Office of the Commissioner for Municipal Affairs, San Juan, PR Section 108 Loan Guarantee Program Office of Audit, Region 4 Audit Report Number: 2015-AT-1001 Atlanta, GA December 5, 2014 To: María Ortíz, Director, Community Planning and Development, San Juan Field Office, 4ND //signed// From: Nikita N. Irons, Regional Inspector General for Audit, Atlanta Region, 4AGA Subject: The Office of the Commissioner for Municipal Affairs Needs To Make Improvements in Administering Its Section 108 Loan Guarantee Program Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector General’s (OIG) final results of our review of the Office of the Commissioner for Municipal Affairs’ Section 108 Loan Guarantee 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 404-331-3369. Audit Report Number: 2015-AT-1001 Date: December 5, 2014 The Office of the Commissioner for Municipal Affairs Needs To Make Improvements in Administering Its Section 108 Loan Guarantee Program Highlights What We Audited and Why We audited the Office of the Commissioner for Municipal Affairs’ Section 108 Loan Guarantee program as part of our strategic plan and based on the deficiencies noted during our recent review of Municipal Affairs’ Section 108 Loan Guarantee program, concerning the slow progress of the Vieques Sports Complex project. 1 The objectives of the audit were to determine whether Section 108 loan program funds were effectively used to meet a Community Development Block Grant (CDBG) program national objective and provide the intended benefits and whether borrowers complied with loan contract and the U.S. Department of Housing and Urban Development (HUD) requirements. What We Found Municipal Affairs did not ensure that borrowers completed three Section 108 Loan Guarantee activities that showed signs of slow progress. As a result, HUD had no assurance that more than $21 million awarded and disbursed for three Section 108-funded activities met a national objective of the CDBG program and fully provided the intended benefits. Section 108 loan program borrowers used more than $1 million for ineligible expenditures and did not support the eligibility of more than $367,000 in program disbursements. In addition, loan proceeds were not disbursed within the established timeframe, borrowers did not provide HUD the required loan collateral, borrowers did not establish a financial management system in accordance with HUD requirements, and investments were not fully collateralized. As a result, HUD lacked assurance that funds were adequately accounted for, safeguarded, and used for authorized purposes and in accordance with HUD requirements. What We Recommend We recommend that HUD (1) determine the eligibility of more than $20 million in unsupported Section 108 program costs and activities that showed signs of slow progress and (2) require the repayment of more than $1 million in ineligible expenditures. 1 Audit memorandum number 2014-AT-1801, issued March 20, 2014 Table of Contents Background and Objectives ....................................................................................3 Results of Audit ........................................................................................................5 Finding 1: Section 108 Loan Guarantee-Funded Activities Did Not Meet Program Objectives........................................................................................................................... 5 Finding 2: Loan Agreement Provisions and HUD Requirements Were Not Followed ............................................................................................................................. 9 Scope and Methodology .........................................................................................14 Internal Controls ....................................................................................................16 Appendixes ..............................................................................................................18 A. Schedule of Questioned Costs .................................................................................. 18 B. Auditee Comments and OIG’s Evaluation ............................................................. 19 C. Schedule of Ineligible Disbursements...................................................................... 25 2 Background and Objectives The Section 108 Loan Guarantee program is the loan guarantee provision of the Community Development Block Grant (CDBG) program. Section 108 loans provide grantees with a source of financing for economic development, housing rehabilitation, public facilities, and large-scale physical development projects. The principal security for the loan guarantee is a pledge by the grantee or the State of current and future CDBG funds. Section 108 obligations are financed through underwritten public offerings and may be for terms of up to 20 years. A nonentitlement public entity may apply for up to five times the latest approved CDBG amount received by its State. 