oversight

The City of Sarasota, FL, Did Not Always Properly Administer Its NSP2

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-04-25.

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

OFFICE OF AUDIT
REGION 4
ATLANTA, GA




                   City of Sarasota, Sarasota, FL

               Neighborhood Stabilization Program 2
                      Recovery Act Program




2013-AT-1004                                        APRIL 25, 2013
                                            April 25, 2013
                                           The City of Sarasota, FL, Did Not Always Properly
                                           Administer Its NSP2




TO:            Gary Causey, Director of Community Planning and Development, Jacksonville Field
               Office, 4HD

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

SUBJECT:       The City of Sarasota, FL, Did Not Always Properly Administer Its NSP2

    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of the City of Sarasota’s administration of the
Neighborhood Stabilization Program 2 (NSP2) funds authorized under the American Recovery and
Reinvestment Act of 2009.

    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.
                                               April 25, 2013
                                               The City of Sarasota, FL, Did Not Always Properly
                                               Administer Its NSP2




Highlights
Audit Report 2013-AT-1004



 What We Audited and Why                        What We Found

We audited the City of Sarasota because it     The City met the low-, moderate-, or middle-income
was awarded $23 million in                     national objective and properly accounted for program
Neighborhood Stabilization Program 2           income. However, it did not ensure that some NSP2
(NSP2) funds and it was in accordance          expenditures for the redevelopment of a public housing
with our audit plan to review funds            site were eligible. This condition occurred because the
provided under the American Recovery           City did not (1) appropriately review expenditures, (2)
and Reinvestment Act of 2009. Our              have an adequate agreement with its subrecipient, (3)
objective was to determine whether the         maintain effective coordination with all the parties
City administered its NSP2 in accordance       involved in this activity, and (4) have continuous internal
with applicable Federal requirements.          audit reviews conducted on its NSP2. This deficiency
Specifically, we wanted to determine           resulted in ineligible costs of $388,130 to the program.
whether (1) approved activities met a
national objective, (2) program income         In response to our audit, the City provided additional
was properly accounted for, and (3)            documentation after the exit conference to show that
expended funds were allowable.                 ineligible expenditures were allowable or reclassified
                                               with other eligible expenditures. Therefore, the City
                                               was not required to reimburse the U.S. Treasury
                                               $388,130 from non-Federal funds.

 What We Recommend

We recommend that the Director of
Community Planning and Development
of the Jacksonville field office require the
City to (1) implement its NSP2 policies
and procedures, and (2) request its
internal audit division to continually
examine potentially risky areas of the
City’s Office of Housing and Community
Development program operations.
                            TABLE OF CONTENTS

Background and Objective                                                     3

Results of Audit
Finding: The City Did Not Ensure That Some NSP2 Expenditures Were Eligible   4

Scope and Methodology                                                        8

Internal Controls                                                            10

Appendixes
   A. Auditee Comments and OIG’s Evaluation                                  11
   B. Questioned Costs for the Redevelopment of a Public Housing Site        17




                                           2
                        BACKGROUND AND OBJECTIVE

On February 17, 2009, Congress enacted Public Law 111-5, known as the American Recovery
and Reinvestment Act of 2009. Title XII of Division A of the Recovery Act provided additional
emergency assistance for the redevelopment of abandoned and foreclosed-upon homes as
initially authorized under Division B, Title III, of the Housing and Economic Recovery Act of
2008. Specifically, Congress appropriated $1.93 billion in Neighborhood Stabilization Program
2 (NSP2) funds to stabilize communities that have suffered from foreclosure and abandonment
through the purchase and redevelopment of foreclosed-upon and abandoned homes and
residential properties. In 2010, the U.S. Department of Housing and Urban Development (HUD)
awarded NSP2 grants to 56 grantees nationwide, which included States, units of general local
government, nonprofits, and a consortium of public and private nonprofit entities.

HUD awarded the City of Sarasota, a municipal corporation of the State of Florida, $23 million
in NSP2 funds on behalf of the Sarasota Consortium, which included the City as the lead entity
and Sarasota County. NSP2 funds are administered by the City and County Office of Housing
Community Development. This office was established in 1995 in an interlocal agreement
between the City and County to cooperatively administer housing and community development
programs.

