oversight

Economic Development Programs Lacked Adequate Controls To Ensure Program Effectiveness

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-09-03.

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

OFFICE OF AUDIT
REGION 4
ATLANTA, GA




           Community Planning and Development

    Brownfield Economic Development Initiative and
        Empowerment Zone Grant Programs




2013-AT-0003                             SEPTEMBER 3, 2013
                                                        Issue Date: September 3, 2013

                                                        Audit Report Number: 2013-AT-0003




TO:            Yolanda Chavez, Deputy Assistant Secretary for Grant Programs, DG

               Valerie Piper, Deputy Assistant Secretary for Economic Development, DE



FROM:          Nikita N. Irons, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT:       Economic Development Programs Lacked Adequate Controls To Ensure Program
               Effectiveness

    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG), final results of our review of controls over the Brownfield and Round
II Empowerment Zone programs.

    HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.

    The Inspector General Act, Title 5 United States Code, section 8L, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

   If you have any questions or comments about this report, please do not hesitate to call me at
404-331-3369.
                                          Date of Issuance: September 3, 2013
                                          Economic Development Programs Lacked Adequate
                                          Controls To Ensure Program Effectiveness




Highlights
Audit Report 2013-AT-0003


 What We Audited and Why                   What We Found

As part of the U.S. Department of         HUD did not have adequate procedures to ensure the
Housing and Urban Development             effectiveness of its Brownfield Economic
(HUD), Office of Inspector General’s      Development Initiative. It did not fully implement
(OIG) annual plan, we audited HUD’s       plans to improve monitoring and did not identify and
controls over the Brownfield and Round    terminate in a timely manner projects that grantees
II Empowerment Zone programs. Our         never started. These conditions occurred because of
objective was to determine whether        confusion within HUD over monitoring requirements
HUD had adequate procedures to            and responsibilities, and because HUD was reluctant to
measure Brownfield and Round II           terminate projects and deobligate funds before grants
Empowerment Zone effectiveness.           expired. As a result, the Brownfield program was not
                                          always effective. In addition, HUD unnecessarily
                                          delayed returning at least $22.4 million in unneeded
 What We Recommend
                                          Brownfield funds to the Treasury, and needs to return
                                          an additional $5.16 million for projects that grantees
We recommend that HUD clarify             did not start.
requirements and responsibilities for
reporting and monitoring Brownfield       HUD’s Round II Empowerment Zone Performance
project performance and progress.         Measurement System (PERMS) contained unsupported
HUD should also identify and terminate    and inaccurate program results. Grantees generally
Brownfield projects that grantees never   could not support economic development results and
started, including the four grants        some expense eligibility, and one inaccurately reported
identified in this report totaling more   a program achievement. These deficiencies occurred
than $5.16 million, and return the        due to misreporting by grantees that went undetected
unneeded funds to the U.S. Treasury.      partly because it was impractical for HUD to verify all
In addition, HUD should require           of the data grantees entered into the system and partly
Columbia-Sumpter County, SC, and          because of a deficiency in HUD’s risk-based selection
Miami-Dade County, FL, to support         process for grantee monitoring. As a result, for the
more than $2.2 million in Round II        three grantees we reviewed, HUD could not rely on
Empowerment Zone expenses or repay        grantee submitted PERMS information for determining
the Treasury from non-Federal funds.      the effectiveness of the program, and grantees could
                                          not support at least $2.2 million in expenses.
                            TABLE OF CONTENTS

Background and Objective                                                         3

Results of Audit
      Finding 1: HUD Did Not Implement Procedures To Ensure Brownfield Economic
                 Development Initiative Effectiveness                            4
      Finding 2: The Round II Empowerment Zone Performance Measurement System
                 Was Not Reliable                                               10

Scope and Methodology                                                           15

Internal Controls                                                               17

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use           18
   B. Auditee Comments and OIG’s Evaluation                                    19
   C. Round II Empowerment Zone Implementation Plans                           26




                                            2
                      BACKGROUND AND OBJECTIVE

The Brownfield Economic Development Initiative provided competitive economic development
grants to Community Development Block Grant (CDBG) recipients in connection with loans
guaranteed under Section 108 of the Housing and Community Development Act of 1974.
Brownfield grants provided financial assistance for industrial or commercial sites where
redevelopment was hindered by the presence or potential presence of environmental
contamination. Under the Section 108 loan guarantee provision of the CDBG program, the U.S.
Department of Housing and Urban Development (HUD) offered communities a source of
financing for housing rehabilitation, economic development, and large-scale physical
development projects. Each Brownfield grant required new Section 108 loan guarantees, and
applicants were required to pledge their current and future CDBG funds as the principal security
for the loan guarantee. HUD’s Office of Economic Development administered the Brownfield
competitions, and the Office of Block Grant Assistance administered the grants after the Section
108 loan guarantees were approved. In 2012 the Office of Block Grant Assistance assumed full
administration. Implementing guidance was in 24 CFR (Code of Federal Regulations) Part 570.
HUD awarded 97 Brownfield grants between 2002 and 2011 valued at $134 million in
Brownfield funds and $549 million in Section 108 loan guarantees. HUD terminated Brownfield
as a distinct program as of fiscal year 2012; however, Brownfield activities remain eligible under
the CDBG program.

