoods in increasing home resale values, market its communities, create
high standards for property improvement, and forge strong connections among neighbors. This
grantee was awarded $26 million in Program funding on February 11, 2010. Under its
agreement with HUD, the grantee serves as the lead member of a consortium and is responsible
for monitoring its consortium members and ensuring compliance with HUD Program
requirements. In its HUD-approved Program application, the consortium consists of the grantee
and consortium members including Druid Heights Community Development Corporation,
Incorporated; Habitat for Humanity of the Chesapeake, Incorporated; St. Ambrose Housing Aid
Center, Incorporated; the City of Baltimore Department of Housing and Community
Development; and Telesis Baltimore Corporation, a for-profit developer. In March 2011, the
grantee requested to amend its HUD-approved Program application. It requested to reclassify
three of its consortium members as developers. On June 30, 2011, HUD approved the
amendment.

As shown below, activities focused on (1) acquisition and rehabilitation of abandoned or
foreclosed-upon properties for sale to persons of low and moderate income, (2) buyers’ closing
cost assistance, and (3) project administration. As of August 15, 2011, the grantee had expended
$8.6 million of its award. The grantee has resold 20 program units to home buyers.

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
                                        Program      Projected      Program
                       Responsible       funds        number          funds       Program
  Housing activity        entity        granted       of units      expended      units sold
 Acquisition,        St. Ambrose
 rehabilitation, and Housing Aid
 resale              Center, Inc.      $8,112,600       186        $1,838,361         7
                     Druid Heights
                     Community
 Acquisition,        Development
 rehabilitation, and Corporation,
 resale              Inc.               5,650,000        28           738,683         0
 Acquisition,        Telesis
 rehabilitation, and Baltimore
 resale              Corporation        4,733,200        35         2,212,784         0
                     Habitat for
 Acquisition,        Humanity of the
 rehabilitation, and Chesapeake,
 resale              Inc.               4,200,000       100         3,155,675         3
 Purchase and        Healthy
 rehabilitation by   Neighborhoods,
 direct buyer        Inc.               1,025,000                     206,508         10
 Total housing
 activity                              $23,720,800                 $8,152,011
 10 percent
 administration                                         Not                          Not
 costs                                  $2,372,080   applicable     $492,020      applicable
 Totals                                $26,092,880      349        $8,644,031        20

Our objective was to determine whether the grantee ensured that its consortium members
properly awarded Program contracts and resold homes according to the requirements of the
Recovery Act and applicable HUD regulations.




                                              5
                                  RESULTS OF AUDIT

Finding: The Grantee Generally Ensured That Its Consortium Members
Met Recovery Act Requirements
The grantee ensured home buyers met income eligibility requirements and that resale values
were appropriate. The grantee needed to prepare or provide additional documentation after the
audit, on five of the six contract awards totaling almost $2.9 million in order to fully justify that
it properly awarded the contracts in accordance with Federal requirements. This occurred
because the grantee needed to develop and implement improved controls to make sure that it
adequately monitored its consortium members’ contract award process.



 Income Eligibility and Property
 Resale Value Requirements
 Were Met


               Section IV.A.3.c. of the notice of funding availability for the Program required
               home buyers to meet income eligibility requirements. Program funds were to be
               used to assist persons whose incomes did not exceed 120 percent of the area
               median income. We reviewed the income documentation of 17 home buyers
               assisted with Program funds and determined that all met income eligibility
               requirements.

               Section J of appendix 1of the notice of funding availability for the Program
               required that redeveloped properties sold to individuals as a primary residence be
               sold in an amount equal to or less than redevelopment costs. We reviewed the
               resale values of the properties sold and determined that the resale values did not
               exceed redevelopment costs. We also reviewed and selected a sample of 10 high-
               valued expenditures totaling $2.7 million. We found that the $2.7 million was
               used for expenditures that met Program eligibility requirements.

