oversight

The County of Santa Barbara, CA, Did Not Comply With HOME Investment Partnerships Program Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-07-09.

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

OFFICE OF AUDIT
REGION 9
LOS ANGELES, CA




               The County of Santa Barbara, CA

         HOME Investment Partnerships Program




2013-LA-1007                                     JULY 9, 2013
                                                        Issue Date: July 9, 2013

                                                        Audit Report Number: 2013-LA-1007




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




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


SUBJECT:       The County of Santa Barbara, CA, Did Not Comply With HOME Investment
               Partnerships Program Requirements


    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 County of Santa Barbara’s
compliance with HOME Investment Partnerships Program rules and requirements.

    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.
                                           July 9, 2013
                                           The County of Santa Barbara, CA, Did Not Comply With
                                           HOME Investment Partnerships Program Requirements




Highlights
Audit Report 2013-LA-1007


 What We Audited and Why                    What We Found

We reviewed the County of Santa            The County demonstrated that expenditures totaling
Barbara’s HOME Investment                  more than $3.9 million related to rental housing project
Partnerships program due to concerns       costs were eligible and adequately supported.
expressed by the U.S. Department of        However, it incurred more than $3.5 million in
Housing and Urban Development’s            unsupported and ineligible HOME costs. In addition,
(HUD) Los Angeles Office of                it did not perform the required monitoring of its
Community Planning and Development         community housing development organizations or
regarding the County’s administration      conduct required onsite inspections of its HOME-
of its HOME program. Our objective         funded rental housing properties.
was to determine whether the County
performed its monitoring
responsibilities and ensured that
incurred HOME program expenditures
were eligible and supported.

 What We Recommend

We recommend that the Director of the
HUD Los Angeles Office of
Community Planning and Development
require the County to (1) support more
than $3.1 million in expenses or repay
the program; (2) repay $444,499 in
ineligible expenses from non-Federal
sources; and (3) update and implement
its written monitoring, record-keeping,
and payment processing policies and
procedures as well as controls to ensure
compliance with required HOME
program rules and requirements.
                           TABLE OF CONTENTS

Background and Objective                                                         3

Results of Audit

      Finding: The County’s Lack of Monitoring Resulted in More Than $3.5 Million
               In Questioned Costs                                                5

Scope and Methodology                                                            13

Internal Controls                                                                15

Appendixes
A.    Schedule of Questioned Costs                                               17
B.    Auditee Comments and OIG’s Evaluation                                      18
C.    Summary of Questioned Costs                                                25
D.    Criteria                                                                   26




                                           2
                      BACKGROUND AND OBJECTIVE

HOME Investment Partnerships Program
The National Affordable Housing Act of 1990 created the U.S. Department of Housing and
Urban Development’s (HUD) HOME Investment Partnerships Program. By establishing the
HOME program, Congress intended to establish a partnership between the Federal Government
and States, units of local government, and nonprofit organizations to expand the supply of
affordable, standard housing for low-income families.

County of Santa Barbara
The County of Santa Barbara is the lead agency for the Santa Barbara County HOME
Consortium, which is comprised of the surrounding cities of Buellton, Carpinteria, Goleta,
Lompoc, Santa Maria, and Solvang. The consortium was formed in 1994 in order for the County
and participating jurisdictions to qualify for HOME program funds directly from HUD. The
funds are targeted at low- and very low-income families and used to finance and develop low-
income and special needs housing opportunities. During fiscal years 2007 through 2012, HUD
awarded the County more than $9.2 million in HOME program funds.

The County’s Community Services Department (CSD), Housing and Community Development
(HCD) Division, is responsible for the administration of the County’s HOME program, which
includes monitoring and inspection responsibilities and the processing of disbursements to its
community housing development organizations (CHDOs). The formation of the CSD resulted
from the County’s management reorganization that realigned its former Department of HCD
under the CSD as a division. Since July 1, 2007, the County has funded 12 HOME-funded
projects, which consisted mainly of rental housing properties.

HUD’s Los Angeles Office of Community Planning and Development last performed an onsite
monitoring review of the County’s HOME program during the period April 30 through May 4,
2012. The review identified many issues that the County needed to address to comply with HUD
rules and requirements. Among the issues noted by HUD were the following:

   •   Executed written agreements between the County and CHDOs that did not include all of
       the required regulatory provisions.
   •   Lack of sufficient policies, procedures, and monitoring to ensure HOME program
       compliance.
   •   Insufficient supporting source documentation for invoices related to incurred HOME
       costs.

The County is implementing corrective actions to resolve the issues identified. Based on the
results of the monitoring, HUD requested that OIG conduct a more comprehensive review of the
County.




                                               3
Audit Objective
The objective of our review was to determine whether the County performed its monitoring
responsibilities and ensured that incurred HOME program expenditures were eligible and
supported.