2 For purposes of determining project and activity eligibility, the CDBG rules and requirements apply. All projects and activities must meet one of the following three national objectives of the CDBG program: (1) principally benefit low- and moderate-income persons, (2) assist in eliminating or preventing slums and blight, or (3) assist with community development needs having a particular urgency. The Office of the Commissioner for Municipal Affairs is the lead agency in Puerto Rico charged with the responsibility of overseeing the administration of the State allocation of CDBG program funds. Municipal Affairs was created August 30, 1991, through the Commonwealth of Puerto Rico Autonomous Municipalities Act of 1991. One of its responsibilities is to regulate, advise, and give technical and professional assistance to municipalities in the areas related to their organization, administration, and operations. In fiscal year 2014, The U.S. Department of Housing and Urban Development (HUD) awarded Puerto Rico nearly $26.1 million in State CDBG funds, distributed among 51 nonentitlement recipients. Between 2006 and 2013, HUD approved more than $23 million in Section 108 loans to five Puerto Rico nonentitlement recipients. The table below provides details of the five Section 108 loans. Municipality Loan amount Loan purpose San Lorenzo $6,000,000 Acquisition of property and development of activity center Dorado 5,500,000 Acquisition of property and development of hotel facilities Acquisition of property and development of multicultural Rincon 4,850,000 activity center and aquatic park Camuy 4,264,000 Development of hotel facilities Maunabo 3,000,000 Development of sports and entertainment center Total $23,614,000 2 A nonentitlement public entity represents a unit of general local government that does not receive CDBG funds directly from HUD as part of the CDBG entitlement program. 3 The objectives of the audit were to determine whether Section 108 loan program funds were effectively used to meet a CDBG program national objective and provided the intended benefits and whether borrowers complied with loan contract and HUD requirements. 4 Results of Audit Finding 1: Section 108 Loan Guarantee-Funded Activities Did Not Meet Program Objectives Municipal Affairs did not ensure that borrowers completed three Section 108 Loan Guarantee activities that showed signs of slow progress. This deficiency occurred because Municipal Affairs did not implement adequate monitoring procedures for its Section 108 activities. As a result, HUD had no assurance that more than $21 million awarded and disbursed for three Section 108-funded activities met a national objective of the CDBG program and fully provided the intended benefits. Slow Progress Activities More than $21 million was invested for three activities that reflected slow progress without assurance that the activities would provide the intended benefits. San Lorenzo activity center - In July 2006, HUD approved a $6 million Section 108 loan to the Municipality of San Lorenzo for property acquisition and the development of an activity center that included movie theaters, bowling alleys, and other facilities. According to the loan agreement, all loan proceeds had to be withdrawn and disbursed by December 31, 2008. The Municipality’s Federal programs director informed us that the Municipality did not have the funds to complete the project as originally planned and that it had not found a private investor that could provide the additional financing needed to construct the activity center. We performed a site inspection of the activity center project in March 2014 and confirmed that the project had not been completed. At the time of our inspection, the project site had been converted to a parking facility (see picture 1). The Municipality did not provide documentation showing that HUD approved the change in the scope of the project. Picture 1 - San Lorenzo activity center site converted to a parking facility 5 More than 8 years had elapsed since HUD approved the Section 108 funds for the activity, and the intended benefits had not materialized. Based on this condition, HUD had no assurance that the San Lorenzo activity center project would fully meet CDBG program objectives and provide the intended benefits. Therefore, more than $7.9 million in Section 108 and CDBG funds invested in the project was unsupported. 