oversight

The City of Auburn, NY Community Development Block Grant Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-09-26.

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

 OFFICE OF AUDIT
 REGION 2
 NEW YORK, NEW JERSEY




                  The City of Auburn, NY

    Community Development Block Grant Program




2013-NY-1010                           SEPTEMBER 26, 2013
                                                        Issue Date: September 26, 2013

                                                        Audit Report Number: 2013-NY-1010




TO:            William T. O’Connell
               Director, Community Planning and Development Division, Buffalo, NY, 2CD



FROM:          Edgar Moore
               Regional Inspector General for Audit, New York, New Jersey Region, 2AGA


SUBJECT:       The City of Auburn, NY, Did Not Always Administer Its Community
               Development Block Grant Program in Accordance With HUD Requirements


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final results of our review of the City of Auburn, NY’s Community
Development Block Grant program.

    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.
                                            September 26, 2013
                                            The City of Auburn, NY, Did Not Always Administer Its
                                            Community Development Block Grant Program in
                                            Accordance With HUD Requirements



Highlights
Audit Report 2013-NY-1010


 What We Audited and Why                         What We Found

We audited the City of Auburn, NY’s             City officials did not (1) adequately establish
Community Development Block Grant               and implement the necessary controls to ensure
(CDBG) program based on an Office of            that program activities were adequately
Inspector General risk analysis that            documented and administered in accordance
considered the amount of funding the            with HUD regulations, (2) always expend
City had available to expend. The               CDBG funds for eligible activities, and (3)
objectives of the audit were to determine       adequately expend and account for program
whether the City had (1) established and        income.
implemented the necessary controls to
ensure that program activities were         City officials (1) were slow in expending the
adequately documented and administered      City’s revolving loan funds and maintained an
in accordance with U.S. Department of       excessive balance of program income, (2) made
Housing and Urban Development (HUD)         unnecessary draws from the City’s CDBG
regulations, (2) expended CDBG funds        entitlement funding, (3) had weaknesses in
for eligible activities, and (3) properly   accounting controls related to the City’s revolving
expended and accounted for program          loan program income accounts, and (4) did not
income.                                     report program income to HUD accurately or in a
                                            timely manner. City officials also did not always
  What We Recommend                         ensure that the City’s CDBG-funded activities
                                            accomplished program objectives. Specifically,
                                            City officials did not (1) maintain sufficient
We recommend that HUD instruct City         documentation to support that all CDBG-funded
officials to (1) expend more than $2.4      activities met their stated objectives and that costs
million in CDBG program income or           were eligible, (2) perform adequate monitoring or
reprogram the funds to other eligible       oversight of the funded activities, and (3) fully use
program activities, (2) provide             the available funds for program administration.
documentation to support the $177,923       We attribute these deficiencies to the City’s (1)
shortage in program income or repay any     lack of communication and coordination between
unsupported amount from non-Federal         officials in the program and financial divisions of
funds, (3) provide documentation to justify the City, (2) ongoing capacity issues due to recent
the $949,064 in unsupported costs and repay budget constraints and staff turnover, and (3)
any amount determined to be ineligible from inadequate written policies and procedures.
non-Federal funds, and (4) establish and
implement controls and procedures to ensure
the proper administration of the program.
                            TABLE OF CONTENTS

Background and Objectives                                                         3

Results of Audit
      Finding 1: City Officials Did Not Adequately Administer the City’s CDBG     4
                 Revolving Loan Fund

      Finding 2: City Officials Did Not Always Ensure That CDBG-Funded Activities 11
                 Met Program Objectives

Scope and Methodology                                                            15

Internal Controls                                                                16

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use             18
B.    Auditee Comments and OIG’s Evaluation                                      19




                                            2
                          BACKGROUND AND OBJECTIVES

The Community Development Block Grant (CDBG) program was established by Title I of the
Housing and Community Development Act of 1974, Public Law 93-383 as amended, 42 U.S.C.
(United States Code) 5301. The program provides grants to State and local governments to aid
in the development of viable urban communities. Governments are to use grant funds to provide
decent housing and suitable living environments and to expand economic opportunities,
principally for persons of low and moderate income. To be eligible for funding, every CDBG-
funded activity must meet one of the program’s three national objectives. Specifically, every
activity, except for program administration and planning, must

              Benefit low- and moderate-income persons,
              Aid in preventing or eliminating slums or blight, or
              Address a need with a particular urgency because existing conditions pose a serious and
               immediate threat to the health or welfare of the community.