                                              4
                                RESULTS OF AUDIT
Finding: The County’s Lack of Monitoring Resulted in More Than $3.5
         Million in Questioned Costs
The County disbursed more than $3.5 million in HOME funds to its CHDOs for ineligible and
unsupported costs. In addition, it did not perform the required monitoring of its CHDOs or
conduct the required onsite inspections of its HOME-funded rental housing properties. We
attributed these deficiencies to the Community Services Department’s lack of oversight to ensure
that its staff implemented the required controls to ensure compliance with program rules and
requirements. As a result, the County incurred more than $3.5 million in questioned HOME
costs that could deprive it and surrounding cities’ low- and very low-income families of needed
benefits.



 The County Disbursed More
 Than $3.5 Million for Ineligible
 and Unsupported Costs

              The County demonstrated that expenditures totaling more than $3.9 million
              related to rental housing project costs were eligible and supported. The eligible
              costs included development hard costs, acquisition costs, related soft costs, and
              cost relating to payment of a loan. The supported costs had adequate
              documentation, which included invoices, copies of canceled checks paid to
              vendors, payroll records, appraisals, property purchase agreements, escrow
              instructions, settlement statements, title reports, and recorded grant deeds.
              However, the County disbursed more than $3.1 million for unsupported costs and
              $444,499 for ineligible costs (see appendix C). According to 24 CFR (Code of
              Federal Regulations) 92.508(a)(3)(ii), the County must maintain project records
              related to the source and application of funds for each project, including
              supporting documentation. In addition, according to 24 CFR 85.20(a)(2), the
              County’s fiscal control and accounting procedures must be sufficient to permit the
              tracing of funds to a level of expenditures adequate to establish that such funds
              have not been used in violation of the restrictions and prohibitions of applicable
              statutes (see appendix D).

              Unsupported Costs
              The County disbursed more than $3.1 million in HOME funds for unsupported
              costs related to the Dahlia Court II, College Park Apartments, Cypress Court,
              Creekside Village, and Casa de Familia properties. Without adequate supporting
              documentation, neither we nor the County could determine whether the CHDOs’
              incurred costs were eligible under the HOME program or permitted the adequate
              tracing of program expenditures.



                                               5
The County disbursed more than $2.1 million for the Dahlia Court II and College
Park Apartments properties without sufficient documentation from the CHDOs to
substantiate the eligibility and reasonableness of costs incurred. The County
disbursed funds for the Dahlia Court II property, which was under construction,
without obtaining and reviewing documents evidencing the payment of incurred
soft costs such as permits and architectural costs to vendors. In addition, it
disbursed funds for the College Park Apartments property, which was completed
in May 2008, without obtaining and reviewing adequate supporting source
documents for the unknown type of costs related to this property. The records
reviewed for this property included only escrow instructions. Further, the escrow
funds disbursed exceeded the total HOME funds disbursed. The County was
unable to locate additional supporting documents to substantiate the eligibility of
program expenditures related to both of these properties.

The County disbursed a total of $517,957 for the Cypress Court and Creekside
Village properties without sufficient documentation to permit the adequate tracing
of program expenditures. It disbursed funds for the Cypress Court property,
which was under construction, without reviewing supporting source documents
for the incurred soft costs. During the audit, the County attempted to address this
issue by providing us additional supporting documentation that it obtained from
the CHDO in question. However, the County provided documents for permit fees
that exceeded the HOME funds reimbursed by more than $197,000. In addition,
the County disbursed funds for the Creekside Village property, which was
completed in June 2012, for permit fees that exceeded the HOME funds
reimbursed. Neither the County nor the CHDOs could provide further
documentation to permit the adequate tracing of the program expenditure.

The County disbursed $438,756 in unsupported development hard costs related to
the Casa de Familia property, which was under construction. The County did not
require its CHDO to submit adequate and full documentation of incurred costs to
support the eligibility and reasonableness of costs paid. It accepted invoices from
the CHDO’s general construction contractor, which had minimal information that
the contractor considered to be required documentation. For example, the
contractor’s invoice included a line item amount with the general line item
description “general requirements.” The County believed that the construction
contractor’s invoices were sufficient, since the documents were based on the
construction contract and contractor’s interpretation that such documentation was
in line with the industry standard. However, this practice is contrary to HUD’s
requirements, which include more documentation to support eligible HOME
costs.

Overall, the County attempted but failed to locate and provide additional
documents to show the eligibility of program expenditures related to these
properties.




