oversight

The City of Jersey City, NJ's HOME Investment Partnerships Program Administration Had Financial and Administrative Control Weaknesses

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-09-18.

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

 OFFICE OF AUDIT
 REGION 2
 NEW YORK-NEW JERSEY




                          City of Jersey City, NJ

         HOME Investment Partnerships Program




2014-NY-1009
        1 Error! No text of specified style in document. | HUDOIG   SEPTEMBER 18, 2014
NOVEMBER xx, 2012
                                                  Issue Date: September 18, 2014

                                                  Audit Report Number: 2014-NY-1009




TO:            Anne Marie Uebbing
               Director, Office of Community Planning and Development, Newark Field Office,
               2FD

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

SUBJECT:       The City of Jersey City, NJ’s HOME Investment Partnerships Program
               Administration Had Financial and Administrative Control Weaknesses

    Enclosed is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG), final audit report on our review of Jersey City, NJ’s HOME
Investment Partnerships Program.

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

    The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

   If you have any questions or comments about this report, please do not hesitate to call me at
212-264-4174.
                                       September 18, 2014

                                       The City of Jersey City, NJ’s HOME Investment
                                       Partnerships Program Administration Had Financial and
                                       Administrative Control Weaknesses



Highlights
Audit Report 2014-NY-1009


 What We Audited and Why                    What We Found

We audited the City of Jersey City, NJ’s   The City’s HOME program was not always administered
HOME Investment Partnerships Program       in compliance with program requirements. HOME funds
based on a risk assessment that            were not always properly committed, expended, or
considered the amount of funding, the      reported in compliance with program requirements due to
risk score assigned to it by the U.S.      the City’s inadequate controls over recording and
Department of Housing and Urban            reconciling of its commitment and expenditure of funds.
Development (HUD), and general             Therefore, more than $1.5 million was not committed and
congressional interest in the HOME         expended in a timely manner and more than $1.48 million
program. The objective of the audit was    of ineligible commitments were made.
to determine whether City officials had
established and implemented adequate       HOME funds were expended on ineligible and
controls to ensure that the HOME           unsupported costs due to inadequate monitoring of the
program was administered in compliance     City’s subgrantees. Therefore, $566,873 was not available
with program requirments and Federal       for eligible activities and there is no assurance that
regulations.                               $949,362 was expended for eligible HOME activities.

 What We Recommend                       HOME match contributions were not always eligible or
                                         adequately supported. This was due to untimely updating
                                         and tracking of HOME match contributions reported to
We recommend that HUD recapture $1.5 HUD and control weaknesses over monitoring HOME
million in uncommitted and unexpended match agreements. Therefore, $4.36 million in ineligible
funds; and instruct City officials to    match contribution was reported and HOME rent limits
deobligate a commitment of more than     were not established for properties assisted with more than
$1.48 million for a canceled project;    $1.28 million in HOME match funds.
reimburse $566,873 expended for an
ineligible use and provide documentation HOME program income was not properly reported and
to support that $949,362 was expended    used before entitlement funds. We attribute this to
for eligible activities; remove $4.36    incorrectly setting up activities in IDIS, and lack of
million in ineligible HOME match funds knowledge for reporting program income in IDIS.
from the City’s match report; and record Therefore, $803,710 in program income was not recorded
in HUD’s Integrated Disbursement and     in IDIS and used before entitlement funds, and the use of
Information System (IDIS) the receipt of $289,858 in program income was not recorded in IDIS.
$803,710 and the use of $289,858 in
program income.
                             TABLE OF CONTENTS

Background and Objective                                                             3

Results of Audit
      Finding 1:    City Officials Did Not Ensure That HOME Funds Were Committed,
                    Expended, and Reported in Compliance With Program Requirements   4
      Finding 2:    Administrative Controls Did Not Ensure Compliance With Program
                    Requirements                                                     10
      Finding 3:    HOME Match Contribution Funds Were Not Administered in
                    Accordance With Program Requirements                             17
      Finding 4:    Program Income Was Not Always Reported and Expended
                    Before HOME Entitlement Funds                                    20


Scope and Methodology                                                                23

Internal Controls                                                                    25

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use                 27
B.    Auditee Comments and OIG’s Evaluation                                          29




                                             2
                     BACKGROUND AND OBJECTIVES
The HOME Investment Partnerships Program, authorized under Title II of the Cranston-
Gonzalez National Affordable Housing Act, as amended, is designed to create affordable
housing opportunities for low-income households. The HOME program is the largest Federal
block grant program, through which the U.S. Department of Housing and Urban Development
(HUD) has allocated approximately $2 billion annually in formula grants to States and hundreds
of local governments for creating affordable housing for low-income households. Grantees are
required to provide matching funds of 25 percent from non-Federal sources. HOME program
regulations are found at 24 CFR (Code of Federal Regulations) Part 92. HUD has provided
additional guidance in its guidebook entitled “Building HOME,” dated February 2006.

The HOME program allows States and local governments flexibility to use HOME funds for a
variety of activities to address local housing needs. Funds may be used to support eligible
activities through grants, direct loans, loan guarantees or other forms of credit enhancement, or
rental assistance or security deposits. Participating jurisdictions may choose among a broad
range of eligible activities, including home purchase or rehabilitation financing assistance to
eligible homeowners and new home buyers, building or rehabilitating housing for rent or
ownership, or for other reasonable and necessary expenses related to the development of
nonluxury housing, including site acquisition or improvement, demolition of dilapidated housing
to make way for HOME-assisted development, and payment of relocation expenses.

HUD awarded the City of Jersey City more than $2.88 and $1.57 million in HOME funds for
program years 2011 and 2012, respectively. The City’s HOME program is administered by its
Community Development Division, which is located at 30 Montgomery Street, Jersey City, NJ.
The city council is the legislative branch of the City government and consists of six ward
councilpersons and three at-large (elected citywide) councilpersons.

The City’s HOME program assisted different types of housing activities, including first-time
home buyer, home buyer and home ownership, and rental housing activities. However, the
majority of the City’s HOME drawdowns in program years 2010 through 2012 were provided for
the acquisition, rehabilitation, and new construction of rental, home buyer, and home ownership
activities rather than first-time home buyer activities.

The objective of the audit was to determine whether City officials had established and
implemented adequate controls over the City’s HOME program to ensure that the program was
administered in compliance with program requirements and Federal regulations.




                                                3
                                      RESULTS OF AUDIT


Finding 1: City Officials Did Not Ensure That HOME Funds Were
           Committed, Expended, and Reported in Compliance With
           Program Requirements
City officials did not always ensure that the City’s HOME funds were committed, expended, and
reported in compliance with HOME program regulations. Specifically, HOME funds (1) were
not committed and expended in a timely manner; (2) remained committed in HUD’s Integrated
Disbursement and Information System (IDIS)1 for a terminated project; (3) were not deposited
into the HOME trust account when reimbursed; (4) were disbursed for unsupported planning,
administrative, and program costs and in excess of the 10 percent limit; and (5) did not always
reconcile between IDIS and the City’s accounting records. We attribute these deficiencies to
weaknesses in procedures to track the commitment and expenditure of HOME funds, ensuring
that funds were expended for eligible costs and properly reimbursed, and reconciling financial
information reported in IDIS with the City’s accounting records. As a result, more than $3.2
million in HOME funds was not made available for eligible activities in a timely manner;
$266,463 and $9,371 in HOME funds were used for ineligible and unsupported costs,
respectively; and $118,561 in HOME funds was not accurately recorded in IDIS.


