oversight

The State of Michigan Lacked Adequate Controls Over Its Neighborhood Stabilization Program Under the American Recovery and Reinvestment Act of 2009

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-09-15.

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

OFFICE OF AUDIT
REGION 5
CHICAGO, IL




                  State of Michigan

     Neighborhood Stabilization Program Under the
                    Recovery Act




2013-CH-1006                           SEPTEMBER 15, 2013
                                                        Issue Date: September 15, 2013

                                                        Audit Report Number: 2013-CH-1006


TO: Keith Hernandez, Director of Community Development, 5FD

      //signed//
FROM: Kelly Anderson, Regional Inspector General for Audit, Chicago Region, 5AGA

SUBJECT: The State of Michigan Lacked Adequate Controls Over Its Neighborhood
            Stabilization Program Under the American Recovery and Reinvestment Act of
            2009


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), results of our review of the State of Michigan’s Neighborhood
Stabilization Program 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 8M, 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
(312) 913-8684.
                                            September 15, 2013
                                            State of Michigan Lacked Adequate Controls Over Its
                                            Neighborhood Stabilization Program Under the
                                            American Recovery and Reinvestment Act of 2009



Highlights
Audit Report 2013-CH-1006


 What We Audited and Why                     What We Found

We audited the State of Michigan’s          The Authority did not ensure that Federal requirements
Neighborhood Stabilization Program          were followed in its administration of the State’s
under the American Recovery and             Program. Specifically, the Authority (1) could not
Reinvestment Act of 2009 as part of the     provide sufficient documentation to support that
activities in our fiscal year 2013 annual   increased construction costs for a new construction
audit plan. We selected the State’s         project were necessary and reasonable and (2) did not
Program based upon our designation of       ensure that consortium members acquired residential
the Program as high risk. Further, we       properties at a 1 percent discount from the properties’
received an anonymous complaint             current market value.
regarding the State’s Program. Our
objectives were to determine whether        As a result, the Authority (1) lacked sufficient
the Michigan State Housing                  documentation to support that its use of nearly
Development Authority, the                  $184,000 in Program funds for increased project
administrator of the State’s Program,       construction costs was necessary and reasonable and
complied with Federal requirements in       (2) inappropriately used nearly $55,000 in Program
its use of Program funds for (1)            funds for the acquisition of 12 properties.
increased construction costs for a new
construction project and (2) consortium
members’ acquisition of residential
properties. This is the third of three
audit reports on the State’s Program.

 What We Recommend

We recommend that the Director of
HUD’s Detroit Office of Community
Planning and Development require the
State to (1) provide sufficient
supporting documentation or reimburse
its Program nearly $184,000, (2)
reimburse its Program nearly $55,000,
and (3) implement adequate procedures
and controls to address the findings
cited in this audit report.
                            TABLE OF CONTENTS

Background and Objectives                                                                3

Results of Audit
      Finding 1: The Authority Lacked Sufficient Documentation To Support Increases in
                 Construction Costs for a New Construction Project                        5

      Finding 2: The Authority Did Not Ensure That Consortium Members Complied With
                 Federal Requirements When Acquiring Residential Properties               8

Scope and Methodology                                                                    11

Internal Controls                                                                        13

Appendixes
   A. Schedule of Questioned Costs                                                       15
   B. Auditee Comments and OIG’s Evaluation                                              16
   C. Federal Requirements                                                               27




                                            2
                     BACKGROUND AND OBJECTIVES

The Program. Authorized under Section 2301 of Title III of the Housing and Economic
Recovery Act of 2008, as amended, Congress appropriated $4 billion for the Neighborhood
Stabilization Program to provide grants to every State and certain local communities to purchase
foreclosed-upon or abandoned homes and rehabilitate, resell, or redevelop these homes to
stabilize neighborhoods and stem the decline in value of neighboring homes. The Act states that
amounts appropriated, revenues generated, or amounts otherwise made available to States and
units of general local government under Section 2301 will be treated as though such funds were
Community Development Block Grant funds under Title I of the Housing and Community
Development Act of 1974.

Congress amended the Program and increased its funding as part of the American Recovery and
Reinvestment Act of 2009. The Recovery Act provided the U.S. Department of Housing and
Urban Development (HUD) an additional $2 billion in Program funds to competitively award to
States, local governments, nonprofit organizations, or consortia of nonprofit organizations, which
could submit proposals in partnership with for-profit organizations. In January 2010, HUD
awarded 56 organizations more than $1.9 billion in funds through a competitive process.

The State. The Michigan State Housing Development Authority administers the State of
Michigan’s Program. The Authority was created by the Michigan Legislature in 1966 under the
laws of the State. It is governed by an eight-member board consisting of the State’s treasurer,
the director of the State’s Department of Human Services, and the director of the State’s
Department of Transportation. The board includes five other members appointed to 4-year terms
by the State’s governor and confirmed by the State Senate. The Authority’s mission is to
provide financial and technical assistance through public and private partnerships to create and
preserve decent and affordable housing for low- and moderate-income residents and to engage in
community economic development activities to revitalize urban and rural communities. The
Authority’s records are located at 735 East Michigan Avenue, Lansing, MI, and 3028 West
Grand Boulevard, Detroit, MI.

As part of a consortium, the State submitted an application to HUD, dated July 13, 2009, which
totaled $290 million in Program funds under the Recovery Act. On January 14, 2010, HUD
awarded nearly $224 million in Program funds to the consortium. The Authority is the lead
agency administering the Program.

