oversight

CPD Did Not Monitor Grantees' CPD-Funded Assets Transferred by Former Redevelopment Agencies To Minimize HUD's Risk

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-02-28.

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

OFFICE OF AUDIT
REGION 9
LOS ANGELES, CA




     Office of Community Planning and Development
                   Washington, DC

      Community Development Block Grant, Section
        108, Economic Development Initiative, and
       Brownfield Economic Development Initiative
                       Programs




2014-LA-0001                            FEBRUARY 28, 2014
                                                        Issue Date: February 28, 2014

                                                        Audit Report Number: 2014-LA-0001




TO:            Yolanda Chavez, Deputy Assistant Secretary for Grant Programs, DG

               //SIGNED//
FROM:          Tanya E. Schulze, Regional Inspector General for Audit, Los Angeles Region,
               9DGA


SUBJECT:       CPD Did Not Monitor Grantees’ CPD-Funded Assets Transferred by Former
               Redevelopment Agencies To Minimize HUD’s Risk


    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 Office of Community Planning and
Development’s (CPD) monitoring of CPD-funded assets transferred by former redevelopment
agencies.

    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
213-534-2471.
                                           February 28, 2014
                                           CPD Did Not Monitor Grantees’ CPD-Funded Assets
                                           Transferred by Former Redevelopment Agencies To
                                           Minimize HUD’s Risk



Highlights
Audit Report 2014-LA-0001


 What We Audited and Why                    What We Found

We audited the U.S. Department of          The San Francisco and Los Angeles CPD field offices
Housing and Urban Development’s            did not monitor grantees’ CPD-funded assets
(HUD) San Francisco and Los Angeles        transferred by former redevelopment agencies to
Offices of Community Planning and          minimize HUD’s risk. Further, the CPD offices did
Development’s (CPD) monitoring of          not record and maintain accurate and complete lists of
CPD-funded assets transferred by           grantees’ CPD-funded assets or track CPD-funded
former redevelopment agencies due to       assets managed by the grantees’ former redevelopment
concerns that CPD-funded assets may        agencies during the State’s mandated shutdown of the
be lost during the State of California’s   agencies. Therefore, there was no assurance that CPD
statewide mandated closure of              had a complete and accurate account of CPD-funded
redevelopment agencies. Our objective      assets. As a result, more than $99 million in CPD
was to determine whether the San           funds used to acquire assets by the defunct
Francisco and Los Angeles CPD field        redevelopment agencies is at risk of being transferred
offices monitored grantees’ CPD-           to entities that may not continue to meet HUD’s CPD
funded assets transferred by former        program objectives.
redevelopment agencies to minimize
HUD’s risk.

 What We Recommend

We recommend that HUD (1) develop
policies and procedures that allow for
more proactive monitoring of grantees’
CPD funding and assets, (2) establish a
formal listing of assets funded through
CPD, and (3) require its grantees to
provide adequate documentation
supporting the grantees’ binding and
enforceable rights to CPD-funded assets
as required in HUD regulations and
requirements.
                            TABLE OF CONTENTS

Background and Objective                                                     3

Results of Audit
      Finding: CPD Did Not Monitor Grantees’ CPD-Funded Assets Transferred
               by Former Redevelopment Agencies To Minimize HUD’s Risk       5

Scope and Methodology                                                        10

Internal Controls                                                            12

Appendixes
A.    Schedule of Funds To Be Put to Better Use                              14
B.    Auditee Comments and OIG’s Evaluation                                  15
C.    Listing of Sampled CPD-Funded Assets                                   23
D.    Criteria                                                               27




                                            2
                       BACKGROUND AND OBJECTIVE

As part of the State of California’s budget deficit resolution, the governor issued an executive
action to close all redevelopment agencies. The executive order established a deadline of
February 1, 2012, for California cities with redevelopment agencies to close down and then
transfer all assets to designated receivers (successor agencies). As part of the executive order,
each successor agency must submit to the State’s Oversight Board and Finance committee a long
range property management addressing the use and disposition of the former redevelopment
agency’s assets. The options include 1) the retention of the asset for governmental use pursuant
to State regulation, 2) the retention of the asset for future development, 3) the sale of the asset, or
4) the use of the asset to fulfill an enforceable obligation. Before the executive order, several
redevelopment agencies managed U.S. Department of Housing and Urban Development (HUD),
Office of Community Planning and Development (CPD)-funded assets on behalf of the
respective cities. Further, HUD awarded grantees CPD funds, such as Community Development
Block Grant (CDBG), Section 108 Loan Guarantee, Economic Development Initiative (EDI),
and Brownfield Economic Development Initiative (BEDI), to pass through to at least 90
redevelopment agencies in California to meet each of the programs’ specific objectives and
goals.

