oversight

The City of Elmira, NY, Did Not Always Administer Its CDBG Program in Accordance with HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-05-20.

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

OFFICE OF AUDIT
REGION 2
NEW YORK, NEW JERSEY




               The City of Elmira, New York

  Community Development Block Grant Program




2014-NY-1004                                  MAY 20, 2014
                                                        Issue Date: May 20, 2014

                                                        Audit Report Number: 2014-NY-1004




TO:            William O’Connell,
               Director, Community Planning and Development, Buffalo, NY, 2CD

               //SIGNED//Joseph Vizer
               for
FROM:          Edgar Moore,
               Regional Inspector General for Audit, New York-New Jersey Region, 2AGA

SUBJECT:       The City of Elmira, NY, Did Not Always Administer Its CDBG Program in
               Accordance With HUD Requirements

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

    HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.

    The Inspector General Act, Title 5 United States Code, section 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
(212) 264-4174.
                                           May 20, 2014
                                           The City of Elmira, NY, Did Not Always Administer Its
                                           CDBG Program in Accordance With HUD Requirements




Highlights
Audit Report 2014-NY-1004


 What We Audited and Why                       What We Found

We audited the City of Elmira, NY’s           City officials did not always (1) ensure that
administration of its Community               program activities were adequately documented
Development Block Grant (CDBG)                and administered in accordance with HUD
program based on our risk analysis and        regulations, and (2) expend CDBG funds for
funding received by the City. The             eligible activities. Specifically, the City charged
objectives of the audit were to               costs to its CDBG program without adequate
determine whether the City (1) ensured        documentation to show that the costs met a
that program activities were adequately       national objective or benefited the CDBG program.
documented and administered in                In addition, excessive administrative program
accordance with U.S. Department of            delivery costs were charged to the CDBG program,
Housing and Urban Development                 including costs for administering a State program.
(HUD) regulations, and (2) expended           We also noted deficiencies in the City’s ability to
CDBG funds for eligible activities.           safeguard assets and segregate duties. These
                                              deficiencies occurred because City officials had not
                                              placed adequate emphasis on establishing and
 What We Recommend
                                              implementing the needed controls to ensure
                                              compliance with program requirements, including
We recommend that the Director of             documenting compliance with national objectives,
HUD’s Buffalo Office of Community             properly allocating costs to the programs receiving
Planning and Development instruct the         the benefit, and safeguarding assets and
City to (1) provide documentation             segregating duties.
regarding $200,000 in unsupported
costs so that HUD can determine the
eligibility of the costs; (2) repay
$25,062 in ineligible costs; (3) provide
supporting documentation for
rehabilitation program delivery costs;
and (4) establish and implement
controls to ensure compliance with
program requirements, that costs are
charged to the benefiting programs, and
that assets are properly safeguarded and
duties are properly segregated.
                           TABLE OF CONTENTS

Background and Objectives                                                  3

Results of Audit

      Finding: City Officials Did Not Always Administer the CDBG Program   4
               in Accordance With HUD Requirements

Scope and Methodology                                                      12

Internal Controls                                                          14

Appendixes
A.    Schedule of Questioned Costs                                         16
B.    Auditee Comments and OIG’s Evaluation                                17




                                          2
                        BACKGROUND AND OBJECTIVES

The Community Development Block Grant (CDBG) Entitlement Communities Grants program
is authorized under Title 1 of the Housing and Community Development Act of 1974, Public
Law 93-383, as amended (42 U.S.C. (United States Code) 5301 et seq.), and provides annual
grants on a formula basis to entitled cities and counties 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.

Entitlement communities develop their own programs and funding priorities. However, grantees
must give maximum feasible priority to activities that benefit low- and moderate-income
persons. A grantee may also carry out activities that aid in the prevention or elimination of
slums or blight. Additionally, grantees may fund activities when the grantee certifies that the
activities meet other community development needs having a particular urgency because existing
conditions pose a serious and immediate threat to the health or welfare of the community and
other financial resources are not available to meet such needs. CDBG funds may not be used for
activities that do not meet these broad national objectives.