The Empowerment Zone program included grants and tax incentives to locate businesses and
hire local residents in economically disadvantaged areas. The Empowerment Zone program was
carried out in 3 rounds, with HUD designating 15 Round II Empowerment Zones under Public
Law 105-34. State and local governments nominated areas for Empowerment Zone designation
and were required to submit a strategic plan detailing how they intended to achieve the program
goals. Those selected had to meet specified criteria with respect to poverty, unemployment, and
general economic distress. HUD’s Office of Community Renewal administered the
Empowerment Zone program with the implementing guidance from 24 CFR Part 598. The 15
Round II Empowerment Zones each received grants totaling more than $25.6 million. All
Empowerment Zone grants expired on July 2, 2010.

Our objective was to determine whether HUD had adequate procedures to measure Brownfield
and Round II Empowerment Zone effectiveness.




                                                 3
                                     RESULTS OF AUDIT

Finding 1: HUD Did Not Implement Procedures To Ensure Brownfield
Economic Development Initiative Effectiveness
HUD did not implement procedures to ensure the effectiveness of its Brownfield Economic
Development Initiative. It did not fully implement plans to improve monitoring, and did not
identify and terminate in a timely manner projects that grantees did not start. These conditions
occurred because of confusion within HUD over monitoring requirements and responsibilities,
and because HUD was reluctant to terminate projects and deobligate funds before grants expired.
As a result, the Brownfield program was not always effective. In addition, HUD unnecessarily
delayed returning at least $22.4 million in unneeded Brownfield funds to the U.S. Treasury and
needs to return an additional $5.16 million for projects that grantees did not start.


    HUD Did Not Fully Implement
    Plans for Improving
    Monitoring

                 HUD developed a performance reporting and monitoring tool that it did not use,
                 and its monitoring was inconsistent. Therefore, HUD’s action did not increase the
                 project completion rate, and about one third of the Brownfield projects never
                 started. 1

                 A Required Performance Reporting and Monitoring Tool Was Not Used
                 HUD was concerned about the number of Brownfield projects that grantees did
                 not start, and during 2004 added the requirement for a logic model report to help
                 determine whether the projects were progressing as planned. 2 HUD staff stated
                 that about one-third of the projects never started, in part, due to provisions
                 included in the 1989 HUD Reform Act that limited communication with grant
                 applicants before award. Because of this limitation, staff was unable to clear up
                 problems or questions related to the applications until after grant award. HUD
                 had made earlier changes to application scoring to reward applicants with proven
                 capabilities and ready-to-go projects. It awarded more points for experience and
                 achieving results and for concurrent Brownfield and Section 108 applications.
                 However, the fact that HUD could not communicate with the applicants before
                 award, made it imperative that HUD closely monitor grantee progress.




1
  For grants awarded from 2004, when the logic model was first required, through 2006, about 31 percent of the
projects never started.
2
  Notice of Funding Availability; Federal Register Volume 69, Number 94; May 14, 2004; section VI, paragraph C,
page 27346
                                                       4
                 The notices of funding availability application process required grantees to
                 provide specific schedules for carrying out the project and identifying measurable
                 benchmarks, such as acquisition, demolition, site improvements, relocation, and
                 construction. The logic model was a reporting and monitoring tool that HUD
                 developed to assess grantee performance according to the schedules and identify
                 impediments to progress. HUD required that grantees annually prepare and
                 submit the more detailed logic model reports along with the standard consolidated
                 annual performance and evaluation report. 3

                 Due to confusion within HUD over the Brownfield program requirements, HUD
                 did not enforce the logic model requirement with the grantees, and headquarters
                 staff did not forward the reports they received to field offices to aid in the
                 identification of grantees for monitoring. Headquarters staff members said that
                 they were unaware of the logic model reporting requirements or that the grantees
                 were required to submit the reports to the headquarters Financial Management
                 Division office. Staff did not track when logic models were due, from whom they
                 were due, or whether they were submitted as required. Since the logic model
                 reports were not available to them, some field office staffs used the less detailed
                 consolidated annual performance and evaluation report as their Brownfield
                 monitoring tool. Some field office staff members also mistakenly thought that
                 Brownfield was a headquarters program that headquarters staff was monitoring.
                 Since they generally did not use the logic model reports, field office staffs did not
                 use the most complete information when selecting grantees for monitoring.

                 HUD’s Monitoring Was Inconsistent
                 The regulations required HUD to determine, at least annually, whether grantees
                 carried out and had the continuing capacity to carry out their activities in a timely
                 manner. 4 Instead, HUD used risk-based assessments outlined in Handbook
                 1840.1 to identify grantees for monitoring. Under this method, HUD often failed
                 to select Brownfield grants for monitoring due to their relatively low dollar
                 amount. We contacted 28 5 grantees and found that HUD had not monitored 7
                 grants; however, 6 of the 21 grantees with projects that never started said that
                 HUD had actively monitored their progress and offered assistance. The other 15
                 grantees either did not respond or were not sure whether HUD had monitored
                 their grants.

