oversight

The Municipality of Arecibo, PR, Did Not Always Ensure Compliance With Community Development Block Grant Program Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-03-22.

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

 OFFICE OF AUDIT
 REGION 4
 ATLANTA, GA




               The Municipality of Arecibo, PR

    Community Development Block Grant Program




2013-AT-1003                                     MARCH 22, 2013
                                                        Issue Date: March 22, 2013

                                                        Audit Report Number: 2013-AT-1003




TO:            Maria Ortiz, Director, Community Planning and Development, San Juan Field
                Office, 4ND

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

SUBJECT:       The Municipality of Arecibo, PR, Did Not Always Ensure Compliance With
                Community Development Block Grant Program Requirements

    Enclosed is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final results of our review of the Municipality of Arecibo’s Community
Development Block Grant Program.

    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: March 22, 2013
                                          The Municipality of Arecibo, PR, Did Not Always Ensure
                                          Compliance With Community Development Block Grant
                                          Program Requirements



Highlights
Audit Report 2013-AT-1003


 What We Audited and Why                   What We Found

As part of the U.S. Department of         The Municipality’s financial management system did
Housing and Urban Development             not properly identify the source and application of
(HUD), Office of Inspector General’s      more than $1.8 million in Block Grant funds and did
(OIG) annual plan and based on the        not support the eligibility of more than $400,000. As a
large amount of funds approved, we        result, HUD lacked assurance that funds were
audited the Municipality of Arecibo’s     adequately accounted for, safeguarded, and used for
Community Development Block Grant         requested and eligible purposes.
program. Our main objective was to
determine whether the Municipality        The Municipality charged the Block Grant program
complied with HUD regulations,            more than $1.6 million as activity costs associated with
procedures, and instructions related to   wages without supporting the basis and reasonableness
the administration of its Block Grant     of funds charged. Therefore, HUD had no assurance
program.                                  that funds were used solely for eligible purposes and
                                          that Block Grant-funded activities met program
                                          objectives.
 What We Recommend
                                          The Municipality did not support more than $1.2
We recommend that HUD (1) determine million spent in its housing rehabilitation and road
the eligibility of more than $4.6 million reconstruction activities and did not demonstrate
disbursed for unsupported Block Grant compliance with the Block Grant national objective.
program costs, (2) require the            Consequently, HUD lacked assurance that Federal
repayment of more than $500,000 in        funds drawn for housing rehabilitation and street
ineligible expenditures, (3) require the improvement efforts met program objectives and that
Municipality to develop a financial       Block Grant funds were used solely for authorized
management system in accordance with purposes.
HUD requirements and provide related
training to its staff, (4) require the    The Municipality generally complied with
Municipality to charge only eligible      requirements for planning, soliciting, and awarding
program delivery costs to the Block       contracts and purchase orders. However, it failed to
Grant program, and (5) require the        perform a required cost analysis in one contract and
Municipality to improve its housing       did not always maintain adequate documentation of all
rehabilitation program to ensure that     of its procurement history. As a result, it did not
Block Grant funds are used in             support the reasonableness of more than $124,000
accordance with HUD regulations.          disbursed in an awarded construction contract.
                          TABLE OF CONTENTS

Background and Objective                                                       3

Results of Audit
      Finding 1: The Municipality’s Financial Management System Did Not Comply  4
                 With HUD Requirements
      Finding 2: The Municipality Did Not Support Certain Activity Costs        7
      Finding 3: The Municipality Did Not Support Its Reported Housing         11
                 Rehabilitation Accomplishments and National Objectives
      Finding 4: The Municipality’s Procurement Procedures Had Weaknesses      17

Scope and Methodology                                                         21

Internal Controls                                                             23

Appendixes
A.    Schedule of Questioned Costs                                            25
B.    Auditee Comments and OIG’s Evaluation                                   26




                                         2
                         BACKGROUND AND OBJECTIVE

The Community Development Block Grant program is funded by the U.S. Department of
Housing and Urban Development (HUD). It provides annual grants on a formula basis to
entitled cities, urban counties, and States to develop viable urban communities by providing
decent housing and a suitable living environment and by expanding economic opportunities,
principally for low- and moderate-income persons.

The Municipality of Arecibo is an entitlement recipient administering more than $13.69 million
in Community Development Block Grant funds approved by HUD during the last 5 years ending
June 30, 2012. HUD’s Integrated Disbursement and Information System 1 reflected Block Grant
expenditures exceeding $4.8 million during fiscal years ending June 30, 2011, and 2012, for the
following activities:

        Block Grant activity                     Fiscal year 2011                Fiscal year 2012
Public facilities and improvements                    $786,679                     $1,012,907
Housing rehabilitation                                 749,720                        545,081
Planning and administration                            522,454                        454,582
Public services                                        406,353                        337,167
Total                                               $2,465,206                     $2,349,737

The Municipality’s Development Department is responsible for administering the Block Grant
program. Its books and records are maintained at José de Diego Street, Arecibo, PR. We
audited the Municipality’s Block Grant program as part of the HUD Office of Inspector
General’s (OIG) strategic plan. The Municipality was selected for review based on the amount
of HUD funding provided.

The objective of the audit was to determine whether the Municipality complied with HUD
regulations, procedures, and instructions related to the administration of the Block Grant
program. Specifically, we evaluated whether (1) its financial management system complied with
HUD requirements, (2) it disbursed Block Grant funds for allowable and supported costs, (3)
funded activities met national objectives, and (4) it followed HUD’s and its own procurement
requirements.




1
  HUD’s Integrated Disbursement and Information System is the drawdown and reporting system for the four
community planning and development formula grant programs. The system allows grantees to request their grant
funding from HUD and report on what is accomplished with these funds.


