oversight

The State Did Not Monitor the City of Cedar Rapids' Voluntary Property Acquisition Program in Accordance With Its Approved Disaster Recovery Action Plans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-05-06.

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

OFFICE OF AUDIT
REGION 7
KANSAS CITY, KS




                      The State of Iowa

               CDBG Disaster Recovery Program




2013-KC-1002                                    May 6, 2013
                                                U.S. DEPARTMENT OF
                               HOUSING AND URBAN DEVELOPMENT
                                         OFFICE OF INSPECTOR GENERAL




                                                                   Issue Date: May 6, 2013

                                                                   Audit Report Number: 2013-KC-1002


TO:            Yolanda Chávez, Deputy Assistant Secretary for Grant Programs, DG

               //signed//
FROM:          Ronald J. Hosking, Regional Inspector General for Audit, Region 7AGA


SUBJECT:       The State Did Not Monitor the City of Cedar Rapids’ Voluntary Property
               Acquisition Program in Accordance With Its Approved Disaster Recovery Action
               Plans


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of the State of Iowa.

    HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.

    The Inspector General Act, Title 5 United States Code, section 8L, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

   If you have any questions or comments about this report, please do not hesitate to call me at
913-551-5870.




                                                Office of Audit Region 7
                                 400 State Avenue, Suite 501, Kansas City, KS 66101
                                      Phone (913) 551-5870, Fax (913) 551-5877
                          Visit the Office of Inspector General Web site at www.hudoig.gov.
                                                           
                                           May 6, 2013
                                           The State of Iowa Did Not Monitor the City of Cedar
                                           Rapids’ Voluntary Property Acquisition Program in
                                           Accordance With Its Approved Disaster Recovery Action
                                           Plans


Highlights
Audit Report 2013-KC-1002


 What We Audited and Why                    What We Found

We audited the State of Iowa’s             The State did not monitor the City’s voluntary property
monitoring of the City of Cedar Rapids’    acquisition program in accordance with its approved
voluntary property acquisition program.    Disaster Recovery action plans. Its monitoring
We selected the State for review based     checklists did not include all of its procurement
on a prior audit of the City’s voluntary   requirements, such as cost reasonableness and all
property acquisition program. During       required contract provisions.
fiscal years 2009 through 2012, the
State awarded the City more than $166
million in disaster funding. Our audit
objective was to determine whether the
State monitored the City’s voluntary
property acquisition program in
accordance with its approved Disaster
Recovery action plans.

 What We Recommend

We recommend that the U.S.
Department of Housing and Urban
Development (HUD) require the State
to update its monitoring checklists to
include elements of 24 CFR (Code of
Federal Regulations) 85.36(f) and all of
the required contract provisions found
at 24 CFR 85.36(i).




                                                 .
                                                  
                            TABLE OF CONTENTS


Background and Objective                                                             3

Results of Audit
      Finding: The State Did Not Monitor the City’s Voluntary Property Acquisition
      Program in Accordance With Its Approved Disaster Recovery Action Plans         4

Scope and Methodology                                                                6

Internal Controls                                                                    7

Appendixes
A.    Auditee Comments                                                               8
B.    Criteria                                                                       9




                                            2
                       BACKGROUND AND OBJECTIVE

In the late spring and early summer of 2008, the State of Iowa suffered a series of disastrous
tornadoes, followed by record-breaking floods. In May 2008, following these events, the Federal
Emergency Management Agency declared various counties in the State as disaster areas. This
declaration allowed the counties to receive Federal aid from certain Federal agencies.

The U.S. Department of Housing and Urban Development (HUD) awarded more than $890
million in disaster funding through its Community Development Block Grant (CDBG) Disaster
Recovery program to the State. The appropriation law required the State to submit action plans
to HUD, which described the State’s overall plan for disaster recovery. Specifically, the State’s
action plans required it to perform monitoring activities that addressed program compliance with
contract provisions, including those related to the national objective, financial management, and
regulations at 24 CFR (Code of Federal Regulations) Part 85.

The State tasked the Iowa Economic Development Authority (State) with administering its
disaster recovery activities. Created in 2011 to replace the Iowa Department of Economic
Development, its mission is to strengthen economic and community vitality by building
partnerships and leveraging resources to make Iowa the choice for people and business. The
State distributed a substantial portion of the funds for planned activities in the areas of housing
buyouts, housing production, and infrastructure projects.

