oversight

The City of Chicago, IL, Lacked Adequate Controls Over Its HOME Investment Partnerships Program-Funded Rental New Construction Projects and Program Income

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-09-30.

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

OFFICE OF AUDIT
REGION 5
CHICAGO, IL




                  City of Chicago, IL

         HOME Investment Partnerships Program




2014-CH-1011                            SEPTEMBER 30, 2014
                                                        Issue Date: September 30, 2014

                                                        Audit Report Number: 2014-CH-1011


TO:          Ray E. Willis, Director of Community Planning and Development, 5AD

             //signed//
FROM:        Kelly Anderson, Regional Inspector General for Audit, Chicago Region, 5AGA

SUBJECT: The City of Chicago, IL, Lacked Adequate Controls Over Its HOME Investment
         Partnerships Program-Funded Rental New Construction Projects and Program
         Income


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of the City of Chicago’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
(312) 353-7832.




                                                 
                                             September 30, 2014
                                             The City of Chicago, IL, Lacked Adequate Controls Over
                                             Its HOME Investment Partnerships Program-Funded
                                             Rental New Construction Projects and Program Income



Highlights
Audit Report 2014-CH-1011


    What We Audited and Why                   What We Found

We audited the City of Chicago’s             Leases between the owners and the households for
HOME Investment Partnerships                 Program-funded units in two projects included
Program. We selected the City’s              language prohibited by HUD’s regulations and the
Program based upon our analysis of risk      City’s regulatory agreements with the owners. As a
factors related to Program grantees in       result, the City drew down nearly $7.4 million in
Region 5’s1 jurisdiction. Our objectives     Program funds for two projects in which the rights of
were to determine whether the City           73 households were not protected.
complied with HUD’s requirements
regarding (1) leases between rental new      The City did not always follow HUD’s requirements in
construction projects’ owners and            its use and reporting of Program income. It (1)
households, (2) use and reporting of         inappropriately drew down nearly $25.2 million in
Program income, and (3) monitoring of        Program funds from its HOME investment trust fund
projects.                                    treasury account from January 1, 2012, through
                                             December 31, 2013, when it had available Program
    What We Recommend                        income, (2) inappropriately used Program income, (3)
                                             did not report more than $4.3 million in Program
                                             income in HUD’s Integrated Disbursement and
We recommend that the Director of            Information System in a timely manner, and (4) did not
HUD’s Chicago Office of Community            deposit Program income into its HOME investment
Planning and Development require the         trust fund local account. As a result, (1) the U.S.
City to (1) ensure that leases between       Treasury paid more than $30,000 in unnecessary
the owners and the households for            interest on the Program funds that the City drew down
Program-funded units do not include          from its treasury account when Program income was
prohibited language; (2) reimburse its       available, (2) the City had more than $9,000 less in
Program or HUD, for transmission to          Program income to be used for eligible Program
the U.S. Department of the Treasury,         activities, and (3) HUD and the City lacked assurance
from non-Federal funds; (3) ensure           regarding the amount of Program income available to
inspected units were Program-assisted        the City.
units; and (4) implement adequate
procedures and controls to address the       The City did not always conduct required annual
findings cited in this audit report.         compliance monitoring of projects in calendar year
                                             2013. As a result, HUD and the City lacked assurance
                                             that households were (1) living in units that met
1
 Region 5 includes the States of Illinois,
                                             HUD’s property standards requirements, (2) income
Indiana, Michigan, Minnesota, Ohio, and      eligible, and (3) not paying excessive rents.
Wisconsin.


                                                    
                             TABLE OF CONTENTS

Background and Objectives                                                             3

Results of Audit
        Finding 1: Leases Between Rental New Construction Projects’ Owners and
                   Households Included Prohibited Language                            4

        Finding 2: The City Did Not Always Use and Report Program Income in Accordance
                   With HUD’s Requirements                                             7

        Finding 3: The City Did Not Always Conduct Required Annual Compliance
                   Monitoring of Rental New Construction Projects                    10

Scope and Methodology                                                                13

Internal Controls                                                                    15

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use               17
   B.   Auditee Comments and OIG’s Evaluation                                        18
   C.   HUD’s Requirements and the City’s Regulatory Agreements                      23
   D.   Schedule of Program Income That Was Not Reported in a Timely Manner          25




                                             2
                     BACKGROUND AND OBJECTIVES

The Program. Authorized under Title II of the Cranston-Gonzalez National Affordable Housing
Act, as amended, the HOME Investment Partnerships Program is funded for the purpose of
increasing the supply of affordable standard rental housing; improving substandard housing for
existing homeowners; assisting new home buyers through acquisition, construction, and
rehabilitation of housing; and providing tenant-based rental assistance.