According to HUD’s Disaster Recovery Grant Reporting system, as of June 30, 2012, the City
had expended $15.6 million, which included $794,107 in program income. The system indicated
that the City had progressed with activities related to the acquisition and rehabilitation of single-
family and multifamily properties, demolition of blighted structures, and redevelopment of a
public housing site. The City worked with nonprofit developers and subrecipients to implement
its NSP2.

Our objective was to determine whether the City administered its NSP2 in accordance with the
Recovery Act and HUD requirements. Specifically, we wanted to determine whether (1)
approved activities met a national objective, (2) program income was properly accounted for,
and (3) expended funds were allowable.




                                                  3
                                  RESULTS OF AUDIT

Finding: The City Did Not Ensure That Some NSP2 Expenditures Were
Eligible
The City did not ensure that some NSP2 expenditures for the redevelopment of a public housing
site were eligible. This condition occurred because the City did not (1) appropriately review
expenditures, (2) have an adequate agreement with the subrecipient, (3) maintain effective
coordination with all the parties involved in this activity, and (4) have continuous internal audit
reviews conducted on its NSP2. As a result, the City charged ineligible costs of $388,130 to the
program.



 Ineligible Expenditures


                     The City drew down $2.5 million in NSP2 funds for the redevelopment of
                     a public housing site. This was a mixed financed project that was funded
                     by multiple sources administered by the City and other entities. This
                     activity resulted in the development of 68 affordable apartments and a
                     commercial retail component, consisting of 10,500 square feet of retail
                     space.

                     The drawdown of $2.5 million was comprised of four drawdown vouchers.
                     Two of the four vouchers reviewed were eligible and supported. However,
                     the remaining two vouchers had ineligible expenditures totaling $388,130.
                     Regulations at 24 CFR (Code of Federal Regulations) 85.20 (b)(2) and (3)
                     requires the grantees to maintain accounting records and effective controls
                     and accountability of funds.

                                    NSP2
                                 drawdown      Total voucher    Questioned     Ineligible
                                 voucher no.      amount         amount
                                   137767       $1,692,900       $186,814          X
                                   168338        $ 201,316       $201,316          X
                                   163913        $ 305,784       $     0
                                   158354        $ 300,000       $     0
                                    Total        $2,500,000      $388,130




                                                  4
   1. Drawdown Voucher 137767 - $1,692,900

This drawdown voucher contained more than $1.5 million in eligible
expenditures. However, the remaining $186,814 in expenditures were ineligible.
The City agreed that the voucher contained unallowable expenditures that should
have been charged to other funds. These expenditures included $2,479 in excess
draws and $171,975 in ineligible expenses related to the commercial retail
component and demolition; therefore, the City did not appropriately review
expenditures to ensure that costs were eligible NSP2 expenses.

In response to our audit, the City proposed to offset these unallowable
expenditures with other eligible expenses incurred for this redevelopment activity.
HUD agreed with the City transferring the expenses. During the exit conference
on March 19, 2013, the City provided additional documentation to support this
reclassification of expenditures to the appropriate programs, as well as a complete
reconciliation of the project funds. As a result, the City provided sufficient
documentation to address this finding.

This voucher also contained $12,360 in unallowable legal expenses that were
related to the retail section according to the invoice description. The City did not
recognize this expense as unallowable. Neighborhood Stabilization Program
Resource Exchange, FAQ ID: 672, further explains that under eligible use E for
redevelopment, NSP2 funds may not be used for nonresidential purposes.
Therefore, this legal expense should not have been charged to the program and
$12,360 was ineligible.

In response to our audit, after the exit conference, the City provided additional
information from the attorney certifying that legal services were for the residential
portion of the activity. Therefore, the City provided sufficient documentation to
address this finding.

   2. Drawdown Voucher 168338 - $201,316

During the audit, the City discovered that the developer also sent private funds to
the trustee to pay for the expenditures that supported drawdown voucher 168338,
resulting in unused NSP2 funds of $201,316. On November 21, 2012, the unused
funds were returned to the City. This occurred because there was no effective
coordination with all the parties involved in this activity to ensure expenses were
not funded by multiple sources. As a result, we recommended that unused funds
be returned to the U.S. Treasury. According to the City’s NSP2 grant agreement,
February 11, 2013, was the deadline to expend 100 percent of the NSP2 funds.