    HOME Funds Not Committed
    in a Timely Manner

                 City officials did not commit $464,663 of the City’s program year 2011
                 accumulated entitlement funds in a timely manner as required. Regulations at 24
                 CFR (Code of Federal Regulations) 92.500(d)(1)(B) provide for the reduction or
                 recapture of any HOME funds that are not committed within 24 months after the
                 last day of the month in which HUD notifies the grantee that its HOME
                 agreement has been executed. Regulations at 24 CFR 92.2 define commitment as
                 when the grantee executes a legally binding agreement with a subgrantee. While
                 $59.3 million in accumulated HOME funds was required to be committed by July
                 31, 2013, $464,6632 was not committed by this deadline. We attribute this
                 condition to City officials’ failure to deobligate in IDIS a $2 million commitment
1
 The Integrated Disbursement and Information System (IDIS) is the drawdown and reporting system for all of
HUD’s Office of Community Planning and Development (CPD) formula grant programs including the HOME
program, which is the focus of this audit report.
2
  Of the City’s $60.8 million accumulated commitment reported in IDIS as of July 31, 2013, $2 million related to
the cancelled project, leaving reported eligible commitments of $58.8 million. Since the City’s required
commitment was $59.3 million, there was a commitment shortfall of $514,663. However, since $50,000 of the
shortfall is questioned in recommendation 2G, we removed this amount to avoid duplication and $464,663 is
considered to be a commitment shortfall.



                                                         4
           for a housing project that was terminated on September 12, 2012, which caused
           the officials to believe that more funds than needed had been committed within
           the time limits. As a result, $464,663 of the City’s HOME funds was not
           available for commitment to other eligible HOME activities.

HOME Funds Not Expended in
a Timely Manner

           City officials did not expend the City’s program years 2005 through 2007
           accumulated entitlement funds in a timely manner. Regulations at 24 CFR
           92.500(d)(1)(C) provide for the reduction or recapture of HOME funds that are
           not expended within 5 years after the last day of the month in which HUD notifies
           the grantee that its HOME agreement has been executed. Community Planning
           and Development (CPD) Notice 01-13, section V, provides that the 5-year
           deadline occurs 5 years after the last day of the month in which HUD notifies the
           grantee that it has executed the HOME agreement. However, City officials did
           not expend more than $1 million of the City’s HOME funds in the required
           timeframe as follows:

                        Program    Deadline for       Amount not
                        year       expenditure      expended by the
                                                       deadline
                        2005       07-31-2010         $ 158,559
                        2006       04-30-2011            598,015
                        2007       05-31-2012            303,955
                        Total                         $1,060,529

           We attribute this deficiency to weaknesses in the City’s controls over monitoring
           the progress of funded housing projects, which hampered its ability to ensure that
           HOME funds were expended within the required timeframes. As a result, more
           than $1 million in HOME funds was not available to fund other eligible HOME
           activities in a timely manner.

Funds Committed for a
Terminated Project

           City officials continued to report $2 million as a commitment in IDIS for a rental
           housing project that was terminated on September 12, 2012. Regulations at 24
           CFR 92.2(1) provide that funds are committed when a participating jurisdiction
           executes a legally binding agreement with a subgrantee to use HOME funds.
           When the project was terminated, there was no longer a legally binding
           agreement, and the funds should have been deobligated. We attribute this
           deficiency to weaknesses in the City’s controls over monitoring the status of
           HOME-funded projects to ensure that funds are deobligated when funded projects


                                            5
                are terminated. As a result, more than $1.483 million was not made available for
                other eligible HOME program activities, and the City’s accumulated commitment
                in IDIS was overstated by more than $1.48 million.

    Funds Disbursed for Ineligible
    Costs and a Terminated Project

                City officials disbursed funds for ineligible HOME costs and a terminated project.
                Regulations at 24 CFR Part 225, appendix (A)(C)(1), provide that costs allowable
                under Federal awards must be necessary and reasonable for proper and efficient
                performance and administration of Federal awards. City officials disbursed
                $23,549 for water and sewer connection fees , $2,100 for costs associated with a
                canceled project, and $4,375 to replace rollup doors for the nonresidential portion
                of a mixed-use project—which are ineligible HOME program costs according to
                24 CFR 92.214(a)(9) and 503(b)(2). Therefore, the use of the $30,024 was
                neither necessary nor reasonable for the administration of the City’s HOME
                program. We attribute this deficiency to weaknesses in the City’s financial
                controls that did not safeguard assets by preventing the charging of costs to the
                HOME program that were not applicable. As a result, $30,024 in HOME funds
                was not available for other eligible HOME activities.

    Funds Reimbursed Not
    Deposited Into the Trust
    Account

                City officials deposited $190,000 in reimbursed HOME entitlement funds from
                the City’s affordable housing trust fund into the City’s local bank account instead
                of its HOME Investment Trust Fund treasury account. Regulations at 24 CFR
                92.503(b)(3) provide that reimbursement of HOME funds disbursed from the
                participating jurisdiction’s HOME Investment Trust Fund treasury account must
                be repaid to that account. We attribute this deficiency to weaknesses in the City’s
                financial controls for ensuring that reimbursed funds are properly recorded and
                accounted for in compliance with HOME program requirements. As a result, the
                City’s HOME Investment Trust Fund account was understated by $190,000, and
                there was no assurance that the $190,000 was or would be used for eligible
                HOME activities.




3
  The $2 million includes the $464,663 questioned in recommendation 1A and the $50,000 questioned in
recommendation 2G. Therefore, the questionable amount should be $1,485,337 ($2,000,000 - $514,663) to avoid
duplicate counting of questionable costs.

                                                      6
Unsupported Use of HOME
Funds for Administrative Costs

            City officials did not maintain documentation to support that HOME funds used
            for program planning and administrative costs complied with program
            requirements. CPD Notice 97-09, section II (B), requires a participating
            jurisdiction to maintain records that adequately identify the source and application
            of its HOME funds, and 24 CFR 92.207 provides that no more than 10 percent of
            HOME funds may be expended for program administrative and planning costs.
            The City’s HOME cash account reported $534,191 as available, which would
            limit its disbursement for planning and administrative costs to $53,419; however,
            the City disbursed $289,858 from its HOME cash account for planning and
            administrative costs. Thus, $236,439 ($289,858 less $53,419) was considered
            ineligible. In addition, the source and use of $93,711 of the $534,191 was not
            identified. Thus, 10 percent, or $9,371, is considered an unsupported use of
            HOME funds for planning and administrative expenses until documentation is
            made available to support the use of the $93,711 for eligible HOME costs other
            than HOME planning and administrative costs. We attribute this deficiency to
            weaknesses in the City’s financial controls over tracking the source and the use of
            HOME funds. As a result, $236,439 was not available to fund other eligible
            activities, and there was no assurance that the $93,711 was used for eligible
            HOME activities.

Information in IDIS Not Always
Reconciled With the City’s
Accounting Records

            Information recorded in IDIS did not always reconcile with information in the
            City’s accounting records. Regulations at 24 CFR 85.20(b)(2) require grantees to
            maintain accurate financial records. However, the City’s accounting records
            showed that $16,192 in HOME program income was used for two separate
            housing activities; although $10,325 of the $16,192 was recorded in IDIS as a use
            of entitlement funds, the use of the remaining amount of $5,867 was not recorded
            in IDIS. In addition, a drawdown of $102,369 for a home ownership project was
            mistakenly recorded in IDIS as a drawdown for a rental housing project. We
            attribute this deficiency to weaknesses in the City’s financial controls to ensure
            that financial information reported in IDIS reconciles to financial information
            recorded in the City’s accounting records. As a result, HOME program income in
            the City’s accounting records was understated by $16,192, and the use of
            $102,369 in HOME program income recorded in IDIS was not traceable to the
            correct HOME housing project in the City’s accounting records.




