oversight

The City of San Bernardino, CA, Did Not Administer Its Community Development Block Grant and Community Development Block Grant-Recovery Act Programs in Accordance With HUD Rules and Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-04-23.

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

 OFFICE OF AUDIT
 REGION 9
 LOS ANGELES, CA




               The City of San Bernardino, CA

        Community Development Block Grant
    Formula Allocation and Recovery Act Programs




2013-LA-1004                                    APRIL 23, 2013
REPORT
                                                        Issue Date: April 23, 2013

                                                        Audit Report Number: 2013-LA-1004




TO:            William Vasquez, Director, Los Angeles HUD Office of Community Planning
               and Development, 9DD

               Dane Narode, Associate General Counsel for Program Enforcement, CACC

               ///SIGNED///

FROM:          Tanya E. Schulze, Regional Inspector General for Audit, Los Angeles Region 9,
               9DGA


SUBJECT:       The City of San Bernardino, CA, Did Not Administer Its Community
               Development Block Grant and Community Development Block Grant-Recovery
               Act Programs in Accordance With HUD Rules and Regulations


    Enclosed is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final results of our review of the City of San Bernardino’s Community
Development Block Grant and Community Development Block Grant-Recovery Act programs.

    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
213-534-2471.
                                          April 23, 2013
                                          The City of San Bernardino, CA, Did Not Administer Its
                                          Community Development Block Grant and Community
                                          Development Block Grant-Recovery Act Programs in
                                          Accordance With HUD Rules and Regulations


Highlights
Audit Report 2013-LA-1004


 What We Audited and Why                   What We Found

We reviewed the City of San               The City did not operate in accordance with HUD rules
Bernardino’s Community Development        and regulations. It used $47,699 in CDBG funds for
Block Grant (CDBG) and CDBG-              ineligible expenditures and lacked supporting
Recovery Act (CDBG-R) programs            documentation for more than $7.1 million. The City
because the U.S. Department of            also did not report $168,761 in program income and
Housing and Urban Development’s           did not adequately support its procurement activities
(HUD) Los Angeles Office of               for the $951,548 in Recovery Act funds it received.
Community Planning and Development
expressed concerns about the City’s
administration of its CDBG program.
Our objective was to determine whether
the City administered its CDBG and
CDBG-R program funds in accordance
with applicable HUD requirements.

 What We Recommend

We recommend the Director of HUD’s
Los Angeles Office of Community
Planning and Development require the
City to (1) repay $47,699 in ineligible
expenses from non-Federal sources, (2)
support more than $7.1 million in
expenses or repay the program, (3)
remit $168,761 in unreported program
income, and (4) demonstrate the
reasonableness of $951,548 in Recovery
Act funds used in the procurement of
two contracts. We also recommend that
HUD’s Associate Counsel for Program
Enforcement pursue civil remedies,
civil money penalties, or other
administrative action, as appropriate,
against the City for intentionally not
reporting CDBG program income.
                            TABLE OF CONTENTS

Background and Objective                                                          3

Results of Audit
      Finding 1: The City Improperly Used or Lacked Supporting Documentation
                 for Its Use of More Than $7.16 Million in Program Funds          5
      Finding 2: The City Did Not Report Program Income Generated From
                 Program Activities                                               10
      Finding 3: The City Did Not Adequately Support Its Procurement Activities
                 for CDBG-R Activities                                            14

Scope and Methodology                                                             16

Internal Controls                                                                 17

Appendixes
A.    Schedule of Questioned Costs                                                19
B.    Auditee Comments and OIG’s Evaluation                                       20
C.    Criteria                                                                    24
D.    Summary of Questioned Costs                                                 28




                                            2
                      BACKGROUND AND OBJECTIVE

The City of San Bernardino operates under a hybrid mayor-council-city manager form of
government. Each of the seven members of the council is elected by voters within their
respective wards. The mayor and council members serve 4-year terms. Under the supervision of
the mayor, the city manager is the chief administrative officer. The city manager directs most
City departments, other than those governed by separate boards and offices of elected officials.
The city manager’s office, in addition to assisting the mayor and council in policy formulation,
focuses on special projects. The City also has an elected city attorney, city treasurer, and city
clerk.

The City was awarded the following Community Development Block Grant (CDBG) and
CDBG-Recovery Act (CDBG-R) funds:

Fiscal year                         CDBG             CDBG-R               Total
July 1, 2009, to June 30, 2010      $3,602,903       $951,548             $4,554,451
July 1, 2010, to June 30, 2011      $3,891,483       Not applicable       $3,891,483
July 1, 2011, to June 30, 2012      $3,244,569       Not applicable       $3,244,569
                                                     Total                $11,690,503

The City filed an emergency petition for Chapter 9 bankruptcy on August 1, 2012. It will
continue to operate and provide essential services to its community while working through its
financial problems under the protection of the Chapter 9 bankruptcy code.

The City had been using its Economic Development Agency to administer its CDBG and
CDBG-R funds. The Economic Development Agency is equivalent to a redevelopment agency.
The governor of California executed a proposal to eliminate all redevelopment agencies
statewide on June 29, 2011. Consequently, on January 9, 2012, the City became the successor
agency to the Economic Development Agency. As such, the City is now directly responsible for
administering the program funds.

HUD’s Los Angeles Office of Community Planning and Development last performed an onsite
monitoring review of the City’s CDBG program for the fiscal year ending June 30, 2006. It
identified a lack of adequate documentation for the use of CDBG funds under the City’s code
enforcement program and that its reimbursement system was inadequate to identify the funding
source. In addition, HUD’s review of the City’s consolidated annual performance and evaluation
report submissions for the fiscal years ending June 30, 2010, and June 30, 2011, identified
discrepancies between the report and information in HUD’s systems, difficulties in timely and
accurate accounting for program income and expenditures, and overspending on code
enforcement expenditures. As of February 2013, the City had not submitted its report to HUD
for the fiscal year ending June 30, 2012, which was due September 30, 2012.




