oversight

The City of Worcester, MA, Did Not Properly Administer Its Community Development Block Grant Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-07-29.

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

                            1
OFFICE OF AUDIT
REGION 1
BOSTON, MA




                  City of Worcester, MA

       Community Development Block Grant Program




 2013-BO-1002                             JULY 29, 2013
                                                        Issue Date: July 29, 2013

                                                        Audit Report Number: 2013-BO-1002




TO:            Robert Shumeyko
               Director, Office of Community Planning and Development, Boston, MA, 1AD



FROM:          Edgar Moore
               Regional Inspector General for Audit, Boston Region 1, 1AGA

SUBJECT:       The City of Worcester, MA, Did Not Properly Administer Its Community
               Development Block Grant Program

    Enclosed is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final results of our review of the City of Worcester, MA, regarding its
administration of its Community Development Block Grant (CDBG) 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
212-264-4174.
                                            July 29, 2013
                                            The City of Worcester, MA, Did Not Properly
                                            Administer Its Community Development Block
                                            Grant Program



Highlights
Audit Report 2013-BO-1002


 What We Audited and Why                     What We Found

We audited the City of Worcester’s          The City did not properly administer its CDBG
administration of its Community             program. Specifically, City officials did not (1) ensure
Development Block Grant (CDBG)              that costs paid for under the City’s affordable housing,
program. We selected the City for           public service, and code enforcement activities were
review based on a request from the U.S.     eligible and supported; (2) document and could not
Department of Housing and Urban             show that a national objective was met for several of
Development (HUD), Boston, MA,              the activities reviewed; (3) ensure that the public
Office of Community Planning and            service cap of 15 percent was not exceeded; and (4)
Development. The objectives of the          ensure that the contracted CDBG revolving loan fund
audit were to determine whether the         was administered effectively and efficiently and in
City established adequate controls to       accordance with HUD regulations. These conditions
ensure that the CDBG activities were        were caused by a lack of (1) proper internal controls
eligible and supported and met a            over activity classification, identification of a national
national objective, and whether the City    objective, and cash disbursements; (2) adequate
exceeded the 15 percent public service      management and a management plan; (3) City policies
cap.                                        and procedures related to CDBG administration and
                                            record keeping, resulting in inconsistent guidance; and
                                            (4) oversight of subrecipients. As a result, the City
 What We Recommend
                                            paid more than $2.4 million in ineligible costs and
                                            more than $3.9 million in unsupported costs and must
We recommend that the Director of the       reallocate $153,268 in unexpended CDBG funds to
HUD Boston Office of Community              other eligible CDBG activities.
Planning and Development instruct the
City to (1) repay more than $2.1 million
in CDBG program funds that was
expended for ineligible activities and
$298,303 that was expended over the
CDBG 15 percent public service cap,
(2) provide documentation to support
that more than $3.9 million in CDBG
program funds was expended for
eligible activities and used for eligible
loans that met a national objective, and
(3) reallocate $153,268 to be used for
other eligible CDBG activities.
                           TABLE OF CONTENTS

Background and Objectives                                                         3

Results of Audit
      Finding 1:    The City’s CDBG Activities Were Not Always Eligible and       5
                    Supported and Did Not Always Meet a National Objective

      Finding 2:    The City Exceeded Its 15 Percent Public Service Cap          13

      Finding 3:    The City Did Not Ensure That Its Subcontracted Revolving Loan 15
                    Fund Was Administered in Accordance With HUD Regulations

Scope and Methodology                                                            18

Internal Controls                                                                20

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use             22
B.    Auditee Comments and OIG’s Evaluation                                      23
C.    Schedule of Questioned Affordable Housing, Public Service, and Code
      Inspection Costs by Agency and Activity (Finding 1)                        32
D.    Applicable HUD and City of Worcester Contract Requirements                 33




                                            2
                         BACKGROUND AND OBJECTIVES

The Community Development Block Grant (CDBG) program was established by Title I of the
Housing and Community Development Act of 1974, Public Law 93-383, as amended, 42 U.S.C.
(United States Code) 5301. The program provides grants to State and local governments to aid in
the development of viable urban communities. Governments are to use grant funds to provide
decent housing and suitable living environments and expand economic opportunities, principally for
persons of low and moderate income. To be eligible for funding, every CDBG-funded activity must
meet one of the program’s three national objectives. Specifically, every activity, except for program
administration and planning, must

       Benefit low- and moderate-income persons,
       Aid in preventing or eliminating slums or blight, or
       Address a need with a particular urgency because existing conditions pose a serious and
        immediate threat to the health or welfare of the community.

The City of Worcester, MA, is a CDBG entitlement grantee. CDBG funds are received from the
U.S. Department of Housing and Urban Development (HUD) annually to revitalize
neighborhoods, expand affordable housing and economic opportunities, and improve community
facilities and services, principally to benefit low- and moderate-income persons. The City’s
Executive Office of Economic Development administers the CDBG program.

HUD awarded the City more than $13.7 million in program years 35, 36, and 37.1 CDBG funds are
awarded to City departments, other public agencies, public and private nonprofit entities, and
for-profit entities to carry out eligible housing and community development projects within the
boundaries of Worcester, MA. The City’s goals include to (1) promote a livable, viable, and
sustainable community; (2) improve the quality of the existing housing stock; (3) mitigate
foreclosures and stabilize City neighborhoods; (4) preserve, maintain, and develop affordable
housing opportunities; (5) reduce the number of homeless persons through the provision of
supportive housing services; and (6) provide for the educational and social service needs of
inner-city, low-income populations.

                              Program year              CDBG entitlement amount
                                   35                        $4,671,840
                                   36                        $4,947,036
                                   37                        $4,141,185
                                  Total                     $13,760,061

In many instances, the City subcontracted CDBG funds to not-for-profit subrecipients to undertake
various neighborhood revitalization efforts. Although we did not review program year 38, which
covers the period from July 1, 2012 through June 30, 2013, City officials have been working with

1
  Program year 35 is from July 1, 2009, to June 30, 2010, program year 36 is from July 1, 2010, to June 30, 2011,
and program year 37 is from July 1, 2011, to June 30, 2012.



                                                         3
HUD and Dennison & Associates, a technical assistance consultant provided by HUD, to correct
past practices and craft policies and procedures that lay a framework for future management of its
programs.

The objectives of the audit were to determine whether the City established adequate controls to
ensure that the CDBG activities were eligible and supported and met a national objective, and
whether the City exceeded the 15 percent public service cap.




