oversight

The City of Passaic, NJ Expended Community Development Block Grant Funds for Eligible Activities but Needs to Address Administrative Weaknesses

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-09-30.

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

 OFFICE OF AUDIT
 REGION 2
 NEW YORK-NEW JERSEY




                       City of Passaic, NJ

    Community Development Block Grant Program




2014-NY-1010                                 SEPTEMBER 30, 2014
                                                       Issue Date: September 30, 2014

                                                       Audit Report Number: 2014-NY-1010




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 Passaic, NJ Expended Community Development Block Grant Funds
               for Eligible Activities but Needs to Address Administrative 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 the City of Passaic, NJ’s
Community Development Block Grant Program.

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

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

   If you have any questions or comments about this report, please do not hesitate to call me at
212-264-4174.
                                            September 30, 2014
                                            The City of Passaic, NJ, Expended Community
                                            Development Block Grant Funds for Eligible Activities
                                            but Needs To Address Administrative Weaknesses

Highlights
Audit Report 2014-NY-1010


 What We Audited and Why                     What We Found

We audited the City of Passaic, NJ’s        City officials generally disbursed funds for eligible
Community Development Block Grant           activities, but there were administrative control
(CDBG) program in support of the            weaknesses, which lessened assurance that the
Office of Inspector General’s (OIG)         program was administered in accordance with HUD
goal of improving the U.S. Department       regulations and funds were adequately safeguarded.
of Housing and Urban Development’s          Specifically, the following deficiencies were found in
(HUD) execution of its fiscal               5 of 15 project activities reviewed: 2 subrecipient
responsibilities. We selected the           agreements had not been executed for activities
Authority based on a risk assessment of     obligating $551,954 in CDBG funds, and $306,710
grantees administered by the HUD            was obligated for 2 activities after the term of the
Newark, NJ, field office that considered    subrecipient agreements had expired. In addition, 2
grantee funding, HUD’s 2013 risk            subrecipient agreements were not amended when the
score, and prior OIG audits. The audit      authorized funding was increased by $173,740, and the
objective was to determine whether City     City could not be assured that a subrecipient delivered
officials had adequate controls to ensure   $60,000 in CDBG-funded services. We attribute these
that the program was administered in        deficiencies to City officials’ unfamiliarity with HUD
accordance with HUD regulations and         regulations and weaknesses in subrecipient
program requirements.                       monitoring. However, in response to the audit, at the
                                            exit conference City officials provided two
 What We Recommend                          retroactively executed memorandums of understanding
                                            and evidence of satisfactory performance for the
                                            $551,954 in obligated funds, and two amended
We recommend that HUD instruct City         subrecipient agreements whose initial term had
officials to execute the necessary          expired, which will provide greater assurance that the
subrecipient agreements, provide            $306,710 will be expended as intended.
documentation to support that assisted
activities were properly
administeredand complted, and
strengthen controls over the
maintenance of CDBG-funded activity
files and subrecipient monitoring.
                           TABLE OF CONTENTS

Background and Objective                                                         3

Results of Audit
      Finding: There Were Control Weaknesses in the Administration of the CDBG   4
               Program

Scope and Methodology                                                            8

Internal Controls                                                                9

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use             11
B.    Auditee Comments and OIG’s Evaluation                                      12




                                            2
                      BACKGROUND AND OBJECTIVE

The Community Development Block Grant (CDBG) program was established by Title I of the
Housing and Community Development Act of 1974 (Public Law 93-383). With the mandate to
improve the lives of low- and moderate-income individuals, the primary objective of the program
is to develop viable urban communities by providing decent housing, suitable living
environments, and expanded economic opportunities. The program gives annual grants on a
formula basis to entitled cities, urban counties, and States to address social, economic,
environmental, and housing problems in their communities. To be eligible for funding, every
CDBG-funded activity, except program administration and planning, must meet one of the
program’s three national objectives: (1) benefit low- and moderate-income persons, (2) aid in
preventing or eliminating slums or blight, or (3) address a need with a particular urgency because
existing conditions pose a serious and immediate threat to the health or welfare of the
community. To receive an annual CDBG entitlement grant, a grantee must submit a
consolidated plan that provides the grantee’s goals for the program to the U.S. Department of
Housing and Urban Development (HUD) for approval.