Grantees use CDBG funds to develop viable urban communities by providing decent housing
and a suitable living environment and by expanding economic opportunities, principally for low-
and moderate-income persons. The Section 108 program is the loan guarantee provision of the
CDBG program that provides grantees with a source of financing for economic development,
housing rehabilitation, public facilities, and large-scale physical developments. EDI grants are
used to directly enhance the security of Section 108 guaranteed loans or to improve the viability
of the same Section 108-assisted project. BEDI is a key competitive grant program that HUD
administers to stimulate and promote economic and community development with the
redevelopment of abandoned, idled, and underused industrial and commercial facilities where
expansion and redevelopment are burdened by real or potential environmental contamination.
Without the grantees’ having ownership of these CPD-funded assets, there are risks of physically
losing assets that could generate future program incomes, add to the affordable housing stock, or
generate other future economic and community development opportunities for the targeted areas.

Since redevelopment agencies have closed or are in the process of closing, there are concerns
that affordability covenants related to CPD-funded assets may be ignored during the transfer of
control. Additionally, there are concerns that CPD or the redevelopment agencies did not
maintain adequate documentation of the CPD-funded assets or funds. The State’s fiscal issues,
which led to its sale of State-owned assets, raise significant concerns that CPD-funded assets
may be included in these sales without CPD approval. As a result, there is a possibility that
undisclosed sums of CPD funds may go unaccounted for or be lost during the transfer from the
redevelopment agencies to successor agencies. Further, these successor agencies may ignore
HUD requirements and regulations and assume that no CPD funds were associated with the
related assets. Finally, these funding issues, from a Federal perspective, raise concerns that CPD
may not have the necessary resources to monitor the actions taking place in California.
Therefore, potential limited resources may hamper CPD’s ability to ensure that its interests are


                                                   3
protected and risks are minimized during the State’s mandated shutdown of redevelopment
agencies and transfer of CPD-funded assets.

Our objective was to determine whether the San Francisco and Los Angeles CPD field offices
monitored grantees’ CPD-funded assets transferred by former redevelopment agencies to
minimize HUD’s risk.




                                              4
                                RESULTS OF AUDIT


Finding: CPD Did Not Monitor Grantees’ CPD-Funded Assets Transferred by
         Former Redevelopment Agencies To Minimize HUD’s Risk
The San Francisco and Los Angeles HUD CPD field offices did not record and monitor CPD-
funded assets that were part of the State’s mandated shutdown of grantees’ redevelopment
agencies. These field offices relied on the grantees to provide information about the affected
assets. However, such information was not available since the grantees did not have the required
documentation to support ownership of the sampled assets. This condition occurred because
CPD’s lack of formal policies and procedures and controls for monitoring did not ensure that
CPD-funded assets’ interests were maintained and at an acceptable risk. The associated risk of
grantees’ not having ownership of these CPD-funded assets includes the physical loss of assets
that could generate future program incomes, add to the affordable housing stock, or generate
other future economic and community development opportunities for the targeted areas. Without
policies in place, CPD-funded assets may not continue to meet program objectives. As a result,
at least $99 million in CPD funds used to acquire assets by the defunct redevelopment agencies
is at risk of being transferred to entities that may not continue to meet CPD program objectives.


 San Francisco and Los Angeles
 Field Offices Did Not Monitor
 the Transfer of CPD-Funded
 Assets

              The San Francisco and Los Angeles CPD field offices did not monitor grantees
              with respect to CPD funds spent on redevelopment assets. In addition, neither
              office had complete and accurate information readily available to identify affected
              assets and programs overseen by the defunct redevelopment agencies. Instead,
              CPD staff relied on the grantees for information that they should have maintained
              for monitoring purposes. CPD staff acknowledged that there was a hands-off
              approach to monitoring the transfer of assets from the grantees’ redevelopment
              agencies to designated successor agencies. Without a comprehensive approach,
              there is a risk that CPD-funded assets may be lost during the closure process of
              the former redevelopment agencies.