                                             7
Conclusion

             City officials did not ensure that HOME funds were committed, expended, and
             reported in compliance with program requirements. Consequently, funds were
             not made available for eligible projects, were disbursed for unsupported activity,
             and were not reconciled between IDIS and the City’s records. We attribute these
             deficiencies to weaknesses in procedures that led to not tracking the commitment
             and expenditure of HOME funds in a timely manner, ensuring that funds were
             expended for eligible costs and properly reimbursed, and reconciling financial
             information reported in IDIS with the City’s accounting records.

Recommendations

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

             1A. Repay the $464,663 not committed within the required timeframe so that
                 these funds can be recaptured in accordance with Federal regulations.

             1B. Repay the $1,060,529 not expended within the required timeframe so that
                 these funds can be recaptured in accordance with Federal regulations.

             1C. Deobligate the $1,485,337 committed to a canceled project, thus ensuring
                 that these funds can be put to better use.

             1D. Develop financial controls to ensure that HOME funds are committed,
                 expended, and reported in compliance with program requirements and
                 deobligated when previously approved HOME projects are canceled.

             1E. Reimburse the City’s HOME program line of credit $30,024 from non-
                 Federal funds for the ineligible and duplicate payments and a payment for a
                 terminated project made with HOME funds.

             1F. Strengthen the City’s financial controls to provide greater assurance that
                 HOME funds are used for eligible and reasonable HOME costs.

             1G. Reimburse its HOME Trust Investment Fund treasury account for the
                 $190,000 deposited into the City’s local bank account, thus ensuring that
                 these funds can be used for eligible HOME activities.

             1H. Strengthen financial controls to provide greater assurance that reimbursement
                 of drawdowns from the City’s HOME Investment Trust Fund treasury
                 account are deposited into the account if they are not immediately needed.




                                              8
1I. Reimburse the City’s HOME program income account for the $236,439
    disbursed in excess of the allowable limit for planning and administrative
    costs.

1J. Provide documentation for the unsupported source and use of $93,711 so that
    10 percent, or $9,371, disbursed for planning and administrative costs can be
    considered eligible administrative expenses, and if documentation cannot be
    provided, reimburse the City’s HOME program account from non-Federal
    funds.

1K. Establish and implement financial controls to ensure that program income is
    properly reported in IDIS and is not used for program administrative costs in
    excess of the 10 percent limit.

1L. Reconcile the $118,561 ($16,192 + 102,369) discrepancy between the City’s
    accounting records and financial information reported in IDIS to ensure that
    these funds have been put to their intended use.

1M. Strengthen the City’s financial controls to ensure that the City’s accounting
    records are reconciled to IDIS information.




                                 9
Finding 2: Administrative Controls Did Not Ensure Compliance With
           Program Requirements
City officials did not implement adequate administrative controls to ensure that they
administered the City’s HOME program in compliance with HOME program requirements.
Specifically, HOME funds were disbursed for ineligible and unsupported activities, a deed
restriction or other mechanism was not always imposed on assisted properties, and program files
lacked required documentation, such as environmental clearances, tenant eligibility support, and
subrecipient agreements. We attribute these deficiencies to inadequate monitoring of the City’s
community housing development organizations (CHDO), a lack of communication with a City
subgrantee, and a lack of adequate program training to ensure compliance with program
requirements. As a result, $250,410 in HOME funds was used for ineligible activities, more than
$1.3 million in HOME funds was not used in an effective manner, and $459,991 in HOME funds
was used for an unsupported activity.



 HOME-Assisted Units Sold to
 Ineligible Home Buyers


              City officials awarded and disbursed $250,410 in HOME funds to two
              subgrantees for the construction and rehabilitation of housing units, which were
              later sold to two ineligible home buyers. Regulations at 24 CFR 92.254(a)(3)
              provide that HOME-assisted home ownership housing units must be acquired by a
              home buyer whose family qualified as a low-income family, and 24 CFR 92.2
              provides that a low-income family means a family with an annual income that
              does not exceed 80 percent of the median income for the area. The income of
              both of these homeowners exceeded this requirement. We attribute this
              deficiency to weaknesses in the City’s administrative controls over determining
              applicant eligibility, which allowed home buyer assistance to ineligible families.
              As a result, $250,410 was not available to assist eligible home buyers.

 Lack of Documentation To
 Support the Eligibility of a
 HOME Housing Activity

              City officials disbursed $464,366 from the City’s HOME funds for the acquisition
              and rehabilitation of a rental housing activity without maintaining documentation
              to support compliance with the maximum HOME subsidy limit, the
              environmental clearance process, and the identification of the sources and
              application of program income generated from the activity. Regulations at 24
              CFR 92.508(a) provide that participating jurisdictions must establish and maintain
              sufficient records to enable HUD to determine whether rental housing complies
              with the HOME program maximum per-unit subsidy, environmental review

                                              10
                 requirements at 24 CFR 92.352 and Part 58, regarding the source and application
                 of program income. We attribute this deficiency to weaknesses in the City’s
                 administrative controls over monitoring its subgrantees. As a result, there is no
                 assurance that $459,9914 was expended on an eligible HOME rental housing
                 project.

    Funds Provided to CHDOs
    Were Inadequately Supported

                 City officials disbursed $535,255 in HOME CHDO reserve funds and $50,000 in
                 a CHDO predevelopment loan to two CHDOs without adequate documentation
                 showing that the organizations qualified as CHDOs. Regulations at 24 CFR 92.2
                 provide that to be eligible as a CHDO, an organization must document that among
                 its purposes to provide decent housing that is affordable to low- and moderate-
                 income people, at least one-third of its governing board should be representatives
                 of low-income communities and no more than one-third should be public officials
                 or appointees of State or local government. The CHDO should also maintain a
                 financial management system that conforms to the financial accountability
                 standards at 24 CFR 84.21.

                 However, neither of the two CHDOs had bylaws, articles of incorporation, or
                 resolutions to support that at least one-third of its board was composed of
                 representatives of low-income communities and no more than one third of its
                 board members were public officials, or appointees of State or local governments
                 as required. In addition, the CHDO that received $535,255 in CHDO reserve
                 funds did not have a financial management system that conformed to 24 CFR
                 84.21 when it was certified and did not have documentation to show that
                 providing decent housing that is affordable to low-and moderate-income people
                 was among its purposes in its bylaws, articles of incorporation, or resolutions.
                 We attribute these deficiencies to City officials’ lack of training on the
                 requirements to qualify as a CHDO. As a result, the City’s CHDO reserve
                 reported in IDIS was overstated by the ineligible $535,255, and $50,000 was not
                 available to an eligible CHDO for predevelopment loans.

                 Further, City officials waived a repayment of the CHDO’s $50,000
                 predevelopment loan without adequate justification. Regulations at 24 CFR
                 92.301(b)(3) provide that a participating jurisdiction may waive repayment of a
                 predevelopment loan in whole or in part if there are impediments to project
                 development that the participating jurisdiction determines to be reasonably
                 beyond the control of the CHDO. However, City officials lacked documentation
                 to determine whether the loan was properly waived. We attribute this deficiency
                 to weaknesses in the City’s administrative controls related to maintaining

4
  The $459,991 is computed by taking the original disbursed amount of $464,366 less $4,375, which is questioned in
recommendation 1E as a part of the $30,024 ($23,549+2,100+ $4,375) to avoid duplicate counting of same
questionable amounts.

                                                       11
                  documentation to ensure that loan repayment waivers are adequately supported.
                  As a result, $50,000 in HOME funds was not available for eligible HOME
                  activities.

    Deed Restriction Not Imposed
    on Three Assisted Properties

                  City officials did not impose deed restrictions or other similar mechanisms on two
                  properties5 assisted with $518,250 in HOME funds and another property assisted
                  with $299,744 in HOME match funds. Regulations at 24 CFR 92.252(e) and
                  254(a)(5) provide that a deed restriction, covenant running with the land, or other
                  similar mechanism must be imposed on property assisted with HOME and
                  eligible HOME match contribution funds. We attribute this deficiency to an
                  oversight in implementing the City’s controls, which ensured that HUD’s and the
                  City’s interest of $817,994 ($518,250 + 299,744) in the properties was protected
                  during the period of affordability. As a result, there was no assurance that the
                  three properties would remain affordable during the affordability period as
                  required.