The City of Passaic was incorporated in 1917 and operates under an elected mayoral-council
form of government. The City was designated an entitlement community by HUD and was
awarded $1.3 million and $1.6 million in CDBG program funds in fiscal years 2012 and 2013,
respectively. The City’s CDBG program is administered through its Department of Community
Development to implement community development projects. Examples of community
development projects include park and field rehabilitation, street and sewer improvements,
summer youth employment activities, and senior and disabled citizen health and recreation
services.

The audit objective was to determine whether City officials had adequate controls to assure that
the CDBG program was administered in accordance with HUD regulations and program
requirements.




                                                3
                                    RESULTS OF AUDIT


Finding: There Were Control Weaknesses in the Administration of the
         CDBG Program
City officials generally disbursed CDBG funds for eligible activities, but there were weaknesses
in City officials’ administration of subrecipient agreements, which lessened assurance that the
program was administered in accordance with HUD regulations and funds were adequately
safeguarded. Specifically, weaknesses were found in 5 of 15 Integrated Disbursement and
Information System (IDIS)1 activities reviewed. City officials did not (1) execute subrecipient
agreements for two activities for which $551,954 was obligated, (2) extend two subrecipient
agreements when $306,710 was obligated after the term of the agreements had expired, (3)
amend two subrecipient agreements when the authorized funding was increased by $173,740,
and (4) ensure that a subrecipient delivered $60,000 in CDBG-funded services. We attribute
these deficiencies to City officials’ unfamiliarity with HUD regulations and weaknesses in
subrecipient monitoring. However, in response to the audit, at the exit conference City officials
provided two retroactively executed memorandums of understanding2 and evidence of
satisfactory performance for the $551,954 in obligated funds, and two amended subrecipient
agreements whose initial term had expired, which will provide greater assurance that the
$306,710 will be expended as intended.




    Subrecipient Agreements Not
    Executed as Required by
    Program Regulations

                City officials funded two activities without executing subrecipient agreements and
                two activities without extending the term of the agreement. Regulations at 24
                CFR (Code of Federal Regulations) 570.503 require that grantees sign a written
                agreement with a subrecipient before disbursing CDBG funds to the subrecipient
                and that the agreement remain in effect during any period the subrecipient has
                control over CDBG funds, including program income. Agreements were not
                executed for two street improvement projects with the City’s Division of
                Engineering totaling $551,954.

                The City’s director of community development stated that the previous CDBG
                program manager was unfamiliar with CDBG regulations and did not execute the
                required subrecipient agreements. The lack of agreements specifying the exact
                work and timeframes for completion could affect City officials’ ability to monitor
                the implementation of the subrecipient’s work and ensure that the expenditure of
                $551,954 was appropriate. However, in response to the audit, City officials

1
  IDIS is HUD’s drawdown and reporting system. The system allows grantees to request grant funding from HUD
and report on what is accomplished with these funds.
2
  The memorandums of understanding contained the necessary provisions required by a subrecipient agreement.
                                                     4
          executed retroactive memorandums of understanding (MOU) for these activities,
          which they provided at the exit conference, along with documentation to support
          that the desired performance had been provided. Also at the exit conference, City
          officials provided a 2009 MOU for $72,005 that had been disbursed for a park
          rehabilitation project with the City’s Department of Recreation and Cultural
          Affairs. As a result, HUD is now assured that the $623,959 was expended for
          eligible activities and expected performance.


Subrecipient Agreements Not
Amended When Needed

          While City officials executed a subrecipient agreement for the disbursement of
          $306,710 for two activities, the subrecipient did not execute contracts for the
          work until after the subrecipient agreement had expired, and City officials did not
          amend the agreement to extend the time of performance. The officials could not
          explain why the term of the agreements had not been extended. We attribute this
          to City officials’ unfamiliarity with CDBG regulations and inadequate monitoring
          to ensure that subrecipient agreements were executed and remained in effect
          while the subrecipients had access to CDBG funds. The lack of agreements
          specifying the exact work and timeframes for completion could affect City
          officials’ ability to monitor the implementation of the subrecipient’s work and
          ensure that the $306,710 was used appropriately. At the exit conference, City
          officials provided recently executed amended subrecipient agreements to extend
          the time of performance, ensuring the City’s ability to monitor the subrecipients’
          progress.

          City officials also did not amend two subrecipient agreements with the City’s
          Department of Recreation and Cultural Affairs to show an increase in funding of
          $160,548 and $13,192. Regulations at 24 CFR 570.503(a)(1) show that a
          subrecipient agreement must include a description of the work to be performed, a
          schedule for completing the work, and a budget and that these items must be in
          sufficient detail to provide a sound basis for the recipient to monitor performance
          under the agreement. The subrecipient agreements showed that any increase or
          decrease in the amount of funds available to the subrecipient from HUD should be
          in written amendments to the subrecipient agreements. However, no amendment
          to the agreement was made. We attribute these deficiencies to City officials’ not
          monitoring subrecipient expenditures against budgeted amounts as required by
          CDBG regulations. As a result, program funding was awarded in excess of the
          approved budgets.


