OFFICE OF AUDIT D REGION 2 NEW YORK-NEW JERSEY Morris County, NJ Community Development Block Grant Program 2013-NY-1003 JANUARY 23, 2013 OVEMBER xx, 2012 Issue Date: January 23, 2013 Audit Report Number: 2013-NY-1003 TO: Anne Marie Uebbing Director, Office of Community Planning and Development, Newark Field Office, 2FD FROM: Edgar Moore Regional Inspector General for Audit, New York-New Jersey, Region, 2AGA SUBJECT: Morris County, NJ’s Community Development Block Grant Program Had Weaknesses in Its Financial and Administrative Controls Enclosed is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector General (OIG), final results of our review of the Morris County, NJ officials’ administration of their Community Development Block Grant (CDBG) Program to determine whether Authority officials administered the CDBG Program in accordance with HUD 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 212- 264-4174. January 23, 2013 Morris County, NJ’s Community Development Block Grant Program Had Weaknesses in Its Financial and Administrative Controls Highlights Audit Report 2013-NY-1003 What We Audited and Why What We Found We audited Morris County, NJ’s County officials generally expended CDBG funds for Community Development Block Grant eligible activities, but weaknesses in financial and (CDBG) program based on a risk administrative controls lessened assurance that program assessment, which considered the size administration always complied with HUD regulations and of the program, the U.S. Department of HUD’s interest was protected. Specifically, (1) CDBG Housing and Urban Development’s funds were obligated or expended for ineligible or (HUD) risk analysis, and prior audit unsupported activities, (2) the County’s action plan was not coverage. The objectives of the audit properly amended, (3) financial information was not always were to determine whether County accurate (4) subrecipients were not always monitored in officials established adequate controls compliance with HUD regulations and the County’s policies, to ensure that CDBG funds were and (5) liens were not imposed on assisted properties. expended for eligible activities and that Consequently, (1) $140,705 was obligated and expended for the program was administered in unsupported activities, and $19,500 was expended for accordance with HUD regulations. ineligible activities; (2) neither the public nor HUD was aware of the change in the use of more than $400,000 for What We Recommend previously approved activities; (3) County officials lacked assurance that the financial data submitted by the County accurately reflected its performance; (4) subrecipients were We recommend that the Director of not effectively monitored to ensure that the activites had HUD’s New Jersey Office of been accomplished according to program requirements; and Community Planning and Development (5) HUD’s interest in a property assisted with $71,729 in instruct County officials to (1) provide CDBG funds was not protected. These conditions existed documentation to support the obligation due to County officials’ unfamiliarity with CDBG and expenditure of $140,705 or regulations and implementation of inadequate financial and reimburse the County’s CDBG line of administrative controls. credit, (2) reimburse the County’s CDBG line of credit for the $19,500 in ineligible assistance, (3) record a lien or other notice of record on the real property acquired with CDBG funds, and (4) strengthen financial and administrative controls to ensure that CDBG funds are used in accordance with applicable regulations. TABLE OF CONTENTS Background and Objectives 3 Results of Audit Finding 1: Funds Were Generally Expended for Eligible Activities 4 Finding 2: There Were Instances of Noncompliance with HUD Regulations 8 Scope and Methodology 12 Internal Controls 14 Appendixes A. Schedule of Questioned Costs and Funds to Be Put to Better Use 16 B. Auditee Comments and OIG’s Evaluation 17 2 BACKGROUND AND OBJECTIVES The Community Development Block Grant (CDBG) program was authorized by Title 1 of the Housing and Community Development Act of 1974 (Public Law 93-383) to provide communities with resources to address a wide range of unique community development needs. The program provides grants on a formula basis to entitled States, cities, and counties to develop viable urban communities by providing decent housing, suitable living environments, and expanding economic opportunities, principally for low- and moderate-income persons. Grantees have the flexibility to develop their own programs and funding priorities. However, to be eligible for CDBG funding, a grantee’s activity (other than program administration and planning) must meet one of the CDBG program’s three national objectives: (1) benefit low- and moderate- income persons, (2) aid in preventing or eliminating slums or blight, or (3) address a need with a particular urgency that poses a serious and immediate threat to the health and welfare of the community for which other financial resources are not available to meet such needs. Morris County, located in northern New Jersey, has 492,276 residents spread among 39 municipalities. The County is governed