    Funds Committed Without
    Environmental Clearance

                  City officials committed HOME funds in IDIS for two housing projects before
                  completing the required environmental clearance process. However the
                  environmental clearance was completed within a month of the subgrantee
                  agreement dates. CPD Notice 01-11, section IV, provides that the participating
                  jurisdiction must not execute a legally binding agreement for property acquisition,
                  rehabilitation, conversion, repair, or construction until environmental clearance
                  has been obtained. However, more than $2.5 million was committed via legally
                  binding subgrantee agreements for two housing projects before this clearance was
                  obtained. We attribute this deficiency to weaknesses in the City’s administrative
                  controls to ensure that all environmental requirements were met before the
                  commitment deadline for HOME funds. As a result, there was no assurance that
                  these projects met environmental requirements before funds were committed;
                  however, we do not take a monetary exception since the clearance was obtained
                  within a month of committing the funds.




5
  One of the two properties is a HOME assisted rental property, which is currently owned by the City of Jersey City
and will be transferred /sold to a subgrantee in the future. The other property was acquired by a subgrantee with
HOME funds; however, it is currently owned by a different subgrantee that plans to ready it as a for sale home in the
future.

                                                         12
Lack of Documentation To
Support Compliance With
Rental Housing Requirements

           City officials did not maintain adequate documentation, such as lease agreements
           and income documentation, including pay stubs for household members; to
           support compliance with HOME rent limits and the income eligibility of tenants
           occupying three of the four reviewed rental units. Regulations at 24 CFR 508(a)
           provide that a participating jurisdiction must establish and maintain sufficient
           records to demonstrate that each family is income eligible and that each rental
           housing project meets the affordability and income targeting requirements for the
           required period. We attribute this deficiency to weaknesses in the City’s
           monitoring of its subgrantee and the City’s Real Estate Management Division
           staff’s lack of familiarity with HOME program requirements. As a result, there
           was no assurance that the three rental housing units were rented and occupied in
           compliance with HOME program requirements.

Program Administration Not
Always Compliant With
Program Requirements

           City officials did not always maintain proper documentation in their HOME
           program files to support that funds were disbursed in compliance with HOME
           program requirements. Specifically,

                  HOME funds of $480,000 were awarded and disbursed to 1 of the 16
                   rental and home ownership activities reviewed (IDIS activity 897)
                   without evidence that a subgrantee agreement and certificate of
                   occupancy were executed to support the eligibility of the housing project.
                   Regulations at 24 CFR 92.508(a) require that each participating
                   jurisdiction establish and maintain sufficient records to enable HUD to
                   determine whether the participating jurisdiction has met the requirements
                   at 24 CFR Part 92, which provide that housing constructed or
                   rehabilitated with HOME funds must meet all applicable local codes, and
                   zoning ordinances at the time of project completion.

                  HOME funds were both committed and expended before subgrantee
                   agreements were executed. Funds were reported as committed in IDIS
                   for 10 of 15 rental and home ownership properties and were disbursed for
                   4 of 15 rental and home ownership properties reviewed before HOME
                   subgrantee agreements were executed. This action is contrary to 24 CFR
                   92.2, which provides that funds are committed when a legally binding
                   agreement is executed between the grantee and the subgrantee, and 24
                   CFR 92.504(b), which requires a grantee to enter into a written agreement


                                           13
                     with a subgrantee that ensures compliance with the requirements of Part
                     92 before disbursing any HOME funds to any entity.

                    Interest income on HOME assistance recipients’ bank accounts was not
                     calculated when determining the income eligibility of 7 of 10 home
                     buyers, contrary to 24 CFR 92.203, which provides that income includes
                     interest, dividends, and other net income of any kind from real or personal
                     property.

             We attribute the deficiencies described above to weaknesses in the City’s
             administrative controls over monitoring HOME activities for compliance with
             program requirements. As a result, there was no assurance that the City’s HOME
             housing activities were always administered in compliance with program
             requirements.

Conclusion

             Administrative control weaknesses led to noncompliance with program
             requirements. Specifically, City officials did not implement adequate controls to
             ensure that (1) HOME-assisted units were sold to eligible home buyers, (2) deed
             restrictions were imposed on HOME-assisted properties, (3) CHDOs were
             certified and recertified in compliance with program requirements, (4) the
             environmental clearance process was completed before funds were committed in
             IDIS, (5) documentation was maintained to support HOME activities’ compliance
             with program requirements, (6) interest income was considered in calculating
             home buyers’ income eligibility, and (7) HOME program activities were
             administered in compliance with program requirements and Federal regulations.
             As a result, HOME funds of $250,410 and $459,991 were expended on ineligible
             and unsupported costs respectively and more than $1.3 million in HOME funds
             was not used in an effective manner. We attribute these deficiencies to
             inadequate training to ensure the eligibility of HOME-assisted home buyers,
             inadequate monitoring of the City’s CHDOs, a lack of communication with a City
             subgrantee, and unfamiliarity with administrative program requirements.

Recommendations

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

             2A. Reimburse the City’s HOME program line of credit $250,410 from non-
                 Federal funds for HOME assistance expended on housing units acquired by
                 two ineligible home buyers.

             2B Provide training to program employees to ensure that they certify HOME-
                assisted home buyers in compliance with program requirements.

                                             14
2C. Provide documentation to support compliance with the maximum HOME
    subsidy limits, the environmental review process, and the use and application
    of program income for the unsupported housing activity or repay $459,991
    from non-Federal funds to the City’s HOME program line of credit.

2D. Strengthen controls to ensure that documentation to support compliance with
    HOME program requirements is maintained as required.

2E. Reduce the City’s CHDO reserve balance for the ineligible $535,255
    reported in IDIS.

2F. Provide training to program employees to ensure that the City’s CHDOs are
    certified in compliance with program requirements.

2G. Reimburse $50,000 from non-Federal funds to the City’s HOME program
    line of credit for the ineligible predevelopment loan.

2H. Strengthen controls over the waiver of CHDO repayment of predevelopment
    loans to ensure that the circumstances for a waiver are properly documented.

2I. Strengthen administrative controls over CHDOs to ensure that City CHDOs
    are certified and recertified in compliance with HOME program
    requirements.

2J. Impose a deed restriction or other mechanism approved by HUD on the two
    HOME-assisted properties when they are sold or transferred to an eligible
    homebuyer and a subgrantee to enforce affordability requirements or repay
    the $518,250 from non-Federal funds to the City’s HOME program line of
    credit.

2K. Impose a deed restriction or other mechanism approved by HUD on the
    property assisted with HOME match contribution funds to enforce
    affordability requirements or reduce the City’s carryover balance of HOME
    match by $299,744.

2L. Strengthen the City’s administrative controls to ensure that a deed restriction
    or other mechanism approved by HUD are imposed on properties assisted
    with HOME and HOME match funds to ensure that HUD’s interest in
    assisted properties is protected.

2M. Strengthen administrative controls to ensure that HOME funds are committed
    in IDIS for housing projects after the environmental clearance for these
    projects has been completed.




                                 15
2N. Provide documentation to support compliance with HOME program rent
    limit and income eligibility requirements for the three tenants who occupy
    HOME-assisted units.

2O. Provide an executed HOME subgrantee agreement for IDIS activity 897,
    which was awarded $480,000, to support compliance with program
    requirements; if not provided these funds should be repaid to the City’s
    HOME program line of credit from non-Federal funds.

2P. Strengthen controls over maintaining documentation to support compliance
    with HOME rent limits and HOME assistance applicant income eligibility,
    including ensuring that interest income is included in the calculation of
    HOME applicants’ income eligibility.