                                                 3
Audit Objective
Our objective was to determine whether the City administered its CDBG and CDBG-R program
funds in accordance with HUD rules and regulations. Specifically, we wanted to determine
whether program funds were used for eligible purposes and program income was reported in
accordance with regulations.




                                            4
                                RESULTS OF AUDIT


Finding 1: The City Improperly Used or Lacked Supporting
           Documentation for Its Use of More Than $7.16 Million in
           Program Funds
The City did not comply with Federal regulations when it improperly used or lacked supporting
documentation for the use of more than $7.16 million in CDBG program funds. Specifically, the
City used $47,699 in program funds for ineligible expenses, and it could not support the
eligibility of $7.11 million in program funds. The problems occurred because the City did not
have adequate procedures and lacked the capacity to monitor the program to ensure that HUD
regulations were followed. As a result, more than $7.16 million in program funds was not
available for decent, affordable housing and other services principally for low- and moderate-
income persons.


 The City Used CDBG Funds for
 Ineligible Expenses


              The City spent $47,699 for ineligible expenses (see appendix D). The ineligible
              expenses included

                     $13,698 for services for ineligible properties, overdraws on program
                      funds, etc.;
                     $14,001 in general government expenses; and
                     $20,000 in additional funding for its subrecipient to overcome another
                      Federal agency fund deficiency.

              Ineligible Code Enforcement Expenditures Totaled $13,698
              The City used program funds totaling $13,698 in ineligible expenditures for the
              following:

                     Overdraws of $10,003 in program funds. For the fiscal year ending June
                      30, 2011, the City drew more than $2.58 million in code compliance
                      expenditures, but accounting records showed expenditures totaled only
                      $2.57 million, so program funds were overdrawn by $10,003.
                     Overdraws of $1,845 for May 2011 code compliance expenditures. The
                      City incorrectly calculated the amount it should be reimbursed, charging
                      $123,885 when the actual amount totaled $122,040 in expenses.
                     Reimbursement of $1,436 for services performed on ineligible properties
                      that were listed as non-CDBG in the City’s automated Go-Enforce system.



                                               5
                               o Case number 10-193531 ($535)
                               o Case number 09-7949 ($753)
                               o Case number 09-19667 ($148)
                           Duplicate costs claimed for the same amendment of tax bills for the
                            months of November and December 2010 totaling $414.

                   Ineligible Administrative Costs Totaled $14,001
                   Contrary to 24 CFR (Code of Federal Regulations) 570.207(a)(2), the City
                   charged an allocation of $14,001 in ineligible general government cost to the
                   program.

                   Ineligible Additional Funding of $20,000 Was Provided to a Subrecipient
                   The City provided additional funding of $20,000 to one subrecipient to overcome
                   another Federal agency fund deficiency. The Legal Aid Society already had
                   received $9,500 from program funds to perform CDBG-related activities. City
                   council records detailed that the subrecipient was “short on cash” and a council
                   member was “hoping they could get $20,000 from unexpended CDBG funding.”
                   We determined that the Legal Aid Society, Inland Counties Legal Services, Inc., a
                   Federal agency, was reducing its funds. As a result, the city council approved the
                   allocation of $20,000 to the subrecipient to be issued due to urgent need.
                   However, regulations at 2 CFR Part 225, appendix A, paragraph C.3.c state that
                   any cost allocable to a particular Federal award or cost objective under these
                   regulations may not be charged to other Federal awards to overcome fund
                   deficiencies, to avoid restrictions imposed by law or terms of the Federal awards,
                   or for other reasons. In addition, the cash shortage was not urgent as claimed in
                   the city council notes. Records showed that the cuts in funding were signed in
                   February 2012, after the January 5, 2012, general ledger entries for $20,000. The
                   initial reduction in funds of about $3,500 was not scheduled to start until April
                   2012.

    The City Lacked Supporting
    Documentation for
    Expenditures and Draws

                   Expenses totaling more than $7.1 million were unsupported because the City
                   lacked documentation to support the reimbursements (see appendix D). The
                   missing documentation included, among other records, checks, invoices,
                   contracts, and support for allocation methodologies. In some circumstances, there
                   were no records provided for the expenditures. The unsupported expenses
                   included
                        More than $4.8 million in code enforcement expenditures, including but
                          not limited to salaries, supplies, contract services, fleet, government
                          outreach, etc.;
                        More than $1.3 million in administrative costs; and
1
    Case numbers were provided in place of addresses.


                                                        6
                         $942,266 in sample draws without adequate records to support the
                          expenditures.

                 Unsupported Code Enforcement Expenditures
                 The code compliance division spent $4.8 million for unsupported costs. Most of
                 the funds were spent on salaries and benefits for code enforcement officers. The
                 City used various percentages (94, 84, or 40 percent) for their code enforcement
                 salaries without an adequate cost allocation plan or explanation to support how
                 these percentages were determined. The City also charged lump-sum amounts for
                 expense items with no basis or records to show how the amounts were
                 determined. For example, in 2010,2 the City charged, among other expenses,
                 information technology costs ($217,024), worker’s compensation benefits
                 ($179,872), liability charges ($262,108), and telephone expenses ($101,640) with
                 no records to support the amount attributed to the CDBG program. Further, the
                 City was inconsistent in charging expenses to the CDBG program. For example,
                 in 2009, it determined that $115,991 in disallowed expenses should not be
                 reimbursed with CDBG funds. However, in 2010, it retroactively charged 20
                 percent of the $115,991 to the CDBG program with no basis or explanation. This
                 practice continued for several months in 2010 and then stopped. Afterward, the
                 percentages fluctuated for each expense charged to the program, and City staff
                 could not explain the amounts charged.

                 Unsupported Administrative Costs
                 The City drew down $1.3 million in unsupported program funds for its
                 administrative costs (refer to appendix D). It did not maintain an adequate cost
                 allocation plan as required by 2CFR Part 225, appendix A, paragraph C.3.d (see
                 appendix C) and used an allocation method based, for the most part, on estimates
                 not supported by formal accounting and other records to support the propriety of
                 the costs assigned to Federal awards. Further, the City was unable to provide an
                 adequate explanation or support for how the percentages were determined. As a
                 result, we determined more than $1.3 million in administrative costs to be
                 unsupported.