The City. The City of Chicago is governed by a mayor and 50 alderman elected to 4-year terms.
The City’s Office of Budget and Management manages, monitors, and enforces the grants
management processes for the City’s Program. The City’s Department of Planning and
Development administers the City’s Program. The mission of the Department is to promote the
comprehensive growth and well-being of the City and its neighborhoods. The City’s Program
records are located at 121 North LaSalle Street, 10th Floor, Chicago, IL.

The following table shows the amount of Program funds the U.S. Department of Housing and
Urban Development (HUD) awarded the City for Program years 2009 through 2013.

                                  Program       Program
                                    year          funds
                                    2009        $32,210,131
                                    2010         32,135,117
                                    2011         28,453,829
                                    2012         17,226,156
                                    2013         16,059,598
                                   Totals      $126,084,831

Our objectives were to determine whether the City complied with HUD’s requirements regarding
(1) leases between rental new construction projects’ owners and households, (2) use and
reporting of Program income, and (3) monitoring of projects.




                                              3
                                       RESULTS OF AUDIT

Finding 1: Leases Between Rental New Construction Projects’ Owners
            and Households Included Prohibited Language
Leases between rental new construction projects’ owners and the households for Program-funded
units in two projects included language prohibited by HUD’s regulations and the City’s
regulatory agreements with the owners. This weakness occurred because the City lacked
adequate procedures and controls to ensure that the leases did not contain prohibited language.
As a result, the City drew down nearly $7.4 million in Program funds for two projects in which
the rights of 73 households were not protected.


    Projects’ Leases Included
    Prohibited Language

                   We reviewed the leases between the projects’ owners and the households for 23
                   of the 794 Program-assisted units from the 14 projects that the City reported as
                   complete in HUD’s Integrated Disbursement and Information System2 from
                   January 1, 2012, through December 31, 2013. The City drew down nearly $55
                   million in Program funds for the 14 projects.

                   The leases between the owners and the households for two units in two projects
                   (numbers 8806 and 10289) included language prohibited by HUD’s regulations at
                   24 CFR (Code of Federal Regulations) 92.253(b)(3) and the City’s regulatory
                   agreements with the owners. Project numbers 8806 and 10289 consisted of 40
                   and 33 Program-assisted units, respectively. Therefore, we reviewed the leases
                   for an additional 10 units in each of the two projects. These leases also contained
                   prohibited language. Property managers for each of the projects stated that all of
                   the leases for the Program-assisted units included the same prohibited language.

                   The leases for the units in project number 8806 contained the following prohibited
                   language.




2
    HUD’s System is the drawdown and reporting system for the Program.


                                                        4
           The leases for the units in project number 10289 contained the following
           prohibited language.




           The City drew down nearly $7.4 million in Program funds for the two projects
           ($4,913,961 for project number 8806 and $2,448,226 for project number 10289).

           In May 2014 and as a result of our audit, the City had the owner of project
           number 8806 execute lease addenda that removed the prohibited language from
           the leases for 34 of the 40 units in the project. The City also provided a new lease
           for an additional unit that did not contain prohibited language. For the remaining
           five units, three of the units were vacant, and the owner was involved in ongoing
           eviction proceedings with the households in two units. Further, in April and May
           2014, the City had the owner of project number 10289 execute lease addenda that
           removed the prohibited language from the leases for the 33 units in the project.

