OFFICE OF AUDIT
REGION 4
ATLANTA, GA
Municipality of Carolina, PR
HOME Investment Partnerships Program
2014-AT-1007 AUGUST 8, 2014
Issue Date: August 8, 2014
Audit Report Number: 2014-AT-1007
TO: María Ortíz, Director, Community Planning and Development, San Juan Field
Office, 4ND
//signed//
FROM: Nikita N. Irons, Regional Inspector General for Audit, Atlanta Region, 4AGA
SUBJECT: The Municipality of Carolina Did Not Properly Administer Its HOME Program
Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final results of our review of the Municipality of Carolina’s HOME
Investment Partnerships 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 8M, 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 404-331-3369.
August 8, 2014
The Municipality of Carolina Did Not Properly
Administer Its HOME Program
Highlights
Audit Report 2014-AT-1007
What We Audited and Why What We Found
We audited the Municipality of The Municipality disbursed HOME funds for three
Carolina’s HOME Investment activities that showed signs of slow progress without
Partnerships Program as part of our assurance that the activities would generate the
strategic plan, based on the amount of intended benefits. In addition, it did not ensure that
HOME funds approved. The objectives the principal residency requirement was met for the
of the audit were to determine whether duration of the period of affordability for 35 home
HOME-funded activities met program buyers. As a result, HUD had no assurance that more
objectives, home buyers complied with than $8.2 million disbursed for HOME-funded
HOME’s primary residency activities met program objectives and fully provided
requirement for the duration of the the intended benefits.
period of affordability, and the
Municipality maintained a financial The Municipality’s financial management system did
management system in compliance with not properly identify the source and application of
the U.S. Department of Housing and more than $726,000 in HOME funds and did not
Urban Development’s (HUD) support the eligibility of more than $68,000 in
requirements and reported accurate and program disbursements. In addition, the Municipality
supported information in HUD’s allowed the use of more than $62,000 for ineligible
Integrated Disbursement and expenditures, did not remit to its treasury account
Information System. more than $56,000 in unexpended drawdowns, and
consistently maintained a high cash balance in its
What We Recommend bank account. As a result, HUD lacked assurance that
funds were adequately accounted for, safeguarded,
and used for authorized purposes and in accordance
We recommend that HUD (1) determine with HUD requirements.
the eligibility of more than $8.6 million
in unsupported HOME program costs The Municipality did not ensure the accuracy of
and activities that showed signs of slow commitments and other information entered into
progress, (2) deobligate and put to HUD’s information system. It did not support more
better use more than $387,000 in than $387,000 in HOME commitments and failed to
overstated obligations, (3) require the report more than $233,000 in program income
repayment of more than $62,204 in receipts in HUD’s information system. As a result,
ineligible expenditures, and (4) remit to HUD had no assurance that the Municipality met
its treasury account $56,102 in HOME program commitment and disbursement
unexpended funds. requirements.
TABLE OF CONTENTS
Background and Objectives 3
Results of Audit
Finding 1: HOME-Funded Activities Did Not Meet Program Objectives 5
Finding 2: The Municipality’s Financial Management System Did Not
Comply With HUD Requirements 10
Finding 3: The Municipality Did Not Have Adequate Controls Regarding
Information Entered Into HUD’s Information System 15
Scope and Methodology 18
Internal Controls 20
Appendixes
A. Schedule of Questioned Costs and Funds To Be Put to Better Use 22
B. Auditee Comments and OIG’s Evaluation 23
C. List of Activities Not Meeting Principal Residency Requirement 42
2
BACKGROUND AND OBJECTIVES
The HOME Investment Partnerships Program is authorized under Title II of the Cranston-
Gonzalez National Affordable Housing Act as amended. The U.S. Department of Housing and
Urban Development (HUD) allocates funds by formula to eligible State and local governments
for the purpose of increasing the supply of decent, safe, sanitary, and affordable housing to low-
and very low-income families. State and local governments that become participating
jurisdictions may use HOME funds to carry out multiyear housing strategies through acquisition,
rehabilitation, new housing construction, and tenant-based rental assistance.
Participating jurisdictions are required to commit HOME funds within 24 months and expend
them within 5 years after the last day of the month in which HUD notifies the participating
jurisdiction of HUD’s execution of the HOME agreement. 1 In addition to the HOME program’s
regulatory 5-year disbursement requirement, the National Defense Authorization Act of 1991
(Public Law 101-510, dated November 5, 1990) requires that on September 30 of the fifth year
after the period of availability for obligation of a fixed-appropriation account ends, the account
be canceled and, thereafter, not be available for obligation or expenditure for any purpose. 2
Participating jurisdictions are required to expend, for eligible costs, HOME funds drawn down
from the treasury account within 15 days. Any unexpended drawdowns must be returned to the
treasury account. HUD also requires that HOME funds in the participating jurisdiction’s local
bank account, including program income and recaptured funds, 3 be disbursed before additional
grant funds are requested.
Participating jurisdictions draw down HOME funds through HUD’s Integrated Disbursement and
Information System. HUD’s information system is also used to monitor and track HOME
commitments, program income, repayments, and recaptured funds, among other things. In
addition, HUD uses the data that the participating jurisdiction provides in HUD’s information
system to report on the performance of the HOME program to Congress and other program
stakeholders.
The Municipality of Carolina was founded in 1857. The governing system consists of an
executive and legislative body elected for 4-year terms. The Municipality is the fifth largest
local participating jurisdiction in Puerto Rico, for which HUD has approved more than $14.7
million in HOME funds during the last 11 fiscal years. HUD’s information system reflected
HOME drawdowns exceeding $19 million between January 2001 and October 2013.
1
For purposes of determining compliance with commitment and disbursement requirements, HUD considers the
sum of commitments and expenditures from the fiscal year allocation being examined and later allocations.
