oversight

The State of Wyoming Did Not Always Administer Its CDBG Program in Accordance With Applicable Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-05-26.

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

      State of Wyoming, Cheyenne, WY
        Community Development Block Grant Program




Office of Audit, Region 8     Audit Report Number: 2015-DE-1001
Denver, CO                                          May 26, 2015
To:            Edward Atencio, Acting Director, Denver Office of Community Planning and
               Development, 8AD

               //signed//
From:          Ronald J. Hosking, Regional Inspector General for Audit, 8AGA
Subject:       The State of Wyoming Did Not Always Administer Its CDBG Program in
               Accordance With Applicable Requirements


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 Wyoming’s Community Development
Block Grant program.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
913-551-5870.
                    Audit Report Number: 2015-DE-1001
                    Date: May 26, 2015

                    The State of Wyoming Did Not Always Administer Its CDBG Program in
                    Accordance With Applicable Requirements




Highlights

What We Audited and Why
We selected the State of Wyoming’s Community Development Block Grant (CDBG) program
for audit based on a risk analysis that considered the funding received and the rating received on
the risk assessment conducted by the U.S. Department of Housing and Urban Development
(HUD) for Region 8 (Colorado, Montana, North Dakota, South Dakota, Utah, and Wyoming).
Our audit objective was to determine whether the State reimbursed only approved costs, its grant
agreements contained all required language, it properly monitored its projects, and it ensured that
projects met the national objective in accordance with HUD’s CDBG requirements.

What We Found
The State reimbursed two subrecipients for costs that it had not formally approved, its grant
agreements lacked the required language on program income, it did not adequately monitor the
projects it funded, and it funded a project without ensuring that it would meet the national
objective. These conditions occurred because the State (1) did not have a policy requiring formal
approval for changes made outside the scope of the original contract, (2) did not realize that the
projects it funded potentially generated program income, (3) relied on one staff member to
monitor all activities throughout Wyoming, and (4) lacked a procedure requiring a subrecipient
to market future homes in a subdivision to low- and moderate-income home buyers. As a result,
(1) more than $371,000 in funding was not available to benefit low- and moderate-income
people; (2) the State had no assurance that grant subrecipients accounted for program income and
used it in accordance with requirements; (3) the grant funds were at increased risk for fraud,
waste, and abuse; and (4) the State did not have assurance that the $500,000 used for one project
would benefit low- and moderate-income home buyers.

What We Recommend
We recommend that the Director of HUD’s Denver Office of Community Planning and
Development require the Wyoming Business Council to (1) reimburse from non-Federal funds
the $105,514 spent on ineligible costs and provide support for the $266,072 spent on projects or
reimburse any ineligible amount from non-Federal funds, (2) ensure that future grant agreements
meet requirements, (3) implement a procedure for conducting onsite monitoring over the course
of each project, and (4) provide support for the $500,000 spent on one project or reimburse any
ineligible amount from non-Federal funds.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding 1: The State Reimbursed Subrecipients for Costs That It Had Not
         Formally Approved ........................................................................................................... 4
         Finding 2: The State’s Grant Agreements Did Not Contain Required Langauge
         on Program Income .......................................................................................................... 7
         Finding 3: The State Did Not Adequately Monitor Grant Activities .......................... 9
         Finding 4: The State Funded a Project Without Ensuring That It Would Meet
         the National Objective .................................................................................................... 11

Scope and Methodology .........................................................................................12

Internal Controls ....................................................................................................13

Appendixes ..............................................................................................................14
         A. Schedule of Questioned Costs .................................................................................. 14
         B. Auditee Comments and OIG’s Evaluation ............................................................. 15




                                                                  2
Background and Objective
Established in 1974, the Community Development Block Grant (CDBG) program provides
assistance to ensure decent affordable housing, provides services to the most vulnerable in our
communities, and creates jobs through expansion and retention of businesses. Annual grants are
awarded on a formula basis to local governments and States. States then award grants to smaller
units of local government based on their funding priorities and program criteria. Every funded
activity must meet one of the following national objectives:

      Benefit low- and moderate-income persons,
      Aid in the prevention or elimination of slums and blight, or
      Meet community development needs having a particular urgency.