The City Lacked Adequate
Procedures and Controls

           The weakness described above occurred because the City lacked adequate
           procedures and controls to ensure that the leases between the projects’ owners and
           the households did not contain language prohibited by HUD’s regulations and the
           City’s regulatory agreements with the owners. The assistant commissioner of the
           Monitoring and Compliance Division in the City’s Department of Planning and
           Development stated that although the City did not review projects’ standard leases
           before the projects were completed and units were leased, the Division’s staff
           should have reviewed the projects’ leases during the City’s required annual
           compliance monitoring. However, the staff did not review the leases because the
           staff assumed that the owners used leases that complied with HUD’s regulations
           and the regulatory agreements. Further, the Division’s long-term Program
           monitoring requirements and procedures required owners to submit leases for new
           households only and did not specify that the Division’s staff should review the
           leases for prohibited language.



                                            5
Conclusion

             The City lacked adequate procedures and controls to ensure that the leases
             between the projects’ owners and the households did not contain language
             prohibited by HUD’s regulations and the City’s regulatory agreements with the
             owners. As a result, the City drew down nearly $7.4 million in Program funds for
             two projects in which the rights of 73 households were not protected due to
             prohibited language in the leases.

Recommendations

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

             1A. Ensure that over the next year, the owner of project number 8806 does not
                 execute leases that include prohibited language for the 38 units in which (1)
                 the owner executed lease addenda for 34 units that removed the prohibited
                 language from the current leases, (2) the owner executed a new lease for a
                 unit that did not contain prohibited language, or (3) three units were vacant.
                 This measure will ensure that $4,668,263 ($4,913,961 / 40 units * 38 units)
                 in Program funds drawn down for the 38 units in the project was used in
                 accordance with HUD’s regulations and the City’s regulatory agreement
                 with the owner.

             1B. Ensure that for the two Program-assisted units in project number 8806 in
                 which the owner is involved in ongoing eviction proceedings with the
                 households, (1) the leases between the owner and the households are
                 amended to remove the prohibited language if the households are not
                 evicted, (2) the owner executes leases that do not include prohibited
                 language with new households if the households are evicted, or (3)
                 reimburse its Program from non-Federal funds for the $245,698 ($4,913,961
                 / 40 units * two units) in Program funds drawn down for the two units as
                 appropriate.

             1C. Ensure that over the next year, the owner of project number 10289 does not
                 execute leases that include prohibited language for the 33 units in which the
                 owner executed lease addenda that removed the prohibited language from
                 the current leases. This measure will ensure that $2,448,226 in Program
                 funds drawn down for the 33 units in the project was used in accordance
                 with HUD’s regulations and the City’s regulatory agreement with the owner.

             1D. Implement adequate procedures and controls to ensure that leases associated
                 with Program-assisted units are reviewed to ensure that the leases do not
                 contain prohibited language.



                                              6
Finding 2: The City Did Not Always Use and Report Program Income
              in Accordance With HUD’s Requirements
The City did not always follow HUD’s requirements in its use and reporting of Program income.
It (1) inappropriately drew down nearly $25.2 million in Program funds from its HOME
investment trust fund treasury account from January 1, 2012, through December 31, 2013, when
it had available Program income, (2) inappropriately used Program income, (3) did not report
more than $4.3 million in Program income in HUD’s System in a timely manner, and (4) did not
deposit Program income into its HOME investment trust fund local account. These weaknesses
occurred because the City lacked adequate procedures and controls to ensure that it used and
reported Program income in accordance with HUD’s requirements. As a result, (1) the U.S.
Department of the Treasury paid more than $30,000 in unnecessary interest on the Program
funds that the City drew down from its treasury account when Program income was available, (2)
the City had more than $9,000 less in Program income to be used for eligible Program activities,
and (3) HUD and the City lacked assurance regarding the amount of Program income available
to the City.


 The City Inappropriately Drew
 Down Program Funds When It
 Had Program Income

              Contrary to regulations at 24 CFR 92.502(c)(3), the City did not always properly
              use income generated from its Program. The City inappropriately made 60
              drawdowns from its treasury account from January 1, 2012, through December
              31, 2013, when it had available Program income. The drawdowns totaled nearly
              $25.2 million in Program funds.

 The City Inappropriately Used
 Program Income

              The City did not use Program income in accordance with regulations at 24 CFR
              92.503(a)(1). The City received $9,200 in Program income in April 2013.
              However, in July 2013, it inappropriately reported the Program income in HUD’s
              System as Community Development Block Grant program. In September 2013,
              the City used this Program income for the expenses of two Block Grant-funded
              activities. The City’s assistant comptroller in the Department of Finance’s Grants
              and Project Accounting Division stated that the activities were not eligible under
              the Program.