                                                 4
                                      RESULTS OF AUDIT


Finding 1: The City’s CDBG Activities Were Not Always Eligible and
           Supported and Did Not Always Meet a National Objective
The City did not administer its CDBG program in accordance with applicable HUD requirements
and its own contract requirements. Specifically, City officials did not ensure that costs paid for
under the City’s affordable housing, public service, and code enforcement activities were
properly classified, eligible, and supported. Officials also did not document and could not show
that a national objective was met for several of the activities reviewed. This condition was
caused by a lack of (1) proper internal controls over activity classification, identification of a
national objective, and cash disbursements; (2) adequate management and a management plan;
(3) City policies and procedures related to CDBG administration and record keeping, resulting in
inconsistent guidance; and (4) oversight of subrecipients. As a result, the City expended more
than $2.1 million in ineligible costs and more than $3.2 million in unsupported costs for
activities that may not have met the intended national objective. Further, $153,268 in
unexpended funds could be reallocated to other eligible CDBG activities (see appendix C for
breakout by agency and activity).


    Affordable Housing Activities
    Not Eligible or Supported

                 The City contracted with various community development corporations2 under its
                 affordable housing production program.3 The CDBG contracts were for project
                 delivery costs, but the contracts were not project specific and did not include
                 quantifiable performance indicators in subrecipient agreements or adequately
                 track subrecipient performance in accordance with regulations at 24 CFR (Code
                 of Federal Regulations) 570.503(b)(1). The City also did not indicate which
                 national objective the agencies would meet in the City’s subrecipient agreements.
                 Further, the City had no documentation to show how many affordable housing
                 units the corporations produced or how the agencies met a national objective in
                 each contract year. The corporations’ project cash requests were submitted to the
                 City without documentation supporting what activity was performed or which
                 projects were worked on.

                 In addition, the City did not perform adequate monitoring of the agencies in
                 accordance with 24 CFR 85.40(a). Although City officials performed annual
                 monitoring of the corporations, the monitoring was not detailed and did not
                 include a review of the projects completed or in process, and when issues were

2
  Worcester East Side CDC (Community Development Corporation), Worcester Common Ground CDC, Oak Hill
CDC, and Main South CDC
3
  Alternately known as the housing stabilization program and collectively known as the affordable housing program.


                                                        5
                 identified; officials did not perform follow-up monitoring to ensure that they were
                 corrected. We were informed that the City’s housing responsibilities had been
                 restructured over the past few years by creating a new, independent division,
                 replacing underperforming staff, and adding professionals, including a
                 compliance position, with strong housing development and Federal funding
                 backgrounds. However, at the time in question, the City’s CDBG housing
                 department consisted of only the director and one staff assistant, yet the majority
                 of the CDBG funds were allocated to affordable housing programs.

                 A HUD monitoring review in June 2012 disclosed various findings related to this
                 program, including the misclassification of program delivery activities as housing
                 production activities. As part of the corrective action, HUD allowed the City to
                 give the corporations an opportunity to support the costs by allocating the CDBG
                 funds to specific projects or activities that the corporations worked on, and we
                 reviewed the additional information as part of this audit. As with the above, we
                 noted that in some instances the CDBG projects submitted by the corporations
                 were not eligible projects as they did not meet a national objective. Also, several
                 of the projects’ developer fees and overhead costs for the projects deemed eligible
                 exceeded the maximum allowable amount.4 Therefore, as a result of the above
                 and based on our testing of the additional information provided, the City
                 expended $1,324,583 on ineligible costs that did not meet a program objective or
                 were not reasonable because they exceeded the allowable amount for the
                 developer fee. In addition $652,444 allocated to projects deemed eligible is
                 considered unsupported until further review and determinations are made,
                 including verification of sources and uses and a subsidy-layering review for each
                 project that received funding from various sources. Further, $54,420 in
                 unexpended funds should be reallocated to other eligible CDBG activities (see
                 appendix C).

                 The City also contracted with the Worcester Community Housing Resources
                 agency to pay for professional direct services and affordable housing lending.
                 The agency was contracted to make loans to property owners trying to rehabilitate
                 their properties, as well as to receivers to maintain properties and bring them up to
                 code. However, in several instances, the administrative fees charged to the
                 CDBG program to process the loans equaled or greatly exceeded the amount of
                 the loan. For example, the agency processed a loan for $579 and charged the
                 CDBG program $6,652 in administrative fees. This was not a reasonable expense
                 for administering these loans. Further, the City did not possess adequate records
                 to demonstrate compliance with HUD requirements in meeting the national
                 objective. Therefore, the City did not know whether the loans made were CDBG
                 eligible and whether the terms of the loan met CDBG requirements (see finding
                 3).



4
 The developer fee and overhead were limited to 5 percent of acquisition costs and 12.5 percent of hard and soft
development costs.


                                                         6
            Worcester Community Housing Resources was also contracted to assess the
            rehabilitation costs and feasibility of the housing receivership appointments based
            on requests from the City’s Department of Inspectional Services and Division of
            Housing Development. The agency charged administrative costs to the CDBG
            program for receivership services; however, several of the projects did not make it
            to receivership. Therefore, these projects should not have been charged to the
            CDBG program until the City had an interest in them and they were in
            receivership. This was not an eligible CDBG activity as no national objective was
            met.

            The agency also did not have a fee schedule for this service as the contract was set
            up to pay a certain percentage of the employees’ salaries and fringe benefits.
            However, when the agency tried to support the costs charged to the CDBG
            program, it based its administrative costs on the actual or estimated rehabilitation
            costs. If the property did not go into receivership, the administrative costs
            charged to the CDBG program were not allowed. As a result, the City disbursed
            $575,356 on an ineligible activity as a national objective was not met. In
            addition, $216,695 is considered unsupported until further review and
            determinations are made, including obtaining beneficiary data to support that it
            met a national objective by serving low- and moderate-income individuals. Thus,
            the remaining $62,699 in unexpended funds should be reallocated to other eligible
            CDBG activities (see appendix C).

            The conditions described above occurred because the City did not (1) properly
            execute its CDBG contracts with the agency, (2) have City policies and
            procedures related to CDBG administration and record keeping, and (3) have
            adequate oversight of its subrecipients.