3 Dorado hotel facilities - In November 2006, HUD approved a $5.5 million Section 108 loan to the Municipality of Dorado for property acquisition and the development of a 48- room hotel facility. According to the loan agreement, all loan proceeds had to be withdrawn and disbursed by February 29, 2008. The Municipality’s Federal programs director informed us that the Municipality did not have the funds necessary to develop the project as originally planned because of its high estimated construction cost and was revising the scope of the project. We performed a site inspection of the hotel project in June 2014 and confirmed that the construction had not started (see picture 2). Picture 2 - Dorado hotel project site More than 7 years had elapsed since HUD approved the Section 108 funds for the activity, and the intended benefits had not materialized. Based on this condition, HUD had no assurance that the Dorado hotel project would fully meet CDBG program objectives and provide the intended benefits. Therefore, more than $7.3 million in Section 108 and CDBG funds invested in the project was unsupported. 4 Camuy hotel facilities - In March 2006, HUD approved a $4.2 million Section 108 loan to the Municipality of Camuy for the development of an 80-room hotel facility. According to the loan agreement, all loan proceeds had to be withdrawn and disbursed by December 31, 2008. 3 The $7.9 million invested in the activity consisted of $6 million Section 108 loan proceeds plus $1.9 million in CDBG funds used for loan repayments. 4 The $7.3 million invested in the activity consisted of $5.5 million Section 108 loan proceeds plus $1.8 million in CDBG funds used for loan repayments. 6 The Municipality’s Federal programs director informed us that the Municipality did not have the funds necessary to develop the project because of its high estimated construction cost and was reviewing alternate projects to use the Section 108 funds. We performed a site inspection of the hotel project in March 2014 and confirmed that the construction had not started (see picture 3). Picture 3 - Camuy hotel project site More than 8 years had elapsed since HUD approved the Section 108 funds for the activity, and the intended benefits had not materialized. Based on this condition, HUD had no assurance that the Camuy hotel facility project would fully meet CDBG program objectives and provide the intended benefits. Therefore, more than $5.8 million in Section 108 and CDBG funds invested in the project was unsupported. 5 Lack of Monitoring Efforts Municipal Affairs did not implement monitoring procedures for its Section 108 loan program. The most recent monitoring review was performed in 2005. HUD regulations at 24 CFR (Code of Federal Regulations) 570.710 assign the principal responsibility to the State CDBG grantees to ensure compliance with all applicable requirements governing the use of the guaranteed loan funds. Further, 24 CFR 570.492 provides that the State must review units of general local government and in cases of noncompliance, take such actions as appropriate to prevent a continuance of the deficiency, mitigate any adverse effects, and prevent a recurrence. Municipal Affairs’ lack of monitoring efforts compromised the effectiveness of the Section 108-funded activities in meeting a national objective of the CDBG program. Conclusion The deficiencies discussed above occurred because Municipal Affairs did not implement monitoring procedures and controls to ensure that its activities met Section 108 Loan Guarantee 5 The $5.8 million invested in the activity consisted of $4.26 million Section 108 loan proceeds plus $1.6 million in CDBG funds used for loan repayments. 7 program objectives. As a result, HUD had no assurance that more than $21 million invested in the Section 108-funded activities met a national objective of the CDBG program and fully provided the intended benefits. Recommendations We recommend that the Director of the San Juan Office of Community Planning and Development instruct Municipal Affairs to 1A. Submit a plan for how it will proceed with respect to the Municipality of San Lorenzo activity center project, including a schedule that HUD can track to ensure its completion. HUD must reevaluate the feasibility of the activity and determine the eligibility of the $7,010,276 already invested. 6 If HUD determines that the activity has been canceled or is not feasible, Municipal Affairs must mitigate activity losses by committing any unused loan proceeds for future loan repayments. 1B. Submit a plan for how it will proceed with respect to the Municipality of Dorado hotel project, including a schedule that HUD can track to ensure its completion. HUD must reevaluate the feasibility of the activity and determine the eligibility of the $7,369,000 already invested. If HUD determines that the activity has been canceled or is not feasible, Municipal Affairs must mitigate activity losses by committing any unused loan proceeds for future loan repayments. 1C. Submit a plan for how it will proceed with respect to the Municipality of Camuy hotel project, including a schedule that HUD can track to ensure its completion. HUD must reevaluate the feasibility of the activity and determine the eligibility of the $5,474,376 already invested. 