                                                      3
                                 RESULTS OF AUDIT

Finding 1: The Municipality’s Financial Management System Did Not
Comply With HUD Requirements
The Municipality’s financial management system did not properly identify the source and
application of more than $1.8 million in Block Grant funds and did not support the eligibility of
more than $422,000 in program charges. These deficiencies occurred because of a lack of
training of the accounting staff and poor oversight of financial management processes. As a
result, HUD lacked assurance that all funds were adequately accounted for, safeguarded, and
used for requested and eligible purposes and in accordance with the Block Grant program
requirements.


 Inadequate Accounting Records


               The Municipality’s accounting records did not reflect complete and accurate
               financial information on Block Grant program activities and did not permit the
               adequate tracing of program receipts and expenditures. Regulations at 24 CFR
               (Code of Federal Regulations) 85.20(b) require grantees to maintain financial
               records that are accurate, current, and complete and that adequately identify the
               source and application of funds provided for assisted activities. However, the
               Municipality’s accounting records did not comply with HUD requirements and
               were not adequate for the preparation of reports. For example, the Municipality
               did not maintain a general ledger for the Block Grant program. The records
               maintained did not reflect disbursement by grant, activity, and funding type and
               did not properly account for capital assets. We also found several instances in
               which the Municipality charged expenditures to the incorrect activity.

               In addition, the Municipality’s accounting records did not reflect the disposition
               of more than $1.8 million for the Block Grant program. An analysis of amounts
               posted in the Municipality’s check register and amounts drawn from HUD’s
               system reflected that the Municipality drew down more Federal funds than the
               amount disbursed for payroll expenses during the period July 1, 2009, through
               December 31, 2011. As of December 2011, HUD’s system reflected that the
               Municipality had withdrawn more than $5.3 million in Federal funds, but
               Municipality records showed just over $3.5 million in disbursements. The
               difference of more than $1.8 million, according to the Municipality, represented
               electronic transfers made between bank accounts to cover payroll expenses;
               however, these costs were not reflected in the Block Grant program accounting
               records. A Municipality official stated that the information was kept by the
               Municipality’s Finance Office; however, it was not readily available for our
               review.


                                                4
             The Municipality did not maintain a financial management system that permitted
             the tracing of funds to a level which ensured that such funds had not been used in
             violation of the restrictions and prohibitions of applicable statutes. As a result,
             HUD lacked assurance that funds were adequately accounted for, safeguarded,
             and used for eligible purposes. A Municipality official informed us that the
             Municipality was implementing a new financial management system that would
             address the shortcomings of the system.

Unsupported Program
Disbursements

             The Municipality charged the Block Grant program the full lease cost of its office
             space, although part of the space was occupied by a division that performed
             general government activities not associated with the Block Grant program. The
             Municipality did not prorate the lease cost; therefore, $385,164 in rent charges
             between July 1, 2009, and June 30, 2012, was considered unsupported pending a
             HUD eligibility determination of the proper cost allocation. In addition, the
             Municipality did not provide documentation supporting the reasonableness,
             allowability, and allocability of $37,228 charged to the Block Grant program,
             associated with administrative and other activity-related expenses. Specifically, it
             did not provide disbursement vouchers or other support evidencing costs charged
             to the program. The administrative costs were charged mainly to professional
             consulting service-related expenses.

Lack of Training and
Inadequate Oversight of
Financial Management

              The Municipality had not provided sufficient financial management-related
              training to its accounting staff to ensure that Block Grant funds were adequately
              accounted for. According to accounting staff members, they had not received
              training for about 20 years. Municipality management also had not provided
              clear guidance on how to maintain an accounting system that provides timely and
              accurate accounting information on Block Grant program-related transactions.
              Therefore, due to the lack of training, proper guidance, and oversight, the
              Municipality’s accounting staff was not aware of all Federal requirements
              concerning financial management systems.

Conclusion

             The Municipality maintained a financial management system that (1) did not
             reflect the full history of all financial transactions, (2) did not properly identify the
             source and application of Block Grant funds, and (3) permitted program charges
             for unsupported costs. This condition occurred due to a lack of training of


                                                5
            accounting staff and poor oversight of financial management processes. As a
            result, HUD lacked assurance that funds were used only for requested and eligible
            purposes.

Recommendations

            We recommend that the Director of the San Juan Office of Community Planning
            and Development require the Municipality to

            1A.      Develop a financial management system in accordance with HUD
                     requirements.

            1B.      Submit supporting documentation showing the eligibility, reasonableness,
                     and allocability of $1,829,165 charged to the Block Grant program for
                     payroll expenses that were not properly accounted for in the
                     Municipality’s accounting records and for $422,393 2 in administrative
                     expenses and other activity-related costs that were not properly supported
                     or reimburse the program from non-federal funds.

            1C       Charge the Block Grant program only for the lease space directly used for
                     the administration and carrying out of program activities.

            1D       Provide financial management-related training to its accounting staff and
                     improve its oversight of the financial management system processes.




    2
     Amount includes $385,164 of rent charges between July 2009 and June 2012, and $37,228 charged to the
    Block Grant program, associated with administrative and other activity related expenses paid between July
    2009 and August 2011.


                                                   6
Finding 2: The Municipality Did Not Support Certain Activity Costs
The Municipality charged to the Block Grant program more than $1.6 million as activity costs
associated with wages without supporting the basis and reasonableness of the charges and how
these costs were directly related to carrying out the activities. These deficiencies occurred
because the Municipality disregarded HUD requirements. As a result, HUD lacked assurance
that costs charged to the Block Grant program were allowable, allocable, and reasonable.