The City of Auburn, NY, is a CDBG entitlement grantee. The U.S. Department of Housing and
Urban Development (HUD) awarded the City more than $1.1 million in CDBG funding in
program year 2010, $984,494 in 2011, and $814,792 in 2012.1 In addition, the City received
$288,052 in funds under the American Recovery and Reinvestment Act of 2009. These funds
were available to support a variety of activities directed at improving the physical condition of
neighborhoods by providing housing rehabilitation and public improvements and facilities,
fostering economic development by providing technical and financial assistance to local
businesses and creating employment, or improving services for low- and moderate-income
households. The City also administers a CDBG-funded revolving loan fund. The City operates
under the council-manager form of government, and its CDBG activities are administered
through the City’s Office of Planning and Economic Development. It is the responsibility of the
Office of the City Comptroller to receive, disburse, and account for all financial transactions of
the City. The files and records related to the City’s CDBG program are maintained at Memorial
City Hall, located in Auburn, NY.

The objectives of the audit were to determine whether the City had (1) established and
implemented the necessary controls to ensure that program activities were adequately
documented and administered in accordance with HUD regulations, (2) expended CDBG funds
for eligible activities, and (3) properly expended and accounted for program income.




1
    The City’s CDBG program year is April 1 through March 31.

                                                        3
                                    RESULTS OF AUDIT

Finding 1: City Officials Did Not Adequately Administer the City’s
           CDBG Revolving Loan Fund
City officials did not properly administer a CDBG revolving loan fund, which was supposed to
be used to provide low-interest loans for housing rehabilitation and economic development
activities directed at benefiting low- and moderate-income persons. Specifically, City officials (1)
were slow in expending these funds and maintained an excessive balance of program income, (2)
made unnecessary draws from the City’s CDBG entitlement funding when a sufficient amount of
program income was available, (3) had weaknesses in their accounting controls related to the
City’s revolving loan program income accounts, and (4) reported program income to HUD
inaccurately and in an untimely manner. We attribute these deficiencies to the City’s lack of
communication and coordination between officials in the program and financial divisions of the
City as well as its inadequate written policies and procedures. As a result, more than $2.4
million in program income funds was not used to benefit low- and moderate-income persons in a
timely manner and could have been used instead of having unnecessary drawdowns from the
City’s CDBG line of credit. Also, there was an unexplained shortage of more than $177,000 in
the City’s bank balance when compared to the program income balance reported to HUD.


    Slow Progress and Excessive
    Revolving Loan Fund Balance

                In recent years, the City had been slow in expending its revolving loan fund
                balance. This condition resulted in the City’s maintaining an excessively large
                balance of program income. The City had a bank balance of more than $2.4
                million as of June 30, 2013; in comparison, the City received entitlement funding
                of only $814,792 in program year 2012. Therefore, the City had more than three
                times its entitlement funding for the program year on hand as of that date.
                Regulations at 24 CFR (Code of Federal Regulations) 85.20(b)(7) state that
                procedures for minimizing the time elapsing between the transfer of funds and
                disbursement by grantees must be followed.

                The City’s slow progress in expending its revolving loan fund can be seen
                through analysis of the receipts and draws recorded in HUD’s Integrated
                Disbursement and Information System (IDIS).2 The following chart represents
                the balance contained in the City’s revolving loan fund over time using these IDIS
                data.


2
  IDIS is a nationwide drawdown and reporting system for HUD’s four community planning and development grant
programs: CDBG, the HOME Investment Partnerships, the Emergency Shelter Grants, and Housing Opportunities
for Persons With AIDS. The system allows grantees to request their grant funding from HUD and report on their
program accomplishments. HUD uses these data to report to Congress and monitor grantees.

                                                      4
                            Revolving loan fund balance
            $3,500,000.00

            $3,000,000.00

            $2,500,000.00

            $2,000,000.00

            $1,500,000.00

            $1,000,000.00

             $500,000.00

                      $-




          The chart above shows how the balance in the City’s revolving loan fund steadily
          increased over time with more receipts than draws annually. For example,
          program income receipts were $465,759 more than program income draws in
          program year 2011, $271,181 more in program year 2010, and $335,770 more in
          program year 2009. Data downloaded from IDIS showed that as of June 30,
          2013, the City was expending revolving loan funds that had been received during
          program year 2007 and, thus, had not drawn any of the funds received since the
          end of that program year, which occurred March 31, 2008.

          City officials had been budgeting only small amounts for the City’s revolving
          loan fund in recent annual action plans. Discussions with City officials also
          revealed that little marketing was performed for the City’s revolving loan
          programs. The City’s excessive program income balance was discussed with
          HUD officials, who stated that the City would be required to develop a plan to
          expend these funds in a timely manner. However, as of the end of our review,
          City officials had made no progress on the development of this plan. Therefore,
          the more than $2.4 million maintained in the City’s bank accounts should be
          reprogrammed for other eligible purposes and put to better use.