2
Fiscal year 2006 HOME funds that were not spent by September 30, 2013, were subject to recapture by the United
States Treasury.
3
Program income and recaptured funds may result from the resale and recapture requirements imposed by HUD and
the participating jurisdiction on the participants to ensure affordability during predetermined periods, depending on
the assistance amount provided.
3
The Municipality’s Department of Housing is responsible for administering the HOME program.
Its books and records are maintained at Amadeo Street, Carolina, PR. We selected the
Municipality of Carolina for review as part of the HUD Office of Inspector General’s (OIG)
strategic plan, based on the amount of HOME funds approved.
The objectives of the audit were to determine whether HOME-funded activities met program
objectives, home buyers complied with HOME’s primary residency requirement for the duration
of the period of affordability, and the Municipality maintained a financial management system in
compliance with the U.S. Department of Housing and Urban Development’s (HUD)
requirements and reported accurate and supported information in HUD’s Integrated
Disbursement and Information System.
4
RESULTS OF AUDIT
Finding 1: HOME-Funded Activities Did Not Meet Program Objectives
The Municipality disbursed HOME funds for three activities that showed signs of slow progress
without assurance that the activities would generate the intended benefits. In addition, it did not
ensure that the principal residency requirement was met for the duration of the period of
affordability for 35 home buyers. These deficiencies occurred because the Municipality did not
implement adequate procedures and controls to ensure that its activities met HOME objectives
and disregarded HUD’s requirements. As a result, HUD had no assurance that more than $8.2
million disbursed for HOME-funded activities met program objectives and fully provided the
intended benefits.
Slow Progress Activities
The Municipality disbursed more than $7.5 million for three activities that
reflected slow progress without assurance that the activities would provide the
intended benefits. HUD regulations at 24 CFR (Code of Federal Regulations)
92.504(a) provide that the Municipality is responsible for managing the day-to-
day operations of its HOME program, ensuring that HOME funds are used in
accordance with all program requirements and written agreements, and taking
appropriate action when performance problems arise.
Felipe Birriel housing project – The activity was initially funded on June
23, 2003, for land acquisition and construction of a 60-unit housing
project to be sold to low- and very low-income families. In 2011, the
scope of the housing project was reduced to 56 units due to an
archeological discovery at the project site. In June 2013, the Municipality
decided that only 28 of the 56 units to be constructed would be subsidized
with HOME funds.
We performed a site inspection of the housing project in September 2013
and confirmed that the project was not finished. The construction of the
housing project started in May 2013, and at the time of our inspections,
none of the HOME-subsidized units had been completed. See project
picture below.
5
Figure 1-Felipe Birriel housing project
More than 10 years had elapsed since HOME funds were committed to the
activity, and the intended benefits had not materialized. HUD’s
information system showed that the Municipality had obligated more than
$4.2 million in HOME funds, representing an investment of more than
$153,000 per unit. As of February 2014, the Municipality had disbursed
more than $3.9 million, or 92 percent of the total funding, but the project
had not been completed. Based on this condition, HUD had no assurance
that the Felipe Birriel housing project would fully meet HOME program
objectives and provide the intended benefits. Therefore, more than $3.9
million disbursed was unsupported.
Lorenzo Vizcarrondo housing project – The activity was initially funded
on July 28, 2004, for land acquisition and construction of a 33-unit
housing project to be sold to low- and very low-income families. HUD’s
information system showed that the Municipality obligated more than $3.8
million in HOME funds for this activity.
We performed a site inspection of the housing project in July 2013 and
confirmed that the construction of the project had not started. See project
picture below.
Figure 2-Lorenzo Vizcarrondo housing project site
6
More than 9 years had elapsed since HOME funds were committed to the
activity, and the intended benefits had not materialized. Based on this
condition, HUD had no assurance that the Lorenzo Vizcarrondo housing
project would fully meet HOME program objectives and provide the
intended benefits. Therefore, more than $2.8 million in HOME funds
disbursed was unsupported.
Federico Cordero housing project – The activity was initially funded on
April 20 2007, for land acquisition and construction of a 36-unit housing
project, of which 18 units were to be sold to low- and very low-income
families and subsidized with HOME funds. HUD’s information system
showed that the Municipality drew down more than $2 million in HOME
funds for this activity. According, to the Municipality’s records, the
project was completed on April 2013.
We performed a site inspection of the housing project in October 2013 and
found that 7 of the 18 HOME-subsidized units had not been sold and
occupied by low- and very low-income families. Based on this condition,
HUD had no assurance that the Federico Cordero housing project would
fully meet HOME program objectives and provide the intended benefits.
Therefore, more than $700,000 in HOME funds disbursed was
unsupported.
The Municipality did not properly manage activities to ensure compliance with
HOME program objectives. Program regulations at 24 CFR 92.2 provide that in
projects owned by a participating jurisdiction, the funds should be committed and
the project should be set up in HUD’s information system when construction can
reasonably be expected to start within 12 months of the project setup date. More
than 7 years had elapsed since HOME funds were committed to the three
activities, and the intended benefits had not materialized.
Principal Residency Requirement
Not Supported
The Municipality provided more than $675,000 in home-buyer assistance without
making appropriate monitoring efforts to ensure that home buyers met the HOME
principal residency requirement in 24 CFR 92.254(a)(3). Internal monitoring
reviews initiated in March 2012 identified 35 home buyers that did not comply
with HOME’s primary residency requirement for the duration of the period of
affordability. For example, in some cases, the owner did not reside in the unit, the
unit was leased to another person, or the unit was vacant because it had been
repossessed by the bank. Appendix C provides details on the 35 home buyers.
