oversight

The City of Kansas City, MO, Did Not Properly Obligate Its NSP1 Grant Funds and Allowed Its Subrecipient To Enter Into Contracts Without the Required Provisions

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-02-05.

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

OFFICE OF AUDIT                                      DRAFT
REGION   7
   For Discussion and Comment Only - Subject to Review and Revision
KANSAS CITY, KS




                          The City of Kansas City, MO

                Neighborhood Stabilization Program 1




2014-KC-1003                                                          February 5, 2014
                                                        Issue Date: February 5, 2014

                                                        Audit Report Number: 2014-KC-1003




TO:            Dana Buckner, Director, Office of Community Planning and Development, Kansas
               City, KS, 7AD

               //signed//
FROM:          Ronald J. Hosking, Regional Inspector General for Audit, 7AGA


SUBJECT:       The City of Kansas City, MO, Did Not Properly Obligate Its NSP1 Grant
               Funds and Allowed Its Subrecipient To Enter Into Contracts Without the
               Required Provisions


    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 Kansas City, MO.

    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
913-551-5870.




                                                .
                                            February 5, 2014
                                            The City of Kansas City, MO, Did Not Properly Obligate
                                            Its NSP1 Grant Funds and Allowed Its Subrecipient To
                                            Enter Into Contracts Without the Required Provisions



Highlights
Audit Report 2014-KC-1003


 What We Audited and Why                     What We Found

We selected the City of Kansas City,        The City improperly obligated $63,494 of its NSP1
MO’s Neighborhood Stabilization             funds. It improperly obligated $14,467 when it used
Program 1 (NSP1) based on previous          estimated instead of actual amounts and $49,027 when
problems in the City’s Community            it used amounts based on contracts signed after the
Development Block Grant (CDBG)              obligation deadline of September 19, 2010.
program and the amount of funding it
received. During fiscal year 2008, the      The City also allowed its subrecipient to enter into
City received more than $7.3 million in     contracts without all of the required provisions. None
NSP1 funding. Our audit objectives          of its seven contracts between the subrecipient and its
were to determine whether the City          primary property developers included all required
properly obligated its NSP1 grant funds     provisions.
and allowed its subrecipient to enter
into contracts without the required
provisions.

 What We Recommend

We recommend that HUD require the
City to develop and implement a system
to track its subrecipient’s obligation of
NSP1 funds and develop and implement
detailed operational policies and
procedures to ensure proper obligation of
NSP1 funds. In addition, we recommend
that HUD require the City to work with
its subrecipient to amend its NSP1-
funded contracts to include the missing
provisions and adequately train its staff
regarding the provisions required in
NSP1-funded contracts.




                                                   
                            TABLE OF CONTENTS

Background and Objectives                                                            3

Results of Audit
      Finding 1: The City Improperly Obligated $63,494 of Its NSP1 Funds             4
      Finding 2: The City Allowed Its Subrecipient To Enter Into Contracts Without   6
                 the Required Provisions

Scope and Methodology                                                                8

Internal Controls                                                                    9

Appendixes
A.    Auditee Comments and OIG’s Evaluation                                          11
B.    Criteria                                                                       14




                                             2
                      BACKGROUND AND OBJECTIVES

The Neighborhood Stabilization Program (NSP) was authorized under Title III of the Housing
and Economic Recovery Act of 2008. It provides grants to States and certain local communities
to purchase foreclosed-upon or abandoned homes and rehabilitate, resell, or redevelop them to
stabilize neighborhoods and stem the declining value of neighboring homes. The Act calls for
allocating funds to “states and units of local governments with the greatest need.” In the first
phase of the program, NSP1, the U.S. Department of Housing and Urban Development (HUD)
allocated $3.9 billion in program funds to assist in the redevelopment of abandoned and
foreclosed-upon homes.

On March 19, 2009, HUD signed an agreement with the City of Kansas City, MO, for more than
$7.3 million in NSP1 funds. The City is responsible for ensuring that the NSP1 funds are used in
accordance with program requirements. On June 17, 2009, the City contracted with the
Economic Development Corporation of Kansas City to administer the NSP1 funds as its
subrecipient. The use of a designated subrecipient did not relieve the City of its responsibility to
ensure that program funds were used in accordance with applicable requirements.

During calendar years 2009 and 2010, the Corporation contracted with seven primary property
developers to acquire and rehabilitate qualified, abandoned or foreclosed-upon properties in the
greater Kansas City area. The City and the Corporation are responsible for determining the
adequacy of performance under subrecipient agreements as described in 24 CFR (Code of
Federal Regulations) 570.910. They are also required to ensure that all contracts funded under
NSP1 comply with procurement regulations at 24 CFR 84.84(h)(5), appendix A.