The State of Wyoming created the Wyoming Business Council in 1998 and made it responsible
for encouraging, stimulating, and supporting the development and expansion of the State’s
economy. The Council’s Investment Ready Communities Division administers the State’s
CDBG program. Between April 1, 2010 and March 31, 2014, the Council received more than
$13.4 million in grant funds from the U.S. Department of Housing and Urban Development
(HUD), which it distributed for projects throughout Wyoming.

HUD’s Integrated Disbursement and Information System is used to track the grant funds
allocated to the State. This system allows grantees to request their grant funds from HUD and
report on what is accomplished with these funds. It is a nationwide database that provides HUD
with current information regarding the program activities underway across the Nation so it can
report to Congress and monitor grantees.
The objective of the audit was to determine whether the State reimbursed only approved costs, its
grant agreements contained all required language, it properly monitored its projects, and it
ensured that projects met the national objective in accordance with HUD’s CDBG requirements.




                                               3
Results of Audit

Finding 1: The State Reimbursed Subrecipients for Costs That It
Had Not Formally Approved
The State reimbursed two subrecipients for costs that it had not formally approved. This
condition occurred because the State did not have a policy requiring formal approval for changes
made outside the scope of the original contract. As a result, more than $371,000 in funding was
not available to benefit low- and moderate-income people under the approved national objective.
The State Reimbursed Subrecipients for Costs That It Had Not Approved
The State reimbursed subrecipients for costs that it had not formally approved for two projects.
The approved use of funds for one project was “for the purpose of installing a turn lane on the
Salt Creek Highway” so semi-trailer trucks could access a future parts store. The national
objective was to create jobs at this store for low- and moderate-income persons. The turn lane
was instrumental to building the parts store and, therefore, creating jobs because the Wyoming
Department of Transportation required its installation due to safety concerns.

However, the State reimbursed a city (the subrecipient) for paving and landscaping a second
street, although it did not evaluate how the paving and landscaping were needed to meet the
project’s purpose and formally approve these additions. A city official told us that once the
project was underway, the fire department wanted a second entrance for emergencies. The store
added a back entrance, and the City used more than $266,000 in grant funds to pave the street
that met this entrance between the store and a park. Then it used the remaining funds totaling
more than $93,000 for landscaping next to the street and park. The funds spent on landscaping
were ineligible because the landscaping was not needed to create jobs at the parts store, and the
funds spent on paving the street were unsupported because the street may have been considered
necessary for the parts store with the proper supporting documentation. The photos below show
the street behind the store and the landscaping, with the grey parts store in the upper right corner
of the right picture.




                                                  4
The State also reimbursed a different subrecipient that spent unused funds on a sign without
reevaluating and approving that the sign met the project’s purpose of adding space for selling
merchandise. The grant agreement stated that the subrecipient would “use the funds for Meals
on Wheels to build an addition onto their retail store facility” to allow for more room to sell
donated merchandise. However, after completing the addition, it used excess funds to install an
electronic sign, when the store addition and Meals on Wheels buildings already had large signs
on them. The portion of the electronic sign paid for with grant funds totaled more than $12,000.
The sign, shown below, was ineligible because it did not meet the project’s purpose.




These additional expenditures warranted reevaluation by the State under 24 CFR (Code of
Federal Regulations) 570.209(c) because the scope of the projects changed. This regulation
requires reevaluation of the project additions under HUD’s requirements and the subrecipients’
guidelines.
The State Did Not Require Formal Approval of Additional Costs
The State did not have a policy requiring formal approval for additional costs outside the scope
of the original grant agreement. In the two projects referred to above, a State’s staff member told
the subrecipients to use the grant funds for the additional costs. The State’s board of directors
did not reevaluate or approve the project additions. The State should have formally approved or
denied these costs based on how well these projects served low- and moderate-income persons.
Grant Funding Was Unavailable for the Intended Persons
More than $371,000 in grant funding was not available to benefit low- and moderate-income
persons under the approved national objective. Without reevaluating the additions to the
projects, the State did not ensure that these project additions were the most effective and efficient
use of HUD resources.
Recommendations
We recommend that the Director of HUD’s Denver Office of Community Planning and
Development require the Wyoming Business Council to
       1A.     Reimburse from non-Federal funds the $105,514 spent on ineligible costs.