Unnecessary CDBG
Entitlement Drawdowns

          City officials made draws from the City’s CDBG entitlement funding for
          activities that were budgeted under its revolving loan fund when a sufficient
          amount of program income was available to expend. The City’s annual action
          plans stated that the revolving loan fund was to be used in the award of loans for

                                           5
          the City’s Home Repair Assistance Program, Small Business Assistance Program,
          and special development projects. However, on many occasions, City officials
          made draws from the City’s CDBG entitlement to fund these expenditures.
          Regulations at 24 CFR 570.504(b)(2)(i) state that program income in the form of
          repayments to or interest earned on a revolving fund must be substantially
          disbursed from the fund before additional cash withdrawals are made from the
          U.S. Treasury for the same activity.

          Four Home Repair Assistance Program activities drawn from the City’s CDBG
          entitlement were reviewed as part of this audit. All four of these activities
          included loans awarded through the City’s CDBG entitlement draws instead of its
          revolving loan fund balance. One special development project loan awarded to
          Currier Plastics, Inc., in the amount of $750,000 was also reviewed as part of this
          audit. Of this amount, $600,000 was drawn from the City’s CDBG entitlement
          funding, and $150,000 was from the City’s revolving loan fund balance. Instead
          of using the available revolving loan funds to make this payment, City officials
          drew down $600,000 on January 28, 2013, and, in turn, were able to meet the
          City’s program year 2012 CDBG timeliness requirement by the January 31, 2013,
          test date. It should be noted that the City failed to meet its program year 2011
          CDBG timeliness requirement and would have been subject to recapture if it had
          failed to meet it for a second straight year. Regulations at 24 CFR 570.902(a)
          state that before the funding of the next annual grant, HUD will consider an
          entitlement recipient to be failing to carry out its CDBG activities in a timely
          manner if 60 days before the end of the grantee’s current program year, the
          amount of entitlement grant funds available to the recipient under grant
          agreements but undisbursed by the U.S. Treasury is more than 1.5 times the
          entitlement grant amount for its current program year.

Accounting Control
Weaknesses With Program
Income

          It is the responsibility of the City’s Office of the Comptroller to receive, disburse,
          and account for all financial transactions of the City, including those related to the
          CDBG program. During this review, multiple instances of weaknesses in the
          controls implemented over the accounting of the City’s program income were
          identified. Regulations at 24 CFR 85.20(b)(3) state that effective control and
          accountability must be maintained for all grant and subgrant cash, real and
          personal property, and other assets and that grantees and subgrantees must
          adequately safeguard all such property and ensure that it is used solely for
          authorized purposes.




                                            6
                 The City maintained all of its CDBG funding in the same bank accounts,3 which
                 included entitlement draws and program income related to its multiple revolving
                 loan programs. These accounts were also used for Urban Development Action
                 Grant-related transactions. However, City officials did not keep schedules or
                 other documentation to sufficiently track the revolving loan funds in the accounts.
                 As a result, City officials were unable to easily provide information to support all
                 deposits and transfers between the City’s bank accounts. This condition also
                 resulted in the City’s using its revolving loan funds as advances for CDBG
                 activity expenditures later reimbursed through entitlement draws. These practices
                 were contrary to regulations at 24 CFR 570.500(b), which define a revolving fund
                 as a separate fund (with a set of accounts that are independent of other program
                 accounts) established for the purpose of carrying out specific activities, which, in
                 turn, generate payments to the fund for use in carrying out the same activities.

                 City officials also did not perform regular reconciliations between the program
                 income balance reported to HUD through IDIS and the balances maintained in the
                 City’s related bank accounts. There was a disconnect between the program and
                 financial divisions of the City. The Office of Planning and Economic
                 Development handled all IDIS-related reporting, and the Office of the City
                 Comptroller handled all of the financial reporting, but the data prepared by the
                 two divisions were not adequately compared and reconciled.

                 The program income balance presented in IDIS is calculated based on the
                 program income receipts and draws entered by City officials. As of June 30,
                 2013, the balance shown in IDIS was more than $2.6 million. However, on that
                 date, the balance in the City’s related bank accounts was less than $2.5 million.
                 There was an unexplained difference of $177,923 between what had been
                 reported to HUD through IDIS and the amount of program income on hand.
                 Regulations at 24 CFR 85.20(b)(2) state that grantees and subgrantees must
                 maintain records that adequately identify the source and application of funds
                 provided for financially assisted activities, including information pertaining to
                 grant or subgrant awards and authorizations, obligations, unobligated balances,
                 assets, liabilities, outlays or expenditures, and income.

                 Because City officials did not perform regular reconciliations between the
                 program income balance reported to HUD through IDIS and the balances
                 available to expend in the City’s related bank accounts, they were unable to
                 explain the difference between them. Therefore, $177,923 was considered
                 unsupported costs.

