oversight

The City of New York, NY, Did Not Always Disburse Community Development Block Grant Disaster Recovery Assistance Funds to Its Subrecipient in Accordance With Federal Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-11-24.

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

    The City of New York, Office of
   Management and Budget, New York,
                  NY
      Community Development Block Grant Disaster
     Recovery Assistance Funds, Public Service Activity




Office of Audit, Region 2       Audit Report Number: 2015-NY-1001
New York – New Jersey                           November 24, 2014
To:            Marion Mollegen McFadden
               Deputy Assistant Secretary for Grant Programs, DG

               //SIGNED//
From:          Edgar Moore
               Regional Inspector General for Audit, 2AGA
Subject:       The City of New York, NY, Did Not Always Disburse Community Development
               Block Grant Disaster Recovery Assistance Funds to Its Subrecipient in
               Accordance With Federal Regulations

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 City of New York, Office of Management and
Budget’s administration of the Community Development Block Grant Disaster Recovery
Assistance funds awarded to the City.

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

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

If you have any questions or comments about this report, please do not hesitate to call me at 212-
264-4174.
                    Audit Report Number: 2015-NY-1001
                    Date: November 24, 2014
                    The City of New York, NY, Did Not Always Disburse Community
                    Development Block Grant Disaster Recovery Assistance Funds to Its
                    Subrecipient in Accordance With Federal Regulations


Highlights

What We Audited and Why
We audited the City of New York, Office of Management and Budget’s administration of the
Community Development Block Grant Disaster Recovery Assistance (CDBG-DR) funds
awarded to the City as a result of damages caused by Hurricane Sandy. This review was related
to the disbursement of $183 million as reimbursement to the Health and Hospitals Corporation
under the City’s Public Service activity. The objectives of the audit were to determine whether
the City (1) disbursed CDBG-DR funds in accordance with the guidelines established under the
U.S. Department of Housing and Urban Development (HUD)-approved action plan and HUD
rules and regulations and (2) maintained effective program and financial management controls.

What We Found
City officials did not always disburse CDBG-DR funds in accordance with Federal regulations.
Specifically, City officials disbursed $183 million to the City’s subrecipient for unsupported
salary and fringe benefits and unreasonable and unnecessary expenses, and did not adequately
monitor its subrecipient and sufficiently document national objectives. In addition, the City had
weaknesses in its financial management controls, and allowed the disbursement without a proper
review to support the claim. These deficiencies were attributed to weaknesses in the City’s
management controls over its disbursement process and monitoring procedures and City
officials’ failure to follow the requirements of the City’s grant agreement. As a result, City
officials could not assure HUD that CDBG-DR funds were disbursed for eligible, reasonable,
and necessary program expenses in compliance with HUD rules and regulations. Further, the
remaining allocation of $40 million would be considered funds put to their intended use if City
officials implement our recommendations to establish adequate monitoring controls.

What We Recommend
We recommend that HUD’s Deputy Assistant Secretary for Grant Programs instruct City
officials to (1) provide documentation to justify the $183 million in unsupported salary and
fringe benefits and associated expenses charged to the grant, and (2) strengthen controls over
disbursements to ensure that all costs charged to the program are eligible and adequately
supported with source documentation in compliance with Federal regulations.
Table of Contents
Background and Objectives ....................................................................................3

Results of Audit ........................................................................................................5
         Finding: The City Did Not Always Disburse CDBG-DR Funds to Its Subrecipient
                   in Accordance With Federal Regulations ..................................................... 5

Scope and Methodology .........................................................................................11

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

Appendixes ..............................................................................................................15
              Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 15
              Auditee Comments and OIG’s Evaluation ............................................................. 16




