oversight

The City of Toledo, OH, Did Not Always Administer Its Community Development Block Grant-Recovery Act Program in Accordance With HUD's and Its Own Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-09-30.

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

OFFICE OF AUDIT
REGION 5
CHICAGO, IL




                  The City of Toledo, OH

           Community Development Block Grant-
                Recovery Act Program




2013-CH-1010                               SEPTEMBER 30, 2013
                                                        Issue Date: September 30, 2013

                                                        Audit Report Number: 2013-CH-1010




TO: Jorgelle Lawson, Director of Community Planning and Development, 5ED

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


SUBJECT: The City of Toledo, OH, Did Not Always Administer Its Community
Development Block Grant-Recovery Act Program in Accordance With HUD’s and Its Own
Requirements.

    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final audit report of our audit of the City of Toledo’s Community
Development Block Grant program funded 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) 353-7832.
                                            September 30, 2013
                                            The City of Toledo, OH, Did Not Always Administer Its
                                            Community Development Block Grant-Recovery Act
                                            Program in Accordance With HUD’s and Its Own
                                            Requirements


Highlights
Audit Report 2013-CH-1010


 What We Audited and Why                     What We Found

We audited the City of Toledo’s             The City did not ensure that Federal regulations and its
Community Development Block Grant           own policies were followed in the administration of its
funded under the American Recovery          Recovery Act Block Grant funds. Specifically, it did
and Reinvestment Act of 2009 as part of     not always ensure that assisted households were
the activities in our fiscal year 2013      income eligible. As a result, HUD and the City lacked
annual audit plan. We selected the          assurance that Recovery Act Block Grant funds were
City’s Block Grant based upon recent        used for eligible households.
media attention regarding the City’s
programs, a request by the Honorable        Further, the City did not always (1) obtain price quotes
Marcy Kaptur, and a referral from the       from at least three contractors and (2) ensure that it
Office of Inspector General’s Office of     paid reasonable prices for its roof and exterior repair
Investigation. Our objective was to         projects. As a result, HUD lacked assurance that the
determine whether the City effectively      City’s procurements were conducted in a manner that
administered its grant in accordance        provided full and open competition, and HUD and the
with the U.S. Department of Housing         City lacked assurance that Recovery Act Block Grant
and Urban Development’s (HUD) and           funds were used appropriately.
its own requirements.

 What We Recommend

We recommend that the Director of
HUD’s Columbus Office of Community
Planning and Development require the
City to (1) support or reimburse more
than $74,000 to HUD from non-Federal
funds for transmission to the U.S.
Treasury for the inappropriately assisted
households or unreasonable or
excessive costs for roof and exterior
repairs and (2) develop and implement
adequate procedures and controls to
address the findings cited in this audit
report.
                            TABLE OF CONTENTS

Background and Objective                                                         3

Results of Audit
      Finding 1: The City Did Not Always Ensure That Assisted Households Were
                 Income Eligible                                                 4

      Finding 2: The City Did Not Always Comply With HUD’s and Its Own
                 Procurement Requirements                                        8

Scope and Methodology                                                           13

Internal Controls                                                               16

Appendixes
A.    Schedule of Questioned Costs                                              18
B.    Auditee Comments and OIG’s Evaluation                                     19
C.    Schedule of Program Projects’ Deficiencies                                24
D.    Federal Regulations and the City’s Policies                               26




                                             2
                         BACKGROUND AND OBJECTIVE

The Block Grant program. Authorized under Title I of the Housing and Community
Development Act of 1974, as amended, the Community Development Block Grant program is
funded to assist in the development of viable urban communities by providing decent housing, a
suitable living environment, and expanding economic opportunities, principally for persons of
low and moderate income. All Block Grant activities must meet one of the following national
objectives: (1) benefit low- and moderate-income persons, (2) aid in the prevention or
elimination of slums and blight, or (3) meet certain community development needs having a
particular urgency.

American Recovery and Reinvestment Act of 2009-funded Community Development Block
Grant. On February 17, 2009, the President signed the American Recovery and Reinvestment
Act of 2009 into law. The Recovery Act awarded the U.S. Department of Housing and Urban
Development (HUD) $13.6 billion. Of this amount, $1 billion was allocated to the Community
Development Block Grant program to carry out, on an expedited basis, eligible activities under
the Block Grant program. Of the $1 billion, more than $2.1 million in formula funds was
allocated to the City of Toledo.

The City. Organized under the laws of the State of Ohio, the City of Toledo is governed by a
mayor and a 12-member council, elected to 4-year terms. The City’s Department of
Neighborhoods is responsible for administering the City’s Block Grant program funded by HUD.
The overall mission of the Department is to responsibly, efficiently, and with citizen input plan,
administer, allocate, and monitor the Federal dollars received by the City as an entitlement city
to ensure compliance with HUD’s national objectives. The Department used a portion of the
City’s Recovery Act Block Grant funds to provide roof and other exterior repairs for residential
structures. It provided eligible property owners Recovery Act Block Grant-funded grants of up
to $7,500 to address roof and other exterior repair needs. The City’s project records are located
at One Government Center, Suite 1800, Toledo, OH.

The City completed 158 roof and other exterior repair projects totaling $997,643 in Recovery
Act Block Grant funds. We reviewed 60 of the 158 projects that the City reported as complete in
HUD’s Integrated Disbursement and Information System1 from March 18, 2009, through
September 24, 2012. It drew down $377,603 in Recovery Act Block Grant funds for the 60
projects.