                 In addition, the City did not have comprehensive written policies and procedures.
                 City officials used their experience and in some cases, brief individual program
                 procedures to direct them in the administration of the City’s CDBG-funded
                 programs. However, many of the day-to-day activities involved in the

3
 The City has two community development bank accounts; one is a checking account, and the other is a savings
account.

                                                       7
          administration of the grant were not documented. HUD identified this condition
          as a concern during its 2011 monitoring of the City, but no corrective action was
          taken. City officials were also unable to provide written accounting policies and
          procedures during our review.

Program Income Not Reported
Accurately and in a Timely
Manner


          Officials in the City’s Office of Planning and Economic Development were
          responsible for recording program income receipts and draw information in IDIS.
          Regulations at 24 CFR 85.20(b)(1) state that accurate, current, and complete
          disclosure of the financial results of financially assisted activities must be made in
          accordance with the financial reporting requirements of the grant or subgrant.
          However, we identified instances of the City’s failure to record program income
          transactions accurately and in a timely manner.

          City officials recorded revolving loan payment receipts under inaccurate IDIS
          activity numbers. Each loan awarded from the City’s revolving loan fund was
          given its own distinct activity number in IDIS. However, City officials grouped
          the receipt amounts by program area and recorded them under four distinct
          activity numbers, representing the four revolving loan programs. Some of the
          numbers used to represent revolving loan program areas represented activities that
          were funded through the City’s CDBG entitlement. Therefore, the receipts were
          not accurately recorded under the activity numbers related to the loans that
          generated the program income.

          The City received payments on its outstanding revolving loans throughout the
          year. However, City officials only recorded these payments as receipts in IDIS
          annually and did so months after the end of the program year on multiple
          occasions. Therefore, the program income balance reported to HUD in IDIS was
          regularly inaccurate as it was understated for nearly the entire year due to the
          failure of the City to report program income receipts in a timely manner. For
          example, as of March 31, 2013, the end of program year 2012, there were no
          program income receipts reported in IDIS for the period. However, on June 28,
          2013, City officials recorded program income receipts of $289,235 for program
          year 2012. Thus, it was nearly 3 months after the end of the program year that
          related receipts were recorded in IDIS.

          City officials also did not report the City’s IDIS draws in a timely manner. On
          average during the audit period, City officials made IDIS draws approximately 3
          months after the related expenditures occurred and were entered into the City’s
          internal accounting system. As a result, City officials expended the City’s
          revolving loan funds maintained in its community development bank accounts
          and later reimbursed these funds through IDIS entitlement draws. Therefore, the


                                            8
             program income funds included in the City’s revolving loan fund were being used
             as advances for CDBG entitlement expenditures.

Conclusion

             City officials did not properly administer a CDBG revolving loan fund, which
             was supposed to be used to provide low-interest loans for housing rehabilitation
             and economic development activities directed at benefiting low- and moderate-
             income persons. Specifically, City officials (1) were slow in expending these
             funds and maintained an excessive balance of program income, (2) made
             unnecessary draws from the City’s CDBG entitlement funding when a sufficient
             amount of program income was available, (3) had weaknesses in their accounting
             controls related to the City’s revolving loan program income accounts, and (4) did
             not report program income to HUD accurately and in a timely manner. We
             attribute these deficiencies to the lack of communication and coordination
             between the program and financial divisions of the City as well as the City’s
             inadequate written policies and procedures. As a result, more than $2.4 million in
             program income funds was not used to benefit low- and moderate-income persons
             in a timely manner and could have been used instead of having unnecessary
             drawdowns from the City’s CDBG line of credit. Also, there was an unexplained
             shortage of more than $177,000 in the City’s bank balance when compared to the
             program income balance reported to HUD .

Recommendations

             We recommend that the Director of HUD’s Buffalo Office of Community
             Planning and Development instruct City officials to

             1A.    Expend or reprogram to other eligible program activities the $2,451,645 in
                    CDBG program income maintained in the City’s community development
                    bank accounts as of June 30, 2013, so the City can assure HUD that these
                    funds have been put to better use.

             1B.    Establish and implement controls to ensure that all CDBG program
                    income and disbursements are accounted for properly. Specifically, City
                    officials should perform regular CDBG program income reconciliations
                    among data in IDIS, City bank accounts, and the City’s internal
                    accounting system, as well as maintaining more adequate documentation
                    to track CDBG program income receipts and expenditures.

             1C.    Develop procedures to ensure that program income is disbursed before
                    drawing down CDBG funds from the U.S. Treasury and CDBG funds are
                    not drawn down for expenses that were already paid for with program
                    income funds.


                                              9
1D.   Provide documentation to justify the $177,923 unsupported difference
      between the City’s CDBG program income balance in IDIS and its bank
      account balances as of June 30, 2013. Any portion of the unsupported
      difference determined to be ineligible should be reimbursed from non-
      Federal funds.