 Unreasonable Activity Costs

                  Between July 13, 2007, and July 6, 2012, the Municipality charged an average of
                  48 percent, or $1.8 million, of the Block Grant funds awarded for carrying out
                  housing rehabilitation and public facility improvement activities as activity costs
                  for the wages of Municipality employees. These activities were mainly associated
                  with the repair and construction of roads, the improvement of recreational
                  facilities, and assistance to local citizens in the rehabilitation of their homes. In
                  six of the seven activities, the construction work was performed by private
                  contractors, but the Municipality also charged the wages of municipal employees
                  who did not perform any work related to the activity. For example, activity 1036
                  was charged about 69 percent in questionable payroll costs. Further, in activity
                  1128, the Municipality charged the Block Grant program more than $257,000 in
                  activity delivery costs when no street resurfacing efforts had taken place.

                                                                             Total Block Grant Amount of        Percentage of the
                                                                             funds drawn from     salaries    activity expenditures
                    IDIS* activity                                           HUD system as of charged as       charged as delivery
                       number                      Activity name                July 6, 2012   delivery costs          costs
                         922                    Street improvement              $709,561        $322,309                45
                         878         Basketball court improvement Bo. Obrero    $179,191          $36,685               20
                        1036                    Street improvement              $361,784        $252,553                69
                        1081                    Street improvement              $447,332        $241,922                54
                        1128                    Street improvement              $257,915        $257,905                100
                      Various 3               Housing rehabilitation          $1,853,913        $760,655                41
                         877            Basketball court improvement Bo.        $178,487          $22,994               13
                                                      Jaraelito
                                                        Total                 $3,988,183      $1,895,023                48
                  *HUD’s Integrated Disbursement and Information System

                  The Municipality, as explained below, charged ineligible and unsupported
                  program delivery costs to these activities.




       3
           Activities include 651, 874, 923, 1021, 1022, 1033, 1080, and 1130.



                                                                7
Ineligible Activity Delivery Cost


              Between August 5, 2008, and July 6, 2012, the Municipality charged more than
              $552,000 in program delivery costs to six Block Grant activities for the full wages
              and fringe benefits of 17 Municipality employees who did not perform duties or
              responsibilities directly related to carrying out such activities. These employees
              were assigned to other Block Grant-funded activities that were not related to the
              activity charged with the cost. Regulations at 24 CFR 570.206 allow the
              disbursements for eligible activity costs, including staff and overhead costs
              directly related to carrying out the activity. In addition, a cost is allocable to a
              particular cost objective if the goods or services involved are chargeable or
              assignable to such cost objective in accordance with the relative benefits received
              (2 CFR Part 225, appendix B, section C.3a). The Municipality did not ensure that
              costs charged to the Block Grant program were directly related to carrying out the
              chargeable activities and charged the cost of public service-related activities to
              other activities to avoid a 15 percent threshold expenditure limitation established
              by HUD under the Block Grant program. 4 Therefore, more than $552,000 in
              costs charged to these activities was considered ineligible.

Unsupported Activity Delivery
Costs

              Program delivery costs charged to the Block Grant program were not properly
              supported by source documents or incurred according to all of the applicable
              requirements. The Municipality charged more than $1 million to six Block Grant
              activities as program delivery costs between August 5, 2008, and July 6, 2012,
              without ensuring that costs were allocated in accordance with Federal
              requirements; therefore, these costs were questionable. The Municipality
              disbursed the funds for the salaries and fringe benefits of 15 employees, who
              either performed local government duties while also assigned to perform work for
              the Block Grant program or worked in multiple Block Grant program activities,
              without properly allocating the cost among the activities. Although it charged the
              Block Grant program the full payroll costs associated with these employees, it did
              not maintain documentation to support the basis of the allocation and the
              reasonableness of the costs as required by 2 CFR Part 225, appendix B, item
              8.h.(4). 5 Therefore, HUD lacked assurance of the reasonableness, allowability,

     4
       The Community Development Block Grant Guide, chapter 7.2, requires that the total amount of Block
     Grant funds obligated for public service activities must not exceed 15 percent of the annual grant allocation
     plus 15 percent of program income received during the prior year.
     5
       Regulations at 2 CFR Part 225, appendix B, item 8.h.(4), requires that when employees work on multiple
     activities or cost objectives, distribution of their salaries or wages be supported by personnel activity
     reports, an equivalent documentation, or other substitute system that has been approved by the cognizant
     Federal agency.


                                                      8
             and allocability of more than $1 million in payroll costs charged to the Block
             Grant program.

Disregard for Requirements

             The Municipality disregarded HUD requirements and instructions to ensure that it
             charged all of its program delivery costs appropriately. Municipality officials
             acknowledged that because of financial constraints and to avoid local budget
             shortfalls, the Municipality knowingly charged the salaries of employees who
             were working for the local government to activities funded with Federal funds.
             Officials also stated that the salaries of some employees working in the La Posada
             Homeless activity were charged to street improvement activities to avoid
             exceeding the 15 percent limit threshold established by HUD regulations for a
             public service activity.

Conclusion

             The Municipality improperly charged to the Block Grant program the salaries of
             employees who did not perform duties directly related to carrying out the funded
             activities or performed other functions not related to the Block Grant activity
             charged without adequately allocating the cost. It did so to subsidize local
             government activities and to avoid exceeding the public services (15 percent)
             threshold expenditure limitation established under the Block Grant program. As a
             result, HUD had no assurance that costs charged to the activities as program
             delivery costs were allowable and reasonable.

Recommendations

             We recommend that the Director of the San Juan Office of Community Planning
             and Development

             2A.    Require the Municipality to reimburse from non-federal funds $552,658 in
                    unallowable and unallocated costs associated with the disbursement of
                    salaries and fringe benefits of employees who did not perform duties
                    directly related to carrying out activities charged with the program
                    delivery costs.