 The Grantee’s Process for
 Awarding Program Contracts
 Needed Improvement


               Three of the grantee’s consortium members procured services needed to complete
               the redevelopment of 73 properties acquired with Program funds. As of
               August 30, 2011, the consortium members had awarded six contracts totaling $3.2
               million. We reviewed the contract files of all six contracts to determine whether
               they were properly awarded. While the grantee eventually provided reasonable

                                                  6
assurance that it received fair and reasonable prices on these contracts, it needed
to prepare and provide additional documentation after the audit on five of the six
contract awards totaling almost $2.9 million in order to fully justify that it
received a fair and reasonable price and awarded the contracts in accordance with
Federal requirements.

           Regulations at 24 CFR 84.43 required that procurement transactions be
           conducted in a manner providing full and open competition.
           Regulations at 24 CFR 84.46 further required that procurement records
           and files for purchases in excess of the small purchase threshold
           include a justification for lack of competition when competitive bids or
           services are not obtained. One consortium member awarded two
           contracts totaling $649,525 without publicly advertising the
           solicitations. Instead, the consortium member e-mailed the
           solicitations to contractors that expressed an interest in previous
           newspaper advertisements for similar type work. HUD guidance
           required the invitation for bids to be published at least once in a
           newspaper of general circulation, providing sufficient time prior to bid
           opening. The grantee acknowledged the consortium member did not
           publicly advertise the two solicitations but believed it had received and
           evaluated a sufficient number of bids through e-mails it sent to
           potential bidders. After we raised concerns over the lack of public
           advertisements, the grantee provided estimates from its contractual
           inspector demonstrating that it received a fair and reasonable price.
           However, in accordance with HUD guidance and to make sure all
           interested contractors are provided an opportunity to bid on contracts,
           the grantee should ensure consortium members advertise solicitations
           at least once in a newspaper of general circulation, providing sufficient
           time prior to bid opening.

           Regulations at 24 CFR 84.44 required that the grantee set forth
           requirements that the bidder fulfill in order for the bid or offer to be
           evaluated by the recipient. The bid solicitations for two of the
           contracts reviewed totaling over $1.2 million required that the bidders’
           resume include the company’s expertise and experience in doing
           renovations which incorporated green technologies and building
           construction techniques. However, the winning bid package provided
           no evidence of any expertise and experience in doing renovations
           which incorporated green technologies and the bid evaluation form
           provided no evidence that this was considered in the contract award
           process. After we raised concerns over the lack of evidence of
           consideration of green technologies the grantee informed us none of
           the bidders had experience in green strategies. However, the
           consortium member needed to adequately document this assertion and
           provide evidence that expertise and experience in green technology
           was adequately evaluated and considered in its bid evaluation.

                                 7
                      Regulations at 24 CFR 84.46 required that procurement records and
                      files for purchases in excess of the small purchase threshold include a
                      basis for contractor selection and the basis for award cost or price.
                      The bid evaluation for one contract award totaling almost $1 million
                      did not demonstrate a basis for contractor selection and the basis for
                      award cost or price. After we raised concerns over the lack of
                      evidence of the basis for award cost or price the grantee prepared
                      documentation showing how it evaluated the bids and its claim that it
                      received a fair and reasonable price.

The Grantee Did Not
Adequately Monitor Contract
Awards


           Section IV.A.3.f. of the notice of funding availability for the Program required the
           grantee to have a plan for monitoring program activities and ensuring the
           performance of its consortium members. Although the grantee had adequately
           monitored its consortium members’ acquisition of abandoned and foreclosed
           homes, the grantee had not adequately monitored its consortium members’
           procurement of services for the redevelopment of the acquired homes. The
           grantee did not adequately monitor the contract award process used or the
           procurement files maintained by its consortium members to ensure Federal
           regulations were followed.

           On June 30, 2011, the grantee received approval from HUD to reclassify its
           consortium members as developers. HUD’s guidance for developers participating
           in the Program does not require developers to follow Federal procurement
           requirements or Federal management and budget circulars. However, developers
           must execute a developer’s agreement with the grantee and provide a detailed cost
           estimate for redevelopment work. The developer may not provide housing
           counseling services to potential buyers. The grantee should closely monitor its
           developers’ activities to ensure that Program requirements are followed.

