Fort Worth, TX Office of Audit, Region 6 2 Disaster Recovery State of Oklahoma Community Development Block Grant September 30, 2016 Audit Report Number: 2016-FW-1010 DISCUSSION DRAFT REPORT DISCUSSION DRAFT REPORT For Discussion and Comment OnlyFor Discussion and Comment Only Subject to Review and Revision Subject to Review and Revision To: Stan Gimont, Acting Deputy Assistant Secretary for Grant Programs, DG //signed// From: Tracey Carney, Acting Regional Inspector General for Audit, 6AGA Subject: The State of Oklahoma Did Not Obligate and Spend Its Community Development Block Grant Disaster Recovery Funds in Accordance With 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 Oklahoma 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 817-978-9309. Audit Report Number: 2016-FW-1010 Date: September 30, 2016 The State of Oklahoma Did Not Obligate and Spend Its Community Development Block Grant Disaster Recovery Funds in Accordance With Requirements Highlights What We Audited and Why We audited the State of Oklahoma because it received $93.7 million in Community Development Block Grant Disaster Recovery (CDBG-DR) allocations for presidentially declared disasters that occurred in 2011, 2012, and 2013. The substantial amount of CDBG-DR funding required a review of the State’s program. Our objective was to determine whether the State obligated and spent its grant in accordance with requirements. What We Found The State did not obligate and spend CDBG-DR funds in accordance with requirements. The State failed to support how it determined activity eligibility, existence, disaster event qualification, reasonableness of cost estimates, prioritization, and fund allocation as required. It routinely did not determine compliance with procurement and environmental requirements. Further, it routinely made payments based on incomplete, insufficient, or no supporting documentation. The State believed that its procedures for obligating and spending Federal funds were its choice based upon its understanding of CDBG requirements. The State’s failure to comply with requirements resulted in unsupported obligations and expenditures of more than $11.7 million and $4.3 million, respectively. What We Recommend We recommend that the Acting Deputy Assistant Secretary for Grant Programs require the State to (1) develop and implement policies and procedures to document and perform detailed review and testing to establish eligibility, existence, disaster event qualifications, reasonableness of cost estimates, prioritization, and fund allocation, both retroactively and prospectively, which would put $81.9 million to better use; (2) support or properly obligate more than $11.7 million in unsupported obligations; and (3) support or repay more than $4.3 million in unsupported expenditures. Table of Contents Background and Objective......................................................................................3 Results of Audit ........................................................................................................4 Finding: The State Did Not Obligate and Spend CDBG-DR Funds in Accordance With Requirements ...................................................................................... 4 Scope and Methodology .........................................................................................13 Internal Controls ....................................................................................................15 Appendixes ..............................................................................................................17 A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 17 B. Auditee Comments and OIG’s Evaluation ............................................................. 18 C. Schedule of Original Obligations and Funds Spent by Subrecipient ................... 40 Background and Objective The Disaster Relief Appropriations Act of 2013 provided $16 billion 1 in Community Development Block Grant Disaster Recovery (CDBG-DR) funds for necessary expenses related to presidentially declared disaster relief and long-term recovery for such disasters that occurred in 2011, 2012, and 2013. The President may designate a location as a disaster area, upon request by the State governor, for qualifying events. These declarations entitled the requesting State jurisdiction to various forms of Federal assistance. During this period, the State of Oklahoma experienced a number of presidentially declared disasters that were eligible to receive assistance under the Act. Oklahoma’s governor designated the Oklahoma Department of Commerce to manage its CDBG- DR funds. The Oklahoma Department of Commerce has also managed the State of Oklahoma’s Community Development Block Grant (CDBG) program since the 1980s. The State received CDBG grants in the amount of $13.1 million and $12.6 million for fiscal years 2014 and 2015, respectively. The U.S. Department of Housing and Urban Development (HUD) required2 the State to use its funds to meet one of three national objectives: (1) aid low- to moderate-income individuals, (2) prevent or eliminate slum and blight, or (3) address urgent need. HUD provided two allocations of CDBG-DR funds to the State totaling $93.7 million. HUD awarded the first allocation of $10.6 million in CDBG-DR funding to the State on December 23, 2013, with a requirement to spend a minimum of $3.22 million (30.4 percent) of this