The Disaster Recovery Grant Reporting (DRGR) system was developed by HUD for the Disaster
Recovery Block Grant program and other special appropriations. HUD uses the DRGR system
to track NSP1 funding because no other application and reporting system is sufficiently flexible
to deal with program requirements.

Our audit objectives were to determine whether the City properly obligated its NSP1 funds and
allowed its NSP1 subrecipient to enter into contracts without the required provisions.




                                                 3
                                RESULTS OF AUDIT

Finding 1: The City Improperly Obligated $63,494 of Its NSP1 Funds
The City improperly obligated $63,494 of its NSP1 funds. This condition occurred because the
City lacked controls to track or monitor the Corporation’s obligation of NSP1 funds. As a result,
the funds were not available for use by other qualified program participants.


 The City Improperly Obligated
 NSP1 Funds

              The City improperly obligated $63,494 of its NSP1 funds, contrary to section
              2301(c)(1) of the Housing and Economic Recovery Act, which requires grantees
              to use NSP funds within 18 months of receipt of the funds. Compliance with the
              statutory 18-month use requirement requires the grantee or subrecipient to
              document that an obligation linked to a specific NSP activity was incurred. NSP
              Policy Alert, Volume 3, April 23, 2010, states that if the grantee or subrecipient
              provides assistance to a developer, an obligation may be recorded when the
              developer’s agreement is executed and the developer has identified specific
              properties to be acquired or rehabilitated. HUD will consider the NSP funds
              obligated for a specific activity only when the developer furnishes the grantee or
              subrecipient with information identifying specific properties and providing
              documented cost estimates for each activity (see appendix B).

              As of September 30, 2010, the City reported more than $7.3 million (100 percent)
              of its initial NSP1 funds as obligated in the DRGR system. The City generally
              based its obligations on information provided by the Corporation. In four
              instances, it improperly obligated a total of $14,467 when the Corporation
              estimated the obligations, which were not fully supported by contracts, and
              entered into written agreements with primary property developers. In two
              instances, the City improperly obligated a total of $49,027 when the Corporation
              obligated funds based on contracts signed after the obligation deadline of
              September 19, 2010. The two contracts were signed on January 6 and September
              11, 2011.

 The City Lacked Controls Over
 the Obligation of NSP1 Funds

              The City lacked controls to track or monitor the Corporation’s obligation of its
              NSP1 funds. It generally relied on information provided by the Corporation and
              did not require its program staff to verify the obligation information received from
              the Corporation. The City’s program staff told us they did not review the


                                                4
                                                 
           obligation information received from the Corporation against supporting
           documentation before entering the data into the DRGR system.

Funds Were Not Available for
Program Participants

           As a result of the issues discussed above, a total of $63,494 of the City’s NSP1
           funds was not available for use by other qualified program participants.

Recommendations

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

           1A.    Develop and implement a system to track and monitor the Corporation’s
                  obligation of NSP1 funds to comply with section 2301(c)(1) of the Housing
                  and Economic Recovery Act and applicable HUD rules and regulations.

           1B.    Develop and implement detailed operational policies and procedures to
                  ensure proper obligation of NSP1 funds, including ongoing program
                  income, in compliance with the Housing and Economic Recovery Act and
                  applicable HUD rules and regulations.




                                            5
                                              
                                RESULTS OF AUDIT

Finding 2: The City Allowed Its Subrecipient To Enter Into Contracts
Without the Required Provisions
The City allowed the Corporation to enter into seven NSP1-funded contracts that did not contain
all of the required provisions. This condition occurred because the City did not adequately train
its program and Corporation staff regarding HUD contract requirements. As a result, the City
and HUD lacked assurance the contractors would comply with all program requirements. In
addition, they could not ensure that their own interests were fully protected.


 Required Provisions Were Not
 Included in NSP1 Contracts

               The City allowed its NSP1 subrecipient to enter into seven NSP1-funded
               contracts without all of the provisions required by Federal regulations. On June
               17, 2009, the City contracted with the Corporation to administer its NSP1 grant
               funds. The Corporation was required to follow Community Development Block
               Grant (CDBG) procurement rules outlined in 24 CFR 84.84 to hire contractors for
               the purchase of goods and services.