             2B.    Require the Municipality to provide support showing the allocability and
                    eligibility of $1,077,577 spent on salaries and fringe benefits for
                    employees who performed local government duties and multiple federally
                    funded activities without properly allocating the costs directly related to
                    carrying out each activity. Any amounts determined ineligible must be
                    reimbursed to the Block Grant program from non-federal funds.


                                              9
2C.   Require the Municipality to ensure that only eligible program delivery
      costs are charged to the Block Grant program.

2D.   Require the Municipality to discontinue charging program delivery cost to
      activities that are not public services related activities in order to avoid the
      15 percent threshold expenditure limitation established under the Block
      Grant Program.




                                10
Finding 3: The Municipality Did Not Support Its Reported Housing
Rehabilitation Accomplishments and National Objectives
The Municipality did not support the reported accomplishments of its housing rehabilitation
efforts and did not demonstrate compliance with Block Grant national objectives of its street
improvement activities. These deficiencies occurred because the Municipality did not have in
place a tracking system for its housing efforts and was not aware of all HUD requirements. As a
result, HUD had no assurance that reported accomplishments were accurate and program
objectives were met.


 Unsupported Accomplishments


              The Municipality awarded to local citizens $882,909 in Block Grant funds for
              housing rehabilitation efforts between July 1, 2009, and June 30, 2011. During
              this period, it reported to HUD that it had completed the rehabilitation work for
              more than 215 dwelling units. However, Municipality management did not
              maintain adequate internal controls to track and support the accomplishment of its
              rehabilitation activities. As a result, HUD had no assurance that program
              objectives were met or that reported accomplishments were accurate.

              The Municipality reported in its 2009 annual performance report that a total of 97
              dwelling units had been rehabilitated. However, the Municipality’s records
              reflected that only two units had been completed. The Municipality’s housing
              rehabilitation accomplishments included in the 2010 annual performance report
              were also unsupported. The Municipality reported that 118 dwelling units were
              rehabilitated between July 2010 and June 2011, but its records reflected that only
              28 had been completed. Therefore, the Municipality reported to HUD inaccurate
              information, and HUD had no assurance that program objectives were met.

              The Municipality also did not properly monitor its housing rehabilitation efforts
              to ensure the timely completion of the rehabilitation work. Its housing
              rehabilitation guidelines established that the rehabilitation work must be
              completed within 120 days after construction materials are delivered to the
              program participants. The Municipality approved assistance to 299 participants
              between July 2009 and December 2011. However, it did not ensure that program
              guidelines were followed when the rehabilitation work was completed within the
              established timeframe (120 days) in only nine units. In 182 of the 299 approved
              cases (61 percent), the rehabilitation was completed between 406 and 855 days
              after the assistance was granted. As a result, the rehabilitation of these units was
              not completed in a timely manner.

              The Municipality did not have in place an adequate tracking system to show the
              total assistance provided to each participant, the status of the repair work, the
              dwelling units with due inspections, or the participants with undelivered

                                               11
materials. The Municipality would have to review each individual case file to
obtain or extract the above-mentioned data. Further, the housing rehabilitation
director informed us that between 30 and 40 percent of the materials purchased
were not used because participants did not complete the repair work. Therefore,
HUD had no assurance that Block Grant program objectives were met.

We identified other deficiencies related to the administration of the housing
rehabilitation activities.

Material going to waste - In May 2012, we visited 10 program participant
residences to determine whether repairs had been completed. Our visits identified
two participants that had received materials valued at $8,624 but had performed
no work. Some of the materials were on the property and were going to waste.




Materials going to waste                 Incomplete workmanship



Inspection process inadequate - The Municipality had not inspected 268 of the
299 cases approved for rehabilitation assistance. The Municipality’s housing
rehabilitation guidelines provided that assisted dwelling units would be inspected
to ensure the use of the materials provided to participants and the adequacy of
rehabilitation work. Once materials were delivered, the Municipality was to
conduct progress inspections every 60 days until the repair work was completed
and a final inspection was conducted. A Municipality official informed us that
there was a shortage of personnel to perform the required inspections in a timely
manner. The Municipality supported only $65,597 in disbursements associated
with 28 housing units that were found to have been completed during their field
inspections.

Missing work specifications - The Municipality did not prepare detailed work
write-ups or specifications of the rehabilitation work needed. The files contained
only a general statement from the Municipality’s inspector. The files did not
clearly demonstrate the type of repair needed to bring the unit up to program
standards. It contained a general description that did not clearly demonstrate the
scope of the rehabilitation needed. As a result, the files did not properly support
the needed repairs, and the completed work assisted with Block Grant funds could
not be determined.

                                 12
                  Preexisting housing quality standards deficiencies not addressed - The
                  Municipality did not follow its own policies and procedures when providing
                  Block Grant assistance by not addressing all preexisting code violations. The
                  Municipality’s housing rehabilitation program guidelines required that all repairs
                  must fulfill basic and indispensable needs so that the unit provides a secured
                  dwelling and a better living condition. The guidelines also provided that all
                  housing rehabilitation work approved under the program must comply with
                  Federal, State, and municipal regulations and requirements. OIG inspections
                  revealed that in one unit, classified as completed by the housing inspector, the
                  Municipality did not provide sufficient assistance to ensure that the unit complied
                  with its housing quality standards. The violations included that the (1) unit had
                  no running water or electricity, (2) kitchen and bathroom had not been completed,
                  and (3) back door had no stairs or rails.