                 Unsupported Sample Draws
                 The City drew down $942,266 in program funds, including $462,820 in CDBG
                 and $479,446 in CDBG-R funds, without adequate support (see appendix D). The
                 vouchers submitted were not adequately documented. Specifically, these
                 expenses were not supported by source documents such as invoices. Regulations
                 at 24 CFR 85.20 require that grantees maintain records which adequately identify
                 the source and application of funds. Accounting records must be supported by
                 such source documentation as canceled checks, paid bills, payrolls, time and
                 attendance records, and contract and subgrant award documents. Contrary to the
                 regulations, the City did not maintain adequate accounting records to support the


2
 For the fiscal year ending June 30, 2011, the City budgeted $1.7 million but spent more than $2.5 million in code
compliance division expenditures. It overspent by $853,863 without HUD’s approval or a formal amendment.


                                                         7
             draws sampled. As a result, we determined $942,266 to be unsupported, of which
             $479,446 was CDBG-R funds.

The City Lacked Procedures
and Capacity To Monitor the
Program

             The City did not ensure that it followed all HUD rules and regulations because it
             did not have adequate procedures or the capacity to monitor the program. Before
             the statewide termination of redevelopment agencies, the City’s Economic
             Development Agency ran the CDBG program with no monitoring from the City.
             Due to the lack of program monitoring, City staff members were unable to explain
             actions by the Agency before its termination. In addition, the only procedures
             related to the CDBG program consisted of a binder called “A Timeline of
             Monthly Steps and Proposed Schedule.” Further, the City explained that it was
             not working on a new policy and procedures related to CDBG because of its short
             staffing for the program. There was only one staff member assigned to oversee
             and report on the program. The inadequate procedures were due to the City’s lack
             of capacity to monitor the program and not sufficiently recognizing the need for
             developing and maintaining proper controls.

Conclusion

             The City used more than $7.1 million in program funds for ineligible or
             unsupported expenses. This condition occurred because the City did not follow
             all of HUD’s rules and regulations as it did not have adequate procedures or the
             capacity to monitor the program. As a result, more than $7 million in CDBG
             funds was not available for decent, affordable housing and other services
             principally for low- and moderate-income persons.

Recommendations

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

             1A.    Repay the CDBG program $47,699 for ineligible expenses from non-
                    Federal funds.

             1B.    Provide support for $6,637,341 in unsupported costs or repay the CDBG
                    program from non-Federal funds.

             1C.    Provide support for $479,446 in unsupported CDBG-R costs or repay the
                    U.S. Treasury from non-Federal funds.




                                              8
1D.   Suspend the program and CDBG funding until it can demonstrate that it
      has procedures and controls in place and capacity to operate its program
      properly.

1E.   Establish and implement sufficient internal control policies and procedures
      to ensure that CDBG program funds are committed and expended in
      accordance with HUD rules and requirements.




                               9
Finding 2: The City Did Not Report Program Income Generated From
           Program Activities
The City did not report program income generated from its CDBG activities in accordance with
Federal regulations. It failed to report $168,761 in program income earned from CDBG
activities. This condition occurred because the did not have any applicable program income
policies and procedures. As a result, $168,761 in CDBG funds was not available for decent,
affordable housing and other services principally for low- and moderate-income persons.


    Inaccurate Information Was
    Reported to HUD


                    The City did not report accurate and timely program income to HUD as required
                    by Federal regulations at 24 CFR 570.504. It reported a total of $184,836 in
                    program income for fiscal years ending June 30, 2010, and June 30, 2011. Not
                    only did the City erroneously report the amount of program income, the $184,836
                    in program income that it reported was inaccurately attributed to

                            Code compliance,
                            Center for individuals with disabilities, and
                            General program administration.

                    The City had not reported any program income for the fiscal year ending June 30,
                    2012, because it had not submitted its applicable consolidated annual performance
                    and evaluation report.

                    The City’s neighborhood rehabilitation program revolving loans generated
                    $176,716 of the program income, and the remaining $8,120 was generated from
                    demolition costs incurred by the City. This inaccurate reporting misled HUD to
                    believe that the City was reporting program income for its code compliance
                    activity3 when it did not. This condition occurred because the City did not have
                    any applicable program income policies and procedures to ensure its staff to
                    follow appropriate program requirements. As a result, it could not assure HUD
                    that it could appropriately account for its program income for the use of decent,
                    affordable housing and other services for low- and moderate-income persons
                    before using additional program funds.




3
    The City’s code compliance division received most of the entitlement grant.


                                                          10
    Program Income Was Not
    Reported

                 The City failed to report $168,761 in CDBG program income to HUD in
                 accordance with Federal requirements. Regulations at 24 CFR 570.504(a) require
                 that receipts and expenditures of program income be recorded as part of the
                 financial transactions of the grant program. The regulations also require that
                 program income be disbursed for eligible activities before additional cash
                 withdrawals are made from the U.S. Treasury. The City did not report program
                 income for the following activities:

                 1. Neighborhood Rehabilitation Program Income
                    The City’s repayment of revolving loans generated $249,731 in program
                    income for fiscal years ending June 30, 2010, June 30, 2011, and June 30,
                    2012; however, the City reported that its loan program generated only
                    $176,716. Additionally, the City incorrectly reported program income
                    generated from its revolving loans for those years.

                             For the fiscal year ending June 30, 2010, $430 in income was reported
                              to HUD over the actual program income generated for that year.
                              According to the City, the difference was attributable to the
                              understatement of income to HUD for the fiscal year ending June 30,
                              2009.
                             For the fiscal year ending June 30, 2011, the City reported $104,848 in
                              program income, an overstatement of $1,000. The City stated that the
                              overreporting of income was due to a clerical error.
                             For the fiscal year ending June 30, 2012, the City had not reported any
                              of its income of $73,4454 generated from its revolving loans.

