State of Illinois Community Development Block Grant Disaster Recovery Program Office of Audit, Region 5 Audit Report Number: 2015-CH-1009 Chicago, IL September 30, 2015 To: Ray E. Willis, Director of Community Planning and Development, 5AD //signed// From: Kelly Anderson, Regional Inspector General for Audit, Chicago Region, 5AGA Subject: The State of Illinois’ Administrator Lacked Adequate Controls Over the State’s Community Development Block Grant Disaster Recovery Program-Funded Projects 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 State of Illinois’ Community Development Block Grant Disaster Recovery 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 312-353-7832. Audit Report Number: 2015-CH-1009 Date: September 30, 2015 The State of Illinois’ Administrator Lacked Adequate Controls Over the State’s Community Development Block Grant Disaster Recovery Program- Funded Projects Highlights What We Audited and Why We audited the State of Illinois’ Community Development Block Grant Disaster Recovery program. The audit was part of the activities in our fiscal year 2015 annual audit plan. We selected the State’s program based on a congressional request from the Honorable Mark Kirk to review the State’s awards of program funds under the Consolidated Security, Disaster Assistance, and Continuing Appropriations Act of 2009 for three projects.1 Our objective was to determine whether the State’s Department of Commerce and Economic Opportunity ensured that program funds used for the three projects met Federal requirements. What We Found The Department did not ensure that program funds used for the three projects met Federal requirements. It could not provide sufficient documentation to support that two of the three projects met a national objective and the use of program funds for one of the projects. Further, program funds loaned for one of the projects were not repaid as required by the Department’s grant agreement with the subrecipient and the Department could not ensure that two of the subrecipients appropriately procured services for three contracts associated with two of the projects. As a result, HUD and the Department lacked assurance that more than $1.7 million in program funds was used and more than $4.3 million in program funds will be used in accordance with Federal requirements. In addition, the Department did not have $250,000 in program funds available for eligible program-funded projects. What We Recommend We recommend that the Director of HUD’s Chicago Office of Community Planning and Development require the State to (1) support or reimburse its program from non-Federal funds for the three projects that lacked evidence of compliance with Federal requirements, (2) support that one project met a national objective or deobligate the program funds, (3) reimburse its program from non-Federal funds for the program funds not repaid, and (4) implement adequate controls to address the findings cited in this audit report. 1 The awards were to (1) Chicago Neighborhood Initiatives, Inc., (2) the South Suburban Mayors and Managers Association, and (3) the City of Belleville. Table of Contents Background and Objective......................................................................................3 Results of Audit ........................................................................................................5 Finding: The Department Did Not Administer Three Program-Funded Projects in Accordance With Federal Requirements ....................................................... 5 Scope and Methodology ...........................................................................................9 Internal Controls ....................................................................................................10 Appendixes ..............................................................................................................11 A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 11 B. Auditee Comments and OIG’s Evaluation ............................................................. 12 C. Applicable Requirements ......................................................................................... 36 2 Background and Objective Community Development Block Grant Disaster Recovery funds were authorized under the Consolidated Security, Disaster Assistance, and Continuing Appropriations Act of 2009 for necessary expenses related to disaster relief; long-term recovery; and restoration of infrastructure, housing, and economic revitalization in areas affected by hurricanes, floods, and other natural disasters occurring during 2008 for which the President declared a major disaster under Title IV of the Robert T. Stafford Disaster Relief and Emergency Assistance Act of 1974. The funds were to be used for activities authorized under Title I of the Housing and Community Development Act of 1974 as amended. The U.S. Department of Housing and Urban Development (HUD) allocated nearly $194 million in Community Development Block Grant Disaster Recovery funds to the State of Illinois. The State’s Department of Commerce and Economic Opportunity administers the State’s program. The Department was created in 2003 by the Illinois General Assembly under the laws of the State. Its mission is to raise Illinois’ profile as a premier global destination and to provide a foundation for the economic prosperity of all Illinoisans through the coordination of business recruitment and retention, providing essential capital to small businesses, investment in infrastructure and job training for a 21st century infrastructure, and the administration of State and Federal grants. The Department’s program records are located at 500 East Monroe Street, Springfield, IL. On June 30, 2010, the Department entered into a contract with CDM Smith, Inc.,2 to assist it in administering the program. CDM Smith, Inc.’s program records are located at 427 East Monroe Street, Springfield, IL. The Honorable Mark Kirk requested that we review the State’s awards of program funds under the Act to (1) Chicago Neighborhood Initiatives, Inc. to build a new community center in Chicago, (2) the South Suburban Mayors and Managers Association for the demolition of the Dixie Square Mall, and (3) the City of Belleville to create jobs at the Wagner Motor Car Company. The following table shows the amount of program funds awarded, obligated, and disbursed to the subrecipients for the three projects. Subrecipient Awarded Obligated Disbursed Chicago Neighborhood Initiatives, Inc. $4,998,600 $4,998,600 $652,242 Association 4,000,000 3,075,472 3,075,472 City of Belleville 1,000,000 1,000,000 1,000,000 Totals $9,998,600 $9,074,072 $4,727,714 2 Previously known as Camp, Dresser, and McKee, Inc. 3 Our objective was to determine whether the Department ensured that program funds used for the three projects met Federal requirements. Specifically, we wanted to determine whether the (1) projects met a national objective, (2) projects clearly showed a direct or indirect relation to the disaster, (3) program funds were used for eligible expenses, and (4) subrecipients appropriately procured services. 