              The San Francisco field office provided a list of assets that pertained only to
              Section 108 rather than a complete list of CPD-funded assets impacted by the
              redevelopment agency closure. Further, the field office had not reviewed whether
              assets were properly transferred by the redevelopment agencies to the respective
              successor agencies.




                                               5
           The Los Angeles field office provided a list of grantees with the respective
           redevelopment agencies. Discussions with Los Angeles field office staff revealed
           that the field office did not maintain a list of grantees’ assets.

           The Los Angeles field office indicated that CPD-funded assets managed by its
           grantees’ redevelopment agencies were not tracked and monitored for accuracy in
           identifying and transferring the affected assets to the successor agencies. In
           addition, field office staff relied on the grantees for information about the CPD-
           funded assets. The Los Angeles CPD field office did not monitor the use of the
           grantees’ funding for the acquisition and construction of these assets. CPD staff
           confirmed that the field office did not monitor its’ grantees to ensure that all of
           HUD regulations and requirements were met due to limited resources.
           Consequently, CPD’s reliance on the grantees, without formal and proactive
           monitoring to ensure ownership of the grantees’ assets, created uncertainty
           regarding whether CPD-funded assets would continue to meet CPD program
           objectives.

Grantees Did Not Have Binding
and Enforceable Rights to
Sampled Assets

           Since the CPD field offices essentially relied on the grantees to ensure that CPD-
           funded assets were properly identified and transferred from the former
           redevelopment agencies to the successor agencies, we reviewed and sampled 20
           assets from the Cities of San Francisco, San Jose, and Los Angeles to determine
           whether that had occurred. In 15 of 20 assets reviewed, the grantees did not have
           the required documentation to show binding and enforceable rights to these assets.
           10 of the 15 assets were subject to the State’s dissolution process.

           Seven of the ten sampled assets reviewed for the cities of San Francisco and San
           Jose combined were subject to the State’s dissolution process. Without these
           grantees having binding and enforceable rights to the reviewed assets, there was
           no assurance that CPD program objectives, including economic development and
           affordable housing, would continue to be met as required by 24 CFR (Code of
           Federal Regulations) 570.503(b)(7) (see appendix D).

           Discussions with the City of San Francisco confirmed that the grantee was not the
           owner or beneficiary of any of the four reviewed CPD-funded assets managed and
           administered by the City’s former redevelopment agency. The City was unable to
           provide documentation that showed binding and enforceable rights that ensured
           that the former redevelopment agency used the reviewed assets in accordance
           with program requirements. Further, the City’s affected assets were subject to the
           State’s dissolution process, which would require it to request that the State
           transfer the assets in question to its control.




                                            6
The City of San Jose did not obtain ownership and control of three of the assets
sampled during the review. Instead, private developers that conducted business
with the defunct redevelopment agency were listed as the owners and
beneficiaries of the assets in question. Further, the City could not ensure that it
would continue to meet specific program objectives in the areas of economic
development and affordable housing as required by 24 CFR 85.42, 570.705, and
570.506(d) without binding and enforceable rights to these CPD-funded assets.
As a result, more than $38 million in CPD program funds may be lost.

Below is a listing of CPD-funded assets that the Cities of San Francisco and San
Jose did not have documentation to show binding and enforceable rights.

       Grantee                          Project                     HUD funding
                                                                       amount
    San Francisco             Bayview Hunters Point                   $4,000,000
    San Francisco         Yerba Buena Center – Marriott              $20,087,385
    San Francisco         Yerba Buena Center – Metreon                $2,142,569
    San Francisco       Yerba Buena Center – Howard Street            $6,704,961
      San Jose          Masson: 161 W. Santa Clara Street             $1,500,000
      San Jose              Security: 84 S. First Street              $2,350,000
      San Jose           EU: 35 & 49 E. Santa Clara Street            $1,350,000
                             Total                                   $38,134,915

See appendix C for a listing, photos, the status, and the type of funding related to
the CPD-funded assets affected by the State-mandated shutdown of
redevelopment agencies that the Cities of San Francisco and San Jose could lose
by not having documentation to show binding and enforceable rights.