2Q. Strengthen controls to ensure that HOME housing activities are administered
    in compliance with program requirements.




                                16
Finding 3: HOME Match Contribution Funds Were Not Administered in
           Accordance With Program Requirements

City officials inadequately accounted for and administered their HOME match contribution
funds. Specifically, they continued to report match contribution funds associated with
terminated projects, inaccurately tracked and reported their match contributions, and failed to
always include HOME rent limit provisions in subgrantee agreements funded with match
contribution funds. We attribute these deficiencies to weaknesses in procedures for the
accounting for and monitoring of HOME match contribution use. Consequently, more than $4.3
million in ineligible City HOME match contribution funds could be used to draw down HOME
entitlement funds, the City’s HOME match liabilities were overstated by $58,824, more than
$1.28 million in HOME match contribution funds was used to fund projects with inadequate
written agreements to ensure that the projects were eligible, and there is no assurance that future
HOME entitlement drawdowns of more than $2.846 million will be based on eligible HOME
match contributions.


    HOME Match Contribution
    Funds Reported for Canceled
    Projects

                City officials maintained more than $4.3 million in the City’s HOME match
                contribution carryover balance as of September 30, 2012, for projects that had
                been canceled before September 30, 2012. 24 CFR 92.219 provides that funds
                reported as HOME matching contribution funds must be disbursed for housing
                that is assisted with HOME funds or housing that, while not HOME assisted,
                meets HOME affordability requirements. We attribute this deficiency to
                weaknesses in the City’s monitoring of its HOME match contributions to ensure
                that the funds were accurately tracked and updated in a timely manner. As a
                result, the City reported more than $4.3 million in ineligible match contribution
                funds, which could be used to support drawing down HOME entitlement funds.

    Inaccurate Tracking and
    Reporting of HOME Match
    Contribution Funds

                City officials inaccurately reported a HOME match liability on the City’s annual
                HOME match reports. 24 CFR 92.218 provides that a participating jurisdiction
                must make matching contributions throughout a Federal fiscal year, based upon
                the amount of funds drawn from its HOME Investment Trust Fund in that fiscal
                year, and establish a system that tracks match liabilities as they are incurred and
                match credit as it is made. However, in its annual reports to HUD for Federal
6
 The $2,845,129 ($8,535,386 /3) represents the average annual HOME entitlement drawdowns from HUD’s Line of
Credit Control System (LOCCS), which was required to be matched during Federal fiscal years 2010 through 2012.

                                                     17
             fiscal years 2010 through 2012, City officials overstated the City match liabilities
             by $58,824, or more than 12.5 percent. We attribute this deficiency to
             weaknesses in the City’s procedures for tracking its HOME matching liabilities to
             ensure compliance with program requirements. As a result, the City’s matching
             liabilities reported to HUD in fiscal years 2010 through 2012 were overstated by
             $58,824.

Match Contribution Funds
Provided to Inadequately
Supported Projects

         City officials did not include HOME rent limit provisions in the City’s subgrantee
         agreements for projects assisted with more than $1.28 million in HOME match
         contributions. Regulations at 24 CFR 92.219(b)(2)(b) provide that a participating
         jurisdiction must execute, with the recipient of HOME match contribution funds, a
         written agreement that imposes the HOME program affordability requirements at
         24 CFR 92.252, including the limitation for the maximum HOME rent. We
         attribute this deficiency to weaknesses in the City’ administration of match
         contribution funds that failed to ensure subgrantee agreements funded with match
         contribution funds complied with HOME program requirements. As a result, there
         was no assurance that housing units assisted with more than $1.28 million in
         HOME match contributions would comply with HOME program rent limits.

Conclusion

             HOME match contributions were not administered in compliance with
             regulations. Specifically, City officials inaccurately accounted for and reported
             the amount of the City’s eligible HOME match contribution funds and provided
             match contribution funds to projects for which affordable housing agreements
             were executed without ensuring compliance with HOME rent limits.
             Consequently, ineligible HOME match of $4.3 million could be used to draw
             down HOME entitlement funds, HOME match liabilities were overstated by
             $58,824, more than $1.28 million in HOME match funds was used for projects
             with inadequate written agreements to ensure affordability, and there was no
             assurance that future annual HOME entitlement drawdowns of more than $2.84
             million will be based on eligible HOME match contributions. We attribute these
             weaknesses to inadequate procedures for tracking and updating HOME match
             contribution funds in a timely manner to ensure compliance with regulations.

Recommendations

             We recommend that the Director of HUD’s Newark, NJ, Office of Community
             Planning and Development instruct City officials to:



                                              18
3A. Remove the $4,360,000 in ineligible HOME match from the City’s HOME
    match report, thus ensuring that the match will not be used to draw down
    HOME entitlement funds.

3B. Increase the City’s HOME match carryover balance by the $58,824 in
    overstated match liabilities, thus ensuring that the City can use these funds to
    meet its future match contribution fund obligation.

3C. Strengthen controls over match contribution fund accounting and reporting to
    ensure that HOME match contributions and liabilities are correctly calculated
    and reported properly and in a timely manner to HUD in compliance with
    HOME program requirements, thus ensuring that future HOME entitlement
    drawdowns of $2,845,129 will be based upon eligible HOME match
    contribution funds.

3D. Revise subgrantee agreements for the three rental housing projects assisted
    with HOME match funds, to include HOME program rent provisions, or
    reduce the City’s carryover balance of HOME match by $1,284,000.

3E. Strengthen administrative controls to ensure that subgrantee agreements for
    projects assisted with HOME match contribution funds include HOME
    program rent limit provisions.




                                 19
Finding 4: Program Income Was Not Always Reported and Expended
           Before HOME Entitlement Funds
City officials did not always report program income in IDIS or disburse program income before
drawing down HOME program entitlement funds. Specifically, $803,710 in HOME program
income was not recorded in IDIS, and $513,852 of it was not disbursed before HOME
entitlement funds were drawn down. We attribute these deficiencies to weaknesses in
procedures for HOME subgrantee agreements that did not require program income provisions,
City employees’ inadequate knowledge of how to record program income in IDIS, and the City’s
poor tracking of the receipt and use of program income. As a result, the City’s program income
reported in IDIS was understated by $803,710, the use of $289,858 in program income for
administrative costs was not recorded in IDIS, and HOME entitlement funds were drawn down
before $513,852 in available program income was used.


 Lack of Program Income
 Provisions in Subgrantee
 Agreement

              City officials did not ensure that provisions for recording and accounting for
              program income were included in subgrantee agreements for 12 of the 15 HOME
              activities reviewed. Regulations at 24 CFR 92.504(c) require participating
              jurisdictions to have program income provisions in their subgrantee written
              agreements. We attribute this deficiency to weaknesses in the City’s procedures
              for ensuring that subgrantee agreements include all required provisions. As a
              result, there was no assurance that all program income was reported and used for
              eligible HOME activities.

  Unreported Program Income
  Not Used Before Entitlement
  Drawdowns Were Made

              City officials did not report in IDIS $513,852 in program income generated after
              October 2012. In addition, rather than use these funds first, they drew down
              HOME entitlement funds from LOCCS. Regulations at 24 CFR 92.503 provide
              that program income must be deposited into the participating jurisdiction’s
              HOME Investment Trust Fund local account unless the participating jurisdiction
              permits the recipient to retain the program income for additional HOME projects
              pursuant to a written agreement. Further, CPD Notice 97-09, section III, provides
              that HOME funds in the local account must be disbursed before entitlement
              drawdowns, and that IDIS is designed to record the receipt and use of HOME
              program income and the participating jurisdiction should establish a program
              income fund in IDIS to record the receipt of program income. We attribute this
              deficiency to weaknesses in the City’s administrative controls over establishing
              HOME activities in IDIS, and the lack of program income provisions in HOME

                                              20
             subgrantee agreements. As a result, City officials drew down entitlement funds
             instead of using the unreported program income, and the City’s recorded program
             income in IDIS was understated by $513,852.