Public Service Activities Not
Supported

            Our review of five public service activities revealed that the City did not possess
            adequate records to demonstrate compliance with HUD requirements in meeting
            the national objective for its public service activities. City officials did not
            maintain adequate supporting documentation to demonstrate that the individuals
            served were low- and moderate-income persons in accordance with 24 CFR
            570.506(b). These conditions occurred because the City lacked effective
            management controls and adequate monitoring and oversight of its public service
            activities. Four of the five public service activities reviewed received $1,509,643;
            as a result, these funds were considered to be unsupported (see appendix C).

            The City did not adequately track subrecipient performance in accordance with
            regulations at 24 CFR 570.503(b)(1). They did not have adequate procedures in
            place to ensure that project cash requests contained the proper support according
            to 24 CFR 570.506(h). The subrecipients submitted project cash requests to the
            City, but City officials did not receive adequate monthly reports, as required by


                                             7
                 the contract, to document the number of unduplicated clients served or the
                 services provided or support to show that the clients were low- and moderate-
                 income. However, City officials continued to process project cash requests and
                 reimburse the subrecipients.

                 The City also did not perform adequate monitoring of the subrecipients in
                 accordance with 24 CFR 85.40(a). The project monitor performed annual
                 monitoring; however, when issues were identified, City officials did not follow up
                 with the subrecipients or recommend corrective action. The City did not have a
                 management plan or policies and procedures in place to document monitoring
                 procedures for staff to follow. Further, although staffing changed throughout the
                 program years at all four agencies conducting public service activities, there was
                 no notification to the City as provided for in the contract. The contract included a
                 percentage of salary and other expenses to be charged to the CDBG program;
                 however, the percentages charged for employee salaries and other expenses
                 changed throughout all 3 program years for all of the agencies with no
                 explanation for the changes. Although the total amount reimbursed to the
                 agencies did not exceed the contracted amount, it appeared as though the
                 percentages were increased throughout the year to ensure that the agencies
                 received all of the allocated funds. However, City officials did not question the
                 modifications.

                 According to City officials, starting in January 2013 each project cash request
                 submitted by the public service agencies included the number of unduplicated
                 individuals served and a self-declaration income certification for each new client.
                 The City paid on a per-client basis and only for the number of clients that it could
                 support was eligible. If information was missing, such as name, address, income,
                 client signature, etc., the City did not include the client in the reimbursement.

                 The fifth public service activity reviewed was Operation Clean City. The scope
                 of work was to clean up public property on an ongoing basis. However, this was
                 not an eligible CDBG expense as it was a general responsibility of the City
                 according to 24 CFR 570.207(a)(2). Further, according to 24 CFR 570.201(e), to
                 be eligible for CDBG assistance, a public service activity must be either a new
                 service or a quantifiable increase in the level of an existing service above that
                 which has been provided by or on behalf of the unit of general local government
                 in the 12 calendar months before the submission of the action plan. The City was
                 not able to document this information. In addition, the contract did not specify
                 which national objective this activity would meet, and there was no supporting
                 documentation to show which national objective this activity met. According to
                 HUD’s Integrated Disbursement and Information System (IDIS),5 the City
                 classified Operation Clean City as limited low- and moderate-income clientele.
                 The City also did not monitor this activity in program years 35, 36, or 37. As of
                 May 2013, the City had paid $130,512 for salaries and supplies; therefore, we

5
  IDIS is a nationwide database of current information regarding CDBG activities underway across the Nation,
including funding and accomplishment data. HUD uses this information to report to Congress and monitor grantees.


                                                       8
                 considered this amount to be ineligible since the services provided appeared to
                 have been a general City responsibility and this activity did not meet a national
                 objective. Further, the $36,149 in unexpended funds for this program should be
                 reallocated and used for other eligible CDBG activities (see appendix C).

    Code Inspection Activity Not
    Eligible or Supported

                 The City did not demonstrate compliance with HUD requirements in meeting the
                 national objective for its code inspection activity.6 The contract did not list which
                 national objective the code inspection activity would meet. According to IDIS,
                 the national objective listed was for low- to moderate-income area benefit;
                 however, neither the City’s Executive Office of Economic Development nor the
                 Department of Inspectional Services maintained adequate supporting
                 documentation to demonstrate that the code inspection activity met the national
                 objective. The City did not show whether this activity was targeted at
                 deteriorated or deteriorating areas described by the grantee; that 51 percent of
                 residents of the area were low- or moderate-income persons; and that code
                 enforcement, together with public improvements, rehabilitation, and services to be
                 provided, could be expected to arrest the decline in the area in accordance with 24
                 CFR 570.202(c).

                 The Department of Inspectional Services was contracted to provide systemic code
                 inspections in targeted CDBG areas and Neighborhood Revitalization Strategy
                 Areas in coordination with the Executive Office of Economic Development.
                 Specifically, the Department of Inspectional Services, with the approval of the
                 Executive Office of Economic Development, was contracted to identify specific
                 neighborhoods to be inspected and coordinate other services available to improve
                 properties. Additionally, compliant-driven inspections could not be more than 20
                 percent of total inspections funded with CDBG funds, and source documentation
                 on code complaints had to be analyzed annually to identify targeted code
                 enforcement priorities. The Department of Inspectional Services also was
                 required to continue with neighborhood sweeps when necessary. However,
                 neither the Executive Office of Economic Development nor the Department of
                 Inspectional Services could provide documentation to support which objective
                 was being achieved.

                 According to the contracts, the City allocated more than $1 million for salaries
                 and fringe benefits for Department of Inspectional Services employees for code
                 inspections and constable services between years 35 and 37. The Department of
                 Inspectional Service did not submit monthly project cash requests as required by
                 the contract. In program year 35, they did not submit cash requests at all;
                 however, officials continued to reimburse the Department of Inspectional

6
 Code inspection was incorrectly classified under “affordable housing” and not under the CDBG-eligible category
known as “code enforcement.”


                                                       9
Services. The City did not receive cash requests in program year 35 but paid the
employees based on the information in the City’s payroll system.

Further, in program years 36 and 37, the amounts in the project cash requests did
not always match those in the contract. Specifically, the project cash requests
were not an accurate representation of what the City paid. Based on the project
cash requests and the totals in IDIS, it was unclear what was expended. The City
provided the amounts expended according to its financial management system,
which showed that the City expended a total of $994,408 for code inspection,
$888,148 for salary and fringe benefits of employees performing inspections, and
$106,260 for constable services. City officials explained that funds were used
from previous program years to cover some of the costs, which was why the totals
in IDIS did not always match the contracted amounts.