An anonymous complaint to our office alleged that the Authority inappropriately used
construction contingencies for phases IIIC and IIID of Gardenview Estates, a new construction
project. We found that the Authority lacked sufficient documentation to support that its use of
nearly $184,000 in Program funds for increased construction costs (building concrete, earth
work, builder’s profit, general requirements, and builder’s overhead) for phases IIIC and IIID of
the project was necessary and reasonable. The Authority transferred funds budgeted for
construction contingencies to cover the increases in the construction costs.



                                                3
Our objectives were to determine whether the Authority complied with Federal requirements in
its use of Program funds for (1) increased construction costs for a new construction project and
(2) consortium members’ acquisition of residential properties. This is the third of three audit
reports on the State’s Program.




                                                4
                                      RESULTS OF AUDIT
Finding 1: The Authority Lacked Sufficient Documentation To Support
    Increases in Construction Costs for a New Construction Project
The Authority did not comply with Federal regulations in its use of Program funds for phases
IIIC and IIID of Gardenview Estates, a new construction project. It could not provide sufficient
documentation to support that increased construction costs were necessary and reasonable.
These weaknesses occurred because the Authority lacked adequate procedures and controls
regarding the project to ensure that it appropriately followed Federal regulations. As a result,
HUD and the Authority lacked assurance that the Authority’s use of nearly $184,000 in Program
funds for increased project construction costs was necessary and reasonable.


    The Authority Lacked
    Sufficient Documentation To
    Support Its Use of Nearly
    $184,000 in Program Funds

                 We reviewed more than $250,000 in construction costs (building concrete, earth
                 work, builder’s profit, general requirements, and builder’s overhead) that the
                 Authority transferred from the construction contingencies for phases IIIC and IIID
                 of the project. As of June 24, 2013, the Authority had disbursed more than
                 $226,000 in Program funds for the increased costs.

                 On April 24, 2012, the lessees1 entered into construction contracts for phases IIIC
                 and IIID of the project with a general contractor which included construction cost
                 trade payment breakdowns,2 dated April 2, 2012. On November 8, 2012, the
                 lessees and the contractor amended the trade payment breakdowns to increase
                 construction costs for additional work that needed to be completed due to poor
                 soil conditions. The Authority approved the amended trade payment breakdowns
                 and transferred funds budgeted for construction contingencies to cover the
                 increases in the construction costs. However, contrary to Federal regulations at
                 appendix A, section C.1, of 2 CFR (Code of Federal Regulations) Part 225, the
                 Authority had not been able to provide sufficient documentation to support that its
                 use of nearly $184,000 in Program funds for the increased construction costs was
                 necessary and reasonable.

                 The following table shows the construction costs in the trade payment
                 breakdowns, the increases in the construction costs, the amount of Program funds

1
  The lessees are leasing the property from the Detroit Housing Commission for 50 years for the development of
phases IIIC and IIID of the project.
2
  A trade payment breakdown is an estimate of the cost of various components and quantities of work to be
completed for the purpose of making partial payments.

                                                        5
              disbursed for the construction costs, and the amount of Program funds disbursed
              for the construction costs for which the Authority could not provide sufficient
              documentation to support that the costs were necessary and reasonable.

 Phase     Construction cost    Apr. 2, 2012   Nov. 8, 2012   Increase     Disbursed    Unsupported
  IIIC   Building concrete         $435,260       $544,339     $109,079       $98,171       $71,193
         Earth work                  222,030        229,602        7,572        6,815         6,815
         Builder’s profit            575,715        582,714        6,999        6,699         4,977
         General requirements        543,129        550,128        6,999        6,332         4,705
         Builder’s overhead          191,905        194,238        2,333        2,233         1,659
 IIID    Building concrete           410,728        513,567     102,839        92,555        82,212
         Builder’s profit            562,917        569,087        6,170        5,919         5,258
         General requirements        531,054        537,224        6,170        5,585         4,960
         Builder’s overhead          187,639        189,696        2,057        1,973         1,753
            Totals               $3,660,377     $3,910,595     $250,218     $226, 282      $183,532

             As of June 24, 2013, the Authority had not used the remaining $23,936 in Program
             funds budgeted for the increased construction costs.

The Authority Lacked
Adequate Procedures and
Controls

              These weaknesses occurred because the Authority lacked adequate procedures
              and controls to ensure that it used Program funds in accordance with Federal
              regulations.

              The Authority’s Rental Development Division’s construction specialist for phases
              IIIC and IIID of the project was responsible for reviewing trade payment
              breakdowns and supporting documentation to ensure that the costs were
              reasonable and then submitting the trade payment breakdowns to the Division’s
              construction manager for approval. However, the construction specialist stated
              that she did not receive supporting documentation for the amended trade payment
              breakdowns. The Division’s construction manager approved the amended trade
              payment breakdowns without reviewing documentation supporting the need for
              the additional construction work. The construction manager stated that the
              Authority relied on an on-site third party soils engineer to ensure that the
              increased construction costs were accurate and the increased construction costs in
              the amended trade payment breakdowns appeared reasonable.

Conclusion

              The Authority lacked adequate procedures and controls regarding its use of
              Program funds for phases IIIC and IIID of the project. As a result, it lacked
              sufficient documentation to support that its use of nearly $184,000 in Program
              funds for the increased construction costs for phases IIIC and IIID of the project
              was necessary and reasonable.

                                                 6
Recommendations

          We recommend that the Director of HUD’s Detroit Office of Community
          Planning and Development require the State to

          1A. Provide sufficient supporting documentation or reimburse its Program from
              non-Federal funds, as appropriate, for the $183,532 in Program funds used
              for phases IIIC and IIID project construction costs for which the Authority
              did not have sufficient documentation to demonstrate that the costs were
              necessary and reasonable.