Contrary to requirements in 24 CFR 92.504(a), the Municipality did not ensure
that home buyers complied with all program requirements and did not take
appropriate measures when performance issues arose. In all cases, more than 1
7
year had elapsed since the Municipality became aware that the intended benefits
had not occurred without making appropriate monitoring efforts. The
Municipality’s HOME program director informed us that the Municipality was
aware of the home buyers who did not comply with the principal residency
requirement but no further action was taken because of the lack of staff and
resources. This was not an acceptable explanation for not performing an integral
component of the Municipality’s HOME program responsibilities and
disregarding HUD’s instructions and requirements.
A June 2011 HUD monitoring included a similar deficiency, and HUD urged the
Municipality to establish procedures to ensure compliance with the principal
residency and affordability requirements. However, the deficiency remained
unresolved.
Section VII of Notice CPD 12-003 provides that it is the Municipality’s
responsibility to ensure that the HOME-assisted housing qualifies as affordable
housing during the period of affordability. If the original home buyer no longer
occupies the unit as his or her principal residence, the Municipality, as the entity
responsible for the day-to-day operations of its HOME program, must repay its
investment trust account from non-Federal funds. The Municipality did not
enforce the residency requirement and did not reimburse the HOME program
when it became aware of the noncompliance. Thus, it did not adequately manage
these activities to ensure that $675,194 in HOME assistance provided met
program objectives and fully provided the intended benefits.
Conclusion
The deficiencies discussed above occurred because the Municipality did not
implement adequate procedures and controls to ensure that its activities met
HOME objectives and disregarded HUD’s requirements. As a result, HUD had
no assurance that more than $8.2 million disbursed for HOME-funded activities
met program objectives and fully provided the intended benefits.
Recommendations
We recommend that the Director of the San Juan Office of Community Planning
and Development
1A. Reevaluate the feasibility of the activities and determine the eligibility of the
$7,136,298 disbursed for the three projects with signs of slow progress. 4 The
Municipality must reimburse its HOME program from non-Federal funds if
4
Total disbursements of $7,542,737 were adjusted to consider $230,811 questioned in recommendation 2A, $68,322
questioned in recommendation 2B, $56,102 questioned in recommendation 2D, and $51,204 questioned in
recommendation 2C.
8
HUD determines the activities to have been terminated and reprogram and
put to better use any unexpended funds associated with the terminated
activities.
1B. Require the Municipality to submit all supporting documentation showing
that the 35 home buyers met the principal residency requirement for the
duration of the period of affordability or reimburse the HOME program from
non-Federal funds the $675,194 in HOME assistance provided.
1C. Recapture any shortfalls generated by the closure and deobligation of funds
associated with recommendations 1A to 1B that do not meet statutory
requirements for the timely commitment and expenditure of funds pursuant
to the National Defense Authorization Act of 1991 and/or Title II of the
Cranston-Gonzalez National Affordable Housing Act, as amended.
1D. Require the Municipality to fully implement monitoring control procedures
and properly follow up on monitoring results to ensure that assisted activities
meet program objectives and applicable affordability requirements.
9
Finding 2: The Municipality’s Financial Management System Did Not
Comply With HUD Requirements
The Municipality’s financial management system did not properly identify the source and
application of more than $726,000 in HOME funds and did not support the eligibility of more
than $68,000 in program disbursements. In addition, the Municipality allowed the use of more
than $62,000 for ineligible expenditures, did not remit to its treasury account more than $56,000
in unexpended drawdowns, and consistently maintained a high cash balance in its bank account.
These deficiencies occurred because the Municipality did not set up the appropriate accounts to
trace HOME receipts and expenditures and did not implement adequate measures to ensure
compliance with program requirements. As a result, HUD lacked assurance that funds were
adequately accounted for, safeguarded, and used for authorized purposes and in accordance with
HUD requirements.
Inadequate Accounting Records
The Municipality’s accounting records did not reflect complete and accurate
financial information on HOME program activities and did not permit the
adequate tracing of program receipts and expenditures. Regulations at 24 CFR
85.20(b) require grantees to maintain financial records that are accurate, current,
and complete and that adequately identify the source and application of funds
provided for assisted activities. However, the Municipality’s accounting records
did not comply with HUD requirements and were not adequate for the preparation
of reports. For example, the records maintained did not reflect disbursement by
grant, activity, and funding type and did not properly account for capital assets.
In two activities, the Municipality’s records reflected that it disbursed more funds
than were drawn from HUD’s system. However, the Municipality could not
explain the difference or the source of the extra funds. The general ledger
accounts did not reflect the correct balance and did not provide individual
accounts for the recording of receipts associated with program income, recaptured
funds, and repayments. These were all recorded in the same general HOME
account.
In addition, for the period July 1, 2011, to October 31, 2013, the Municipality’s
accounting records did not reflect the disposition of more than $495,000 for the
HOME program. As of October 2013, HUD’s system reflected that the
Municipality had withdrawn more than $5 million in HOME funds, but analysis
of amounts posted in the Municipality’s check register showed just over $4.5
million in disbursements. See table below.
HUD’s information system drawn amount $5,001,054
Municipality’s records disbursed amount 4,505,127
Difference $495,927
Table 1
10
The Municipality also provided conflicting information on the total amount
disbursed for HOME-funded activities. For example, the expenditures shown in
the Municipality’s records for two activities did not agree with amounts reflected
in HUD’s information system, and the Municipality could not account for
$230,811in HUD drawdowns. See table below.
Activity Activity Name Municipality’s HUD’s
number records information Difference
system
403 Lorenzo Vizcarrondo $2,611,805 $2,800,516 ($188,711)
379 Felipe Birriel $2,672,584 $2,714,684 ($42,100)
Total $5,284,389 $5,515,200 ($230,811)
Table 2
The Municipality did not maintain a financial management system that permitted
the tracing of funds to a level which ensured that such funds had not been used in
violation of the restrictions and prohibitions of applicable statutes. The
Municipality could not explain discrepancies between its records and HUD’s
information system and could not account for $726,738 drawn. As a result, HUD
lacked assurance that funds were adequately accounted for, safeguarded, and used
for eligible purposes.