7 If HUD determines that the activity has been canceled or is not feasible, Municipal Affairs must mitigate activity losses by committing any unused loan proceeds for future loan repayments. 1D. Conduct monitoring of the Section 108 activities with signs of slow progress to ensure that program objectives are met and provide the intended benefits. 6 Total investments of $7,999,275 were adjusted to account for $988,154 questioned in recommendation 2A and $845 in recommendation 2C. 7 Total investments of $5,830,878 were adjusted to account for $436 questioned in recommendation 2A and $356,066 in recommendation 2C. 8 Finding 2: Loan Agreement Provisions and HUD Requirements Were Not Followed Section 108 loan program borrowers used more than $1 million for ineligible expenditures and did not support the eligibility of more than $367,000 in program disbursements. In addition, loan proceeds were not disbursed within the loan agreement timeframes, borrowers did not provide HUD the required loan collateral, borrowers did not establish a financial management system in accordance with HUD requirements, and investments were not fully collateralized. These deficiencies occurred because Municipal Affairs did not perform monitoring reviews of Section 108 borrowers to ensure compliance with the loan agreement and regulations. As a result, HUD lacked assurance that funds were adequately accounted for, safeguarded, and used for authorized purposes and in accordance with HUD requirements. Program Disbursements Not Related to Approved Projects Contrary to the loan agreement, more than $1 million in Section 108 loan proceeds was disbursed to pay for expenditures that were not related to the approved Section 108 projects or were used as a source of temporary financing to the unit of local government. Therefore, the Section 108 Loan Guarantee program was charged with unnecessary costs that provided no benefits and did not meet program objectives. The Municipalities of San Lorenzo, Maunabo, and Camuy disbursed more than $589,000 in Section 108 funds for costs that were not related to the approved projects and for ineligible bank overdraft fees. Paragraph 1(a) of the loan agreement provided that funds could be withdrawn from the guarantee loan funds account only for the payment of the costs of approved Section 108 activity, transfer to the loan repayment account, or the temporary investment of funds under the contract. Regulations at 2 CFR 225, Appendix B, Paragraph 16 provide that fines and penalties are unallowable program costs. Appendix C provides details of the ineligible disbursements. In addition, the Municipality of San Lorenzo inappropriately transferred Section 108 loan proceeds to its general fund account. Contrary to paragraph 1(a) of the loan agreement, between December 2008 and February 2014, the Municipality made 30 transfers to the general fund totaling more than $6.1 million. Its Federal program director informed us that the funds were transferred to cover cash shortfalls in the general account and the Municipality was not aware that such transactions were contrary to the loan agreement. The Municipality’s records showed that it had returned most of the funds to its guarantee loan funds account but owed more than $490,000. Program Expenditure Eligibility Not Substantiated Section 108 loan program borrowers did not support the reasonableness and allowability of more than $367,000 in Section 108 program funds disbursed. Regulations at 2 CFR 225, Appendix A, Paragraph C.1.b. provide that to be allowable under Federal awards, costs must be necessary, reasonable, and adequately documented. Since proper supporting documentation was not provided, HUD lacked assurance that funds were used for authorized purposes and in accordance with HUD requirements. See table 1 for details of the unsupported disbursements. 9 Check Municipality Date number Amount Comment San Lorenzo Dec. 6, 2007 110 $845 No support provided Inspection services, support was not adequate to exclude other charges Maunabo Apr. 11, 2008 32 10,929 not related to the approved project. Jan. 23, 2009 32 112,320 No support provided Sept. 18, 2009 34 131,500 No support provided Camuy Mar. 18, 2010 35 23,441 No support provided May 14, 2009 36 1,100 No support provided Aug. 11, 2010 37 74,580 No support provided Aug. 25, 2010 38 13,125 No support provided Total $367,840 Table 1 Unexpended Section 108 Loan Proceeds Three Section 108 loan program borrowers did not expend loan proceeds before the loan agreement deadline. The agreement for the Section 108 Loan Guarantee assistance, paragraph 1(a), required that all of the loan funds be withdrawn and disbursed by the borrower for the approved activities by a specified date. Any funds remaining after the deadline were to be transferred to an established loan repayment account. Despite this requirement, the borrowers maintained unused Section 108 loan proceeds totaling more than $8.8 million. HUD informed