According to the U.S. Department of Housing and Urban Development’s (HUD) Integrated
Disbursement and Information System,1 for fiscal years 2010 through 2012, the City of Elmira,
NY, was awarded $3.74 million in CDBG funds, which was allocated to 21 activities in 2010, 24
activities in 2011, and 14 activities in 2012.

The City operates under a mayor-city manager-council form of government, and its CDBG
activities are administered both in-house, through the City’s Department of Community
Development, and by subrecipient organizations. The City is responsible for overseeing,
monitoring, and managing CDBG activities. The files and records related to the City’s CDBG
program are maintained at City Hall, Third Floor, 317 East Church Street, Elmira, NY.

The objectives of the audit were to determine whether the City (1) ensured that program
activities were adequately documented and administered in accordance with HUD regulations
and (2) expended CDBG funds for eligible activities.




1
  The Integrated Disbursement and Information System is a nationwide drawdown and reporting system for HUD’s
four community planning and development grant programs: the CDBG, HOME Investment Partnerships,
Emergency Shelter Grants, and Housing Opportunities for Persons With AIDS programs. The system allows
grantees to request their grant funding from HUD and report on their program accomplishments. HUD uses these
data to report to Congress and monitor grantees.


                                                      3
                                RESULTS OF AUDIT


Finding:      City Officials Did Not Always Administer the CDBG
              Program in Accordance With HUD Requirements
City officials did not always (1) ensure that program activities were adequately documented and
administered in accordance with HUD regulations, and (2) expend CDBG funds for eligible
activities. Specifically, they charged costs to the City’s CDBG program without adequate
documentation to show that the costs met a national objective or benefited the CDBG program.
In addition, excessive administrative program delivery costs were charged to the CDBG
program, including costs for administering a State program. We also noted deficiencies in the
City’s ability to safeguard assets and segregate duties. These deficiencies occurred because City
officials had not placed adequate emphasis on establishing and implementing the controls needed
to ensure compliance with program requirements, including documenting compliance with
national objectives, properly allocating costs to the programs receiving the benefit, and
implementing other needed controls to properly safeguard assets and segregate duties. As a
result, unsupported costs of $797,048 and ineligible costs of $25,062 were expended for
activities that did not benefit the City’s CDBG program, including additional charges for State
rehabilitation program delivery costs, and other assets were at risk of being misappropriated.


 City Files Did Not Always
 Contain Adequate
 Documentation

              City files did not always contain documentation to support whether the costs
              incurred met a national objective or benefited the CDBG program. As a result,
              $225,062 in costs charged to the CDBG program was either unsupported or
              ineligible. Specifically, a $200,000 commercial loan was considered to be
              unsupported, and $18,027 paid to a nonprofit for its administrative costs and
              $7,035 paid to an architecture firm for work related to a State grant were
              ineligible since these costs were not adequately supported with documentation to
              show that the costs benefited the CDBG program or met a national objective. The
              details are described below:

              $200,000 Commercial Loan Did Not Meet a National Objective

              The City, through its subrecipient, Southern Tier Economic Growth, administers
              its CDBG revolving Economic Development Loan programs, including a
              commercial loan program and an industrial loan program. A commercial loan of
              $200,000 was made on April 19, 2011, at a 2 percent interest rate to relocate
              several manufacturing businesses into one central location. As of September 30,
              2013, the loan was current with an unpaid principal balance of $136,416, but it


                                               4
                  had not led to the creation of any jobs. Regulations require that funds used for
                  public benefit create or retain at least one full-time-equivalent, permanent job per
                  $35,000 in CDBG funds used, which would have required the creation or
                  retention of at least six full-time jobs.2 However, the project eligibility form for
                  the loan required that the subrecipient create 14 full-time jobs, with 8 to be filled
                  by low- to moderate-income persons. According to loan documents and the
                  subrecipient’s procedures, the borrower had 3 years to create the jobs. However,
                  since the loan was made on April 19, 2011, the borrower had only until April 19,
                  2014, to create the 14 jobs, or it would not meet a national objective of the
                  program.