          1B. Implement adequate procedures and controls to ensure that the Authority
              maintains documentation to sufficiently support increases in construction
              costs in accordance with Federal requirements.

          We recommend that the Director of HUD’s Detroit Office of Community
          Planning and Development

          1C. Ensure that if the Authority uses Program funds for the remaining $23,936
              in increased construction costs for phases IIIC and IIID of the project that
              had not been used as of June 24, 2013, it can provide sufficient
              documentation to support that the construction costs are necessary and
              reasonable.




                                           7
Finding 2: The Authority Did Not Ensure That Consortium Members
   Complied With Federal Requirements When Acquiring Residential
                             Properties
The Authority did not always ensure that consortium members acquired residential properties at
a 1 percent discount from the properties’ current market value. These weaknesses occurred
because the Authority needs to improve procedures and controls for its Program-funded activities
involving acquisition to ensure compliance with Federal requirements. As a result, it
inappropriately used nearly $55,000 in Program funds for the acquisition of 12 properties.


    The Authority Did Not Ensure
    That Residential Properties
    Were Acquired at a Discount of
    at Least 1 Percent From
    Current Market Value

                  We reviewed 92 Program-funded activities involving acquisition under the
                  Recovery Act. The 92 activities totaled more than $2.1 million in Program funds
                  budgeted for acquisition.

                  Contrary to section 2301(d)(1) of Title III of the Act and section C of the notice of
                  fund availability for the Program under the Recovery Act, dated June 11, 2009,
                  the Authority inappropriately used $54,993 in Program funds for the acquisition
                  of 12 residential properties. It did not ensure that the State’s consortium members
                  acquired the properties at a 1 percent discount from the properties’ current market
                  value. The consortium members

                          Did not acquire six properties (activity numbers 69310, 69496, 69578,
                           69581, 71955, and 72413) using the most recent state equalized value3 to
                           determine the properties’ current market value,
                          Acquired three of the properties (activity numbers 72085, 75283, and
                           85153) for more than the average price of the comparable homes sold in
                           the area that was included in the properties’ comparable market analyses,
                          Acquired one property (activity number 81021) for more than its appraised
                           value,
                          Acquired another property (activity number 74206) for more than the
                           suggested value in the broker price opinion for the property, and
                          Acquired the remaining property (activity number 74050) at its state
                           equalized value times two.



3
 According to the State, state equalized value, generally the same as assessed value, is one half of a property’s true
cash value, which is the fair market value or the usual selling price of a property.

                                                           8
The State Needed To Improve
Procedures and Controls

             These weaknesses occurred because the Authority needed to improve procedures
             and controls for its Program-funded activities involving acquisition to ensure
             compliance with Federal requirements.

             The assistant director and housing coordinator of a consortium member’s
             Community Development Department said that the consortium member was
             switching to a new operating system when the six properties (activity numbers
             69310, 69496, 69578, 69581, 71955, and 72413) were purchased. Since the
             consortium member’s staff still had access to and was more comfortable using the
             old operating system, the staff obtained the state equalized values for the six
             properties from the old system. However, the staff was not aware that the state
             equalized values for the current year were only updated in the new system.

             The special assistant for program development of the Authority’s Executive
             Office stated that although the consortium members acquired four properties
             (activity numbers 72085, 74206, 81021, and 85153) for more than the (1) average
             price of the comparable homes sold in the area, (2) appraised value, or (3)
             suggested value, the properties were acquired for less than the properties’ state
             equalized value times two. HUD did not set a hierarchy as to which valuation
             method to use in establishing the current market value. Therefore, the costs to
             acquire the properties were reasonable. However, it was not reasonable to use the
             valuation method of state equalized value times two to support higher property
             acquisition costs. Further, the property associated with activity number 81021
             was acquired for $50,500. Therefore, the consortium member was required to
             acquire the property at a discount of at least 1 percent from the property’s current
             market appraised value as established through an appraisal.

             The program and policy manager of the Authority’s Community Development
             Division provided an electronic mail from a consortium member’s community
             resource planner stating that the acquisition of the property (activity number
             74050) that was acquired at its state equalized value times two was due to an
             oversight.

Conclusion

             The Authority needs to improve procedures and controls for its Program-funded
             activities involving acquisition to ensure compliance with Federal requirements.
             As a result, it inappropriately used nearly $55,000 in Program funds for the
             acquisition of 12 properties.




                                              9
Recommendations

          We recommend that the Director of HUD’s Detroit Office of Community
          Planning and Development require the State to

          2A. Reimburse its Program $54,993 from non-Federal funds for the Program
              funds used to acquire 12 properties in excess of a 1 percent discount from
              the properties’ current market value.

          2B. Implement revised procedures and controls to ensure that the Authority
              complies with Federal requirements in its use of Program funds for
              consortium members’ property acquisitions.




                                         10
                             SCOPE AND METHODOLOGY

We performed our onsite audit work from December 2012 through May 2013 at the Authority’s
office located at 735 East Michigan Avenue, Lansing, MI. The audit covered the period
February 2010 through October 2012 and was expanded as determined necessary.

To accomplish our objectives, we reviewed

                Applicable laws; Federal regulations at 2 CFR Part 225; HUD’s regulations at 24
                 CFR Part 570; the U.S. Department of Transportation’s regulations at 49 CFR
                 Part 24; notices of fund availability for the Program under the Recovery Act,
                 dated May 4, 2009, June 11, 2009, November 9, 2009, and January 21, 2010;
                 HUD’s grant agreement with the Authority for the Program under the Recovery
                 Act; and HUD’s Detroit Office of Community Planning and Development’s
                 monitoring reports for the State’s Program and Block Grant and HOME
                 Investment Partnerships programs from 2008 through 2012.