Our objective was to determine whether the City effectively administered its Recovery Act
Block Grant funds that were used for roof and other exterior repairs in accordance with HUD’s
and its own requirements. Specifically, we wanted to determine whether the City ensured that
(1) the procurement of housing rehabilitation services was properly performed and supported, (2)
sufficient documentation was maintained to support the use of Block Grant funds, and (3)
services were provided only to eligible households.
1
 HUD’s Integrated Disbursement and Information System is a nationwide database used by grantees to request
grant funding from HUD and report on what is accomplished with these funds for the four Community Planning and
Development formula grant programs as well as select Recovery Act programs.

                                                      3
                                RESULTS OF AUDIT


Finding 1: The City Did Not Always Ensure That Assisted Households
           Were Income Eligible
The City did not always ensure that assisted households were income eligible. These
weaknesses occurred because the City lacked adequate procedures and controls in the
administration of its grant to ensure that it complied with HUD’s requirements. As a result, more
than $14,000 in Recovery Act funds was used to support households that were not income
eligible, and HUD and the City lacked assurance that more than $46,000 in Recovery Act funds
was used to provide roof and exterior repairs to eligible households.


 The City Did Not Always
 Ensure That Recovery Act
 Funds Were Used for Eligible
 Households

              Contrary to HUD’s regulations at 24 CFR (Code of Federal Regulations)
              570.208(a)(3), the City drew down $14,145 in Recovery Act Block Grant funds
              from June 30, 2010, through December 8, 2011, to assist two households that
              were not income eligible. The Recovery Act grant funds were used to provide
              roof and other exterior repairs for project numbers 3427 ($6,785) and 3624
              ($7,360). The households’ income exceeded HUD’s income guidelines by $5,755
              (12.9 percent) and $2,950 (6.7 percent), respectively.

              The City also did not ensure that it maintained adequate and sufficient
              documentation to support that seven households were income eligible. The City’s
              files for the seven households did not contain sufficient documentation to support
              income for all adult members of the household as required by HUD’s regulations
              at 24 CFR 570.3 and 570.506(b)(4)(iii). The City used $46,504 in Recovery Act
              Block Grant funds to provide roof and exterior repair services to these
              households.

              The City Lacked Support for Its Income Determinations

              Although the City maintained adequate documentation to determine that the
              households for the remaining 51 projects were income eligible, it lacked
              documentation to support its household income determinations. The City could
              not provide one or more of the following: (1) sufficient and timely income
              documentation for household members, (2) the income limits used for the
              households, (3) the date the income determination was performed, and (4) the



                                               4
                  estimated projected annual income that it calculated for the households as
                  required by HUD.2

                  The table in appendix C of this report shows the 7 projects for which the City did
                  not maintain adequate income eligibility documentation and the 51 projects for
                  which the City could not provide documentation to support its household income
                  determinations.

    The City Lacked Adequate
    Procedures and Controls

                  The City lacked adequate procedures and controls to ensure compliance with HUD’s
                  requirements. According to the City’s rehabilitation specialist and former housing
                  manager, the Department’s former director instructed the staff to get the projects
                  completed quickly. Therefore, nearly all of the Recovery Act Block Grant roof
                  and exterior repair projects were completed from approximately the end of 2009
                  through the end of 2010. The former housing manager told the neighborhood
                  development specialists that the Recovery Act funds had to be spent quickly;
                  therefore, they were rushed to get clients under contract, causing mistakes to be
                  made. In addition, at the time, there were only two neighborhood development
                  specialists providing client intake for all of the HUD programs including the
                  Recovery Act Block Grant.

                  The City did not use the prevailing rate of income when calculating the annual
                  income for one member of the household associated with project number 3427.
                  The household member received monthly child care income both from the
                  families of the children cared for and the county. However, according to a
                  neighborhood development specialist, when calculating annual income, the City
                  mistakenly included only the portion that was paid by the families. Regarding
                  project number 3624, the City determined that the household’s income exceeded
                  HUD’s income limit; however, a neighborhood development specialist stated that
                  despite this excess income, the former housing manager verbally instructed her to
                  proceed with the project and did not provide a reason.

                  The current housing manager stated that when applications were taken and
                  processed, there were no established policies or procedures in place that explained
                  (1) what income documentation was needed, (2) how income documentation was
                  used to determine the household’s annual income, and (3) how income
                  verifications were performed. Further, the neighborhood development specialists
                  did not use a worksheet or other similar form that would aid in documenting the
                  income eligibility determination by having all pertinent information in one place.
                  Any income calculations that the housing specialists performed were documented
                  on scratch paper. The former housing manager did not tell them that they had to
                  (1) perform household income determinations in any particular way and (2)

2
    24 CFR 570.506 and 24 CFR 570.506(b)(1)

                                                   5
             document their determinations. A neighborhood development specialist said that
             the neighborhood development specialists were told by the former housing
             manager to use the income documentation that the household brought to the initial
             meeting. Therefore, the households were not asked to provide additional support
             for their income to clarify or supplement what was brought in. Further, at the
             time the projects were completed, the files were disorganized, and documents
             were scattered. It was also mentioned that it took a significant amount of time to
             clean up and organize the files and documents may have been misplaced or
             discarded as a result.

Conclusion

             The City lacked adequate procedures and controls in its administration of the
             Recovery Act Block Grant to ensure that it appropriately followed HUD’s
             regulations. As a result, more than $14,000 in Recovery Act funds was used to
             support households that were not income eligible, and HUD and the City lacked
             assurance that more than $46,000 in Recovery Act funds was used to provide
             services to eligible households.

             In projecting the 9 households for which the City used $60,649 ($6,785 + $7,360
             + $46,504) in Recovery Act funds to the universe of 158 roof and other exterior
             repair projects of other assisted households, we estimated that the City used at
             least $82,574 in Recovery Act Block Grant funds for 12 households that either
             were not income eligible or provided insufficient income documentation to
             determine eligibility.