by a seven-member Board of Chosen Freeholders, elected to 3-year terms. The Freeholder Board sets policies that are carried out by the county administrator working through six umbrella departments, which form a “cabinet” to conduct day- to-day operations. The U.S. Department of Housing and Urban Development (HUD) awarded Morris County more than $2.4 and $2 million in CDBG funds for program years 2010 and 2011, respectively. The County designated the Division of Community Development under the Department of Planning and Development to administer its CDBG program. In addition to administrative costs, the County’s CDBG funds are mainly allocated to four major activities: housing, public services, public facilities and improvements, and homeowner rehabilitation. County officials implement these activities through various agencies, as well as with municipalities and nonprofit organizations. The objectives of the audit were to determine whether County officials established adequate controls to ensure that CDBG funds were expended for eligible activities and that the program was administered in accordance with HUD regulations. 3 RESULTS OF AUDIT Finding 1: Funds Were Generally Expended for Eligible Activities While County officials generally expended CDBG funds for eligible activities, disbursements were made for ineligible and unsupported activities, and financial data were not always accurately maintained. Specifically, County officials disbursed $19,500 for an ineligible loan, $209,735 for costs that were inadequately supported, and $10,970 for unreasonable or unnecessary costs, and officials inaccurately reported financial data to HUD. These conditions occurred because of officials’ unfamiliarity with HUD regulations and implementation of inadequate financial and administrative controls. As a result, funds were not available for other eligible activities, and County officials lacked assurance that all costs incurred were for eligible activities and that financial data submitted to HUD accurately reflected its performance. Rehabilitation Loan to Ineligible Homeowner County officials disbursed $19,500 to a homeowner who was ineligible for a housing rehabilitation loan. The County’s housing rehabilitation loan program disbursed funds to provide decent housing for low- and moderate-income homeowners who reside within the participating municipalities of the Morris County Consortium, and the County’s policy requires that assisted homeowners not own more than one property. However, the County’s application form did not advise applicant homeowners that they were required to disclose ownership of additional properties or to certify that the information provided was truthful. As a result, one homeowner received a $19,500 loan for septic system rehabilitation while owning another property in the County, thus preventing $19,500 from being available for eligible CDBG rehabilitation loans. Inadequately Supported Drawdown and Disbursements County officials lacked documentation that $49,735 was drawn down for an eligible activity. Regulations at 24 CFR (Code of Federal Regulations) 85.21 specify that Federal funds must be administered on a reimbursement basis, and regulations at 2 CFR Part 225 require that allowable costs be adequately documented. However, County officials drew down funds for the housing rehabilitation program based on estimated costs rather than reimbursement of actual costs. As a result, they drew down $49,735 more than the actual disbursements recorded in the general ledger for program years 2009 and 2010. This deficiency occurred because County officials lacked controls to ensure that 4 the use of funds was adequately supported and drawdowns were made as close as possible to the time of making disbursements. In addition, County officials reimbursed $80,000 to a subrecipient for a street improvement project without adequate support that the project had been completed and the associated costs were incurred for the benefit of the low- and moderate-income area specified in the subrecipient agreement. The project was multisource funded, and reimbursement was made without adequate documentation that the $80,000 in CDBG funds was for the CDBG-assisted portion. As a result, County officials lacked assurance that the $80,000 was used for the CDBG-funded portion and benefited only the low- and moderate-income area. This deficiency occurred because weaknesses in financial controls allowed officials to disburse funds without assurance that the program requirements were met and the use of CDBG funds was properly supported. County officials agreed that the supporting documentation was not adequate and during our audit, obtained additional documents from the subrecipient that adequately supported the $80,000 disbursement, thus ensuring that these funds were used for their intended purpose. County officials awarded another $80,000 for a public improvement project without adequate documentation showing that it would primarily benefit low- and moderate-income residents. While County officials conducted a survey to identify low- and moderate-income residents, the survey was not conducted in accordance with 24 CFR 570.208. These