oversight

The Niagara Falls Housing Authority Did Not Always Administer Its HOPE VI Grant Program and Activities in Accordance With HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-07-10.

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

OFFICE OF AUDIT
REGION 2
NEW YORK-NEW JERSEY




               Niagara Falls Housing Authority
                     Niagara Falls, NY

           HOPE VI Revitalization Grant Program




2014-NY-1007                                     JULY 10, 2014
                                                       Issue Date: July 10, 2014

                                                       Audit Report Number: 2014-NY-1007




TO:            Dominique Blom,
               Deputy Assistant Secretary of Public Housing Investments, PI

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

SUBJECT:       The Niagara Falls Housing Authority Did Not Always Administer Its HOPE VI
               Grant Program and Activities 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 a review of the Niagara Falls Housing Authority’s
HOPE VI 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.
                                           July 10, 2014
                                           The Niagara Falls Housing Authority Did Not Always
                                           Administer Its HOPE VI Grant Program and Activities
                                           in Accordance With HUD Requirements



Highlights
Audit Report 2014-NY-1007


 What We Audited and Why                    What We Found

We audited the Niagara Falls Housing       The Authority did not always administer its HOPE VI
Authority’s HOPE VI grant program          grant program and activities in accordance with
based on an Office of Inspector General    requirements. Specifically, contrary to Federal
risk analysis and the amount of funding    regulations and the HOPE VI grant agreement,
the Authority received. The objectives     Authority officials drew more HOPE VI funds from
of the audit were to determine whether     HUD’s Line of Credit Control System than were
the Authority administered its HOPE VI     needed to cover project expenditures. We attribute this
grant program and activities in            deficiency to Authority officials incorrectly
accordance with U.S. Department of         interpreting Federal regulations and the grant
Housing and Urban Development              agreement requirements. As a result, more than $1
(HUD) and HOPE VI grant program            million in phase I HOPE VI funds drawn was not
requirements.                              applied to project expenditures. In addition, the
                                           Authority earned $26,785 in accrued interest on these
                                           funds through February 2014, which should be
 What We Recommend
                                           returned to the U.S. Treasury. Further, Authority
                                           officials drew $403,324 more in HOPE VI funds than
We recommend that HUD instruct             was needed to meet its share of the development costs
Authority officials to (1) reimburse the   for phase II.
U.S. Treasury for approximately $1.5
million in HOPE VI funds drawn in
excess of need to cover project
expenditures, and (2) establish
procedures to ensure that program funds
are drawn in accordance with the grant
agreement and regulations.
                           TABLE OF CONTENTS


Background and Objectives                                                     3

Results of Audit
      Finding: Authority Officials Withdrew HOPE VI Funds in Excess of Need   4

Scope and Methodology                                                         7

Internal Controls                                                             8

Appendixes
A.    Schedule of Questioned Costs                                            10
B.    Auditee Comments and OIG’s Evaluation                                   11




                                           2
                      BACKGROUND AND OBJECTIVES

The Niagara Falls Housing Authority is a municipal housing authority created under the New
York State Public Housing Law, section 415. The Authority’s board consists of seven members
who appoint an executive director who is responsible for the Authority’s day-to-day operations.
The Authority is a public corporation formed for the purpose of providing housing services in
Niagara Falls, NY, in accordance with the rules and regulations prescribed by the U.S.
Department of Housing and Urban Development (HUD).

The HOPE VI program, originally known as the Urban Revitalization Demonstration program,
was developed as a result of recommendations by the National Commission on Severely
Distressed Public Housing, which was charged with proposing a national action plan to eradicate
severely distressed public housing. The final report of the National Commission on Severely
Distressed Public Housing recommended revitalization in three general areas:

      Physical improvements,
      Management improvements, and
      Social and community services to address resident needs.

As a result, HOPE VI was created by the U.S. Department of Veterans Affairs, HUD, and the
Independent Agencies Appropriations Act of 1993 (Pub.L. 102-389), approved on October 6,
1992.