    Unsupported National
    Objectives Compliance

                  The Municipality disbursed more than $410,000 in Block Grant funds between
                  November 2008 and August 2011 for two activities associated with the
                  reconstruction and pavement of roads throughout the Municipality without
                  supporting whether the activities complied with a national objective 6. It mainly
                  reported to HUD that the activities met the national objective of benefiting low-
                  and moderate-income persons based on the area benefit subcategory and the 2000
                  census. Although most of the roads were located in census blocks of low- and
                  moderate-income persons as determined by the 2000 census, the area served by
                  the activity was limited to a few census block groups surrounding the area in
                  which it was located. For example, roads were constructed or resurfaced for the
                  benefit of between 2 to 40 families, whereas the number of persons residing in the
                  blocks used to determine the national objective was between 765 and 2,967.

                  The Municipality, therefore, did not, as required by 24 CFR 570.208 (a)(1), 7
                  properly determine the service area before Block Grant assistance was provided to
                  repair streets that would usually benefit only residents of the immediately
                  adjacent area. Therefore, the Municipality did not properly document whether the
                  activity complied with a national objective by not demonstrating how the served
                  area benefited only low- and moderate-income persons.



6
  According to HUD guidance (24 CFR 570.483), to qualify for Federal funding, every Block Grant-funded activity
must meet one of the following three national objectives; (1) benefiting low- and moderate-income persons, (2)
preventing or eliminating slums or blight, and (3) meeting an urgent needs having a particular urgency because
existing conditions pose a serious and immediate threat to the health or welfare of the community.
7
  Regulations at 24 CFR 570.208(a)(1) require that area benefit activities be available to all of the residents in a
particular area where at least 51 percent of the residents are low- and moderate-income persons. Such an area need
not be coterminous with census tracts or other officially recognized boundaries but must be the entire area served by
the activity.

                                                         13
           We also noted instances in which the Municipality did not properly document
           how it determined its street improvement activities’ compliance with national
           objectives, including inconsistent or missing information regarding the boundaries
           of the service area, percentage of low- and moderate-income persons in the
           service area, and number of families benefited. Information reported to HUD in
           its information system was also not consistent with the Municipality’s records in
           relation to the blocks served with the activity. Further, we found instances in
           which the Municipality did not maintain evidence of compliance with a national
           objective in service areas where less than 51 percent of persons were not low- and
           moderate-income persons as determined by the 2000 census.

Private Properties Repaved


           In October 2012, we performed site inspections of 11 street resurfacing projects
           funded with Block Grant funds. The Municipality improperly paid from Block
           Grant funds for the road resurfacing private properties. During our visit, we noted
           that six private properties had been paved with HUD funds. The OIG inspections
           showed that there were road resurfacing projects for which construction or
           resurfacing work included private driveways or roads to residences that appeared
           to be private property instead of municipal roads, and were recorded as
           improvements to public facilities




                                           14
                 A Municipality official informed us that he did not know that private properties
                 were resurfaced since it was not permitted and that the Municipality did not
                 require residents to provide evidence that the roads to be constructed or resurfaced
                 were in public domain. 8

    Conclusion


                 The Municipality did not support the accomplishments of its housing
                 rehabilitation efforts and did not demonstrate compliance with Block Grant
                 national objectives in its street improvement activities. Therefore, not all of the
                 reported program accomplishments could be supported, and $817,312 in funds
                 awarded for these efforts was considered unsupported pending an eligibility
                 determination by HUD. In addition, the Municipality did not support whether
                 $410,221 in Block Grant funds disbursed for road resurfacing activities was for a
                 HUD-approved national objective and for eligible purposes. The deficiencies
                 occurred because the Municipality did not have in place an adequate tracking
                 system that could show the total assistance provided to each participant, the status
                 of the repair work, and the housing rehabilitation cases inspected. The
                 Municipality was also not fully aware of all of HUD’s Block Grant national
                 objective requirements. As a result, HUD lacked assurance that Federal funds
                 drawn down for housing rehabilitation and street improvement efforts met
                 program objectives, Block Grant funds were used solely for authorized purposes,
                 and reported accomplishments were accurate.

    Recommendations

                 We recommend that the Director of the San Juan Office of Community Planning
                 and Development




8
 HUD informed us that under the public facilities and improvements activity type the construction or resurfacing
work of private driveways or roads to residences in private property is not allowable.

                                                        15
                 3A.      Require the Municipality to submit all supporting documentation showing
                          the current status of the repair work and the eligibility and propriety of
                          $817,310 9 for housing rehabilitation activities or reimburse the Block
                          Grant program from non-federal funds.

                 3B.      Require the Municipality to submit supporting documentation evidencing
                          how Block Grant funds in the amount of $410,221 disbursed for street
                          improvements benefited low- and moderate-income persons in accordance
                          with HUD requirements or reimburse the Block Grant program from non-
                          Federal funds.

                 3C.      Require the Municipality to determine the amount expended for the
                          resurfacing of all private properties and reimburse the Block Grant
                          program from non-federal funds.

                 3D.      Require the Municipality to implement an adequate tracking system for
                          housing rehabilitation activities that can accurately show the status of the
                          repair work for each assisted dwelling unit and maintain adequate staffing
                          to ensure that unit inspections are conducted as required by its policies and
                          procedures.

                 3E.      Require the Municipality to ensure that Block Grant funds are used for
                          activities meeting a national objective and for eligible purposes, that they
                          are properly supported, and that staff are aware of all of the HUD’s Block
                          Grant national objective requirements.




9
  Questioned amount consists of $882,909 in housing rehabilitation awards made by the Municipality minus
$65,599 in disbursements associated with 28 housing units that were found to have been completed during field
inspections.


                                                       16
Finding 4: The Municipality’s Procurement Procedures Had
Weaknesses
Generally, the Municipality complied with requirements for planning, soliciting, and awarding
contracts and purchase orders. However, it failed to perform a required cost analysis in one
contract, and in all four contracts reviewed, it did not follow all of HUD’s regulations in regards
to maintaining adequate documentation of the procurement history. In addition, the Municipality
did not ensure that contracts included all of the provisions required by Federal regulations. The
conditions occurred because of the Municipality’s inadequate knowledge of HUD requirements
and deficient written policies and procedures. As a result, the Municipality did not support the
reasonableness of more than $124,000 awarded in a contract.