Unsupported Program
Disbursements
Activity delivery costs – The Municipality charged the HOME program more
than $37,000 for project costs associated with wages of two municipal employees.
Regulations at 24 CFR 92.206(d)(6) allow disbursements for eligible project
costs, including staff and overhead costs directly related to carrying out the
project, such as services related to assisting potential owners, tenants, and home
buyers. In addition, 24 CFR 92.508(a)(3)(ii) requires participating jurisdictions to
maintain records demonstrating the source and application of funds, including
supporting documentation, in accordance with 24 CFR 85.20. However, the
Municipality did not provide supporting documentation showing the basis and
reasonableness of funds charged to HOME activities and how these costs directly
related to carrying out the activities. Therefore, HUD lacked assurance of the
reasonableness, allowability, and allocability of $37,501 in project delivery costs
charged to the HOME program on June 2013.
Project costs – The Municipality did not support the reasonableness and
allowability of more than $30,000 in HOME program funds disbursed.
Regulations at 24 CFR 92.206 and 92.508(a) allow disbursements for reasonable
and allowable costs associated with HOME-funded projects, which are supported
with records that enable HUD to determine that HOME requirements were met.
See table below for details of the unsupported disbursements.
11
Date Check number Amount Description
Aug. 19, 2004 1539 18,700 Canceled check not provided
Payment related to property appraisals for the
Lorenzo Vizcarrondo housing project; no
vendor’s invoice, evidence of service receipt,
May 07, 2004 1483 11,212 etc.
Aug. 12, 2004 1533 909 Canceled check not provided
Total $30,821
Table 3
Ineligible Program
Disbursements
The Municipality disbursed $51,204 in HOME funds for appraisal and blueprint
costs that were not related to HOME activities or for activities that were not
carried out. In addition, it improperly disbursed $11,000 in HOME funds to
reimburse a 2010 HUD finding. Therefore, the HOME program was charged with
unnecessary costs that provided no benefits and did not meet program objectives.
See the table below for details of the ineligible disbursements.
Date Check number Amount Description
Appraisals and residential inspections in relation
Apr. 3, 2009 2327 $27,664 to acquisitions that were not carried out
Aug. 10, 2012 2491 11,000 Payment of a HUD finding
Payment for title search, property survey, and
registration fees for two lots that were already
Aug. 11, 2005 1730 8,165 owned by the Municipality
Payment for title search, property survey, and
May 7, 2004 1483 7,475 registration fees unrelated to HOME project
Blueprints related to property acquisitions that
June 27, 2008 2217 7,044 were not carried out
Tax payments to the Puerto Rico Treasury
Apr. 3, 2009 2333 856 related to a property acquisition not carried out
Total $62,204
Table 4
Unexpended Drawdowns
The Municipality failed to return more than $56,000 in unexpended HOME
drawdowns. HUD regulations at 24 CFR 92.502(c)(2) state that HOME funds
drawn down from a participating jurisdiction’s treasury account must be expended
for eligible costs within 15 days. Any unexpended drawdowns must be returned
to HUD. In February 2008, the Municipality received a check totaling $56,102
12
associated with the reimbursement of previously funded HOME activities. 5 The
Municipality did not provide supporting documentation showing the disposition
of the receipts and whether the funds were returned to its treasury account as
required by HUD. As a result, HUD lacked assurance that funds were adequately
accounted for, safeguarded, and used for eligible purposes.
High Cash Balance
HUD regulations at 24 CFR 92.502(c)(3) require that HOME funds in the
participant jurisdiction’s local account be disbursed before additional grant funds
are requested. Contrary to HUD requirements, the Municipality did not disburse
HOME funds in a timely manner and consistently maintained a high cash balance
in its bank account. The Municipality’s December 2013 bank statement reflected
a cash balance of more than $158,000, and the Municipality maintained a monthly
average balance of more than $85,000 during the 18-month period ending
December 2013. See figure below.
Figure 3
Conclusion
The weaknesses discussed above occurred because the Municipality did not set up
the appropriate accounts to trace HOME receipts and expenditures and did not
implement adequate measures to ensure compliance with program requirements.
As a result, HUD lacked assurance that funds were adequately accounted for,
safeguarded, and used for authorized purposes and in accordance with HUD
requirements.
5
The State court returned the funds because the expropriation did not take place since the Municipality was already
the owner of the property.
13
Recommendations
We recommend that the Director of the San Juan Office of Community Planning
and Development require the Municipality to
2A. Submit all supporting documentation showing the eligibility and propriety of
$726,738 in unaccounted for drawdowns from its treasury account or
reimburse the HOME program from non-Federal funds.
2B. Submit all supporting documentation showing the eligibility and propriety of
$68,322 charged to the HOME program for project and administrative costs or
reimburse the program from non-Federal funds.
2C. Reimburse from non-Federal funds $62,204 in ineligible project costs.
2D. Remit to its treasury account and put to better use the reimbursed HOME
funds totaling $56,102.
2E. Develop and implement a financial management system in accordance with
HUD requirements to ensure that HOME funds drawn down can be traced to a
level which ensures that such funds have not been used in violation of the
restrictions and prohibitions of applicable statutes.
2F. Develop and implement procedures to ensure that funds are disbursed in a
timely manner.