allocation in Cleveland County, OK. HUD allocated an additional $83.1 million in CDBG-DR funding to the State, effective June 9, 2014, requiring the expenditure of a minimum of $41.2 million (44 percent) of the total $93.7 million allocation in Cleveland and Creek Counties in Oklahoma. HUD required 3 the State to request and spend its CDBG-DR funds by September 30, 2017, and September 30, 2019, respectively. HUD also required4 the State to use at least 50 percent of the funds to meet the low- to moderate-income national objective. During the review period, generally from December 23, 2013, through December 31, 2015, the State had obligated and spent more than $49 million and $9 million of the $93.7 million in CDBG-DR funds, respectively. As of June 30, 2016, the State had obligated and spent more than $79.5 million and $26.1 million, respectively. Our objective was to determine whether the State obligated and spent its CDBG-DR funds in accordance with requirements. 1 Reduced to $15.18 billion after sequestration 2 24 Code of Federal Regulations (CFR) 570.483 3 78 Federal Register (FR) 76154 4 78 FR 14329 3 Results of Audit Finding: The State Did Not Obligate and Spend CDBG-DR Funds in Accordance With Requirements The State did not comply with requirements when it obligated and spent CDBG-DR funds. Specifically, for all 14 obligations reviewed, the State did not document its selection process to provide evidence of how it considered activity eligibility, existence, disaster event qualification, reasonableness of cost estimates, prioritization, or fund allocation. 5 Further, the State failed to exercise due diligence in determining that activities met national objective criteria or ensure that subrecipients were registered and eligible to receive Federal funding. For expenditures, the State did not ensure that subrecipients complied with environmental 6 and procurement regulations. 7 Additionally, the State did not review and determine that subrecipients had supporting documentation for expenditures before payment. The State took an informal approach to operating its program because it believed it had the flexibility in interpreting the requirements, commonly known as maximum feasible deference. However, this requirement did not allow the State to inconsistently interpret the regulations or excuse it from developing and implementing procedures that were sufficient to ensure the appropriateness of obligations and expenditures. 8 As a result, the State was not able to support more than $11.7 million in obligations and more than $4.3 million in expenditures. Due to the systemic weakness of controls and poor management of the funds, the State could not provide HUD with reasonable assurance that it would properly obligate or spend the remaining $81.9 million in CDBG-DR funds. The State Failed To Evaluate or Support Obligations of Federal Funds For all 14 activities reviewed, the State did not document its selection process to provide evidence of how it considered activity eligibility, existence, disaster event qualification, reasonableness of cost estimates, prioritization, or fund allocation. 9 Once the subrecipients formally applied for the funds, the State performed a pass or fail threshold review. This threshold review did not provide sufficient documentation to show how selected activities met its requirements. The State further failed to exercise due diligence in determining that activities met national objective criteria. Finally, the State did not have evidence that it ensured subrecipients were registered and eligible to receive Federal funding. According to the State, it took an informal approach to evaluating and selecting proposed activities. The State used an approach known as “method of distribution” to obligate its CDBG-DR funds to units of general local government rather than administering its CDBG-DR funds directly. However, HUD required 10 the State to keep records to document its funding decisions made under method of distribution. 5 State of Oklahoma Action Plans, dated March 23 and October 3, 2014 6 24 CFR 58 7 24 CFR 85.36 and State of Oklahoma CDBG Project Management Guide, Requirement No. 405 8 24 CFR 570.480(c) 9 State of Oklahoma Action Plans, dated March 23 and October 3, 2014 10 24 CFR 570.490(a)(2) 4 As described in three examples below, the State had multiple instances of noncompliance and poor management for sample items reviewed. Lastly, the State did not take appropriate corrective action when informed of deficiencies. Example 1: City of Mannford, OK – Construction of a 40-Unit Elderly Complex The State did not adequately plan when it obligated $5 million for the City to build a 40-unit complex to house low-income elderly persons displaced by a 2012 wildfire disaster. The disaster destroyed 376 units in Creek County, OK, with an estimated 15 percent (57 units) of the loss population identified as elderly. Of the 376 units destroyed, approximately 100 units were rebuilt, leaving an estimated remaining 276 units destroyed with an estimated loss population of 40 units identified as elderly occupied. None of the destroyed housing was located in Mannford but, rather, in outlying areas of the County. Initially, the State wrongly asserted that the $5 million obligation to the City met the limited clientele sub-objective of the low- to moderate- income benefit national objective. 