Receipt and Use of Program
Income Not Recorded in IDIS

             City officials did not properly account for program income. CPD Notice 97-09,
             section III (N), provides that a participating jurisdiction must establish a program
             income fund in IDIS to record the receipt and use of program income. However,
             City officials did not record in IDIS the receipt or use of $289,858 in program
             income received before April 2010 and used during the period April 2010 through
             May 2013 for the City’s HOME program planning and administrative costs. We
             attribute this deficiency to weaknesses in the City’s financial controls over
             monitoring the accuracy and completeness of program income recorded in IDIS.
             As a result, the City’s reported program income in IDIS was understated by
             $289,858.

Conclusion

             City officials did not always record and properly expend HOME program income
             as required. Therefore, the receipt of $803,710 (289,858 + 513,852) in program
             income was not recorded in IDIS, and $513,852 of this amount was not used
             before making HOME entitlement drawdowns. We attribute these deficiencies to
             City officials’ failure to include program income provisions in their subgrantee
             agreements and their unfamiliarity with the administration of and accounting for
             HOME program income. As a result, the $513,852 was not used before HOME
             entitlement drawdowns were made, and program income reported in IDIS was
             understated by $803,710.

Recommendations

             We recommend that the Director of HUD’s Newark, NJ, Office of Community
             Planning and Development instruct City Officials to

             4A. Strengthen administrative controls to ensure that program income provisions
                 are included in subgrantee agreements as required.

             4B Record $513,852 in program income in IDIS and use it before making
                entitlement drawdowns from LOCCS, thus ensuring that $513,852 in
                program income is properly accounted for and put to better use.

             4C. Strengthen controls to ensure that program income is used before making
                 entitlement drawdowns as required by program regulations.

                                              21
4D. Record the receipt and use of $289,858 in program income in IDIS, thus
    ensuring that $289,858 in program income is properly accounted for and put
    to better use.

4E. Strengthen financial controls to ensure that the receipt and use of program
    income is reported in IDIS in a timely manner.

4F. Request technical training on the administration of and accounting for
    program income.




                                22
                        SCOPE AND METHODOLOGY

The audit focused on whether City officials had established and implemented adequate controls
over the City’s HOME program to ensure that the program was administered in compliance with
HOME program requirements and Federal regulations. We performed the audit fieldwork from
September 2013 to April 2014 at the City’s Community Development Division at 30
Montgomery Street, Jersey City, NJ.

To accomplish our objectives, we

      Reviewed relevant HOME program requirements and applicable Federal regulations to
       gain an understanding of the HOME administration requirements.

      Interviewed staff from the HUD Newark, NJ, Office of Community Planning and
       Development and the City.

      Obtained an understanding of the City’s management controls and procedures through
       analysis of the City’s responses to management control questionnaires.

      Reviewed the City’s consolidated annual performance and evaluation reports and action
       plan for HOME program years 2010 through 2012 to gather data on the City’s
       expenditures and planned activities.

      Reviewed reports from IDIS to obtain HOME disbursements and program income data
       for the audit period, and reports from LexisNexis to obtain information related to real
       properties assisted with HOME funds. Our assessment of the reliability of IDIS and
       LexisNexis data was limited to the data sampled, and the data were reconciled with data
       in the City’s records; therefore, we did not assess the reliability of these systems.

      Reviewed the City’s organization chart for its HOME program and its HOME program
       policies, including its HOME policy and procedures manual, and accounting and
       purchasing policies.

      Reviewed the latest HUD monitoring report for the City’s HOME program and the city
       council resolutions for program years 2010 through 2012.

      Reviewed documentation for the annual recertification of three nonprofit entities that
       received CHDO operating, loan, or reserve funds during program years 2010 through
       2012.

      Selected and reviewed a sample of more than $4.59 million, or 43 percent, of the City’s
       total HOME fund drawn downs made in the years 2010 through 2012, and more than
       $4.4 million from the City’s HOME drawdowns made before or after the years 2010
       through 2012. The sample was selected based on one or more of the following risk

                                               23
        factors: the City drewdown HOME funds from LOCCS or committed HOME funds in
        IDIS a few months before the HOME-assisted property was acquired, a lien or deed
        restriction was not imposed on the assisted property, projects were progressing slowly, or
        a HOME-assisted property was later sold to the City.

       Reviewed documentation, including subgrantee agreements, environmental reviews,
        appraisal reports, deeds, invoices, contract requests for payment, and canceled checks, to
        support the eligibility of the 16 IDIS HOME activities included in our sample and to
        support the eligibility of costs associated with these 16 IDIS HOME activities.

       Selected and reviewed matching contribution fund documentation associated with a
        sample of $2,863,744, or 35 percent, of the total matching contribution funds reported for
        Federal fiscal years 2007 through 2009.7

       Reviewed a copy of the bank statements associated with the City’s HOME program and
        traced deposits to IDIS reports. Our assessment of the reliability of data included in bank
        statements and IDIS was limited to the data sampled, which were reconciled among
        different sources; therefore, we did not assess systems generating the data.

       Selected and reviewed a sample of 4 of 30 rental housing units at 3 housing projects
        assisted with HOME funds.

       Selected and reviewed a sample of 14 of 20 for-sale units at 3 housing projects assisted
        with HOME funds.

The audit generally covered the period April 1, 2010, through March 31, 2013, and was extended
as needed to accomplish the objective.

We conducted the audit in compliance 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 objective.




7
  The City did not report any HOME match contribution funds on its HOME match reports for the years 2010
through 2012; therefore, we selected a sample of the years 2007 through 2009.

                                                      24
                              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:

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

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

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

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

               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.


                                                 25
Significant Deficiencies

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

                           The City did not always implement adequate internal controls to
                            ensure the achievement of program objectives because HOME
                            housing activities were not always administered in compliance with
                            program requirements and units assisted with HOME funds were
                            sold to ineligible home buyers (see findings 1 through 4).

                           The City did not always establish or implement adequate internal
                            controls to ensure that resources were used in compliance with laws
                            and regulations because (1) HOME funds were not committed and
                            expended as required, (2) HOME funds were used for HOME
                            program planning and administrative costs in excess of allowable
                            limits, (3) units assisted with HOME funds were sold to ineligible
                            home buyers, (4) a deed restriction or other similar mechanism was
                            not always imposed on HOME-assisted properties, (5) funds were
                            provided to nonprofit entities that did not meet CHDO requirements,
                            (6) the City provided HOME assistance to housing projects without
                            ensuring compliance with all program requirements, and (7) HOME
                            match contribution funds and program income were not adequately
                            managed and reported (see findings 1 through 4).

                           The City did not always establish or implement adequate internal
                            controls to ensure that resources were safeguarded against waste,
                            loss, and misuse as HOME funds were used for unsupported and
                            ineligible costs (see findings 1 and 2).

                           The City did not always establish or implement adequate internal
                            controls to ensure the validity and reliability of data because the
                            receipts and the use of program income were not always reported in
                            IDIS, information in the City’s accounting records was not always
                            reconciled with that in IDIS, and information listed on the City’s
                            HOME match reports submitted to HUD was not always traceable to
                            IDIS reports (see findings 1, 3, and 4).