us that the borrower should make the transfer unless the funds were still needed to carry out the approved activity. The borrower should either transfer the unexpended funds to the repayment account or submit a request for extension to HUD. The borrowers did not transfer the unused funds to the repayment account and did not provide evidence that it had requested an extension from HUD. Table 2 provides details of the unexpended loan proceeds. Loan Disbursement Bank balance as of Municipality amount deadline date review date Comment The Municipality informed us that it was aware of the disbursement Dorado $5,500,000 Feb. 29, 2008 $4,307,775 Apr. 30, 2014 deadline. The Municipality informed us that it was not aware of the San Lorenzo 6,000,000 Dec. 31, 2008 666,948 Feb. 28, 2014 disbursement deadline. The Municipality informed us that it was not aware of the Camuy 4,264,000 Dec. 31, 2008 3,826,760 Feb. 28, 2014 disbursement deadline. Total $15,764,000 $8,801,483 Table 2 Loan Collateral Not Provided in Accordance With Loan Agreement The Section 108 loan program borrowers did not provide additional security to assure the repayment of the debt obligation as required in paragraph 15 of the loan agreement. As a condition for receiving Loan Guarantee assistance, the borrower was required to submit additional security in the form of a sole first priority lien of real property within an established 10 timeframe. For one loan, the lien was filed more than 3 years after the deadline. For the other three loans, the lien was overdue and was not filed by the borrower. As a result, HUD was at risk of not being able to exercise appropriate remedies in the event of a borrower’s defaulting on the Section 108 loan. Table 3 provides details of the overdue and late liens. Municipality Lien deadline Comment San Lorenzo Sept. 27, 2006 Lien not submitted to HUD Nov. 17, 2011 Lien not submitted to HUD June 18, 2012 Lien not submitted to HUD Dorado 8 Apr. 22, 2014 Lien not submitted to HUD June 11, 2014 Lien not submitted to HUD June 30, 2014 Lien not submitted to HUD Maunabo Sept. 21, 2006 Lien not submitted to HUD Lien filed in January 2010, more than 3 years Camuy Sept. 21, 2006 after the deadline Table 3 Inadequate Accounting Records The accounting records of the four Section 108 loan program borrowers did not reflect complete and accurate financial information on program activities and did not permit the adequate tracing of program receipts and expenditures. Regulations at 24 CFR 85.20(b) require recipients of Federal awards to maintain financial records that are accurate, current, and complete and that adequately identify the source and application of funds provided for assisted activities. However, the borrowers did not maintain a financial management system that permitted the tracing of funds to a level that ensured that such funds had not been used in violation of the restrictions and prohibitions of applicable statutes. For example, the records maintained did not properly account for program income, accounts receivable, and capital assets. The accounting records also contained several instances of incorrect balances and transactions not recorded. The Municipalities of San Lorenzo and Camuy did not maintain a general ledger for the Section 108 program. The accounting record maintained was a check register that contained incomplete and inaccurate financial information. As a result, HUD lacked assurance that funds were adequately accounted for, safeguarded, and used for eligible purposes. Investments Not Fully Collateralized With Government Obligations Section 108 loan program borrowers invested the loan proceeds in certificates of deposit at local commercial banks without ensuring that they were fully collateralized with Government obligations. Paragraph 1(a) of the loan agreement provided that any amount of Section 108 loan proceeds deposited into a bank and in excess of the Federal deposit insurance limit must be fully invested in Government obligations. 9 The Municipalities of Camuy and Dorado invested $7 8 The Dorado activity involved the acquisition of five properties, and the liens were due within 5 business days of the acquisition. 