                                               7
The City’s Reporting of
Program Income to HUD Was
Not Timely

             Contrary to HUD’s Office of Community Planning and Development Notice 97-
             9, the City did not report Program income in HUD’s System in a timely manner.
             The City reported in HUD’s System that it received more than $4.3 million in
             Program income from January 1, 2012, through December 31, 2013, through 24
             entries. However, it exceeded HUD’s 30-day reporting requirement for all of the
             entries by 10 to 159 days. The table in appendix D of this report shows the month
             in which the City earned Program income, the amount of Program income earned,
             the date on which the City reported the Program income in HUD’s System, and
             the number of days it exceeded HUD’s 30-day requirement.

             Further, the City did not deposit Program income into its HOME investment trust
             fund local account as required by regulations at 24 CFR 92.503(a)(1). Although
             the City deposited Program funds drawn down from its treasury account into its
             local account, it deposited income generated from its Program into the City’s
             Grants and Project Accounting Division’s bank account and tracked the Program
             income through its accounting system.

The City Lacked Adequate
Procedures and Controls

             The weaknesses described above occurred because the City lacked adequate
             procedures and controls to ensure that it used and reported Program income in
             accordance with HUD’s requirements. The assistant comptroller in the Grants
             and Project Accounting Division stated that the City mistakenly drew down
             Program funds from the treasury account rather than using available Program
             income due to staff oversight. The assistant comptroller also stated that an
             accountant, who was responsible for reporting Program income in HUD’s System,
             and the supervisor of accounting in the Division had other responsibilities.
             Therefore, ensuring that Program income was reported in HUD’s System in a
             timely manner was not their main focus. The accountant said that there were
             times when he got behind and deposited several months of Program income at one
             time rather than monthly.

Conclusion

             The City lacked adequate procedures and controls to ensure that it used and
             reported Program income in accordance with HUD’s requirements. As a result,
             (1) the U.S. Department of the Treasury’s paid $30,225 in unnecessary interest on
             the nearly $25.2 million in Program funds that the City drew down from its




                                             8
                   treasury account when Program income was available,3 (2) the City had more than
                   $9,000 less in Program income to be used for eligible Program activities, and (3)
                   HUD and the City lacked assurance regarding the amount of Program income
                   available to the City.

    Recommendations

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

                   2A. Reimburse HUD, for transmission to the U.S. Treasury, $30,225 from non-
                       Federal funds for the unnecessary interest the U.S. Department of the
                       Treasury paid on the Program funds that the City drew down from its
                       treasury account when Program income was available.

                   2B. Reimburse its Program from non-Federal funds $9,200 for the Program
                       income inappropriately used for two Block Grant activities.

                   2C. Implement adequate procedures and controls to ensure that it (1) uses
                       available Program income for eligible housing activities before it draws
                       down Program funds from its treasury account, (2) reports Program income
                       in HUD’s System in a timely manner, and (3) deposits Program income into
                       its local account.




3
    See scope and methodology.


                                                   9
Finding 3: The City Did Not Always Conduct Required Annual
     Compliance Monitoring of Rental New Construction Projects
The City did not always conduct required annual compliance monitoring of Program-funded
rental new construction projects in calendar year 2013. This weakness occurred because the City
lacked adequate procedures and controls for conducting annual compliance monitoring of
projects as required by HUD’s regulations. As a result, HUD and the City lacked assurance that
households were (1) living in units that met HUD’s property standards requirements, (2) income
eligible, and (3) not paying excessive rents.


 The City Did Not Always
 Conduct Required Annual
 Compliance Monitoring of
 Projects

              We reviewed the City’s annual compliance monitoring for the six Program-
              funded projects that the City reported as completed in HUD’s System from
              January 1 through December 31, 2012. The City drew down more than $26.3
              million in Program funds for the six projects. Each project contained more than
              25 units.