11 However, the regulations did not permit new construction under the limited clientele sub-objective. The City’s pre-application narrative requested $2.5 million of the $5 million cost to construct the apartment complex, along with other disaster-related activities. In the City’s official application, it included the entire $5 million cost of the complex. Due to the State’s informal planning process, the State could not support how it selected and approved the complex or an explanation of the differences between the pre-application and application requests. In addition to the lack of planning, the State performed a pass or fail threshold review to approve this activity. The threshold review did not have sufficient explanation or support for the procedures conducted. If the State had performed an adequate review of the activity, it may have been able to identify and correct the deficiencies. According to its records, the State approved the construction of the complex under the limited clientele sub-objective. 12 This sub-objective did not allow for funding new construction. Therefore, the State used an ineligible sub-objective to obligate funds. The State further failed to require the City to support its stated objective of housing 100 percent low-income elderly persons displaced by the wildfire. During a site visit, City officials verbally stated they planned to occupy the complex with elderly-only residents at market rate rents, a significant departure from only low-income elderly people displaced due to the wildfires. After notification to the State of its error, the State conceded its failure to meet the limited clientele sub-objective criteria and changed its sub-objective to low- to moderate housing activities. 13 This sub-objective required low- to moderate-income persons to occupy at least 51 percent of the units at affordable rents. However, the State still had a goal to ensure 100 percent low-income elderly persons displaced by the wildfire disaster occupied the complex. With an estimated qualifying population of 40 and the disaster having occurred almost 4 years earlier, the State agreed to meet this stringent goal. The State also did not conduct a beneficiary survey to determine eligible 11 To be eligible for CDBG-DR funds, the activity must meet one of three national objectives as defined in 24 CFR 570.483. 12 24 CFR 570.483(b)(2) 13 24 CFR 570.483(b)(3) 5 low-income elderly tenants displaced by the wildfire. Because the obligation did not meet a national objective or the more stringent State goal, the obligation was unsupported. As a result of the State’s lack of planning, the complex may not meet a national objective. Example 2: City of Sapulpa – Purchase of Fire Equipment The State failed to establish disaster qualification, determine appropriateness of equipment, or determine national objective criteria before obligating funds for fire equipment. In August 2012, Creek County, OK, experienced a series of wildfires. The wildfires caused significant fire damage across unincorporated areas of the County. The limited road network and lack of a water distribution system across much of the County increased the extent of the damage. The State obligated approximately $2.5 million for acquisition of fire equipment by the City of Sapulpa. 14 The State failed to exercise due diligence in the obligation of approximately $2.5 million for the purchase of fire equipment by the City. The State incorrectly relied on HUD email communications regarding waiver requests for a different entity as tieback to the wildfire disaster. The City’s pre-application narrative and application narrative contained inconsistencies in fire vehicle terminology and capabilities. For example, the narrative stated that the City intended to replace old equipment and expand its service fleet as opposed to mitigation and resiliency against future wildfires. The State did not notice and follow up on the differences, require clarification, or require the City to tie back its request to fighting wildfires. The State neglected to require adequate documentation from the City to support that at least 51 percent of the area population qualified as low- to moderate-income to meet the national objective criteria. 15 While the State provided certain survey guidance, the City provided only summary figures and a color-coded map without references or supporting detailed data. The State failed to review and require correction of the City’s low- to moderate-income submission before obligating the funds. As with the other samples reviewed, the State’s threshold review was unsatisfactory and provided no detail of State procedures performed to verify State-specified criteria for approval for either its task-specific or overall determination of pass or fail for grant approval. Due to the deficiencies cited, the State’s obligation of approximately $2.5 million was unsupported. Example 3: Lincoln County – Resurface a Road Due to Tornado-Related Damage The State failed to inspect and verify tornado-related damage before obligating more than $268,000 in funds to resurface a road in Lincoln County. The County completed the activity under budget for more than $228,000. The State recaptured the difference of more than $39,000. Before obligating the funds, the State failed to verify the damage to this road. The State did not perform a site visit or obtain pictures before approving this activity. During our site visit, Lincoln County officials provided a picture of the road. While the picture showed apparent 14 CDBG-DR allowed for the acquisition of fire equipment to assist communities with mitigation and resiliency against future wildfires. 