                 Despite HUD’s efforts to improve grantee performance by requiring logic model
                 reporting to better measure grantee progress, it did not properly implement the
                 reporting system, and the rate of projects that never started remained at about one-
                 third.

3
  Notices of funding availability for 2004 (section VI, paragraph C, page 27346), 2005 (section VI, paragraph C,
page 13965), 2006 (section VI, paragraph C, page 11884), 2007 (section VI, paragraph C, page 54337), 2008 and
2009 (section VI, paragraph C, page 54), and 2010 (section VI, paragraph C, page 33)
4
  24 CFR 570.900(a)(1)
5
  We contacted the 21 grantees with projects that did not start by email or telephone, plus in earlier work, we
performed onsite visits with another 7 grantees with active grants.
                                                         5
    HUD Did Not Identify and
    Terminate in a Timely Manner
    Projects That Grantees Never
    Started

                 HUD did not act in a timely manner on the warning signs that projects were not
                 progressing or on grantee requests to terminate projects. This condition caused
                 HUD to delay identifying projects in trouble. It also delayed de-obligating and
                 returning to the Treasury about $22.4 million in Brownfield grants for 20 of the
                 21 grants that did not start. HUD should also verify that the three grants
                 identified in the subsection titled Some Active Projects Were Not Progressing
                 are not going to start and return another $4.29 million in Brownfield funding to
                 the Treasury.

                 HUD Did Not Act on Missed Performance Milestones
                 Our review of the 21 grants that did not start from the 73 grants awarded from
                 2002 through 2006 showed that HUD had not acted on missed performance
                 milestones indicating that the projects were in trouble. The notices of funding
                 availability required grantees to meet application and approval deadlines for
                 Section 108 loan guarantees as well as their performance milestones for project
                 financial and construction activities. The notices warned that HUD could
                 deobligate funding if grantees did not submit the Section 108 loan guarantee
                 application within specified timeframes or did not meet performance milestones. 6

                 Thirteen of the twenty-one grantees did not meet the Section 108 loan guarantee
                 requirement, thereby ensuring that their projects would not start. One grantee told
                 us that it did not apply for the Section 108 loan because HUD could deduct
                 defaulted loan amounts from future CDBG funding.

                 HUD did not act on grantees that missed financial and construction performance
                 milestones. Since law established the grant expiration dates, HUD could have
                 used the performance milestones to determine whether the grantees had time to
                 complete their projects. HUD waited until the grant’s expiration date to
                 deobligate funds for 20 of the 21 grants, an average delay of 33 months from the
                 last date that the project could have started in order to be completed before the
                 grant expired. We also noted that HUD only partially deobligated the Brownfield
                 funds for a Sacramento, CA, grant, leaving $872,630 of the $2 million grant
                 needing to be deobligated.




6
  Notices of funding availability for 2002 (section IV, paragraph (A), page 14142), 2003 (section IV, paragraph (F),
page 21429), 2004 (section VI, paragraph B.1.b, page 27346), 2005 (section VI, paragraph B.1.b, page 13964), 2006
(section VI, paragraph B.1.b, page 11883), 2007 (section VI, paragraph B.1.b, page 54337), 2008 and 2009 (section
VI, paragraph B.1.b, page 52), and 2010 (section VI, paragraph B.1.b, page 32)
                                                         6
                 HUD Did Not Respond to Grantee Terminations in a Timely Manner
                 HUD did not always act in a timely manner on grantee requests that HUD
                 terminate their grants. The regulations allowed grantees to terminate for
                 convenience upon written notification to HUD setting forth the reasons and
                 effective date for the termination. 7 Because the grantees did not start the project
                 and expend funds, there was no need to perform closeout procedures. Therefore,
                 HUD should deobligate the unneeded funds shortly after termination. Of the
                 three grantees that notified HUD of project terminations, HUD deobligated the
                 $225,000 in Brownfield funding for one on the day of the notification but waited
                 about 4 years to deobligate funds for the other two. Whittier, CA, requested grant
                 termination on December 16, 2005, but HUD did not deobligate its funds until
                 September 30, 2009, and Cocoa, FL, requested grant termination on May 31,
                 2007, but HUD did not deobligate its funds until September 30, 2011.

                 HUD did not terminate projects that did not start because it did not see a benefit to
                 de-obligating funds before grant expiration. Staff members told us that since they
                 could not reaward the funds, they did not cancel a Brownfield grant due to lack of
                 progress. Starting with the 2004 awards, the notices of funding availability
                 required HUD to deobligate and return unneeded funding to the Treasury. 8
                 Instead, HUD kept 20 of the 21 grants active when there was no longer a need for
                 $22.4 million in Brownfield funds.

                 Some Active Projects Were Not Progressing
                 We reviewed 13 of the 24 active grants awarded between 2007 through 2011 with
                 no grant expenditure activity. Through contacting the grantees and researching
                 documentation, we identified one project that the grantee wanted to terminate and
                 two that showed a lack of planned progress or missed milestones, indicating that
                 the grantees could not complete them as approved.