                                    5
On March 15, 2013, the City indicated that it used the returned funds to pay for
other eligible expenses by reallocating funds. During the exit conference on
March 19, 2013, HUD agreed with the City’s adjustment. We reviewed and
accepted the reallocation of funds; therefore, the City provided documentation
to address this finding.

See appendix B for further details of these questioned costs.

The conditions described above occurred because the City did not properly
administer its NSP2 funds by not maintaining effective coordination with all
the parties involved in this activity and not having an adequate agreement with
its subrecipient. The agreement did not include provisions concerning
program requirements as required by 24 CFR 570.503(a). In response to our
audit, after the exit conference, the City provided an executed subrecipient
agreement dated, March 25, 2013, that included the NSP2 provisions and a
reconciliation prepared by all the parties involved in the activity; therefore, the
City addressed this finding.

In addition, the City did not appropriately review expenditures and it did not
have continuous internal audit reviews conducted on its NSP2 program as
required by NSP2 Notice of Funding Availability Docket No. FR-5321-N-01.

In accordance with the NSP2 grant agreement, the City assumed full
responsibility for the administration of the NSP2 grant. Therefore, as the
administrator, it was responsible to ensure efficient oversight of the grant
funds. During the exit conference, the City recognized that it needs and plans
to strengthen its controls and accountability of funds and better coordinate
with its subrecipient. To ensure that the controls are effective and efficient,
we recommend that its internal audit division conduct continuous reviews of
potentially risky areas of the Office of Housing Community Development’s
program operations.

As a result of the City’s improper administration of its NSP2 funds, HUD had
no assurance that $388,130 in NSP2 funds were eligible. Since the City
provided additional documentation showing the eligibility or reclassification of
the ineligible expenditures, the City sufficiently addressed the finding and it
will not be required to reimburse the U.S. Treasury $388,130 from non-Federal
funds.




                                  6
Recommendations


        We recommend that the Director of Community Planning and Development of the
        Jacksonville field office require the City to

        1A. Implement its NSP2 policies and procedures to ensure program income is
            expended in compliance with NSP2 requirements.

        1B. Request its internal audit division to continuously review potentially risky
            areas of the Office of Housing Community Development’s program
            operations.




                                           7
                                  SCOPE AND METHODOLOGY

We performed the review from September 2012 through January 2013 at the City’s Office of
Housing and Community Development located at 111 South Orange Avenue, Sarasota, FL. Our
review generally covered the period February 11, 2010, through June 30, 2012, and it was
extended as necessary.

To accomplish our objective, we

          •         Reviewed relevant HUD regulations,

          •         Reviewed relevant City policies and procedures,

          •         Interviewed HUD and City officials,

          •         Reviewed City financial records related to program expenditures and
                    program income,

          •         Reviewed reports from HUD’s Disaster Recovery Grant Reporting system, and

          •         Reviewed City recipient and property files and records.

The City was awarded $23 million in NSP2 funds. Based on the City’s quarterly performance
report, as of June 30, 2012, the City had expended $15.6 million, which included $794,107 in
program income. The report indicated that the City had progressed with activities related to the
acquisition and rehabilitation of single-family and multifamily properties, demolition of blighted
structures, and redevelopment of a public housing site. To carry out these activities, the City
worked with eight nonprofit developers and subrecipients. The nonprofit developers and
subrecipients purchased, rehabilitated, and sold or rented the properties to eligible beneficiaries.
We selected two of these eight entities based on the large dollar amount drawn down and a third
entity because of its relationship to a City commissioner. 1

Of these entities, we initially selected the activity with the largest drawdown to review for cost
allowability. Specifically, we selected the largest drawdown voucher from each of the selected
activities, which totaled approximately $2.2 million, or 14.4 percent of the total drawdown. Our
review disclosed questionable expenditures with one activity, the redevelopment of a public
housing unit site. As a result, we extended our review to the entire $2.5 million that this activity
received.


 1
   Since the commissioner was not in office when the City entered into the NSP2 contract with the selected entity, there was no
 conflict of interest.