In September 2006, the Authority was awarded a $20 million HOPE VI grant to revitalize Center
Court, a 134-unit public housing project on the north end of Niagara Falls, NY. The original
revitalization plan included three phases of housing development, each with rental and
homeownership for a total of 282 housing units. In December 2007, the construction for phase I
began; however, delays plagued the project as a result of environmental contamination on the
construction site and the default of the initial investor. As a result of these issues, construction
was forced to stop in July 2008. Construction was restarted in June 2009 after a new soil
remediation plan was approved and another private investor was secured. The Authority
amended the revitalization plan, and the new plan included separate development phases for
rental and homeownership totaling 246 housing units. The new phase I consisted of 115 rental
units, phase II 100 rental units, and phase III 31 homeownership units. In July 2010, there was a
second closing for phase I due to the changes; as such, in total, 215 rental units were completed.
The phase III homeownership activity was never started.

The objectives of the audit were to determine whether the Authority administered its HOPE VI
grant program and activities in accordance with HUD and HOPE VI grant program requirements.




                                                 3
                                        RESULTS OF AUDIT


Finding: Authority Officials Withdrew HOPE VI Funds in Excess of
         Need
Contrary to Federal Regulations and the Hope VI grant agreement, Authority officials drew
down more HOPE VI funds from HUD’s Line of Credit Control System (LOCCS)1 than
necessary to cover project expenditures. We attribute this deficiency to Authority officials
incorrectly interpreting Federal regulations and grant agreement requirements. As a result, more
than $1 million in phase I HOPE VI funds drawn was not applied to project expenditures. In
addition, the Authority earned $26,785 in accrued interest on these funds through February 2014,
which needs to be returned to the U.S. Treasury. Further, Authority officials drew $403,324
more in HOPE VI funds than was necessary to meet its share of the development costs for phase
II.


    The Authority Drew More
    HOPE VI Funds Than
    Necessary in Phase I

                    Authority officials drew down $1,084,187 more than necessary to meet the HOPE
                    VI expenses for phase I. HOPE VI funds were a portion of the total investment in
                    this mixed-finance project executed between Authority officials and HUD. The
                    other project investment sources included private investment and other public
                    funds, such as City of Niagara Falls and State of New York funds. Authority
                    officials had advanced HOPE VI funds to keep the project on schedule in phase I
                    when the initial private investor defaulted and stopped meeting its funding
                    obligation in December 2008. However, in July 2010 when other investors were
                    found and phase I of the project reclosed, Authority officials were reimbursed all
                    of the HOPE VI funds they had advanced. After the reclosing, all proceeds were
                    deposited into the Authority’s HOPE VI money market bank account. At this
                    point Authority officials did not make withdrawals from LOCCS to pay for phase
                    I project expenditures but, rather, made withdrawals from the HOPE VI money
                    market bank account, reducing the closing proceeds amount. When the
                    construction of phase I was completed, the HOPE VI portion of the phase I
                    expenditures was around $3.6 million. However, Authority officials had been
                    previously reimbursed HOPE VI funds of around $4.6 million. As a result,
                    Authority officials had drawn down $1,084,187 more than what was necessary to
                    meet the HOPE VI expenses for phase I of the project. In addition, the Authority
                    had earned $26,785 in interest on these funds, and rather than using the remaining



1
    LOCCS is the system HUD uses to disburse and track the payment of grant funds to grant recipients.

                                                          4
                 balance of HOPE VI funds toward phase II expenditures, Authority officials left
                 these funds in the bank account, and resumed drawing from LOCCS2.

                 Authority officials indicated that the excess HOPE VI funds available at the end
                 of phase I occurred because the budgeted HOPE VI funds in the original closing
                 exceeded the budgeted HOPE VI funds in the reclosing budget. They stated that
                 this excess also occurred because all of the original HOPE VI budgeted funds had
                 already been drawn down from LOCCS at the time of the reclosing in July 2010.
                 Also, newly added sources, such as Recovery and Reinvestment Act funds, took
                 the place of some of the originally budgeted HOPE VI expenditures, resulting in
                 excess funds being available for this phase.

    The Authority Drew More
    HOPE VI Funds Than
    Necessary in Phase II

                 Authority officials withdrew $403,324 more in HOPE VI funds than was
                 necessary to cover its phase II expenditures. Authority officials decided that
                 HOPE VI funds would be used first to pay for all of the project’s hard costs due to
                 concerns over meeting the HOPE VI expenditure deadline of September 30,
                 20123. Authority officials entered into a loan agreement for the phase II
                 construction in which HOPE VI funds allotted to hard costs needed to be
                 expended before funds were drawn from other sources. As a result, they
                 withdrew 100 percent of the budgeted HOPE VI funds allotted to this phase for
                 hard costs without drawing from the other investment sources. However, the total
                 development costs for phase II were less than budgeted. Thus, Authority officials
                 withdrew $403,324 more HOPE VI funds than were necessary. Authority
                 officials should have established controls to ensure that the Authority did not
                 draw more public housing grant funds than were necessary to meet its share of the
                 development costs4.