                 •   Bremerton, WA’s Boardwalk and Evergreen Expansion Project for which
                     HUD awarded a $1.75 million Brownfield grant and made available up to $2.8
                     million in Section 108 loan guarantees was not going to proceed. The city had
                     planned to remediate a contaminated site and develop it into a waterfront park.
                     The project manager said that the city did not move forward and was
                     canceling this project.

                 •   Burlington, VT’s mayor canceled the HUD-approved Moran Center Project,
                     and in our opinion, the city does not have time to complete an alternative
                     project. The project, funded with $1.04 million in Brownfield funds and up to
                     $2.08 million in Section 108 loan guarantees, was to have converted a coal-
                     fired generating plant into a children’s museum, sailing center, and ice

7
 24 CFR 85.44(b)
8
 Notices of funding availability for 2004 (section VI, paragraph B.1.c, page 27346), 2005 (section VI, paragraph
B.1.c, page 13964), 2006 (section VI, paragraph B.1.c, page 11883), 2007 (section VI, paragraph B.1.c, page
54337), 2008 and 2009 (section VI, paragraph B.1.c, pages 52 and 53), and 2010 (section VI, paragraph B.1.c, page
33)
                                                        7
                 climbing adventure. The mayor canceled the planned project in July 2012
                 because he wanted alternative development proposals in which the city would
                 not serve as the developer and private investment would be more involved.
                 The city received more than 40 proposals in April 2013 and was identifying
                 the finalists. It planned to place the finalists on the annual Town Hall Meeting
                 Day ballot for citizen voting in March 2014. HUD approved the city to use
                 the Brownfield funds and the Section 108 loan guarantees for architect and
                 engineering services and construction. The city estimated that these activities
                 would take 27 months, or until June 2016, if it started immediately after the
                 election. However, we do not believe that the city would have time to obtain
                 HUD’s approval and construct whatever project the citizens select in March
                 2014 before the September 30, 2014, statutory Brownfield grant expiration
                 deadline.

             •   Santa Rosa, CA’s Cannery Project had not progressed. The city planned to
                 fund the commercial component of this project with a $1.5 million Brownfield
                 grant and up to $5.6 million in Section 108 loan guarantees. Although HUD
                 extended the Section 108 loan application deadline until September 2013 to
                 give the city more time to submit its Section 108 application, the planned
                 health club that was to provide the 232 jobs to achieve the national objective
                 withdrew from the project and the city did not have a replacement business.
                 The mayor opposed and the city council voted to cancel the residential
                 component, which was to have built low-income senior housing on top of the
                 health club building. Further, the developer was in a legal dispute with the
                 State of California because the State had reclaimed more than $4 million in
                 redevelopment funds that the city needed for the residential component.

Conclusion

             HUD did not fully implement performance reporting and progress monitoring
             procedures because its staff was uncertain about the requirements. It did not
             ensure that grantees submitted the required logic model reports or that field office
             staffs used the reports to assess progress and identify grantees for monitoring or
             technical assistance. In addition, it did not terminate in a timely manner
             Brownfield projects that did not start because it did not see a benefit to de-
             obligating funds before the statutory expiration. Grantees missed required
             milestones to apply for and obtain Section 108 loan guarantees and start planned
             performance activities, but HUD left the projects active until the grants expired.
             By not fully using the logic model reports and acting on warning signs that
             projects were not progressing, HUD lost an opportunity to better ensure that the
             21 grantees created or retained 6,577 planned jobs and helped to redevelop
             contaminated sites across the country. HUD should strengthen its Brownfield
             monitoring so that it can better identify projects that are not progressing and target
             technical assistance when needed. HUD should confirm that Bremerton wants to
             cancel its project and that the other cities cannot complete their planned projects

                                               8
                 before their statutory deadlines. It should then deobligate and return to the
                 Treasury $5.16 million in Brownfield funds. 9

    Recommendations

                 We recommend that the Deputy Assistant Secretary for Grant Programs

                 1A.      Require grantees to comply with the logic model reporting requirements
                          contained in the notices of funding availability or submit an alternative
                          performance measuring report similar to the logic model report.

                 1B.      Issue a directive to collect the annual logic model reports or the alternative
                          performance measuring report, and forward them to the responsible HUD
                          field office for review and inclusion in the field offices’ annual grantee risk
                          analyses.

                 1C.      Issue a directive to deobligate and return funds to the Treasury in a timely
                          manner when projects do not start or it becomes obvious that projects will
                          not start due to missed milestones or grantee termination requests.

                 1D.      Deobligate the remaining $872,630 in Brownfield funds for the
                          Sacramento grant.

                 1E.      Confirm that the grantees for the three active grants in the report are not
                          going to start their projects, then deobligate and return to the Treasury the
                          $4.29 million in Brownfield funds.