Recommendations

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

             1A. Reimburse HUD $14,145 from non-Federal funds for transmission to the
                 U.S. Treasury for the Recovery Act Block Grant funds inappropriately used
                 to assist project numbers 3427 and 3624.

             1B. Support or reimburse HUD $46,504 from non-Federal funds for
                 transmission to the U.S. Treasury for the Recovery Act Block Grant funds
                 used for project numbers 3439 ($6,963), 3449 ($7,500), 3502 ($7,300), 3819
                 ($4,995), 3873 ($7,500), 3884 ($7,300), and 3922 ($4,946) for which the
                 City did not maintain sufficient documentation to determine whether the
                 assisted households were income eligible.

             1C. Review and provide the results to HUD for the remaining 98 Recovery Act
                 Block Grant-funded roof and other exterior repair project files that were not
                 part of our sample to ensure that the households were income eligible and

                                             6
     that it maintained adequate and sufficient documentation to support that
     households were income eligible. For any household determined to be
     ineligible or if the City’s files lack documentation to support a household’s
     eligibility, the related amount will be added to 1A or 1B as appropriate.

1D. Develop and implement adequate procedures and controls, including
    training for its employees, to ensure that it (1) accurately calculates a
    household’s estimated annual income by projecting the prevailing rate of
    income; (2) maintains documentation to support the calculation of the
    household’s estimated projected annual income including the household’s
    estimated projected annual income, the household size, HUD’s applicable
    income limit, a determination as to whether the household is income
    eligible, and the date on which the determination is made; and (3) does not
    provide assistance to households with incomes exceeding HUD’s income
    guidelines.




                                 7
Finding 2: The City Did Not Always Comply With HUD’s and Its Own
           Procurement Requirements
The City did not always (1) obtain price quotes from at least three contractors and (2) ensure that
it paid reasonable prices for its roof and exterior repair projects. These weaknesses occurred
because the City lacked adequate procedures and controls to ensure that its procurements
complied with Federal and its own requirements. As a result, HUD lacked assurance that the
City’s procurements were conducted in a manner that provided full and open competition.
Further, HUD and the City lacked assurance that Recovery Act Block Grant funds were used
appropriately.


    The City Did Not Obtain a
    Sufficient Number of Price
    Quotes for Services

                 The City did not obtain price quotes from at least three contractors for the services
                 associated with all 60 of its roof and exterior repair projects reviewed. Contrary
                 to HUD’s requirements and its own policies,3 for 49 projects, the City obtained
                 price quotes from only one contractor, and for the remaining 11 projects, it
                 obtained price quotes from two. Further, for the 11 projects, the City only
                 obtained a price quote from a second contractor because the price quoted from the
                 first contractor was not within a 15 percent range above or below the City’s
                 independent cost estimate (see appendix C). Therefore, the City’s procurements
                 for its Recovery Act Block Grant-funded projects were not always conducted in a
                 manner that allowed full and open competition as required by HUD.4 The City
                 also did not maintain sufficient records, as required by HUD’s regulations at 24
                 CFR 85.36(b)(9), to detail the rationale for not following the City’s policies in the
                 procurement of services for the 60 projects.

    The City Did Not Ensure That
    the Costs of Its Roof and
    Exterior Repairs Projects Were
    Reasonable

                 For 26 of the 60 projects (43 percent), the contract costs exceeded the City’s
                 independent estimate(s) by more than $10,237 collectively. However, the City’s
                 files did not contain adequate documentation, such as a cost analysis, to determine
                 whether the amounts exceeding the estimates for its roof and exterior repair
                 projects were reasonable in accordance with HUD’s and its own procurement


3
  Section I.E. of the City’s Administrative Policy and Procedure Number Five, effective January 31, 2008, and 24
CFR 85.36(d)(1)
4
  24 CFR 85.36(c)(1)

                                                        8
                 requirements.5 For 21 of the 26 projects, as previously mentioned, the City
                 received only one bid, and for the remaining 5 projects, it received two. Had it
                 appropriately procured the contracts for its roof and exterior projects, it may have
                 received the services at a lower cost. In projecting these 26 projects to the
                 universe of 158 roof and exterior repair projects, we estimate that the City used at
                 least $21,233 in Recovery Act Block Grant funds for 83 projects without adequate
                 support to show whether the roof and exterior repairs were provided at a
                 reasonable cost.6

                 The table in appendix C shows the 26 projects and the amount of Recovery Act
                 Block Grant funds used for roof and exterior repairs for which the City lacked
                 sufficient documentation to support that the costs of the repairs were reasonable.

                 The City Lacked Independent Cost Estimates or Analyses

                 The City lacked sufficient documentation to support $8,814 in Recovery Act
                 Block Grant funds used for six roof and exterior repair projects. Specifically, it
                 could not support that it performed an independent estimate for the contract price
                 of $6,754 to repair two projects (project numbers 3477 and 3819) and did not
                 perform a cost analysis or independent estimate for change orders totaling $2,060
                 for four projects (project numbers 3503, 3515, 3687, and 3792) as required by
                 HUD regulations at 24 CFR 85.36(b)(9) and (f)(1). Further, the City could not
                 support that it performed an independent estimate of the cost of the repairs before
                 receiving price quotes from contractors for 25 projects.

                 The City Accepted Estimates Above Its 15 Percent Threshold

                 Contrary to its own policies,7 the City accepted estimates from contractors that
                 exceeded the City’s independent estimate by more than 15 percent for two
                 projects (project numbers 3478 and 3647). Therefore, it used $651 in Recovery
                 Act Block Grant funds that was not reasonable for two projects. Further, for one
                 project, the City disbursed an additional $264 above the contractor’s estimate
                 because the amounts were calculated incorrectly.