                                                            2
Background and Objectives
The Community Development Block Grant (CDBG) program is a flexible program that provides
communities with resources to address a wide range of unique community development needs. The
U.S. Department of Housing and Urban Development (HUD), Office of Block Grant Assistance, is
responsible for the management and oversight of the CDBG Disaster Recovery Assistance (CDBG-
DR) program.
A unique part of the CDBG program is that it provides disaster recovery assistance, which helps
cities, counties, and States recover from presidentially declared disasters, especially in low-income
areas. CDBG-DR funding is appropriated by Congress as a special CDBG appropriation in
response to a disaster. The statutory authority for CDBG-DR funding is made through individual
supplemental appropriations to address specific disasters. Funding for damages caused by
Hurricane Sandy are found in the Disaster Appropriations Act of 2013 (Public Law 113-2). This
appropriation has provided the City of New York access to more than $4.2 billion in disaster
assistance. CDBG-DR funds are to be used for necessary expenses related to disaster relief,
long-term recovery and restoration of infrastructure, and housing and economic revitalization in
the most impacted and distressed areas. Each activity must (1) address a disaster-related impact
(direct or indirect) in a presidentially declared county for the covered disaster, (2) be a CDBG-
eligible activity, and (3) meet a national objective.
On October 29, 2012, Hurricane Sandy made landfall along the New Jersey coastline, impacting
more than a dozen States. Over the span of 48 hours, the storm caused the New York City
metropolitan area to experience high winds, extensive rainfall, and a storm surge that flooded many
low-lying areas of the city. The storm left in its path power outages, damaged homes, and damage
to critical public and private infrastructure.
The chart below identifies the three allocations made to the City for CDBG-DR-funded
activities.

                 Date of Federal Register                       Allocation amount
                 March 5, 2013                                      $1,772,820,000
                 November 18, 2013                                  $1,447,000,000
                 May 30, 2014                                        $994,056,000
                 Total funding through May 2014                     $4,213,876,000


The City allocated $322 million to public services, which was approved by HUD in an action
plan, dated May 10, 2013, from the first allocation of funding. The City disbursed $183 million




                                                   3
from HUD’s Line of Credit Control System 1 (LOCCS) on November 14, 2013, to reimburse its
subrecipient, the Health and Hospitals Corporation, under the public service activity. HHC is a
public-benefit, not-for-profit Corporation operated by the City for the express purpose of
operating the City’s health-care network, including hospitals and clinics.
Under the Public Service category, CDBG funds may be used to provide public services,
including labor, supplies, materials, and other costs, provided that each of the following criteria
are met:
The public service must be either

    •   A new service or

    •   A quantifiable increase in the level of a service, above that which has been provided by
        or on behalf of the unit of general local government, through funds raised by such unit, or
        received by such unit from the State in which it is located during the 12 months before
        submission of the grantee’s applicable action plan. 2 This requirement is intended to
        prevent the substitution of CDBG funds for recent support of public services by the
        grantee using local or State government funds.

The objectives of the audit were to determine whether the City (1) disbursed CDBG-DR funds in
accordance with the guidelines established under the HUD-approved action plans and HUD rules
and regulations and (2) maintained effective program and financial management controls. This
review was related to the disbursement of $183 million as reimbursement to the City’s
subrecipient, the Health and Hospitals Corporation, under the Public Service activity.




1
  The Line of Credit Control System (LOCCS) is HUD’s primary grant disbursement system and handles
disbursements for a majority of HUD programs. The system is Internet based. Grant disbursements are assisted via
the Internet through eLOCCS.
2
  Regulations at 24 CFR (Code of Federal Regulations) 570.201(e) provide for an exception to this requirement,
stating that such exemption may be made if HUD determines that any decrease in the level of service was the result
of events not within the control of the unit of general local government.



                                                         4
Results of Audit

Finding: The City Did Not Always Disburse CDBG-DR Funds to Its
Subrecipient in Accordance With Federal Regulations
City officials disbursed $183 million to the City’s subrecipient, the Health and Hospitals
Corporation, for unsupported salary and fringe benefits and associated utility expenses and
unreasonable and unnecessary costs, and did not adequately monitor its subrecipient and
sufficiently document national objectives. In addition, the City had weaknesses in its financial
management controls, which allowed the expenditure without a proper review to support the
claim. These deficiencies were attributed to weaknesses in the City’s management controls over
its disbursement process and monitoring procedures and City officials’ failure to follow the
requirements of the City’s grant agreement. As a result, City officials could not assure HUD that
$183 million in CDBG-DR funds was disbursed for eligible, reasonable, and necessary program
expenses in compliance with HUD rules and regulations.