1E.   Develop a comprehensive overall CDBG policies and procedures manual
      to ensure that City officials adequately administer the City’s CDBG
      program in accordance with HUD regulations. Specifically, the City
      should ensure that program income is accurately accounted for and
      reported to HUD in a timely manner.




                             10
Finding 2: City Officials Did Not Always Ensure That CDBG-Funded
           Activities Met Program Objectives
City officials did not always ensure that all of the City’s CDBG-funded activities accomplished
program objectives before disbursing funding. Specifically, City officials did not (1) maintain
sufficient documentation to support that all CDBG-funded activities met their stated objectives
and that costs were eligible, (2) perform adequate monitoring or oversight of the funded
activities, and (3) fully use the available funds for program administration, which contributed to
the lack of capacity to properly administer the CDBG program. We attribute these deficiencies
to the City’s lack of capacity to properly administer the program due to staff turnover and budget
constraints and the lack of adequate written policies and procedures. As a result, the City
expended more than $949,000 for activities that did not have adequate documentation to support
the eligibility of the costs incurred.


 Insufficient Supporting
 Documentation Maintained

               The City’s CDBG project files did not contain sufficient documentation to
               support that each activity met program objectives. Specifically, economic
               development loan files did not include job creation data or proof of eligible
               expenditures after the disbursement of the loan proceeds, and a public services
               activity file did not contain adequately documented clientele income
               certifications.

               Three economic development loans awarded by the City were reviewed as part of
               this audit. They included loans awarded to Columbus Center Development, LLC,
               in the amount of $140,000, Downtown Deli in the amount of $40,000, and Currier
               Plastics, Inc., in the amount of $750,000. None of the City’s project files related
               to these three loans included job creation data or proof of eligible expenditures
               after the disbursement of the loan proceeds. Regulations at 24 CFR 570.208(a)(4)
               state that for an activity that creates jobs, the recipient must document that at least
               51 percent of the jobs will be held by or available to low- and moderate-income
               persons and for an activity that retains jobs, the recipient must document that the
               jobs would be lost without the CDBG assistance. The loan recipient
               commitments for each of these loans stated that the borrower agreed to spend the
               funds for purposes of the commitment within 30 days of the date of the
               commitment. They also required that the borrower document to the City’s
               satisfaction the actual costs paid as part of the project before final disbursement;
               however, this documentation was not adequate. City officials, as a result of our
               audit, obtained additional documentation from one borrower, Columbus Center
               Development, LLC, to support job creation and the eligible expenditure of the
               loan proceeds; however, these documents did not provide sufficient support that
               program objectives were met.

                                                 11
           The City disbursed $19,064 for its Chronic Offenders Rehabilitation Program
           public services activity. This activity consisted of counseling chronic juvenile
           delinquents and young criminals rather than incarcerating them. The file
           maintained by the City for this public services activity did not include
           documentation supporting its qualification under the low- and moderate-income
           limited clientele national objective. However, after our request for this
           information, City officials obtained client information reports for nine different
           clients from the subrecipient administering the program. These reports contained
           incomplete and insufficient information regarding the household size and income
           of the clientele assisted. Regulations at 24 CFR 570.208(a)(2) state that activities
           qualifying under the low- to moderate-income limited clientele national objective
           require information on family size and income evidencing that at least 51 percent
           of the clientele includes persons whose family income does not exceed the low-
           and moderate-income limit. Based on the documentation provided, there was
           inadequate assurance that program objectives were met.

           The City’s CDBG project files did not contain adequate documentation to support
           that each activity met program objectives. As a result, City officials lacked
           assurance that these objectives were accomplished. Therefore, the $930,000
           expended on three economic development loans and the $19,064 expended on a
           public services activity were considered unsupported.

Inadequate Monitoring of
CDBG-Funded Activities

           Several instances were identified in which City officials did not perform adequate
           monitoring or oversight of the City’s CDBG-funded activities. Specifically,
           subrecipients were provided funds without valid contracts in place and later not
           monitored in a sufficient manner. Further, loan recipients were not monitored
           after disbursement of the loan proceeds to ensure that program objectives were
           accomplished. Regulations at 24 CFR 85.40(a) state that grantees are responsible
           for managing the day-to-day operations of grant- and subgrant-supported
           activities. Grantees must monitor grant- and subgrant-supported activities to
           ensure compliance with applicable Federal requirements and that performance
           goals are achieved. Grantee monitoring must cover each program, function, or
           activity.

           The City used a subrecipient, Homsite Fund, Inc., to administer its Home Repair
           Assistance Program, which provides low-interest loans to homeowners in need of
           eligible repairs to their homes. Although the City reimbursed the subrecipient for
           its administration of the program, the two parties did not execute a subrecipient
           agreement for the 2011 program year. The contract that was executed for the
           2010 program year expired on June 30, 2011, and was not extended. Therefore,
           contrary to regulations at 24 CFR 570.503, the City disbursed CDBG funds to a
           subrecipient without having a signed, written agreement in place.