                                 6
Ineligible Costs
The County disbursed $419,433 for ineligible development expenses that were
not allowed under the terms of the executed loan agreement for the Dahlia Court
II property. The loan agreement allowed the CHDO to incur certain development
costs. However, the County approved other unallowable expenses incurred by the
CHDO. The County’s loan agreement specifically stated that changes in
individual items comprising the project’s budget required the prior written request
of the CHDO and the written consent of the County (see appendix D). A County
staff member noted that a former staff member had determined that the expenses
were eligible uses of HOME funds and acknowledged that the County should
have executed a formal amendment to the loan agreement. However, the County
did not execute an amendment that would have corrected the problem. Current
County staff could not comment on the previous management’s oversight of
contract or amendments.

The County disbursed $24,000 to People’s Self-Help Corporation for operating
expenses related to first-time homebuyer and foreclosure prevention counseling
services. HUD requirements at 24 CFR 92.205 did not explicitly mention
foreclosure counseling as an eligible HOME activity. According to 24 CFR
92.206(d)(6), staff and overhead costs directly related to carrying out the project,
including housing counseling, may be charged to project costs only if the project
is funded and the individual becomes the owner or tenant of the HOME-assisted
project (see appendix D). County staff informed us that the expenses were for
foreclosure counseling and that a homebuyer assistance program had not existed
since 2006. Therefore, according to the regulations, the foreclosure counseling
costs were not eligible. Staff could not comment on the previous management’s
execution and approval of agreements that did not take in to account HUD
requirements.

The County disbursed $816 for delinquent taxes and $250 (total of $1,066) for a
discount that was inappropriately not credited as a cost reduction related to the
Creekside Village property. According to 24 CFR 92.214(a)(8), HOME funds
may not be used to pay delinquent taxes on properties funded with HOME funds.
In addition, according to 2 CFR 225, attachment A (C)(4) and (D)(1), applicable
credits, such as discounts, related to allowable costs shall be appropriately
credited either as a cost reduction or cash refund. Further, the total cost of
Federal awards is comprised of the allowable direct cost of the program, plus its
portion of allowable indirect costs, less applicable credits (see appendix D). In
response to these issues, current County staff could not comment on the previous
management’s execution and approval of agreements that did not take in to
account HUD requirements. In addition, County staff did not know that the
discount had not been credited to the program. Its CHDO’s general partner, the
Housing Authority of the County of Santa Barbara, stated that its staff did not
note the discount during the data entry of the invoice. Therefore, it did not take
the discount.




                                  7
The County Did Not Conduct
and Document Monitoring and
Onsite Inspections

          The County contracted with various CHDOs to develop affordable housing. HUD
          regulations 24 CFR 92.504(a) requires the County to review the performance of
          these CHDOs at least annually. HUD regulations 24 CFR 92.504(d) require that
          the County perform onsite inspections of its HOME-funded rental housing
          properties to determine compliance with property standards and verify the
          information submitted by the CHDO related to the properties’ occupancy by low-
          income households. In addition, HUD regulations 24 CFR 92.508(a)(6)(iii)
          requires that the County maintain evidence of these reviews and the corrective
          actions taken to resolve findings and concerns (see appendix D).

          Monitoring Was Not Adequately Performed and Documented
          The County did not perform the required annual monitoring and follow-up
          reviews of three of the four sampled CHDOs as required by HUD requirements.
          The limited monitoring records for three of the four sampled CHDOs consisted of
          two e-mails requesting a final construction update and the scheduling of a brief
          walk-through of a property. Discussions with a County staff member found that
          “the County’s monitoring records indicated that there have been holes in the
          monitoring function and if monitoring had been performed, the documentation
          was either lacking or inconsistent.”

          During its own monitoring reviews of Lompoc Housing Community
          Development Corporation, a CHDO, the County did not address the performance
          problems it identified as required by HUD regulations. For example, the CHDO
          did not submit to the County its required annual reports. However, the County
          disbursed HOME funds to the now-defunct CHDO without documentation to
          support the incurred costs. Monitoring documents showed that the CHDO had
          consistent performance problems. The deficiencies in both management oversight
          and financial systems included missing a scheduled monitoring meeting; many
          instances of postponing on-site monitoring visits; not addressing monitoring
          findings and concerns; and not submitting requested documentation such as
          audited financial statements, general ledgers, and other project-related documents.
          According to a County request letter, the CHDO had not submitted audited
          financial statements to the County since 2005. There are concerns as to why the
          County continued to disburse funds to the CHDO when there were continuing
          issues.

          Onsite Inspections Were Not Always Performed
          The County did not conduct onsite monitoring as often as required for its Rancho
          Hermosa and College Park Apartments properties. HUD requires the County to
          perform onsite compliance monitoring of these projects every year. Since
          construction for these properties had been completed for more than 1 year, these
          properties were subject to onsite inspections. The County’s records for Rancho


                                           8
           Hermosa included a one-page status report stating that the County and HUD had
           inspected the property in May 2012. However, the County did not maintain
           sufficient documentation to show that it had conducted the inspections in May
           2012. The County did not perform onsite inspections at the College Park
           Apartments in 2009, 2011, and 2012. The County’s 2010 CHDO monitoring
           report stated that it conducted eight onsite inspections of housing units in 2010.
           However, the County could not provide documentation to show that it performed
           those inspections.