 Procurement Deficiencies in
 Contracts Reviewed

           We analyzed four contracts awarded between July 1, 2009, and June 30, 2012,
           totaling more than $1.6 million. The Municipality generally showed that it procured
           services in a manner that provided, to the maximum extent practical, open and free
           competition; however, there was at least one procurement deficiency in all contracts
           reviewed.

           For example, the Municipality did not always

               •   Maintain adequate support to demonstrate that it provided potential
                   contractors with complete and adequate specifications of the scope of services
                   to be performed and adequate bid forms.

               •   Ensure that contracts included all provisions required by 24 CFR 85.36(i).
                   For example it did not include provisions related to (1) providing HUD, the
                   Comptroller General of the United States, or any of their duly authorized
                   representatives access to any books, documents, papers, and records of the
                   contractor, which are directly pertinent to the specific contract for the purpose
                   of making audit, examination, excerpts, and transcriptions, and (2) mandatory
                   standards and policies relating to energy efficiency, which are contained in the
                   State energy conservation plan issued in compliance with the Energy Policy
                   and Conservation Act and

               •   Prepare an independent cost or price analysis to determine the reasonableness
                   of the charges.




                                                17
                 The following table contains a list of the procurement deficiencies found during
                 the review.

                         Contract information                                      Deficiencies
                         Award          Amount    No cost or     Missing or     Bid package      Missing     Did not follow
                                                    price       inadequate      not properly     contract     Municipality
                                                   analysis    specifications   documented      provisions   procurement
                                                                 of services                                  regulations
                                                                  solicited

                      Interactive    $1,047,480                      X                              X              X
                      fountain
                      Hato Viejo       $284,376                                      X              X
                      Community
                      Center
                      Town Square      $239,995                                      X              X              X
                      improvements
                      Landmarks        $124,200       X                              X              X              X




 Outdated Policies and
 Procedures

                 The Municipality’s written procedures did not fully conform to applicable Federal
                 standards and contained inconsistencies. According to Municipality officials, the
                 policies and procedures used during their procurement process included the
                 Municipality’s procurement regulations. They also used the less restrictive
                 regulations of the Office of Commissioner for Municipal Affairs that the
                 municipalities of Puerto Rico must follow when procuring goods and services.
                 These policies and procedures contained inconsistencies regarding when the small
                 purchase method could be used in the procurement process and in publicly
                 advertised sealed bid procurements in which only one bid was received from
                 potential contractors.

                 Municipality officials stated that the threshold used when using the small
                 purchase method 10 had been changed in the past from $40,000 to $100,000 and
                 that the policy of the Municipality in this regard was obsolete. In addition, the
                 Municipality’s procurement regulations were changed in all open sealed bid
                 procurement actions in which only one bid was received in the process. In these
                 cases, the Municipality’s regulations required procurement officials to perform a
                 second public bid when only one bid was received in the initial publicly open
                 sealed bid process; whereas, in the Office of Commissioner for Municipal Affairs
                 regulation, it was not a requirement. Municipality officials explained that
                 procurement procedures were carried out selectively because State law allowed it
                 and because the Municipality considered its Bid Board Regulation to be obsolete.

10
  Small purchase method are those relatively simple and informal procurement methods for securing services,
supplies, or other property that do not cost more than the simplified acquisition threshold established by the
Municipality. If small purchase procedures are used, price or rate quotations shall be obtained from an adequate
number of qualified sources.


                                                          18
                    The Municipality, as required by its written regulations, did not perform a second
                    bid on three occasions and used the small purchase method instead of the sealed
                    bid method in six of the eight contracts reviewed.

                    Municipality officials did not provide written evidence of who authorized the
                    procurement procedural changes, when these changes went into effect, or whether
                    the changes were implemented by an authorized Municipality official or a
                    governing body. Therefore, they may have arbitrarily changed their policies and
                    procedures to be less restrictive without the proper authorization, allowing the use
                    of procurement methods that may have been less competitive among potential
                    bidders.

                    In addition, both procurement policies and procedures did not conform to the
                    following applicable Federal standards 11:

                         •   Maintaining written procedures for the conduct of small purchases.

                         •   Maintaining a written code of conduct governing the performance of their
                             employees engaged in the award and administration of contracts.

                         •   Maintaining written procedures that provide for a review of proposed
                             procurements to avoid the purchase of unnecessary or duplicative items.

                         •   Maintaining procurement selection procedures to ensure that all
                             solicitations (1) incorporate a clear and accurate description of the
                             technical requirements for the material, product, or service to be procured
                             and (2) identify all requirements which the offerors must fulfill and all
                             other factors to be used in evaluating bids or proposals.

 Conclusion

                    Generally, the Municipality complied with HUD procurement requirements when
                    it awarded contracts. However, there was a material noncompliance in the
                    procurement of one construction contract, and the Municipality’s policies and
                    procedures did not always conform to applicable Federal standards. The
                    Municipality could improve its procurement process by revising its procurement
                    policies and procedures and consistently performing required cost analysis to
                    ensure that goods and services are obtained under the most advantageous terms.




11
     Federal citations are included in 24 CFR 85.36 (b) (3-4) and (c) (3).


                                                            19
Recommendation


          We recommend that the Director of the San Juan Office of Community Planning
          and Development require the Municipality to

          4A.    Submit supporting documentation showing the reasonableness of
                 $124,200 charged to the Block Grant program in relation to procurement
                 for the construction of landmarks or reimburse the program from non-
                 federal funds.