              The City did not always conduct annual compliance monitoring of projects from
              January 1 through December 31, 2013, as required by regulations at 24 CFR
              92.504(d)(1). It did not perform annual onsite inspections of Program-assisted
              units for project numbers 8806, 10288, 10289, and 10295 to determine whether
              the units complied with the property standards requirements of 24 CFR 92.251.
              Further, contrary to regulations at 24 CFR 92.252(f)(2), the City did not ensure
              that the owner of project number 10289 provided the City with information on the
              rents and occupancy of Program-assisted units to demonstrate compliance with 24
              CFR 92.252. Therefore, the City also did not perform an onsite review to verify
              the information that the owner was required to submit.

              In April 2014 and as a result our audit, the owner of project number 10289
              provided the City with information on the rents and occupancy of Program-
              assisted units and the City performed an onsite review to verify the information
              that the owner submitted. Further, as of August 2014, the City had performed
              onsite inspections of units in the four projects. However, it did not provide
              sufficient documentation to support that the units it inspected for project numbers
              10288 and 10289 were Program-assisted units at the time of the inspections.




                                               10
The City Lacked Adequate
Procedures and Controls

             The weakness described above occurred because the City lacked adequate
             procedures and controls for conducting annual compliance monitoring of projects
             from January 1 through December 31, 2013, as required by HUD’s regulations.
             The Construction and Compliance Division in the City’s Department of Planning
             and Development did not have a sufficient number of rehabilitation construction
             specialists to complete the annual onsite inspections of Program-assisted units in a
             timely manner. The Department planned to hire an additional rehabilitation
             construction specialist in 2015. The deputy commissioner of the Construction and
             Compliance Division also stated that three of the six rehabilitation construction
             specialists missed a significant amount of work time due to illness and other
             issues. The assistant commissioner of the Monitoring and Compliance Division
             in the City’s Department of Planning and Development said that the City could
             not contract for inspectors due to union issues.

             The assistant commissioner said that for project number 10289, the City’s
             Multifamily Affordable Financing Division in the City’s Department of Planning
             and Development did not provide the Monitoring and Compliance Division the
             regulatory agreement and Program-funded unit information. Although the
             Monitoring and Compliance Division requested the documentation from the
             Multifamily Affordable Financing Division, it did not follow up when it did not
             receive the documentation. Therefore, it did not know which units were Program-
             funded units and did not monitor the project.

Conclusion

             The City lacked adequate procedures and controls for conducting annual
             compliance monitoring of projects from January 1 through December 31, 2013, as
             required by HUD’s regulations. As a result, HUD and the City lacked assurance
             that households were (1) living in units that met HUD’s property standards
             requirements, (2) income eligible, and (3) not paying excessive rents.

Recommendations

             We recommend that the Director of HUD’s Chicago Office of Community
             Planning and Development

             3A. Ensure that the units the City inspected for project numbers 10288 and
                 10289 were Program-assisted units at the time of the inspections.




                                              11
We recommend that the Director of HUD’s Chicago Office of Community
Planning and Development require the City to

3B. Implement adequate procedures and controls to ensure that (1) it performs
    annual onsite inspections of Program-assisted units for projects with more
    than 25 units to determine whether the units complied with the HUD’s
    property standards requirements, (2) the projects’ owners provide the City
    with information on the rents and occupancy of Program-assisted units to
    demonstrate compliance with 24 CFR 92.252, and (3) it performs annual on-
    site inspections to verify the information submitted by the owners for
    projects with more than 25 units.




                              12
                         SCOPE AND METHODOLOGY

We performed our onsite audit work from January through April 2014 at the City’s offices located
at 121 North LaSalle Street, Chicago, IL. The audit covered the period January 2012 through
December 2013 and was expanded as necessary.

To accomplish our objectives, we reviewed

               Applicable laws, regulations at 24 CFR Part 92, HUD’s “Building HOME: A
                Program Primer,” and HUD’s Office of Community Planning and Development
                Notice 97-9.

               The City’s consolidated plan for 2010 through 2014, action plans for 2012 and
                2013, single audit reports for 2011 and 2012, accounting records, data from
                HUD’s System and the City’s MITAS enterprise loan system, policies and
                procedures, Program project files, and organizational chart.

               HUD’s files for the City.