regulations require that the survey be conducted in a manner that meets standards of statistical reliability that are comparable to those of the decennial census1 data and be approved by HUD. However, while the survey was designed to be conducted for 61 households, the results were based upon 51 responses; therefore, the survey did not meet the standards of statistical reliability. In addition, the survey was not reviewed by HUD to determine its reasonableness and accuracy. This deficiency occurred because County officials were not aware of CDBG program requirements related to conducting a survey to determine a low- and moderate-income service area. Therefore, County officials lacked assurance that the $80,000 awarded for the public improvement was an eligible use of CDBG funds. Unreasonable or Unnecessary Cost County officials awarded a subrecipient $10,970 more in CDBG funds than requested for a public facility improvement activity to replace carpet at a health facility. Subpart C of 2 CFR Part 225 states that costs must be necessary and reasonable to be allowable under Federal awards. However, in this instance, the 1 A decennial census is conducted every 10 years, as required by the U.S. Constitution, and is used to make decisions affecting legislation and Federal spending on projects and programs that are vital to the health and welfare of the U.S. population and economy. 5 total cost of the project was estimated to be $21,000, and the subrecipient requested $9,030 to supplement the $11,970 it was going to receive from another source. However, County officials awarded $20,000 because the County’s policy provides that the minimum grant for a public facility improvement is $20,000. As a result, County officials could not assure HUD that the $10,970 was incurred for reasonable or necessary costs. Inaccurate Financial Reporting Regulations at 24 CFR 85.20 require that CDBG recipients maintain a financial management system that provides accurate, current, and complete records of financial results. However, the County’s records did not always reflect the results of actual operations or reconcile with what was reported to HUD. For example, County records for program year 2009 reported $3,500 more in program income than was earned. Additionally the County’s action plan for 2010 did not include $100,000 for rehabilitation delivery costs. The summary of the County’s consolidated annual performance and evaluation report for program year 2010 stated that total expenditures would be less than $1.2 million, while the supplemental report indicated that the expenditures were more than $2.5 million. As a result, HUD was not provided with accurate data to adequately evaluate the performance of the County’s CDBG program. These inaccuracies resulted from insufficient controls over financial reporting and human error. Upon being informed of these issues during our audit, County officials agreed to correct them. Conclusion County officials generally expended CDBG funds for eligible activities; however, officials’ unfamiliarity with HUD regulations and implementation of inadequate financial and administrtaive controls resulted in some ineligible, unreasonable, and unsupported costs, as well as inaccurate reporting. As a result, County officials could not assure HUD that all disbursements were for eligible activities and the financial data submitted to HUD accurately reflected the County’s performance. Recommendations We recommend that the Director of HUD’s Newark, NJ, Office of Community Planning and Development instruct County Officials to 1A. Reimburse the County’s CDBG line of credit from non-Federal funds for the $19,500 disbursed for an ineligible rehabilitation loan. 1B. Strengthen controls over the County’s homeowner rehabilitation loan application procedures by revising the application to inform applicants of the prohibition against ownership of another property and include a reference to 6 possible imposition of civil monetary penalties under the False Claims Act for anyone providing false information. 1C. Provide documentation to support that the $49,735 drawdown was expended for eligible CDBG costs and if such support cannot be provided, repay the amount from non-Federal funds. 1D. Strengthen controls over reimbursement procedures to ensure that disbursement of CDBG funds, such as the $80,000 that was disbursed for the street improvement project without adequate support, is made based upon documentation adequate to ensure that the funds were used for eligible purposes and the costs incurred were reasonable and properly supported, thus ensuring that these funds were used for their intended purpose. 1E. Provide documentation to support that the $80,000 obligated for the public improvement project is an eligible expense. If it is not deemed eligible, the funds should be deobligated. 1F. Strengthen the County’s internal controls to ensure that the County documents support that CDBG funds will be used to assist projects in a low- and moderate-income service area in accordance with the CDBG program requirements before obligating and disbursing the funds. 