                 2. Demolition Program Income
                    The City expended $109,467 in CDBG funds for demolition costs and
                    recuperated those funds by either direct payment from the owners of the
                    properties being demolished or through tax liens placed on the properties until
                    the full cost was recaptured. However, the City did not record the receipt of
                    demolitions as CDBG program income in a specified general ledger. Instead,
                    it recorded the income in its general fund account. Overall, the City generated
                    a total of $182,031 in program income between 2009 and 2011, of which it
                    received $103,436. However, the City recorded and reported only one receipt
                    to HUD in the amount of $8,120. As a result, it failed to report the remaining
                    $95,316 in program income received from the demolition activity. Further,
                    according to the City, the remaining amount, $78,5955 in program income


4
  The applicable amount for the fiscal year ending June 30, 2012, was $74,445. However, since the City
overreported its program income for the prior year by $1,000, we netted the amount to $73,445 ($74,445-$1,000).
5
  $182,031-$103,436=$78,595


                                                       11
                     earned, had not been received. Once this income is received, the City should
                     report the amount to HUD in accordance to 24 CR 570.504(a).

                Refer to table below for a summary of unreported program income.

                Summary of unreported program income
                 Activity                                                        Amount
                 Neighborhood Rehabilitation Revolving Loan
                 Program                                                          $73,445
                 Demolition                                                       $95,316
                            Total unreported program income                      $168,761

                The unreported program income of $168,761 was not available for decent,
                affordable housing and other services principally for low- and moderate-income
                persons. These conditions occurred because the City did not have program
                income policies and procedures.

    The City Lacked Program
    Income Procedures


                Before the City became the successor agency to the Economic Development
                Agency,6 the Agency administered the CDBG program. Although the City had
                general procedures regarding program income, they addressed only program
                income generated from revolving loans. All other income (such as code
                compliance) generated was reported under the general fund; therefore, any
                income applicable to the CDBG program would not be identified as such.
                Economic Development Agency officials explained that they had told the City
                many times that the CDBG program income must be returned to the CDBG
                program.

                In 2010, the Agency had an independent consultant conduct a CDBG review. The
                consultant’s report, dated January 2010, recommended that the code enforcement
                program track all repayments of demolition expenses attributable to the CDBG
                program and deposit the funds into a separate account, not in general funds. As a
                result, the City established procedures for its code compliance program;
                specifically, CDBG funded inspections7 in November 2010. However, the City
                did not address procedures regarding demolition expenses or other activities
                generating program income.




6
  The Economic Development Agency was eliminated on June 29, 2011.
7
  The City’s CDBG funded inspections produces revenues through fines and penalties. However, 24 CFR 85.25(d)
indicates that fines and penalties are not considered program income.


                                                     12
Conclusion

             The City did not report $168,761 in program income to HUD in accordance with
             Federal requirements. It inaccurately reported program information and failed to
             report program income to HUD because it did not have procedures and lacked
             adequate controls. As a result, $168,761 in program funds was not available for
             decent, affordable housing and other services for low- and moderate-income
             persons.

Recommendations

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

             2A.    Remit to its CDBG program from non-Federal funds the $73,445 in
                    program income that it received for the repayment of revolving loans.

             2B.    Remit to its CDBG program from non-Federal funds the $95,316 in
                    program income that it received for its demolition activities.

             2C.    Establish and implement additional procedures and controls to ensure that
                    program income is recorded, reported, and expended in accordance with
                    HUD rules and requirements.

             We recommend that HUD’s Associate Counsel for Program Enforcement

             2D.    Determine legal sufficiency and if legally sufficient, pursue civil remedies
                    (31 U.S.C (United States Code) Section 3801-3812, 3729, or both), civil
                    money penalties (24 CFR 30.35), or other administrative action against the
                    City, its principals, or both for intentionally not reporting revenues
                    generated from its code compliance division as CDBG program income.




                                             13
Finding 3: The City Did Not Adequately Support Its Procurement
           Activities for CDBG-R Activities
The City used CDBG-R funds, procured professional services, and awarded contracts without
maintaining records to support its procurement activities. This condition occurred because the
City did not adequately monitor the Economic Development Agency and relied on the Agency to
maintain the records. As a result, it paid at least $951,548 to contractors without adequate
support to show whether the services were performed at a reasonable cost.


    The City Did Not Follow
    Prudent Procurement Practices


                 Contrary to 24 CFR 85.36(b)(2), the City did not maintain a contract
                 administration system. It was unable to provide documentation showing that bids
                 were received for services obtained for its CDBG-R activities totaling $951,548,
                 the entire amount of the grant received. Specifically, the funds were used to
                 award contracts for handicap curbs8 ($451,548) and to Speicher Park9 ($500,000).
                 The City did not adequately monitor the Agency. It relied on the Agency to
                 maintain records but did not monitor the Agency to ensure that it did so. The
                 Agency has since been dissolved, and the City is now directly responsible for
                 administering the program. Although the City established purchasing procedures,
                 they did not detail the requirement of maintaining records in accordance with
                 HUD rules and regulations. Overall, the City paid $951,548 to two vendors for
                 services without adequate support to ensure that services paid for were obtained at
                 low and competitive costs and in accordance with HUD rules and regulations.

                 At the March 27, 2013, exit conference, the City provided additional procurement
                 records for the two contracts. However, the procurement records were still
                 incomplete and did not demonstrate the reasonableness of the costs charged to the
                 CDBG-R funds.

    Conclusion

                 The City violated HUD procurement requirements and paid $951,548 without
                 adequate support to ensure that services were obtained at a low and competitive
                 cost. This condition occurred because the City relied on the Agency to maintain
                 its procurement records. Although the payments were made to unrelated third-
                 party vendors, it was necessary for the City to demonstrate the reasonableness of
                 the costs charged to the CDBG-R funds.
8
  The scope of work included construction for the Americans with Disabilities Act ramps and sidewalks for various
locations citywide.
9
  The scope of work included construction of a skate park, parking lot, basketball court, and community garden and
compliance with the Americans with Disabilities Act for all onsite park improvements.