4 Results of Audit Finding: The Department Did Not Administer Three Program- Funded Projects in Accordance With Federal Requirements The Department did not ensure that program funds used for three projects met Federal requirements.3 It could not provide sufficient documentation to support that two of the three projects met a national objective and the use of program funds for one of the projects. Further, program funds loaned for one of the projects were not repaid as required by the Department’s grant agreement with the subrecipient and the Department could not ensure that two of the subrecipients appropriately procured services for three contracts associated with two of the projects. These weaknesses occurred because the Department lacked adequate controls for its administration of the three projects to ensure that the use of program funds met Federal requirements. As a result, HUD and the Department lacked assurance that more than $1.7 million in program funds was used and more than $4.3 million in program funds will be used in accordance with Federal requirements. In addition, the Department did not have $250,000 in program funds available for eligible program-funded projects. Lack of Sufficient Documentation To Support Projects Met a National Objective The Department could not provide sufficient documentation to support that two of the three projects met a national objective. It reported in HUD’s Disaster Recovery Grant Reporting system4 that the community center addressed the national objective of benefiting low- and moderate-income individuals on an areawide basis. However, contrary to HUD’s regulations at 24 CFR (Code of Federal Regulations) 570.483(b)(1), the Department could not provide sufficient documentation to support that the area used to determine whether the project qualified as an activity benefiting low- and moderate-income individuals on an areawide basis was the area that would be served by the community center. Further, the Department could not provide sufficient documentation to support that at least 51 percent of the residents of the area were low- and moderate-income individuals and the area was primarily residential. The Department reported in HUD’s system that the creation of jobs at the Wagner Motor Car Company addressed the national objective of job creation or retention activities. However, it could not provide sufficient documentation to support whether the jobs that were created were full-time or part-time as required by 24 CFR 570.483(b)(4)(i). Therefore, we could not determine whether 51 percent of the jobs that were created provided employment to low-and moderate-income individuals. 3 See appendix C of this audit report. 4 HUD’s system is the drawdown and reporting system for the program. 5 The Department’s deputy director of community development stated that he believed the Department provided sufficient documentation to support that the community center project and the creation of jobs at the Wagner Motor Car Company met a national objective. Loan of Program Funds for Wagner Inappropriately Partially Forgiven The Department allowed the City of Belleville to forgive $250,000 (50 percent) of a $500,000 loan, although Wagner Motor Car Company did not repay the loan in accordance with the repayment schedule in the Department’s grant agreement with the City.5 Wagner made 20 repayments on the loan totaling $250,000 in principal and more than $37,000 in interest.6 However, the 20 payments were 8 to 19 days after the date required by the repayment schedule. Further, contrary to appendix A, section C.1, of 2 CFR Part 225, the Department could not provide sufficient documentation to support Wagner’s use of more than $438,000 of the $1 million in program funds. Wagner deposited $900,000 into its checking account and $100,000 into its money market account. It used nearly $562,000 from the checking account to pay for inventory. The Department stated that Wagner used an additional nearly $201,000 from the checking account to pay off a short-term loan. However, the Department could not provide sufficient documentation to support that the loan was paid off or what Wagner used the loan for. Further, the Department stated that Wagner maintained the remaining more than $237,000 ($1 million - nearly $562,000 - nearly $201,000) in the restricted money market account to fulfill General Motors’ requirement for maintaining a minimum of $250,000 in unencumbered cash. However, the Department could not provide sufficient documentation to support that Wagner maintained the $100,000 in the money market account and that the remaining more than $137,000 ($900,000 - nearly $562,000 - nearly $201,000) from the checking account was transferred into the money market account. The deputy director stated that he believed the Department provided sufficient documentation to support that it followed Federal and State requirements in the administration of the Wagner Motor Car Company project. Since none of Wagner’s repayments on the loan had reached the third level of noncompliance (30 days late), the loan was considered in good standing. Appendix A, section C.1, of 2 CFR Part 225 does not define minimum documentation or the meaning of adequate. The Department believed that it provided adequate documentation to support Wagner’s use of the program funds. Department Could Not Ensure Subrecipients Appropriately Procured Services The Department could not provide sufficient documentation to support that Chicago Neighborhood Initiatives, Inc., performed a cost analysis for its contract with an engineering firm as required by 24 CFR 84.45. Chicago Neighborhood Initiatives, Inc. obtained from an engineering firm a concept engineer’s opinion of probable construction cost for site improvements for the community center, dated November 2012. The opinion stated that the 5 The grant agreement stated that $500,000 was a grant and $500,000 was a 50 percent forgivable loan as long as Wagner met specified repayment requirements. 