                The State’s consolidated plan for 2010, annual performance reports for 2010 and
                 2011, and Program data from HUD’s Disaster Recovery Grant Reporting system
                 and the Authority’s On-line Project Administration Link system.

                The Authority’s audited financial statements for 2010 through 2012, annual
                 reports for 2009 through 2012, financial records, policies and procedures,
                 agreements, Program application, activity files, organizational chart, and budget.

In addition, we interviewed the Authority’s employees, the Detroit Housing Commission’s
personnel, and HUD’s staff.

Finding 1

We reviewed the more than $250,000 in construction costs (building concrete, earth work,
builder’s profit, general requirements, and builder’s overhead) that the Authority transferred
from the construction contingencies for phases IIIC and IIID of Gardenview Estates, a new
construction project. As of June 24, 2013, the Authority had disbursed more than $226,000 in
Program funds for the increases in construction costs.

Finding 2

We statistically selected and reviewed 90 of the 1,391 Program-funded activities involving
acquisition under the Recovery Act set up in the Authority’s Online-Project Administration Link
system and in progress as of January 22, 2013. The 90 activities totaled more than $1.3 million
in Program funds budgeted for acquisition. We used a stratified Chromy sample4 with the

4
 A sample designed to capture numbers across a range of number values but manage high-value, influential
numbers to prevent random over-representation or under-representation from the high-value, influential numbers.

                                                       11
following criteria: (1) a 90 percent confidence interval, (2) a 30 percent error rate; (3) an
achievable precision of 33 percent, and (4) a design effect of 0.80 for stratification and
probability proportional to size sampling. We reviewed two additional Program-funded
activities involving acquisition under the Recovery Act that were administered by the
Authority’s Rental Development Division. The two activities totaled $800,000 in Program funds
for acquisition.

We relied in part on data maintained by the Authority for the Program-funded activities
involving acquisition under the Recovery Act and data in HUD’s system. Although we did not
perform detailed assessments of the reliability of the data, we performed minimal levels of
testing and found the data to be adequately reliable for our purposes.

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




                                               12
                              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 reporting – 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
                      resource use is consistent with laws and regulations.

               We assessed the relevant controls identified above.

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




                                                 13
Significant Deficiencies

             Based on our review, we believe that the following items are significant deficiencies:

             The Authority lacked adequate procedures and controls to ensure that

                   Federal regulations were followed in its use of Program funds for increased
                    construction costs of phases IIIC and IIID of Gardenview Estates, a new
                    construction project (see finding 1).

                   Federal requirements were always followed in the consortium members’
                    acquisition of residential properties under the Program at a 1 percent
                    discount from the properties’ current market value (see finding 2).




                                              14
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                 Recommendation
                                         Ineligible 1/     Unsupported 2/
                     number
                       1A                                         $183,532
                       2A                     $54,993
                      Totals                  $54,993             $183,532

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.




                                             15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation                              Auditee Comments




                                                         MEMORANDUM

                  TO:           Kelly Anderson, Regional Inspector General for Audit, HUD OIG
                  FROM:         Scott Woosley, Executive Director, Michigan State Housing Development
                                Authority /signed/
                  DATE:         August 5, 2013
                  RE:           Michigan State Housing Development Authority Response to HUD OIG Draft
                                Audit Report of the State of Michigan’s Neighborhood Stabilization Program
                                Under the American Recovery and Reinvestment Act of 2009

                                                                                       DELIVERED VIA E-MAIL


                  The Michigan State Housing Development Authority has reviewed the U.S. Department of
                  Housing and Urban Development Office of Inspector General Draft Audit Report dated July 24,
                  2013, and appreciates the opportunity to respond. As discussed, the Authority takes issue with
                  Findings 1 and 2 and asks that you take into account the responses as described below as you
                  finalize your report.

                  FINDING 1 RESPONSE: THE AUTHORITY HAD SUFFICIENT DOCUMENTATION
                  TO SUPPORT INCREASES IN CONSTRUCTION COSTS FOR A NEW
                  CONSTRUCTION PROJECT


Comments 1           More than 300 Pages Submitted
                     Support Increases in Construction
                     Costs


Comment 1                        The Michigan State Housing Development Authority (hereafter the Authority)
                                 disagrees with the HUD Office of Inspector General (HUD OIG) finding related
                                 to the Authority lacking sufficient documentation to support increases in costs for
Comments 1                       a new construction project. In the more than 300 pages of documentation
                                 previously submitted to HUD OIG, there is sufficient support and justification of
 and 2
                                 the additional cost (See Attachment A). Those pages show that construction
                                 procedures were well within industry standards in its reporting.




                                                      16
Ref to OIG Evaluation                              Auditee Comments


                                                                                      Response to HUD OIG Report
                                                                                                     Aug. 5, 2013
                                                                                                           Page 2




Comment 1               Multiple Expert Reviews and
                        Acknowledgments Demonstrate the Need for
                        the Cost Increase to Ensure Sound
                        Construction


                                 The projects in question, Gardenview Estates phases IIIC and IIID, represent
                                 significant enhancements to the affordable housing stock on the west side of the
                                 City of Detroit and additionally meet HUD’s goals for replacement of housing
                                 units on former public housing program sites. The Authority is pleased to partner
                                 with HUD and the Detroit Housing Commission on the redevelopment of this site,
                                 which represent a combined investment of more than $20 million in hard
                                 construction costs in this west Detroit neighborhood.