Since the City did not contract for constable services in program years 35 and 36,
we considered the $80,560 expended for constable services in program years 35
and 36 to be ineligible and the remaining $913,848 paid for code inspection and
constable service to be unsupported, for a total of $994,408 in questioned costs
(see appendix C).

Further, in IDIS, the code inspection activity was incorrectly classified as an
affordable housing activity, when it should have been classified as code
enforcement.

These conditions occurred because the City lacked effective management controls
and adequate monitoring and oversight of its activities. City officials did not
perform adequate monitoring of the subrecipients in accordance with 24 CFR
85.40(a) as they did not always perform the required onsite monitoring visits.
Over the 3-year period, there was only one monitoring visit completed in program
year 36. The monitoring report was incomplete, with very little information
provided and no follow-up listed. Thus, the City did not have a management plan
or policies and procedures in place to document monitoring procedures for staff to
follow.

However, City officials had begun to correct the deficiencies for its program year
38 contracts for code inspection. They requested the following corrective actions
from the Department of Inspectional Services in program year 38 that must be
followed to fund code inspections for future program years. The corrective
actions were originally suggested by HUD to the City in October 2012 and
required that

          The term “deterioration” is defined for purposes of the regulation.
          Defined maps are created for sweep target areas and code inspection
           activity that highlights boundaries within which code inspection
           activity can be carried out.
          There be a sufficient description of the conditions in each area to
           support a determination that the area qualifies as deteriorating or


                                 10
                        deteriorated under the City’s definition. This description is dependent
                        on the City’s definition of deterioration.
                       There is a strategy for using code enforcement, together with other
                        activities, to arrest decline in the area developed. The City already had
                        a separate contract for board up and demolition, which could be used
                        in conjunction with code enforcement.
                       Other information is provided as necessary to determine the impact
                        that code enforcement or other activities have on the decline in the
                        area during the time the CDBG-assisted code enforcement is carried
                        out. This requirement includes tracking progress through the
                        completion of activities.

Conclusion

             The City did not follow HUD requirements or its contract requirements for the
             City’s affordable housing, public service, and code inspection activities. This
             condition was caused by the City’s lack of (1) proper internal controls over
             activity classification, identification of a national objective, and cash
             disbursements; (2) adequate management and a management plan; (3) policies
             and procedures related to CDBG administration and record keeping, resulting in
             inconsistent guidance; and (4) oversight of subrecipients. As a result, the City
             expended more than $2.1 million in ineligible costs and more than $3.2 million in
             unsupported costs. Further, $153,268 in unexpended funds could be reallocated
             to assist other eligible CDBG activities (see appendix C).

Recommendations

         We recommend that the Director of the HUD Boston Office of Community
         Planning and Development instruct City officials to

         1A. Repay $2,111,011 in CDBG program funds that was expended for ineligible
             affordable housing, public service, and code inspection activities.

         1B. Provide documentation to support that $3,292,630 in CDBG program funds
             was expended for eligible costs by obtaining beneficiary data on the clients
             served to ensure that the expenses were eligible and met a national objective,
             verifying the sources and uses and performing a subsidy-layering review as
             applicable and if such support cannot be provided, repay the amount.

         1C. Reallocate $153,268 in unspent affordable housing and Operation Clean City
             funds to be used for other eligible CDBG activities so that these funds can be
             put to better use.

         1D. Continue existing efforts to establish new internal controls to ensure that funds
             are obligated for eligible CDBG activities that meet a national objective and


                                             11
     are disbursed for costs that are adequately supported in accordance with
     CDBG program requirements.

1E. Continue existing efforts to finalize the draft written management plan and
    policies and procedures to ensure that CDBG regulations are consistently
    followed by all City staff.

1F. Include in subrecipient agreements quantifiable performance measurement
    indicators that correspond to the activity and applicable CDBG national
    objectives.

1G. Strengthen subrecipient monitoring procedures to assure HUD that projects
    comply with HUD regulations and the subrecipient agreement provisions.

1H. Update IDIS to ensure that all of the eligible activities funded with CDBG
    funds are accurately reported.




                                 12
Finding 2: The City Exceeded Its 15 Percent Public Service Cap
The City exceeded its public service cap of 15 percent in program years 35 and 36. This
condition occurred because 1) the City misclassified housing counseling activities as housing
services and 2) a previously authorized Neighborhood Revitalization Strategy Area plan,
allowing certain public services activities to exceed the cap, expired in June 2010 and was no
longer valid. As a result, the City exceeded the 15 percent public service cap by $298,303.


    Housing Counseling Costs
    Improperly Classified

                  The City improperly classified $411,972 of housing counseling as housing services
                  in program years 35 and 36. Housing counseling is an eligible activity as part of the
                  home ownership assistance program carried out under 24 CFR 570.201(n). When
                  housing counseling is part of a home ownership program under this part of the
                  regulations, it is not subject to the public service cap. However, the City was not
                  able to document that the housing counseling was part of an eligible home
                  ownership program. Therefore, the cost incurred for housing counseling, in this
                  instance, needed to be classified as a public service activity, which would cause the
                  City to exceed its 15 percent public service cap.

    Lack of an Approved
    Neighborhood Revitalization
    Strategy Area Plan

                  The City also allocated $55,000 of the previous year’s unexpended balances to
                  employment and training costs in program year 36. The City thought this expense
                  was exempt from the public service cap because it was for a Neighborhood
                  Revitalization Strategy Area. However, the City’s previously approved
                  Neighborhood Revitalization Strategy Area plans expired in June 2010; therefore,
                  these funds were not exempt from the public service cap.

    Conclusion

                  According to 24 CFR 570.201(e)(1), the amount of CDBG funds obligated within a
                  program year to support public service activities under this category may not
                  exceed 15 percent of the total grant awarded to the grantee for that year.7 Contrary
                  to regulations, the City exceeded the 15 percent public service cap for program
                  years 35 and 36. We attribute this condition to the City’s misclassification of
                  housing counseling costs and a lack of an approved Neighborhood Revitalization

7
    Plus 15 percent of the total program income it received in the preceding program year


                                                           13
                Strategy Area plan, which when added to the amounts already expended for public
                services,8 caused the City to exceed the public service cap. As a result, the City
                exceeded its 15 percent public service cap by $298,303. These funds were
                ineligible and need to be repaid to HUD.