    The City Lacked Adequate
    Procedures and Controls

                 The weaknesses described above occurred because the City lacked adequate
                 procedures and controls to ensure that its procurements for roof and other exterior
                 repairs complied with Federal and its own requirements. The procurement
                 process for contracts that were less than $10,000 did not include the receipt of at


5
  Federal regulations at appendix A, section C, of 2 CFR Part 225 and 24 CFR 85.36(f)(1)
6
  Our methodology for this estimate is explained in the Scope and Methodology section of this audit report.
7
  Chapter 8, section F, of the City’s Housing Rehabilitation Policy and Procedure Manual

                                                         9
                    least three price quotes.8 Previously, the procurement of contractors within the
                    Department was handled by the rehabilitation specialists, and for any contract that
                    was less than $10,000, only one contractor was solicited to provide a price quote.
                    Contracts were procured on a rotating basis by the rehabilitation specialists, using
                    their own judgment in considering the contractor’s capacity and ability to perform
                    the work. Before the Recovery Act Block Grant funds became available, the
                    former housing manager took over the procurement function from the housing
                    specialists and became the sole person within the Department who performed
                    contractor procurement. The former housing manager did not have the same level
                    of experience as the rehabilitation specialists.

                    For the Recovery Act Block Grant-funded roof and other exterior repair projects,
                    the former housing manager would select one contractor from a list of contractors
                    that she maintained and provide the contractor’s name to the rehabilitation
                    technicians, who would then contact the contractor and obtain a price quote. The
                    former housing manager selected the contractors for the projects by going straight
                    down the list, choosing a different one for each project. However, some
                    contractors declined jobs so not every contractor on the list received an equal
                    number of contracts. In addition, some contractors were working on projects in
                    multiple programs offered by the City and could not accept additional work or did
                    not have the capacity to do additional work, and some contractors declined
                    because the amounts were small and they were interested in bigger projects.
                    Further, some contractors received more work because they could complete the
                    job in a short amount of time, and other contractors could not compete with them.

                    Regarding the City’s lack of documentation to support the reasonableness of
                    prices paid for six roof and exterior repair projects, as mentioned in finding 1,
                    according to a neighborhood development specialist at the time the Recovery Act
                    Block Grant-funded repair projects were completed, the files were disorganized,
                    and documents were scattered. It took a significant amount of time to clean up
                    and organize the files, and documents may have been misplaced or discarded as a
                    result.

    Conclusion

                    The City lacked adequate procedures and controls to ensure that its procurements
                    complied with Federal and its own requirements. As a result, HUD lacked
                    assurance that the City’s procurements were conducted in a manner that provided
                    full and open competition. Further, HUD and the City lacked assurance that
                    Recovery Act Block Grant funds were used appropriately.

    Recommendations



8
    Section I.E. of the City’s Administrative Policy and Procedure Number Five, effective January 31, 2008

                                                          10
                 We recommend that the Director of HUD’s Columbus Office of Community
                 Planning and Development require the City to

                 2A. Support or reimburse HUD from non-Federal funds $8,635 for transmission
                     to the U.S. Treasury for the Recovery Act Block Grant funds used for the 24
                     projects for which the City could not provide adequate support to show
                     whether the services were provided at a reasonable cost.9

                 2B. Support or reimburse HUD $1,759 from non-Federal funds for transmission
                     to the U.S. Treasury for the Recovery Act Block Grant funds used for
                     project number 3477 for which the City lacked documentation to support
                     that it performed an independent estimate for the costs of the services.10

                 2C. Support or reimburse HUD $2,060 from non-Federal funds for transmission
                     to the U.S. Treasury for the Recovery Act Block Grant funds used for
                     project numbers 3503 ($490), 3515 ($320), 3687 ($900), and 3792 ($350)
                     that lacked support that an independent cost estimate was performed for
                     change order items.

                 2D. Reimburse HUD $915 from non-Federal funds for transmission to the U.S.
                     Treasury for the Recovery Act Block Grant funds used for project numbers
                     3478 ($572) and 3647 ($79) that exceeded the City’s estimate by more than
                     15 percent and project number 3876 ($264) that were excessive.

                 2E. Review and provide the results to HUD for the remaining 98 Recovery Act
                     Block Grant-funded roof and other exterior repair project files that were not
                     part of our sample to ensure that the City maintained adequate support to
                     show whether the services were provided at a reasonable cost. For any
                     project for which a price quote was not obtained from at least three
                     contractors and the contract cost exceeded the City’s independent estimate,
                     the project and the overage amount will be added to recommendation 2A.

                 2F. Develop and implement adequate procedures and controls, including training
                     for the City’s employees, to ensure that (1) price quotes for services are
                     obtained from at least three contractors for projects with a contract cost
                     under $10,000; (2) estimates for the costs of housing rehabilitation services
                     are completed before price quotes are received for the services, the date they
                     are completed is maintained, and cost estimates for all change orders are

9
  We did not include $1,602 in Recovery Act Block Grant funds used for four projects for which the City could not
provide adequate support to show whether the services were provided at a reasonable cost since we included it in
recommendation 1B ($625 for project 3884 and $326 for project 3922) and recommendation 2D ($572 for project
3478 and $79 for project 3647) of this report. However, the number of projects included in this recommendation
was reduced from 26 to 24 since a portion of the costs for projects 3478 and 3647 is included in the
recommendation.
10
   We did not include $4,995 in Recovery Act Block Grant funds used for project number 3819 for which the City
lacked documentation to support that it performed an independent estimate for the costs of the services since we
included it in recommendation 1B of this report.

                                                        11
performed and maintained; and (3) documentation is maintained showing
contractor selection or rejection.