                                                  5
1B.   Provide support for the $266,072 spent on projects for which the State did not
      maintain sufficient documentation to determine whether the costs were eligible
      and reimburse any amount that is not eligible from non-Federal funds.
1C.   Implement policies and procedures for reviewing any costs outside the scope of
      the original grant agreement and either formally approve or deobligate these costs.




                                       6
Finding 2: The State’s Grant Agreements Did Not Contain
Required Langauge on Program Income
The State’s grant agreements lacked the required language on program income. This condition
occurred because the State did not realize that the projects it funded potentially generated
program income. As a result, the State had no assurance that grant subrecipients accounted for
program income and used it in accordance with requirements.
Grant Agreements Did Not Contain Program Income Language
The State’s grant agreements lacked the required language on program income. Grant
agreements between the State and its subrecipients were required to contain the program income
requirements found under the CDBG regulations at 24 CFR 570.504(c). The grant agreement
had to specify whether program income generated from the project was to be returned to the
State or kept by the subrecipient. If the subrecipient was allowed to keep the program income,
the agreement needed to specify the activities it could be used for and that all provisions of the
agreement applied to these activities.
The State Was Unaware That Its Funded Projects Potentially Generated Program Income
The State’s staff did not realize that the projects it funded potentially generated program income.
Because the staff did not have a correct understanding of what program income was, it was
unaware of the requirements regarding program income and did not have a system in place to
track or monitor the use of program income. The definition of program income found at 24 CFR
570.500(a) states that program income is income directly generated from the use of grant funds.
Examples listed include proceeds or income from the sale or lease of property obtained with
grant funds and payments of principal and interest on loans made using grant funds.
Of the 23 activities reviewed, the State was not aware that three activities generated lease
payments from the properties acquired with grant funds, and one activity generated principal and
interest from loans made with grant funds. These four activities did not exceed the $35,000 per
year threshold to qualify as program income in accordance with 24 CFR 570.489(e)(2).
However, without tracking the potential program income, the State would not know whether the
activities produced more than $35,000 per year to qualify as program income.
The State Lacked Assurance That Program Income Was Accounted For
The State had no assurance that grant subrecipients accounted for program income. HUD’s
regulations at 24 CFR 85.25 state that grant recipients are encouraged to earn program income to
offset additional program costs. Further, the program income earned needs to be spent according
to the grant agreement provisions and tracked so that accurate data can be submitted to HUD. As
a result of the State’s omission of the program income requirements in its grant agreements, any
program income generated was at an increased risk for fraud, waste, and abuse. Without
monitoring program income, the State cannot be sure that these funds were available to benefit
low- and moderate-income persons.




                                                 7
Recommendations
We recommend that the Director of HUD’s Denver Office of Community Planning and
Development require the Wyoming Business Council to
      2A.    Ensure that future grant agreements meet all requirements of 24 CFR 570.503.
      2B.    Develop and implement written procedures that include all program income
             requirements, including monitoring program income and reporting it to HUD.
      2C.    Review the remainder of the funded grant activities to ensure that all program
             income is accounted for and used for eligible purposes or is reimbursed from non-
             Federal funds.
      2D.    Obtain training for its staff on the program income requirements.




                                              8
Finding 3: The State Did Not Adequately Monitor Grant Activities
The State did not adequately monitor the grant activities it funded. It did not always require
subrecipients to obtain price estimates for contract changes and did not always verify that
contractors and subcontractors were eligible to receive Federal funds. These weaknesses
occurred because the State relied on one staff member to monitor all activities throughout
Wyoming when it could have used regional directors to help with monitoring. As a result, the
grant funds were at an increased risk for fraud, waste, and abuse.
The State Did Not Adequately Monitor Grant Activities
The State did not adequately monitor every grant activity it funded. It required subrecipients to
submit quarterly reports containing the status of the funded activity. The State’s staff reviewed
the reports but did not verify the information contained in them. The State’s program manager
conducted an onsite visit after the activities were completed; however, the State did not perform
site visits or inspections during the course of the activities to verify the accuracy of the
information provided in the quarterly reports or the progress of the activity before its completion.
Regulations at 24 CFR 85.40(a) required the State to manage the day-to-day operations of grant
activities to ensure compliance with applicable Federal requirements and ensure that
performance goals were achieved. This monitoring was to cover each program, function, or
activity funded.