                                                        14
     Recommendations

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

                 3A.     Demonstrate the reasonableness of the CDBG-R funds ($472,102)10 used
                         on the two contracts and require any unsupported or unreasonable amounts
                         to be repaid to the U.S. Treasury.

                 3B.     Implement and follow procurement procedures and maintain records and
                         project files and ensure that they are kept in accordance with HUD rules
                         and regulations.




10
   We recommend that the City demonstrate the reasonableness for the entire $951,548 used for the two contracts.
However, we already questioned $479,446 of this amount under recommendation 1C. To avoid double counting, we
listed the difference of $472,102 as the questioned costs for recommendation 3A.


                                                      15
                                  SCOPE AND METHODOLOGY

We performed our onsite audit work primarily at the City’s office, located in San Bernardino,
CA, between July 2012 and February 2013. Our audit generally covered the period January 1,
2010, through June 30, 2012. We expanded our scope as necessary.

To accomplish our audit objective, we

        Reviewed applicable HUD regulations, including Public Law 111-5; Notice of Funding
         Availability Docket No. FR-5309-N-01; 24 CFR Part 570; 24 CFR Part 85; 2 CFR Part
         225; Office of Management and Budget (OMB) Circular A-133; HUD Handbook –
         Playing by the Rules, Guide to National Objective and Eligible Activities for Entitlement
         Communities; Office of Community Planning and Development Handbook 6509.2; HUD
         Guidebook – A Guidebook for Grantees on Subrecipient Oversight; HUD CDBG and
         Recovery Act Facts, Answers, and Questions; HUD policy alerts and notices; and
         American Recovery and Reinvestment Act of 2009 and OMB Recovery Web sites.

        Reviewed the City’s internal policies and procedures.

        Interviewed the City’s staff.

        Reviewed the City’s accounting records, including general ledgers, invoices, and
         supporting documentation related to the disbursements selected for review.

We selected a nonrepresentative sample of draws from our audit period11 with the highest
expenditures and auditor judgment. The City expended $12.11 million and $951,548 in CDBG
and CDBG-R funds from fiscal years ending June 30, 2009, to June 30, 2012, respectively. Of
that amount, we sampled $1.27 million in CDBG funds and $432,102 in CDBG-R funds during
the survey phase. In the audit phase, we focused on code enforcement expenditures ($4.87
million), administrative costs ($1.4 million), program income, and sampled draws. For our
procurement review, we selected the highest expenditures, which also happened to be funded
under the Recovery Act. The only computer data system we relied on during the audit was the
City’s Go-Enforce system, which we used to determine whether code compliance properties
were designated as CDBG. We confirmed examples to source documents to determine that the
information was reliable enough for audit purposes.

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

11
   Although our audit period started January 1, 2010, there were instances in which we reviewed expenditures from
the fiscal year ending June 30, 2010, because the City did not request these expenditures to be reimbursed until the
fiscal year ending June 30, 2011.


                                                         16
                              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:

                      Policies and procedures that management has implemented to ensure that
                       program funds are expended in accordance with HUD rules and
                       regulations.
                      Policies, procedures, and controls that management has implemented to
                       ensure that program income generated is reported to HUD in accordance
                       with rules and regulations.

               We assessed the relevant controls identified above.

               A deficiency in internal controls 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 Deficiencies

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

                  The City lacked adequate controls over its CDBG and CDBG-R programs to
                   ensure that program funds were expended in compliance with HUD rules and
                   regulations (see findings 1 and 3).


                                                17
   The City lacked sufficient procedures to ensure that program income
    generated was reported to HUD (finding 2).




                                18
                                           APPENDIXES

Appendix A

                      SCHEDULE OF QUESTIONED COSTS

                       Recommendation
                                                    Ineligible 1/      Unsupported 2/
                           number

                               1A                        $47,699
                               1B                                           $6,637,341
                               1C                                             $479,446
                               2A                        $73,445
                               2B                        $95,316
                               3A                                           $472,10212
                              Total                     $216,460            $7,588,889

        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 the decision by HUD program officials. This decision,
                 in addition to obtaining supporting documentation, might involve legal
                 interpretation or clarification of departmental policies and procedures.




12
  In finding 1 (recommendation 1C), we determined $479,446 of the $951,548 in CDBG-R funds to be unsupported
costs. To avoid double counting, we listed the difference of $472,102 as the questioned costs for recommendation
3A.



                                                      19
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                                  Auditee Comments

             Monday, April 8, 2013


             Tanya E. Schulze
             Regional Inspector General for Audit
             Office of Audit (Region 9)
             611 West 6th Street, Suite 1160
             Los Angeles, CA 90017

             Dear Ms. Schulze,

             The City of San Bernardino (CSB) received the revised draft audit report and cover
             letter dated March 28, 2013. That letter requested formal conclusions and comments
             to be submitted by April 8, 2013. Upon receipt of the report, the city hired a
             consultant with experience working with both the Department of Housing and Urban
             Development (HUD) and the Office of Inspector General (OIG) in Los Angeles,
             Name Redacted.1

             The City of San Bernardino disputes the OIG findings that it has unsupported costs as
             set forth in Finding 1. The documentation is available, but needs to be compiled in a
Comment 1
             format which will satisfy the OIG that all funds were used appropriately to provide
             Code Enforcement for Community Development Block Grant (CDBG) properties.
             The City is requesting approval of the following allocation methodology to be applied
             to verifiable, documented Code Enforcement Department costs to determine
             legitimate, eligible expenses related to CDBG properties.