    Conclusion

                 The Authority did not always administer its HOPE VI grant program and
                 activities in accordance with requirements. Specifically, contrary to 24 CFR Part
                 941.612 and the HOPE VI grant agreement, Article II (E) (1), Authority officials
                 drew more HOPE VI funds from LOCCS than were necessary to cover project
                 expenditures. We attribute this deficiency to Authority officials incorrectly
                 interpreting Federal regulations and grant agreement requirements. As a result,

2
  Regulations at 24 CFR 941.612 (b) (1) provide that a housing authority may only draw down public housing
development funds in an approved ratio to other public and private funds, in accordance with a draw schedule
prepared by the PHA and approved by HUD.
3
  The HOPE VI grant agreement Article II (E) (1) states that all FY 2006 HOPE VI funds must be expended by
September 30, 2012.
4
  See footnote 2 above.

                                                        5
          more than $1 million in phase I HOPE VI funds drawn was not applied to project
          expenditures. In addition, the Authority earned $26,785 in accrued interest on
          these funds through February 2014, which must be returned to the U.S. Treasury.
          Further, Authority officials drew $403,324 more in HOPE VI funds than was
          needed to meet its share of the development costs for phase II.

Recommendations

          We recommend that HUD instruct Authority officials to

          1A.     Reimburse the U.S. Treasury for the $1,084,187 in phase I HOPE VI
                  funds drawn in excess of need to cover project expenditures.

          1B.     Reimburse the U.S. Treasury for the $26,785 in interest accrued on the
                  excess HOPE VI funds drawn in phase I through February 2014.

          1C.     Reimburse the U.S. Treasury for the $403,324 in phase II HOPE VI funds
                  drawn in excess of need to cover project expenditures.

          1D.     Establish procedures to ensure that program funds are not drawn down in
                  advance of needed, but in accordance with the grant agreement and
                  regulations.




                                           6
                         SCOPE AND METHODOLOGY
We performed onsite audit work at the Authority’s administrative offices at 744 Tenth Street in
Niagara Falls, NY, between September 2013 and March 2014. The audit scope covered the
HOPE VI grant program expenditure period of July 1, 2007, through September 30, 2012, and
was extended as necessary. To accomplish our objectives, we

     Reviewed relevant HUD regulations, guidebooks, and files.

     Interviewed HUD officials to obtain an understanding of and identify HUD’s concerns with
      the Authority’s operations.

     Reviewed HUD’s correspondence with Authority officials pertaining to the HOPE VI grant
      program.

     Reviewed the Authority’s policies, procedures, and practices.

     Interviewed key personnel responsible for the administration of the HOPE VI grant program.

     We reviewed more than $12.8 million of the $20 million in HOPE VI grant funds.
      For phase I we selected for review the first three and the largest general contractor
      draw requests and supporting documentation, as well as HOPE VI funds charged
      to the project from the advanced funds at the reclosing. We tested over $5.7
      million of the approximately $9.8 million of phase I costs. For phase II, we tested
      more than $7.1 million, which was 100 percent of total draw requests for this
      phase. We tested these costs for eligibility in terms of supporting documentation
      and compliance with program and financing document requirements. We did not
      test the remaining over $3 million of the $20 million LOCCS draws that were for
      soft costs associated with both phases.

     We relied in part on computer-processed data primarily for obtaining background
      information on the Authority’s expenditure of HOPE VI grant funds. We
      performed a minimal level of testing and found the data to be adequate for our
      purposes.

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




                                                 7
                              INTERNAL CONTROLS
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

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

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


 Relevant Internal Controls

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

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

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

                     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 effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.


                                                 8
Significant Deficiencies

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

                   Authority officials did not have adequate controls over compliance with laws
                    and regulations or safeguarding resources as they did not always comply
                    with HUD regulations while applying HOPE VI funds drawn to project
                    expenditures, and drew down more funds than necessary to cover its share of
                    project expenditures (see finding).