                         12
                              SCOPE AND METHODOLOGY

We performed our onsite audit work from February through July 2013 at the City’s offices located
at One Government Center, Suite 1800, Toledo, OH. The audit covered the period March 2009
through September 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 Parts 85 and 570, HUD’s notice of program requirements for Recovery Act
                  Block Grant funding, and HUD’s Office of Block Grant Assistance’s “Basically
                  CDBG [Block Grant]” training manual from November 2007.

                 The City’s financial records, data from HUD’s Integrated Disbursement and
                  Information System, Recovery Act Block Grant roof and other exterior repair
                  project files, policies and procedures, organizational chart, consolidated plan for
                  2010 through 2015, 2008-2009 action plan substantial amendment, and Recovery
                  Act Block Grant funding agreement with HUD.

In addition, we interviewed the City’s employees and HUD’s staff.

Findings 1 and 2

We statistically selected 60 of the 158 Recovery Act Block Grant-funded roof and other exterior
repair projects that the City reported as complete in HUD’s system from March 18, 2009,
through September 24, 2012, to determine whether the City complied with Federal regulations
and its own policies in its use of Recovery Act Block Grant funds for roof and other exterior
repair projects. The 60 projects totaled $377,603 in Recovery Act Block Grant funds. Modeling
showed a stratified random sample to be the most effective way to sample the data. We found a
sample size of 60 to be the best size for providing meaningful audit results without an
unnecessary risk of spurious11 errors. With the frequent occurrence of null values in audits,
possible audit findings follow a lognormal distribution, which approximates a bell curve.

We used replicated sampling to proof-test the sample design and model the true sampling
distribution, thereby confirming the performance of the sample design. The data were sampled
using a computer program written in SAS®12 using the surveyselect procedure with a random-
number seed value of 7. The stratification variable is the grant amount for each Recovery Act
Block Grant-funded roof and other exterior repair project. Taken in rank order by the size of the
grant, the strata were designed to account for fluctuations in low-end grant amounts that would

11
   In addition to verifying the sample design conformed to the stated confidence interval – a one-sided confidence
interval of 95 percent – we tested those rare occurrences that fall under the remaining 5 percent where the projection
would be overstated. We did this to ensure that overstatements are not excessively higher than the true amount
when using this sample design.
12
   A widely accepted platform for statistical calculations, which was specifically designed to evaluate cluster
samples, to project the overall percentage of properties with problems based on the audit results

                                                         13
be expected to cause large variance estimates. With this in mind, there are seven total strata.
The breakdown by stratum, to include total grants in each stratum, total samples per stratum,
grant ranges that make up the strata divisions, probability of selection, and sampling weights, is
listed in the table below.

                                     Universe and sample size by stratum
                Stratum       Total number of Number of samples                     Probability of Sampling
                                                                   Grant range
                 name         grants in stratum  per stratum                          selection     weight

                 Tier1              4                 2             $0 - $2,799         0.500       2.000
                 Tier2              7                 3           $2,800 - $3,799       0.429       2.333
                 Tier3             12                 4           $3,800 - $4,499       0.333       3.000
                 Tier4             18                 7           $4,500 - $4,999       0.389       2.571
                 Tier5             11                 4           $5,000 - $5,999       0.364       2.750
                 Tier6             21                 8           $6,000 - $6,999       0.381       2.625
                 Tier7             85                32           $7,000 - $7,500       0.376       2.656
                 Total             158               60                 N/A             N/A          N/A


Both the amount of projected Recovery Act Block Grant funds that the City used in the universe
without adequate support to show whether the services were provided at a reasonable cost and
the amount of projected Recovery Act Block Grant funds that the City used in the universe for
households that were not income eligible or households that had insufficient income records
maintained by the City were based on traditional means or proportions and their standard errors,
using the surveymeans and surveyfreq procedures provided by SAS®.

Finding 1

We found that there were 9 projects in the sample of 60 in which households were not income
eligible or the households had insufficient income records maintained by the City. We
determined that $60,649 in Recovery Act Block Grant funds was used for households that were
not income eligible or households that had insufficient income records maintained by the City for
the nine projects. This amounts to an average of $1,013 per project. Deducting for statistical
variance to accommodate the uncertainties inherent to statistical sampling, we can state, with a
one-sided confidence interval of 95 percent, that the average amount per activity is $523.13
Projecting this amount to the 158 audit universe, we can state that at least $82,574 ($522.62 *
158) in funds was paid on activities that did not meet this specific program requirement.
Additionally, this defect was found across many Recovery Act Block Grant activities, and we
can also state, with a one-sided confidence interval of 95 percent, that at least 12 activities in our
universe were affected.

Finding 2

We found that there were 26 projects in the sample of 60 in which the contract cost exceeded the
City’s independent estimate. Adding the differences between the contract costs and the City’s
indpendent estimates, we determined that $10,237 in Recovery Act Block Grant funds was used
without adequate support to show whether the services were provided at a reasonable cost for the

13
     The amount is rounded.

                                                          14
26 projects. This amounts to a mean of $184 per project. Deducting for statistical variance to
accommodate the uncertainties inherent to statistical sampling, we can still say, with a one-sided
confidence interval of 95 percent, that the average amount per activity is $134. Projecting this to
the universe of 158 projects, we can say that at least $21,233 in Recovery Act Block Grant funds
was used for projects without adequate support to show whether the services were provided at a
reasonable cost, and it could be more. Additionally, this defect was found across many Recovery
Act Block Grant-funded projects, and we can also say, with a one-sided confidence interval of 95
percent, that at least 83 projects in our universe were affected.

We relied in part on hard copy documentation maintained by the City for the Recovery Act
Block Grant-funded roof and other exterior repair projects 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, which was
informational.