                                            12
           During the period in which this subrecipient operated without a valid contract, the
           City also did not perform adequate monitoring of its operations. Specifically,
           City officials informed us that they did not perform regular onsite monitoring of
           Homsite Fund, Inc., and instead relied on the reports that were submitted with
           each request for payment. Therefore, the City did not comply with HUD
           regulations and, thus, lacked assurance that program objectives were met.

           Annually, the City issues a request for proposals related to its CDBG funding to
           be expended for public services activities. During the 2008 program year, the
           City awarded CDBG funding to Partnership for Results, Inc., to administer the
           Chronic Offenders Rehabilitation Program. The purpose of this program was to
           have chronic juvenile delinquents and young criminals counseled rather than
           incarcerated. The City executed a subrecipient agreement with Partnership for
           Results, Inc., on August 29, 2008. However, this program progressed slowly, and
           no funds were disbursed for it until more than 2 years later. The City made a
           single draw on January 25, 2011, to fund this activity. However, by then, the
           subrecipient agreement, which covered the period August 1, 2008, through July
           31, 2009, had been expired for more than a year. Specifically, the 2008 contract
           read, “The Subrecipient agrees to perform all activities under this contract
           between August 1, 2008 and July 31, 2009. All projects undertaken in relation to
           this contract will be completed by the end of this contract period. All activities
           are to be implemented to ensure their completion in the time allowed.” City
           officials were unable to provide written contract extensions related to this CDBG-
           funded activity.

           Under its Small Business Assistance Program, the City awarded economic
           development loans to local small businesses. Three such economic development
           loans were reviewed as part of this audit. They included loans awarded to
           Columbus Center Development, LLC, Downtown Deli, and Currier Plastics, Inc.
           City officials informed us that the City’s economic development program
           manager was let go in July 2012 due to budget constraints. As a result, no
           monitoring was performed on any of the City’s Small Business Assistance
           Program loan recipients. City officials explained that this condition also
           contributed to the missing documentation identified above.

           Based on the above, City officials did not always perform adequate monitoring or
           oversight of the City’s CDBG-funded activities. As a result, they lacked
           assurance that these activities accomplished program objectives.

Underuse of Program
Administration Funds and
Capacity Issues

           Regulations at 24 CFR 570.200(g) allow up to 20 percent of the sum of any grant,
           plus program income, to be expended for planning and program administrative

                                           13
             costs. The City budgeted $160,000, or 16.25 percent of its 2011 entitlement grant
             ($160,000/$984,494 = 16.25%), for program administration costs but made draws
             of only $79,635, or 8 percent ($79,635/$984,494 = 8%). The City made draws of
             $105,685 from its 2010 program administration activity, which amounted to just 9
             percent of its 2010 CDBG entitlement ($105,685/$1,173,920 = 9%). Therefore,
             the City used much less program administration funding than it was entitled to.
             Through discussions with City officials and our review of the City’s CDBG
             expenditures, we determined that the City experienced capacity issues due to
             budget constraints. These capacity issues affected the City’s CDBG timeliness
             and ability to ensure that program objectives were met. However, the City did not
             fully use the program administration funds allowable by HUD. Regulations at 24
             CFR 570.206(a)(1)(v) state that the salaries, wages, and related costs involved
             with monitoring program activities for progress and compliance with program
             requirements are eligible under program administration. Therefore, not using the
             available funds for the allowable administrative costs contributed to City officials’
             lack of monitoring and proper administration of CDBG activities.

Conclusion

             City officials did not always ensure that all of the City’s CDBG-funded activities
             accomplished program objectives before disbursing funding. Specifically, City
             officials did not maintain sufficient documentation to support that all CDBG-
             funded activities met their stated objectives and did not perform adequate
             monitoring or oversight of the funded activities. We attribute these deficiencies
             to the City’s ongoing capacity issues due to recent budget constraints and staff
             turnover as well as its inadequate written policies and procedures. As a result, the
             City expended more than $949,000 for unsupported costs.

Recommendations

             We recommend that the Director of HUD’s Buffalo Office of Community
             Planning and Development instruct City officials to

             2A.    Provide documentation to justify $949,064 in unsupported costs charged
                    to the CDBG program. Any unsupported costs determined to be ineligible
                    should be reimbursed from non-Federal funds.

             2B.    Develop procedures to ensure that funded activities comply with program
                    objectives and that the activities are sufficiently monitored.

             2C.    Review the City’s use of available program administration funds and
                    determine whether the staffing is appropriate and funds should be
                    reallocated to program administration to more effectively administer the
                    City’s CDBG program.