             Methodology

             The OIG auditors utilized the City’s “Go-Enforcement” system in a limited manner to
             determine whether code compliance properties were designated as CDBG. However,
             that system also contains information to support all enforcement actions for each
             property which are relevant to the direct payroll allocation of staff members. The
             City is proposing to provide additional data from Go Enforce to support the costs set
Comment 2    forth in Finding 1. Allocation calculations will be

             1
              Name Redacted has a J.D. and a B.B.A. and is licensed in her home state as a member of the Wisconsin State Bar
             and Department of Regulation and Licensing as a C.P.A. In California she provides business consulting and
             accounting services. She dealt with the Department of HUD administering funds for over nine years as Chief Financial
             Officer of a Los Angeles nonprofit and a consultant on a similar HUD/OIG audit for a San Bernardino nonprofit.


                      *Names redacted for privacy reasons


                                                          20
            clearly defined, are readily accessible, detailed as to person, date, time, and activity
            and can be reproduced by auditors.

            Payroll Allocation Methodology:
            Inspection Staff:
            Go-Enforce reports can be structured by Inspector, by dates, to list all or specific
            activities, by property, all or CDBG only. We will identify how many activities within
Comment 2   a monthly range each inspector had for CDBG properties divided by the number for
            all properties visited within that period to determine the allocation percentage to apply
            to the salary, taxes and fringe benefits. Other available time documentation includes
            individual Inspector time “Tracking Forms”2 manually prepared by inspectors daily
            which identifies property locations visited, time there, and whether it was CDBG or
            Non-CDBG. The methods overlap depending upon the utilization of the Go-Enforce
            for a specific period within the entire audit period. Where available, we will use the
            Go-Enforce as the more accurate, inclusive and verifiable documentation to readily
            differentiate between the property locations for allocation purposes. Tracking forms
            will be used for employees that are no longer working for the City.

            Administrative Personnel in the Code Enforcement division:
            Administrative personnel primarily spend their time on documentation for citations,
            fees, penalties, notices of default, notices of hearing, hearings for liens, etc. This
            information is also available in Go-Enforce. Creating reports as the time period, the
            Go-Enforce system identifies activities, (Warrants, Hearings, Administration and
            Notices) for CDBG properties divided by those same activities for all properties. That
            percentage will be utilized to allocate Administrative Staff payroll expenses.

            Supervisory Staff:
            For Administrative supervisory staff, the same allocation percentage calculated for the
            Administrative staff will be used. For Inspection Supervisory staff, the percentage of
            total CDBG activities per Go-Enforce will be divided by all similar actions instead of
            being employee specific or averaging the staff percentage.

            Payroll Allocation Example
            November 2010
            We arbitrarily chose an individual month to illustrate the allocation process. For
            November, 2010, CSB allocated 100% of the payroll expenses for specific individuals
            within the department. Instead, we propose to allocate all staff who work on CDBG
Comment 2   properties based on the above allocation percentages. Staff assigned to Commercial
            properties will be excluded. All others providing direct services (Inspectors) can be
            allocated individually. Using the Go-Enforce method confirms that staff provided
            services to CDBG properties in excess of the amount originally claimed for the
            period.3

            2
                Sample of Daily Tracking Form is attached.
            3
                See attached example.




                        *Attachments available upon request



                                                             21
            Other Expenses:
            Office (administrative) expenses will be allocated in the same manner as the
Comment 2   Administrative staff, i.e. Monthly Hearing Agenda percentage of CDBG cases,
            including supplies, postage, printing, copier.

            Occupancy:
            Office occupancy expenses for (utilities, insurance, repairs, cleaning) will be
            calculated a little differently. The Code Enforcement Department also inspects
            properties for Weed abatement. There are 800 such properties, inspected twice
            annually. Accordingly, the occupancy allocation would be based on CDBG activities
            divided by all the total of all G-Enforce activities plus 1600 weed abatement
            inspections.

            Fleet Expenses:
            Fleet expenses, including vehicles, small tools and equipment, gas, maintenance, and
            insurance will be allocated in the same manner as the Inspection Supervisory Staff.

            Upon approval of the direct payroll costs reconciliation procedures and indirect cost
Comment 3   methodology, the City requests that the OIG select sample periods to confirm that all
            the documentation and information is available for reconciliation and allow sufficient
            time for the city to demonstrate same. Alternatively, specifically for the payroll, if the
            OIG requires recalculation for the entire period, CSB requests that the allocation be
            made by individual staff members on an annual, rather than monthly basis in order to
            expedite the process.

            The City requests that the final audit report be delayed until the above allocation
Comment 3   substantiation can be completed. Please contact Brandon Mims, Deputy Director of
            Housing, if you have any questions at (909) 384-5122.



            Sincerely,



            Allen Parker




                                                22
                         OIG Evaluation of Auditee Comments

Comment 1   The City disputes the unsupported costs; however, it has not provided the
            documentation to support the amounts in question. The City was provided with
            ample opportunity to produce documentation during the course of the audit. The
            City will be able to work with HUD to address the implementation of an
            acceptable allocation methodology as part of the audit resolution process for
            recommendation 1D.

Comment 2   The OIG gave the City several opportunities to provide the records during the
            course of the audit. The City will have further opportunity to provide applicable
            supporting documentation to HUD as part of the audit resolution process for
            recommendations 1B and 1C.

Comment 3   The OIG gave the City sufficient opportunity to provide the supporting records in
            question costs during the course of our audit, from July 2012 through February
            2013. As a result, we are not giving an extension to the City. The City can work
            with HUD to resolve the questioned costs as part of the audit resolution process.




                                            23
Appendix C

                                          CRITERIA

24 CFR 570.200, General policies

24 CFR 570.200(a)(2), Compliance with national objectives. Grant recipients under the
Entitlement and HUD-administered under the Entitlement and HUD-administered Small Cities
programs must certify that their projected use of funds has been developed as to give maximum
feasible priority to activities which will carry out one of the national objectives of benefit to low
and moderate income families or aid in the prevention or elimination of slums or blight.

24 CFR 570.200(a)(5), Cost Principles. Costs incurred, whether charged on a direct or an
indirect basis, must be in conformance with OMB Circulars A-87, “Cost Principles for State,
Local and Indian Tribal Governments.”