Internal Controls Were
Inadequate and Staff Was
Unaware of Requirements

           Written Agreements Did Not Define Eligible Costs
           The County’s executed written agreements with the CHDOs did not define the
           eligible HOME costs. According to 24 CFR 92.504(c)(3)(i), written agreements
           must describe the use of the HOME funds, including the tasks to be performed, a
           schedule for completing the tasks, and a budget. These items must be in sufficient
           detail to provide a sound basis for the County to effectively monitor performance
           under the agreement (see appendix D). Four of the seven sampled loan
           agreements did not include budgets in sufficient detail to determine the eligibility
           of the incurred costs. For example, the County provided us an audited cost
           certification to show that HOME program costs for the Rancho Hermosa property
           were supported and eligible. However, the County could not provide
           documentation that disclosed specific supported and eligible HOME program
           costs for College Park Apartments, Cypress Court, and Creekside Village
           properties. As a result, we believed that such expenses were either unsupported
           or ineligible. Current County staff could not comment on the previous
           management’s oversight of the executed missing contract provisions.

           The Grants Management and Administrative Plan, Procedures, and Project
           Monitoring Schedule Were Outdated
           The County’s grants management and administrative plan, policies and
           procedures, and project monitoring schedule were outdated and considered
           internal control weaknesses. County staff was unsure as to when the County had
           updated these documents. Without a detailed and current written plan, policies
           and procedures, and a project-monitoring schedule, the staff would be unable to
           administer the HOME program funds in accordance with HUD rules and
           requirements. County staff agreed with our determination and informed us that
           the Housing and Community Development Division’s policies and procedures
           were getting “a major overhaul.” Additionally, two County staff members
           acknowledged that employee turnover, understaffing, and additional monitoring
           responsibilities created by the successful completion of projects contributed to
           unsuccessful and sporadic attempts at establishing and implementing formal
           policies and procedures.



                                            9
Project Files Were Not Organized
The County’s system for maintaining project files was disorganized and
unmanaged. Project records should serve as a repository for essential project
information and contain, at a minimum, the documentation prescribed in HUD
regulations at 24 CFR 92.508 and 24 CFR 85.20 (see appendix D). The condition
of the County’s files hindered our ability to determine eligibility of incurred
HOME costs. Previous County staff filed documents haphazardly into the
projects’ files without regard for duplication of documents and assurance that
related documents were in the files. Also, previous staff did not always file
documents in the appropriate physical or electronic location. As a result, County
staff had trouble locating requested documents that should have been in project
files. This practice resulted in projects files without documentation to support
questioned HOME program costs. County management accepted responsibility
for the condition of its project files. Further, County staff acknowledged that it
had incomplete project files, as well as duplicate copies of records. As a
corrective action, County management was implementing a filing system to
ensure that project files would be maintained and organized in a logical manner to
permit ready access to relevant information.

Staff Was Unaware of Requirements
County staff was not aware that it was violating HUD requirements when
managing the HOME program. It was not aware of the extent of supporting
source documents that the County must maintain in its files related to disbursed
HOME funds. For example, the County had disbursed HOME funds for the Casa
de Familia and Cypress Court property without reviewing supporting source
documents. During the audit, the County attempted to address this issue by
providing additional documentation that it obtained from the CHDO to support
the questioned costs. However, those documents were not adequate and we
considered the costs unsupported. In the case of documentation for Casa de
Familia, County staff inquired about the applicable regulations related to
supporting source document. Due to perceived construction industry practices,
the County believed that general contractors involved in HOME-funded projects
did not have to submit substantiation or backup documentation with respect to
costs for a previously approved schedule of values. Although the County adopted
this practice, it should have obtained supporting documents from the CHDO to
determine the eligibility of the requests during the initial processing of the
disbursement requests instead of after disbursing the funds.




                                10
The County Started Taking
Corrective Action

             The County had started to take corrective action to address some of the issues
             identified by HUD’s monitoring efforts in 2012. The County submitted to HUD
             additional supporting documents related to the issues concerning the executed
             written agreements with CHDOs, and the matter was under HUD review. The
             County had a proposed submittal date of April 30, 2013, to implement the
             corrective actions related to the County’s policies and procedures and supporting
             documents for invoices. As of the last date of our fieldwork, April 19, 2013, the
             County had not responded to HUD in relation to the deficiencies and corrective
             actions for its HOME policies and procedures and supporting documents for
             invoices. During the last week of fieldwork, a County official informed us that
             the County was executing a contract related to project monitoring services.