15 24 CFR 570.483(b)(1) 6 tornado damage around a road, the road appeared to be unpaved. Without sufficient evidence of damage, the State should not have approved the activity. Therefore, the $228,000 obligation was unsupported. The State Failed To Remedy Defects in Obligations With Updated Documentation After we notified the State of deficiencies and control weaknesses, it did not take effective action to address and correct deficiencies. The State provided updated documentation and information for selected deficiencies noted in its obligations. However, none of the additional documentation was adequate to support the obligations. The State created an updated threshold review for the City of Mannford. This review included unverified and unsupported information. For instance, one section in the review was for cost estimates. The City submitted a one-page cost estimate for the $5 million construction project. The State accepted the cost estimate without additional analysis. In addition, the State contended that the City had completed other CDBG activities as justification for the State’s reliance on the City to oversee the activity. However, the State failed to support its statement with similar construction projects, continuity of experienced management, or other pertinent factors. The State had the City of Sapulpa prepare a new activity narrative that the State entered into its official records. This activity narrative again failed to tie back requested fire equipment to the wildfire disaster with appropriate information, such as fire dates, fire locations, personnel requirements by fire, hours incurred, equipment used, equipment damaged or lost, and other departments assisted, despite detailed guidance provided to the State. Additionally, the State again failed to analyze the narrative for appropriateness of the requested equipment for fighting wildfires. Further, the State created a new threshold review for the City in a revised format but generally copied the narrative straight from other documents and inserted it into the new threshold review without review, amendment, or verification. The revised threshold review also failed to incorporate the guidance previously provided to correct noted deficiencies. The State Failed To Review and Verify the Eligibility of Expenditures The State did not always collect or review supporting documentation to ensure it spent funds for eligible purposes, resulting in more than $4.3 million in questioned costs. HUD required 16 the State to establish and maintain records necessary to facilitate audit by HUD. It also required the State to ensure its subrecipients complied with environmental 17 and procurement regulations. 18 In addition, the State had to review and determine that its subrecipients had proper supporting documentation for expenditures before remitting payment. Before proceeding with an activity, each subrecipient needed to make an environmental determination. HUD required 19 the State to review and approve the determination before releasing funds to its subrecipients. For 13 of the 14 activities reviewed, the State did not ensure 16 24 CFR 570.490(a)(1) and Basically CDBG for States, Chapter 18.3.7 17 24 CFR Part 58 and Basically CDBG for States, Chapter 18.3.8 18 24 CFR 85.36 and State of Oklahoma CDBG Project Management Guide, Requirement No. 405 19 24 CFR 58.22 7 its subrecipients performed adequate environmental reviews nor had appropriate supporting documentation for making environmental determinations. The remaining activity’s environmental review was under State review and did not have the required documentation showing that the activity met environmental regulations. In addition, for eight activities, the State did not • Ensure subrecipients complied with procurement requirements, • Review and analyze subrecipients’ contracts, or • Confirm that subrecipients verified their contractors were registered and eligible to receive Federal funding. 20 For two of the eight activities, subrecipients used an unapproved procurement method. 21 For one activity, the subrecipient advertised in a local community paper for two different types of fire trucks. Not receiving a response to its advertisement, the subrecipient directly contacted two vendors. The subrecipient received a single bid for each fire truck from two different vendors. The State obligated more than $340,000 for the purchase of these two fire trucks. While the State approved the sole-sourced procurement, the advertisement in a local community paper for a specialized product was not sufficient to ensure a competitive procurement process. The State made payments for seven activities based on incomplete, insufficient, or no supporting documentation. 22 For one subrecipient, 23 the State paid multiple requests for funds totaling $810,000 without supporting documentation. The State’s policy24 required subrecipients to maintain certain financial information manually, including invoices. However, the State did not require subrecipients to submit invoices to the State for review before payment. Therefore, the only time that the State could review invoices was during a monitoring review. Finally, the State’s monitoring review for a subrecipient 25 had incorrect information and did not ensure it communicated the importance of following Federal guidelines to the subrecipient. 