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 3 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. 18
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)