                  In addition, there was a potential conflict of interest as the loan was made to a
                  local for-profit corporation, the president of which was also on the board of
                  directors of the subrecipient that made and administered the loan on behalf of the
                  City. The corporation’s president was not on the subrecipient’s loan committee
                  but was a member of its board of directors. HUD regulations prohibit
                  participation in the administration of a contract if there is a real or apparent
                  conflict of interest.3

                  Since no jobs had been created to evidence meeting a national objective of the
                  program, there was a potential conflict of interest, and no related parties’ waiver
                  had been requested from or provided by HUD related to the apparent conflict of
                  interest, we considered the use of CDBG program funds to provide the loan to be
                  unsupported.

                  $18,027 Paid to a Subrecipient Did Not Benefit the CDBG Program

                  The City’s subrecipient, which administers its CDBG-funded revolving Economic
                  Development Loan program, created a sister corporation, Southern Tier Economic
                  Development Corporation. This nonprofit corporation was established to be the
                  owner of a downtown arena facility that was constructed in part with a $4 million
                  Section 108 loan. The Elmira Downtown Arena, LLC, was to manage and
                  operate the arena. Our review revealed that several invoices for the nonprofit
                  corporation had been paid with CDBG funds, although these costs did not benefit
                  the CDBG program. The City’s attorney explained that over the years, the City
                  had paid various administrative costs for the nonprofit for legal and accounting
                  fees and liability insurance. The City’s attorney indicated that these costs were
                  always paid from the City’s general funds because they were considered to be
                  City expenses.



2
  Regulations at 24 CFR (Code of Federal Regulations) 570.209(b) provide the standard for evaluating public benefit
and that the grantee is responsible for ensuring that at least the minimum required public benefit is obtained from
expending CDBG funds.
3
  Regulations at 24 CFR 85.36(b)(3) require that the grantee and subgrantee maintain standards of conduct, which
prohibit participation in the selection, award, or administration of a contract involving Federal funds if there is a real
or apparent conflict of interest.


                                                            5
                  We tested all 10 of the transactions paid on behalf of the nonprofit with CDBG
                  funds since 2009, which totaled $18,027. These costs included payments for
                  income tax return preparation and liability insurance with no apparent benefit to
                  the CDBG program or evidence of meeting a national objective. Therefore, we
                  considered these costs to be ineligible.

                  $7,035 Paid to an Architecture Company Did Not Benefit the CDBG
                  Program

                  Five payments totaling $7,035 were made to an architecture company relating to a
                  State grant to complete a National Register Historic District nomination for the
                  Maple Brand Park Area.4 CDBG funds were used because funds had not been
                  received from the State of New York. The director of the City’s Department of
                  Community Development indicated that the CDBG administration line item
                  would be reimbursed for the $7,035 in costs incurred when State funding was
                  received. The practice of using CDBG funds to prepay costs relating to another
                  funding source is a control weakness in the safeguarding of CDBG assets, and it
                  should be prohibited. In this instance, the costs were incurred relating to a State
                  grant with no bearing on the CDBG program, and, therefore, the costs would be
                  ineligible at the time they were incurred.5 Further, on September 11, 2013, the
                  community development finance director confirmed that a “due from State
                  Grants” receivable had not been established on the CDBG books relating to the
                  prepaid expenses. The lack of a control asset due from account increased the
                  possibility that the funds might not be repaid to the CDBG program.6

                  After our review and before preparation of the draft report, the Department of
                  Community Development director informed us that the State grant funding had
                  been received and the CDBG program had been reimbursed for these costs.
                  However, we considered this to be a significant weakness as CDBG funds were
                  not properly safeguarded and the accounting treatment was not acceptable.