               During calendar years 2009 and 2010, the Corporation contracted with seven
               primary property developers to acquire and rehabilitate qualified, abandoned or
               foreclosed-upon properties in the Kansas City area. According to regulations at
               24 CFR 84.84(h)(5), appendix A, all contracts, including small purchases,
               awarded by recipients and their contractors are required to contain certain
               provisions, including (1) Copeland “Anti-Kickback” Act, (2) Contract Work
               Hours and Safety Standards Act, (3) rights to inventions made under a contract or
               agreement, (4) Clean Air Act and Federal Water Pollution Control Act, (5) Byrd
               anti-lobbying amendment, (6) debarment and suspension, and (7) Drug-Free
               Workplace Act requirements (see appendix B).

               None of the seven contracts between the Corporation and its primary property
               developers addressed any of the above required provisions. As a result of our
               review, the Corporation began preparing contract amendments to address the
               missing provisions in each of the contracts.

 The City Did Not Adequately
 Train Program Staff

               The City did not adequately train its program and the Corporation staff regarding
               HUD contract requirements. Its program and the Corporation staff members told

                                                6
                                                 
           us that they had not been trained regarding the required provisions of NSP1
           contracts and did not review the seven contracts for compliance with applicable
           regulations.

There Was No Assurance of
Program Compliance

           The City and HUD lacked assurance that the contractors would comply with all
           program requirements. In addition, they could not ensure that their own interests
           were fully protected.

Recommendations

           We recommend that the Director of HUD’s Kansas City, KS, Office of Community
           Planning and Development work with the City to require the Corporation to

           2A.    Amend its NSP1 contracts with its primary property developers to include
                  the missing provisions.

           2B.    Adequately train its staff regarding the required provisions of NSP1-funded
                  contracts.




                                            7
                                             
                         SCOPE AND METHODOLOGY

Our review period generally covered March 19, 2009, through March 19, 2013. We performed
onsite work from August 16 through November 20, 2013, at City Hall, located at 414 East 12th
Street, Kansas City, MO. We performed additional onsite work at the subrecipient’s offices,
located at 1100 Walnut, Suite 1700, Kansas City, MO.

To accomplish our objectives, we interviewed City and the Corporation staff and reviewed
     Applicable provisions of the Code of Federal Regulations, the Housing and Economic
       Recovery Act of 2008, Office of Management and Budget circulars, and various
       program policy alerts;
     The City’s Procurement Procedures Manual;
     Relevant audit reports and the City’s audited financial statements;
     The grant and subrecipient agreements, which included other contractor contracts; and
     The subrecipient’s obligation and expense files.

We reviewed a sample of 14 NSP1 obligations from a universe of 63 (22 percent) completed by
the City before the obligation deadline of September 19, 2010. We initially selected nine sample
obligations for testing to determine whether they complied with section 2301(c)(1) of the
Housing and Economic Recovery Act. The nine sample obligations included those recorded
closest to the obligation deadline because they were likely to be misstated or otherwise have high
risk. Because we found evidence of improper obligations, we expanded the sample to include
five additional obligations recorded during the beginning and peak periods of the program. We
selected the highest dollar amounts due to the likelihood of misstatements or the potential for
high risk. When selecting our sample, we did not consider the organizations carrying out the
activities because there were no known special circumstances in regard to them. We also did not
select administrative fees for testing because the City was allowed to obligate 10 percent of the
grant for administrative costs upfront. The cumulative dollar amount of the obligations tested
was nearly $1.5 million of the more than $7.6 million (19.57 percent) in obligations.

We also reviewed seven property developer agreements and the City’s procurement process used
to select the developers. The seven developers were the only ones the Corporation used to
acquire and rehabilitate single-family projects using NSP1 funds.

We relied on computer-processed data provided by the City and the Corporation, which was
responsible for the administration of the City’s NSP1. We performed sufficient tests of the data
using data analysis techniques, and based on the assessments and testing, we concluded that the
data were sufficiently reliable to be used in meeting our objective.

We performed our review 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.
                                                8
                                                  
                              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:

                     Controls over obligating NSP1 funds.
                     Controls over developing NSP1 contracts.

               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.

 Significant Deficiencies

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

                     The City did not have adequate controls over obligating its NSP1 funds (see
                      finding 1).
                     The City did not have controls to ensure that its program and subrecipient
                      contracts contained all of the required provisions (see finding 2).