24 CFR 570.206, Program administrative costs. Payment of reasonable administrative costs
and carrying charges related to the planning and execution of community development activities
assisted in whole or in part with funds provided this part and, where applicable, housing
activities (described in paragraph (g) of this section) covered in the recipients housing assistance
plan. This does not include staff and overhead costs directly related to carrying out activities
eligible under section 570.201 through 570.204, since those costs are eligible as part of such
activities.

24 CFR 570.206(a)(1), General management, oversight and coordination. Reasonable costs of
overall program management, coordination, monitoring, and evaluation. Such costs include, but
are not necessarily limited to, necessary expenditures for the following: Salaries, wages, and
related costs of the recipient’s staff, the staff of local public agencies, or other staff engaged in
program administration. In charging costs to this category the recipient may either include the
entire salary, wages, and related costs allocable to the program of each person whose primary
responsibilities with regard to the program involve program administration assignments, or the
pro rata share of the salary, wages, and related costs of each person whose job includes any
program administration assignments...

24 CFR 570.207, Ineligible activities

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




                                                 24
24 CFR 570.427, Program amendments

24 CFR 570.427(a), HUD approval of certain program amendments. Grantees shall request
prior HUD approval for all program amendments involving new activities or alteration of
existing activities that will significantly change the scope, location, or objectives of the approved
activities or beneficiaries.

24 CFR 570.501, Responsibility for grant administration

24 CFR 570.501(b). The recipient is responsible for ensuring that CDBG 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, such
as the actions described in section 570.910.

24 CFR 570.502, Applicability of uniform administrative requirements

24 CFR 570.502(a). Recipients and subrecipients that are governmental entities (including
public agencies) shall comply with the requirements and standards of OMB Circular No. A-87,
“Cost Principles for State, Local, and Indian Tribal Governments.”

24 CFR 570.506, Records to be maintained. Each recipient shall establish and maintain
sufficient records to enable the [HUD] Secretary to determine whether the recipient has met the
requirements of this part.

24 CFR 570.905, Review of continuing capacity to carry out CDBG funded activities in a
timely manner. If HUD determines that the recipient has not carried out its CDBG activities
and certifications in accordance with the requirements and criteria described in section 570.901
or 570.902, HUD will undertake a further review to determine whether or not the recipient has
continuing capacity to carry out its activities in a timely manner. In making the determinations,
the Department will consider the nature and extent of the recipient’s performance deficiencies,
types of corrective actions the recipient has undertaken and the success or likely success of such
actions.

2 CFR Part 225, appendix A, paragraph C.3.d, states, “Where an accumulation of indirect
costs will ultimately result in charges to a Federal award, a cost allocation plan will be required
as described in Appendices C, D, and E to this part.” According to Appendix E, State and Local
Indirect Cost Rate Proposals, paragraph (B)(2), “…‘Indirect cost rate’ is a device for
determining in a reasonable manner the proportion of indirect costs each program should bear. It
is the ratio (expressed as a percentage) of the indirect costs to a direct cost base.” Further,
paragraph (D)(1)(a) of appendix E states, “All department or agencies of the governmental unit
desiring to claim indirect costs under Federal awards must prepare an indirect cost rate proposal
and related document to support those costs.” In addition, paragraph (D)(2)(a) specifies,
“Documentation of proposals. The following shall be included with each indirect cost proposal:




                                                 25
The rates proposed, including subsidiary work sheets and other relevant data, cross referenced
and reconciled to the financial data...”

2 CFR 225, Appendix A, paragraph C.3.c. Any cost allocable to a particular Federal award or
cost objective under the principles provided for in 2 CFR part 225 may not be charged to other
Federal awards to overcome fund deficiencies, to avoid restrictions imposed by law or terms of
the Federal awards, or for other reasons.

24 CFR Part 570

24 CFR 570.500(a). Program income means gross income received by the recipient or a
subrecipient directly generated from the use of CDBG funds, except as provided in paragraph
(a)(4) of this section.

24 CFR 570.500(a)(1)(x). Funds collected through special assessments made against properties
owned and occupied by households not of low and moderate income, where the assessments are
used to recover all or part of the CDBG portion of a public improvement.

24 CFR 570.503(b)(3), Program income. The agreement shall include the program income
requirements set forth in § 570.504(c). The agreement shall also specify that, at the end of the
program year, the grantee may require remittance of all or part of any program income balances
(including investments thereof) held by the subrecipient (except those needed for immediate cash
needs, cash balances of a revolving loan fund, cash balances from a lump sum drawdown, or
cash or investments held for section 108 security needs).

24 CFR 570.504(a), Recording program income. The receipt and expenditure of program
income as defined in § 570.500(a) shall be recorded as part of the financial transactions of the
grant program.
(b) Disposition of program income received by recipients.
        (1) Program income received before grant closeout may be retained by the recipient if the
        income is treated as additional CDBG funds subject to all applicable requirements
        governing the use of CDBG funds.
        (2) If the recipient chooses to retain program income, that program income shall be
        disposed of as follows:
        (i) Program income in the form of repayments to, or interest earned on, a revolving fund
        as defined in section 570.500(b) shall be substantially disbursed from the funds before
        additional cash withdrawals are made from the U.S. Treasury for the same activity.
        (ii) Substantially all other program income shall be disbursed for eligible activities before
        additional cash withdrawals are made from the U.S. Treasury.
        (iii) At the end of each program year, the aggregate amount of program income cash
        balances and any investment thereof (except those needed for immediate cash needs, cash
        balances of a revolving loan fund, cash balances from a lump-sum drawdown, or cash or
        investments held for section 108 loan guarantee security needs) that, as of the last day of
        the program year, exceeds one-twelfth of the most recent grant made pursuant to section
        570.304 shall be remitted to HUD as soon as practicable thereafter, to be placed in the
        recipient's line of credit.