During calendar years 2009 through 2012, the State awarded the City of Cedar Rapids more than
$166 million to carry out the City’s voluntary property acquisition (buyout) program. This
program assisted property owners and tenants of flood-damaged homes and businesses, allowing
them to relocate outside the flood-impacted area. At the time of our review, the City had spent
$23.2 million on procurement contracts for its buyout program.

In a previous audit of the City’s buyout program (audit report 2013-KC-1001, issued October 23,
2012), we found that the City did not establish cost reasonableness or include all of the required
contract provisions for two of its Disaster Recovery contracts. This report contains a finding on
the State’s monitoring of the City’s buyout program.

The objective of our review was to determine whether the State monitored the City’s voluntary
property acquisition program in accordance with its approved Disaster Recovery action plans.




                                                  3
                                 RESULTS OF AUDIT


Finding: The State Did Not Monitor the City’s Voluntary Property
Acquisition Program in Accordance With Its Approved Disaster
Recovery Action Plans
The State did not monitor the City’s voluntary property acquisition program in accordance with
its approved Disaster Recovery action plans. The State’s monitoring checklists did not address
all of its procurement requirements. As a result, the State did not identify existing procurement
violations by the City, and HUD lacked assurance that the State received the best value for the
$23.2 million spent on procurement contracts.


 Monitoring Was Not in
 Accordance With Action Plans

               The State did not monitor the City’s voluntary property acquisition program in
               accordance with its approved Disaster Recovery action plans. The State’s
               Disaster Recovery action plans required the State to monitor subgrantees for
               compliance with contract provisions, including national objectives, financial
               management, and requirements of 24 CFR Part 85.

               Regulations at 24 CFR 85.36(f) required grantees and subgrantees to perform a
               cost or price analysis in connection with every procurement action. These
               analyses are used to determine the cost reasonableness of proposed contract costs.
               During its monitoring, the State did not determine whether the City adequately
               performed the required cost or price analyses.

               Further, regulations at 24 CFR 85.36(i) contained required contract provisions for
               procurement contracts. During its monitoring, the State did not determine that the
               City’s procurement contracts contained all of the required provisions.

 Monitoring Checklists Did Not
 Address All Procurement
 Requirements


               To conduct its onsite monitoring reviews, the State used a series of checklists
               covering a variety of activities, including procurement and contract management.
               However, the State’s monitoring checklists did not address all of its procurement
               requirements set forth at 24 CFR 85.36, which the State’s action plans required it
               to monitor for compliance. The checklists did not include items such as (1) cost
               reasonableness and (2) all required contract provisions. The procurement

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            checklist included activities related to (1) written policies, procedures, and code
            of conduct; (2) requests for proposals; and (3) methods of procurement, including
            competitive sealed bids and sole source procurement. The checklist did not
            address the required cost or price analyses found at 24 CFR 85.36(f).

            The State’s contract management monitoring checklist did not address all required
            contract provisions found at 24 CFR 85.36(i). Although the checklists included
            some of the required provisions, it did not include provisions related to (1) notice
            of awarding agency requirements and regulations pertaining to reporting and (2)
            compliance with all applicable standards, orders, or requirements issued under the
            Clean Air and Clean Water Acts, including the Environmental Protection Agency
            regulations relating to energy efficiency.

Violations Were Not Identified

            The State did not identify the City’s existing procurement violations, and HUD
            lacked assurance that the State received the best value for the $23.2 million spent
            on procurement contracts. On July 21, 2011, the State conducted a monitoring
            review of the City’s procurement for its voluntary property acquisition program.
            The State did not find any instances of noncompliance. However, a later Office
            of Inspector General (OIG) audit of the City (audit report 2013-KC-1001, issued
            October 23, 2012) found that the City did not establish cost reasonableness or
            include all of the required contract provisions for two of its Disaster Recovery
            contracts.

Recommendations

            We recommend that HUD’s Deputy Assistant Secretary for Grant Programs
            require the State to

            1A. Update its monitoring checklists to include elements of 24 CFR 85.36(f) and
                all of the contract provisions required by 24 CFR 85.36(i).




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                         SCOPE AND METHODOLOGY

Our review period covered October 1, 2009, through September 30, 2012. We performed onsite
work from November 26, 2012, through January 11, 2013, at the State offices located at 200
Grand Avenue, Des Moines, IA.