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




                                                15
                              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.




                                                 16
Significant Deficiencies

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

             The City lacked adequate procedures and controls to ensure that

                It provided roof and exterior repair services to households that were income
                 eligible (see finding 1).

                Federal regulations and its own procurement policies were followed for its
                 roof and other exterior repair projects (see finding 2).




                                              17
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                  Recommendation                            Unsupported
                                          Ineligible 1/
                      number                                    2/
                        1A                  $14,145
                        1B                                     $46,504
                        2A                                       8,635
                        2B                                       1,759
                        2C                                       2,060
                        2D                    915
                                            $15,060            $58,958

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.




                                             18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                           Auditee Comments




                                                   September 16, 2013

             Kelly Anderson, Regional Inspector General for Audit-Region 5
             U.S. Department of Housing and Urban Development
             Office of Inspector General
             Ralph H. Metcalf federal Building
             77 West Jackson Blvd., Suite 2201
             Chicago, IL 60604

             Re: HUD OIG draft CDBG-R report dated September 11, 2013

             Dear Ms. Anderson:

                    The City of Toledo (COT) Department of Neighborhoods (DON) concurs with the
Comment 1    conclusion articulated in the HUD OIG “subject” draft Report which states, “the COT did not
             always administer its Community Development Block Grant-Recovery Act program in
             accordance with HUD’s and its own requirements”. It is most likely, however, that “always” is
             not achievable by any Grantee.

                    Basically, the HUD OIG’s recommendations as to the “always” are centered on (a)
Comment 1    income eligibility of the applicant/household and (b) the procurement practice followed by the
             DON with the CDBG-R “Roof/Envelope Repair” Program.

Comment 2          As to the recommendations regarding (a), the HUD OIG premises their recommendations
             citing 24 CFR 570.208(a) (3) or 24 CFR 570.3 and 24 CFR 570.506(b)(4)(iii). These cited
             regulations are not totally on point, controlling or final in assessing the performance of a HUD
             program. A grantee, primarily per HUD regulations, is required to document that a minimum
             of 70% of the funds awarded were allocated to benefit low and moderate income individuals.
Comment 3    Therefore, it is possible that although a few or some of those households assisted may be
             outside of the “low and moderate income” rubric, the COT/DON can show that more than
             70% of the individuals or households who benefitted from the CDBG-R “Roof/Envelope
             Repair” Program were within the “low and moderate income” levels. The COT can also show
             it targeted “slum and blighted” neighborhoods. Both of these fall within HUD national
Comment 4    objectives. Furthermore, the HUD approved Substantial Amendment for the CDBG-R
             specifically provides that the “Roof/Envelope” Program will target neighborhoods included in
             the NSP tipping point areas. This fact alone can impact the “income” eligibility of the possible
             participants of this Program.


                                                   19
Ref to OIG Evaluation                          Auditee Comments

                 Likewise, as to the HUD OIG’s recommendations regarding the above stated (b), the
Comment 5    COT/DON had a “procurement practice” for the CDBG-R “Roof/Envelope Repair” Program
             that is, arguably, within the guidelines allowed by HUD and the COT. Specifically, the
             component of the CDBG-R Program reviewed by the HUD OIG was a “roof repair” program
             limited to a dollar amount of $7500. Therefore, it did not meet the dollar threshold (more than
             $100,000) that would trigger a more competitive bidding process under HUD regulations or
             COT’s procurement policy. The COT/DON can show that the Administrator responsible for
             implementing the “roof repair” program had a “rotation list” process to allow for minority
Comment 6    contractor participation in the “roof repair” program. Three (3) contractors, one of which had
             to be a minority contractor, were asked to provide a bid for the “roof repair” on a rotational
             basis and based on a pre-determined roof repair estimate of “no more than” $7500. Although
             not the best model or practice for procurement, even at the low dollar amount, the purpose was
             to provide for minority contractor participation; a stated goal of HUD and the COT
             procurement policy.

                 It merits factoring into any analysis of this Program, that the CDBG-R was an “emergency
Comment 7    measure” implemented to assist communities in weathering the economic downturn
             experienced nationally and on a local level. The “addressing of an urgent or emergency need”
             is one of HUD’s three national objectives.

                   The COT/DON welcomes the opportunity to provide HUD Columbus with its corrective
             action plan as to the HUD OIG’s recommendations, because prior to the HUD OIG review of
Comment 8    the Program, the COT/DON had already put in place procedures to correct some of the
             weaknesses highlighted by the HUD OIG. For example, the COT/DON had already put in
             place procedures to better document case files with income eligibility analysis, implementing a
             more robust and rigorous procurement protocol, as well as, providing extensive (ongoing)
             training to DON staff with regards to Program procedures and criteria.

                                                                  Respectfully,

                                                                   //signed//

                                                                  Lourdes Santiago, Director
                                                                  Department of Neighborhoods

             cc:   Paul F. Syring, Acting Deputy Mayor, External Relations
                   Kathleen Kovacs, Deputy Director, DON
                   Bonita Bonds, Acting Commissioner-Adm. Services, DON
                   Adam Loukx, Director, Law Department




                                                  20
                         OIG Evaluation of Auditee Comments

Comment 1   The City’s policies and procedures should provide reasonable assurance that
            assisted households meet income eligibility requirements. The specific issues
            identified during the audit and included in this report would not have occurred
            had proper procedures and oversight been established and functioning
            accordingly.