          4B.    Revise its policies and procedures to ensure that it contains (1) written
                 procedures for the conduct of small purchases, (2) a written code of
                 conduct, (3) procedures for a review of the proposed procurements, and
                 (4) procedures to ensure that all solicitations incorporate a clear and
                 accurate description of the technical requirements for the material,
                 product, or service to be procured and identify all requirements which the
                 offerors must fulfill and all other factors to be used in evaluating bids or
                 proposals .




                                          20
                         SCOPE AND METHODOLOGY

The objective of the audit was to determine whether the Municipality complied with HUD
regulations, procedures, and instructions related to the administration of the Block Grant
program. Specifically, we evaluated whether (1) its financial management system complied with
HUD requirements, (2) it disbursed Block Grant funds for allowable and supported costs, (3)
funded activities met national objectives, and (4) it followed HUD’s and its own procurement
requirements.

To accomplish our objective, we

•   Reviewed applicable HUD laws, regulations, and other HUD program requirements;
•   Reviewed the Municipality’s controls and procedures as they related to our objectives;
•   Interviewed HUD and Municipality officials;
•   Reviewed monitoring, independent public accountant, and HUD’s information system
    reports;
•   Reviewed the Municipality’s files and records, including activity files and financial records;
•   Traced information reported in HUD’s information system to the Municipality’s records; and
•   Performed site inspections of the activities.

We reviewed a sample of transactions based on the dollar amount, and/or on nature of the
expenditure; examining 100 percent of the transactions were not feasible. The results of the
audit apply only to the items selected and cannot be projected to the universe or population.

HUD’s information system reflected that the Municipality withdrew more than $3.6 million in
Block Grant funds up to December 31, 2011, for 24 public facilities and improvement activities
that had disbursements during our audit period. We selected and reviewed activities with
amounts greater than $120,000 and based on the type of activity. The sample resulted in six
activities totaling more than $1.5 million (42 percent) in Block Grant funds withdrawn. The
activities were reviewed and inspected to determine whether funded activities met at least one
national objective and whether the Municipality disbursed Block Grant funds for allowable and
supported costs. Based on deficiencies noted regarding the propriety of funds charged as
delivery costs, we also reviewed withdrawals totaling more than $752,000 made between August
4, 2009, and July 11, 2012, that were associated with three additional activities.

The Municipality’s records reflected that between July 1, 2009, and December 31, 2011, it
disbursed more than $1.3 million in planning and administration costs. For each fiscal year
ending June 30, we selected for review the month with the highest disbursed amount. The
sample resulted in the review of planning and administration costs totaling more than $229,000
associated with the months of September 2009, November 2010, and August 2011. The
expenditures and related supporting documents were reviewed to determine whether the
payments met Block Grant requirements, including allowability and allocability of the costs.

We obtained a list of housing rehabilitation cases funded with Block Grant funds between July 1,
2009, and December 31, 2011. During this period, the Municipality awarded Block Grant funds
                                                21
totaling more than $882,000 associated with 299 housing rehabilitation assistance cases. From
this list, we reviewed 10 activities with awards totaling more than $56,000. They represented,
according to Municipality records, the five completed activities and the five in-progress activities
with the highest awarded amount. Total amounts reviewed represented 6.3 percent of the total
awards. We reviewed and inspected each activity to verify participant eligibility, the status of
the rehabilitation work, and the appropriateness of the assistance provided. We also reviewed
the Municipality’s 2009 and 2010 annual performance reports to assess whether its records
adequately supported reported program accomplishments.

We obtained lists of the Municipality’s Block Grant procurement efforts that were performed
between July 1, 2009, and June 30, 2012. We selected procurement actions outside of the general
audit scope period of July 1, 2009, and December 31, 2011, to ensure that the procurement
actions selected were recently performed. The Municipality conducted six procurement actions,
following the formal advertising method, totaling more than $1.9 million and 11 construction-
related procurement actions, following the small purchase procedures, totaling more than
$589,000. We selected and reviewed the formal advertising procurement actions with awarded
amounts greater than $200,000 and the small purchase procurement actions with awards greater
than $30,000. We also reviewed the procurement of a contract totaling more than $124,000 for
the design, construction, and installation of community landmarks based on indications of
possible deficiencies. The sample resulted in four procurement actions, requiring formal
advertising, totaling more than $1.6 million and eight procurement actions, through small
purchase procedures, totaling more than $547,000. We reviewed each procurement action to
determine whether the procurement process used by the Municipality followed its own policies
and procedures and met HUD standards.

We did not consider the Municipality’s accounting records reliable for our purposes because they
did not reflect complete and accurate financial information on program activities. To achieve
our audit objectives, we relied in part on computer-processed data contained in the
Municipality’s database and HUD's information system. Although we did not perform a detailed
assessment of the reliability of the data, we performed a minimal level of testing and found the
data adequate for our purposes. Testing for reliability included the tracing of data from the
Municipality’s accounting system to their physical files.

The audit generally covered the period July 1, 2009, through December 31, 2011, and we
extended the period as needed to accomplish our objectives. We conducted our fieldwork from
March through November 2012 at the Municipality’s offices in Arecibo, PR.

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




                                                22
                              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 provide reasonable assurance that a program meets its
                   objectives, while considering cost effectiveness and efficiency.

               •   Relevance and reliability of information - Policies and procedures that
                   management has implemented to reasonably ensure that operational and
                   financial information used for decision making and reporting externally is
                   relevant, reliable, and fairly disclosed in reports.

               •   Compliance with laws and regulations - Policies and procedures that
                   management has implemented to reasonably ensure that program
                   implementation is consistent with laws and regulations.