14
Finding 3: The Municipality Did Not Have Adequate Controls
Regarding Information Entered Into HUD’s Information System
The Municipality did not ensure the accuracy of commitments and other information entered into
HUD’s information system. It did not support more than $387,000 in HOME commitments,
failed to report more than $233,000 in program income receipts, and reported other inaccurate
data in HUD’s information system. These deficiencies occurred because the Municipality did
not properly monitor the accuracy of commitments and other information reported in HUD’s
information system and was not fully aware of HUD requirements. As a result, HUD had no
assurance that the Municipality met HOME program commitment and disbursement
requirements.
Unsupported Commitments
The Municipality reported in HUD’s information system that it had committed
more than $7.4 million in HOME funds for two housing activities. However, it
did not maintain proper records to support more than $259,000 in reported
commitments. The Municipality could not provide a list of the commitments
made in relation to the two activities. The only documentation provided was a
disbursement register maintained on Excel spreadsheets with the corresponding
purchase order number. However, the register was incomplete. The table below
shows the activities with overstated commitments.
Reported Committed
commitment amount amount per
Activity in HUD’s Municipality’s Overstated
Activity name
number information system records commitment
403 Lorenzo Vizcarrondo $3,120,130 $2,931,420 $188,710
379 Felipe Birriel 4,287,287 4,216,622 70,665
Total $7,407,417 $7,148,042 $259,375
Table 5
The Municipality also failed to reprogram and put to better use more than
$128,000 in unexpended obligations associated with a terminated housing
activity. HUD’s regulations at 24 CFR 92.205(e) provide that a HOME-assisted
project that is terminated before completion, either voluntarily or otherwise,
constitutes an ineligible activity. Therefore, HOME funds invested in the project
must be repaid and unexpended funds deobligated. On July 23, 2013, the
Municipality and HUD reached an agreement for the Municipality to repay more
than $1.13 million in HOME funds associated with a terminated activity that was
not completed. More than 6 months had elapsed since the repayment plan with
HUD was signed, and as of January 24, 2014, the activity had unexpended
obligations that had not been reprogrammed and put to better use.
The Municipality did not properly monitor the accuracy of information reported
in HUD’s information system, allowing commitments to be overstated by at least
15
$387,449. The inaccurate data compromised the integrity of HUD’s information
system and the degree of reliability that could be placed on the data for
monitoring commitments and compiling national statistics on the HOME
program.
Program Income and
Recaptured Funds Not Properly
Reported
Contrary to HUD requirements, the Municipality did not report proceeds of more
than $233,000 in program income and recaptured funds in HUD’s information
system. HUD’s regulations at 24 CFR 92.503 provide that program income,
recaptured funds, and repayments received must be deposited into the
participating jurisdiction’s HOME account to carry out eligible activities. These
receipts must be reported in HUD’s information system and used before
additional HOME withdrawals are made as required at 24 CFR 92.502(c)(3).
The Municipality’s records showed that it received more than $1.3 million in
program income and recaptured funds from July 1, 2001, through June 30, 2013.
However, as of June 30, 2013, the Municipality had reported only $1.07 million
in HUD’s information system, and $233,137 remained unreported. Therefore, the
Municipality did not report program income and recaptured funds in HUD’s
information system in a timely manner. The Municipality did not properly
monitor the accuracy of the program income and recaptured funds reported in
HUD’s information system, resulting in an understatement of at least $233,137 in
program receipts.
Other Deficiencies
Inaccurate commitment dates – In two activities, the Municipality reported in
HUD’s information system the commitment of more than $7.4 million in HOME
funds between 166 and 362 days after the grant agreement was executed.
Therefore, the actual commitment data were reported in HUD’s information
system with significant delays and inaccurate commitment dates. In addition,
neither contract mentioned the projects by name. As a result, the requirement in
24 CFR 92.2 for an identifiable project at the time of initial commitment in
HUD’s information system was unsupported.
Inaccurate number of housing units – In two activities, the Municipality did not
report accurate activity descriptions in HUD’s information system. The
Municipality reported the construction of 100 total units for a project when the
project had only 56 units. For another project, the description stated that the
project would consist of 20 units, when the documentation indicated that there
were 33 units.
16
Undated signatures in agreements – For 12 written agreements reviewed, the
Municipality did not implement adequate controls to ensure compliance with
Section VII of Notice CPD 07-06. This notice required that signatures of all
parties be dated to show the execution date. A Municipality official informed us
that he was unaware of this requirement. As a result, HUD had no assurance of
the actual commitment date and the Municipality’s compliance with HUD’s
commitment requirements.
Conclusion
These deficiencies occurred because the Municipality did not properly monitor
the accuracy of commitments and other information reported in HUD’s
information system and was not fully aware of HUD requirements. The
inaccurate data compromised the integrity of HUD’s information system and the
degree of reliability that could be placed on the data for monitoring commitments
and compiling national statistics on the HOME program. As a result, HUD had
no assurance that the Municipality met HOME program commitment and
disbursement requirements.
Recommendations
We recommend that the Director of the San Juan Office of Community Planning
and Development require the Municipality to
3A. Deobligate, reprogram, and put to better use $387,449 in overstated
commitments.
3B. Correct any inaccurate information in HUD’s information system, including
but not limited to the receipt of $233,137 associated with program income
and recaptured funds not reported and inaccurate commitment amounts and
dates.
3C. Develop and implement controls and procedures to ensure that only valid
commitments are reported to HUD.
3D. Develop and implement procedures to ensure that program income and
recaptured funds are properly reported.
3E. Develop and implement procedures to ensure that accurate information on
HOME-funded activities is reported in HUD’s information system.
3F. Develop and implement procedures to ensure that grant agreements are
properly signed and dated.
17
SCOPE AND METHODOLOGY
The objectives of the audit were to determine whether HOME-funded activities met program
objectives, home buyers complied with HOME’s primary residency requirement for the duration
of the period of affordability, and the Municipality maintained a financial management system in
compliance with the U.S. Department of Housing and Urban Development’s (HUD)
requirements and reported accurate and supported information in HUD’s Integrated
Disbursement and Information System.