In addition, we interviewed the City’s and projects’ employees and HUD’s staff.

Finding 1

We randomly selected leases between the rental new construction projects’ owners and the
households for 23 of the 794 Program-assisted units from the 14 projects that the City reported as
complete in HUD’s System from January 1, 2012, through December 31, 2013. The City drew
down nearly $55 million in Program funds for the 14 projects. The leases between the owners
and the households for two units in two projects (numbers 8806 and 10289) included language
prohibited by HUD’s regulations. Project numbers 8806 and 10289 consisted of 40 and 33
Program-assisted units, respectively. Therefore, we reviewed the leases for an additional 10
units in each of the two projects.

Finding 2

We were conservative in our determination of the amount of unnecessary interest that the U.S.
Treasury paid. We based our calculation on the 10-year U.S. Treasury rate, using simple interest
on the City’s daily balance of Program income. Further, we did not include in the City’s daily
balance of Program income any Program income received during a month until the first day of
the following month.

Finding 3

We selected the City’s annual compliance monitoring for the six Program-funded rental new
construction projects that the City reported as completed in HUD’s System from January 1



                                               13
through December 31, 2012. The City drew down more than $26.3 million in Program funds for
the six projects. Each project contained more than 25 units.

We relied in part on data in the City’s system and HUD’s System. Although we did not perform
a detailed assessment of the reliability of the data, we performed minimal levels of testing and
found the data to be adequately reliable for our purposes.

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




                                               14
                              INTERNAL CONTROLS

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

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

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


 Relevant Internal Controls

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

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

                     Reliability of financial reporting – Policies and procedures that
                      management has implemented to reasonably ensure that valid and reliable
                      data are obtained, maintained, and fairly disclosed in reports.

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

               We assessed the relevant controls identified above.

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




                                                 15
Significant Deficiencies

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

             The City lacked adequate procedures and controls to ensure that

                The leases between the rental new construction projects’ owners and the
                 households did not contain language prohibited by HUD’s regulations and the
                 City’s regulatory agreements with the owners (see finding 1).

                It used and reported Program income in accordance with HUD’s requirements
                 (see finding 2).

                It conducted annual compliance monitoring of rental new construction
                 projects as required by HUD’s regulations (see finding 3).




                                              16
                                   APPENDIXES

Appendix A

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

                  Recommendation                           Funds to be put
                      number             Ineligible 1/     to better use 2/
                        1A                                     $4,668,263
                        1B                     $245,698
                        1C                                       2,448,226
                        2A                       30,225
                        2B                        9,200
                       Totals                  $285,123         $7,116,489

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/   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 instance, implementation of our recommendations
     will ensure that (1) over the next year, the projects’ owners will not execute leases that
     include prohibited language and (2) Program funds will be used in accordance with
     HUD’s regulations and the City’s regulatory agreements with the owners.




                                             17
       Appendix B

            AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation       Auditee Comments




Comment 1
Comment 2


Comments 2
 and 3




                             18
Ref to OIG Evaluation   Auditee Comments




Comment 4




Comment 5




Comment 6
Comment 2

Comment 6
Comment 2

Comment 2
 and 6




Comment 7




                         19
Ref to OIG Evaluation   Auditee Comments




                         20
                        OIG’s Evaluation of Auditee Comments

Comment 1   The City stated that it amended its existing policies and procedures regarding the
            monitoring of tenant files to specifically incorporate the review of all lease
            agreements including all riders. The City provided its Department of Planning
            and Development’s Monitoring and Compliance Division’s revised long-term
            Program monitoring requirements and procedures as attachment 1. The City also
            stated that its monitoring staff will review all lease agreements during the City’s
            annual owners’ certification process in addition to the annual onsite Program
            records inspections.

            We recognize that the City amended its policies and procedures regarding the
            review of leases associated with Program-assisted units. However, the revised
            long-term Program monitoring requirements and procedures stated that for the
            City’s annual owners’ certification process, rental new construction projects’
            owners must submit leases for new households only and did not specify whether
            the Division’s staff would review the leases for prohibited language. Further, the
            Division would continue to use a 20 percent sample for projects with more than
            five units during the City’s annual onsite Program records inspections. In
            addition, the City’s amended policies and procedures do not indicate whether a
            review of the projects’ standard leases would occur before the projects are
            completed and units are leased. Therefore, the City should work with HUD’s
            Chicago Office of Community Planning and Development to ensure that leases
            associated with Program-assisted units do not contain prohibited language.