                                 Prior to starting construction on this urban renewal site, it was expected that there
                                 would be debris at varying depths during the installation of the footings and
                                 foundations; however, the exact soil composition could not be determined until
                                 the site was fully excavated and soil compression testing could be done in the
                                 precise areas of the footings and trench walls. So, the buildings were initially
                                 planned and designed to have building footings laid at a 42 inch depth, pursuant
                                 to Michigan Building Code requirements that seek to provide frost protection to
                                 the structure foundation and thereby ensure the buildings are soundly constructed.
                                 (See Michigan Administrative Code Section 408.30449(1) which provides for the
                                 42 inch depth requirement.)

                                 As expected, upon excavation and soil compaction testing, the projects’ General
                                 Contractor, Concrete Sub-contractor, Soil Engineer and Architect determined the
                                 additional footing depth required to ensure that the buildings were soundly
                                 constructed. (See additionally Michigan Administrative Code Section
                                 408.30449(2)(b) which provides for downward deviation/additional footing depth
Comment 1                        from the 42 inch requirement based on soil type.) Those same construction,
                                 engineering and design professionals determined that soil conditions where these
                                 footings were to be laid dictated a depth anywhere from 60 to 84 inches
                                 beyond/below the 42 inch depth specified in the building plans and specifications
                                 to ensure sound construction. They field-adjusted the plans and specifications
                                 based on these observations, the Soil Engineer noted the conditions in the
                                 applicable reports on the buildings, and the construction team proceeded to




                                                       17
Ref to OIG Evaluation                           Auditee Comments


                                                                                  Response to HUD OIG Report
                                                                                                 Aug. 5, 2013
                                                                                                       Page 3




                              construct the foundations at the new and adjusted depths. Given the additional
Comments 1
                              footing depth, costs related to the excavation, preparatory work, form placement,
 and 3                        and concrete volume all increased in accordance with the additional footing depth.

                              The Authority, the project sponsor, and the project’s General Contractor started
                              construction on the two properties in June of 2012. As identified in the HUD OIG
                              audit finding, as a part of this construction process, the General Contractor sought
                              amendments to each project’s Trade Payment Breakdown related to anticipated
                              but previously unquantifiable costs for concrete foundation work at each
                              construction project.

Comment 4                     When the Authority’s Construction Manager reviewed the General Contractor’s
                              request for adjustment to the Trade Payment Breakdown to compensate for these
                              additional costs, he reviewed the General Contractor’s request, the Soil
                              Engineer’s report, and the Concrete Sub-contractor’s proposed billings and
                              determined that based on his review of those materials, his knowledge of the
                              construction projects in question, and his more than 30-years’ residential and
                              commercial construction experience that the requested upward adjustments in the
                              construction costs related to the building foundations were necessary and
                              reasonable to complete the foundation construction related to the proposed
                              residential buildings.


                    Questioned Costs Are Only 1.13% of the
Comment 5           $20 Million in Hard Construction Costs


Comment 5                     It is important to note that the amount in question in this finding represents
                               1.13% of the total hard construction costs. While this may seem like a small
                              amount, the Authority takes every audit seriously and sought supporting
                              documentation that would refute HUD OIG’s claim that it lacked sufficient
                              documentation to support increases in construction costs.




                                                   18
Ref to OIG Evaluation                           Auditee Comments


                                                                                  Response to HUD OIG Report
                                                                                                 Aug. 5, 2013
                                                                                                       Page 4




                    The Process Complies with Federal
                    Requirements of Cost Reasonableness



Comment 6                     The Authority believes that the above process fully comports with the
                              requirements of 2 CFR Part 225 related to cost reasonableness including 2 CFR
Comment 1                     225 (C)(1)(a), 2 CFR 225(C)(2)(d), and 2 CFR 225(D)(2)(b) and (c). The
                              Authority further attests that it has provided sufficient supporting documentation
                              to support increases in costs for this new construction project – following
                              standards set by the industry –and it asks that HUD OIG adjust its audit findings
                              and recommendations accordingly.

                              Note: Please also see the more than 300 pages in documentation related to the
                              Gardenview IIIC and IIID Multi-family Housing projects provided to the HUD
                              OIG and incorporated into this response for reference.




                                 RESPONSE TO FINDING 2 BEGINS ON NEXT PAGE




                                                   19
Ref to OIG Evaluation                              Auditee Comments


                                                                                     Response to HUD OIG Report
                                                                                                    Aug. 5, 2013
                                                                                                          Page 5




                  FINDING 2 RESPONSE: THE AUTHORITY DID ENSURE THAT CONSORTIUM
                  MEMBERS COMPLIED WITH FEDERAL REQUIREMENTS WHEN ACQUIRING
                  RESIDENTIAL PROPERTIES

                                 The Authority disagrees with the HUD Office of Inspector General (HUD OIG)
                                 finding that the Authority did not ensure that Consortium Members complied with
Comment 7                        federal requirements when acquiring residential properties. The assertion that
                                 “the State lacked Adequate Procedures and Controls” is unreasonable based on
                                 the OIG’s own findings.


                        Questioned Costs Total Only 0.04% of Total
Comments 7              Program Costs and 3.7% of the Activities
 and 8                  Reviewed


Comment 8                        The audit reviewed more than $2.1 million worth of acquisition activities within
                                 the broader $223 million program and found a little more than $78,000 which is
                                 about 0.04% of the total program or 3.7% of the activities reviewed by the OIG.
                                 Far from a lack of controls, it is the strong program management and procedures
                                 that are in place that limited the errors given the incredibly complex, fast paced
                                 and constantly changing environment in which the program was being
                                 administered.