To accomplish our objectives, we
• Reviewed applicable HUD laws, regulations, and other HUD program
requirements;
• Interviewed HUD and Municipality officials;
• Obtained an understanding of and reviewed the Municipality’s controls and
procedures as they related to our objectives;
• Reviewed monitoring internal reviews and independent public accountant and
HUD’s information system reports; and
• Reviewed and traced information reported in HUD’s information system to the
Municipality’s records, including program income and disbursement records.
HUD’s information system reflected that the Municipality had six open HOME-funded activities
with commitments of more than $16.5 million as of October 31, 2013. We selected and
reviewed five activities with commitments totaling more than $15.3 million, based on funding
amounts and indications of slow progress. We reviewed the five activities to determine the
status of activities, for which HOME funds had been disbursed but which reflected slow
progress.
The Municipality conducted six monitoring reviews, between March and June 2012. The
reviews identified 35 home buyers who did not comply with HUD’s principal residency
requirement for the duration of the period of affordability. For these home buyers, the
Municipality provided $675,194 in HOME program assistance. We reviewed the 35 home
buyers to determine whether the Municipality made proper monitoring efforts to ensure that
activities met program objectives and fully provided the intended benefits.
The Municipality’s accounting records reflected that it disbursed more than $4.5 million in
HOME funds between July 1, 2011, and October 31, 2013. We selected and reviewed
disbursements with amounts greater than $100,000 and based on the type of disbursement or
vendor. The sample resulted in 30 disbursements totaling more than $3.7 million. We reviewed
18
179 additional disbursements totaling more than $4.7 million that were made between January
2003 and December 2010, based on deficiencies noted regarding the allocation of the charges. 6
More than $8.5 million in HOME program expenditures was reviewed to determine whether
funds were used for supported and eligible efforts.
We also reviewed the Municipality’s HOME program bank statements between July 2012 and
December 2013 to determine whether HOME funds were disbursed within HUD’s timeframes.
HUD’s information system reflected that the Municipality had committed more than $14.4
million in HOME funds for six activities as of June 27, 2013. We selected for review two
activities with commitments totaling more than $6.3 million. We reviewed these activities to
determine whether the information reported to HUD, including commitments, was accurate and
supported.
The Municipality’s records showed that between July 1, 2001, and June 30, 2013, it received
more than $1.3 million in program income and recaptured funds. We reviewed the
Municipality’s records associated with the program income receipts to determine whether the
funds were properly reported in HUD’s information system.
To achieve our audit objectives, we relied in part on computer-processed data contained in
HUD’s information system. Although we did not perform a detailed assessment of the reliability
of the data, we performed a minimal level of testing and found the data adequate for our
purposes. We did not rely on computer-processed data contained in the Municipality’s database,
nor were the data used to materially support our audit findings, conclusions, and
recommendations. We did not select 100 percent of the items for testing as the selections made
provided sufficient evidence for the findings presented. The results of the audit apply only to
items selected for review and cannot be projected to the universe or population.
The audit generally covered the period July 1, 2011, through April 30, 2013. However, due to
the issues associated with unrecorded program income and activities with signs of slow progress
for which more than 7 years had elapsed since its initial funding, we expanded our scope to cover
July 1, 2001, through December 31, 2013. We conducted our fieldwork from June 2013 through
February 2014 at the Municipality’s offices in Carolina, PR.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.
6
HUD’s information system reflected more than $13.8 million in drawdowns between January 2003 and December
2010.
19
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 provide reasonable assurance that a program meets its
objectives, while considering cost effectiveness and efficiency.
• Relevance and reliability of information – Policies and procedures that
management has implemented to reasonably ensure that operational and
financial information used for decision making and reporting externally is
relevant, reliable, and fairly disclosed in reports.
• Compliance with laws and regulations – Policies and procedures that
management has implemented to reasonably ensure that program
implementation is consistent with laws and regulations.
• Safeguarding of assets – Policies and procedures that management has
implemented to reasonably prevent and promptly detect unauthorized
acquisition, use, or disposition of assets and resources.
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
20
financial or performance information, or (3) violations of laws and regulations on a
timely basis.
Significant Deficiencies
Based on our review, we believe that the following items are significant deficiencies:
• The Municipality did not implement adequate procedures and controls to
ensure that activities provided the intended benefits and home buyers met
affordability requirements (see finding 1).
• The Municipality did not develop and implement a financial management
system that complied with HUD requirements (see finding 2).
• The Municipality did not have adequate controls to ensure that accurate
information was reported to HUD (see finding 3).
21
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Funds to be put to
number Ineligible 1/ Unsupported 2/ better use 3/
1A $7,136,298
1B 675,194
2A 726,738
2B 68,322
2C $62,204
2D $56,102
3A ______ _________ 387,449
Total $62,204 $8,606,552 $443,551
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/ Recommendations that funds be put to better use are estimates of amounts that could be
used more efficiently if an 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
instance, if the Municipality implements recommendations 2D and 3A, funds will be
available for other eligible activities consistent with HOME requirements.
22
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
23
24
Comment 1
Comment 2
25
Comment 3
26
27
Comment 4
28
Comment 5
29
30
Comment 6
31
Comment 7
32
Comment 8
33
Comment 9
Comment 10
Comment 11
34
Comment 12
Comment 13
Comment 14
35
Comment 14
Comment 14
Comment 14
36
Comment 14
Comment 14
Comment 14
37
OIG Evaluation of Auditee Comments
Comment 1 The Municipality stated that the HOME projects appeared to be progressing at a
slow pace; however, this was the typical pace of similar projects in Puerto Rico
and the United States. In addition, it stated that the Municipality was in
compliance with the applicable HOME program regulations at the time the
projects were planned.