Unsupported Salary and Fringe Benefit Expenses
City officials disbursed CDBG-DR funds to its subrecipient, the Health and Hospitals
Corporation, for unsupported salary and fringe benefits and associated utility expenses. The
$183 million, charged to the CDBG-DR grant on November 14, 2013, reimbursed the City’s
subrecipient for costs associated with salary, fringe benefits, and utility expenses incurred by
Bellevue and Coney Island Hospitals. This condition occurred because the City had weaknesses
in its financial management controls over disbursements. Further, City officials relied on the
subrecipient to ensure that costs claimed complied with Federal regulations.
Regulations at 2 CFR (Code of Federal Regulations) Part 225, appendix B, paragraph 8(h)(3),
provide that “where employees are expected to work solely on a single Federal award or cost
objective, charges for their salaries and wages will be supported by periodic certifications that
the employees worked solely on that program for the period covered by the certification.”
Taking into consideration that the subrecipient incurred the costs in question before the City’s
grant agreement was executed, the requirement for periodic certifications may seem
unreasonable. However, there should be certification to support that employees charged to the
grant worked on Hurricane Sandy-related grant activities. In addition, City officials did not
comply with 24 CFR Part 85.20(b)(6), Source Documentation, which requires that accounting
records be supported by source documentation, such as canceled checks, paid bills, payrolls, time
and attendance records, etc. During the review, City officials provided summary spreadsheets
listing the costs charged to the grant. However, the costs were not adequately supported by
source documentation.



                                                5
The table below shows the breakdown of the summary spreadsheet provided by City officials,
which included $118.6 million for Bellevue Hospital and $64.3 million for Coney Island
Hospital.

                                      Bellevue        Coney Island
         Expense type                 Hospital          Hospital           Total
 Salary                               $69,529,476      $47,407,325      $116,936,801
 Fringe benefits                       36,753,280       25,059,513        61,812,793
 Affiliation                           17,890,516                0        17,890,516
 Utilities                              3,764,538          636,397         4,400,935
 Less insurance and third-
                                       (9,314,607)      (8,726,432)      (18,041,039)
 party payments
 Total                               $118,623,203       $64,376,803     $183,000,006

The salaries charged to the CDBG-DR grant pertained to hospital employees from various
departments for each hospital. The salaries and fringe benefits were charged to the grant under
the following categories: (1) new services to the community, urgent care, mobile vans, and other
new services; (2) restoration of facilities to operations; and (3) service readiness: support
services, affiliation, information technology, other centrally managed contract allocations,
maintenance of equipment and other critical expenses, and service-related other than personal
services. The affiliation costs included more salary expenses for Bellevue Hospital and utility
costs for both hospitals. The Corporation submitted the claim for $183 million by reducing the
amount of actual costs incurred by insurance and third-party payments.

City officials did not provide justification and adequate documentation to substantiate the basis
for the salary and fringe benefits costs of the hospital employees charged to the CDBG-DR grant.
Further, City officials did not provide required certifications, adequate personnel activity reports,
or other supporting documentation to substantiate that the salary expense charged to the CDBG-
DR grant were eligible disaster-related activities. City officials stated that the salary and fringe
benefit expenses charged to the grant were prorated based on applying a factor to the actual
expenses for the period charged to the grant.
As a result, City officials could not assure HUD that the CDBG-DR funds charged to the grant
were for eligible, reasonable, and necessary disaster-related program expenses.

Unreasonable and Unnecessary Expenses Incurred
City officials used CDBG-DR funds for expenses related to employees who did not work or who
worked at other facilities without supporting documentation to indicate that the activity was
grant related. The Corporation chose to keep all employees of Bellevue and Coney Island
Hospitals on its payrolls in lieu of instituting temporary layoffs.

In addition, CDBG-DR funds were used for the hospitals’ utility expenses. City officials
charged approximately $4.4 million to the disaster recovery grant for utilities, which was used
for steam, gas, and electric costs incurred by the two hospitals. The invoices submitted included
100 percent of these costs for periods when the facilities were closed, which represented the
normal operating expenses of the Health and Hospitals Corporation.