For the Los Angeles CPD field office, 8 of the 10 sampled assets totaling more
than $61 million in CPD program funds did not have the required documentation
to show that the City of Los Angeles had binding and enforceable rights as
required under the CPD program. 4 of the 10 sampled assets were subject to the
State’s dissolution process. These purchases were made to assist the City in
meeting specific program objectives that included economic development and
affordable housing. However, a public records search identified the City’s
defunct redevelopment agency and private developers as the owners of the eight
assets in question. Discussions with City officials determined that the City was
unable to show that it owned the sampled assets. Further, the City was unable to
provide assurance that it had documentation that showed binding and enforceable
rights to these CPD-funded assets. As a result, a designated oversight board will
oversee the former redevelopment agency’s assets and will be responsible for the
potential dissolution of these assets. Without these binding and enforceable
rights, it could not ensure that CPD program objectives in the areas of economic
development and affordable housing would continue to be met.




                                  7
             Below is a listing of CPD-funded assets that the City did not have the required
             documentation to show binding and enforceable rights.

                 Grantee                           Project                         HUD funding
                                                                                      amount
               Los Angeles                  Marlton Square                          $20,875,000
               Los Angeles            The Noho Commons Project                      $18,800,000
               Los Angeles          Slauson Central Shopping Center                  $7,658,000
               Los Angeles      Goodyear Tract Brownfields Demonstration             $4,442,000
                                                  Site
               Los Angeles          Goodyear Tract Land Acquisition                  $2,564,068
               Los Angeles                Crenshaw Gateway                           $2,218,128
               Los Angeles                   Blossom Plaza                           $2,599,800
               Los Angeles                 Westlake Theatre                          $2,000,000
                                          Total                                     $61,156,996

             See appendix C for a listing, photos, the status, and the type of funding related to
             the CPD-funded assets affected by the State-mandated shutdown of
             redevelopment agencies that the City could lose by not having documentation to
             show binding and enforceable rights.

Conclusion

             CPD did not monitor the transfer of grantees’ CPD-funded assets transferred by
             the former redevelopment agencies to minimize HUD’s risk. Further, it did not
             record and maintain accurate records of grantees’ CPD-funded assets managed by
             the respective former redevelopment agencies. Despite this being a significant,
             unique event, CPD did not take proactive measures to establish specific policies
             and procedures or implement those in place to address the State’s action to close
             down redevelopment agencies that managed, administered, or owned assets
             funded with CPD program funds, such as CDBG, Section 108, EDI, and BEDI,
             among other non-HUD-funded assets. CPD acknowledged that there was a
             hands-off approach to monitoring the transfer of assets from the grantees’
             redevelopment agencies to designated successor agencies, based on direction from
             CPD headquarters. Consequently, CPD did not have a complete and accurate
             account of CPD-funded assets impacted by the closure of the redevelopment
             agencies. Further, more than $99 million in CPD funds used to acquire assets by
             the defunct redevelopment agencies is at risk of being transferred to entities that
             may not continue to meet specific CPD program objectives.




                                               8
Recommendations

          We recommend that the Deputy Assistant Secretary for Grant Programs

          1A. Require all grantees in the State of California to provide adequate
              documentation, such as title deeds, supporting grantees’ enforceable rights to
              CPD-funded assets as required in HUD regulations at 24 CFR 570.503, 705,
              and 506, and 24 CFR 85.42. If the grantees are unable to provide required
              supporting documentation to show binding and enforceable rights to the
              CPD-funded assets, HUD should implement appropriate administrative
              action to correct the identified deficiency or recover those funds. This
              measure would ensure that at least $99,291,911 in CPD funds could be put to
              better use in continuing to meet CPD program objectives, which include
              providing affordable housing and economic development to targeted areas.

          1B. Develop and implement formal policies and procedures that allow for more
              proactive monitoring of grantees’ CPD funding and assets to ensure that CPD
              has a plan of action to address this event, as well as possibly similar events in
              the future, to better ensure that its grantees and subgrantees meet CPD
              program requirements and funding objectives.

          1C. Establish a process to ensure that CPD maintains formal listings of assets
              funded through its CPD programs to ensure better comprehensive awareness
              and monitoring of its grantees.




                                            9
                         SCOPE AND METHODOLOGY

We conducted our audit work at the HUD Office of Inspector General (OIG) in Los Angeles,
CA, with site visits to the cities of San Jose, San Francisco, and Los Angeles, between April and
November 2013. Our audit period covered the period January 1, 2011, to December 31, 2012.