Comment 2   The objectives of our audit were to determine whether the City effectively
            administered its Recovery Act Block Grant funds that were used for roof and
            other exterior repairs in accordance with HUD’s and its own requirements.
            Specifically, we wanted to determine whether the City ensured that (1) the
            procurement of housing rehabilitation services was properly performed and
            supported, (2) sufficient documentation was maintained to support the use of
            Block Grant funds, and (3) services were provided only to eligible households.
            Therefore, HUD’s regulations at 24 CFR 570.3, 24 CFR 570.208(a)(3), 24 CFR
            570.506(b)(4)(iii), and the City’s requirements included in appendix D of this
            report were applied.

Comment 3   According to the City’s substantial amendment to its 2008-2009 one year action
            plan for its roof and repair program the national objective citation is low- and
            moderate-income housing activities. Therefore, HUD’s regulations at 24 CFR
            570.208(a)(3) apply and state that eligible housing activities carried out for the
            purpose of providing or improving permanent residential structures must be
            occupied by low- and moderate-income households upon completion. Thus, for
            all activities completed, the assisted household must be occupied by low- and
            moderate-income households not merely more than 70 percent of the activities
            completed.

Comment 4   The City is correct that one of HUD’s national objectives is activities which aid in
            the prevention or elimination of slums or blight. However, this national objective
            was not cited in the City’s substantial amendment to its 2008-2009 one year
            action plan for the roof and repair program. According to the City’s substantial
            amendment the national objective citation is low- and moderate-income housing
            activities. HUD’s regulations at 24 CFR 570.208(a)(3) state that eligible housing
            activities carried out for the purpose of providing or improving permanent
            residential structures must be occupied by low- and moderate-income households
            upon completion.

Comment 5   HUD’s regulations at 24 CFR 85.36(b)(1) state that grantees and subgrantees
            must use their own procurement procedures, which reflect applicable State and
            local laws and regulations, provided that the procurements conform to applicable
            Federal law and the standards identified in 24 CFR 85.36. Section 85.36(c)(1)
            states that all procurement transactions must be conducted in a manner providing
            full and open competition consistent with 24 CFR 85.36. Section 85.36(d)(1)
            states that when procurement by small purchase is used, price or rate quotations

                                             21
            must be obtained from an adequate number of qualified sources. The City’s
            procurement procedures state that purchases under $10,000 may be authorized
            only after the department or division obtains at least three quotes from at least
            three different vendors or suppliers of the item or service in the requisition and
            then selects the best vendor from the price quotes submitted.

            The procurement practice used for the City’s CDBG-R Roof and Repair Program
            did not (1) adhere to the City’s procurement procedures as required in 24 CFR
            85.36(b)(1), (2) ensure procurements were conducted manners that provided full
            and open competition, and (3) ensure that price or rate quotations were obtained
            from an adequate number of qualified sources.

Comment 6   As stated in the report, the City did not obtain price quotes from at least three
            contractors for the services associated with all 60 of its roof and exterior repair
            projects reviewed. Contrary to HUD’s requirements and its own policies, for 49
            projects, the City obtained price quotes from only one contractor, and for the
            remaining 11 projects, it obtained price quotes from two. Further, former staff
            who worked directly with the CDBG-R roof repair program stated that only one
            contractor was asked to submit a bid or each project.

            The City did not provide documentation to support that three contractors were
            solicited to provide bids for the CDBG-R roof repair projects on a rotational basis.

Comment 7   The City is correct that one of HUD’s national objectives is activities designed to
            meet community development needs having a particular urgency. However, this
            national objective was not cited in the City’s substantial amendment to its 2008-
            2009 one year action plan for the roof and repair program. According to the
            City’s substantial amendment the national objective citation is low- and moderate-
            income housing activities. HUD’s regulations at 24 CFR 570.208(a)(3), state that
            eligible housing activities carried out for the purpose of providing or improving
            permanent residential structures must be occupied by low- and moderate-income
            households upon completion.

            Further, according to HUD’s notice of program requirements for Recovery Act
            Block Grant funding, if the urgent need criteria is to be used then the City had to
            certify that current economic conditions are of recent origin and constitute a
            serious and immediate threat to the welfare of the community and demonstrate
            that it is unable to finance the activity on its own, and that other sources of
            funding are not available. The City did not provide documentation to support the
            urgent need national objective.

Comment 8   The City’s planned corrective action plan putting in place procedures to ensure
            that income eligibility determinations are properly documented, ineligible
            households are not assisted, HUD’s requirement and its own policies regarding
            procurement are followed, and documentation is maintained showing contractor



                                             22
selection or rejection should resolve the issues and recommendations cited in this
audit report, as applicable.




                                23
Appendix C

   SCHEDULE OF PROGRAM PROJECTS’ DEFICIENCIES

                Lack of documentation to
                         support                                             Lacked documentation
                                                                                to support that
    Program                                                                     cost of roof and
     project   Household        Income       Solicited one   Solicited two    exterior repairs was
    number     eligibility   determination       quote          quotes             reasonable
        3463                       X               X
        3470                       X               X                                          $237
        3477                       X               X
        3508                       X                              X
        3510                       X              X
        3515                       X              X
        3625                       X              X                                           $520
        3628                       X              X                                           $200
        3652                       X              X
        3790                       X                              X                           $180
        3792                       X              X                                           $376
        3796                       X              X                                           $325
        3817                       X              X                                           $855
        3873       X                              X
        3427                                      X
        3431                      X               X                                           $439
        3433                      X               X                                           $445
        3439       X                                              X
        3449       X                              X
        3450                      X               X
        3453                      X               X
        3454                      X               X
        3467                      X               X
        3468                      X               X
        3472                      X               X
        3474                      X               X
        3478                      X               X                                           $756
        3479                      X                               X
        3482                      X               X
        3485                      X               X
        3502       X                              X
        3503                      X               X                                           $372
        3507                      X               X                                           $502
        3511                      X               X
        3619                      X               X                                           $120
        3620                      X                               X