1G. Provide documentation showing that the $10,970 disbursed in excess of a subrecipient’s request was reasonable and necessary. If it is deemed unreasonable or unnecessary, the funds should be repaid to the County’s CDBG line of credit from non-Federal funds. 1H. Strengthen internal controls over the County’s financial reporting to ensure that financial information submitted to HUD is accurate, current, and complete. 1I. Request CDBG financial management training from the HUD Office of Community Planning and Development’s field office staff. 7 Finding 2: There Were Instances of Noncompliance with HUD Regulations County officials did not always administer the CDBG program in accordance with HUD regulations. Specifically, they did not (1) include quantifiable performance indicators in subrecipient agreements or adequately track subrecipient performance, (2) adequately monitor subrecipients as required by HUD regulations and the County’s monitoring policy, and (3) seek HUD approval or request public comment before canceling or modifying HUD-approved activities. We attribute these deficiencies to County officials’ unfamiliarity with CDBG regulations and inadequate implementation of policies and procedures. In addition, procedures were not in place to impose a lien on a CDBG-assisted real property. Consequently (1) the subrecipient agreements were insufficient to provide a sound basis for the County to effectively monitor performance of subrecipients, (2) neither HUD nor County officials were assured that activities were accomplished according to program requirements, (3) neither the public nor HUD was made aware of the change in the use of more than $400,000 for previously approved activities, and (4) neither HUD nor the County’s interest was protected against future disposition of the property assisted with $71,729 in CDBG funds,. Inadequate Subrecipient Agreements County officials executed inadequate agreements with subrecipients contrary to HUD regulations and the County’s own policy. Regulations at 24 CFR 570.503(b)(1) specify that the subrecipient agreement must include a description of the work to be performed, a schedule for completing the work, and a budget. These items must be in sufficient detail to provide a sound basis for the recipient to effectively monitor performance under the agreement. However, while a 2009 monitoring review by HUD reported that the scope of services written into the County’s subrecipient agreements lacked quantifiable performance indicators and the County agreed to include indicators corresponding to the nature of the activity and the national objective, 6 of the 14 subrecipient agreements reviewed lacked such information. In addition, while the County had amended its procedures to extend the time of performance for the subrecipients that were not able to complete projects within the timeframe specified in the agreements a few years earlier, County officials executed subrecipient agreements that referenced the prior procedures. Therefore, the subrecipient agreements did not provide a sound basis for the County to effectively monitor subrecipient performance as required by 24 CFR 570.503(b)(1). We attribute these deficiencies to County officials’ failure to implement adequate financial and administrtaive controls that would provide a sound basis for monitoring subrecipients. 8 Inadequate Subrecipient Monitoring County officials did not monitor subrecipient performance or take action when performance was inadequate as required by HUD regulations and the County’s own policy. Regulations at 24 CFR 85.40 require that grantees monitor subgrantee-supported activities to ensure compliance with applicable Federal requirements and that performance goals are achieved, and the monitoring must be over each program, function, or activity. Further, the County’s policy provides detailed monitoring procedures for its specific CDBG projects, including annual reviews. However, County officials did not conduct an annual monitoring review of their social services subrecipients or perform onsite inspections of their public improvement projects. Further, they did not obtain detailed accomplishment data from 9 of 14 subrecipients to aid in evaluating subrecipient performance and failed to take action when 5 of the subrecipients did not complete their projects within the timeframe specified in the subrecipient agreements. County officials stated that they were under the impression that CDBG activities needed to be monitored only every other year. As a result, they could not assure HUD that their activities were accomplished according to program requirements. We attribute these deficiencies to County officials’ unfamiliarity with HUD and County regulations. Approved Projects Changed Without Proper Notification County officials canceled and modified their planned CDBG activities without notifying HUD and the public as required. Regulations at 24 CFR 570.302 and 91.505 and the County’s policy require that HUD approval be obtained and the public be notified of any substantial amendment to the CDBG action plan. HUD allows grantees to define what would be a substantial amendment, and County officials defined it as being when a project is canceled or a new project is added. However, County officials transferred approximately $214,000 and $235,000 to the homeowner rehabilitation activity, which was originally allocated $300,000 and $77,940, in program years 2010 and 2009, thus increasing the budgets to $514,000 and $312,940, respectively, without notifying HUD or the public. As a result, multiple activities were either canceled or had a significant funding decrease after HUD had already approved the action plans. Therefore, more than $400,000 in CDBG funds may not have been used for the activities previously reported to the public and approved by HUD. This deficiency existed because County officials were not familiar with HUD regulations and did not establish and enforce adequate procedures for processing program amendments. 