To accomplish our objective, we

   •   Reviewed applicable requirements and regulations, policies and procedures, HUD
       handbooks, guidance, and internal controls relating to the monitoring of CPD-funded
       assets;

   •   Interviewed HUD CPD field office staff responsible for the monitoring of grantees’ CPD-
       funded assets;

   •   Obtained, reviewed, and analyzed assets obtained by grantees’ respective redevelopment
       agencies;

   •   Conducted site visits to sampled defunct redevelopment agencies’ CPD-funded assets;
       and

   •   Conducted a public records search of sampled defunct redevelopment agencies’ CPD-
       funded assets.

To determine whether the San Francisco and Los Angeles CPD field offices monitored grantees’
CPD-funded assets transferred by former redevelopment agencies to minimize HUD’s risk, we
selected the largest funded grantees managed by each respective office. For the Los Angeles
field office, we determined a universe of 90 grantees with respective redevelopment agencies.
We randomly selected five grantees to review; however, four of the five grantees either had
minimal CDBG funding or no redevelopment agency that managed its CDBG, Section 108, EDI,
and BEDI funding and assets. We relied on HUD’s funding matrix, which is comprised of data
from HUD’s IDIS computer data system, to determine total funding for grantees. We confirmed
total funding amounts with the Line of Credit Control System (LOCCS) and determined that the
information was reliable for audit purposes. As a result, we selected the remaining sampled
grantee, the City of Los Angeles, for review. We then selected 10 assets with the highest
funding to review.

For the San Francisco field office, we determined a universe of 73 grantees with redevelopment
agencies. We selected the two highest funded grantees with redevelopment agencies for review,
the City of San Francisco and the City of San Jose. For the City of San Francisco, we selected
the four highest funded assets for review. For the City of San Jose, we selected all six assets for
review. We relied on HUD’s funding matrix, which is comprised of data from HUD’s IDIS
computer data system, to determine total funding for grantees.




                                                10
Audit results were determined through analysis of documentation and site visits. We did not
project our findings to the population using this sample.

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. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                              11
                              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
               objective:

               •   Policies and procedures implemented to ensure that CPD-funded assets meet
                   specific CPD program objectives, which include providing economic
                   development and affordable housing to targeted areas.

               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 Deficiency

               Based on our review, we believe that the following item is significant deficiency:

               •   CPD did not have policies, procedures, and controls in place to ensure that
                   HUD’s interests in CPD-funded assets were maintained to meet CPD program
                   objectives, as well as minimize the associated risk of grantees’ not having the
                   required documentation to show binding and enforceable rights to these CPD-
                   funded assets, including the potential loss of assets that could generate future
                   program incomes, add to the affordable housing stock, or generate other future


                                                 12
economic and community development opportunities for the targeted areas
(finding).




                           13
                                   APPENDIXES

Appendix A

    SCHEDULE OF FUNDS TO BE PUT TO BETTER USE

                           Recommendation         Funds to be put
                               number             to better use 1/
                                 1A                $99,291,911

    1/   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, the funds to be put to better use totaled more than $99
         million ($38,134,915 + $61,156,996 as shown in the finding tables) in CPD-funded
         assets of which the sampled grantees did not have the required documentation to
         show binding and enforceable rights during the State-mandated shutdown of
         redevelopment agencies to ensure HUD’s continued interest in meeting its CPD
         program objectives of providing affordable housing and economic development to
         targeted areas in need of urban renewal. Implementation of better policies,
         procedures, monitoring, and controls will help minimize instances of such assets
         being used for purposes that do not meet HUD’s interests in areas such as affordable
         housing and economic development in targeted areas.