                                                 26
24 CFR 570.504(b)(3). Program income on hand at the time of closeout shall continue to be
subject to the eligibility requirements in subpart C and all other applicable provisions of this part
until it is expended.

24 CFR 85.25(d) Governmental revenues. Taxes, special assessments, levies, fines, and other
such revenues raised by a grantee or subgrantee are not program income unless the revenues are
specifically identified in the grant agreement or Federal agency regulations as program income.

24 CFR 85.36(b), Procurement standards

(1) Grantees and subgrantees will 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 this section.
(2) Grantees and subgrantees will maintain a contract administration system which ensures that
contractors perform in accordance with the terms, conditions, and specifications of their
contracts or purchase orders.




                                                 27
Appendix D

                             SUMMARY OF QUESTIONED COSTS

                  Code enforcement expenditures, administrative costs, sample draws13

 Code enforcement expenditures

                                                Unsupported amount                             Ineligible amount
                                                                                      FYE                   FYE
                                    FYE*          FYE          FYE                    June      FYE         June
                                   June 30,     June 30,     June 30,                  30,    June 30,       30,
                  Description        2010         2011         2012        Total      2010      2011        2012   Total
           Salaries & benefits    $1,183,855   $1,641,609   $1,070,000   $3,895,464     n/a         n/a      n/a       $0
                      Supplies       $4,439      $36,447                   $40,886      n/a         n/a      n/a       $0
           Tools & equipment           $686                                   $686      n/a         n/a      n/a       $0
                      Printing       $1,907         $417                    $2,324      n/a         n/a      n/a       $0
                       Postage      $12,350                                $12,350      n/a         n/a      n/a       $0
      Copy machine & copier          $1,057       $3,320                    $4,378      n/a         n/a      n/a       $0
     Other operating expenses          $651                                   $651      n/a         n/a      n/a       $0
                       Garage        $5,750                                 $5,750      n/a         n/a      n/a       $0
        IT** charges in house        $5,000     $217,024                  $222,024      n/a         n/a      n/a       $0
                    Telephone        $2,500     $101,640                  $104,140      n/a         n/a      n/a       $0
             Communications          $2,475                                 $2,475      n/a         n/a      n/a       $0
                  Fleet & fuel       $7,400      $30,073                   $37,473      n/a         n/a      n/a       $0
      Worker’s compensation                     $179,872                  $179,872      n/a         n/a      n/a       $0
             Liability charges                  $262,108                  $262,108      n/a         n/a      n/a       $0
            Membership dues                       $2,175                    $2,175      n/a         n/a      n/a       $0
             Medical supplies                       $591                      $591      n/a         n/a      n/a       $0
     Contract services, county
            assessor, medical
     supplies, county auditor,
                 lock services,
       government outreach,
            county clerk, etc.                   $41,609                   $41,609      n/a      $1,850      n/a   $1,850
       20 % of expense items                     $32,746                   $32,746      n/a         n/a      n/a       $0

 Subtotal code
 enforcement
 expenditures                     $1,228,070   $2,549,632   $1,070,000   $4,847,702     $0       $1,850      $0    $1,850




13
   The schedule is a summary of the questioned costs identified during the audit. We provided a detailed itemized
listing of questioned costs with the audit report to the City and to HUD.


                                                                28
Administrative costs

                                    Unsupported amount                             Ineligible amount
                                                                                                 FYE
                          FYE        FYE        FYE                      FYE         FYE         June
                         June 30,   June 30,   June 30,                 June 30,    June 30,      30,
          Description     2010       2011       2012       Total         2010        2011        2012    Total
  Administrative costs   $120,000   $764,299   $442,520   $1,326,819         n/a     $14,001       n/a   $14,001

Subtotal
administrative costs     $120,000   $764,299   $442,520   $1,326,819          $0     $14,001       $0    $14,001


Sample draws

          Description          Unsupported amount          Total              Ineligible amount          Total
    Legal Aid Society                $1,265                  $1,265                  n/a                     $0
               Frazee                $1,722                  $1,722                  n/a                     $0
      Children’s Fund                $2,500                  $2,500                  n/a                     $0
       Al-Shifa Clinic               $3,052                  $3,052                  n/a                     $0
St. John’s Community                 $1,250                  $1,250                  n/a                     $0
 Youth Action Project                $1,416                  $1,416                  n/a                     $0
  Inland AIDS Project                $1,076                  $1,076                  n/a                     $0
          Community
         Development
   Department, City of
       San Bernardino               $100,000               $100,000                  n/a                     $0
       Senior Services
              Program               $81,313                 $81,313                  n/a                     $0
CAL Theatre Phase II                $28,102                 $28,102                  n/a                     $0
 Inland Fair Housing                $48,785                 $48,785                  n/a                     $0
Eastside Skate Park at
  Speicher Park ADA
         Improvement
           (CDBG-R)                 $379,807               $379,807                  n/a                     $0
   Sun Trust Leasing,
                  Inc.              $192,339               $192,339                  n/a                     $0
   Handicap curbs and
    ramps (CDBG-R)                  $99,639                 $99,639                  n/a                     $0
Subtotal sample
draws                               $942,266               $942,266                  $0                      $0


Other



          Description          Unsupported amount          Total              Ineligible amount          Total
Additional funding for
   Legal Aid Society
             ($20,000)                n/a                          $0              $20,000               $20,000




                                                     29
     Overdrew for FYE
         June 30, 2011.
      Drew $2,581,509
     when expenditures
            totaled only
             $2,571,506                    n/a                                          $10,003            $10,003
     Overdrew for May
 2011. The City added
        incorrectly, and
  records revealed only
          $122,040, not
               $123,885                    n/a                        $0                $1,845              $1,845
 Subtotal other                            $0                         $0               $31,848             $31,848


                           Total unsupported (code                          Total ineligible (code
                           enforcement, administrative,                     enforcement, administrative,
                           sample draws, and other                          sample draws, and other
 Totals                    questioned costs)                   $7,116,787   questioned costs)              $47,699

* FYE = fiscal year ending
** IT = information technology




                                                          30