                                                  6
In an annual yearend report, dated February 28, 2013, the president of the Corporation expressed
concerns about financial burdens placed on the Corporation as a result of the storm (Hurricane
Sandy). Specifically, the report expressed concerns of over $180 million in lost revenue. The
report states:
       We remain very concerned, however, about roughly $180 million dollars in lost revenue
       incurred during the period when our Bellevue and Coney Island facilities were fully or
       partially closed, as these losses are not Federal Emergency Management Agency (FEMA)
       reimbursable. If not addressed, this loss will severely destabilize our finances going into
       next fiscal year. We remain hopeful that a portion of the several billion dollars
       appropriated by Congress recently in storm related Community Development Block
       Grant funds can be tapped to cover these losses.
Reimbursement for lost revenue is not a reasonable expense under the Public Service category.
Regulations at 2 CFR Part 225, appendix a, paragraph C(1)(a), state that to be allowable under
Federal awards, costs must be necessary and reasonable for proper and efficient performance and
administration of Federal awards. The costs charged to the grant for employees who could not
return to work due to the closure of the two hospitals and utility costs did not appear to be a
reasonable cost for the disaster assistance grant. This condition occurred because City officials
did not conduct an adequate review of the claim submitted by its subrecipient and did not require
the subrecipient to submit source documentation to support the reimbursement claim.
Further, during the review, City officials could not readily answer questions related to the utility
costs charged to the grant without consulting the subrecipient. The subrecipient provided
summary schedules to show what utility costs were paid during the period that were charged to
the grant. However, the schedules did not account for adjustments to the costs for the period
October 28, 2012, through June 27, 2013, for Coney Island Hospital and October 28, 2012,
through February 6, 2013, for Bellevue Hospital, which should have reduced the charges when
the hospital departments reopened.
A statistical sample of 90 employees was selected for Bellevue Hospital, and a second statistical
sample of 85 employees was selected for Coney Island Hospital. During our survey, we tested
30 employees, consisting of 15 employees at each hospital. Our survey results showed that 100
percent of the employees tested charged some leave during the period reviewed. In addition, we
found one employee who was on extended sick leave for an injury sustained that was unrelated
to the storm, yet this employee’s leave was charged to the grant. As a result, City officials could
not assure HUD that CDBG-DR funds charged to the grant were reasonable and necessary
disaster-related program expenses.

Inadequate Monitoring of Subrecipient
City officials did not adequately monitor the City’s subrecipient, the Health and Hospitals
Corporation, and approved invoices without a review of source documents to substantiate the
costs. In accordance with 24 CFR Part 85.40(a), grantees are responsible for managing the day-
to-day operations of grantee- and subgrantee-supported activities to ensure compliance with
applicable Federal requirements.



                                                  7
City officials provided a checklist for monitoring the Corporation, which detailed how the claim
for $183 million met one of the required national objectives of the CDBG program. City
officials did not provide further evidence to show that they monitored the subrecipient. Upon
further inquiries about the breakdown of the amount charged, City officials could not readily
answer questions and stated that they would have to get back to us. Further, City officials stated
that it was their policy to rely on the subrecipient to provide details on the amount charged to the
CDBG-DR grant because of the relationship the City had with its subrecipient. On September 4,
2013, the City entered into a subrecipient agreement with the Corporation. The terms of the
agreement specified that the subrecipient would comply with Federal regulations.
The City’s lack of review and its reliance on the subrecipient showed weaknesses in its
monitoring procedures. Further, the City’s policy and procedures manual did not contain
adequate steps detailing how the City would monitor its subrecipient to ensure compliance with
Federal regulations. Accordingly, City officials approved invoices from the City’s subrecipient
without a review of source documentation to substantiate the costs charged to the CDBG-DR
grant. This issue was cited as a concern in HUD’s monitoring report, conducted in September
2013, before the City’s disbursement of CDBG-DR funds.
City officials planned to disburse an additional $40 million to the Corporation for similar costs
charged to the grant under the public service activity. City officials should establish and
implement adequate controls and procedures to ensure that the City’s subrecipient is adequately
monitored in compliance with all applicable requirements so that the remaining $40 million
allocation for the Corporation can be put to its intended use.