4
  The National Register of Historic Places is the official list of the Nation’s historic places worthy of preservation,
authorized by the National Historic Preservation Act of 1966. The National Park Service’s National Register of
Historic Places is part of a national program to coordinate and support public and private efforts to identify,
evaluate, and protect America’s historic and archeological resources.
5
  Regulations at 24 CFR 570.200(a), Determination of eligibility, provide that for costs to be eligible, they must
meet a national objective and benefit the CDBG program and costs incurred must be allocated in accordance with
Federal cost principles, which require the costs to be necessary and reasonable and properly allocable to the CDBG
program.
6
  Regulations at 24 CFR 85.20, Standard for financial management systems, (b), provides that grantees and
subgrantees must maintain records, which adequately identify the source and application of funds provided for
financially assisted activities and that effective control and accountability must be maintained for all grant and
subgrant cash, real and personal property, and other assets. Grantees and subgrantees must adequately safeguard all
such property and ensure that it is used solely for authorized purposes.


                                                           6
Costs of Administering the
Homeowner Rehabilitation
Program Were Not Reasonable


          The City administers a CDBG homeowner rehabilitation activity and also charges
          the CDBG program for the rehabilitation administration costs (program delivery
          costs) related to this program. The homeowner rehabilitation costs consist of
          loans and grants to homeowners for various rehabilitation work, while the
          program delivery costs should primarily be for the salary and fringe benefit costs
          of a housing inspector and a housing rehabilitation assistant. From July 2010
          through June 2011 $230,000 was charged to the CDBG program for rehabilitation
          program delivery. We tested 10 biweekly payrolls during that period and
          determined that the payroll charges were adequately supported. However, we
          noted that the total charges for program delivery costs were not reasonable,
          economical, or efficient in proportion to the level of actual rehabilitation costs for
          work completed at homeowner residences. For instance, the actual cost of
          homeowner rehabilitation for the past 5 program years and as of June 27, 2013,
          was $527,096, while the program delivery cost was $865,287 for a total of
          $1,392,383. Therefore, the program delivery costs represented 164 percent of the
          actual homeowner rehabilitation costs.

          The City also received funding from the State to run a State-funded rehabilitation
          program. However, the director of the Community Development Department
          informed us that since the State did not provide administrative funds as part of its
          grants, the Department charged employee costs to the CDBG rehabilitation
          program delivery activity for the State-funded activities as well as the CDBG-
          funded activities. Thus, the City had been carrying out State-funded activities
          with CDBG funds and then classifying those costs as program delivery costs
          related to CDBG-funded rehabilitation activities.

          Using unaudited data provided to us for the period 2008 through 2012, we
          estimated that the City expended more than $1.7 million on actual rehabilitation
          costs, consisting of 31 percent for the CDBG rehabilitation program and 69
          percent for the State rehabilitation program (see chart below).




                                            7
                               Total CDBG and State direct rehabilitation expenditures

                  Year                    CDBG                 State rehabilitation Total expenditures
                                          rehabilitation       expenditures         without program
                                          expenditures                              delivery costs
                  2008                                 $76,865            $162,595            $239,460
                  2009                                 170,655             278,225             448,880
                  2010                                 137,933             234,874             372,807
                  2011                                 128,315             258,714             387,029
                  2012                                  13,328             240,000             253,328
                  Total                               $527,096          $1,174,408          $1,701,504
                  Percentage of                           31%                  69%                100%
                  total

                  During the same period, the City charged the CDBG program a total of $865,287
                  for program delivery (rehabilitation administrative) costs, which included the
                  costs of administering the State rehabilitation program. As a result, the CDBG
                  program absorbed all of the administrative costs of the State rehabilitation
                  program. If the program delivery administrative costs were allocated in
                  proportion to the total estimated expenditures of the CDBG and State
                  rehabilitation programs, the State should have paid approximately 69 percent of
                  the total program delivery costs, which would have been $597,048 ($865,287 x
                  69%). Further, we estimated the average annual amount of program delivery
                  costs that should have been paid by the State program to be approximately
                  $119,410 ($597,048 / 5 years). Federal cost principles require that for costs to be
                  allowable, they must be reasonable and allocable to the Federal program being
                  charged.7 While there are a number of acceptable methods by which the City
                  could have estimated these costs, including direct time spent on the State and
                  CDBG rehabilitation activities, which may have resulted in different amounts, we
                  considered the estimated costs that could have been allocated to the State program
                  ($597,048) to be unsupported.