9
 The $5.16 million is for the Bremerton, Burlington, and Santa Rosa grants ($1,750,000 + $1,040,000 +
$1,500,000) totaling $4.29 million plus the $872,630 that was not fully deobligated when the Sacramento grant
expired.
                                                        9
Finding 2: The Round II Empowerment Zone Performance
Measurement System Was Not Reliable
HUD’s Round II Empowerment Zone Performance Measurement System (PERMS) contained
unsupported and inaccurate program results. Grantees generally could not support economic
development results and some expense eligibility, and one inaccurately reported a program
achievement. These deficiencies occurred due to misreporting by grantees and went undetected
partly because it was impractical for HUD to verify all of the data grantees entered into the
system and partly due to a deficiency in HUD’s risk-based selection process for grantee
monitoring. As a result, for the three grantees we reviewed, HUD could not rely on PERMS
information for determining the effectiveness of the program, and grantees could not support at
least $2.2 million in expenses.



     Reported Results Were Not
     Accurate

                 We reviewed the reliability of data submitted to HUD for 3 of the 15
                 Empowerment Zone grantees and found that none could support economic
                 development results or expense eligibility and one inaccurately reported a
                 program achievement.

                 HUD required each Empowerment Zone grantee to develop a strategic plan
                 describing overall goals along with supporting implementation plans with more
                 specific goals, sources and uses of funding, milestones toward goal achievement,
                 and economic development results. 10 The regulations required that these
                 implementation plans meet an economic development standard, such as
                 employment training and assistance or business development assistance. 11 HUD
                 also required grantees to submit an annual performance report so that it could
                 determine grantees’ continuing eligibility for the Empowerment Zone program.
                 HUD’s Office of Community Renewal developed PERMS, an Internet-based
                 performance measurement system, for grantees to self-report results that HUD
                 could use in evaluating program performance. 12 As support for their PERMS
                 reporting, HUD required that grantees have records identifying the use of funds,
                 procedures for preparing necessary reports, and accounting records supported by
                 source documentation. 13




10
   24 CFR 598.615(a)
11
   24 CFR 598.615(a)
12
   HUD’s “Introduction to the RC/EZ Initiative,” page 3
13
   24 CFR 85.20a(1), b(2), and b(6)
                                                          10
                   Grantees Could Not Support Economic Development Results
                   We compared the number of jobs created or retained, the persons trained, and the
                   businesses assisted according to grantee reporting in PERMS to the grantee’s
                   supporting records. We looked at three implementation plans for Knoxville, TN,
                   two for Columbia-Sumter County, SC, and five for Miami-Dade County, FL. The
                   grantees generally lacked adequate support for what they had reported to HUD
                   through PERMS. They provided spreadsheets that lacked supporting source
                   documents, comingled payroll records, and issued a closeout report that
                   contradicted reported results. Appendix C shows the results for all of the
                   implementation plans reviewed.

                   Some Grantees Could Not Support Expense Eligibility
                   Two grantees could not provide support showing that some of their expenses were
                   eligible. Miami-Dade could not show how it spent about $1.9 million, and
                   Columbia-Sumter County lacked support for about $371,000. Regulations
                   required grantees to maintain records adequately identifying the use of funds. 14

                   Miami-Dade had a $1.3 million implementation plan for providing training and
                   employment opportunities that would result in placing Empowerment Zone
                   residents into jobs. The description in the application and the approving board
                   resolution stated that the funds were for job training and placement, but the
                   project budget and the closeout report showed that Miami-Dade used the funds for
                   land acquisition and building renovation. Miami-Dade could not explain how it
                   used the $1.3 million or an additional $580,622 that it spent under an
                   implementation plan for assisting businesses by providing access to capital.

                   Columbia-Sumter County could not support $371,216 in expenditures for an
                   implementation plan for workforce development. Although HUD had monitored
                   Columbia-Sumter County and approved the draw requests, the grantee was unable
                   to provide support for the expenditures. Some of the required supporting
                   documentation was commingled with other implementation plans, and Columbia-
                   Sumter County had purged some of the required documents.

                   One Grantee Misreported a Project
                   Miami-Dade inaccurately reported in PERMS that it had completed the $3 million
                   Carrie Meek Poinciana Industrial Center under an implementation plan for
                   assisting businesses. However, a representative of Miami-Dade told us that a
                   subrecipient had misreported this and some other information and that Miami-
                   Dade was in the process of making corrections. Following our inquiry, Miami-
                   Dade corrected the report to show that the Industrial Center was not complete and
                   that it had deobligated the $3 million in Section 108 loan funding. Of the five
                   implementation plans reviewed for Miami-Dade, most of the deficiencies were
                   with the three administered by its subrecipient. It appeared that Miami-Dade had


14
     24 CFR 85.20(b)(2)
                                                  11
                  improved program administration after terminating its agreement with the
                  subrecipient in 2007.

     Monitoring Was Sometimes
     Inadequate

                  HUD’s monitoring of the individual grantees varied. The Empowerment Zone
                  regulations did not specify the frequency of comprehensive monitoring. The
                  regulations stated that HUD would review the performance of an Empowerment
                  Zone grantee through its regular evaluation process, through onsite monitoring as
                  warranted by program needs, and by other appropriate means. 15 Thus, HUD field
                  offices used risk-based guidance in HUD’s monitoring handbook and instructions
                  in annual notices for selecting grantees for monitoring.

                  Between 2002 and 2008, HUD monitored Knoxville and Miami-Dade once but
                  monitored Columbia-Sumter County five times. Even when it selected a grantee
                  for monitoring through the risk-based process, HUD’s limited resources made it
                  impractical to review the many implementation plans employed by some grantees.