9 The Federal insurance amount is currently limited to $250,000. Government obligations are defined as a direct obligation of or any obligation for which the full and timely payment principal and interest is guaranteed by the 11 million in loan proceeds in certificates of deposit at commercial banks in Puerto Rico. HUD informed us that the investment in certificates of deposit in excess of Federal insurance is not permissible unless the excess is fully collateralized with Government obligations. However, the borrowers did not provide evidence showing that these investments were fully collateralized with Government obligations. As a result, HUD had no assurance that Federal funds were properly safeguarded. Table 4 provides details of the Section 108 funds invested in certificates of deposit. Total amount invested in certificates Municipality of deposit as of review date Dorado $3,500,000 April 30, 2014 Camuy 3,500,000 March 6, 2014 Total $7,000,000 Table 4 Lack of Monitoring Municipal Affairs did not monitor Section 108 borrowers to ensure compliance with all applicable requirements governing the use of Loan Guarantee funds. Its monitoring director informed us that the most recent monitoring review of the Section 108 program was performed in 2005. HUD’s regulations at 24 CFR 570.492 provide that the State must review units of general local government and in cases of noncompliance, take such actions as appropriate to prevent a continuance of the deficiency, mitigate any adverse effects, and prevent a recurrence. Municipal Affairs’ lack of monitoring efforts compromised the effectiveness of Section 108- funded activities, and HUD lacked assurance that funds were adequately accounted for, safeguarded, and used for authorized purposes. Conclusion The deficiencies discussed above occurred because Municipal Affairs did not perform monitoring reviews of its Section 108 loan program borrowers. As a result, HUD lacked assurance that funds were adequately accounted for, safeguarded, and used for authorized purposes and in accordance with HUD requirements. Recommendations We recommend that the Director of the San Juan Office of Community Planning and Development instruct Municipal Affairs to 2A. Recover from the borrowers and reimburse $1,080,242 to the applicable loan guarantee account from non-Federal funds for ineligible disbursements that were United States of America, including but not limited to United States Treasury certificates of indebtedness and notes and bonds –State and local government series, or certificates of ownership of the principal of or interest on direct obligations of or obligations unconditionally guaranteed by the United States of America, which are held in trust by a commercial bank that is a member of the Federal Reserve System and has capital and surplus in excess of $100 million. 12 not related to the approved projects and used to finance local government operations. 2B. Ensure that borrowers did not use Section 108 funds to finance local government operations and verify the return of any ineligible disbursement. 2C. Obtain and submit supporting documentation showing the eligibility and propriety of $367,840 in disbursements or reimburse the loan guarantee account from non- Federal funds. 2D. Ensure that the borrowers either transfer the unexpended Section 108 loan proceeds to the repayment account or submit a request for extension to HUD. 2E. Ensure that the borrowers provide HUD the additional security requirements according to the loan agreement. 2F. Ensure that borrowers develop and implement a financial management system in accordance with HUD requirements to ensure that program funds can be traced to a level that ensures that such funds have not been used in violation of the restrictions and prohibitions of applicable statutes. 2G. Ensure that all Section 108 loan proceeds deposited at commercial banks are properly collateralized with Government obligations. 2H. Conduct monitoring reviews of all Section 108 projects and ensure that borrowers comply with all loan agreement provisions and HUD regulations. We also recommend that the Director of the San Juan Office of Community Planning and Development 2I. Increase monitoring of Municipal Affairs’ performance in the administration of its Section 108 loan program. Consider imposing sanctions if Municipal Affairs does not demonstrate program progress. 13 Scope and Methodology The objectives of this audit were to determine whether Section 108 loan program funds were effectively used to meet a national objective of the CDBG program and fully provided the intended benefits and whether borrowers complied with loan contract and HUD requirements. To accomplish our objectives, we • Reviewed applicable laws, regulations, and relevant HUD program requirements, including the Section 108 loan contracts; • Reviewed HUD Section 108 loan-related files, including the application for the loan, status reports, and disbursement information reported on loan proceeds and CDBG funds; • Reviewed Municipal Affairs’ and borrowers’ project files and records; • Reviewed HUD’s Integrated Disbursement and Information System reports; • Conducted site inspections of the projects; and • Interviewed HUD, Municipal Affairs, and municipality officials. Between 2006 and 2013, HUD approved more than $23 million in Section 108 loans to five nonentitlement recipients. We reviewed the five Section 108 loans to determine whether the loan proceeds were used in accordance with the application and loan agreement and whether activities provided the intended benefits. The borrowers’ records reflected that more than $7.8 million