    There Were Control
    Weaknesses Related to
    Safeguarding Assets and
    Segregation of Duties

                  Interviews with City officials and a review of program and financial files
                  identified control weaknesses related to the safeguarding of assets and segregation
                  of duties; specifically,

7
  Regulations at 2 CFR Part 225, Appendix A - General Principles for Determining Allowable Costs, Section C -
Basic Guidelines, subsection 2, requires that for costs to be allowable, they must be reasonable. Subsection 3(a)
provides that for costs to be allocable to a Federal program, they must be in accordance with the relative benefits
received.



                                                          8
                   The Department of Community Development had a chart of accounts but
                    lacked specific written procedures covering the CDBG accounting system.

                   CDBG journal entries were not always fully explained, nor were the
                    entries formally approved by the community development director. To
                    enhance controls, the City should maintain a general journal that provides
                    written explanations documenting the reason(s) and methodology for the
                    entries, and all entries should be formally approved by the community
                    development director.

                   The finance director, who was responsible for cash receipts, reconciled the
                    bank statements but did not sign checks. To enhance controls, the
                    Department of Community Development should consider assigning the
                    function of bank reconciliations to an employee who is not responsible for
                    cash receipts.

                   The Department of Community Development did not use purchase orders
                    for all items acquired. This practice was contrary to City policy and was a
                    safeguarding of assets control weakness. To enhance controls, the
                    Department should follow City purchasing procedures.

                   The Department of Community Development did not document the receipt
                    of all purchased items. This was a safeguarding of assets control
                    weakness. To enhance controls, the Department should document the
                    receipt of all purchased items (for example, by preparing receiving
                    reports).

                   All CDBG-related mail, including vendor invoices, was opened by the
                    finance director. An employee who is not involved with the accounting
                    function should open the mail and keep a log of all received mail.
             Regulations at 24 CFR (Code of Federal Regulations) 85.20(b)(3) provide that
             effective control and accountability must be maintained for all grant and subgrant
             cash, real and personal property, and other assets. Grantees and subgrantees must
             adequately safeguard all such property and ensure that it is used solely for
             authorized purposes. If City officials enhance the above controls, they can work
             toward achieving this goal.

Conclusion

             City officials did not always (1) ensure that program activities were adequately
             documented and administered in accordance HUD regulations and (2) expend
             CDBG funds for eligible activities. These deficiencies occurred because City
             officials did not place adequate emphasis on establishing and implementing the
             controls needed to ensure compliance with program requirements, including


                                              9
          documenting compliance with national objectives, properly allocating costs to the
          programs receiving the benefit, and implementing other needed controls to
          properly safeguard assets. As a result, unsupported costs of $797,048 (200,000 +
          597,048) and ineligible costs of $25,062 were expended with CDBG funds for
          activities that did not benefit the City’s CDBG program, including estimated
          charges for State rehabilitation program delivery costs, and other assets were at
          risk of misappropriation.

Recommendations

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

          1A.     Submit documentation to justify the unsupported costs of $200,000
                  incurred for an economic development loan so that HUD can make an
                  eligibility determination. For any costs determined to be ineligible, HUD
                  should require the City to reimburse the CDBG program from non-Federal
                  funds.

          1B.     Require the subrecipient to request a waiver related to the apparent
                  conflict of interest and implement standards of conduct procedures that
                  prohibit participation in the selection, award, or administration of a
                  contract involving Federal funds if there is a real or apparent conflict of
                  interest.

          1C.     Repay from non-Federal funds the ineligible costs of $18,027 that were
                  paid to a subrecipeint, which did not benefit the CDBG program.

          1D.     Provide documentation regarding the repayment of the $7,035 that was
                  paid an architecture firm related to a State grant to ensure that it was
                  properly repaid to the CDBG program from non-Federal funds.

          1E.     Establish controls to ensure that grant- and subgrant-supported activities
                  are adequately monitored and administered to provide assurance that funds
                  have been used only for eligible activities, costs incurred are necessary
                  and reasonable, and national objectives have been attained.