                                              14
                         SCOPE AND METHODOLOGY

We performed onsite audit work at the City’s offices in Memorial City Hall located in Auburn, NY,
between January and July 2013. The audit scope covered the period January 1, 2011, through
December 31, 2012, and was extended as necessary. We relied in part on computer-processed data
primarily for obtaining background information on the City’s expenditure of CDBG funds. We
performed a minimal level of testing and found the data to be adequate for our purposes. To
accomplish our objectives, we

      Reviewed relevant HUD regulations, guidebooks, and files.

      Interviewed HUD officials to obtain an understanding of and identify HUD’s concerns with
       the City’s operations.

      Reviewed HUD’s 2008 and 2011 monitoring reports.

      Reviewed the City’s policies, procedures, and practices.

      Interviewed key personnel responsible for the administration of the City’s CDBG program.

      Tested expenditures in many program areas, including public facilities and improvements,
       economic development, rehabilitation, public services, clearance, and direct homeowner
       assistance. Specifically, we selected a sample consisting of the 14 activities that had
       received the largest amounts of funding out of the 126 activities funded since the start of our
       audit period. For program years 2010 through 2012, the City received more than $2.9
       million in CDBG entitlement funding and reported program income receipts of $784,544.
       HUD’s IDIS reports reflected that more than $3.3 million in CDBG funds was disbursed for
       126 activities between January 1, 2011, and March 31, 2013. Our sample consisted of
       expenditures totaling more than $1.7 million for 14 different activities. This amount
       represented almost 52 percent of the City’s more than $3.3 million in expenditures during
       this period.

      Reviewed the City’s CDBG revolving loan fund transactions and balance. For program
       years 2010 and 2011, the City reported program income receipts of $784,544. As of March
       31, 2013, no program income receipts had been reported for program year 2012. IDIS
       reports reflected that $455,110 in CDBG program income funds was disbursed for 14
       activities between January 1, 2011, and December 31, 2012. As of June 30, 2013, IDIS
       reports reflected a program income balance of more than $2.6 million.

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.


                                                 15
                              INTERNAL CONTROLS

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

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

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


 Relevant Internal Controls

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

                     Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

                     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.

                     Laws and regulations – Policies and procedures that management has
                      implemented to reasonably ensure that resource use is consistent with laws
                      and regulations.

                     Safeguarding of resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

               We assessed the relevant controls identified above.

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

                                                 16
Significant Deficiencies

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

                   The City did not have adequate controls over the effectiveness and efficiency
                    of program operations when it did not establish adequate administrative
                    controls to ensure that costs associated with various program areas were
                    supported and eligible under the CDBG program (see finding 2).

                   The City did not have adequate controls over the reliability of data when it
                    did not report program income transactions to HUD through IDIS in an
                    accurate and timely manner (see finding 1).

                   The City did not have adequate controls over compliance with laws and
                    regulations as it did not always comply with HUD regulations while
                    disbursing CDBG funds (see findings 1 and 2).

                   The City did not have adequate controls to ensure that CDBG resources were
                    safeguarded when program income was not adequately tracked or accounted
                    for (see finding 1).




                                              17
                                   APPENDIXES

Appendix A

              SCHEDULE OF QUESTIONED COSTS
             AND FUNDS TO BE PUT TO BETTER USE

                   Recommendation                         Funds to be put
                                       Unsupported 1/
                       number                             to better use 2/
                         1A                                    $2,451,645
                         1D                  $177,923
                         2A                  $949,064
                        Total              $1,126,987          $2,451,645


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/   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. In this case, if our recommendation is implemented, it
     will result in the elimination of an excessive balance of program income of more than
     $2.4 million by ensuring that the funds are used in a timely manner to benefit low- and
     moderate-income people and prevent unnecessary draws from the U.S. Treasury.




                                             18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         19
Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 4




Comment 5




                         20
Ref to OIG Evaluation   Auditee Comments




Comment 6




Comment 7



Comment 8




                         21
Ref to OIG Evaluation   Auditee Comments




Comment 9




Comment 10




                         22
Ref to OIG Evaluation   Auditee Comments




Comment 11


Comment 12




Comment 13




                         23
Ref to OIG Evaluation   Auditee Comments




Comment 14




Comment 15




                         24
Ref to OIG Evaluation   Auditee Comments




                         25
                         OIG Evaluation of Auditee Comments

Comment 1   City officials requested that their comments be included in the body of the report
            rather than in an appendix. We determined that a presentation of the auditee
            comments in the body of the report was not necessary, as all of the City’s
            responses are addressed in this appendix B.