National Objectives Not Sufficiently Documented
City officials did not sufficiently document that one of the required national objectives was met
as required by the grant agreement between the City and HUD. Regulations at 24 CFR Part
570.208(a)(1) define area benefit activities as an activity that benefits all residents in a particular
area in which 51 percent of the residents are low- and moderate-income persons.

On May 10, 2013, HUD officials approved the City’s action plan, which detailed the City’s plans
for the public service activity and meeting the required national objective for low- and moderate-
income persons. After HUD officials completed their monitoring review in September 2013,
HUD worked with the City officials to change the required national objective from low- and
moderate-income persons clientele to low- and moderate-income area benefit beginning in
February 2014. City officials were instructed to submit additional documentation to HUD for
review to change the required national objective.

It appeared that City officials were unfamiliar with the criteria and Federal requirements
regarding meeting one of the required three national objectives of the CDBG program. City
officials maintained that both hospitals complied with this national objective. However, HUD
advised the officials to separate the activities by hospital as shown in HUD’s Disaster Recovery




                                                   8
Grant Reporting 3 (DRGR) system because HUD did not agree that both hospitals would meet the
national objective of low- and moderate-income area benefit. Although the disbursement of
CDBG-DR funds occurred in November 2013, City officials agreed in March 2014 to make the
HUD-requested adjustment of separating the activities by hospital in HUD’s DRGR system.
However, as of October 6, 2014, City officials were still working with HUD to submit
documentation to satisfy the required national objective for Bellevue Hospital.
Consequently, City officials disbursed CDBG-DR funds without sufficiently documenting that
the expenses charged to the grant for the Bellevue Hospital site met a required national objective
as required by the terms of the grant agreement with HUD. Therefore, City officials need to
improve the process of defining the national objectives and ensure that they can demonstrate that
the objectives have been met.

Conclusion
City officials disbursed $183 million to the City’s subrecipient, the Health and Hospitals
Corporation, for unsupported salary and fringe benefits and associated utility expenses and
unreasonable and unnecessary costs and did not adequately monitor its subrecipient and
sufficiently document the national objectives. Therefore, the CDBG-DR funds disbursed to the
City’s subrecipient were considered unsupported. These deficiencies were attributed to
weaknesses in the City’s financial management controls over its disbursement process and
monitoring procedures and City officials’ failure to follow the requirements of the City’s grant
agreement with HUD. As a result, City officials could not assure HUD that $183 million in
CDBG-DR funds was disbursed for eligible, reasonable, and necessary program expenses in
compliance with HUD rules and regulations.

Recommendations
We recommend that HUD’s Deputy Assistant Secretary for Grant Programs instruct City officials
to
      1A.  Provide documentation to justify the $183 million in unsupported salary and fringe
           benefits and associated expenses charged to the CDBG-DR program. If
           documentation provided does not support the costs, this amount should be repaid
           from non-Federal funds.
         1B.      Strengthen controls over disbursements to ensure that all costs charged to the
                  program are eligible, reasonable, necessary, and adequately supported with source
                  documentation in compliance with Federal regulations.
         1C.      Establish and implement adequate controls and procedures to ensure that
                  subrecipients are monitored in compliance with all applicable requirements so that
                  the remaining $40 million allocation for the Health and Hospitals Corporation will
                  be put to its intended use.



3
 DRGR is a HUD reporting system that is facilitated via the Internet to allow grant recipients to identify activities
funded under their action plans and amendments, along with budgets and performance goals for those activities.



                                                           9
1D.   Ensure that the national objectives are defined and adequately documented in
      relation to the $183 million disbursement and any future allocation and that changes
      to the national objectives are sufficiently documented.