          1F.     Establish controls to ensure that CDBG funds are not used to pay for costs
                  related to other funding sources or programs.

          1G.     Provide documentation to support the reasonableness and eligibility of the
                  administrative program delivery costs charged to the CDBG program,
                  including $597,048 in program delivery costs that could have been
                  allocated to the State program, and repay the CDBG program from non-
                  Federal funds any amounts determined to be unreasonable or ineligible.



                                            10
1H.   Establish procedures to ensure that the costs of administering the State-
      funded rehabilitation program are no longer charged to the CDBG
      program.

1I.   Establish controls to ensure that assets are adequately safeguarded and
      duties are adequately segregated.




                               11
                         SCOPE AND METHODOLOGY

We performed our onsite work at the City’s offices between August and November 2013. The
audit scope covered the period July 2011 through June 2013 and was extended as necessary.

To accomplish our audit objectives, we

      Reviewed applicable HUD regulations, the Code of Federal Regulations, and other
       requirements and directives that govern the CDBG program.

      Reviewed the City’s applicable policies and procedures used to administer CDBG
       activities.

      Reviewed subrecipient activities to determine whether national objectives were met.

      Interviewed City officials responsible for administering the City’s CDBG program.

      Obtained and reviewed program and financial documentation from the City and its
       subrecipients pertaining to the CDBG activities reviewed.

      Reviewed HUD’s monitoring reports and files for the City’s community planning and
       development programs.

      Reviewed independent public accountant audits and financial reporting.

      Reviewed costs charged to the CDBG program for activities tested during the review,
       along with the applicable supporting documentation provided.

      Reviewed data from HUD’s Integrated Disbursement and Information System for
       background and informational purposes. We relied in part on computer-processed data
       for obtaining background information on the City’s expenditure of CDBG funds. We
       performed a minimal level of testing and found the data to be adequate for our purposes.

For fiscal years 2010 through 2012, the City was awarded $3.74 million in CDBG funds, and
those funds were allocated to 21 activities in 2010, 24 activities in 2011, and 14 activities in
2012.

We reviewed internal controls and five of the City’s CDBG activities. Selection of the activities
reviewed focused primarily on higher funded activities and also included subrecipient-
administered activities.

The City, through its subrecipient, Southern Tier Economic Growth, administers CDBG
revolving Economic Development Loan programs, including a commercial loan program and an
industrial loan program. As of June 2013, there were 12 active loans made between August 2006



                                                12
and February 2013 totaling $755,000. Since 2010, the subrecipient has made a total of six loans.
Two of the loans were industrial loans, and the remaining four loans were commercial loans. We
selected two industrial loans and one commercial loan for review.

Activities were not selected using statistical sampling methodologies, and the results of the
sampling are applicable only to the activites tested, and no projection of the results of the audit
testing was made to the activities that were not selected for testing.

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




                                                 13
                              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.

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

               We assessed the relevant controls identified above.

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


                                                 14
Significant Deficiencies

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

                City officials did not have adequate controls over the efficiency and
                 effectiveness of program operations when they did not establish adequate
                 administrative controls to ensure that CDBG funds were not used to fund a
                 nonprofit’s operating costs that did not benefit the CDBG program or meet a
                 national objective (see finding).

                City officials did not have adequate controls over compliance with laws and
                 regulations when they did not address or seek a HUD waiver relating to a
                 potential conflict of interest associated with a CDBG-funded economic
                 development loan, which also had not met a national objective of the program
                 at the time of the review (see finding).

                City officials did not have an adequate system to ensure that resources were
                 properly safeguarded when they did not ensure that CDBG funds were not
                 used to pay for costs associated with other funding sources. In addition,
                 duties were not always optimally segregated, procedures covering the CDBG
                 accounting system were not documented, journal entries were not formally
                 approved by the community development director, purchase orders were not
                 always used for items acquired, and receiving reports were not always
                 prepared to document the receipt of all purchases, which diminished the City’s
                 controls over the safeguarding of resources (see finding).