6 The City remitted the more than $287,000 to the Department. 6 prices were based on average prices from contractors’ bid prices that the engineering firm had reviewed for similar projects within the past year or available material and labor cost data and that some unit prices were adjusted for special conditions. The Department did not provide documentation to support the opinion. In December 2013, Chicago Neighborhood Initiatives, Inc., requested qualifications for engineering services associated with site and infrastructure work in preparation for the community center, and two engineering firms submitted qualifications.7 Chicago Neighborhood Initiatives, Inc., selected the firm that it believed was the best qualified, which was the same firm that provided the opinion, in February 2014. In May 2014, it entered into a contract with the firm totaling $720,500. However, CDM Smith, Inc., completed a cost reasonableness review for the design and construction engineering services portion of the contract to support that $470,800 for the services was reasonable. The deputy director stated that it was the opinion of Department’s contractor that the scope and entire price of Chicago Neighborhood Initiatives, Inc.’s contract with the firm was reasonable. However, the Department did not provide documentation to support the opinion concerning the remaining $249,700 of the contract for environmental services, soil boring activities, and work to be completed by a subcontractor related to materials collection and testing during the construction oversight. Contrary to HUD’s regulations at 24 CFR 84.43 and 84.45 and the Association’s procurement policies and procedures, the Department did not ensure that the Association obtained more than one bid for two requests for proposals for professional and consulting services and performed a cost analysis for the services. The same firm provided the bids for both requests. The Association entered into two contracts with the firm8 and paid the firm $59,600 in program funds under the contracts. The deputy director stated that the subrecipients procured the services using 24 CFR 85.36 and he believed that the subrecipients complied with those procurement regulations. However, since the subrecipients were nonprofit corporations, 24 CFR 84.40 through 84.48 were the applicable procurement regulations. The deputy director stated that he believed that the engineer’s opinion for the community center met the requirements of an independent estimate for the engineering services. He also believed that it was acceptable for the Association to enter into contracts with the firm for professional and consulting services after receiving only one bid since the Association requested proposals from several firms. 7 The firm that provided the opinion was one of the two firms that submitted qualifications. 8 The Association’s contracts with the firm were for $56,000 and nearly $6,000. 7 Conclusion The weaknesses described above occurred because the Department lacked adequate controls for its administration of the three projects to ensure that the use of program funds met Federal requirements. As a result, HUD and the Department lacked assurance that more than $1.7 million in program funds was used and more than $4.3 million in program funds will be used in accordance with Federal requirements. Further, the Department did not have $250,000 in program funds available for eligible program-funded projects. Recommendations We recommend that the Director of HUD’s Chicago Office of Community Planning and Development require the State to 1A. Support or reimburse its program from non-Federal funds $1,211,842 (more than $652,000 disbursed to Chicago Neighborhood Initiatives, Inc. + $1 million disbursed to the City of Belleville + nearly $60,000 for the Association’s two contracts - $500,000)9 for the program funds used for the three projects without sufficient documentation to support that the use of the funds met Federal requirements. 1B. Support that Chicago Neighborhood Initiatives, Inc.’s community center project met a national objective or deobligate the $4,346,358 in program funds. 1C. Reimburse its program from non-Federal funds $250,000 for the program funds that the City of Belleville inappropriately forgave the Wagner Motor Car Company from repaying. 1D. Implement adequate controls to ensure that the Department administers the program in accordance with Federal requirements. 9 We did not include the (1) $250,000 in principal that Wagner Motor Car Company repaid since the City of Belleville remitted the amount to the Department and (2) $250,000 in program funds that the City inappropriately forgave Wagner since we included the amount in recommendation 1C. 8 Scope and Methodology We performed our audit work from November 2014 through July 2015 at the Department’s offices located at 500 East Monroe Street, Springfield, IL, and HUD’s Chicago regional office located at 77 West Jackson Boulevard, Chicago, IL. The audit covered the period September 2010 through September 2014 and was expanded as necessary. To accomplish our objective, we reviewed Applicable laws; Federal regulations at 2 CFR Parts 225 and 230; HUD’s regulations at 24 CFR Parts 84 and 570; the Federal Register, dated February 13, 2009, August 14, 2009, and October 22, 2010; HUD’s “CDBG [Community Development Block Grant] Disaster Recovery Framework” training handout; HUD’s grant agreement with the State for program funds; and HUD’s files for the State’s program. The State’s action plan for program funding, single audit report for 2011, comprehensive annual financial reports for 2012 through 2014, and program data from HUD’s system. The Department’s grant agreements with subrecipients, policies and procedures, and organizational charts. Subrecipients’ policies and procedures and accounting records. In addition, we interviewed the subrecipients’, CDM Smith, Inc.’s, and the Department’s employees and HUD’s staff. Finding We reviewed the three program-funded projects that the Honorable Mark Kirk asked us to review. We relied in part on the data from HUD’s system. Although we did not perform a detailed assessment of the reliability of the data, we performed minimal levels of testing and found the data to be adequately reliable for our purposes. We conducted the audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective(s). We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. 