                                                           Program year          Program year              Totals
                                                                35                    36

                CDBG allocation                                $4,671,840              $4,947,036
                Program income9                                   $16,239                 $15,347
                    Total allocation and program               $4,688,079              $4,962,383
                                           income
                Amount expended for public                       $617,458                $661,441
                service activities (before
                reclassification)
                Reclassified housing counseling                  $200,986                $210,986           $411,972
                Reclassified Neighborhood                            N/A                  $55,000            $55,000
                Revitalization Strategy Area
                plan
                Amount expended for public                     ($818,444)              ($927,427) ($1,745,871)
                service activities (after
                reclassification)
                15 percent of total allocation                   $703,211                $744,357        $1,447,568
                and program income

                Amount over 15 percent cap                       $115,233                $183,070           $298,303


    Recommendations

                  We recommend that the Director of the HUD Boston Office of Community
                  Planning and Development instruct the City to

                  2A. Repay HUD $298,303 that was expended in excess of the CDBG public
                      service cap limit.

                  2B. Strengthen the its internal controls to ensure that the City properly classifies
                      all of its activities so that it does not exceed the CDBG public service cap in
                      future program years.

                  2C. Submit a Neighborhood Revitalization Strategy Area plan to HUD for
                      approval.
8
  Before the reclassification, the percentage was under 15 percent, and, therefore, some of the reclassified cost was
considered eligible, and only the amounts exceeding 15 percent were considered ineligible.
9
  Received from the previous program year


                                                          14
Finding 3: The City Did Not Ensure That Its Subcontracted Revolving
           Loan Fund Was Administered in Accordance With HUD
           Regulations
The City did not ensure that its subcontracted CDBG revolving loan fund was administered
effectively and efficiently and in accordance with HUD regulations. Specifically, City officials
did not ensure that the City’s subcontracted CDBG revolving loan fund was properly set up and
administered; program income was tracked, recorded, and put back into the loan fund as
required; they conducted monitoring reviews of the loan program to ensure that it met a national
objective; and interest earned on the loan funds was remitted to HUD for transmittal to the U.S.
Treasury at least annually.10 This condition occurred because officials did not properly set up the
revolving loan fund contract with the subrecipient to document what types of loans would be
provided; the terms of the loans; and how to track, record, and use program income.
Additionally, officials did not properly monitor or oversee the subrecipient administering the
revolving loan fund. Consequently, they could not document that low- and moderate-income
individuals were assisted and that the loan fund of $635,000 was used efficiently and effectively.


     Revolving Loan Fund Not
     Properly Set Up and
     Administered

                 The City contracted with Worcester Community Housing Resources to administer
                 its revolving loan fund program; however, the agreement did not detail the types
                 of loans to be made, the terms of the loans, or how to track and account for
                 program income earned. The City provided $400,000 in CDBG funds and
                 $235,000 in CDBG-Recovery Act (CDBG-R) funds to Worcester Community
                 Housing Resources to set up the revolving loan fund. However, agency officials
                 did not provide reports or documentation on any of the loans made or repayments
                 received. The City also did not properly monitor the revolving fund to ensure that
                 it ran properly. During our audit, officials requested a list of the loans made;
                 however, the information received was not sufficiently detailed to determine
                 which loans were made, the amount of the loan disbursed, or the amount of the
                 loan that had been paid back.

                 Further, Worcester Community Housing Resources did not provide support
                 showing that the loans were eligible. According to the City, several of the loans
                 were deferred and forgivable, which may not have been eligible under CDBG
                 regulations. Agency officials informed the City that several of the loans had been

10
  This deficiency was identified by the HUD Boston Office of Community Planning and Development during its
monitoring review performed in June 2012 and communicated to the City in August 2012 in a monitoring letter.
HUD requested that the City obtain the interest within 30 days and return it to HUD; however, as of May 2013, the
City had remitted no interest to HUD.


                                                        15
           made with the agency’s own funds so the agency planned to reimburse itself for
           these loans with CDBG funds. Therefore, these loans were not originally
           identified on the agency’s submission of loans made. Some of these loans were
           made years ago and may not have had the proper CDBG restrictions in place.
           Further City officials told agency officials to stop lending CDBG funds as of
           December 2012 so that the City could determine which loans were outstanding
           and how much in program income had been received.

Program Income Not Properly
Tracked, Recorded, and Put
Back Into Loan Fund

           The City did not obtain documentation to show how much program income had
           been earned. Therefore, it did not know how much interest had been repaid and
           whether the program income earned was properly accounted for and used in
           accordance with CDBG regulations at 24 CFR 570.504.

No Monitoring or Oversight of
the Revolving Loan Fund

           Worcester Community Housing Resources did not provide beneficiary data for
           the loans made to the City to determine whether they were eligible under the
           CDBG program. Therefore, the City needs to obtain the loan files for all of the
           loans made with CDBG funds to ensure that the loans were made to and benefited
           low- and moderate-income individuals. It should be noted that the City had not
           monitored the revolving loan fund to ensure its compliance with CDBG and
           CDBG-R regulations since it was established in program year 34.

Interest Not Remitted to HUD
as Required


           Worcester Community Housing Resources officials maintained the CDBG
           revolving loan funds in an interest-bearing account, but officials had not been
           instructed to remit interest earned on the account to HUD. Regulations at 24 CFR
           570.500(b) require that funds in a revolving loan fund be held in an interest-
           bearing bank account and that the interest earned be transmitted to HUD at least
           annually; however, City officials did not submit evidence that interest was
           remitted to HUD. This condition occurred because the City did not put the
           program requirements related to remitting the interest earned to HUD at least once
           a year into the subgrantee agreement under which the funds were provided to the
           agency. As a result, none of the bank interest had been remitted to HUD since the
           fund was established in program year 34, although some interest was repaid to the
           City in program year 38.



                                           16
Conclusion


             The City had no assurance that its revolving loan fund was used in accordance
             with HUD requirements and that the program income earned from the loans was
             properly tracked, recorded, and used in accordance with CDBG regulations. We
             attribute this condition to City officials not properly setting up the revolving loan
             fund contract to document what types of loans would be provided; the terms of
             the loans; and how to track, record, and use program income. The City also did
             not properly monitor the subrecipient administering the revolving loan fund.
             Therefore, we questioned the entire $635,000 provided to Worcester Community
             Housing Resources as unsupported costs. Further, the City had not remitted
             interest earned on the funds to HUD as required.