                                              15
                                    APPENDIXES

Appendix A

                  SCHEDULE OF QUESTIONED COSTS


     Recommendation
                    Ineligible 1/          Unsupported 2/ 2/
         number

          1A                                 $200,000
          1C            $18,027
          1D              7,035
          1G                                  597,048
         Total          $25,062              $797,048

1/    Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
      that the auditor believes are not allowable by law; contract; or Federal, State, or local
      policies or regulations.

2/    Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
      or activity when we cannot determine eligibility at the time of the audit. Unsupported
      costs require a decision by HUD program officials. This decision, in addition to
      obtaining supporting documentation, might involve a legal interpretation or clarification
      of departmental policies and procedures.




                                              16
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         17
Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 4




Comment 5




                         18
Ref to OIG Evaluation   Auditee Comments




Comment 6




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                          OIG Evaluation of Auditee Comments

Comment 1 City officials indicated that meeting the low-mod job creation requirement has
          proven to be difficult and that the company is willing to repay the CDBG loan.
          City officials indicated that they will pursue repayment of the $200,000 loan by
          June 30, 2014. The City officials’ comments and planned actions are responsive
          to the finding and recommendation.

Comment 2 City officials stated that they would request a waiver from HUD on the prior
          potential conflict of interest. Also, City Officials and STEG will not extend any
          loan involving HUD funds without first identifying any real or apparent conflicts
          of interest and requesting a HUD review and waiver. The City officials’
          comments and planned actions are responsive to the finding and
          recommendations.

Comment 3 City officials agreed that the $18,027 paid to a subrecipeint was ineligible because
          it did not benefit the CDBG program and should be repaid with non-Federal
          funds. The City officials’ comments and planned actions are responsive to the
          finding and recommendations.

Comment 4 City officials agreed that $7,035 paid to architecture firm for a non-CDBG
          historic district nomination was a control weakness and that CDBG funds will not
          be used to prepay expenses for other grants. City officials indicated that the
          $7,035 had been repaid to the CDBG program. The City officials’ comments are
          responsive to the finding and recommendations, however, the HUD Buffalo
          Community Development staff should verify the accounting treatment related to
          the advance and repayment of the funds as part of the audit resolution process.

Comment 5 City officials indicated that in the past municipalities were not eligible to receive
          administrative costs from the state, but now the City can and will apply for funds
          to administer the State rehabilitation program. City officials indicated that the
          HUD Buffalo Office in its review of the CDBG program for the year ended June
          30, 2013, stated that “Per unit costs and CDBG program delivery costs were
          reasonable.” City officials also indicated that using actual expenditures from
          QuickBooks resulted in different results when comparing the amount of State
          rehabilitation expenditures to CDBG expenditures, and that rehabilitation
          expenditures applicable to State funding were only 49.5 percent compared to the
          69 percent reported in OIG’s chart in the report. City officials indicated that they
          will try to make efforts to control program delivery costs and apply for the
          maximum administrative allowance allowed by the State program. However, our
          review of the HUD report revealed that it did not clearly indicate that the
          reasonable program delivery costs were specifically applicable to the
          rehabilitation activity as opposed to the overall CDBG program. Furthermore,
          HUD program staff indicated that program delivery costs for the rehabilitation
          activity appeared high when we discussed the finding with them. The difference
          in the amounts and percentages of rehabilitation funded activities is based on what



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             program and calendar years are included in the computation and can be attributed
             to timing differences. Therefore, City Officials should provide documentation to
             reconcile the differences in amounts expended per IDIS compared to the amounts
             expended per QuickBooks as part of the audit resolution process to support if the
             program delivery costs for the rehabilitation activity are reasonable. Note that
             although City officials’ comments indicate that 50.5 percent of the total
             rehabilitation costs were applicable to the State program, all the program delivery
             and administrative costs were charged to the CDBG program, which does not
             appear to be proper as Federal cost principles require the costs to be reasonable
             and allocable to the program being charged.

Comment 6 City officials indicated that they will establish controls to ensure that assets are
          adequately safeguarded and duties are adequately segregated. Therefore, the City
          officials’ comments and planned actions are responsive to the finding and
          recommendation.




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