                                               9
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS

                           Recommendation           Ineligible 1/
                                  number
                                         1A           $1,084,187
                                         1B              $26,785
                                         1C             $403,324
                                       Total          $1,514,296

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.




                                            10
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         11
Ref to OIG Evaluation   Auditee Comments




Comment 3


Comment 4



Comment 5

Comment 6

Comment 7



Comment 8

Comment 9

Comment 10


Comment 11




                         12
Ref to OIG Evaluation   Auditee Comments




Comment 12
Comment 13




Comment 14




Comment 15




                         13
Ref to OIG Evaluation   Auditee Comments




                         14
                         OIG Evaluation of Auditee Comments

Comment 1   Authority officials state that the NFHA always acted appropriately and within the
            guidelines of the program and in concert with the HUD Field Office. However,
            we determined, based on our review which was conducted in compliance with
            governmental auditing standards, that Authority officials drew more HOPE VI
            funds from LOCCS than were needed to cover project expenditures. Authority
            officials should have established controls to ensure that the Authority did not
            draw more public housing grant funds than were necessary to meet its share of the
            development costs.

Comment 2   Authority officials state that the project was not only salvaged, but it became and
            continues to be a success. However, rather than providing 282 rental and
            homeownership units as approved in the original HOPE VI revitalization plan,
            only 215 total units were completed. In addition, HUD’s total investment in the
            project increased from $20 million in HOPE VI funds to over $30 million. The
            $30 million includes the HOPE VI funds plus Recovery Act funds from the
            Capital Fund program-formula grant, competitive grant, and the Tax Credit
            Assistance Program (TCAP).

Comment 3   Authority officials state that NFHA drew down (on a monthly basis) only the
            amount of phase I budgeted hard costs that were authorized in the original HUD
            approved HOPE VI closing budget and consistent with HUD's approval of a non-
            pari passu funding plan to maintain construction until re-closing with the
            replacement investor. Pari passu funding refers to making draws in accordance
            with ratios as established in executed financing documents. Although this was
            considered at the time we were conducting our review, the issue remains that
            HOPE VI funds were drawn in excess of need because when construction was
            completed $1,084,187 in phase I funds remained, and were not included as part of
            the HUD funds used to complete the phase.

Comment 4   Authority officials state that the OIG comment fails to account for unique
            circumstances associated with phase I including default of the original investor.
            However, the draft report addresses the unique events that occurred as this project
            progressed in the background and objectives section and also in the finding.
            Authority officials also state that most of the reimbursed funds received at the
            reclosing were re-disbursed for approved project development costs in subsequent
            monthly draws. However, $1,084,187 in phase I funds remained unaccounted for
            through the completion of the project.

Comment 5   Authority officials state that the HUD approved re-closing budget used less
            HOPE VI funds than the original closing budget and that the difference
            (effectively a bridge) is evident in the HUD approved respective closing mixed
            finance budgets, and was discussed with HUD after re-closing and at the time of
            each subsequent HOPE VI budget revision request. However, bridge loan
            documents were not executed. In addition, the excess HOPE VI funds were not

                                             15
              identified as program income, nor were they expended prior to any additional
              LOCCS draws and by the September 30, 2012 deadline date.

Comment 6     Authority officials state that HUD advised them to set up the phase II budget for
              draw down from LOCCS, rather than first using excess phase I refunded
              proceeds. However, Authority officials could not provide documentation from
              HUD to support HUD’s guidance to draw from LOCCS prior to using the
              refunded phase I proceeds.

Comment 7     Authority officials state that establishing an endowment trust to sustain
              community and supportive services is a permitted activity under the grant (up to
              15% of the grant total) and NFHA is setting up an endowment trust with the
              bridged funds. However, the questioned funds should have been expended by the
              September 30, 2012, expenditure deadline; and since they weren’t, the funds
              should be returned to the Treasury. Also, the funds were not drawn down for the
              purpose of establishing an endowment trust, but were drawn for construction
              purposes and not used; therefore, the funds need to be returned to the Treasury.

Comment 8     Authority officials state that NFHA drew down only the amount of phase II costs
              that were included in the HUD approved mixed finance budgets for the phase and
              the HUD approved NFHA loan documents. However, Authority officials drew
              more HOPE VI funds from LOCCS than were needed to cover project
              expenditures for phase II. For example, the first general contractor payment for
              phase II in October 2011 was for $343,716. This HOPE VI fund draw was for
              100 percent of the contractor payment, rather than a percentage in accordance
              with the ratio to other public and private funds.