                        Multiple Changes in HUD
                        Guidance Throughout Program
                        Implementation



                                 During the course of the NSP Program, HUD issued no less than 60 separate
                                 notices, policy alerts and bulletins. Many of these resulted in the need to
                                 communicate changes or clarifications in policy with several hundred sub-
                                 recipients, developers, contractors, non-profit organizations, staff and other
                                 stakeholders. Not only was the project workforce large, but it was also ever
                                 changing as communities were hit with the devastating workforce reductions and
                                 management changes that resulted from Michigan’s foreclosure crisis. The
                                 constantly evolving federal guidance and work in Michigan’s most distressed
                                 cities was orchestrated all while MSHDA staff was managing over one billion
                                 dollars in combined work associated with federal housing programs under very




                                                      20
Ref to OIG Evaluation                               Auditee Comments


                                                                                        Response to HUD OIG Report
                                                                                                       Aug. 5, 2013
                                                                                                             Page 6



                                  tight time constraints.

Comments 7                        An error rate of 3.7% would be called a success by most reasonable standards
                                  given the conditions in place during this program. Simply stated, the statement
 and 8                            represents lack of understanding of the practical realities and complexity of the
                                  NSP program.

                        Consortium Members Used
                        Methodologies Consistent with the
                        Intent of HUD Guidance


                                  City of Hamtramck

Comment 9                         The Authority disagrees with the HUD OIG finding on activity number 75283.
                                  Attached is documentation that supports the $23,400 as outlined in the Buyer’s
                                  Statement dated August 11, 2011 (See Attachment B). The SEV value of activity
                                  number 75283 was $26,200 in 2011, multiplying this number by two would result
                                  in the market value at the time being a maximum of $52,400. The comparable
                                  information provided was used to establish the fair market value of the property in
                                  order to prepare the voluntary sale notification to seller purchase price offer and is
                                  a second method utilized to ensure that the 1% purchase discount was met. The
                                  attached documentation from Contracting Resources states the square footage,
                                  siding, etc. (See Attachment B). Based on the comparable previously provided of
                                  other two- bedroom, two-story homes in the area with similar square footage and
                                  housing characteristics, it was determined that the average sale price was within
                                  the range of $21,000 and $25,500 and subsequently a purchase offer for $23,725
                                  was made.

Comment 9                         The Authority contends that based on the SEV documentation and the comparable
                                  information that the city has demonstrated that purchase discount requirement was
                                  met and that the $23,400 purchase was reasonable.

                                  Berrien County Land Bank

                                  The Authority disagrees with the OIG’s findings on activity numbers 69581,
Comment 10                        72413, 69496, 69578, 69310, and 71955. The properties purchased by the Berrien
                                  County Land Bank (BCLB) were done in keeping with the established local




                                                        21
Ref to OIG Evaluation                     Auditee Comments


                                                                             Response to HUD OIG Report
                                                                                            Aug. 5, 2013
                                                                                                  Page 7




Comment 10              process and did in fact reflect a 1% purchase price discount. The attached
                        memorandum from the Berrien County Treasurer establishes two critical facts.
                        First, that local policies required the Consortium to make their purchase decisions
                        in April of 2011 (See Attachment C). Secondly, that the State Equalized Value
                        records in Berrien County at the time were always a year behind and unavailable
                        until August or September of 2011, after the purchase date.

Comment 10              In calculating the purchase price with requisite discount, on activity numbers
                        69581, 72413, 69496, 69578, 69310, and 71955), BCLB relied on the 2010 SEV,
                        which was the best information available at the time. Both the election to
                        purchase as well as the closing itself occurred in advance of the August 2011 date
                        that the County Treasurer indicated the updated figures were available.

                        Michigan Land Bank Fast Track Authority

                        The Authority disagrees with the OIG’s findings on activity numbers 74206,
                        85153, and 72085, completed by the Michigan Land Bank Fast Track Authority.
Comment 11              Local program officials, with years of experience working in real estate within the
                        local neighborhoods, believed each of these properties was critical to the
                        implementation of the program, and found the initial property valuation reviewed
                        by the OIG to be flawed.

                        The attached documentation shows that the SEV for each of these properties was
                        well in excess of the purchase price and incorporated the requisite 1% discount
Comments 11             (See Attachments D, E, and F). It is common practice in federal housing
                        programs to use a third valuation mechanism to reconcile a discrepancy between
 and 12                 two differing price points. The State of Michigan Department of Licensing and
                        Regulatory Affairs clearly defines the SEV as equal to one-half of your property’s
                        actual value. In this case of these properties, the SEV was used to settle a dispute
                        between the Broker’s Price Opinion and the requested purchase price.

Comment 13              When program officials reviewed the appraisal on activity number 81021 they
                        found it to be severely out of line with local market conditions and known
                        conditions within that historic neighborhood. The slate roof and other historically
                        significant architectural features alone were known to be valued at well over
Comment 14              $50,000. Program officials again relied on the SEV to settle the dispute between
                        the appraisal and the requested purchase price.




                                             22
Ref to OIG Evaluation                    Auditee Comments


                                                                           Response to HUD OIG Report
                                                                                          Aug. 5, 2013
                                                                                                Page 8



                        Given the constantly evolving federal guidance in the NSP program, specific shift
                        in rules surrounding purchase price and valuation when coupled with changes in
                        program personal – current staff at the time relied on the SEV alone on this
                        property. The Authority does acknowledge that given the purchase price on this
                        property, Land Bank officials should have ordered a new appraisal to settle the
                        discrepancy, however, if a second appraisal would have been conducted, the
                        Authority believes it would have supported a purchase price far in excess of the
                        $50,500 price.

                        Genesee County Land Bank

                        The Authority agrees with the conclusion reached on activity 74050. The $134
                        difference was as a result of human error on the part of local officials in
                        calculating the purchase price discount.