9 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: Effectiveness and efficiency of operations – Policies and procedures that management has implemented to reasonably ensure that a program meets its objectives. Reliability of financial reporting – Policies and procedures that management has implemented to reasonably ensure that valid and reliable data are obtained, maintained, and fairly disclosed in reports. Compliance with applicable laws and regulations – Policies and procedures that management has implemented to reasonably ensure that resource use is consistent with laws and regulations. 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. Significant Deficiency Based on our review, we believe that the following item is a significant deficiency: The Department lacked adequate controls for its administration of three projects to ensure that the use of program funds met Federal requirements (see finding). 10 Appendixes Appendix A Schedule of Questioned Costs and Funds To Be Put to Better Use Recommendation Funds to be put Ineligible 1/ Unsupported 2/ number to better use 3/ 1A $1,211,842 1B $4,346,358 1C $250,000 Totals $250,000 $1,211,842 $4,346,358 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. 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 recommended improvements, avoidance of unnecessary expenditures noted in preaward reviews, and any other savings that are specifically identified. In this instance, implementation of our recommendation will ensure that program funds are used in accordance with HUD’s regulations. 11 Appendix B Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 12 Ref to OIG Auditee Comments Evaluation Comment 1 13 Ref to OIG Auditee Comments Evaluation Comments 2, 3, and 4 14 Ref to OIG Auditee Comments Evaluation Comments 2, 3, and 4 Comment 5 15 Ref to OIG Auditee Comments Evaluation Comments 2 and 6 Comments 6 and 7 Comments 6 and 8 Comments 6 and 9 Comment 6 16 Ref to OIG Auditee Comments Evaluation Comment 6 Comment 6 Comment 6 Comment 1 17 Ref to OIG Auditee Comments Evaluation Comment 10 Comment 10 Comment 1 18 Ref to OIG Auditee Comments Evaluation Comments 2, 11, and 12 Comment 11 Comment 13 19 Ref to OIG Auditee Comments Evaluation Comment 12 Comments 12 and 14 Comments 11 and 12 Comment 1 20 Ref to OIG Auditee Comments Evaluation Comment 15 21 Ref to OIG Auditee Comments Evaluation Comment 15 Comment 15 Comment 1 22 Ref to OIG Auditee Comments Evaluation Comments 4 and 16 Comment 17 Comments 4 and 17 Comments 16, 17, and 18 Comment 18 Comments 16, 17, and 18 23 Ref to OIG Auditee Comments Evaluation Comments 16, 17, and 18 Comment 19 Comment 20 Comment 1 24 Ref to OIG Auditee Comments Evaluation Comments 4 and 21 Comment 22 Comments 4, 21, 22, and 23 Comment 24 25 Ref to OIG Auditee Comments Evaluation Comment 25 Comment 1 26 Ref to OIG Auditee Comments Evaluation Comments 3, 26, and 27 Comments 3, 26, and 28 Comments 27 and 29 27 Ref to OIG Auditee Comments Evaluation Comments 27 and 29 Comments 27 and 29 Comments 27 and 29 Comments 27, 29, and 30 Comments 27, 29, and 31 Comments 27, 29, and 31 Comment 1 28 OIG Evaluation of Auditee Comments Comment 1 We did not include in appendix B page 5 of the response since it was intentionally left blank and the cover pages to the responses for each item and the attachments since the cover pages and the attachments were not necessary to understand the comments of the Department’s deputy director of community development. We provided the Director of HUD’s Chicago Office of Community Planning and Development a complete copy of the written comments plus page 5, the cover pages, and the attachments. Comment 2 We revised the report to state the following: The Department’s deputy director of community development stated that he believed the Department provided sufficient documentation to support that the community center project and the creation of jobs at the Wagner Motor Car Company met a national objective. Comment 3 We revised the report to state the following: The deputy director stated that he believed the Department provided sufficient documentation to support that it followed Federal and State requirements in the administration of the Wagner Motor Car Company project. Since none of Wagner’s repayments on the loan had reached the third level of noncompliance (30 days late), the loan was considered in good standing. Appendix A, section C.1, of 2 CFR Part 225 does not define minimum documentation or the meaning of adequate. The Department believed that it provided adequate documentation to support Wagner’s use of the program funds. Comment 4 We revised the report to state the following: The deputy director stated that the subrecipients procured the services using 24 CFR 85.36 and he believed that the subrecipients complied with those procurement regulations. However, since the subrecipients were nonprofit corporations, 24 CFR 84.40 through 84.48 were the applicable procurement regulations. The deputy director stated that he believed that the engineer’s opinion for the community center met the requirements of an independent estimate for the engineering services. He also believed that it was acceptable for the Association to enter into contracts with the firm for professional and consulting services after receiving only one bid since the Association requested proposals from several firms. Comment 5 The Department entered into a contract with CDM Smith, Inc., to assist it in administering the program. Therefore, we did not remove or redact CDM Smith, Inc., from the report. 