in Section 108 loan proceeds were disbursed between May 2007 and April 2014. We reviewed all the disbursements related to the Section 108 projects of the Municipalities of Camuy, San Lorenzo, and Maunabo totaling more than $6.4 million. We reviewed additional disbursements from the Municipality of Dorado with amounts greater than $10,000. The sample resulted in 10 disbursements totaling more than $1.4 million. We did not review the disbursements related to the Municipality of Rincon because at the time of our audit, Section 108 loan proceeds had not been transferred. More than $7.8 million in Section 108 loan program expenditures was reviewed to determine whether funds were used for supported and eligible efforts. To achieve our audit objectives, we relied in part on computer-processed data contained in HUD’s information system. Although we did not perform a detailed assessment of the reliability of the data, we performed a minimal level of testing and found the data adequate for our purposes. We did not rely on computer-processed data contained in Municipal Affairs’ and borrowers’ databases, nor were the data used to materially support our audit findings, 14 conclusions, and recommendations. We did not select 100 percent of the items for testing, as the selections made provided sufficient evidence for the findings presented. The results of the audit apply only to items selected for review and cannot be projected to the universe or population. The audit generally covered the period January 1, 2005, through December 31, 2013. We conducted our fieldwork from February through August 2014 at Municipal Affairs’ offices in San Juan, PR, and the borrowers’ offices in Camuy, Dorado, Maunabo, and San Lorenzo, PR. We conducted the audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective(s). We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. 15 Internal Controls Internal control is a process adopted by those charged with governance and management, designed to provide reasonable assurance about the achievement of the organization’s mission, goals, and objectives with regard to • Effectiveness and efficiency of operations, • Reliability of financial reporting, and • Compliance with applicable laws and regulations. Internal controls comprise the plans, policies, methods, and procedures used to meet the organization’s mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations as well as the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined that the following internal controls were relevant to our audit objectives: • Program operations – Policies and procedures that management has implemented to provide reasonable assurance that a program meets its objectives, while considering cost effectiveness and efficiency. • Relevance and reliability of information – Policies and procedures that management has implemented to reasonably ensure that operational and financial information used for decision making and reporting externally is relevant, reliable, and fairly disclosed in reports. • Compliance with laws and regulations – Policies and procedures that management has implemented to reasonably ensure that program implementation is consistent with laws and regulations. • Safeguarding of assets – Policies and procedures that management has implemented to reasonably prevent and promptly detect unauthorized acquisition, use, or disposition of assets and resources. 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. 16 Significant Deficiencies Based on our review, we believe that the following items are significant deficiencies: • Municipal Affairs did not implement adequate procedures and controls to ensure that activities provided the intended benefits and met a national objective of the CDBG program (see finding 1). • Municipal Affairs did not implement adequate monitoring efforts to ensure that Section 108 loan borrowers complied with loan agreement provisions and regulations (see finding 2). 17 Appendixes Appendix A Schedule of Questioned Costs Recommendation Ineligible 1/ Unsupported 2/ number 1A $7,010,276 1B 7,369,000 1C 5,474,376 2A $1,080,242 2C 367,840 Totals $1,080,242 $20,221,492 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. 