                  Except for one in Knoxville, the implementation plans selected for review had not
                  been subject to HUD monitoring reviews. The HUD monitor for Knoxville had
                  missed the grantee’s lack of support for its jobs information. However, based on
                  our review of nine HUD monitoring reports, we determined that HUD generally
                  verified economic development results and expense eligibility. Since the
                  deficiencies found generally occurred in implementation plans that HUD had not
                  monitored, we concluded that there was not a systemic problem with HUD’s
                  monitoring procedures. However, we also concluded that the risk-based
                  monitoring selection process employed by the field offices contributed to the
                  deterioration of at least one grantee’s program without HUD’s knowledge.

                  Procedures for Identifying High-Risk Grantees Were Inadequate
                  HUD’s procedures for identifying high-risk Empowerment Zone grantees for
                  monitoring were not adequate to allow staff a reasonable opportunity to detect
                  misstatements in performance information or violations of laws and regulations
                  on a timely basis. This condition occurred because HUD failed to consider the
                  significant added risk posed to program performance and compliance when a
                  grantee used a subrecipient to carry out its program.

                  From 1999 through 2007, Miami-Dade contracted with a nonprofit subrecipient,
                  the Miami-Dade Empowerment Trust, to administer its grant. During that 8-year
                  period, HUD selected the grantee for monitoring only once. That deficiency
                  occurred because HUD’s annual risk assessment focused only on the grantee; it
                  ignored the subrecipient.


15
     24 CFR 598.620(a)
                                                  12
             HUD monitored Miami-Dade during 2002 and found problems with management
             controls, unsupported expenses, ineligible expenses, and procurement procedures.
             The Empowerment Trust provided written assurance to HUD that it had corrected
             the problems, and HUD did not perform a follow-up review.

             Beginning in June 2007, a Miami newspaper published a series of articles that
             were extremely critical of Miami-Dade’s and the Empowerment Trust’s program
             administration and HUD’s oversight. Miami-Dade then released an audit report
             in September 2007, covering October 2002 through June 2007, that repeated the
             same problems found by HUD’s 2002 monitoring plus many more. Serious
             deficiencies included a failure to obtain required audits, a lack of many needed
             internal controls, a lack of support for disbursements, and others.

             During 2009, HUD followed up Miami-Dade’s audit with two additional
             monitoring reviews, the first since 2002. Those reviews identified unsupported
             expenses of $3.7 million and many other previously unidentified deficiencies and
             resulted in HUD’s suspending Miami-Dade’s Empowerment Zone designation.

             HUD Made Significant Improvements to Its Risk-Based Selection Process
             In October 2007, HUD significantly changed the risk assessment procedures
             related to the Empowerment Zone program. A new Office of Community
             Planning and Development (CPD) notice, CPD-07-07, contained procedures
             designed to increase the chance that HUD would select Empowerment Zone
             grantees for monitoring. The notice incorporated many of the changes
             recommended by HUD’s Office of Community Renewal. These changes
             specifically addressed subrecipient involvement in Empowerment Zone grants
             and many of the problems found with the Miami-Dade Empowerment Zone.
             They appear to have been effective, because HUD identified Miami-Dade as high
             risk for both 2008 and 2009.

Conclusion

             HUD could not rely on PERMS data submitted by the three grantees we reviewed
             for evaluating the program and reporting to Congress, because the information
             was often unsupported and inaccurate. Grantees generally could not support their
             reported jobs, job training, and businesses assisted with required source
             documents. In addition, grantees could not support more than $2.2 million in
             expenses including a $1.3 million misreported achievement.

             Our review of past monitoring reports showed that HUD generally verified
             performance and expense information when it monitored grantees, but it was not
             practical to monitor all of the implementation plans employed by grantees. In
             addition, HUD had corrected a weakness in the risk-based process it used for
             selecting grantees for monitoring. Because of this condition, we concluded that
             these results did not indicate a systemic weakness in HUD’s monitoring
             procedures.
                                                13
Recommendations

          We recommend that the Deputy Assistant Secretary for Economic Development
          require the Office of Community Renewal to

          2A.     Require Knoxville, Columbia-Sumter County, and Miami-Dade to provide
                  support for their unsupported PERMS information.

          2B.     Require Columbia-Sumter County and Miami-Dade to support the
                  eligibility of $2,251,838 in expenses or repay the Treasury using non-
                  Federal funds.




                                           14
                        SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed

 •    The Government Performance and Results Act of 1997
 •    Prior Office of Inspector General (OIG) audit reports
 •    HUD Handbooks 1830.2 and 1840.1
 •    Community Planning and Development Monitoring Handbook 6509.2, REV-6
 •    Brownfield grants-Section 108 loan guarantees
            o 24 CFR Parts 85 and 570
            o Brownfield studies
            o The notices of funding availability and related HUD documents
            o Applications and grant agreements
     • Round II Empowerment Zones
            o 24 CFR Part 598
            o Strategic plans and implementation

We interviewed HUD staff within the offices of the Deputy Assistant Secretaries for Economic
Development and Grants Programs at headquarters and in field offices.