29 Comment 6 Contrary to HUD’s regulations at 24 CFR 570.483(b)(1), the Department could not provide sufficient documentation to support that the area used to determine whether the project qualified as an activity benefiting low- to moderate-income individuals on an areawide basis was the area that would be served by the community center. Therefore, the Department could not provide sufficient documentation to support that at least 51 percent of the residents of the selected area were low- to moderate-income individuals and the area was primarily residential. Comment 7 Section 4 of part I of the application described the community center project as site and infrastructure improvements to complete the development of a 138,000- square-foot indoor sports center. The 10-mile radius to be served by the community center was predominantly African American, and more than 25 percent of the population was Latino. The community center will serve the surrounding low-income communities through its offerings of indoor baseball, soccer, and lacrosse fields, a unique combination not currently offered in Chicago. Section 3.3 stated that the community center’s interior will feature three 120 by 200 foot full-size turf fields to accommodate baseball, soccer, and lacrosse. The community center will also accommodate meetings, community events, and exhibitions. Further, section 3.5 stated that the areas to be served included the far south side of Chicago, the Pullman and Roseland communities, and the greater Calumet region. The map did not include much of the far south side of Chicago and the greater Calumet region. In addition, the Department’s application checklist for the community center stated that the documentation used to support that the community center addressed the national objective of benefiting low- and moderate-income individuals on an area wide basis was from Chicago Neighborhood Initiative, Inc.’s Pullman Park project, which involved the construction of a large retail store. Therefore, it appears that the area that would be served by the community center would be greater than the roughly 4-mile by 4- mile square included in the service area map for the Pullman Park project. Comment 8 Many of the large thoroughfares that connect the community center to the census tracts that the Department included in its updated service area map and that the deputy director stated would make transportation to the community center easier using roads, buses, and sidewalks also connect the community center to census tracts that the Department did not include in its updated map. Therefore, the interstate highways and the river should not deter individuals living in such census tracts from using the community center. Comment 9 The deputy director did not provide support for the services that the four community centers provided. Therefore, we contacted three of the four community centers. South Central Community Center was the only one that had an indoor sports facility. It had one indoor basketball court. We were unable to locate Oak Lawn Community Center. Therefore, the deputy director’s statement that residents of the areas where the community centers are located would be less likely to travel to the community center in Pullman is not supported. 30 Comment 10 We revised the report to state the following: The Department could not provide sufficient documentation to support that two of the three projects met a national objective. We also removed the following from the report: The Department reported in HUD’s system that the demolition of the Dixie Square Mall addressed the national objective of aiding in the prevention or elimination of slums and blight on an area wide basis. However, the Department could not provide sufficient documentation to support that the area used to support the objective met the conditions contained in the regulations at 24 CFR 570.483(c)(1)(ii)(A) or (B). Comment 11 We removed from the report that the Department could not provide sufficient documentation to support the income for all of the individuals who were hired as required by 24 CFR 570.483(b)(4)(i). Comment 12 The Department could not provide sufficient documentation to support whether the jobs that Wagner Motor Car Company created were full time or part time as required by 24 CFR 570.483(b)(4)(i). Therefore, we could not determine whether 51 percent of the jobs that were created provided employment to low- and moderate-income individuals. Further, we could not determine whether Wagner hired 13 full-time-equivalent permanent employees, of which 7 were to be low- to moderate-income individuals, as required by the Department’s modification to the grant agreement with the City of Belleville. Comment 13 On March 30, 2015, the Department stated that for its grant to the City of Belleville, it did not apply the waiver in 74 FR (Federal Register) 65369, dated October 22, 2010, which allowed the State to establish a low- and moderate- income jobs benefit by documenting for each person employed the name of the business, the type of job, and the annual wages or salary of the job and stated that HUD would consider the person income qualified if the annual wages or salary of the job was at or under the HUD established income limit for a one person household. Comment 14 The deputy director stated that 5 of the 13 employees the City of Belleville reported in its final grantee report as having full-time jobs appeared to have only part-time jobs since the employees’ annualized wages were less than minimum wage and the 5 jobs should not be counted as full-time-equivalent jobs. The Department’s own limited analysis showed that the City appeared to have inappropriately reported 31.2 percent of the 16 jobs as full-time jobs. Therefore, we could not rely on the City’s final grantee report to support that the remaining eight (13 – 5) employees had full-time jobs. Comment 15 We removed the following from the report: 31 Contrary to the Act, the Department could not provide sufficient documentation to support that program funds used for the Dixie Square Mall project were for necessary expenses related to the flooding that occurred in Illinois during 2008. The Department stated that the disaster caused a rise in unemployment and that the demolition of the Mall would enable potential development and ultimately job creation. The Department also stated that future development would stabilize the City of Harvey’s tax base. However, the Department was unable to provide sufficient documentation to support that the demolition of the Mall would enable future development