Comment 2   We did not include in appendix B the attachments that the City provided since the
            attachments were not necessary to understand the City’s comments. We provided
            the Director of HUD’s Chicago Office of Community Planning and Development
            with a complete copy of the City’s written comments plus the attachments.

Comment 3   The City provided as attachment 1A lease addenda executed by the owner of
            project number 10289 that removed the prohibited language from the leases for
            the 33 Program-assisted units.

            We revised the report to state the following:

               Further, in April and May 2014, the City had the owner of project number
                10289 execute lease addenda that removed prohibited language from the
                leases for the project’s 33 units.

            We also amended recommendation 1C to reflect this revision.

Comment 4   The City stated that it will repay any unnecessary interest incurred from
            improperly administering Program income. The City should work with HUD’s
            Chicago Office of Community Planning and Development regarding the
            reimbursement to HUD, for transmission to the U.S. Treasury, from non-Federal



                                             21
            funds for the unnecessary interest the U.S. Department of the Treasury paid on the
            Program funds that the City drew down from its treasury account when Program
            income was available.

Comment 5   The City stated that it will reimburse HUD for the Program income that was
            inappropriately used. The recommendation is that the City reimburse its Program
            from non-Federal funds for the Program income that was inappropriately used for
            two Block Grant activities. Therefore, the City should work with HUD’s Chicago
            Office of Community Planning and Development to ensure that this
            recommendation is appropriately implemented.

Comment 6   The City provided its Department of Finance’s Grants and Project Accounting
            Division’s Program income process as attachment 2. The Program income
            process stated that an operations analyst in the Division will record the receipt of
            Program income in the City’s MITAS enterprise loan system. At the end of the
            month, the operations analyst will provide to the Division’s accountant
            responsible for the Program a report that details the Program income activity
            reflected in the MITAS enterprise loan system for the month. The accountant will
            create and submit for approval a cash receipt for the Program income. Once
            approved, the Program income will be reported in the City’s general ledger. The
            accountant will then report the Program income in HUD’s System by the 30th day
            of the following month.

            We recognize that the City amended its policies and procedures regarding the use,
            reporting, and depositing of Program income. However, since the Program
            income process does not contain timeframes for the creation, submission, and
            approval of the cash receipt, it is not clear whether the reporting of the Program
            income in HUD’s System will be the 30th day of the following month from when
            the Program income was (1) received or (2) reported in the City’s general ledger.
            Further, the City would have already determined the amount of Program income
            received by the end of each month that it was earned. Therefore, the City should
            work with HUD’s Chicago Office of Community Planning and Development to
            ensure that Program income is (1) used for eligible housing activities before it
            draws down Program funds from its treasury account and (2) reported in HUD’s
            System in a timely manner.

Comment 7   Although the City maintained the spreadsheet to track the annual compliance
            monitoring of projects from January 1 through December 31, 2013, it did not
            perform annual onsite inspections of Program-assisted units for project numbers
            8806, 10288, 10289, and 10295 to determine whether the units complied with the
            property standards requirements of 24 CFR 92.251. Further, the City did not
            ensure that the owner of project number 10289 provided the City with information
            on the rents and occupancy of Program-assisted units to demonstrate compliance
            with 24 CFR 92.252 and did not perform an onsite review to verify the
            information that the owner was required to submit.




                                             22
Appendix C

   HUD’S REQUIREMENTS AND THE CITY’S REGULATORY
                   AGREEMENTS

Finding 1

Regulations at 24 CFR 92.253(b)(3) state that a lease between an owner and a tenant of rental
housing assisted with Program funds may not contain a provision excusing the owner from
responsibility in which the tenant agrees to not hold the owner or the owner’s agents legally
responsible for any action or failure to act, whether intentional or negligent.

Regulations at 24 CFR 92.504(a) state that a participating jurisdiction is responsible for
managing the day-to-day operations of its Program, ensuring that Program funds are used in
accordance with all Program requirements and written agreements, and taking appropriate action
when performance problems arise. The use of subrecipients or contractors does not relieve the
participating jurisdiction of this responsibility.