For the survey, we performed site visits to five HUD field offices in Columbia, SC; Greensboro,
NC; Jacksonville, FL; Knoxville, TN; and Miami, FL. We also performed site visits and tested
the accuracy of grantee-reported performance results for three Round II Empowerment Zone
grants (Columbia-Sumter County, SC; Knoxville, TN; and Miami-Dade, FL) and seven
Brownfield grants (Concord, NC; Fort Pierce, FL; Memphis, TN (2); Palm Beach County, FL
(2); and Rocky Mount, NC).

We selected the 3 out of the 15 nationwide Round II Empowerment Zone grants based solely on
their location within HUD’s Region IV; therefore, we did not project our results to the other 12
in the universe. We selected the Brownfield grants based on an attribute sample with a 90
percent confidence level, a 50 percent anticipated error rate, a 20 percent desired range, and a
universe of 190 grants awarded from 1998 through 2009. This process gave us a sample size of
52. We selected the seven grants located within Region IV, in order, from the attribute sample,
substituting any grants that did not start or were completed with the next grant, in order.

We reviewed the 21 grants in which the grantees did not start the planned projects from the
universe of 73 Brownfield grants awarded from 2002 through 2006.

We reviewed the 17 grants in which grantees had not or only partially used their HUD funding
from the universe of 24 Brownfield grants awarded from 2007 through 2011.

We tested the reliability of Round II Empowerment Zone grantee-reported performance in
PERMS and Brownfield grantee-reported performance in the consolidated annual performance
and evaluation reports. We compared grantee reported accomplishments to their supporting

                                               15
source documents. We found that the jobs and expenses reported in PERMS were not reliable,
but the data in the consolidated annual performance and evaluation reports was generally
reliable. We therefore developed Finding 2 on PERMS not being reliable for determining the
effectiveness of the Empowerment Zone program.

We calculated $5.16 million in funds put to better use under the Inspector General Act of 1978,
as amended, for the de-obligation of funds from programs. Confirming that Bremerton, WA,
wants to cancel its project and that Burlington, VT, and Santa Rosa, CA, cannot complete their
planned projects before their statutory deadlines should allow HUD to deobligate $4.29 million
in Brownfield funds ($1,750,000 + $1,040,000 + $1,500,000) that will no longer be needed, plus
$872,630 remaining to be deobligated for an expired Sacramento grant.

We performed our onsite audit work at HUD headquarters, field offices, and grantee locations
from June through December 2012. From December 2012 through March 2013, we performed
work via correspondence with the 21 grantees that did not start or complete the planned projects
and the 17 grantees that had not or only partially used their HUD funding. For the 17 grantees,
we also contacted the servicing HUD field offices.

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




                                               16
                              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:

               •    Effectiveness of operations
               •    Controls over program operations
               •    Controls over compliance with laws and regulations

               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 Deficiency

               Based on our review, we believe that the following is a significant deficiency:

               •      HUD did not implement procedures to ensure Brownfield Economic
                      Development Initiative effectiveness.




                                                 17
                                    APPENDIXES

Appendix A

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


              Recommendation                              Funds to be put to
                      number         Unsupported 1/            better use 2/
                   1D                                             $872,630
                   1E                                           $4,290,000
                   2B                    $2,251,838



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 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.




                                             18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




Comment 3




                         19
Comment 4




Comment 5

Comment 6




Comment 7




            20
Comment 8




            21
Comment 9




            22
23
                         OIG Evaluation of Auditee Comments

Comment 1   We clarified the responsibilities of the Offices of Economic Development and the
            Office of Block Grant Assistance in the Background section of this report.

Comment 2   We changed the wording to show that instead of $53 million, HUD delayed
            returning the $22.4 million in Brownfield funding to the Treasury. Following
            discussion with HUD staff, we deleted the $30.4 million for Section 108 loan
            guarantees because the budget authority required for the loan guarantees was only
            $184,575.

Comment 3   We revised the report to more clearly show that the 2002 and 2003 notices of
            funding availability required grantees to provide time schedules and measureable
            benchmarks for HUD to use in monitoring progress, but that it wasn't until the
            2004 notice of funding availability that grantees were required to use and submit
            the logic model report.

Comment 4   We agree that only one logic model report might not influence a field office to
            monitor a grant. However, HUD developed a report to measure grantee progress
            but then did not fully use it. Logic model reports, and the performance schedules
            required since 2002, provided a means to show where a project stood compared to
            planned performance, but more importantly it could identify projects needing
            HUD's technical assistance. To clarify the effect of the logic model reporting, we
            showed its effect on the rate of projects that did not start instead of on the
            Brownfield program as a whole.

            We agree that developing environmentally contaminated sites is risky and believe
            that is why it is critical to use performance measuring tools to identify projects
            that are not progressing so that HUD can assist the grantees or recapture the
            funds.

Comment 5   We removed the paragraph on the Stockton project after discussing the project
            activities with HUD staff and reviewing legal opinions from the Office of General
            Counsel.