leading to job creation. It provided a February 2009 economic impact analysis of a planned redevelopment project for the Mall. However, it did not provide the redevelopment plan, and the economic impact analysis stated that the company was not retained to provide an opinion regarding the planned redevelopment project’s financial feasibility. The Department also provided an October 2012 redevelopment plan for the Dixie Highway corridor redevelopment project area. However, the project area did not include the site of the Mall. Further, although demolition of the Mall was completed in December 2012, redevelopment had not occurred on the site as of July 2015. We also amended recommendation 1A to reflect these revisions. Comment 16 The Department could not provide sufficient documentation to support that Chicago Neighborhood Initiatives, Inc., performed a cost analysis for its contract with an engineering firm as required by 24 CFR 84.45. Comment 17 Part IV of the Department’s grant agreement with Chicago Neighborhood Initiatives, Inc., dated November 10, 2013, states that Chicago Neighborhood Initiatives, Inc., must conduct all procurement transactions in a manner providing for full and open competition and in compliance with the more stringent and applicable of the procurement regulations at 24 CFR 85.36 or 24 CFR 84.40 through 84.48 or the State’s procurement code at 30 Illinois Compiled Statutes 500. Since Chicago Neighborhood Initiatives, Inc., was a nonprofit corporation, 24 CFR 84.40 through 84.48 were the applicable procurement regulations. Section 84.45 states that some form of cost or price analysis must be made and documented in the procurement files in connection with every procurement action. Further, regulations at 24 CFR 85.36(f)(1) state that grantees and subgrantees must perform a cost or price analysis in connection with every procurement action, including contract modifications. Comment 18 Chicago Neighborhood Initiatives, Inc., obtained from an engineering firm a concept engineer’s opinion of probable construction cost for site improvements for the community center, dated November 2012. The opinion stated that the prices were based on average prices from contractors’ bid prices that the engineering firm had reviewed for similar projects within the past year or available material and labor cost data and that some unit prices were adjusted for special conditions. The Department did not provide documentation to support the 32 opinion. In December 2013, Chicago Neighborhood Initiatives, Inc., requested qualifications for engineering services associated with site and infrastructure work in preparation for the community center, and two engineering firms submitted qualifications. The firm that provided the opinion was one of the two firms that submitted qualifications. Chicago Neighborhood Initiatives, Inc., selected the firm that it believed was the best qualified, which was the same firm that provided the opinion, in February 2014. In May 2014, it entered into a contract with the firm totaling $720,500. It was not appropriate to use an opinion, especially without documentation to support the opinion, from the selected firm to support the reasonableness of the contract. Comment 19 CDM Smith, Inc. completed a cost reasonableness review for the design and construction engineering services portion of the contract to support that $470,800 for the services was reasonable. We revised the report to state the following: The Department’s deputy director of community development stated that it was the opinion of Department’s contractor that the scope and entire price of Chicago Neighborhood Initiatives, Inc.’s contract with the firm was reasonable. However, the Department did not provide documentation to support the opinion concerning the remaining $249,700 of the contract for environmental services, soil boring activities, and work to be completed by a subcontractor related to materials collection and testing during the construction oversight. Comment 20 The Department did not provide documentation to support Chicago Neighborhood Initiatives, Inc.’s cost analysis of engineering services associated with site and infrastructure work in preparation for the community center. Comment 21 Contrary to HUD’s regulations at 24 CFR 84.43 and 84.45 and the Association’s procurement policies and procedures, the Department did not ensure that the Association obtained more than one bid for two requests for proposals for professional and consulting services and performed a cost analysis for the services. Comment 22 Part IV of the Department’s grant agreement with the Association, dated November 19, 2010, states that the Association must conduct all procurement transactions in a manner providing for full and open competition and in compliance with the more stringent and applicable of the procurement regulations at 24 CFR 85.36 or 24 CFR 84.40 through 84.48 or the State’s procurement code at 30 Illinois Compiled Statutes 500. Since the Association was a nonprofit corporation, 24 CFR 84.40 through 84.48 were the applicable procurement regulations. Section 84.43 states that all procurement transactions must be conducted in a manner that provides, to the maximum extent possible, free and open competition. Section 84.44 states that all recipients must establish written procurement procedures. Section 84.45 states that some form of cost or price 33 analysis must be made and documented in the procurement files in connection with every procurement action. Further, regulations at 24 CFR 85.36(b)(1) state that grantees and subgrantees must use their own procurement procedures, which reflect applicable State and local laws and regulations, provided that procurements conform to applicable Federal law and the standards identified in 24 CFR 85.36. Section 85.36(c)(1) states that all procurement transactions will be conducted in a manner providing full and open competition consistent with 24 CFR 85.36. Section 85.36(f)(1) also states that grantees and subgrantees must perform a cost or price analysis in connection with every procurement action including contract modifications. Comment 23 The Association’s procurement policies and procedures state that all purchases that use Federal awards of more than $5,000 but less than $100,000 must be made by obtaining written quotations from