Recommendations

             We recommend that the Director of the HUD Boston Office of Community
             Planning and Development instruct the City to

             3A. Provide documentation to support that $635,000 in CDBG program funds
                 was used in accordance with HUD requirements for eligible loans that met a
                 national objective. If such support cannot be provided, the City should
                 repay the amount.

             3B. Determine the amount of CDBG program income earned and provide
                 documents to ensure that it was used in accordance with HUD requirements.
                 If such support cannot be provided, the City should repay the income to the
                 CDBG program.

             3C. Remit any bank interest earned on the revolving loan fund to HUD for
                 transmittal to the U.S. Treasury.

             3D. Request that Worcester Community Housing Resources repay any funds
                 available in the revolving loan fund and restructure the revolving loan fund
                 agreement to ensure that future loans are CDBG eligible and processed in
                 accordance with HUD CDBG regulations.

             3E. Establish and implement a program income policy and include the policy in
                 all of the subrecipient agreements to ensure that program income is tracked,
                 recorded, and used in accordance with HUD CDBG regulations.

             3F. Establish and implement a monitoring policy to ensure that all loans are
                 CDBG eligible and meet a national objective.




                                               17
                            SCOPE AND METHODOLOGY

The audit focused on whether the City established and implemented adequate controls to ensure
that the CDBG program was administered in accordance with program requirements. We
performed the audit fieldwork from October 2012 to May 2013 at the Worcester City Hall
located at 455 Main Street, Worcester, MA. Our audit covered the period July 2009 through
September 2012 and was extended when necessary to meet our audit objectives.

To accomplish our objectives, we

        Reviewed relevant CDBG program requirements and applicable Federal regulations to
         gain an understanding of CDBG administration requirements.

        Interviewed staff from the HUD Boston, MA, Office of Community Planning and
         Development and the City’s Executive Office of Economic Development.

        Reviewed the City’s consolidated annual performance and evaluation reports, action
         plans, and city council minutes related to CDBG activity to gather data on the City’s
         expenditures.

        Reviewed the City’s audited financial statements for fiscal years ending June 30, 2010,
         2011, and 2012, to further understand the City’s programs and identify issues for follow-
         up.

        Reviewed HUD’s IDIS reports to document the City’s activities and disbursements. Our
         assessment of the reliability of the data in this system was limited to data reviewed and
         reconciled with City records; therefore we did not assess the reliability of this system.

        Selected a nonstatistical sample of 11 CDBG activities with an authorized amount of
         more than $5.7 million to test for compliance with HUD regulations. This amount
         represented 41 percent of $13.911 million received by the City and used to fund 71
         activities during program years 35, 36, and 37. These activities were selected based on
         risk identified by the HUD Boston Office of Community Planning and Development and
         our interviews with City staff.

        Identified all of the City’s public service activities and calculated the percentage of
         CDBG funds used for public service activities.

        Reviewed the CDBG revolving loan fund of $635,00012 for compliance with HUD
         regulations.


11
   This amount includes unexpended balances from previous years CDBG funds that were allocated to projects in
program years 35, 36 and 37.
12
   The revolving loan fund was set up with $400,000 in CDBG funds and $235,000 in CDBG-R funds.


                                                      18
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                               19
                              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
               objectives:

                     Effectiveness and efficiency of operations – Policies and procedures that
                      management has implemented to reasonably ensure that a program meets
                      its objectives.

                     Reliability of financial data – Policies and procedures that management has
                      implemented to reasonably ensure that valid and reliable data are obtained,
                      maintained, and fairly disclosed in reports.

                     Compliance with applicable laws and regulations – Policies and procedures
                      that management has implemented to reasonably ensure that resources use is
                      consistent with laws and regulations.

                     Safeguarding of resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and abuse.

               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.


                                                 20
Significant Deficiencies

             Based on our review, we believe that the following items were significant
             deficiencies in program years 35, 36, and 37:

                   The City did not have adequate controls over efficiency and effectiveness
                    of program operations when officials did not establish adequate
                    administrative controls to ensure that costs associated with affordable
                    housing, public service, and code enforcement activities were adequately
                    classified, eligible, and supported (see findings 1, 2, and 3).

                   The City did not have adequate controls over reliability of financial data
                    when officials did not establish adequate financial controls to ensure that
                    the agencies reimbursed or funded with CDBG funds provided valid and
                    reliable data based on the activities performed (see findings 1, 2, and 3).

                   The City did not have adequate controls over compliance with laws and
                    regulations when officials did not always comply with HUD regulations
                    while disbursing program funds, classifying activities, and ensuring that
                    activities met a national objective (see findings 1, 2, and 3).

                   The City did not have an adequate system to ensure that resources were
                    properly safeguarded when officials did not obtain adequate
                    documentation to ensure that costs charged to their affordable housing,
                    public service, code enforcement, and revolving fund activities were
                    eligible and supported (see findings 1, 2, and 3).




                                              21
                                      APPENDICES

Appendix A

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

 Recommendation                          Unsupported     Funds to be put
                      Ineligible 1/
     number                                  2/          to better use 3/
       1A                 $2,111,011
       1B                                  $3,292,630
       1C                                                        $153,268
       2A                   $298,303
       3A                                    $635,000

                          $2,409,314       $3,927,630            $153,268

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.

3/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this instance, if the City implements our
     recommendations to reprogram $153,268 in unspent allocated affordable housing and
     Operation Clean City activities, they can assure HUD that these funds will be properly
     put to better use.




                                             22
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         23
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3




                         24
Ref to OIG Evaluation   Auditee Comments




Comment 4




                         25
Ref to OIG Evaluation   Auditee Comments




Comment 5




Comment 6




                         26
Ref to OIG Evaluation   Auditee Comments




Comment 7




Comment 8




                         27
Ref to OIG Evaluation   Auditee Comments




                         28
Ref to OIG Evaluation   Auditee Comments




                         29
                         OIG Evaluation of Auditee Comments

Comment 1   City officials acknowledged that in the past they should have required
            subrecipients to produce more specific outcomes, monitor progress, and paid for
            only eligible accomplishments. As such, they contend that they are now working
            with HUD and its technical assistant to improve the CDBG program to ensure
            future compliance with CDBG regulations; therefore, we acknowledged this effort
            in the background section of this report.