                                        10
Scope and Methodology
Our review generally covered the period October 28, 2012, through June 27, 2013, and was
extended as needed. We performed our fieldwork from January through July 2014 at the City’s
offices located at 255 Greenwich Street, New York, NY; the Health and Hospitals Corporation’s
corporate offices located at 125 Water Street, New York, NY; Bellevue Hospital located at 462
1st Avenue, New York, NY; and Coney Island Hospital located at 26-01 Ocean Parkway,
Brooklyn, NY.
To accomplish our audit objectives, we

   •   Reviewed applicable laws, regulations, HUD handbooks, HUD notices, and the City’s
       policies and procedures.
   •   Obtained an understanding of the City’s disbursement and financial controls.
   •   Interviewed officials of HUD’s Disaster Recovery and Special Issues Division, New York
       City Office of Management and Budget, and Health and Hospitals Corporation.
   •   Reviewed the City’s action plan and amendments.
   •   Reviewed the grant agreement between HUD and the City.
   •   Reviewed the subrecipient agreement between the City and the Corporation.
   •   Evaluated the City’s internal controls and reviewed computer controls to identify
       potential weaknesses related to our objectives.
   •   Reviewed data in HUD’s DRGR system and Line of Credit Control System.
   •   Reviewed the City’s financial statements for the years 2012 and 2013.

We selected two statistical samples of employees charged to the grant from the Corporation’s
Personal Services Expenditure Reporting (PSER) system, which contained payroll data for the
employees for the two hospitals charged to the grant. The payroll data covered the dates for
which the City claimed reimbursement for the period October 28, 2012, through February 6,
2013, for Bellevue Hospital and October 28, 2012, through June 27, 2013, for Coney Island
Hospital. The universe for Bellevue Hospital consisted of 4,149 employees with a total of $69.5
million in salaries and benefits. The universe for Coney Island Hospital consisted of 2,510
employees with a total of $47.4 million in salaries and benefits. A statistical sample of 90
employees was selected for Bellevue Hospital, and a second sample of 85 employees was
selected for Coney Island Hospital, from which a survey size of 15 employees for each hospital
was tested during the survey. The value of the survey amounted to $284,698 for Bellevue
Hospital and $359,660 for Coney Island Hospital.
Our sampling method was variable with a one-sided 95 percent confidence interval. This design
allowed us to account for variation in the sizes of the salary claims covered by the disaster
recovery grant. Salary claims were ranked by dollar value and then stratified to control for
variance in dollar amounts.


                                               11
We relied in part on computer-processed data primarily for obtaining background information on
the City’s disbursement of program funds. We performed a minimal level of testing and found
the data to be adequate 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 objectives.




                                                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 objectives:

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

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

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

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

We assessed the relevant controls identified above.

A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to the effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.




                                                  13
Significant Deficiencies
Based on our review, we believe that the following items are significant deficiencies:

•   City officials did not have adequate controls over program operations when they did not (1)
    ensure that adequate documentation was maintained for the $183 million in disbursements
    associated with salaries, fringe benefits, and associated utility costs charged to the disaster
    assistance program, (2) adequately monitor the City’s subrecipient, and (3) sufficiently
    document national objectives in accordance with HUD rules and regulations (see finding).

•   City officials did not have adequate controls over compliance with laws and regulations when
    they did not comply with HUD regulations for disbursing program funds and monitoring
    program subrecipients before reimbursing claims submitted by the City’s subrecipient (see
    finding).

•   City officials did not have adequate controls over safeguarding resources when they disbursed
    CDBG-DR funds without maintaining source documentation and had weaknesses in their
    financial management controls that allowed disbursement without a proper review (see
    finding).




                                                   14
Appendixes

Appendix A


           Schedule of Questioned Costs and Funds To Be Put to Better Use
               Recommendation                       Funds to be put
                                  Unsupported 1/     to better use 2/
                   number
                        1A            $183,000,000
                        1C                                 $40,000,000




                      Totals          $183,000,000         $40,000,000



1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.
2/   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, if City officials implement our
     recommendations to establish controls requiring that subrecipients be monitored and
     requests for funds be properly supported before payment, it will ensure compliance with
     all applicable regulations of the CDBG-DR program so that the remaining $40 million
     allocation for the City’s subrecipient, the Health and Hospitals Corporation, can be put to
     its intended use.