Comment 2   City officials stated that they were unaware that a plan to expend the City’s
            revolving loan fund balance was to be developed before the end of our review and
            that after learning of this finding, they contacted HUD Buffalo Office of
            Community Planning and Development (CPD) staff with a tentative plan for the
            funds. During a discussion on February 25, 2013, HUD Buffalo CPD officials
            informed us that the City would be required to develop a plan. We were not
            aware of a deadline for this plan, but as of the end of our review, nothing had
            been developed. City officials were responsive in their development of a tentative
            planned use for these funds after learning of this finding. However, a final
            determination will be made as to the eligibility of the proposed planned activities
            by HUD officials during the audit resolution process.

Comment 3   City officials requested a definition of the term “substantially disbursed” as used
            in the HUD regulations regarding the use of revolving loan funds before funds are
            drawn from the U.S. Treasury for the same activity. “Substantially disbursed”
            does not mean that the City should have an amount of program income equal to
            three times its entitlement funding as reported since this could impact whether the
            City will meet its 1.5 timeliness test. However, City officials should request
            guidance from HUD officials regarding this matter as part of the audit resolution
            process.

Comment 4   City officials indicated that they were unaware of the practice of expending
            revolving loan funds and later reimbursing them through draws from the U.S.
            Treasury. However, City officials outlined their plan to address this issue in their
            comments regarding recommendations 1B and 1C, which were responsive to our
            recommendations.

Comment 5   City officials developed a tentative plan for the excess program income to be
            expended for CDBG remediation activities related to the cleanup of brownfield
            properties. Although officials’ actions were responsive to our recommendation to
            develop a planned use of these funds, the plan would have to be reviewed and
            approved by HUD officials during the audit resolution process.

Comment 6   City officials were responsive to our recommendation in that they will perform
            quarterly reconciliations for the City’s revolving loan fund. However, these
            procedures will have to be tested and approved by HUD officials during the audit
            resolution process.




                                             26
Comment 7     City officials’ actions were responsive to our recommendation in that they will set
              up a separate bank account for the City’s program income.

Comment 8     City officials attributed the unexplained difference between the revolving loan
              fund balances in IDIS and the City’s bank accounts to the turnover in key staff at
              the City. However, officials’ actions were responsive to our recommendation in
              that they proposed a review of the financial records to identify the cause of the
              difference.

Comment 9     City officials’ planned actions were responsive to our recommendation in that
              they had started researching information related to developing CDBG policies and
              procedures manuals.

Comment 10 City officials expressed concern over the inclusion of the economic development
           loan awarded to Currier Plastics, Inc., in our finding as it had just closed in
           January 2013. However, the documentation related to this loan was reviewed in
           May 2013, and City officials informed us in July 2013 that no monitoring had
           been performed on this loan. Based on the Office of Planning and Economic
           Development’s lack of an economic development program manager and the lack
           of documentation in previous economic development loan files reviewed, this
           loan was considered unsupported. City officials should provide the
           documentation to the HUD Buffalo office as part of the audit resolution process.
           For the evaluation of the comments regarding “Chronic Offenders” public service
           activity and “Columbus Center” loan, see comments 12 and 13 below.

Comment 11 City officials stated that the City’s relationship with Homsite Fund, Inc., was
           different from that of a “typical subrecipient.” However, Homsite Fund, Inc., was
           provided CDBG funds for program delivery costs during the period; thus, an
           executed, written agreement needed to be in place.

Comment 12 City officials stated that a written contract extension for the Chronic Offenders
           Rehabilitation Program was obtained. This contract extension was provided to us
           during the exit conference. However, the contract extension was dated July 22,
           2013, which was well after the CDBG funds were disbursed to the subrecipient,
           Partnership for Results, Inc. Therefore, these funds were disbursed without a
           valid written contract in place, which would have made it difficult to enforce
           compliance with program requirements.

Comment 13 City officials questioned the section of the report stating that the documents
           provided for the economic development loan awarded to Columbus Center
           Development, LLC, were insufficient. The documentation provided to support
           job creation related to this loan included several employees who were hired before
           the awarding of the loan and also a significant number of employees who
           exceeded the HUD income limits. The documentation provided to support the
           expenditures made with these loan funds was a list and, thus, did not include
           invoices or copies of checks. Based on the documentation received and lack of

                                              27
              monitoring before our request for this documentation, the costs associated with
              this loan were considered unsupported. City officials provided additional
              documentation at the exit conference for the other unsupported costs included in
              this finding. However, this information will have to be reviewed by HUD Buffalo
              officials as part of the audit resolution process.

Comment 14 City officials’ actions were responsive to our recommendation in that they had
           started researching information related to developing a CDBG policies and
           procedures manuals. A final determination will be made as to the adequacy of the
           City’s CDBG policies and procedures manual by HUD officials during the audit
           resolution process.

Comment 15 City officials’ actions were responsive to our recommendation in that they
           acknowledged that the Office of Planning and Economic Development was
           understaffed, which significantly impacted the delivery and administration of the
           City’s CDBG program. They were attempting to fill some of the vacancies in the
           department to restore capacity.




                                             28