  The Grantee Did Not Have the
  Required Internal Audit
  Function


           In addition to having a monitoring plan, section IV.A.3.f. of the notice of funding
           availability for the Program required that the grantee have an internal audit
           function to examine potentially risky areas of program operations and
           management. The grantee had not established an internal audit function as
           required. However, at the completion of our audit, it stated that it was in the
           process of obtaining services from an external accounting firm so that the internal
           audit function could be implemented as required.

                                            8
Technical Assistance Is To Be
Provided to the Grantee



            HUD’s Office of Technical Assistance performed an assessment of the grantee’s
            Program during the week of August18, 2011. Based on its evaluation, it
            recommended that technical assistance be provided to the grantee. Technical
            assistance is provided to achieve the highest level of performance and results in
            community planning and development areas including the Recovery Act
            programs. The grantee will receive technical assistance in the areas of program
            administration, financial administration, and compliance with Federal regulations.
            It will also be assisted with revising the number of units to be resold to home
            buyers.

Recommendations



            We recommend that the Director of HUD’s Baltimore Office of Community
            Planning and Development require the grantee to

            1A.    Develop and implement controls to ensure that it adequately monitors its
                   developers to ensure that Program requirements are followed.

            1B.    Establish an internal audit function as required.




                                             9
                         SCOPE AND METHODOLOGY

We conducted the audit from May to August 2011 at the grantee’s office located at 2 East Read
Street, Baltimore, MD, and its consortium members’ offices located throughout Baltimore, MD.
The audit covered the period February 2009 through August 2011.

To accomplish our audit objective, we reviewed

       The Recovery Act, the Program notice of funding availability, and related HUD
       documents.

       Regulations at 24 CFR Part 84, applicable HUD guidance, and other directives that
       govern the Program.

       The grantee’s approved Program application, amended application, budgets, grant
       agreement, consortium members’ agreements, developer’s agreement, and other program
       records.

       Policies and procedures related to the grantee’s and its consortium members’
       expenditures, disbursements, procurement, and monitoring plans.

       Public databases and census tract data to assess whether properties met eligibility criteria.

       Income documentation and buyers’ closing cost assistance provided to 17 home buyers.

We conducted interviews with the grantee, its consortium members, its developer, and HUD
staff. As of August 30, 2011, consortium members had awarded six contracts totaling $3.2
million. We reviewed the contract files of the six contracts awarded. We also reviewed and
selected a sample of 10 high-valued expenditures totaling $2.7 million. We found that the $2.7
million was used for expenditures that met Program eligibility requirements. We reviewed 17
home buyer files and determined that income eligibility requirements were met. Lastly, we
reviewed the resale values of eight homes and found that they met Program requirements.

To achieve our audit objective, we relied in part on computer-processed data. The computer-
processed data included the grantee’s expenditure data, HUD’s Line of Credit Control System
data, 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
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.


                                                10
                              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:

                  Program operations - Policies and procedures that management has
                  implemented to reasonably ensure that a program meets its objectives.

               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 grantee needed to provide additional documentation and improved
                  monitoring to ensure that consortium members properly awarded Program
                  contracts in accordance with Federal requirements.



                                                 11
The grantee did not ensure that its consortium members fully complied with
Program regulations with respect to monitoring and the implementation of an
internal audit function.




                           12
                        APPENDIX

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation     Auditee Comments




                           13
14
Comment 1


Comment 1


Comment 1




            15
Comment 2




            16
Comment 3




            17
                        OIG Evaluation of Auditee Comments

Comment 1   Although the consortium member awarded the contracts, the grantee was
            responsible for ensuring that Program requirements were followed. The grantee
            executed a Program grant agreement with HUD agreeing that it would comply
            with Program guidance and award terms. By executing the Program grant
            agreement, the grantee assumed responsibility for the grant on behalf of the
            consortium and was to ensure compliance with all Program requirements.

Comment 2   The bidders were required to provide a company resume that included expertise
            and experience in green technology. The audit evidence showed that the
            consortium member failed to document that it considered expertise and
            experience in green technology (or lack thereof) in its bid evaluation.

Comment 3   The audit evidence showed that the grantee needed to develop and implement
            improved controls to make sure that it adequately monitored its consortium
            members’ contract award process.




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