                                                 24
SCHEDULE OF PROGRAM PROJECTS’ DEFICIENCIES
               (CONCLUDED)

               Lack documentation to                                      Lacked documentation
                      support                                                to support that
 Program                                                                     cost of roof and
  project   Household        Income       Solicited one   Solicited two    exterior repairs was
 number     eligibility   determination       quote          quotes             reasonable
     3622                       X               X                                          $270
     3624                                       X
     3631                      X                               X                           $125
     3640                      X               X
     3645                      X               X                                           $122
     3647                      X                               X                           $440
     3649                      X               X
     3650                      X               X                                           $290
     3653                      X                               X
     3687                      X               X
     3787                      X               X
     3791                      X               X                                           $557
     3794                      X                               X                           $202
     3802                      X               X
     3805                      X               X                                           $370
     3806                      X               X
     3807                      X               X                                           $450
     3818                      X               X                                           $176
     3819       X                                              X
     3875                      X                               X                           $957
     3876                      X               X
     3884       X                              X                                           $625
     3887                      X               X
     3922       X                              X                                           $326
  Totals        7              51              49              11                       $10,237




                                             25
Appendix D

     FEDERAL REGULATIONS AND THE CITY’S POLICIES

Findings 1 and 2

HUD’s regulations at 24 CFR 85.40(a) state that 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 ensure compliance with applicable Federal requirements and that
performance goals are achieved. Grantee monitoring must cover each program, function, or
activity.

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 must comply with HUD’s regulations at 24 CFR 85.40(a).

Finding 1

HUD’s regulations at 24 CFR 570.3 define a low- and moderate-income household as a
household having an income equal to or less than the Section 8 low-income limit established by
HUD. Grantees must estimate the annual income of a household by projecting the prevailing
rate of income of each member of the household at the time assistance is provided to the
household. Estimated annual income must include income from all household members.

HUD’s regulations at 24 CFR 570.208(a)(3) state that eligible housing activities carried out for
the purpose of providing or improving permanent residential structures must be occupied by low-
and moderate-income households upon completion.

HUD’s regulations at 24 CFR 570.506 state that each recipient must establish and maintain
sufficient records to enable HUD to determine whether the recipient has met the requirements of
24 CFR Part 570. Section 570.506(b) states that at a minimum, the recipient needs records
demonstrating that each activity undertaken meets one of the criteria set forth in 24 CFR
570.208. Section 570.506(b)(1) states that for each activity determined to benefit low- and
moderate-income persons, the recipient must maintain the income limits applied and the point in
time when the benefit was determined. Section 570.506(b)(4)(iii) states that for each activity
carried out for the purpose of providing or improving housing which is determined to benefit
low- and moderate-income persons, the recipient must maintain records to support the size and
income of the household.

                                                 26
Finding 2
HUD’s regulations at 24 CFR 85.36(b)(1) state that grantees and subgrantees must use their own
procurement procedures, which reflect applicable State and local laws and regulations, provided
that the procurements conform to applicable Federal law and the standards identified in 24 CFR
85.36. Section 85.36(b)(2) states that grantees and subgrantees must maintain a contract
administration system, which ensures that contractors perform in accordance with the terms,
conditions, and specifications of their contracts or purchase orders. Section 85.36(b)(9) states
that grantees and subgrantees must maintain records sufficient to detail the significant history of
a procurement. These records include but are not necessarily limited to the following: rationale
for the method of procurement, selection of contract type, contractor selection or rejection, and
the basis for the contract price. Section 85.36(c)(1) states that all procurement transactions must
be conducted in a manner providing full and open competition consistent with 24 CFR 85.36.
Section 85.36(d)(1) states that when procurement by small purchase is used, price or rate
quotations must be obtained from an adequate number of qualified sources. Section 85.36(f)(1)
states that grantees and subgrantees must perform a cost or price analysis in connection with
every procurement action, including contract modifications. The method and degree of analysis
are dependent on the facts surrounding the particular procurement situation, but as a starting
point, grantees must make independent estimates before receiving bids or proposals.

HUD’s regulations at 24 CFR 570.200(f)(1)(i)(B) state that eligible activities may be undertaken,
subject to local law, by the recipient through procurement contracts governed by HUD’s
regulations at 24 CFR 85.36.

HUD’s regulations at 24 CFR 570.502(a) state that recipients and subrecipients that are
governmental entities must comply with Office of Management and Budget Circular A–87 and
HUD’s regulations at 24 CFR 85.36.

Appendix A, section C.1, of 2 CFR Part 22514 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 the reasonableness
of a given cost, consideration must be given to (1) the restraints or requirements imposed by such
factors as sound business practices; (2) market prices for comparable goods or services; and (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.

Section I.E. of the City’s Administrative Policy and Procedure Number Five, effective January
31, 2008, states that purchases under $10,000 may be authorized only after the department or
division obtains at least three quotes from at least three different vendors or suppliers of the item
or service in the requisition. Section II refers to the City’s Purchasing Process and Procedures
Manual. Section III.A. states that all department, division, and agency heads are responsible for

14
     Office of Management and Budget Circular A-87 was relocated to 2 CFR Part 225.

                                                        27
observing and following the Administrative Policy and Procedure Number Five. The City’s
Purchasing Process and Procedures Manual states that the manual is provided to the City’s
employees to follow or reference when procuring commodities and services or entering into
contracts for the City. For purchases under $10,000, the requesting division obtains at least three
price quotes for the product or service desired and then selects the best vendor from the price
quotes submitted.

Chapter eight, section F, of the City’s Housing Rehabilitation Policy and Procedure Manual,
effective June 1989, states that bids which are within 15 percent range below or above the staff
estimate are considered for acceptance.




                                                28