                                             14
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1
Comment 2




                         15
Comment 3




            16
Comment 4




Comment 5




Comment 6




            17
Comment 7




Comment 8




Comment 9




            18
Comment 10


Comment 11




Comment 12




Comment 13




             19
                         OIG Evaluation of Auditee Comments

Comment 1   We agree that CPD has a monitoring process based on an annual risk assessment
            of its grantees. However, CPD did not have formal policies and procedures, such
            as a notice, to provide guidance to the field offices and grantees on how to address
            the State’s mandated action to close redevelopment agencies that were tasked
            with meeting CPD program objectives on behalf of the grantees. This action
            occurred outside of normal review process and CPD should have directed its
            efforts to ensure that grantees are able to meet program objectives with minimal
            effect from the State’s actions. As result, we based our recommendations on our
            assessment of CPD’s response to the State’s action to dissolve the redevelopment
            agencies tasked to complete the program objectives on the grantees’ behalf. The
            cited report, 2013-AT-0002, was based on the review of CPD’s risk assessment
            process, or methodology, used for monitoring selected grantees for the fiscal year.
            Our review specifically focused on how CPD handled the State’s actions against
            redevelopment agencies that acted on behalf of grantees to meet program
            objectives.

Comment 2   We did not review the effectiveness of CPD’s annual risk assessment and
            monitoring of grantees during the fiscal year. Instead, our review focused on how
            CPD responded to the State’s action against agencies that were tasked to perform
            service on behalf of the grantees. Based on discussions with the San Francisco
            and Los Angeles field office personnel, there was a “hands-off” approach to
            addressing the issue. Further, CPD headquarters instructed the field offices to
            assist the State only when requested. These field offices relied on the grantees to
            enter information about the project status into CPD’s disbursement and reporting
            system. When we asked for a list of CPD-funded assets, the field offices stated
            that we would need to obtain the information from the grantees. They stated that
            HUD regulations did not require field offices to maintain such a list. However,
            when a situation occurs in which CPD funds a project and program objectives are
            at stake, CPD should have taken the initiative to establish and implement specific
            formal policies and procedures for the field offices and grantees to follow to
            ensure assets were protected and program objectives were met. As part of the
            formal policies and procedures, CPD could have requested lists from the grantees
            to show what funds and projects were managed by the defunct redevelopment
            agencies. If CPD had taken these proactive measures, it would have provided
            field offices with additional information to assist in the monitoring of grantees’
            CPD-funded projects impacted by the State’s mandated closure of redevelopment
            agencies.

Comment 3   We appreciate CPD’s efforts to conduct reviews of grantees such as the Cities of
            San Jose, San Francisco, and Los Angeles during fiscal year 2014. However, it
            should be noted that our report results prompted CPD to conduct reviews of the
            grantees in question.




                                             20
Comment 4   We understand that the State, not CPD, was the responsible party that initiated the
            dissolution of the redevelopment agencies. We also understand that CPD held
            discussions with the State to discuss the situation and the roles of the
            redevelopment agencies to the grantees. However, CPD should have established
            formal policies and procedures for the grantees and field offices to ensure that
            assets were protected and used to meet program objectives.

Comment 5   We agree that 24 CFR 85.31 was incorrectly cited throughout the report, as it is
            not listed as one of the applicable uniform administrative requirements in 24 CFR
            570.502. We have removed this regulation from the report. For clarification, 24
            CFR 570.505 only appeared on pages 7 and 8 of the report. The applicable
            regulation should have been 24 CFR 570.705, as it relates to loan requirements
            that the grantee and subrecipients must adhere to within the executed agreements.
            24 CFR 570.503 is applicable to the review as it provides information to required
            elements within the executed agreements between the grantee and subrecipient.
            We corrected the referenced regulation on pages 6 and 8 of the report.

Comment 6   We acknowledge there are no current HUD regulations requiring CPD to monitor
            the transfer of CPD-funded assets. We agree that the grantees are responsible for
            monitoring the subrecipients. However, CPD, as the awarding agency is
            responsible for ensuring that the grantees can meet the specified program
            objectives. During the State’s mandate to close redevelopment agencies, or
            subrecipients to the grantees, CPD should have taken the necessary actions to
            provide field offices and grantees formal policies and procedures to ensure that
            the State’s action did not affect grantees’ ability to meet the program objectives.
            Without any formal policies and procedures, as well as lists of CPD-funded assets
            from the grantees, CPD may not be able to ensure that grantees can accomplish
            program objectives with minimal impact from the State’s actions.

Comment 7   We requested agreements between the grantees and the redevelopment agencies,
            also known as subrecipients, but some were missing. Of the agreements provided
            to us, some were unsigned or incomplete. In most instances, the grantees were
            unable to provide us executed agreements. Other grantees acknowledged issues
            with the agreements and were in the process of correcting those deficiencies.
            However, the agreements provided to us did not provide clear language related to
            reversion of assets. Since the redevelopment agencies are no longer active, the
            concern this audit raised is whether ownership rights and controls, as well as the
            executed agreements are still valid and applicable to the grantee.