Conclusion

             The County incurred more than $3.5 million in ineligible and unsupported costs
             related to its HOME program. In addition, it did not conduct monitoring and on-
             site inspections of its HOME-funded properties as required by HUD. We
             attributed these deficiencies to the Community Services Department’s lack of
             oversight to ensure that it implemented the required controls to monitor the
             County’s CHDO’s performance, HOME-assisted rental housing properties, and
             incurred program costs. In addition, the Department’s lack of oversight did not
             ensure that the County executed written agreements and amendments in
             compliance with applicable HOME program rules and requirements. As a result,
             the County incurred questioned costs that could hamper it and surrounding cities’
             ability to address the needs of low- and very low-income families.

Recommendations

             We recommend that the Director of the HUD Los Angeles Office of Community
             Planning and Development require the County to:

                1A. Provide documentation to support the $3,110,602 in unsupported costs
                    or repay the HOME Investment Trust Fund United States Treasury
                    account from non-Federal funds.

                1B. Repay to the HOME Investment Trust Fund United States Treasury
                    account $444,499 from non-Federal funds for ineligible costs.

                1C. Update and implement its written monitoring policies and procedures, as
                    well as internal controls to ensure that it conducts and documents its
                    monitoring and onsite inspections of HOME-funded properties as
                    required by HOME program rules and requirements.


                                             11
   1D. Update and implement its written payment processing policies and
       procedures to ensure that program funds are supported and comply with
       applicable rules, requirements, and executed agreements.

   1E. Update and implement its recordkeeping policy to ensure that the
       County maintains records as prescribed by HUD rules and requirements.

We recommend that the Director of the HUD Los Angeles Office of Community
Planning and Development

   1F. Provide training and technical assistance to ensure that applicable
       County staff is trained and aware of HOME program rules and
       requirements to ensure compliance.




                               12
                        SCOPE AND METHODOLOGY

We performed our onsite audit work at the County office located in Santa Barbara, CA, between
November 2012 and April 2013. Our audit covered the period January 1, 2007, through
November 1, 2012, and was expanded to other periods as necessary.

To accomplish our audit objective, we

   •   Reviewed applicable HUD rules and requirements;

   •   Reviewed County internal controls and procedures;

   •   Interviewed County officials; and

   •   Reviewed monitoring, independent public accountant, and HUD’s Integrated
       Disbursement and Information System (IDIS) reports.

HUD’s IDIS records showed that from January 1, 2007, through November 1, 2012, the County
had disbursed more than $10.8 million in HOME funds. We selected for review all project-
related disbursement voucher lines over $250,000. This process resulted in 11 line item
expenditures within 8 vouchers totaling more than $5.2 million in HOME funds that was used
toward seven properties managed by four different CHDOs. In addition, we expanded our
review to include

   •   Four vouchers totaling nearly $1.7 million in line item expenses that occurred between
       September 2004 and January 2011 due to deficiencies related to unsupported costs,

   •   Four line item expenditures totaling more than $478,000 related to the expenditures in
       our sample since we determined that reviewing all line items within vouchers would best
       meet our objective, and

   •   Five vouchers disbursed between March and December 2009 totaling $24,000 due to
       concerns of eligibility regarding costs incurred for foreclosure prevention counseling
       services.

In total, we reviewed more than $7.4 million in HOME expenditures to determine whether the
County used the funds for eligible and supported costs. The only computer data system we
relied on during the audit was HUD’s IDIS, which we used to select our sample. We confirmed
several total voucher amounts to a County financial system source document and determined 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


                                               13
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                               14
                              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:

               •   Effectiveness and efficiency of program operations – Implementation of
                   policies and procedures to ensure that program funds are used for eligible
                   purposes.

               •   Reliability of financial information – Implementation of policies and
                   procedures to reasonably ensure that relevant and reliable information is
                   obtained to adequately support program expenditures.

               •   Compliance with applicable laws and regulations – Implementation of policies
                   and procedures to ensure that monitoring, onsite inspections, and expenditures
                   comply with applicable HUD rules and requirements.

               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.




                                                 15
Significant Deficiency

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

            •   The County did not have adequate management oversight and controls in
                place to ensure that monitoring, onsite inspections, and disbursements
                complied with HUD rules and requirements (finding).




                                             16
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                  Recommendation        Unsupported 1/       Ineligible 2/
                      number
                         1A                $3,110,602
                         1B                                    $444,499


1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.

2/   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.