18 Appendix B Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 1 19 Auditee Comments Ref to OIG Evaluation Comment 1 Comment 2 Comment 3 Comment 4 20 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 4 Comment 5 Comment 6 Comment 2 Comment 7 Comment 8 Comment 3 21 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 22 OIG Evaluation of Auditee Comments Comment 1 Municipal Affairs stated that under the current program procedures borrowers maintain control of the Section 108 funds without its and HUD’s involvement. It also stated that it is in the process of establishing and adopting new procedures to address the deficiencies identified in the audit report. Contrary to the Municipal Affairs’ statements, the current regulations and program guidelines of the Section 108 program do not limit the ability of the State to monitor and properly track the use of program funds on behalf of the borrowers. HUD’s regulations at 24 CFR 570.492 provide that the State must review units of general local government and in cases of noncompliance, take such actions as appropriate to prevent a continuance of the deficiency, mitigate any adverse effects, and prevent a recurrence. Any new procedures the Municipal Affairs implements must comply with all HUD requirements. Comment 2 We commend Municipal Affairs for recognizing the need of a work plan for the three activities with signs of slow progress to ensure program objectives are met. Comment 3 We appreciate Municipal Affairs efforts to promptly initiate monitoring reviews of the Section 108 borrowers. Comment 4 Municipal Affairs stated that some of the questioned costs were not authorized by the Section 108 loan agreement but are CDBG eligible expenditures. The loan agreements will be amended to include the questioned costs as part of eligible activities. Municipal Affairs requested that appendix C be renamed to unauthorized disbursements. In addition, it stated that it will coordinate the reimbursement of the Section 108 funds transferred to the general account. The Municipalities of San Lorenzo, Maunabo, and Camuy disbursed Section 108 funds for costs that were not related to the approved projects. Paragraph 1(a) of the loan agreement provided that funds could be withdrawn from the guarantee loan funds account only for the payment of the costs of approved Section 108 activity, transfer to the loan repayment account, or the temporary investment of funds under the contract. Therefore, more than $589,000 in Section 108 funds is ineligible. We did not modify the report and recommendations. Amendments to the loan agreement to make the questioned costs eligible after the facts must be evaluated by HUD. HUD must determine whether such amendment is permissible under the program and it must ensure that all HUD requirements, such as procurement, environmental, and citizen participation, were met. Comment 5 We appreciate Municipal Affairs efforts to implement new monitoring procedures on the use and disposition of Section 108 funds. 23 Comment 6 We appreciate Municipal Affairs efforts to require the borrowers to submit the documentation related to the unsupported disbursements and provide it to HUD for an eligibility determination. Any amounts determined ineligible by HUD should be reimbursed from non-Federal funds. Comment 7 We appreciate Municipal Affairs efforts to ensure that Section 108 borrowers provide the additional security to assure the repayment of the debt obligation as required in paragraph 15 of the loan agreement. Comment 8 We commend Municipal Affairs for recognizing the need for improving the financial management system of its non-entitlement borrowers. 24 Appendix C Schedule of Ineligible Disbursements Check Municipality Date number Amount Comment Disbursement for local road repairs Feb.7, 2012 132 $133,965 not related to the approved project Disbursement for local road repairs Mar. 21, 2012 133 34,161 not related to the approved project Disbursement for local road repairs Mar. 29, 2012 134 70,734 not related to the approved project Disbursement for local road repairs May 25, 2012 135 3,795 not related to the approved project San Lorenzo Disbursement for local road repairs May 29, 2012 136 21,728 not related to the approved project Disbursement for local road repairs June 21, 2012 137 133,453 not related to the approved project Disbursement for local road repairs July 3, 2012 138 41,220 not related to the approved project Disbursement for local road repairs July 3, 2012 139 58,653 not related to the approved project Disbursement for construction Feb. 15, 2008 0001 32,267 patents and taxes not related to the approved project Disbursement for partial release of 10 percent retention of the Mar. 18, 2008 0002 857 construction patents and taxes not related to the approved project Disbursement for release of 10 percent retention of patents and Mar. 25, 2008 0005 2,728 local taxes not related to the Maunabo approved project Disbursement for construction of Nov. 9, 2010 1003 53,593 baseball park not related to the approved project Disbursement for release of 10 percent retention of construction of Sept. 1, 2011 1007 1,802 baseball park not related to the approved project Overdraft bank charges, ineligible N/A N/A 405 under 2 CFR Part 225 Overdraft bank charges, ineligible Camuy N/A N/A 436 under 2 CFR Part 225 Total $589,797 25
The Office of the Commissioner for Municipal Affairs Needs To Make Improvements in Administering Its Section 108 Loan Guarantee Program
Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-12-05.
Below is a raw (and likely hideous) rendition of the original report. (PDF)