                                                 9
                                                   
Separate Communication of
Minor Deficiencies

           We reported minor deficiencies to the auditee in a separate management
           memorandum




                                          10
                                            
                        APPENDIXES

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation      Auditee Comments

Comments




                            11
                              
Ref to OIG Evaluation   Auditee Comments




Comment 1




                         12
                           
                        OIG Evaluation of Auditee Comments

Comment 1   We noted that the Housing and Economic Recovery Act of 2008 authorizes the
            Secretary to specify alternative requirements to any provision of the Community
            Development Act of 1974. In part, the Secretary is required to provide Congress
            with written notice of waivers and publish them in the Federal Register. On
            October 19, 2010, HUD published a notice of NSP1 reallocation process changes
            in the Federal Register. This notice provides a range of corrective actions for
            grantees who fail to meet the 18-month requirement and recognizes that grantees
            will not be able to budget perfectly. It also provides guidance allowing a
            reasonable contingency for each project. We considered these provisions,
            reevaluated the draft recommendation, and based upon the circumstances
            involved, we changed the recommendation accordingly.




                                           13
                                             
Appendix B

                                        CRITERIA

Housing and Economic Recovery Act of 2008

Section 2301(c)(1): “In general, any state or unit of general local government that Receives
amounts pursuant to this section shall, not later than 18 months after the receipt of such
amounts, use such amounts to purchase and redevelop abandoned and foreclosed homes and
residential properties.”

NSP Policy Alert, Volume 3, April 23, 2010

Overview: “Section 2301(c)(1) of the Housing and Economic Act of 2008 requires grantees to
use NSP funds within 18 months of receipt of the funds. The NSP Notice published on October
6, 2008, provides that NSP funds are used for the purposes of section 2301(c)(1) when they are
obligated by a grantee (or its subrecipient) for a specific NSP activity. Thus compliance with the
statutory use requirement requires the grantee (or subrecipient) to document the following:
     an obligation was incurred, and
     the obligation can be linked to a NSP specific activity.”

Definition: “The term ‘obligation’ means the amounts of orders placed, contracts awarded,
goods and services received, and similar transactions during a given period that will require
payment by the grantee (or subrecipient) during the same or future period. Note that none of
these actions would constitute a use for NSP purposes unless the action is related to a specific
activity. Except for certain activities (which are discussed below), HUD does not consider NSP
funds obligated for a specific activity unless the obligation can be linked to a specific address
and/or household. The NSP Notice explicitly provides that funds are not obligated for an activity
when sub awards (e.g., grants to subrecipients or to units of general local government) are
made.”

24 CFR 84.84

24 CFR 84.84(h)(5): “All contracts, including small purchases, awarded by recipients and their
contractors shall contain the procurement provisions of appendix A as applicable.”

Appendix A to Part 84 – Contract Provisions

       1) Equal Employment Opportunity: All contracts shall contain a provision requiring
          compliance with E.O. 11246, “Equal Employment Opportunity.”
       2) Copeland “Anti-Kickback” Act (18 U.S.C. [United States Code] 874 and 40 U.S.C.
          276c): All contracts and subgrants in excess of $2000 for construction or repair
          awarded by recipients and subrecipients shall include a provision for compliance with
          the Copeland “Anti-Kickback” Act (18 U.S.C. 874).


                                               14
                                                  
3) Davis-Bacon Act, as amended (40 U.S.C. 276a to a-7): When required by Federal
   program legislation, all construction contracts awarded by the recipients and
   subrecipients of more than $2000 shall include a provision for compliance with the
   Davis-Bacon Act (40 U.S.C. 276a to a-7).
4) Contract Work Hours and Safety Standards Act (40 U.S.C. 327 through 333): Where
   applicable, all contracts awarded by recipients in excess of $2000 for construction
   contracts and in excess of $2500 for other contracts that involve the employment of
   mechanics or laborers shall include a provision for compliance with Sections 102 and
   107 of the Contract Work Hours and Safety Standards Act (40 U.S.C. 327-333).
5) Rights to Inventions Made Under a Contract or Agreement: Contracts or agreements
   for the performance of experimental, developmental, or research work shall provide
   for the rights of the Federal Government and the recipient in any resulting invention
   in accordance with 37 CFR part 401, “Rights to Inventions Made by Nonprofit
   Organizations and Small Business Firms Under Government Grants, Contracts and
   Cooperative Agreements,” and any implementing regulations issued by HUD.
6) Clean Air Act (42 U.S.C. 7401 et seq.) and the Federal Water Pollution Control Act
   (33 U.S.C. 1251 et seq.), as amended: Contracts and subgrants of amounts in excess
   of $100,000 shall contain a provision that requires the recipient to agree to comply
   with all applicable standards, orders or regulations issued pursuant to the Clean Air
   Act (42 U.S.C. 7401 et seq.) and the Federal Water Pollution Control Act as amended
   (33 U.S.C. 1251 et seq.).
7) Byrd Anti-Lobbying Amendment (31 U.S.C. 1352): Contractors who apply or bid for
   an award of $100,000 or more shall file the required certification.




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