                                             17
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         18
Comment 2




Comment 3




Comment 4




            19
Comment 5




Comment 3




            20
Comment 6




Comment 7



Comment 8




            21
                         OIG Evaluation of Auditee Comments

Comment 1   We disagree with the County’s contention that the $468,605 in questioned costs
            was eligible and supported. While the County provided additional documentation
            in response to the draft report, it did not change our conclusion. (Note: we did not
            include the additional documentation in the audit report; however, it is available
            upon request.) For the $419,433 in ineligible costs, the County provided email
            correspondence related to the CHDO’s disbursement requests and the County’s
            requests for written explanation for the budget changes. However, the County did
            not provide documentation that showed whether the CHDO had addressed the
            County’s concern about justifying the revised budget. Further, it was not until
            June 10, 2013, as a result of our audit finding, that the County executed the
            budget revision to retroactively amend the loan agreement to show the eligibility
            of the $419,433 in questioned costs. While the expenses may or may not be
            HOME-eligible, these expenses were not in accordance with Section 3.3 of the
            loan agreement that was in effect at the time of the actual expenditures; therefore,
            we did not change our conclusion.

            For the $49,172 in unsupported expenses, we acknowledge that the County
            provided invoices. However, it did not provide canceled checks, as required under
            24 CFR 85.20(b)(6) to be part of the source documentation, to show that the
            incurred expenses were actually paid. Consequently, we did not revise our
            conclusion. During the audit resolution phase the County may be able to resolve
            the questioned costs if it is able to provide corresponding canceled checks that
            show expenses were paid.

Comment 2   According to 24 CFR 92.206(d)(6), staff and overhead costs directly related to
            carrying out the project, including housing counseling, may be charged to project
            costs only if the project is funded and the individual becomes the owner or tenant
            of the HOME-assisted project. County staff informed us that a homebuyer
            assistance program had not existed since 2006. Therefore, the County could not
            directly relate the counseling to any funded projects, nor did any of the
            individuals become the owner or tenant of HOME-assisted projects. Furthermore,
            the incurred counseling expenses did not assist homebuyers; instead, it was used
            for homeowners facing foreclosure including moderate-income households that
            would not have been eligible under the HOME program. Consequently, the
            County incurred $24,000 on counseling expenses that are ineligible and did not
            meet the objective of the HOME program to expand the supply of decent, safe,
            sanitary, and affordable housing for very low-income and low-income families.

Comment 3   According to 24 CFR 92.508(a), the County must establish and maintain
            sufficient records to enable HUD to determine whether the County has met these
            requirements. 24 CFR 92.508(a)(3)(ii) states that the County needs to maintain
            project records related to the source, application, and tracing of funds for each
            project, including supporting documentation in accordance with 24 CFR 85.20
            (b)(2) and (6). Contrary to these requirements, the County did not maintain or



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            provide us adequate supporting source documentation that allowed us to trace the
            application of the funds for each project to substantiate the use of HOME program
            funds. The County provided documentation that showed the payment of the
            permit fees lumped together without clear distinction of the source funding used
            to pay the fees. We are not saying that the County should pay these fees
            separately. Instead, the County could pay these expenses in lump payments as
            long as reviewers such as HUD and OIG can clearly trace these payments to
            supporting documentation for the projects and corresponding permit fees. By
            signing its Funding Approval and HOME Investment Partnerships agreements,
            the County agreed to meet the requirements, regulations, and expectations to
            ensure its incurred costs were supported and traced to the appropriate funding
            sources.

Comment 4   The focus of our review was to determine the compliance of incurred expenses
            with HOME program requirements, not whether the procurement process was in
            compliance with rules and requirements. We did not take issue with the
            procurement of the contractor. The essence of the finding is that the County did
            not maintain adequate documentation to validate the eligibility of the expenses.
            The County’s practice of only obtaining invoices based on the construction
            contract, and the contractor’s interpretation that such documentation was in line
            with industry standards, is contrary to HUD’s requirements at 24 CFR 85.20(b)
            (see appendix D). This requirement provides grantees standards for accounting
            records and source documentation. As stated in the report, the County accepted
            invoices from the CHDO’s general construction contractor that included general
            line items such “general requirements” that did not specify services rendered or
            products delivered for the project. The County stated this is industry standard, yet
            those standards did not take into consideration HUD requirements to provide
            sufficient documentation.

Comment 5   As noted in the audit report, the budgets attached to the loan agreements for this
            property were not in sufficient detail to allow us to determine the eligibility of the
            incurred costs. In addition, the County was unable to locate additional supporting
            documentation to substantiate the eligibility of the HOME program expenditures.
            Furthermore, the accounting records reviewed for this property included only
            escrow instructions and no supporting documentation such as a property purchase
            agreement, an appraisal, recorded deed of trust, title reports, construction
            invoices, or a deed of reconveyance that support the use of the funds indicated in
            the escrow instructions.