at least two responsible vendors. Comment 24 Section 3.1 of HUD’s Office of Community Planning and Development’s Playing by the Rules, a handbook on administrative systems for Community Development Block Grant subrecipients, states that the Federal requirements for procurement are located in 24 CFR 85.36 for government subrecipients and in 24 CFR 84.40 through 84.48 for nonprofit subrecipients. Comment 25 The Department did not provide documentation to support its contractor’s analysis. Comment 26 The Department allowed the City of Belleville to forgive $250,000 of a $500,000 loan, although Wagner Motor Car Company did not repay the loan in accordance with the repayment schedule in the Department’s grant agreement with the City. Comment 27 Contrary to appendix A, section C.1, of 2 CFR 225, the Department could not provide sufficient documentation to support Wagner Motor Car Company’s use of more than $438,000 of the $1 million in program funds. Comment 28 Part II of the Department’s grant agreement with the City of Belleville, dated November 10, 2010, states that Wagner Motor Car Company was required to pay the interest and principal indebtedness on the loan as follows: (1) only the interest due, calculated on the full amount of the outstanding principal, beginning on December 1, 2010, and on the first day of each following month until and including May 1, 2011; (2) more than $9,000 in principal plus applicable interest, beginning on June 1, 2011, and on the first day of each following month until and including October 1, 2015; and (3) the unpaid principal on November 1, 2015. If Wagner was, at all times during the loan, in good standing with all required payments under the loan, the City was authorized to forgive a maximum of $250,000 of the loan principal based on (1) Wagner’s satisfactory performance in remitting repayments of principal and payments of interest as agreed and (2) making specific prepayments defined in the repayment schedule as balloon payments on or before June 1, 2012, April 1, 2013, February 1, 2014, or December 1, 2014, respectively. 34 Wagner made 20 repayments on the loan totaling $250,000 in principal and more than $37,000 in interest. However, the 20 payments were 8 to 19 days after the date required by the repayment schedule. Therefore, the City was not authorized to forgive $250,000 of the loan to Wagner. Comment 29 The Department stated that Wagner Motor Car Company used nearly $201,000 from its checking account to pay off a short-term loan. However, the Department could not provide sufficient documentation to support that the loan was paid off or what Wagner used the loan for. Further, the Department stated that Wagner maintained the remaining more than $237,000 in a restricted money market account to fulfill General Motors’ requirement for maintaining a minimum of $250,000 in unencumbered cash. However, the Department could not provide sufficient documentation to support that Wagner maintained $100,000 in the money market account and that more than $137,000 from the checking account was transferred into the money market account. Comment 30 The bank statement did not support the payee of Wagner Motor Car Company’s check number 65642 for nearly $201,000. Comment 31 The Department provided Wagner Motor Car Company’s checking account bank statement for the period October 30 through November 30, 2010, which showed that Wagner deposited $900,000 in program funds into the checking account on November 22, 2010. The Department also provided a hand written bank reconciliation for the checking account for November 2010, which included outstanding check number 61778 for $142,000. The bank reconciliation did not include the payee of the check. The Department provided Wagner’s money market account bank statement for the period November 18 through December 21, 2010, which showed that Wagner deposited $100,000 in program funds into the money market account on November 22, 2010. The statement included what appeared to be a tape calculation, showing that $142,000 was added to the money market account, for a total of nearly $255,000. Check 61778 was written next to the addition. The Department did not provide additional bank statements for the money market account. The two bank statements and bank reconciliation were not sufficient to support that Wagner maintained the $100,000 in the money market account and that more than $137,000 from the checking account was transferred into the money market account. 35 Appendix C Applicable Requirements Finding The Consolidated Security, Disaster Assistance, and Continuing Appropriation Act of 2009 states that program funds must be used for necessary expenses related to disaster relief; long- term recovery; and restoration of infrastructure, housing, and economic revitalization in areas affected by hurricanes, floods, and other natural disasters occurring during 2008. HUD’s grant agreement with the State for the program, dated February 4, 2010, states that the State must comply with all waivers and alternative requirements in the Federal Register, dated February 13, 2009. 74 FR (Federal Register) 7245, dated February 13, 2009, states that regulatory provisions governing the Community Development Block Grant program for States at 24 CFR Part 570 apply to the use of program funds. Page 7252 states that 24 CFR 570.502(b), except that HUD recommends but does not require the application of the requirements of 24 CFR Part 84, applies to any activity that a State carries out directly by funding a subrecipient. Regulations at 24 CFR 84.43 state that all procurement transactions must be conducted in a manner that provides, to the maximum extent possible, free and open competition. Section 84.44 states that all recipients must establish written procurement procedures. Section 84.45 states that some form of cost or price analysis must be made and documented in the procurement files in connection with every procurement action. Regulations at 24 CFR 570.483 state that a Community Development Block Grant-assisted activity must comply with one or more of the national objectives. Section 570.483(b)(1) states that for an activity to be considered to address the objective of benefiting low- and moderate- income individuals on an areawide basis, the benefits must be available to all the residents in a particular area