9 Lien Not Recorded on Property Acquired With CDBG Funds County officials disbursed $71,729 in CDBG funds to a nonprofit organization for the acquisition of real property to construct affordable housing without imposing a lien or a deed restriction on the property. Regulations at 24 CFR 84.37 provide that HUD may require recipients to record liens or other appropriate notices of record to indicate that the real property has been acquired with Federal funds and that use and disposition conditions apply to the property. Further, the County’s housing rehabilitation policy requires that assisted property have a lien or deed restriction. This deficiency occurred because County officials believed that Regulations at 24 CFR 84.37 only suggest that a lien may be imposed. Therefore, neither HUD nor the County’s interest of $71,729 was protected against any future disposition of the property. Conclusion County officials did not always administer the CDBG program in accordance with HUD regulations or the County’s own policy. Consequently, County officials lacked assurance that their CDBG-funded activities were accomplished according to program requirements, and the public and HUD were not aware of significant amendments to the County’s action plan. In addition, controls were not established to ensure that HUD’s or the County’s interest in real property purchased with CDBG funds was protected. We attribute these deficiencies to County officials’ unfamiliarity with CDBG regulations and implementation of inadequate financial and administrative controls. Recommendations We recommend that the Director of HUD’s Newark, NJ, Office of Community Planning and Development instruct County Officials to 2A. Record a lien or other appropriate notice of record on the real property acquired with CDBG funds to ensure that HUD’s and the County’s interest in the property is adequately protected and that the $71,729 in CDBG funds used to purchase the property would be reimbursed to the program upon disposition of the property. If a lien or other appropriate notice of record is not recorded, County officials should reimburse the County’s CDBG line of credit for this amount from non-Federal funds, thus putting these funds to better use. 2B. Strengthen the County’s internal controls to ensure that liens or other appropriate notices of record are imposed on properties acquired with CDBG funds to ensure that HUD’s interest is properly protected. 10 2C. Strengthen controls to ensure that quantifiable performance measurement indicators are developed and included in all subrecipient agreements as a basis for evaluating subrecipient performance against the specific activity and applicable CDBG national objectives. 2D. Strengthen subrecipient monitoring procedures to provide assurance that subrecipients will comply with HUD regulations and subrecipient agreements and that appropriate action is taken when subrecipients do not comply with subrecipient agreements. 2E. Strengthen procedures to ensure that HUD and County residents will be properly informed of any significant amendments to the County’s CDBG action plans. 2F. Establish the dollar amount of funds that represents a substantial change in funding and include it in the County’s citizen participation plan. 2G. Request training on CDBG administrative requirements from the HUD Office of Community Planning and Development’s field office staff. 11 SCOPE AND METHODOLOGY The audit focused on whether County officials established and implemented adequate controls to ensure that the CDBG program was administered in accordance with program requirements. We performed the audit fieldwork from July to September 2012 at the County’s offices at 30 Schuyler Place, Morristown, NJ. To accomplish our objectives, we Reviewed relevant CDBG program requirements and applicable Federal regulations to gain an understanding of CDBG administration requirements. Interviewed staff from the HUD Newark, NJ, Office of Community Planning and Development and the County’s Division of Community Development. Obtained an understanding of the County’s management controls and procedures through analysis of its responses to management control questionnaires. Reviewed the County’s consolidated annual performance and evaluation reports, action plans, and County Board of Chosen Freeholders’ resolution of CDBG activities for program years 2010 and 2011 to gather data on the County’s