            At the conclusion of our fieldwork, the County provided us the audited cost
            certification for this property, however, it did not support the $2.1 million in
            questioned costs. Instead, the document referred to “County of SB Partial
            HOME” funds that totaled more than $1.7 million. There was no explanation for
            the discrepancy. In addition, the cost certification stated the County used HOME
            program funds towards “Structures”, a general term, rather than explaining the
            costs that were paid by HOME program funds. 24 CFR 92.508(a)(3)(ii) and 24



                                              23
            CFR 85.20(b)(2) and (6) provides grantees recordkeeping and financial
            management systems requirements to maintain supporting documentation for
            incurred costs. The County did not ensure its documentation of related projects
            costs were in compliance in HUD rules and requirements. As stated during the
            exit conference, the County will have the opportunity to work with HUD to
            address this issue during the audit resolution process and provide the necessary
            documentation to support the questioned costs.

Comment 6   We acknowledge the County’s efforts and corrective actions towards addressing
            its monitoring issues related to its CHDOs and HOME-funded properties.

Comment 7   During the audit resolution process the County will have the opportunity to
            provide any additional documentation to address the $444,499 in ineligible
            expenses. See also Comments 1, 2, and 3.

Comment 8   The report accurately states that the County incurred more than $3.5 million in
            unsupported and ineligible expenses. Of this amount, OIG identified more than
            $3.1 million in unsupported costs and more than $444,000 in ineligible costs that
            the County must address during the audit resolution process. Consequently,
            stating the entire questioned costs as either unsupported or ineligible would not be
            an accurate statement, so we did not change the report.




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Appendix C

                  SUMMARY OF QUESTIONED COSTS

          Project name                 Type of        Amount of    Ineligible   Unsupported
                                      expenses         expenses
                                      reviewed         reviewed
         Dahlia Court II             Acquisition       $972,116    $419,433       $49,172
                                     and related
                                      soft costs
   People’s Self-Help Housing        Related soft      $24,000     $24,000          $0
Corporation Foreclosure Counseling      costs
         Creekside Village            Related soft    $1,218,227    $1,066        $27,957
                                          costs
         Casa de Familia             Development      $529,637        $0         $438,756
                                        hard cost
     College Park Apartments           Unknown        $2,104,717      $0         $2,104,717
          Cypress Court               Related soft     $490,000       $0          $490,000
                                          costs
        Santa Rita Village            Acquisition     $1,568,132      $0            $0
        Rancho Hermosa                Cost relating    $562,176       $0            $0
                                     to payment of
                                          loan
              Total                                   $7,469,005   $444,499      $3,110,602




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Appendix D

                                         CRITERIA

Loan Agreement Between the County and People’s Self-Help Housing Corporation for
Dahlia Court II, Article 3: Loan Disbursement, Section 3.3 – Amount of Disbursement
“Loan proceeds shall be disbursed up to the amount of the Loan shown in the Budget and only
for Lender approved items. Changes in individual items comprising the Budget shall require the
prior written request of Borrower and the written consent of Lender. However, Lender's
obligations shall in no event exceed the Loan amount specified in this Loan Agreement. Any
costs above this amount necessary for the completion of the Project shall be the sole
responsibility of Borrower.”

24 CFR 92.205, Eligible Activities: General.
   (a) Eligible activities.
       (1) HOME funds may be used by a participating jurisdiction to provide incentives to
           develop and support affordable rental housing and homeownership affordability
           through the acquisition (including assistance to homebuyers), new construction,
           reconstruction, or rehabilitation of non-luxury housing with suitable amenities,
           including real property acquisition, site improvements, conversion, demolition, and
           other expenses, including financing costs, relocation expenses of any displaced
           persons, families, businesses, or organizations; to provide tenant-based rental
           assistance, including security deposits; to provide payment of reasonable
           administrative and planning costs; and to provide for the payment of operating
           expenses of community housing development organizations. The housing must be
           permanent or transitional housing. The specific eligible costs for these activities are
           set forth in §§ 92.206 through 92.209.
       (2) Acquisition of vacant land or demolition must be undertaken only with respect to a
           particular housing project intended to provide affordable housing.
       (3) Conversion of an existing structure to affordable housing is rehabilitation, unless the
           conversion entails adding one or more units beyond the existing walls, in which case,
           the project is new construction for purposes of this part.
       (4) Manufactured housing. HOME funds may be used to purchase and/or rehabilitate a
           manufactured housing unit, or purchase the land upon which a manufactured housing
           unit is located. Except for existing, owner-occupied manufactured housing that is
           rehabilitated with HOME funds, the manufactured housing unit must, at the time of
           project completion, be connected to permanent utility hook-ups and be located on
           land that is owned by the manufactured housing unit owner or land for which the
           manufactured housing owner has a lease for a period at least equal to the applicable
           period of affordability.