26 In November 2015, the State auditor and inspector issued a report for State-appropriated funds related to CDBG funds. The report stated, “…there is no review of actual projects, contractor invoices, or other documentation that would provide assurance that…funds are ultimately expended for intended purposes.” While the State monitored CDBG-DR funds, it continued its practice of not reviewing or sufficiently reviewing supporting documentation that showed compliance with regulations before making payments. Without appropriate review, the State put itself at unnecessary risk and did not properly oversee or administer its CDBG-DR funds. 20 Subrecipients for six of the activities had not procured for services or products. 21 Oklahoma State law allowed counties to use a competitively bid nationwide purchasing program. These two subrecipients were cities, and the State did not provide support showing that cities could use the same program. 22 The State had not made payment for 7 of the 14 activities. 23 City of Oklahoma City 24 State of Oklahoma CDBG Project Management Guide, Requirement No. 406 25 Lincoln County 26 24 CFR 570.492 8 The State Did Not Have Sufficient Evidence of Review for the City of Mannford Expenditures The State failed to determine whether the City complied with environmental, procurement, and expenditure requirements. As of December 31, 2015, the State had spent approximately $700,000 for the City’s elderly apartment complex. The City performed an environmental assessment for the apartment complex. However, the State approved the environmental assessment without sufficient supporting documentation, such as maps and other documentation to show flood area, wild and scenic rivers, and airport hazards. The City was also required to publish its environmental determination findings, and the State did not require proof of the publication. The City procured 3 primary contractors and 36 subcontractors to construct the apartment complex. At the State’s direction, the City did not submit contract files, such as bid notices, bid tabulations, contracts, and award notices. Without this documentation, the State could not review and determine the validity of the procurement process before making payment. City personnel stated that a State employee had been on the premises to review procurement documentation. However, the State failed to document this review, the procedures performed, and its determination. After we notified the State of this deficiency in March 2016, the State required the City to enter procurement documentation into the State’s official system of record. However, the City submitted only partial information to the State, and the State did not provide evidence showing why it accepted partial information. In June 2016, the State indicated it had collected this information in a different manner. The State still did not have evidence in its official system of record that it had collected and reviewed this documentation. Finally, the State failed to verify that the City documented contractor eligibility to receive Federal funds. The City requested and the State had paid almost $700,000 as of December 31, 2015, for expenditures associated with this activity. Payments made on requests for funds did not always match the amount of invoices submitted. In two instances, the State altered payment amounts from amounts billed based on undocumented verbal agreements with City personnel. In another two instances, the State failed to review submitted documentation and paid one invoice without investigation of an additional unreferenced subcontractor invoice included in the supporting documentation. Finally, in one instance, the State paid more than $52,000 that was not supported by invoices due to its failure to review. The State Did Not Critically Review City of Sapulpa’s Expenditure Documentation As with the City of Mannford, the State failed to ensure the City of Sapulpa complied with environmental, procurement, and expenditure processes. The City did not comply with all environmental requirements, 27 and the State failed to notice and require compliance. As of December 31, 2015, the City had spent more than $2 million for the acquisition of fire equipment, which was unsupported due to its failure to enforce environmental requirements. 27 24 CFR 58.6 and State of Oklahoma CDBG Project Management Guide, Requirement No. 403 9 The State’s procedures failed to support the method of acquisition. The City contracted with a purchasing intermediary for the acquisition of fire equipment, but the State did not approve the City to use a purchasing intermediary. The acquisition was further unsupported as the method of procurement used by the intermediary was unclear (that is, competitive or sole source). The method of procurement appeared to be sole source. The State did not have evidence of its evaluation and approval of the sole-sourced procurement. Further, the State did not respond to a request for the documentation. The State did not perform a critical review of the City’s ordering and purchasing documents to assess the appropriateness of the fire equipment acquisitions. Specifically, the City acquired three fire vehicles (approximate cost): (1) Freightliner tanker ($294,000), (2) Enforcer