                                              15
Appendix B
             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 2


Comment 3




Comment 4




                               17
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation


Comment 4




Comment 5




Comment 6




                               18
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 7




Comment 8




                               19
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation


Comment 8




Comment 8




                               20
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation


Comment 8




Comment 9




                               21
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 9




Comment 10




                               22
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 10




Comment 11




                               23
                         OIG Evaluation of Auditee Comments


Comment 1   City officials disagree that the salary and fringe benefit expenses are unsupported
            and contend that the justification and documentation provided prove that the
            claimed amounts charged to the grant were for necessary, reasonable, and eligible
            disaster-related expenses. However, the documentation provided did not
            sufficiently show that the employees whose salaries were charged to the CDBG-
            DR grant actually performed work related to the grant. Further, City officials did
            not provide required certifications, adequate personnel activity reports or other
            supporting documentation to substantiate the salary expense charged to the
            CDBG-DR grant. Therefore, the salary and fringe benefits costs charged to the
            grant are considered unsupported.
Comment 2   City officials contend that our report fails to acknowledge that they continuously
            consulted with HUD to ensure that the costs charged to the CDBG-DR grant were
            eligible public service activities. Further, the officials state that the narrative
            descriptions of the public activities and associated costs submitted to HUD were
            within the parameters of Federal Office of Management and Budget circulars.
            Our report does not question the eligibility of the costs charged but that the costs
            charged were not adequately supported. Regulations at 24 CFR Part 85(b)(6)
            require that accounting records be supported by source documents, such as
            canceled checks, paid bills, payrolls, and time and attendance records. Without
            adequate documentation and detailed activity records, there is no assurance that
            the employees charged to the grant worked exclusively on grant activities.
Comment 3   City officials cite a listing of the documents provided to HUD and that the
            information was acknowledged by HUD at the time the City’s payment voucher
            was approved. However, our review of the documents provided to HUD showed
            that the documents did not include sufficient source documentation, such as
            certifications, activity reports, or other documentation, to show that the employees
            charged to the grant actually worked on Hurricane Sandy-related activities. As a
            result, the costs are considered unsupported, and City officials will have to submit
            additional documentation to HUD so that an eligibility determination can be
            made.
Comment 4   City officials state that they reviewed and analyzed the supporting documents
            provided by the City’s subrecipient, the Health and Hospitals Corporation. The
            officials provided the details and descriptions of what was reviewed and stated
            that the records were reviewed by an independent auditor. However, as stated
            above, without detailed activity reports, there is no evidence that the employees
            worked on activities related to Hurricane Sandy. Further, in HUD’s monitoring
            report related to a review conducted in September 2013, it was noted that the
            City’s policies and procedures lacked monitoring procedures detailing how the



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            City would monitor program partners to ensure compliance with all program
            requirements. The HUD monitoring report also expressed concern regarding the
            City’s process for reviewing and processing the reimbursement request from its
            subrecipient, especially relating to ensuring compliance with CDBG-DR record-
            keeping requirements. Based on our review, it was evident that the City did not
            adequately monitor its subrecipient or require source documents to substantiate
            the costs charged.
Comment 5   City officials contend that before disbursing the $183 million in CDBG-DR funds,
            they reviewed and analyzed the Corporation’s supporting documentation to
            ensure that it complied with HUD rules and regulations. Further, they stated that
            the claim for personnel costs accounted for only 92 percent of all active
            employees from Bellevue Hospital and 94 percent of all active employees from
            Coney Island Hospital and excluded all staff on family, medical, or other leave
            during the period claimed. Contrary to the officials’ contention, our review found
            that 100 percent of the employees tested at each hospital charged some leave
            during the period claimed. Therefore, the statement that all staff on family,
            medical, or other leave was excluded from the claim for personnel costs was
            inaccurate. In addition, we found that one employee charged to the grant was on
            extended sick leave for an injury sustained that was unrelated to the storm.
            Therefore, the facts presented in the report are true and accurate. As part of the
            audit resolution process, City officials will be required to submit to HUD
            additional documentation to substantiate costs charged to the grant.
Comment 6   City officials provided background information in the PSER system, an
            independent auditor review of payroll data before the CDBG-DR drawdown, and
            an extensive analysis of the duplication of benefits. None of this background
            information addresses the fact that officials did not always disburse CDBG-DR
            funds to the City’s subrecipient in accordance with Federal regulations. Further,
            the independent auditor’s review was to verify whether the data in the PSER
            system were valid. It did not test to ensure that the drawdown submitted
            complied with HUD rules and regulations.
Comment 7   City officials disagree that unreasonable and unnecessary expenses were incurred,
            stating that it was essential for both hospitals to retain staff on payrolls and in an
            “on call” status so that the hospitals would reopen gradually. Further, the officials
            contend that lost revenue was not the basis for the CDBG-DR claim. However,
            our audit concluded that the salary costs charged to the grant for employees who
            did not work should be considered as unreasonable. In addition, by not
            maintaining records for the employees who may have been transferred to other
            hospitals on how their work related to Hurricane Sandy is another reason why
            these costs should be considered unreasonable. Further, regarding the loss of
            revenue, as the report notes, the subrecipient’s annual yearend report disclosed
            concerns about financial burdens of more than $180 million in lost revenue.
            Thus, City officials’ contention that the lost revenue was not the basis for the