Comment 2   City officials believe that OIG’s estimated computation of ineligible cost using a
            20 percent developer fee on total hard and soft cost only increases the ineligible
            amount; as such they believe that we should have included acquisition costs in the
            computation of ineligible developer fees. They also indicated on page 5 of the
            written response (comment 8) that they drafted written policies and procedures for
            CDBG-supported housing including standards on developer’s fee and overhead
            and that moving forward, the City is adopting the Massachusetts Department of
            Housing and Community Development funding model for affordable housing
            development projects whereby developers will be reimbursed at no more than 5
            percent of the total acquisition costs and at no more than 12.5 percent of hard and
            soft costs. With this in mind, we agreed to include 5 percent of the total
            acquisition costs and 12.5 percent of hard and soft costs, consistent with the new
            proposed fee schedule, and have revised the estimated computation of ineligible
            cost accordingly. We believe that our estimated computation is reasonable
            however; this issue will have to be resolved during the audit resolution process
            with HUD.

Comment 3   City officials believe that OIG’s estimates of total fees and overhead should have
            considered certain administrative costs such as processing, origination, closing
            and legal fees as direct fees. However, the City did not have a fee schedule for
            these services and no basis for the reasonableness of the costs charged. For
            example in some instances, the administrative costs charged to the CDBG
            program greatly exceeded the amount of the assistance provided to the
            homeowner. Again since we believe we used a reasonable method to calculate
            the maximum allowable administrative expense to charge to the CDBG program;
            City officials should work with HUD during the audit resolution process to
            develop a fee schedule, which includes reasonable and eligible fees allowable for
            the services provided by Worcester Community Housing Resources in the future.

Comment 4   City officials acknowledged that they did not obtain the required documentation
            at their office to ensure that public service activities were meeting a national
            objective; that monitoring was not adequate; that operation clean city became a
            standard general local government program; and that code inspection activities
            were not always eligible. However, they state that during program years 38 and
            39 they increased documentation requirements, monitoring, etc., to ensure that



                                            30
            they will be able to document CDBG eligibility in the future. These are all
            actions that are responsive to our recommendations.

Comment 5   City officials believe that some of their housing counseling activities may be
            eligible as housing services. However, the City was given substantial time during
            the audit to document that its housing counseling activities were eligible housing
            services; but, they were not able to obtain and provide the information from its
            subrecipients. The City also informed OIG that only a small portion of the
            housing counseling activities were related to HOME assisted units and would not
            substantially change the reclassified amount. As such, we still consider all of the
            housing counseling costs as public service activities, which caused the City to
            exceed the 15 percent public service cap. Nevertheless, if the City is able to
            provide additional documentation to support that housing counseling activities
            were housing services, this would have to be resolved during the audit resolution
            process with HUD.

Comment 6   City officials acknowledge that their revolving loan fund did not meet all
            eligibility standards and that simple interest from the interest bearing account was
            not immediately remitted to HUD as required. They state that they are working
            with HUD to implement needed changes and have since remitted the simple
            interest to HUD. However, since we did not review this, these changes and
            subsequent remittance of interest will have to be confirmed and resolved during
            the audit resolution process with HUD.

Comment 7   OIG acknowledges that all corrective actions started in program year 38 to correct
            the issues identified in the past program years are responsive to our
            recommendations.

Comment 8   City officials have stated that they laid out various actions to correct their
            procedures going forward, all of which are responsive to our recommendations.




                                             31
Appendix C

       SCHEDULE OF QUESTIONED AFFORDABLE HOUSING,
       PUBLIC SERVICE, AND CODE INSPECTION COSTS BY
              AGENCY AND ACTIVITY (FINDING 1)
                 Agency                     Ineligible      Unsupported Funds to be            Total
                                                                        put to better       questioned
                                                                             use             costs by
                                                                                              agency
     Worcester East Side CDC                   $407,407           $25,425           $17,168     $450,000
     Worcester Common Ground                   $367,265          $156,811           $15,924     $540,000
     CDC
     Oak Hill CDC                              $255,372          $189,191           $21,328          $465,891
     Main South CDC                            $294,539          $245,461                $0          $540,000
     South Worcester Neighborhood                    $0           $35,556                $0           $35,556
     Center13
       Subtotal affordable housing           $1,324,583          $652,444           $54,420        $2,031,447

     Worcester Community Housing               $575,356          $216,695           $62,699          $854,750
     Resources (CDFI*)
     Total affordable housing                $1,899,939          $869,139          $117,119        $2,886,197

     Friendly House                                    $0        $515,768                  $0        $515,768
     Henry Lee Willis                                  $0        $346,429                  $0        $346,429
     Cento Las Americas                                $0        $205,965                  $0        $205,965
     South Worcester Neighborhood                      $0        $441,481                  $0        $441,481
     Center
     Operation Clean City                      $130,512                $0           $36,149          $166,661
     Total public services                     $130,512        $1,509,643           $36,149        $1,676,304

     Code inspection                            $80,560           913,848                  $0        $994,408
     Total code inspection                      $80,560          $913,848                  $0        $994,408

           Grand total             $2,111,011       $3,292,630                     $153,268        $5,556,909
* CDFI = community development financial institution


13
  The South Worcester Neighborhood Center is not a community development corporation; it is a public service
agency. The agency was funded for a rehabilitation specialist position in program year 37. This position was
originally funded under Oak Hill CDC for program years 35 and 36. This amount is considered unsupported for all
three years (35, 36, and 37) as no documentation was provided to show what work was performed and how a
national objective was met. This is the only CDBG affordable housing funding the South Worcester Neighborhood
Center received.


                                                      32
Appendix D

 APPLICABLE HUD AND CITY OF WORCESTER CONTRACT
                 REQUIREMENTS

HUD Regulations

     24 CFR 85.40(a), Monitoring by grantees. Grantees are responsible for managing the
     day-to-day operations of grant and subgrant supported activities. Grantees must monitor
     grant and subgrant supported activities to assure compliance with applicable Federal
     requirements and that performance goals are being achieved. Grantee monitoring must
     cover each program, function or activity.

     24 CFR 201(n), Homeownership assistance. CDBG funds may be used to provide direct
     homeownership assistance to low- or moderate-income households in accordance with
     section 105(a) of the Act.

     24 CFR 202(c), Code enforcement. Costs incurred for inspection for code violations and
     enforcement of codes (e.g., salaries and related expenses of code enforcement inspectors
     and legal proceedings, but not including the cost of correcting the violations) in
     deteriorating or deteriorated areas when such enforcement together with public or private
     improvements, rehabilitation, or services to be provided may be expected to arrest the
     decline of the area.