Subrecipient Planned
Performance Not Supported

          City officials awarded $60,000 in CDBG funds to a nonprofit organization for
          repair and renovation of its Masonic lodge to address building code violations and
          upgrades necessary to allow it to provide youth services or other programs for
          low- to moderate-income families of Passaic. While the final drawdown was in
                                            5
             September 2013, the organization had not provided documentation showing that it
             provided the promised public service as required by the subrecipient agreement.
             Regulations at 24 CFR 570.501(b) show that grantees are responsible for ensuring
             that CDBG funds are used in accordance with all program requirements. We
             attribute this condition to City officials’ inadequate evaluation of the
             subrecipient’s capacity to deliver the public service activity outlined in the
             subrecipient’s application for CDBG funding and the subrecipient agreement.

             As a result, CDBG funds were provided for an unsupported activity. On February
             19, 2014, City officials sent a letter to the organization telling it to comply with
             the subrecipient agreement. The organization had experienced operating
             difficulties and notified City officials that it was working to implement the
             promised services.

Conclusion

             While City officials generally disbursed CDBG funds for eligible activities, there
             were weaknesses in the administration of subrecipient agreements, which lessened
             assurance that the program was administered in accordance with HUD regulations
             and funds were adequately safeguarded. As a result of these weaknesses, City
             officials did not always execute subrecipient agreements or extend subrecipient
             agreements when the term of the agreements had expired. Additionally, officials
             did not amend subrecipient agreements when the authorized CDBG funding was
             increased or ensure that a subrecipient delivered the planned service. We attribute
             these conditions to City officials’ unfamiliarity with HUD regulations and
             weaknesses in subrecipient monitoring to ensure compliance with subrecipient
             agreement timeframes, obligated amounts, and accomplishments. However, at
             the exit conference, City officials provided two retroactively executed
             memorandums of understanding and evidence of satisfactory performance for the
             $551,954 in obligated funds, and two amended subrecipient agreements whose
             initial term had expired, which will provide greater assurance that the $306,710
             will be expended as intended.

Recommendations

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

     1A.     Strengthen controls over CDBG-funded activity files to ensure that up-to-date
             subrecipient agreements and evidence of completion of planned activities are
             maintained.

     1B.     Ensure that performance is satisfactorily completed under the two subrecipient
             agreements for $306,710 that were amended to extend the time of performance,
             thus providing assurance that these funds will be put to better use.

     1C.     Execute amended subrecipient agreements or provide documentation to support
             that the two subrecipient agreements for which the funding was increased were
                                             6
      amended. If adequate documentation is not provided, the $173,740 should be
      repaid to the City’s CDBG program, ensuring that the funds are put to better use.

1D.   Strengthen controls over the City’s administration of its subrecipients to ensure
      that subrecipient agreements are executed before disbursing funds and amended
      when the award or time of performance changes.

1E.   Provide documentation showing that the $60,000 drawdown for the renovation of
      the building will result in provision of the promised services. If this
      documentation cannot be provided, the amount should be repaid to the City’s
      program from non-Federal funds.

1F.   Strengthen controls over the award of CDBG funds to ensure that the entities
      funded can perform the planned activities.




                                       7
                              SCOPE AND METHODOLOGY

The audit focused on whether Authority officials had established adequate controls to administer
their CDBG program in accordance with applicable regulations. We performed the audit
fieldwork from February to June 2014 at the City’s office at 633 Passaic Street, Passaic, NJ.

To accomplish the audit objective, we

      Reviewed HUD’s CDBG program regulations and the Authority’s program policies and
       procedures.

      Documented and obtained an understanding of the City’s financial and administrative
       controls.

      Interviewed HUD field office and City officials.

      Reviewed the City’s independent public accountant reports and HUD monitoring reports
       for program years 2012 through 2013.

      Reviewed the City’s financial and management data reported in IDIS, HUD’s Line of
       Credit Control System (LOCCS), and the Federal Audit Clearinghouse System and
       reconciled the data to the City’s records. Our assessment of the reliability of these data
       was limited to the data sampled and was reconciled with data in the City’s records. As a
       result, we did not assess the reliability of these systems.