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              charges to the CDBG-DR grant is questionable. Lost revenue is not a reasonable
              expense under the Public Service category.
Comment 8     City officials disagree that the costs associated with the employees who could not
              return to work due to closure of the two hospitals and the utility costs did not
              appear to be reasonable charges to the disaster assistance grant. According to the
              officials, all employees covered by the claim were retained to reopen and restore
              the two facilities, and the utility costs were offset by assets. However, the
              officials state that they will continue to explore opportunities to strengthen the
              City’s controls over disbursements to ensure that all costs charged to the program
              are eligible, reasonable, necessary, and adequately supported with source
              documentation. It is our position that if the employees did not work, they should
              not be charged to the grant.
              Further, the summary schedules provided by City officials to support the utility
              costs charged to the grant did not include evidence of a reduction in the costs
              charged as the hospital departments were reopened, which would then be
              considered normal operating expenses. In addition, City officials did not provide
              documentation during our review to support their claim that the utility costs were
              offset by assets. We remind officials that although the $183 million drawdown
              was approved by HUD, it was expressly noted by HUD in the DRGR system and
              in emails to the officials that the draw would be subject to additional monitoring
              and review.
              Lastly, we recognize the officials’ willingness to explore opportunities to
              strengthen controls over disbursements to ensure that all costs charged to the
              program are eligible, reasonable, necessary, and adequately supported with source
              documentation. Such actions are responsive to the recommendations.
Comment 9     City officials disagree that the monitoring of the subrecipient was inadequate and
              state that the HUD December 2013 monitoring report does not state that their
              policies and procedures manual did not contain adequate steps detailing how they
              would monitor their subrecipient. At the beginning of our review, it was evident
              that the monitoring of the City’s subrecipient was inadequate as the City officials
              could not answer routine questions regarding the details of the drawdown made.
              Further, the officials did not maintain monitoring files on the City’s subrecipient.
              However, City officials have begun to implement adequate controls and
              procedures to ensure that subrecipients are monitored in compliance with all
              applicable requirements. The actions of the City officials are responsive to the
              recommendations.
Comment 10 City officials disagree that the national objectives were not documented and that
           they were unfamiliar with applicable criteria and Federal requirements.
           According to the officials, HUD initially agreed that the City had demonstrated
           that the activities met the required national objectives. Based on the discussion
           held during the exit conference and the officials’ feedback, we have revised the
           report to reflect that the national objectives were not sufficiently documented and


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             that the officials must provide additional documentation to support the national
             objective for Bellevue Hospital. Further, we acknowledge the corrective actions
             taken by the officials to provide additional documentation and that they are
             working with HUD to resolve this issue.
Comment 11 City officials acknowledge the report recommendations 1A-1D and state that they
           will continue to work with HUD to ensure that the recommendations are
           addressed. We suggest that City officials continue to seek guidance from HUD
           not only on the report recommendations, but also for all of the City’s planned
           Hurricane Sandy-related activities to be charged to the CDBG-DR grants.




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