To accomplish our objective, we reviewed

      Applicable Code of Federal Regulations, the Stafford Act, and Office of Management
       and Budget circulars;
      The State CDBG Disaster Recovery (1) action plans, (2) Management Guide, (3) policies
       and procedures, and (4) monitoring plans and review reports;
      HUD CDBG Disaster Recovery monitoring review reports;
      Applicable sections of the Iowa Administrative Code;
      Other relevant reviews and the State’s single audit reports;
      Relevant grant agreements and related contractor contracts; and
      Voluntary property acquisition program expenditures.

We also interviewed relevant Iowa Economic Development Authority and contractor staff.

We reviewed a sample of 4 of the City’s 145 voluntary property acquisition program
expenditures that the State had submitted to HUD as of November 29, 2012. Our sample
contained expenditures from each of the major activities of the City’s program, which consist of
(1) property acquisition, (2) demolition, (3) relocation assistance, and (4) administrative fees.
We reviewed the two draws with the highest dollar values, which included significant expenses
for property buyout and relocation activities. In addition, we reviewed the draws with the
highest demolition and administrative fee expenditures to ensure that our sample contained
expenditures from each of the four activities. Cumulatively, we tested nearly $7.1 million of the
more than $79 million in expenditures.

We also reviewed the two onsite monitoring review reports the State performed for the City’s
voluntary property acquisition program to determine whether the monitoring activities complied
with applicable regulations, policies, and procedures. We noted issues with the State’s
monitoring of the City’s procurement process as detailed in the finding.

We relied on the City’s and the State’s computer-processed data. We performed sufficient tests
of the data using data analysis techniques, and based on the assessments and testing, we
concluded that the data were sufficiently reliable to be used in meeting our objective.

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.

                                                6
                                                 
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

      Effectiveness and efficiency of operations,
      Reliability of financial reporting, and
      Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.


 Relevant Internal Controls

               We determined that the following internal controls were relevant to our audit
               objective:

                     Controls over the monitoring of the State’s Disaster Recovery program
                      subrecipients.

               We assessed the relevant controls identified above.

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

 Significant Deficiency

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

                     The State’s monitoring checklists did not address all of its procurement
                      requirements and, therefore, did not ensure that subrecipients complied with
                      applicable laws and regulations.




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Appendix A
                              AUDITEE COMMENTS

Auditee Comments

The auditee elected not to provide written comments.




                                              8
                                                
Appendix B
                                        CRITERIA

24 CFR 85.36

(f) Contract cost and price
    1.    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 is dependent on the facts surrounding the particular procurement situation,
          but as a starting point, grantees must make independent estimates before receiving
          bids or proposals. A cost analysis must be performed when the offeror is required to
          submit the elements of his estimated cost, e.g., under professional, consulting, and
          architectural engineering services contracts. A cost analysis will be necessary when
          adequate price competition is lacking, and for sole source procurements, including
          contract modifications or change orders, unless price reasonableness can be
          established on the basis of a catalog or market price of a commercial product sold in
          substantial quantities to the general public or based on prices set by law or regulation.
          A price analysis will be used in all other instances to determine the reasonableness of
          the proposed contract price.

   2.      Grantees and subgrantees will negotiate profit as a separate element of the price for
           each contract in which there is no price competition and in all cases where cost
           analysis is performed. To establish a fair and reasonable profit, consideration will be
           given to the complexity of the work to be performed, the risk borne by the contractor,
           the contractor’s investment, the amount of subcontracting, the quality of its record of
           past performance, and industry profit rates in the surrounding geographical area for
           similar work.

   3.      Costs or prices based on estimated costs for contracts under grants will be allowable
           only to the extent that costs incurred or cost estimates included in negotiated prices
           are consistent with Federal cost principles (see Sec. 85.22). Grantees may reference
           their own cost principles that comply with the applicable Federal cost principles.

(i) Contract provisions.
    A grantee’s and subgrantee’s contracts must contain provisions in paragraph (i) of this
    section. Federal agencies are permitted to require changes, remedies, changed conditions,
    access and records retention, suspension of work, and other clauses approved by the Office of
    Federal Procurement Policy.