Comment 9     Authority officials state that HUD approved the non-pari passu funding for phase
              II construction costs as the only way to meet NFHA's funding commitment within
              the grant expenditure deadline. Pari passu funding refers to making draws in
              accordance with ratios as established in executed financing documents. However,
              Authority officials should have established controls to ensure that the Authority
              did not draw more public housing grant funds than were necessary to meet the
              HOPE VI program’s share of the development costs.

Comment 10 Authority officials state that Exhibit G of the HUD approved Mixed Finance
           Amendment provides for a reconciliation of the ratio between public housing
           funds and non-public funds upon "full disbursement of all funds" which was not
           determined until final credit allocation and permanent loan closing. This standard
           practice recognizes that project cost savings cannot be predicted six months in
           advance of construction completion. However, the amount questioned in the
           report was based upon the total development cost and the residual HOPE VI funds
           on hand. Therefore, when NFHA officials realized at or prior to permanent
           closing that the excess HOPE VI funds were not going to be used, based on the
           financing documents executed at the phase I reclosing in July 2010, the funds
           should have been returned to the Treasury.

                                              16
Comment 11 Authority officials state that the OIG comment that "Authority officials should
           have established controls to ensure that the Authority did not draw more public
           housing grant funds than necessary" is incorrect and reflects a misunderstanding
           of the Authority's responsibilities under the approved mixed finance evidentiary
           documents. However, we determined that had Authority officials established
           better controls pertaining to the project’s overall budget and how much funding
           would be necessary to complete the project, HOPE VI funds in excess of need
           would not have been drawn from LOCCS.

Comment 12 Authority officials state that the exact project cost (and therefore cost savings) is
           not known until the final cost certification, which occurs months after
           construction completion. However, it should be noted that the amount questioned
           in the report was based upon the total development cost incurred. Therefore,
           when it was realized at or prior to permanent closing that the excess HOPE VI
           funds were not going to be used, based on the financing documents executed at
           the phase I reclosing in July 2010, the funds should have been returned to the
           Treasury. In addition, since the HOPE VI funds were still not fully disbursed at
           the HOPE VI expenditure deadline of September 30, 2012, this further supports
           that these funds should have been returned to the Treasury.

Comment 13 Authority officials state that NFHA previously reprogramed the only predictable
           portion of the project cost savings (from the relocation budget) to fund a shortfall
           in administration and program management costs and that HUD approved the
           applicable budget revision, which was consistent with HUD cost control
           standards. However, Authority officials should have established controls to
           ensure that the Authority did not draw more public housing grant funds than were
           necessary to meet its share of the development costs.

Comment 14 Authority officials state that HUD, NFHA and the developer collaborated
           extensively to address an unprecedented range of obstacles that could have
           derailed the project, but did not. Also, Authority officials state that the two
           completed rental phases are a testament to that cooperation. However, this
           resulted in the completion of a smaller scale project with no homeownership,
           market rate rental, or off-site rental units at an increased cost to HUD. Authority
           officials further state that all public housing grant funds were drawn only as
           needed pursuant to a HUD approved funding plan ("not in advance of needed" as
           suggested); as such, no funds were drawn inappropriately and no change in
           procedures is needed. However, when construction was completed $1,084,187 in
           phase I funds and $403,324 in phase II HOPE VI funds remained, and thus should
           be returned to the Treasury.

Comment 15 Authority officials state that the NFHA successfully administered the $20 million
           HOPE VI grant plus an additional $3.8 million in ARRA funding in support of the
           Center Court revitalization project and that the audit failed to note that other
           positive outcomes of the project. However, we determined that funds were drawn

                                               17
in excess of need and that $1,084,187 in phase I funds and $403,324 in phase II
funds remained when construction was completed. In addition, rather than
providing 282 rental and homeownership units as approved in the original HOPE
VI revitalization plan, only 215 total units were completed. In addition, HUD’s
total investment in the project increased from $20 million in HOPE VI funds to
over $30 million. The $30 million includes the HOPE VI funds plus Recovery
Act funds from the Capital Fund program-formula grant, competitive grant, and
the Tax Credit Assistance Program (TCAP). Therefore, a smaller scale project
was completed with no homeownership, market rate rental, or off-site rental units
at an increased cost to HUD.




                                18