                                                                8
In addition, to determine whether the national objective was met, we selected properties
administered by these entities. Based on the spreadsheet provided by the City, as of June 30,
2012, we had identified 10 of 33 properties that had 20 beneficiaries and expenditures of
approximately $2.7 million, or 17.6 percent of the total amount drawn down. We also determined
whether the City properly accounted for the program income generated by these properties. The
program income for these properties totaled approximately $261,340, or 32.9 percent of the
program income received as of June 30, 2012. The results of this audit apply only to the items
reviewed and cannot be projected to the universe of activities.

We determined that computer-processed data generated by the City were not used to materially
support our audit findings, conclusions, and recommendations. Thus, we did not assess the
reliability of its computer-processed data.

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.




                                                9
                                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:

                •   Controls over program operations;
                •   Controls over compliance with laws and regulations; and
                •   Controls over the safeguarding of resources against waste, loss, and misuse.

                We assessed the relevant controls identified above.

                A deficiency in internal control exists when the design or operation of a control does
                not allow management or employees, in the normal course of performing their
                assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
                impairments to effectiveness or efficiency of operations, (2) misstatements in
                financial or performance information, or (3) violations of laws and regulations on a
                timely basis.

 Significant Deficiency

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

                •   The City did not comply with Federal requirements by not ensuring that some
                    NSP2 expenditures were eligible for the redevelopment of a public housing site.



                                                  10
                        APPENDIXES

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation      Auditee Comments




Comment 1




                             11
Comment 1




Comment 1




            12
Comment 2


Comment 3




Comment 4




            13
Comment 4




            14
Comment 5




            15
                          OIG Evaluation of Auditee Comments


Comment 1   The City described the work performed by our office to achieve the audit objective.
            The City's explanation was not accurate; therefore, for the extent of work performed by
            our office please refer to the Scope and Methodology section of the report.

Comment 2   The City indicated that it paid $36,475 in demolition costs; however, we identified
            $37,039 in demolition costs. The City did reclassify these unallowable expenses to
            address the finding.

Comment 3   The City indicated that it was unable to obtain the necessary documentation to show
            demolition cost was eligible. As a result, it reclassified this expense to another
            program. Going forward, the City should consider implementing the necessary policies
            and procedures to ensure that its basis of cost eligibility is supported.

Comment 4   The City stated that during the audit it voluntarily disclosed that the funds it paid to the
            Sarasota Housing Authority were not used and returned. The City discovered these
            unused funds as a result of obtaining audit information that we requested, from other
            parties involved in the project. Therefore, in the future the City should have better
            communication with all the parties involved in a project.

Comment 5   The City stated that more than 99.6 percent of all vouchers were not questioned by the
            audit team. As stated in the Scope and Methodology section of the report, we did not
            review 100 percent of the vouchers. Specifically, for the review of cost allowability,
            we reviewed 19.6 percent of the total vouchers drawn as of June 30, 2012, and
            questioned $388,130 in NSP2 funds.

.




                                               16
Appendix B

               QUESTIONED COSTS FOR THE
         REDEVELOPMENT OF A PUBLIC HOUSING SITE


                    Drawdown         Amount       Demolition      Retail       Refunds
                     voucher                         1/            2/            3/

                      137767         $184,335          X            X
                      137767         $ 2,479                                      X
                      168338         $201,316                                     X
                       Total        $388,130*


1/   The City charged demolition expenditures related to the redevelopment of a public housing site.
     According to Docket No. FR-5321-N-01 (III)(A)(3)(i), NSP2 funds may not be used to demolish
     any public housing site.

2/   The City charged NSP2 expenditures related to the commercial retail portion of the public housing
     site. Neighborhood Stabilization Program Resource Exchange, FAQ ID: 672, further explains
     that under eligible use E for redevelopment, NSP2 funds may not be used for nonresidential
     purposes.

3/   The City admitted to receiving refunds totaling to $203,795 for overpayments. According to the
     City’s NSP2 grant agreement, February 11, 2013, was the deadline to expend 100 percent of the
     NSP2 funds. As a result, we recommended that the funds be returned to the U.S. Treasury.

     *In response to our audit, the City provided additional documentation to show the ineligible
     expenditures were allowable or reclassified with other eligible expenditures. Therefore, the
     City was not required to reimburse the U.S. Treasury $388,130 from non-Federal funds.




                                                  17