Comment 6   We deleted references to closeout procedures and the footnote reference to 24
            CFR 85.50(a) & (b). We determined these were not applicable due to the grantees
            not starting the projects nor expending funds.

            However, we do not agree that HUD should have delayed de-obligating funds in
            the cases we cited. The notices of funding availability state that HUD may
            approve scope changes under certain circumstances up to the point when the
            appropriated funds are no longer available for obligation. After that, HUD cannot
            approve changes to the scope or need for the original award, but must deobligate
            and return to the Treasury the unused Brownfield funds. When a grantee does not
            start an approved project, it changes the scope and the need for the original award.
                                             24
            HUD must therefore deobligate and return the funds. Delaying the return of the
            Brownfield funds was not supportable when there was no longer a bona fide need.

Comment 7   We appreciate HUD initiating action on the three Brownfield projects that have
            yet to start. HUD should continue working with these grantees and monitoring
            their progress to help them complete their projects, or terminate the grants if they
            cannot meet performance time frames.

Comment 8   Finding 1 Recommendations:

            1A. Based on the written comments and our discussion during the exit conference,
            we deleted this recommendation.

            1B. We modified the recommendation to allow HUD the option to require an
            alternative performance measurement report that provides information similar to
            the logic model report for measuring project progress.

            1C. We agree with HUD's comments. We modified this recommendation in the
            same manner as 1B.

            1D. We agree that the recommended directive should require terminating a project
            based on a grantee’s circumstances.

            1E. We support HUD's planned action to deobligate the remaining $872,630 for
            the Sacramento Brownfield grant as we recommended.

            1F. We agree with HUD's comment stating that there is nothing to decommit
            since the $10.48 million in Section 108 loans for the projects never occurred. We
            revised the recommendation to remove the reference to the loan guarantees.

            Note: These recommendation numbers changed for the final report due to our
            removal of Recommendation 1A.

Comment 9   We agree with HUD’s comment and changed the report wording to show that our
            concern with the reliability of PERMS pertained to the data from the three
            grantees we reviewed, not all PERMS data.




                                             25
Appendix C

    ROUND II EMPOWERMENT ZONE IMPLEMENTATION
                     PLANS

                 Implementation plan
 Empowerment
                                           PERMS results              Grantee records            Analyses
 Zone
                 Empowerment Zone
                 funding – total funding
                 G3.C1.P1                  Employees trained: 8,976   Employees trained: 9,010   1. Spreadsheet of employees trained
                                                                                                 and jobs created was partially
                                           Jobs: 4,286                Jobs: 3,152
 Knoxville                                                                                       completed.
                 $2,850,339 – $5,218,704   Businesses assisted: 1     Businesses assisted: 1     2. Grantee did not have supporting
                                                                                                 source documents.
                 G3.C2.P10                                                                       1. Spreadsheet of jobs created did not
                                                                                                 match PERMS.
                                           Jobs: 79                   Jobs: 71
                                                                                                 2. Grantee did not have supporting
                 $1,750,000 – $6,157,744                                                         source documents.
                 G3.C2.P11                 Jobs: 723                  Jobs: 765                  1. Grantee did not have supporting
                                           Businesses assisted: 189   Businesses assisted: 149   source documents.
                 $2,395,854 –                                                                    2. Grantee counted the number of
                 $15,271,160                                                                     buildings instead of businesses.

                 G3.C1.P2                                                                        1. Spreadsheet comingled payroll
                                                                                                 information for several implementation
 Columbia-
                                           Jobs: 405                  Jobs: 0                    plans.
 Sumter County
                                                                                                 2. Grantee did not have supporting
                 $371,216 – $371,216                                                             source documents.

                 G3.C3.P20                 Jobs: 40                   Jobs: 0                    1. Spreadsheet did not show residents
                                                                                                 employed at least 90 days.
                                           Businesses assisted: 1     Businesses assisted: 1
                                                                                                 2. Grantee did not have supporting
                 $310,000 – $310,000                                                             source documents.
                                                                                                 1. Payroll records for several
                 G3.C1.P4                                                                        implementation plans were comingled.
 Miami-Dade                                                                                      2. Closeout report showed 581 job
                                           Jobs: 800                  Jobs: 0
 County                                                                                          placements but was unclear on whether
                 $1,300,000 – $1,500,000                                                         funds were used for an approved
                                                                                                 project.
                 G3.C2.P46
                                                                                                 Grantee did not have supporting source
                                           Jobs: 10                   Jobs: 0
                                                                                                 documents.
                 $376,000 – $4,567,150
                 G3.C2.P61                 Jobs: 9                    Jobs: 31
                                                                                                 Difference appeared to be 22 retained
                                           Businesses assisted: 1     Businesses assisted: 1     jobs not included in PERMS.
                 $327,778 – $327,778
                 G3.C2.P69                 Jobs: 8                    Jobs: 7                     Difference was not significant and
                                           Businesses assisted: 1     Businesses assisted: 1     grantee had supporting source
                 $273,685 – $273,685                                                             documents.
                 G3.C3.P44
                                                                                                 Grantee did not have supporting source
                                           Jobs: 20                   Jobs: 9
                                                                                                 documents.
                 $590,000 – $17,159,000




                                                          26