     24 CFR 570.207(a)(2), General government expenses. Except as otherwise specifically
     authorized in Subpart C of Part 570 or under OMB [Office of Management and Budget]
     Circular A-87, expenses required to carry out the regular responsibilities of the unit of
     general local government are not eligible for assistance under this part.

     24 CFR 570.503, Agreements with Subrecipients

            (a) Before disbursing any CDBG funds to a subrecipient, the recipient shall sign a
            written agreement with the subrecipient. The agreement shall remain in effect
            during any period that the subrecipient has control over CDBG funds, including
            program income.

            (b) At a minimum, the written agreement with the subrecipient shall include
            provisions concerning the following items:

                    (1) Statement of work. The agreement shall include a description of the
                    work to be performed, a schedule for completing the work, and a budget.
                    These items shall be in sufficient detail to provide a sound basis for the
                    recipient effectively to monitor performance under the agreement.


                                             33
               (2) Records and reports. The recipient shall specify in the agreement the
               particular records the subrecipient must maintain and the particular reports
               the subrecipient must submit in order to assist the recipient in meeting its
               recordkeeping and reporting requirements.

24 CFR 570.506, Records to be Maintained. Each recipient shall establish and maintain
sufficient records to enable the Secretary to determine whether the recipient has met the
requirements of this part. At a minimum, the following records are needed:

       (b) Records demonstrating that each activity undertaken meets one of the criteria
       set forth in § 570.208, Criteria for National Objectives.

       (h) Financial records, in accordance with the applicable requirements listed in §
       570.502, including source documentation for entities not subject to parts 84 and
       85 of this title. Grantees shall maintain evidence to support how the CDBG funds
       provided to such entities are expended. Such documentation must include, to the
       extent applicable, invoices, schedules containing comparisons of budgeted
       amounts and actual expenditures, construction progress schedules signed by
       appropriate parties (e.g., general contractor and/or a project architect), and/or
       other documentation appropriate to the nature of the activity.

City of Worcester Contract Requirements

       Section 1. Scope of Work

       1.1.    The Contractor shall perform and render the services hereinafter set forth
               in the terms and conditions of this Agreement and more specifically in the
               Scope of Work, Exhibit A, attached hereto and incorporated by reference.

       1.2.    The Contractor is and shall at all times remain an “independent
               contractor” with respect to the services to be performed under this
               Agreement.

       1.3.    The Contractor shall comply with the requirements of Title 24 of the Code
               of Federal Regulations, Part 570 (HUD regulations concerning
               Community Development Block Grants (hereinafter “CDBG”)) including
               subpart K of these regulations, except that, to the extent required by the
               Granting Authority, (a) the Contractor does not assume the City’s
               environmental responsibilities described in 24 CFR 570.604 and (b) the
               Contractor does not assume the City’s responsibility for initiating the
               review process under the provisions of 24 CFR Part 52. The Contractor
               shall comply with all other applicable federal, state and local laws,
               ordinances, regulations, orders, guidelines and policies governing this
               Agreement. The Contractor shall utilize funds available under this
               Agreement to supplement rather than supplant funds otherwise available.



                                        34
1.4.   All the Contractor’s activities funded with CDGB funds shall meet one of
       the CDBG Program’s National Objectives: benefit low- and moderate-
       income persons; aid in the prevention or elimination of slums or blight; or
       meet community development needs having a particular urgency, as
       defined in 24 CFR 570.208 and further set forth in 24 CFR 570.503(5).

Section 10. Records

10.1.1 Without limiting the generality of the foregoing, the Contractor shall
       maintain records required by the federal regulations specified in 24 CFR
       570.506 that are pertinent to this Agreement, including but not limited to
       (a) records providing a full description of each activity undertaking, (b)
       records demonstrating that each activity undertaken meets one of the
       National Objectives of the CDBG program, (c) records required to
       determine the eligibility of activities, (d) records required to document the
       acquisition, improvement, use or disposition of real property acquired or
       improved with CDBG assistance, (e) records documenting compliance
       with the fair housing and equal opportunity of the CDBG program, (f)
       financial records as required by 24 CFR 570.502, and 24 CFR 84.21-28,
       and (g) other records necessary to document compliance with Subpart K
       of 24 CFR Part 570.

10.1.2 The Contractor shall maintain client data demonstrating client eligibility
       for services provided. Such data shall include, but not be limited to, client
       name, address, income level or other basis for determining eligibility, and
       description of service provided. Such information shall be made available
       to the City, the Granting Authority and their respective designees for
       review upon request. Disclosure of client information collected under this
       agreement is prohibited, except as expressly required by this Agreement,
       the City, Granting Authority, or otherwise required by law.

10.1.3 The Contractor shall maintain separate records for funding transactions
       relating to this Agreement, and promptly furnish to the City any and all
       documents necessary to accomplish the audit of this CDBG Program as
       further described below.

10.3   The Contractor shall retain and secure for a minimum period of five (5)
       years all financial records, supporting documents, statistical records and
       all other records pertinent to the CDBG program, including but not limited
       to the records identified in this section. Except as may be otherwise
       required herein, the retention period shall begin on the date the City
       submits it final annual performance and evaluation report to HUD
       regarding the activities assisted under this Agreement. The Contractor
       shall retain records beyond the said five (5) year period if audit findings
       have not been finally resolved. Further records for non-expendable



                                 35
       property that were acquired with CDBG funds shall be retained for five (5)
       years after its final disposition. Records for any displaced parties shall be
       retained for five (5) years after said parties have received their final
       payment. Notwithstanding the above, if there is litigation, claims, audits,
       negotiations or other actions that involve any of the records cited and that
       have been started before the expiration of the five-year period, than such
       records shall be retained until completion of the actions and resolution of
       all issues, or the expiration of the five-year period, whichever occurs later.

Section 12. Program Income and Budget Adjustments

12.4   Any directives, orders, or other actions by HUD to restrict, exclude,
       modify, demand a refund, penalize the City on finding ineligible any
       project or program under this Agreement because of the Contractor’s
       failure to abide by or observe the requirements and conditions of the
       Affirmative Action Plan or Equal Opportunity Plan or any other Federally
       mandated requirement, shall be just cause for the City to demand
       immediately re-payment or reimbursement from the Contractor and take
       any other appropriate administrative or legal action.




                                 36