Comment 8   We requested all executed agreements including those with for- profit businesses,
            from the grantees to determine established ownership or legal claim to the CPD
            assets. Some of the agreements between the grantees and redevelopment agencies
            were missing. Of the agreements provided to us, some were unsigned or
            incomplete. For those agreements provided to us for review, we could not
            identify clear language related to the reversion of assets. Since the redevelopment
            agencies are no longer active, the concern this audit raised is whether ownership



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              rights and controls, as well as the executed agreements are still valid and
              applicable to the grantee and for-profit businesses.

Comment 9     We are aware of the previous external reviews of the grantees administration and
              monitoring of CPD funds used at the Goodyear Tract, Blossom Plaza, Slauson
              Central and Avalon, Westlake Theatre, and Marlton Square. However, we
              conducted this internal review to determine whether CPD monitored the grantees’
              CPD-funded assets affected by the State-mandated shutdown of grantees’
              redevelopment agencies.

Comment 10 In July 2013, the City of Los Angeles confirmed that it would include the
           Crenshaw Gateway property in its Long Range Property Management Plan as
           required by the State’s redevelopment statutes. In its submittal, the City stated it
           will request that the designated local authority, the oversight board, and the State
           Department of Finance approve the transfer of this property to the City for
           continuation of its redevelopment activities. The City did not provide us
           documentation to corroborate CPD’s statement that the submittal to the State
           occurred in January 2012.

Comment 11 We are open to reviewing documents that would show that CPD ensured that
           grantees’ executed agreements and other documents meet applicable HUD
           regulations including 24 CFR 570.705 during the audit resolution process. It
           should be noted that the results of our review factored into CPD scheduled
           reviews of the Cities of San Jose and San Francisco.

Comment 12 Our audit period, covering January 1, 2011, to December 31, 2012, allowed us to
           obtain background information about the State’s action to dissolve the
           redevelopments and its potential effect on grantees’ ability to meet CPD program
           objectives. This background information predated the February 1, 2012 deadline
           established by the State. Further, we understand that the State’s mandate is an
           ongoing process and the State’s actions are not yet concluded.

Comment 13 The report accurately stated that only 20 projects from three grantees with the
           highest funded assets were selected as part of the review. Based on the sampled
           results, there is the potential that more CPD-funded assets managed by defunct
           redevelopment agencies could have the same issues if CPD does not implement
           our recommendations.




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Appendix C

            LISTING OF SAMPLED CPD-FUNDED ASSETS
City of San Francisco:

    Bayview Hunters Point                   YBC – Marriott

Status: Completed and occupied    Status: Completed and occupied
Type of funding: CDBG             Type of funding: CDBG




           YBC – Metreon                   YBC – Howard Street

Status: Completed and occupied    Status: Completed and occupied
Type of funding: CDBG             Type of funding: CDBG




                                 23
City of San Jose:

 Masson: 161 W. Santa Clara Street                      Security: 84 S. First Street

Status: Completed and occupied                  Status: Completed and occupied
Type of funding: Section 108                    Type of funding: Section 108




                            EU: 35 & 49 E. Santa Clara Street

                       Status: Completed and occupied
                       Type of funding: Section 108




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City of Los Angeles:

            Marlton Square                           Noho Commons Project

Status: Undeveloped vacant lot              Status: Completed and occupied
Type of funding: Section 108, BEDI,         Type of funding: Section 108 and BEDI
                 EDI, and CDBG




   Slauson Central Shopping Center     Goodyear Tract Brownfields Demonstration Site

Status: Site under construction             Status: Under construction
Type of funding: Section 108 and EDI        Type of funding: Section 108 and BEDI




                                       25
Goodyear Tract Land Acquisition           Crenshaw Gateway

Status: Vacant building                Status: Undeveloped vacant lots
Type of funding: CDBG                  Type of funding: CDBG




             Blossom Plaza                       Westlake Theatre

Status: Vacant building and lot        Status: Building (unknown if occupied)
Type of funding: CDBG                  Type of funding: CDBG