                                             23
                        OIG’s Evaluation of Auditee Comments

Comment 1   We reviewed the documentation provided by the Authority with its response and
            revised the report to state:

               However, contrary to Federal regulations at appendix A, section C.1, of 2
               CFR Part 225, the Authority had not been able to provide sufficient
               documentation to support that its use of nearly $184,000 in Program funds for
               increased construction costs was necessary and reasonable.

            We also revised the table in finding 1 of this report to include the amount of
            Program funds disbursed for the construction costs for which the Authority could
            not provide sufficient documentation to support that the costs were necessary and
            reasonable.

            Further, we amended recommendation 1A to reflect these revisions.

Comment 2   The documentation provided by the Authority included field engineers’ daily
            reports and drawings, construction specifications, and subcontractors’ proposed
            billings for the increased construction costs. The Authority provided this
            documentation during the audit as part of change orders that were submitted for
            the increased construction costs. However, it did not review, approve, or process
            the change orders. Therefore, we did not review the change orders or the
            documentation contained within the change orders.

Comment 3   The additional construction costs were for building concrete, earth work, builder’s
            profit, general requirements, and builder’s overhead.

Comment 4   The Authority’s Rental Development Division’s construction manager stated that
            he approved the amended trade payment breakdowns after reviewing an estimate
            and accounting of additional construction costs for building concrete and earth
            work, along with a summary of the additional costs. The construction manager
            also stated that the Authority relied on an onsite third-party soils engineer to
            ensure that the increased construction costs were accurate, and the increased
            construction costs in the amended trade payment breakdowns appeared
            reasonable. Therefore, the construction manager did not base his approval of the
            amended trade payment breakdowns on a review of the field engineers’ daily
            reports and drawings and construction specifications.

            We revised the report to state the following:

               The Division’s construction manager approved the amended trade payment
               breakdowns without reviewing documentation supporting the need for the
               additional construction work.




                                             24
Comment 5   The nearly $184,000 in Program funds for the increased construction costs, which
            the Authority was not able to provide sufficient documentation to support, was
            81.1 percent of the more than $226,000 in Program funds disbursed for the
            increased construction costs that we reviewed.

Comment 6   Contrary to Federal regulations at appendix A, section C.1, of 2 CFR Part 225, the
            Authority had not been able to provide sufficient documentation to support that its
            use of nearly $184,000 in Program funds for the increased construction costs was
            necessary and reasonable.

            These weaknesses occurred because the Authority lacked adequate procedures
            and controls to ensure that it used Program funds in accordance with Federal
            regulations.

Comment 7   We revised the report to state:

               The Authority needs to improve procedures and controls for its Program-
               funded activities involving acquisition to ensure compliance with Federal
               requirements.

Comment 8   However, the 12 residential properties for which the Authority did not ensure that
            the State’s consortium members acquired the properties at a 1 percent discount
            from the properties’ current market value was 13 percent of the 92 Program-
            funded activities involving acquisition that we reviewed.

Comment 9   We revised the report to state:

               Contrary to section 2301(d)(1) of Title III of the Act and section C of the
               notice of fund availability for the Program under the Recovery Act, dated June
               11, 2009, the Authority inappropriately used $54,993 in Program funds for the
               acquisition of 12 residential properties.

               The consortium members acquired three of the properties (activity numbers
               72085, 75283, and 85153) for more than the average price of the comparable
               homes sold in the area that was included in the properties’ comparable market
               analyses.

            We also removed the following from the report:

               Further, contrary to Federal regulations at appendix A, section C.1, of 2 CFR
               Part 225 and appendix A to the U.S. Department of Transportation’s
               regulations at 49 CFR Part 24, the Authority lacked sufficient documentation
               to support that its use of $23,400 in Program funds for the acquisition of a
               residential property (activity number 75283) was reasonable. The market
               value analysis did not include sufficient information regarding the acquired



                                              25
                  property, such as square footage, year built, and type of exterior, to support
                  that the listed properties were comparable.

              Further, we amended recommendation 2A, deleted recommendation 2B, and
              moved recommendation 2C to recommendation 2B to reflect these revisions.

Comment 10 The deputy director of Berrien County’s Equalization Department stated and
           provided documentation to support that the state equalized values for tax year
           2011 were available for activity numbers 69310, 69496, 69578, 69581, 71955,
           and 72413 as of April 1, 2011. Further, the assistant director and housing
           coordinator of a consortium member’s Community Development Department said
           that the consortium member was switching to a new operating system when the
           six properties (activity numbers 69310, 69496, 69578, 69581, 71955, and 72413)
           were purchased. Since the consortium member’s staff still had access to and was
           more comfortable using the old operating system, the staff obtained the state
           equalized values for the six properties from the old system. However, the staff
           was not aware that the state equalized values for the current year were only
           updated in the new system. Therefore, the consortium member did not acquire
           the six properties using the most recent state equalized value to determine the
           properties’ current market value.

Comment 11 The Authority did not provide documentation to support that the comparable
           market analyses completed for the two properties (activity numbers 72085 and
           85153) and the broker price opinion completed for the remaining property
           (activity number 74206) were flawed.

Comment 12 The Authority did not provide documentation to support that the state equalized
           value times two was a more accurate valuation method for determining the fair
           market value than the comparable market analyses completed for the two
           properties (activity numbers 72085 and 85153) and the broker price opinion
           completed for the remaining property (activity number 74206). Therefore, it was
           not reasonable to use the valuation method of state equalized value times two to
           support higher property acquisition costs.

Comment 13 The Authority did not provide documentation to support that the appraised value
           of the property (activity number 81021) was not in line with local market
           conditions.