and at least 51 percent of the residents must be low- and moderate-income individuals. Such an area does not need to have the same boundaries as census tracts or other officially recognized boundaries but must be the entire area served by the activity. An activity that serves an area that is not primarily residential in character cannot qualify as an activity benefiting low- and moderate-income individuals on an areawide basis. Section 570.483(b)(4)(i) states that a job creation activity is an activity designed to create permanent jobs in which at least 51 percent of the jobs, computed on a full-time equivalent basis, involve the employment of low- and moderate-income individuals. Section 570.483(c)(1) states that for an activity to be considered to address the objective of aiding in the prevention or elimination of slums and blight on an areawide basis; (1) the area, defined by the unit of general local government, meets a definition of a slum, blighted, deteriorated, or deteriorating area under State or local law and (2) the area must meet the conditions cited in 24 CFR 570.483(c)(1)(ii)(A) or (B). Section 570.483(c)(1)(ii)(A) states that at least 25 percent of the properties throughout the area must experience at least one of the following conditions: (1) physical deterioration of buildings or improvements, (2) abandonment of properties, (3) chronic high-occupancy turnover rates or 36 chronic high vacancy rates in commercial or industrial buildings, (4) significant declines in property values or abnormally low property values relative to other areas in the community, or (5) known or suspected environmental contamination. Section 570.483(c)(1)(ii)(B) states that the public improvements throughout the area must be in a general state of deterioration. Regulations at 24 CFR 570.489(n) state that a State must ensure that costs it and its recipients incur conform with Office of Management and Budget Circulars A-87 and A-122 as applicable. Regulations at 24 CFR 570.502(b) state that subrecipients, except subrecipients that are government entities, must comply with Office of Management and Budget Circular A-122. Appendix A, section C.1, of 2 CFR Part 225 requires all costs to be necessary, reasonable, and adequately documented.10 Appendix A, section A.2, of 2 CFR Part 23011 requires that all costs be reasonable and adequately documented. Section A.3 states that a cost is reasonable if, in its nature or amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost. Part IV of the Department’s grant agreement with Chicago Neighborhood Initiatives, Inc., dated November 10, 2013, states that program funds must be spent for project costs that comply with Office of Management and Budget Circular A-122. Chicago Neighborhood Initiatives, Inc., must conduct all procurement transactions in a manner providing for full and open competition and in compliance with the more stringent and applicable of the procurement regulations at 24 CFR 84.40 through 84.48 or the State’s procurement code at 30 Illinois Compiled Statutes 500. Part IV of the Department’s grant agreement with the Association, dated November 19, 2010, states that program funds must be spent for project costs that comply with Office of Management and Budget Circular A-122. The Association must conduct all procurement transactions in a manner providing for full and open competition and in compliance with the more stringent and applicable of the procurement regulations at 24 CFR 84.40 through 84.48 or the State’s procurement code at 30 Illinois Compiled Statutes 500. The Department’s grant agreement with the City of Belleville, dated November 10, 2010, states that the Department agrees to provide a grant to the City in an amount not to exceed $1 million in program funds. Part II of the grant agreement states that the City will receive $1 million in program funds for the benefit of the Wagner Motor Car Company, consisting of a $500,000 grant and a $500,000 loan with an annual interest rate of 5 percent. Wagner was required to pay the interest and principal indebtedness on the loan as follows: (1) only the interest due, calculated on the full amount of the outstanding principal, beginning on December 1, 2010, and on the first day of each following month until and including May 1, 2011; (2) more than $9,000 in principal plus applicable interest, beginning on June 1, 2011, and on the first day of each following month 10 Office of Management and Budget Circular A-87 was relocated to 2 CFR Part 225. 11 Office of Management and Budget Circular A-122 was relocated to 2 CFR Part 230. 37 until and including October 1, 2015; and (3) the unpaid principal on November 1, 2015. If Wagner was, at all times during the loan, in good standing with all required payments under the loan, the City was authorized to forgive a maximum of $250,000 of the loan principal based on (1) Wagner’s satisfactory performance in remitting repayments of principal and payments of interest as agreed and (2) making specific prepayments defined in the repayment schedule as balloon payments on or before June 1, 2012, April 1, 2013, February 1, 2014, or December 1, 2014, respectively. Wagner was required to hire a minimum of 29 additional full-time- equivalent permanent employees before August 31, 2012, and retain the employees until the Department approved the grantee evaluation report. Of the 29 employees, 15 were to be low- to moderate-income individuals. On June 28, 2013, the Department approved a modification to the grant agreement so that Wagner was required to hire only 13 additional full-time-equivalent permanent employees before December 31, 2014. Further, 7 of the 13 employees were to be low- to moderate-income individuals. Part IV states that program funds must be spent for project costs that comply with Office of Management and Budget Circular A-87. The Association’s procurement policies and procedures state that all purchases that use Federal awards of more than $5,000 but less than $100,000 must be made by obtaining written quotations from at least two responsible vendors. 38
The State of Illinois' Administrator Lacked Adequate Controls Over the State's Community Development Block Grant Disaster Recovery Program-Funded Projects
Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-09-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)