The State did not always require subrecipients to obtain price estimates for changes made from
the original contract. One of the activities reviewed had four changes to its contract. None had
price estimates to support the changes. According to 24 CFR 85.36(f), a price analysis must be
completed for contract modifications when a catalog or market price of a product is not
available.

The State did not always verify that contractors and subcontractors were eligible to receive
Federal funds. Regulations in 2 CFR 180.305 do not allow transactions with an excluded or
disqualified party. The Federal Acquisition Regulation, subpart 4.1103, requires that all
contractors be checked in the System for Award Management database before a contract or
agreement is awarded to determine whether they are excluded or disqualified. For those
contractors and subcontractors that were unregistered, the State needed to communicate to them
that they were required to register.
The State Did Not Use All Monitoring Resources
The State relied on one staff member to monitor all activities throughout Wyoming when it could
have used its regional directors to help with monitoring. The State used regional directors to
assist potential grant subrecipients in each of its seven regions in Wyoming. Since it was not
practical for one staff member to travel throughout the State for the onsite monitoring of all of its
funded activities during the year, the regional directors could have been used to assist.

Further, the State relied on subrecipients to obtain price estimates, although some of the
subrecipients did not fully understand the requirements. The State also relied on subrecipients to
verify that all contractors and subcontractors were eligible to receive grant funds in the System
for Award Management or the previous Excluded Parties List System instead of having its own


                                                  9
procedure. Some subrecipients were unaware that they needed to check the system until they
received the closeout monitoring results after the project’s completion.
Grant Funds Were at an Increased Risk for Fraud, Waste, and Abuse
The grant funds awarded by the State were at an increased risk for fraud, waste, and abuse. By
conducting onsite monitoring of projects after completion, it was too late to correct the
deficiencies uncovered during the monitoring, and the grant funds may have been used
inappropriately. For example, a subrecipient may have paid unreasonable costs for contract
changes, or a contractor may have received grant funds while it was disqualified from doing
business with the Federal Government. For 21 of the 23 activities reviewed, at least 1 contractor
or subcontractor received grant funds without the State verifying that it was eligible to receive
the funds. Without performing a search in the System for Award Management, the State lacked
assurance that all project contractors and subcontractors were not excluded from doing business
with the Federal Government.
Recommendations
We recommend that the Director of HUD’s Denver Office of Community Planning and
Development require the Wyoming Business Council to
       3A.     Implement a procedure for conducting onsite monitoring over the course of each
               project, such as using regional directors to conduct monitoring.
       3B.     Ensure that each subrecipient understands procurement requirements by
               continuing to require training for all new subrecipients and for those that do not
               understand the requirements.
       3C.     Implement a procedure for checking all contractors in the System for Award
               Management before awarding any contract and all subcontractors before
               distributing Federal funds, such as requiring subrecipients to submit a copy of the
               System for Award Management results for each contractor and subcontractor
               seeking payment with each draw request to ensure that they are verified before
               receiving Federal funds.




                                                 10
Finding 4: The State Funded a Project Without Ensuring That It
Would Meet the National Objective
The State funded a project without ensuring that it would meet the approved objective. This
condition occurred because the State lacked a procedure requiring the subrecipient to market the
future homes in the subdivision to low- and moderate-income home buyers. As a result, the
State did not have assurance that the $500,000 used for the project would benefit low- and
moderate-income home buyers.
A Project Was Funded Without Ensuring That It Would Meet The Objective
The State funded a project without ensuring that it would meet the approved national objective.
The project involved replacing a cul-de-sac to extend Third Avenue to Pontiac Street, including
improvements to the water and sewer lines, in the town of Mills, WY. This project opened up
land plotted for needed affordable single-family housing as well as allowing for safe traffic flow
and improved emergency vehicle access. The national objective in the application for the project
was to benefit low- and moderate-income persons by providing decent housing. Regulations at
24 CFR 570.208(a)(3) specify the activities that qualify under the low- and moderate-income
housing national objective. It states that an eligible activity is one that is carried out for the
purpose of providing permanent residential structures, which upon completion, will be occupied
by low- and moderate-income households. However, the State did not ensure that the homes in
the subdivision would be for low- and moderate-income households.
The State Lacked a Procedure
The State lacked a procedure requiring the subrecipient to market the future homes in the
subdivision to low- and moderate-income home buyers. The town’s project application did not
contain support showing whom the homes in the subdivision would be marketed to. During the
State’s review process, it did not ensure that such documentation was in place before approving
this project.
The State Spent $500,000 on an Unsupported Project
The State did not have assurance that the $500,000 used for the project would benefit low- and
moderate-income home buyers. At the time of our review, the subdivision was under
construction. The completed homes may not benefit the intended home buyers since the State
did not require that these homes be marketed to these home buyers. As a result, the $500,000
spent on this project was unsupported.
Recommendations
We recommend that the Director of HUD’s Denver Office of Community Planning and
Development require the Wyoming Business Council to
       4A.     Provide support for the $500,000 spent on this project, demonstrating that the
               homes in the subdivision were marketed to low- and moderate-income
               households, or reimburse any amount that is not eligible from non-Federal funds.
       4B.     Implement adequate policies and procedures to ensure that future projects will
               meet all CDBG requirements before approval and maintain supporting
               documentation showing this compliance.