We do not agree with the Municipality since more than 9 years had elapsed since
HOME funds were committed, the intended benefits had not materialized, and
HOME funded activities had not met program objectives. Program regulations at
24 CFR 92.2 provide that in projects owned by a participating jurisdiction, the
funds should be committed and the project should be set up in HUD’s information
system when construction can reasonably be expected to start within 12 months of
the project setup date. The Municipality did not provide additional
documentation showing that projects were in compliance with HOME regulations.
Comment 2 Federico Cordero project - The Municipality indicated that 16 of the 18 HOME-
assisted units were occupied and that it provided copies of mortgages and IDIS
screens to support its compliance. In addition, it considers the housing project to
fully meet HOME program objectives and provide its intended benefits.
Contrary to the Municipality statement, the Municipality did not provide the
mortgages for the 16 units, instead copies of grant agreements were provided.
The Municipality also did not provide additional documentation to demonstrate
that the housing units questioned were occupied by eligible low- and very-low
income families. The Municipality must submit appropriate evidence to HUD in
order for HUD to make a feasibility determination.
Comment 3 Felipe Birriel project - The Municipality indicated that it considers the housing
project to be feasible, that all project costs are eligible, and that the project should
be completed by July 31, 2014. In addition, that it prepared a marketing plan and
that full occupancy is expected during 2014.
The Municipality must submit the appropriate evidence to HUD demonstrating
the feasibility of the project.
Comment 4 Lorenzo Vizcarrondo project - The Municipality stated that the reasons for the
delays were the archeological discoveries at the project site. The Municipality
indicated that it has entered into a memorandum of understanding with the Puerto
Rico State Historic Preservation Society that will permit the construction of the
project. It considers the project to be feasible despite the substantial delays. The
Municipality expects to commence construction of the project by July 2015 and
complete the project by July 2017.
38
The Municipality must submit the appropriate evidence to HUD demonstrating
the feasibility of the project.
Comment 5 The Municipality stated that due to changes in program staff it was unable to
follow-up and verify the home buyers’ occupancy. In addition, it stated that
during the audit it revisited projects and obtained documentation showing that
HOME participants were occupying the units in compliance with HUD
requirements. The Municipality stated that any cases that did not comply would
be referred to the legal division for corresponding action.
We reviewed the additional documentation provided and determined it did not
properly support the principal residency requirement. For example, the mailing
address for some of the utility bills provided as support was different from the
address of the HOME assisted property without any explanation. Since the
information was conflicting, we did not revise the audit report or
recommendations.
Comment 6 The Municipality claimed that the requirements of the National Defense
Authorization Act of 1991 did not apply to three projects and that three projects
were in compliance with such requirements. The Municipality indicated that
HUD’s system uses a First-In First-Out (FIFO) method for committing and
drawing funds and based on this method, it had complied with the timely
disbursement of funds. It also evaluated HOME expiring funds reports and
determined none of the projects reviewed had expiring balances listed in the
report.
Contrary to the Municipality statement, the FIFO method and the HOME expiring
reports have no bearing on the eligibility of commitments and expenditures. The
compliance with the requirements of the National Defense Authorization Act is
not based on the year when the HOME project’s funds were issued. The
determining factor is whether the projects had funds committed from grants dated
2002 and after. All projects under recommendations 1A and 1B included such
commitments. The Municipality did not provide additional support regarding the
eligibility of costs in recommendations 1A and 1B. On a case by case basis, HUD
should determine whether the closure and deobligation of funds associated with
recommendations 1A and 1B would generate any shortfalls related to the statutory
requirements of the National Defense Authorization Act of 1991 and/or Title II of
the Cranston-Gonzalez National Affordable Housing Act, and recapture the funds
as appropriate.
Comment 7 The Municipality stated that it had revised its monitoring procedures to review the
affordability and principal residency requirements for homeownership activities.
OIG did not evaluate the new procedures. HUD must ensure the adequacy and
proper implementation of the new procedures. OIG will evaluate the adequacy of
procedures with HUD during the audit resolution process.
39
Comment 8 The Municipality provided additional documentation related to the costs
questioned in recommendation 2A.
We reviewed the additional documentation and determined it was sufficient to
support the eligibility of $672,817. As a result, we revised the finding and
renumbered this recommendation as 2B.
Comment 9 The Municipality stated that, based on Notice CPD 06-01, it charged wages of
two municipal employees as project related soft costs that were eligible. It
contended that no time allocation was necessary because the staff was only
performing duties related to the HOME program, and because the notice did not
require it.
The HOME program allows disbursements for eligible project costs, including
staff and overhead costs directly related to carrying out the project, such as
services related to assisting potential owners, tenants, and home buyers. In
addition, all costs to be allowable must be reasonable and supported with records
that enable HUD to determine its compliance with all program requirements. The
Municipality did not provided additional documentation to show the eligibility,
propriety, the basis used, and reasonableness of wages charged as activity
delivery costs. Therefore, we did not change the audit report and the
recommendations.
Comment 10 The Municipality claimed that its accounting records are accurate, current, and
complete. It believed that auditors may have used revised vouchers in its
calculation of HOME program disbursements. The Municipality stated that it will
perform a review of all drawdowns made between July 1, 2011, and October 31,
2013. It will provide HUD with the results of such review by October 31, 2014.
We do not concur with the Municipality’s claim that the accounting records were
accurate, current, and complete. As discussed in the report, the records did not
reflect disbursements by grant activity and funding type and did not properly
account for capital assets. In addition, the general ledger accounts did not reflect
the correct balance and did not provide individual accounts for the recording of
receipts associated with program income, recaptured funds, and repayments. The
Municipality did not provide additional documentation to demonstrate the
propriety of the disbursements or that its accounting records were accurate,
current, and complete.