expenditures. Reviewed the County’s audited financial statements for the fiscal years ending December 31, 2010 and 2011, to further our understanding of the County’s programs and identify any issues for follow-up. Analyzed reports from HUD’s computer systems, including the Integrated Disbursement and Information System,2 to document County disbursements and activities. Our assessment of the reliability of the data in these systems was limited to the data sampled, which were reconciled to the County’s records. Reviewed the County’s organizational chart; citizen participation plan; and monitoring, procurement, and accounting policies. Reviewed 14 of 98 subrecipient agreements and the County’s monitoring reports of its subrecipients during program years 2010 and 2011. Selected a nonstatistical sample of 15 CDBG activities with an authorized amount of more than $1.34 million to test for compliance with HUD and County regulations and policy. This represented 30 percent of the $4.5 million received by the County and used to fund 66 activities during program years 2010 and 2011. The sample was 2 The Integrated Disbursement and Information System is a nationwide database of current information regarding CDBG activities underway across the nation, including funding and accomplishment data. HUD uses this information to report to Congress and to monitor grantees. 12 designed to select a cross section of various activities based upon spending, performance status, and the nature of the activities. The audit generally covered the period July 1, 2010, through June 30, 2012, and was extended as needed to accomplish the objectives. We conducted the audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. 13 INTERNAL CONTROLS Internal control is a process adopted by those charged with governance and management, designed to provide reasonable assurance about the achievement of the organization’s mission, goals, and objectives with regard to Effectiveness and efficiency of operations, Reliability of financial reporting, and Compliance with applicable laws and regulations. Internal controls comprise the plans, policies, methods, and procedures used to meet the organization’s mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations, as well as the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined that the following internal controls were relevant to our audit objectives: Program operations – Policies and procedures that management has implemented to reasonably ensure that a program meets its objectives. Compliance with laws and regulations – Policies and procedures that management has implemented to reasonably ensure that resource use is consistent with laws and regulations. Safeguarding resources – Policies and procedures that management has implemented to reasonably ensure that resources are safeguarded against waste, loss, and misuse. Validity and reliability of data – Policies and procedures that management has implemented to reasonably ensure that valid and reliable data are obtained, maintained, and fairly disclosed in reports. 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. 14 Significant Deficiencies Based on our review, we believe that the following items are significant deficiencies: The County did not establish or implement adequate internal controls to ensure that its program met its objectives (see findings 1 and 2). The County did not establish or implement adequate internal controls to ensure that resource use was consistent with laws and regulations (see findings 1 and 2). The County did not establish or implement adequate internal controls to ensure that resources were safeguarded against waste, loss, and misuse (see findings 1 and 2). The County did not establish or implement adequate internal controls to ensure that valid and reliable data were obtained, maintained, and fairly disclosed in reports (see finding 2). 15 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Unreasonable Recommendation Unsupported Funds to be put Ineligible 1/ or number 2/ to better use 4/ unnecessary 3/ 1A $19,500 1C $49,735 1D $80,000 1E 80,000 1G $10,970 2A 71,729 $19,500 $129,735 $10,970 $151,729 1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the auditor believes are not allowable by law; contract; or Federal, State, or local policies or regulations. 2/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program or activity when we cannot determine eligibility at the time of the audit. Unsupported costs require a decision by HUD program officials. This decision, in addition to obtaining supporting documentation, might involve a legal interpretation or clarification of departmental policies and procedures. 3/ Unreasonable or unnecessary costs are those costs not generally recognized as ordinary, prudent, relevant, or necessary within established practices. Unreasonable costs exceed the costs that would be incurred by a prudent person in conducting a competitive business. 