24 CFR 92.206, Eligible project costs.
   HOME funds may be used to pay the following eligible costs:
   (d) Related soft costs. Other reasonable and necessary costs incurred by the owner or
       participating jurisdiction and associated with the financing, or development (or both) of


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       new construction, rehabilitation or acquisition of housing assisted with HOME funds.
       These costs include, but are not limited to:
       (6) Staff and overhead costs directly related to carrying out the project, such as work
           specifications preparation, loan processing inspections, and other services related to
           assisting potential owners, tenants, and homebuyers, e.g., housing counseling, may be
           charged to project costs only if the project is funded and the individual becomes the
           owner or tenant of the HOME-assisted project. For multi-unit projects, such costs
           must be allocated among HOME-assisted units in a reasonable manner and
           documented.

24 CFR 92.214 Prohibited Activities.
   (a) HOME funds may not be used to:
       (8) Pay delinquent taxes, fees or charges on properties to be assisted with HOME funds.

24 CFR 92.504, Participating jurisdiction responsibilities; written agreements; on-site
inspection
   (a) Responsibilities. The participating jurisdiction is responsible for managing the day to day
       operations of its HOME program, ensuring that HOME funds are used in accordance with
       all program requirements and written agreements, and taking appropriate action when
       performance problems arise. The use of State recipients, subrecipients, or contractors
       does not relieve the participating jurisdiction of this responsibility. The performance of
       each contractor and subrecipient must be reviewed at least annually.
   (c) Provisions in written agreements. The contents of the agreement may vary depending
       upon the role the entity is asked to assume or the type of project undertaken. This section
       details basic requirements by role and the minimum provisions that must be included in a
       written agreement.
       (3) For-profit or nonprofit housing owner, sponsor or developer (other than single-family
            owner-occupant)—
            (i) Use of the HOME funds. The agreement between the participating jurisdiction
                and a for-profit or non-profit housing owner, sponsor or developer must describe
                the use of the HOME funds, including the tasks to be performed, a schedule for
                completing the tasks, and a budget. These items must be in sufficient detail to
                provide a sound basis for the participating jurisdiction to effectively monitor
                performance under the agreement.
   (d) Onsite inspections—
       (1) HOME assisted rental housing. During the period of affordability, the participating
            jurisdiction must perform on-site inspections of HOME-assisted rental housing to
            determine compliance with the property standards of § 92.251 and to verify the
            information submitted by the owners in accordance with the requirements of § 92.252
            no less than: every three years for projects containing 1 to 4 units; every two years for
            projects containing 5 to 25 units; and every year for projects containing 26 or more
            units. Inspections must be based on a sufficient sample of units.




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24 CFR 92.508, Recordkeeping
   (a) General. Each participating jurisdiction must establish and maintain sufficient records to
       enable HUD to determine whether the participating jurisdiction has met the requirements
       of this part. At a minimum, the following records are needed:
       (3) Project records.
           (ii) The source and application of funds for each project, including supporting
                documentation in accordance with 24 CFR 85.20.
       (6) Program administration records.
           (iii) Records documenting required inspections, monitoring reviews and audits, and
                 the resolution of any findings or concerns.

24 CFR 85.20, Standards for financial management systems
   (a) A State must expand and account for grant funds in accordance with State laws and
       procedures for expending and accounting for its own funds. Fiscal control and
       accounting procedures of the State, as well as its subgrantees and cost-type contractors,
       must be sufficient to—
       (2) Permit the tracing of funds to a level of expenditures adequate to establish that such
           funds have not been used in violation of the restrictions and prohibitions of applicable
           statutes.
   (b) The financial management systems of other grantees and subgrantees must meet the
       following standards:
       (2) Accounting records. Grantees and subgrantees must maintain records which
           adequately identify the source and application of funds provided for financially-
           assisted activities. These records must contain information pertaining to grant or
           subgrant awards and authorizations, obligations, unobligated balances, assets,
           liabilities, outlays or expenditures, and income.
       (6) Source documentation. Accounting records must be supported by such source
           documentation as cancelled checks, paid bills, payrolls, time and attendance records,
           contract and subgrant award documents, etc.

2 CFR 225, Attachment A, General Principals for Determining Allowable Costs
   (C) Basic Guidelines
       (4) Applicable Credits. Applicable credits refer to those receipts or reduction of
           expenditure-type transactions that offset or reduce expense items allocable to Federal
           awards as direct or indirect costs. Examples of such transactions are: purchase
           discounts, rebates or allowances, recoveries or indemnities on losses, insurance
           refunds or rebates, and adjustments of overpayments or erroneous charges. To the
           extent that such credits accruing to or received by the governmental unit relate to
           allowable costs, they shall be credited to the Federal award either as a cost reduction
           or cash refund, as appropriate.
   (D) Composition Costs
       (1) Total Cost. The total cost of Federal awards is comprised of allowable direct cost of
           the program, plus its portion of allowable indirect costs, less applicable credits.




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