   1. Administrative, contractual, or legal remedies in instances where contractors violate or
      breach contract terms, and provide for such sanctions and penalties as may be
      appropriate. (Contracts more than the simplified acquisition threshold)




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2. Termination for cause and for convenience by the grantee or subgrantee including the
   manner by which it will be effected and the basis for settlement. (All contracts in excess
   of $10,000)

3. Compliance with Executive Order 11246 of September 24, 1965, entitled “Equal
   Employment Opportunity,” as amended by Executive Order 11375 of October 13, 1967,
   and as supplemented in Department of Labor regulations (41 CFR chapter 60). (All
   construction contracts awarded in excess of $10,000 by grantees and their contractors or
   subgrantees)

4. Compliance with the Copeland “Anti-Kickback” Act (18 U.S.C. [United States Code]
   874) as supplemented in Department of Labor regulations (29 CFR part 3). (All contracts
   and subgrants for construction or repair)

5. Compliance with the Davis-Bacon Act (40 U.S.C. 276a to 276a-7) as supplemented by
   Department of Labor regulations (29 CFR part 5). (Construction contracts in excess of
   $2000 awarded by grantees and subgrantees when required by Federal grant program
   legislation)

6. Compliance with Sections 103 and 107 of the Contract Work Hours and Safety Standards
   Act (40 U.S.C. 327A 330) as supplemented by Department of Labor regulations (29 CFR
   part 5). (Construction contracts awarded by grantees and subgrantees in excess of $2000,
   and in excess of $2500 for other contracts which involve the employment of mechanics
   or laborers)

7. Notice of awarding agency requirements and regulations pertaining to reporting.

8. Notice of awarding agency requirements and regulations pertaining to patent rights with
   respect to any discovery or invention which arises or is developed in the course of or
   under such contract.

9. Awarding agency requirements and regulations pertaining to copyrights and rights in
   data.

10. Access by the grantee, the subgrantee, the Federal grantor agency, the Comptroller
    General of the United States, or any of their duly authorized representatives to any books,
    documents, papers, and records of the contractor which are directly pertinent to that
    specific contract for the purpose of making audit, examination, excerpts, and
    transcriptions.

11. Retention of all required records for three years after grantees or subgrantees make final
    payments and all other pending matters are closed.

12. Compliance with all applicable standards, orders, or requirements issued under section
    306 of the Clean Air Act (42 U.S.C. 1857 (h)), section 508 of the Clean Water Act (33
    U.S.C. 1368), Executive Order 11738, and Environmental Protection Agency regulations

                                            10
                                               
       (40 CFR part 15). (Contracts, subcontracts, and subgrants of amounts in excess of
       $100,000).

   13. Mandatory standards and policies relating to energy efficiency which are contained in the
       state energy conservation plan issued in compliance with the Energy Policy and
       Conservation Act (Pub. L. 94A 163, 89 Stat. 871).

State of Iowa Disaster Action Plan for Disaster Recovery #2 - Utilizing Supplemental
CDBG Disaster Recovery Funding from the Consolidated Security, Disaster Assistance,
and Continuing Appropriations Act, 2009 (Public Law 110-329)

Monitoring Standards and Procedure
The State will utilize time-tested State of Iowa CDBG Program monitoring policies and
procedures for ensuring compliance with federal guidelines. These policies and procedures are
consistent with those used by HUD to monitor state-administered and entitlement programs. In
addition, the office of the Auditor of State (which reports to the Governor and the Legislature)
and HUD frequently perform monitoring, assessment or auditing to ensure that the State is in
compliance with state and federal rules and regulations and to assist the state in providing
guidance to CDBG recipients. The CDBG Program responds to these independent internal audit
functions by modifying internal and external administration of the funding.

The State will utilize its existing monitoring process to ensure that all contracts funded under this
disaster recovery allocation are carried out in accordance with federal and state laws, rules and
regulations. Expenditures will be disallowed if the use of the funds does not address disaster-
related needs or are clearly not for the greatest needs. In such case, the local government
receiving the funding would be required to refund the amount of the grant that was disallowed.
The State will develop revised monitoring checklists, appropriate for the Disaster Recovery
funding, and applicable waivers and alternative requirements. In addition to the usual
information collected through the CDBG Monitoring Checklist, the revised version will include
a set of questions designed to address the issue of non-duplication of benefits.

In determining appropriate monitoring of the grant, the State will consider prior CDBG grant
administration, audit findings, as well as factors such as complexity of the project. The State
will determine the areas to be monitored, the number of monitoring visits, and their frequency.
All grants will be monitored at least once on site during the life of the activity. The monitoring
will address program compliance with contract provisions, including national objective, financial
management, and the requirements of 24 CFR Part 85. The State will utilize the checklists
similar to those used in monitoring regular program activities.




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