      Reviewed the City’s HUD-approved CDBG annual plans for fiscal years 2012 and 2013,
       annual contributions contracts, LOCCS vouchers for payments, purchase order schedules,
       contract files, general ledgers, and payment registers.

      Applied computer-assisted auditing techniques to identify questionable transactions and
       payments with CDBG program funding.

      Selected and reviewed a sample of 15 activities for which $2.4 million was drawn down,
       representing 77 percent of the $3.1 million drawdown in IDIS for 62 reported activities
       during that period.

The review generally covered the period March 1, 2010, through June 30, 2013, and was
extended as needed to accomplish our objective. We conducted the audit in accordance with
generally accepted government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objective. We believe that the evidence obtained
provides a reasonable basis for our findings and conclusions based on our audit objective.




                                                 8
                              INTERNAL CONTROLS

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

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

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


 Relevant Internal Controls

               We determined that the following internal controls were relevant to our audit
               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 of resources – Policies and procedures that management has
                   implemented to reasonably ensure that resources are safeguarded against waste,
                   loss, and misuse.

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



                                                 9
Significant Deficiency

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

                   Authority officials did not have adequate controls over the administration
                    of subrecipient grant agreements when subrecipient agreements were not
                    executed or amended when necessary and subrecipient performance was
                    not supported, which lessened assurance that the program was
                    administered in accordance with HUD regulations and funds were
                    adequately safeguarded.




                                             10
                                   APPENDIXES

Appendix A

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


                    Recommendation       Unsupported      Funds to be put
                        number               1/           to better use 2/


                           1B                                  $ 306,710
                           1C            $ 173,740
                           1E               60,000

                        Total             $233,740             $306,710


1/   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.

2/   Recommendation 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
     recommendation that City officials ensure that performance under two subrecipient
     agreements is satisfactorily completed, HUD will have greater assurance that the
     $306,710 obligated will have been expended for the intended purpose.




                                             11
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                Auditee Comments




Comment 1



                        OIG Evaluation of Auditee Comments
Comment 2




                                       12
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 4




Comment 5




                         13
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 6




Comment 6




                         14
Appendix B

          OIG’S EVALUATION OF AUDITEE COMMENTS
Comments 1 At the exit conference, City officials provided two memorandums of
           understanding (MOU) agreements that were retroactively executed in response to
           the audit report and additional documents not available during the audit to support
           that the planned performance was completed. A review of this documentation
           showed that the MOUs, although retroactively executed, would meet the
           requirements of a subrecipient agreement, and that the desired performance was
           obtained for the three completed activities for which $551,954 was disbursed.
           Therefore, the report was revised to acknowledge that the two MOUs had been
           executed.

Comment 2     At the exit conference, City officials provided a 2009 MOU along with other
              documentation that showed that the $72,005 had been properly disbursed. A
              review of this MOU and other documentation showed that it detailed the scope of
              expected performance and that the expected performance was completed.
              Therefore, the report was revised to acknowledge that an MOU had been executed
              and the expected performance was delivered for the $72,005 spent.

Comment 3     City officials provided MOUs and documentation that activities for which CDBG
              funds were disbursed had been successfully completed. Therefore, our original
              recommendation 1A that documentation be provided to support that subrecipient
              agreements’ had been executed and the expected performance delivered for the
              $623,959 ($551,959 + $72,005) disbursed has been removed from the report.
              However, recommendation 1A was revised to require that City officials
              strengthen controls over the maintenance of CDBG-funded activity files to ensure
              that they maintain complete files to support disbursements for all CDBG-funded
              activities, including MOUs and subrecipient agreements. We also added a
              recommendation to ensure that performance is satisfactorily completed under the
              two subrecipient agreements for $306,710 that were amended to extend the time
              of performance, thus providing assurance that these funds will be put to their
              intended use.

Comment 4     City officials amended the two questioned subrecipient agreements to extend the
              time of performance. As a result, the City can now effectively monitor the
              subrecipient’s performance, providing HUD greater assurance that the funds
              already disbursed will be expended as intended. However, evidence of successful
              completion of the planned activities for which $306,710 was committed will still
              need to be given to HUD during the audit resolution process.

Comment 5     City officials stated that they will seek City Council approval to increase the
              funding for activities 742 and 816, after which amended subrecipient agreements
              will be executed. Therefore, this documentation will need to be given to HUD
              during the audit resolution process to ensure that $173,740 was properly spent.

Comment 6     City officials’ planned action is responsive to the report recommendation.
                                              15