Comment 14 The consortium member was required to acquire the property at a discount of at
           least 1 percent from the property’s current market appraised value as established
           through an appraisal.




                                               26
Appendix C

                                FEDERAL REQUIREMENTS

Findings 1 and 2
HUD’s grant agreement with the Authority for the Program under the Recovery Act, dated
February 11, 2010, states that the following are part of the grant agreement: the notices of fund
availability for the Program under the Recovery Act, dated May 4, 2009, June 11, 2009,
November 9, 2009, and January 21, 2010; the Recovery Act; the Housing and Economic
Recovery Act of 2008; the State’s application for Program assistance under the Recovery Act;
HUD’s regulations at 24 CFR Part 570; and the funding approval.

HUD’s regulations at 24 CFR 570.501(b) state that a recipient is responsible for ensuring that
Block Grant funds are used in accordance with all program requirements. The use of designated
public agencies, subrecipients, or contractors does not relieve the recipient of this responsibility.
The recipient is also responsible for determining the adequacy of performance under subrecipient
agreements and procurement contracts and for taking appropriate action when performance
problems arise.

HUD’s regulations at 24 CFR 570.502(a) state that recipients and subrecipients that are
governmental entities, including public agencies, must comply with Office of Management and
Budget Circular A-87.

Finding 1

Appendix A, section C.1, of 2 CFR Part 2255 requires all costs to be necessary, reasonable, and
adequately documented. Section C.2 states that a cost is reasonable if, in its nature or amount, it
does not exceed that which would be incurred by a prudent person under the circumstances
prevailing at the time the decision was made to incur the cost. In determining reasonableness of
a given cost, consideration must be given to (1) the restraints or requirements imposed by such
factors as sound business practices and Federal, State, and other laws and regulations; (2) market
prices for comparable goods or services; (3) whether the individuals concerned acted with
prudence in the circumstances, considering their responsibilities to the organization, its
employees, the public at large, and the Federal Government; and (4) significant deviations from
the established practices of the governmental unit which may unjustifiably increase the Federal
award’s cost.

Finding 2
Section 2301(d)(1) of Title III of the Act states that any purchase of a foreclosed upon home or
residential property under this section must be at a discount from the current market appraised

5
    Office of Management and Budget Circular A-87 was relocated to 2 CFR Part 225.

                                                        27
value of the home or property, taking into account its current condition, and such discount must
ensure that purchasers are paying below-market value for the home or property.

Section I.D.2.c of the notice of fund availability for the Program under the Recovery Act, dated
May 4, 2009, states that except as described in this notice and its appendixes, statutory and
regulatory provisions governing the Block Grant program, including the provisions in subparts
A, C, D, J, K, I, and O of 24 CFR Part 570, as appropriate, should apply to the use of Program
funds. Section I.D.2.g states that the Uniform Relocation Assistance and Real Property
Acquisition Policies Act of 1970 applies as required in 24 CFR Part 570 and appendix 1,
paragraph K, of the notice. Paragraph A of appendix 1 defines current market appraised value as
the value of a foreclosed-upon home or residential property that is established through an
appraisal made in conformity with the appraisal requirements of the Uniform Relocation Act at
49 CFR 24.103 and completed within 60 days before an offer is made for the property by a
recipient, subrecipient, developer, or individual homebuyer. However, if the anticipated value of
the proposed acquisition is estimated at $25,000 or less, the current market appraised value of the
property may be established by a valuation of the property that is based on a review of available
data and is made by a person the recipient determines is qualified to make the valuation.

Section C of the notice of fund availability for the Program under the Recovery Act, dated June
11, 2009, states that each foreclosed-upon home or residential property must be purchased at a
discount of at least 1 percent from the current market-appraised value of the home or property.
The address, appraised value, purchase offer amount, and discount amount of each property
purchased must be documented in the recipient’s Program records.

HUD’s regulations at 24 CFR 570.606(b) state that 49 CFR Part 24 contains the government-
wide regulations implementing the Uniform Relocation Assistance and Real Property
Acquisition Policies Act of 1970. Paragraph 570.606(e) states that the acquisition of real
property for an assisted activity is subject to subpart B of 49 CFR Part 24. Paragraph
570.606(g)(1) states that a grantee is responsible for ensuring compliance with the requirements
of 24 CFR 570.606, despite any third party’s contractual obligation to the grantee to comply with
the provisions of 24 CFR 570.606. For purposes of the State’s Block Grant program, the State
should require recipients to certify that they will comply with the requirements of 24 CFR
570.606.

The U.S. Department of Transportation’s regulations at 49 CFR 24.101(b)(2) state that the
requirements of subpart B do not apply to acquisitions for programs or projects undertaken by an
agency or person that receives Federal financial assistance but does not have authority to acquire
property by eminent domain, provided that such agency or person should, before making an offer
for the property, clearly advise the owner that the agency or person is unable to acquire the
property if negotiations fail to result in an agreement and inform the owner in writing of what the
agency or person believes to be the market value of the property. Appendix A, additional
information to explain sections 24.101(b)(1)(iv) and (2(ii), to 49 CFR Part 24 states that for
programs and projects receiving Federal financial assistance described in 49 CFR 24.101(b)(2),
an agency is to inform the owner(s) in writing of the agency’s estimate of the fair market value
for the property to be acquired. While section 24.101(b)(2) does not require an appraisal for
these transactions, an agency may decide that an appraisal is necessary to support its

                                                28
determination of the fair market value of these properties, and in any event, an agency must have
some reasonable basis for its determination of the fair market value. After an agency has
established an amount it believes to be the fair market value of the property and has notified the
owner of this amount in writing, an agency may negotiate freely with the owner to reach
agreement.




                                                29