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Scope and Methodology
We performed our onsite work between April and July 2014 at the Wyoming Business Council’s
office located at 214 West 15th Street, Cheyenne, WY, and conducted seven project site visits in
Rawlins, Pinedale, Cheyenne, Glenrock, Mills, Bar Nunn, and Riverton, WY. The audit scope
covered the period April 1, 2010, through March 31, 2014.

To accomplish our objective, we

      Reviewed CDBG rules and regulations.
      Reviewed the Council’s policies and procedures.
      Analyzed reports submitted to HUD from the Council and HUD monitoring reports.
      Interviewed the Council’s staff to obtain information on its CDBG program.
      Reviewed the Council’s project files selected for our sample and conducted project site
       visits when appropriate.
      Calculated the amount of matching funds required and compared the yearly totals to the
       funds matched by the State.
      Met with HUD’s Denver Office of Community Planning and Development staff.

We used computer-processed data provided by HUD’s Integrated Disbursement and Information
System to obtain a list of the CDBG-funded projects and their funded amounts for our audit
period. We did not rely on these data for any of our conclusions. All conclusions were based on
source documentation reviewed during the audit.

For our sample selection, we obtained a report from HUD’s Integrated Disbursement and
Information System of the activities awarded during our audit period. There were 96 activities
on the report totaling $13.4 million. We selected a nonstatistical sample of the 2 highest dollar
amount activities awarded for each year of the 4 years in our scope, the 5 funded activities that
created or retained low- to moderate-income jobs, and the remaining 10 with project descriptions
that indicated the potential to generate program income and those for improvements. These 23
activities total $7.6 million in grant funds.

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.




                                                12
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:

   Controls over compliance with CDBG program 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 Deficiencies
Based on our review, we believe that the following items are significant deficiencies:

   The State did not have a policy requiring formal approval for additional costs outside the
    scope of the original grant agreement (see finding 1).
   The State did not have a system in place to track or monitor the use of program income (see
    finding 2).
   The State did not adequately monitor every grant activity it funded (see finding 3).
   The State lacked a procedure requiring the subrecipient to market the future homes in the
    subdivision to low- and moderate-income home buyers (see finding 4).




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Appendixes

Appendix A


                          Schedule of Questioned Costs
                  Recommendation
                                   Ineligible 1/ Unsupported 2/
                      number
                          1A             $105,514
                          1B                               $266,072
                          4A                               $500,000

                        Totals           $105,514          $766,072



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.




                                              14
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




                               15
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 2




                               16
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 3




Comment 4




                               17
                         OIG Evaluation of Auditee Comments


Comment 1   The State did not formally approve these two project’s additions, therefore we
            still consider them to be findings. As part of the normal audit resolution process,
            HUD will work with the State to determine how to satisfy the recommendations.
Comment 2   We appreciate the proactive attention to our recommendations, however, we did
            not verify that the corrections satisfy the recommendations. Therefore, HUD will
            verify whether they adequately meet the intent of the recommendations during the
            normal audit resolution process.
Comment 3   We appreciate the proactive attention to our recommendations, however, we did
            not review the new processes stated in the response. Therefore, HUD will verify
            whether they adequately meet the intent of the recommendations during the
            normal audit resolution process.
Comment 4   We did not review this project under the updated national objective. As part of
            the normal audit resolution process, HUD will work with the State to determine if
            the recommendations are satisfied.




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