Comment 11 The Municipality stated that it reimbursed the $317,701 and that it provided
evidence demonstrating it complied with HOME program requirements.
We reviewed the documentation provided and the Municipality did support the
return of $261,599 to its treasury account as required by HUD. The Municipality
did not provide evidence that the remaining $56,102 was returned as claimed. As
a result, we revised the finding and recommendation 2C accordingly. Based on
the changes made, the previous Recommendation 2C was moved to
40
Recommendation 2D, and vice versa.
Comment 12 The Municipality indicated that HUD does not require that reimbursed funds be
returned to the treasury account and requested the elimination of recommendation
2C.
Contrary to the Municipality’s claim, any unexpended drawdowns must be
returned. HUD regulations at 24 CFR 92.502(c)(2) state that HOME funds drawn
down from a participating jurisdiction’s treasury account must be expended for
eligible costs within 15 days and any unexpended drawdowns must be returned to
HUD. Memorandum entitled “Repayment of HOME Funds Used for Ineligible
Activities or Ineligible Costs and Return of HOME Funds to the Treasury
Account”, dated April 5, 2011, further clarifies that funds drawn down from the
HOME Investment Trust Fund Treasury account in advance of need or in excess
of need be returned to the Treasury account. Once HOME funds drawn down are
returned, the participating jurisdiction must revise applicable vouchers to
accurately represent actual eligible HOME disbursement for activities in HUD’s
system. As a result, the recommendation was not eliminated.
Comment 13 The Municipality stated that OIG’s statement that $11,000 in HOME funds was
used to reimburse a 2010 HUD monitoring finding was incorrect and
unsupported. It claimed that local funds were transferred on March 30, 2012, to
the HOME account and that these funds were used to pay the monitoring finding.
Regarding the $51,204 in ineligible disbursements, the Municipality stated that it
will set aside in the next year’s local budget the funds and reimburse the HOME
program.
The documentation submitted by the Municipality did not support their claim that
the reimbursement was made with local funds. In addition, the amount
transferred did not agree with the $11,000 questioned. The Municipality did not
provide any additional documentation explaining the inconsistencies. As a result
we did not change the audit finding and recommendations. HUD should require
the immediate reimbursement of the $62,204 improperly disbursed.
Comment 14 The Municipality stated that it implemented a new financial management system
and that it developed and implemented procedures to ensure funds are disbursed
in a timely manner. It also stated that it had developed procedures to facilitate the
management of program income and that all program income will be deposited in
a separate bank account.
HUD must ensure the Municipality properly monitors the accuracy of all
information reported in HUD’s information system and correct any inaccuracies.
OIG will evaluate the adequacy of procedures with HUD during the audit
resolution process.
41
Appendix C
LIST OF ACTIVITIES NOT MEETING PRINCIPAL
RESIDENCY REQUIREMENT
Activity Unit
number Housing project number Amount Description
288 San Ciprian II 107 $24,704 Unit was repossessed by bank.
288 San Ciprian II 109 $21,704 Municipality could not verify occupancy.
288 San Ciprian II 112 $16,704 Municipality could not verify occupancy.
288 San Ciprian II 114 $16,704 Municipality could not verify occupancy.
288 San Ciprian II 203 $16,704 Municipality could not verify occupancy.
288 San Ciprian II 210 $21,704 Municipality could not verify occupancy.
288 San Ciprian II 211 $21,704 Municipality could not verify occupancy.
288 San Ciprian II 214 $21,704 Municipality could not verify occupancy.
288 San Ciprian II 215 $16,704 Municipality could not verify occupancy.
288 San Ciprian II 305 $31,704 Municipality could not verify occupancy.
288 San Ciprian II 310 $21,704 Municipality could not verify occupancy.
288 San Ciprian II 313 $31,704 Municipality could not verify occupancy.
288 San Ciprian II 314 $31,704 Municipality could not verify occupancy.
288 San Ciprian II 315 $16,704 Municipality could not verify occupancy.
288 San Ciprian II 316 $16,704 Municipality could not verify occupancy.
288 San Ciprian II 317 $24,704 Municipality could not verify occupancy.
288 San Ciprian III 111 $28,907 Participant did not live in the unit.
288 San Ciprian III 304 $28,907 Participant did not live in the unit.
288 San Ciprian III 309 $28,907 Unit was vacant.
288 San Ciprian III 314 $28,907 Unit was leased.
288 San Ciprian III 318 $39,407 Unit was leased.
351 Balcones de Carolina III A3-301 $23,290 Participant did not live in the unit.
351 Balcones de Carolina III B3-402 $10,571 Municipality could not verify occupancy.
351 Balcones de Carolina III C3-402 $10,571 Participant did not live in the unit.
351 Balcones de Carolina III D3-101 $10,571 Participant did not live in the unit.
351 Balcones de Carolina III D3-201 $9,298 Municipality could not verify occupancy.
351 Balcones de Carolina III D3-401 $9,298 Participant did not live in the unit.
351 Balcones de Carolina III E3-401 $10,571 Unit was vacant.
351 Balcones de Carolina III F3-302 $10,571 Participant did not live in the unit.
351 Balcones de Carolina III I3-302 $9,298 Participant did not live in the unit.
351 Balcones de Carolina III I3-401 $10,571 Participant did not live in the unit.
351 Balcones de Carolina III K3-302 $10,399 Participant did not live in the unit.
351 Balcones de Carolina III 03-202 $9,298 Participant did not live in the unit.
351 Balcones de Carolina III 03-301 $23,290 Participant did not live in the unit.
351 Balcones de Carolina III 03-302 $9,298 Participant did not live in the unit.
Total $675,194
42
The Municipality of Carolina Did Not Properly Administer Its HOME Program
Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-08-08.
Below is a raw (and likely hideous) rendition of the original report. (PDF)