               •   Safeguarding of assets - Policies and procedures that management has
                   implemented to reasonably prevent and promptly detect unauthorized
                   acquisition, use, or disposition of assets and resources.

               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

                                                 23
             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 Municipality’s financial management system did not comply with HUD
                 requirements (see finding 1).

             •   The Municipality did not support certain activity costs (see finding 2).

             •   The Municipality did not support its reported housing rehabilitation
                 accomplishments and national objectives (see finding 3).

             •   The Municipality’s procurement procedures had weaknesses (see finding 4).




                                              24
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                 Recommendation
                         number            Ineligible1/      Unsupported 2/
                      1B                                        $2,251,558
                      2A                     $552,658
                      2B                                          1,077,577
                      3A                                            817,310
                      3B                                            410,221
                      4A                     ________               124,200
                     Total                    $552,658           $4,680,866


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.

2/   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.




                                             25
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         26
Comment 1




Comment 1




Comment 2




Comment 1




            27
Comment 3




Comment 4




Comment 5




            28
Comment 6




Comment 7




Comment 8




            29
                         OIG Evaluation of Auditee Comments

Comment 1   The Municipality stated that it has acquired a new financial management system
            and has commenced training its staff. The Municipality also stated that it will
            provide HUD with the necessary evidence showing the disposition of the $1.8
            million Block Grant program funds.

            We acknowledge the Municipality’s efforts to improve its financial management
            system. It will need to show HUD that its financial system adequately permits the
            tracing of program receipts and expenditures and ensures that all funds were
            adequately accounted for, safeguarded, and used for requested and eligible
            purposes and in accordance with the Block Grant program.

Comment 2   The Municipality stated that 51 of the 52 employees located in the rented space
            carried out tasks related to the Block Grant program; therefore, 98 percent of the
            rented space was dedicated to the Block Grant program. The Municipality also
            stated that the non-Federal division will move from the current location.

            The Municipality did not address the fact that the employees working in the
            division were also performing general government activities not associated with
            the Block Grant program. Accordingly, the lease cost needed to be properly
            allocated in accordance with 2 CFR 225. The Municipality also did not provide
            additional documentation showing the allowability and reasonableness of the
            lease costs. In addition, the Municipality did not address the $36,915 associated
            with administrative and other activity-related expenses that were unsupported.
            Therefore, we did not modify the report finding and recommendation.

Comment 3   The Municipality stated that Block Grant funds were used to pay for the wages of
            employees responsible for supervising and inspecting the public services work
            performed by private contractors.

            As discussed in the report, the Municipality charged an average of 48 percent, or
            $1.8 million, in Block Grant funds for carrying out housing rehabilitation and
            public facility improvement activities as activity costs for the wages of municipal
            employees. However, the Municipality did not provide additional support that
            could demonstrate the allowability and reasonableness of the costs incurred.

Comment 4   The Municipality stated that it will stop charging the Block Grant program for the
            wages and fringe benefits of employees not associated with the program and that
            it will work on a payment plan with HUD to reimburse the ineligible costs.

Comment 5   The Municipality stated that all employees carry out tasks related to the Block
            Grant program, although parts of their salaries are paid with non-Federal funds. It
            also stated that it will ensure that only eligible delivery costs are charged to the
            program.



                                             30
            As discussed in the report, the Municipality disbursed Block Grant funds for
            salaries and fringe benefits of employees who performed local government duties
            while also assigned to perform work for the Block Grant program without
            properly allocating the costs among the activities. Although the Municipality
            claims that parts of the salaries were paid with non-Federal funds, it did not
            provide additional documentation to substantiate its claim. Therefore, we did not
            modify the report finding and recommendations.

Comment 6   The Municipality stated that the units reported to HUD as rehabilitated were those
            to which assistance was provided but for which the repair work had not
            necessarily been completed. The Municipality also stated that it was in the
            process of certifying and closing the cases in which the rehabilitation was
            completed and that it was implementing a new monitoring system to ensure that
            all dwelling rehabilitation efforts are completed within 120 days.

            We acknowledge the Municipality’s efforts to improve its housing rehabilitation
            monitoring efforts. The Municipality will need to provide HUD documentation
            showing that it has established and implemented a tracking system that can
            accurately show the status of the repair work. In addition, it will need to provide
            HUD with documentation supporting the eligibility and propriety of its housing
            rehabilitation efforts.

Comment 7   The Municipality stated that it found no evidence of private properties being
            resurfaced with the Block Grant funds. It also stated that if a private property was
            paved, it was because of the initiative of the private contractor after completing
            the work for the contracted road. In addition, the Municipality stated that to
            ensure compliance with the national objective of benefiting low- and moderate-
            income persons, it will perform socioeconomic studies of the households
            immediately surrounding the streets to be repaved.

            As discussed in the report, the OIG inspections showed that there were road
            resurfacing projects for which construction or resurfacing work included private
            driveways or roads to residences that appeared to be private property instead of
            municipal roads. The possibility of private contractors doing additional work
            outside the scope of the contract raises concerns regarding the proper supervision
            by municipal inspectors and the purchasing of unnecessary materials that could
            result in a waste of Federal funds. The Municipality did not provide additional
            support that could demonstrate the eligibility and propriety of the disbursements
            associated with its street resurfacing efforts. Therefore, we did not modify the
            report finding and recommendation.

Comment 8   The Municipality stated that its bidding process was consistent with local
            regulations and that it was not aware of the contract clauses required by HUD.

            The Municipality did not comment on the fact that it failed to perform a required
            cost analysis, it did not maintain adequate documentation of the procurement

                                             31
history, and its written procedures did not fully conform to applicable Federal
standards and contained inconsistencies. It did not provide additional
documentation to sustain its claim. Therefore, we did not modify the report
finding and recommendations.




                                 32