                                              26
                                       APPENDIXES

Appendix A

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

     Recommendation                             Unsupported       Funds to be put
                             Ineligible 1/
         number                                     2/            to better use 3/
           1A                 $ 464,663
           1B                  1,060,529
           1C                                                           $1,485,337
           1E                     30,024
           1G                                                              190,000
           1I                   236,439
           1J                                         $9,371
           1L                                                              118,561
           2A                   250,410
           2C                                      459,991

             2E                 535,255
             2G                  50,000
             2J                                                            518,250
             2K                                                            299,744
             2O                                    480,000
             3A                                                         4,360,000
             3B                                                            58,824
             3C                                                         2,845,129
             3D                                                         1,284,000
             4B                                                           513,852
             4D                                                           289,858
                              $2,627,320          $949,362            $11,963,555


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.


                                                 27
3/ Recommendations that funds be put to better use are estimates of amounts that could be used
   more efficiently if an Office of Inspector General (OIG) recommendation is implemented.
   These amounts include reductions in outlays, deobligation of funds, withdrawal of interest,
   costs not incurred by implementing recommendation improvements, avoidance of
   unnecessary expenditures noted in preaward reviews, and any other saving that are
   specifically identified. In this case, If HUD implements the recommendations to
    Deobligate $1,485,337 committed in IDIS and reimburse $190,000 to the trust account,
       these funds will be available for eligible HOME activities.
    Require City officials to reconcile the discrepancy between IDIS and City records, it can
       be assured that the $118,561 has been properly reported.
    Require that deed restrictions are imposed on the three assisted properties, HUD’s and the
       City’s interest of $817,994 ($518,250 + 299,744) will be protected and affordability
       requirements will be enforced.
    Require the City to comply with HOME match contribution fund requirements, HUD can
       be assured that (1) the $4.36 million in ineligible match fund contributions will not be
       used to draw down HOME funds, (2) $58,824 of the match contribution will be available
       to meet future match liabilities, (3) eligible match contributions will be used to support
       drawdowns of more than $2.84 million, and (4) HOME affordability requirements will be
       applied to properties assisted with more than $1.28 million in HOME match contribution
       funds.
    Ensure that program income receipts and uses are reported in IDIS, $803,710 in program
       income ($513,852 and $289,858) will be available for eligible HOME activities.




                                               28
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1




                         29
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3

Comment 4

Comment 5


Comment 6



Comment 7




Comment 8




                         30
Ref to OIG Evaluation   Auditee Comments




Comment 8


Comment 9

Comment 10




Comment 11




Comment 12




                         31
Ref to OIG Evaluation   Auditee Comments




                         32
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3


Comment 5


Comment 4




Comment 13




                         33
Ref to OIG Evaluation   Auditee Comments




Comment 6



Comment 13


Comment 13




Comment 7




Comment 13




                         34
Ref to OIG Evaluation   Auditee Comments




Comment 14



Comment 15



Comment 16




Comment 17




Comment 8




                         35
Ref to OIG Evaluation   Auditee Comments




Comment 9




Comment 13




Comment 18




Comment 10




                         36
Ref to OIG Evaluation   Auditee Comments




Comment 19




Comment 20




Comment 21




                         37
Ref to OIG Evaluation   Auditee Comments




Comment 22




Comment 23




                         38
                         OIG Evaluation of Auditee Comments

Comment 1   City officials stated that, while the initial focus of the audit was for the period of
            2010 to 2012, the audit was expanded to include projects dating back to 2003 and
            included projects that were funded in 2013. The audit period was expanded
            because some of the 16 HOME activities, while having disbursements in the early
            years, also had disbursements or were still recorded as active during the period
            2010 to 2012.

Comment 2   City officials acknowledged that the delay in deobligating funds resulted in a
            commitment shortfall. However, the City noted that several circumstances,
            including technical difficulties with IDIS and Superstorm Sandy led to this.
            However, City officials did not deobligate HOME funds of $1.95 million
            committed for the cancelled activity until December 2013 after we brought it to
            their attention. 24 CFR part 92.500 (d)(1)(b) provide that any amount not
            committed within 24 months after the last day of the month in which HUD
            notifies the participating jurisdiction of HUD’s execution of HOME agreement,
            will be recaptured. Therefore, HUD still needs to recapture the $464,663 in
            uncommitted HOME funds, as of July 31, 2013, from the City’s HOME funds.

Comment 3   City officials acknowledged that HOME funds were not expended in a timely
            manner, which they attribute to delays in closing on three HOME eligible
            affordable housing projects. City officials also stated that it is an inaccurate
            representation to classify the activities as ineligible. However, the audit report is
            not referring to the activities, but rather, to the expenditures, which are deemed
            ineligible because the funds were not expended before the City’s annual
            expenditure deadlines. Specifically, the audit disclosed that the closing on three
            projects occurred between 110 and 283 days after the City’s expenditure deadline,
            April 30, 2011. 24 CFR part 92.500(d)(1)(c) provide that any amount not
            expended within five years after the last day of the month in which HUD notifies
            the participating jurisdiction of HUD’s execution of a HOME agreement, will be
            recaptured. Therefore, HUD still needs to recapture the $598,015 that was
            unexpended as of April 30, 2011, related to the three affordable housing projects.

Comment 4   City officials claimed that closing on a fourth housing project was delayed
            approximately five weeks, which is not unusual for a real estate transaction.
            However, the audit disclosed that for this project, City officials drew down
            $773,000 in HOME funds from LOCCS on May 23, 2012, eight days before the
            City’s HOME program expenditure deadline. These funds were used to acquire
            an assisted property on July 23, 2012. Therefore, $773,000 in HOME funds was
            not expended until 53 days after the expenditure deadline, May 31, 2012.
            Consequently, even if the project closing had not been delayed, the funds would
            not have been expended in a timely manner. However, since the City’s
            expenditures, as of May 31, 2012, exceeded its requirements by $469,045, only
            $303,955 ($773,000- 469,045) is questioned (see chart on p.5). Therefore, HUD
            still needs to recapture $303,955 in unexpended HOME funds, as of May 31,
            2012, to comply with 24 CFR part 92.500 (d)(1)(c).

                                              39
Comment 5   City officials stated that the OIG recommendation to recapture $158,559 for a
            cancelled housing project is unreasonable because the City had previously
            reimbursed the HOME account for this cancelled activity. OIG acknowledges
            that the disbursements for the cancelled activity were reimbursed to the City’s
            HOME bank account on August 10, 2009. However, the City’s HOME program
            line of credit was not reimbursed until January 18, 2011. Therefore, the City
            would have had a shortfall of $158,559 as of the expenditure deadline, July 31,
            2010 (see chart on page 5). HUD still needs to recapture the $158,559 in
            expended HOME funds, as of July 31, 2010, to comply with 24 CFR part 92.500
            (d)(1)(c).

Comment 6   City officials stated that this single case of double billing was an anomaly. They
            also stated that reimbursement of $23,549 was received and processed back to the
            appropriate account, and they provided a copy of the reimbursement check and an
            inter-office memorandum as part of their written comments. However, these
            documents are not sufficient to support that the City’s HOME program line of
            credit was properly credited for the $23,549. Therefore, City officials still need to
            provide additional documents to be verified by HUD during the audit resolution
            process. Further, City officials stated that the $23,549 is inaccurately classified as
            ineligible HOME costs. However, the disbursement questioned is deemed
            ineligible because it was a duplicate payment.

Comment 7   City officials initially stated that funds were wired back to HUD, as required.
            However, they subsequently stated that the funds were not wired back to HUD in
            a timely manner (see page 30 & 34). Since no documents were attached to the
            City’s written comments to support that the $190,000 was wired back to HUD or
            the City’s HOME program line of credit, City officials still need to provide HUD
            with documents to support that the City’s HOME program line of credit was
            reimbursed for the $190,000.

Comment 8   City officials acknowledged that the two homebuyers were deemed ineligible; one
            due to deviation from the City’s normal procedures, and the other due to an
            oversight. However, the officials stated that given the number of certifications
            done annually by the City, the two certifications over several years did not
            represent a weakness in the City’s administrative controls. While OIG did not
            review a statistical sample of homebuyers certified by the City during the audit
            period, and therefore is not projecting results, OIG testing did disclose errors in 2
            of 14 cases sampled. Given the causes cited by City officials for the two errors,
            we believe that City officials need to address the causes by providing HOME
            program employees with HOME program training to ensure that they certify
            HOME assisted home buyers in compliance with program requirements.