4/ Recommendations that funds be put to better use are estimates of amounts that could be used more efficiently if an Office of Inspector General (OIG) recommendation is implemented. These amounts include reductions in outlays, deobligation of funds, withdrawal of interest, costs not incurred by implementing recommended improvements, avoidance of unnecessary expenditures noted in preaward reviews, and any other savings that are specifically identified. If the recommendation to evaluate the eligibility of the public improvement project is implemented, HUD would be assured that the $80,000 was used for its intended purpose, and if a lien is recorded on the assisted property as recommended, HUD’s $71,729 interest would be protected, thus ensuring that funds would be available for other CDBG-eligible activities. 16 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments Comment 1 17 Comment 1 Comment 2 Comment 1 Comment 3 18 Comment 3 19 Comment 4 Comment 5 20 Comment 5 Comment 4 21 Comment 6 Comment 4 Comment 4 22 Comment 7 Comment 4 Comment 4 Comment 4 23 Comment 4 Comment 4 Comment 4 24 OIG Evaluation of Auditee Comments Comment 1 County officials acknowledged that the $19,500 rehabilitation loan was provided to a homeowner who owned a second residence, which the County’s rehabilitation program policy prohibited. However, County officials maintain that the loan was eligible since the owner was income eligible and the assistance was provided for his primary residence as required by the program regulations. Nevertheless, County officials stated that the residence for which the loan was provided is for sale, and they propose to either recoup the $19,500 for the CDBG program from the sale proceeds or allow the lien to expire on 12/17/2020. This issue will be addressed during the audit resolution process with HUD officials. Comment 2 OIG acknowledges that it may not be feasible for the County to identify all potential applicant misrepresentations, and as such has recommended that applicants be informed of possible imposition of civil monetary penalties under the False Claims Act for falsification of applicant information. County officials agreed to revise their current rehabilitation application form to disclose this possible liability to applicants, thus putting the onus on potential applicants. County officials’ comments are responsive to our recommendation. Comment 3 County officials stated that reconciliation of the Division’s files, IDIS reports and the Treasurer’s grant reports is one of the accounting safeguards in place, and described their current rehabilitation program drawdown and disbursement procedures. County officials did agree to tighten their internal controls to keep rehabilitation program cash balances to a minimum and disburse reimbursements promptly. However, County officials did not provide documentation to address the $49,735 found to have been drawndown based upon estimated as opposed to actual costs, and thus regarded as an unsupported expense. This issue will be addressed during the audit resolution process with HUD officials. Comment 4 County officials described planned corrective actions which are responsive to our recommendation. Comment 5 County officials maintain that the $80,000 obligation for a public improvement project is an eligible CDBG program expense. While the nature of the obligation is an eligible CDBG program expense, County officials did not comply with HUD procedures prescribed in 24 CFR 570.208 that require any surveys to meet the statistical reliability of the decennial census and be approved by HUD. This issue will be addressed during the audit resolution process with HUD officials. County officials agreed to improve its internal controls by communicating with HUD field office in the future as to the survey vehicle used and outcome of the survey. Comment 6 County officials explained that the subrecipient had experienced financial hardship and therefore the $10,970 disbursed in excess of the subrecipient’s initial request was reasonable and necessary. However, County officials could not locate any additional documentation to support their explanation. County 25 officials are attempting to obtain such documentation from the subrecipient; therefore, this issue will be resolved during the audit resolution process with HUD. Comment 7 We acknowledge that HUD regulations at 24 CFR 84.37 use the word “may”, which allows grantees the option to record a lien or other appropriate notice of record to indicate that personal or real property has been acquired or improved with federal funds and that use and disposition conditions apply to the property; therefore, we have revised the report to not cite this as an instance of noncompliance, but as a need to strengthen controls to better protect HUD’s interest. Since grantees have a fiduciary responsibility to safeguard federal funds and ensure that HUD’s interest is properly protected, we believe that an appropriate notice of record should have been executed, as is done for the County’s housing rehabilitation program. Further, County officials stated that they have taken action to record a lien as suggested. 26
Morris County, NJ's Community Development Block Grant Program Had Weaknesses in Its Financial and Administrative Controls
Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-01-23.
Below is a raw (and likely hideous) rendition of the original report. (PDF)