Sections 2.15 and 2.12 of the City’s regulatory agreements with the owners of rental new
construction project numbers 8806 and 10289, respectively, state that the leases for units in the
projects will not contain a provision in which the tenant agrees to not hold the owner or the
owner’s agents legally responsible for any action or failure to act, whether intentional or
negligent.

Finding 2

Regulations at 24 CFR 92.2 define Program income as gross income received by a participating
jurisdiction directly generated from the use of Program funds or matching contributions.
Program income also includes interest earned on Program income pending its disposition.

Regulations at 24 CFR 92.502(c)(3) state that a participating jurisdiction must disburse Program
funds, including Program income and recaptured Program funds, in its local account before
requesting Program funds from its treasury account.

Regulations at 24 CFR 92.503(a)(1) state that a participating jurisdiction must use Program
income in accordance with the requirements of 24 CFR Part 92 and deposit Program income into
its local account unless it permits a State recipient or subrecipient to retain the Program income
for additional Program projects under the written agreement required by 24 CFR 92.504.

HUD’s Office of Community Planning and Development Notice 97-9, issued September 12,
1997, requires available Program income to be determined and recorded in HUD’s System in
periodic intervals not to exceed 30 days.




                                                23
Finding 3
Regulations at 24 CFR 92.252 state that Program-assisted units in a rental housing project must
be occupied only by low-income households and meet HUD’s maximum Program rent limits to
qualify as affordable housing. Section 92.252(f)(2) states that project owners must annually
provide a participating jurisdiction with information on rents and occupancy of Program-assisted
units to demonstrate compliance with 24 CFR 92.252.

Regulations at 24 CFR 92.504(d)(1) state that during the period of affordability, a participating
jurisdiction must perform onsite inspections of Program-assisted rental housing to determine
compliance with the property standards at 24 CFR 92.251 and to verify the information
submitted by owners in accordance with the requirements of 24 CFR 92.252 no less than every
year for projects containing 26 or more units. Inspections must be based on a sufficient sample
of units.




                                                24
Appendix D

   SCHEDULE OF PROGRAM INCOME THAT WAS NOT
         REPORTED IN A TIMELY MANNER

                                                                              Days over
     Month Program              Program            Date reported in         HUD’s 30-day
     income received         income earned          HUD’s System            requirement*
        Dec. 2011             Not applicable         Jan. 24, 2012          Not applicable
        Jan. 2012                    $29,519        Mar. 16, 2012                 22
        Feb. 2012                     26,752        June 25, 2012                 71
        Mar. 2012                     32,862        June 25, 2012                 71
        Apr. 2012                     30,120        Dec. 31, 2012                159
        May 2012                      31,858        Dec. 31, 2012                159
        June 2012                     30,578        Dec. 31, 2012                159
        July 2012                     34,270        Dec. 31, 2012                159
        Aug. 2012                     20,106        Dec. 31, 2012                159
        Sept. 2012                    29,898        Dec. 31, 2012                159
        Oct. 2012                     21,033        Dec. 31, 2012                159
        Nov. 2012                     41,508        Dec. 31, 2012                159
        Dec. 2012                  3,537,990        Mar. 28, 2013                 57
        Jan. 2013                     25,356         Aug. 5, 2013                100
        Feb. 2013                    135,847         Aug. 5, 2013                100
        Mar. 2013                     31,187         Aug. 5, 2013                100
        Apr. 2013                     37,433         Aug. 5, 2013                100
        May 2013                      28,006         Aug. 5, 2013                100
        June 2013                     28,249         Oct. 10, 2013                36
        July 2013                     29,464         Oct. 10, 2013                36
        Aug. 2013                     28,745         Oct. 10, 2013                36
        Sept. 2013                    28,396        Nov. 19, 2013                 10
        Oct. 2013                     28,589         Jan. 30, 2014                42
        Nov. 2013                     32,734         Jan. 30, 2014                42
        Dec. 2013                     51,453         May 2, 2014                  62
    * The number of days after the 30th day since the City last reported Program income in HUD’s
      System.




                                                 25