Comment 9   Regarding a lack of documentation, City officials stated that they funded these
            projects over ten years ago and performed the required due diligence. They also
            stated in Appendix A in their response to recommendation 2C that the City

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               funded two-2 bedroom units and one-1bedroom unit in the project. However, a
               review of project documents provided during the audit disclosed that the project
               included six HOME-assisted units and did not have evidence of environmental
               documentation. Therefore, the City still needs to provide the missing
               documentation to support compliance with the maximum HOME subsidy limits
               and environmental clearance to HUD during the audit resolution process.

Comment 10 City officials stated that deed restrictions for 2 activities questioned were attached
           and that 1 deed restriction will be recorded upon conveyance of a City-owned
           property to a new entity. However, the deed restrictions provided were not for the
           questioned properties. In addition, OIG recognizes that deed restrictions need to
           be imposed when the City-owned property is sold or transferred. Therefore, we
           added, at Recommendation 2J, “…when they are sold or transferred to an eligible
           homebuyer and a subgrantee…”, City officials will need to provide
           documentation to HUD for review during the audit resolution process.

Comment 11 City officials acknowledged that the HOME match report was not updated to
           reflect activities that were cancelled during the audit period and also did not
           include HOME match credit for eligible activities. The City stated that, during
           the audit, they provided an updated HOME match report to both HUD and the
           OIG. However, the updated HOME match report was dated November 6, 2013,
           which was after the audit period, and receipt of the updated report by HUD could
           not be verified. Therefore, the updated report, and any supporting documentation,
           still needs to be reviewed by HUD during the audit resolution process to
           determine the eligibility of the additional HOME match credits claimed and to
           reduce HOME match claimed for cancelled projects, which were not reviewed by
           OIG. City officials also stated that they removed $4,772,494 in HOME match
           associated with cancelled projects from the City’s HOME match report as
           recommended. However, City officials still need to provide documentation to
           HUD during the audit resolution process so that this action can be verified.

Comment 12 The City officials’ actions to strengthen fiscal controls related to the HOME
           program are responsive to our recommendations.

Comment 13 City officials acknowledged that the commitment or expenses associated with
           these activities were ineligible and therefore, the funds must be repaid during the
           audit resolution process. Regarding the $23,549 for water and sewer connection
           fees, this amount is not inaccurately classified because it is ineligible according to
           24 CFR 92.214(a) (9). Also, the organization (page 36) did not qualify as a
           CHDO; therefore, the CHDO will need to be reclassified and funds recouped.

Comment 14 City officials stated that they are continuing to analyze the data used to classify
           the $9,371 as unsupported; their analysis will have to be provided to HUD during
           the audit resolution process.




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Comment 15 City officials stated that the $102,369 was charged to the wrong activity and that
           they corrected this error when it was brought to their attention; therefore, it is a
           misrepresentation of facts to state that these funds could be put to better use in the
           audit report. However, City officials took corrective action in response to our
           recommendation. Therefore, the $102,369 is properly classified and now
           considered as funds put to better use.

Comment 16 City officials stated that $10,325 of the $16,192 was drawn down for 268
           Fairmount Ave and the remaining balance of $5,867 was unrecorded program
           income that was utilized to cover cost associated with activity#1352. However,
           City officials did not address how the discrepancy between the City’s records and
           IDIS will be reconciled. The City still needs to provide HUD with their
           corrective action during the audit resolution process.

Comment 17 City officials stated that the $175,000 in HOME funds deemed an ineligible use of
           HOME funds in recommendation 2A, was already deemed ineligible in
           recommendation 1B, and therefore recommendation 2A suggesting that they
           reimburse the City’s line of credit for $175,000 is duplicative. OIG acknowledges
           that $61,515 of the $175,000 was included in 1B, and therefore, the questioned
           amount included in recommendation 2A is reduced to $250,410 ($311,925 less
           $61,515).

Comment 18 City officials stated that the questioned project was deemed infeasible because
           delays in the project impeded the City’s ability to fund other shovel-ready
           projects, and that waiver of a CHDO loan repayment is allowed in such
           circumstances. However, 24 CFR 92.301 provides that a waiver is warranted
           when impediments to the project development are beyond the control of the
           CHDO. Since the City did not demonstrate that executing the project in a timely
           manner was due to circumstance beyond the control of the CHDO, City officials
           still need to reimburse the HOME program line of credit for the ineligible pre-
           development loan waived.

Comment 19 City officials stated that it is unfair to state that the questioned costs could be put
           to better use because a deed restriction was not provided. Although City officials
           later attached one to their response the deed provided was not for the questioned
           property (336-348 Bergen Ave). In addition, the amount questioned is classified
           as funds to be put to better use because there is no assurance that HOME program
           affordability requirements will be enforced without having a deed restriction to
           enforce the requirements. Therefore, City officials still need to impose a deed
           restriction on the questionable property, and provide a copy of the deed restriction
           to HUD for review during the audit resolution process.

Comment 20 City officials attached a copy of the certificate of occupancy, dated July 18, 2014,
           as recommended for the 2003 project, but stated that a subgrantee agreement
           could not be located. Therefore, classifying this issue as unsupported is correct.
           City officials still need to provide the subgrantee agreement for the activity, or a

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              substitute document, to HUD for review during the audit resolution process to
              ensure that HOME program requirements are enforced during the affordability
              period.

Comment 21 City officials stated that it is an inaccurate representation to state that $8.8
           million, in City funds could be put to better use. OIG believes that this is an
           accurate representation because the $8.8 million represents questioned or
           ineligible reported match contributions that could be used to drawdown future
           HOME entitlement funds if the City does not strengthen its accounting and
           reporting controls over its HOME match contributions. The $8.8 million consists
           of recommendations 3A, that $4.4 million in HOME match for cancelled HOME
           activities need to be removed from the City’s HOME match report, 3B that $2.8
           million in next year’s HOME entitlement funds could be drawn down if the City
           does not strengthen its accounting and reporting controls over its HOME match
           contribution, 3C that $58,824 was overstated HOME match liabilities reported to
           HUD in fiscal year 2010 through 2012, 3D that $1.3 million in HOME match was
           claimed for projects without having HOME rent limits included in the affordable
           housing agreements to ensure units are rented in compliance with HOME rent
           limits, and 2K that $299,744 in HOME match was claimed for a property without
           having a deed restriction or lien to enforce HOME program requirements.

Comment 22 City officials attached documents to support that they recorded the unreported
           program income in IDIS. However, City officials did not provide documentation
           to support that the recorded program income was used before entitlement
           drawdowns. Therefore, City officials need to provide documentation to HUD for
           verification during the audit resolution process that the recorded program income
           was expended for eligible HOME costs and before making HOME entitlement
           drawdowns. Moreover, City officials stated that it is an inaccurate statement to
           say that these funds could be put to better use since they are being utilized for
           HOME eligible activities. However, the audit disclosed that the $513,852 has
           never been recorded in IDIS or used before making HOME entitlement
           drawdowns from LOCCS. Therefore, if the recommendation is implemented, the
           $513,852 will represent funds to be put to better use because it will be recorded in
           the City’s accounting records and IDIS, and will be used for future eligible
           HOME activities.

Comment 23 City officials stated that the $289,858 in recommendation 4D is a double entry.
           However, the $289,858 in City HOME program income was received before
           April 2010 and had not been recorded in IDIS. It needs to be recorded in IDIS to
           be traceable to the City’s accounting records and enable monitoring of the City’s
           compliance with HOME program requirements.




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