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Appendix D

                                         CRITERIA
24 CFR 85.42, Retention and access requirements for records.
   (a) Applicability.
       (1) This section applies to all financial and programmatic records, supporting documents,
           statistical records, and other records of grantees or subgrantees which are:
           (i) Required to be maintained by the terms of this part, program regulations or the
           grant agreement, or
           (ii) Otherwise reasonably considered as pertinent to program regulations or the grant
           agreement.
   (c) Starting date of retention period
       (2) Real property and equipment records. The retention period for real property and
           equipment records starts from the date of the disposition or replacement or transfer at
           the direction of the awarding agency.
       (3) Records for income transactions after grant or subgrant support. In some cases
           grantees must report income after the period of grant support. Where there is such a
           requirement, the retention period for the records pertaining to the earning of the
           income starts from the end of the grantee’s fiscal year in which the income is earned.

24 CFR 570.503, Agreements with subrecipients.
   (b) At a minimum, the written agreement with the subrecipient shall include provisions
       concerning the following items:
       (2) Records and reports. The recipient shall specify in the agreement the particular
           records the subrecipient must maintain and the particular reports the subrecipient
           must submit in order to assist the recipient in meeting its recordkeeping and reporting
           requirements.
       (7) Reversion of assets. The agreement shall specify that upon its expiration the
           subrecipient shall transfer to the recipient any CDBG funds on hand at the time of
           expiration and any accounts receivable attributable to the use of CDBG funds. It
           shall also include provisions designed to ensure that any real property under the
           subrecipient’s control that was acquired or improved in whole or in part with CDBG
           funds (including CDBG funds provided to the subrecipient in the form of a loan) in
           excess of $25,000 is either:
           (i) Used to meet one of the national objectives in §570.208 (formerly § 570.901) until
               five years after expiration of the agreement, or for such longer period of time as
               determined to be appropriate by the recipient; or
           (ii) Not used in accordance with paragraph (b)(7)(i) of this section, in which event the
                subrecipient shall pay to the recipient an amount equal to the current market value
                of the property less any portion of the value attributable to expenditures of non-
                CDBG funds for the acquisition of, or improvement to, the property. The
                payment is program income to the recipient. (No payment is required after the
                period of time specified in paragraph (b)(7)(i) of this section.)




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24 CFR 570.506, Records to be maintained.
Each recipient shall establish and maintain sufficient records to enable the [HUD] Secretary to
determine whether the recipient has met the requirements of this part. At a minimum, the
following records are needed:
(d) Records which demonstrate compliance with §570.505 regarding any change of use of real
    property acquired or improved with CDBG assistance.

570.705 Loan requirements.
   (b) Security requirements. To assure the repayment of debt obligations and the charges
       incurred under paragraph (g) of this section and as a condition for receiving loan
       guarantee assistance, the public entity (and State and designated public agency, as
       applicable) shall:
   (1) Enter into a contract for loan guarantee assistance with HUD, in a form acceptable to
       HUD, including provisions for repayment of debt obligations guaranteed hereunder;
   (2) Pledge all grants made or for which the public entity or State may become eligible under
       this part; and
   (3) Furnish, at the discretion of HUD, such other security as may be deemed appropriate by
       HUD in making such guarantees. Other security shall be required for all loans with
       repayment periods of ten years or longer. Such other security shall be specified in the
       contract entered into pursuant to § 570.705(b)(1). Examples of other security HUD may
       require are:
       (i) Program income as defined in § 570.500(a);
       (ii) Liens on real and personal property;
       (iii) Debt service reserves; and
       (iv) Increments in local tax receipts generated by activities carried out with the
             guaranteed loan funds.

Title 42 USC Sec. 5308 of the Housing and Community Development Act of 1974,
Guarantee and commitment to guarantee loans for acquisition of property.
d. Repayment contract; security; pledge by State
To assure the repayment of notes or other obligations and charges incurred under this section and
as a condition for receiving such guarantees, the [HUD] Secretary shall require the issuer to--
enter into a contract, in a form acceptable to the Secretary, for repayment of notes or other
obligations guaranteed hereunder; pledge any grant for which the issuer may become eligible
under this chapter; and furnish, at the discretion of the Secretary, such other security as may be
deemed appropriate by the Secretary in making such guarantees, including increments in local
tax receipts generated by the activities assisted under this chapter or dispositions proceeds from
the sale of land or rehabilitated property.




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