Aerial Ascendant 107’ heavy duty ladder ($953,500), and (3) Enforcer Aerial sky boom ($817,000). Creek County is a rural county with a limited road network and water distribution system. The Freightliner tanker had wildfire-fighting capabilities due to its water-carrying capacity. The State may be able to support this purchase if it resolves the issues regarding the use of a purchasing intermediary and method of procurement. The two other ladder trucks had no discernable capabilities for fighting rural wildfires, given the trucks’ need for a road network and water distribution system. Finally, the City did not conduct a contractor eligibility check, and the State failed to notice and require compliance before award of the contract. By its failure, the State unnecessarily put itself at risk of making payments to prohibited contractors. The State Disbursed Federal Funds to Lincoln County Without Adequate Supporting Documentation The State paid more than $228,000 for Lincoln County to resurface a road without adequate supporting documentation for its environmental determination, procurement process, and costs. The County made a more stringent incorrect environmental determination than required. The County did not have the needed documentation to support the appropriate and less stringent environmental determination. The State did not notice or correct this incorrect determination. The State did not verify that the County properly procured its road-resurfacing activity. The activity description in the bid advertisement, bid packet, and contract had three different descriptions. In addition, the contract did not have all of the necessary provisions. 28 Some of the missing provisions included violation or breach of contract, termination for cause, record retention requirements, and compliance with the (1) Clean Air and Water and (2) Anti-Kickback Acts. The State also failed to ensure the County performed a valid contractor eligibility check. Without consistent activity descriptions, required contract provisions, and a valid contractor eligibility check, the State could not conclude that the County followed procurement requirements and had an enforceable contract. 28 24 CFR 85.36(i) and State of Oklahoma CDBG Project Management Guide, Requirement 407 10 The State paid the County based on an unlabeled spreadsheet. The spreadsheet did not identify the contractor, the entity responsible for payment, or the date. Without valid supporting documentation, the State put itself at unnecessary risk for potentially paying ineligible costs and could not support more than $228,000 paid to Lincoln County. The State’s Monitoring Review of The County Was Deficient The State performed a monitoring review of the County on August 6, 2015. The monitoring report had incorrect information and lacked sufficient documentation to support conclusions. For instance, the monitoring report determined that the road-resurfacing purchase order was dated after the unlabeled, undated spreadsheet. It was unclear how the State came to its conclusion. In addition, it determined that the purchase order and the unlabeled spreadsheet were the same amount, which was not correct. The State also claimed that it verified the selected contractor as the lowest bidder by referencing County board minutes. While the minutes stated the contractor was the lowest bidder, the minutes did not show the bid amounts of the other potential contractors. While the County had the bid tabulation sheet, the State failed to collect and use it as proper supporting documentation. The State’s monitoring included only reviewing that the County’s contract contained some, not all, of the required contract provisions. In at least one instance, the monitoring report stated the County had included a contract provision when it did not. Finally, the State determined that the County had performed a contractor eligibility check. However, the date of the eligibility check was a day after the State’s monitoring report and about 4 months after the signed contract. A County representative stated that the County had lost the original eligibility check. According to the new eligibility check, the contractor had not registered to receive Federal funds. Therefore, the contractor was not eligible to receive Federal funds. Updated Documentation Was Inadequate To Support Expenditures The State asked its subrecipients to submit expenditure information that included purchase orders, invoices, canceled checks, bids, contracts, and environmental review documentation. Two of the subrecipients did not include all of the necessary updated documentation to support its expenditures. The State also did not have evidence that it reviewed the updated information to ensure eligibility and completeness. Conclusion The State’s admitted informal approach to evaluating and selecting proposed activities resulted in its inability to support more than $11.7 million in obligations. Since the State did not do damage verification or activity cost reasonableness, the State did not have support for its activity selections. In addition, the State did not ensure its subrecipients followed environmental requirements and procurement policies. Of the more than $11.7 million in unsupported obligations, the State also made more than $4.3 million in payments based on incomplete, insufficient, or no supporting documentation. The State also did not develop and implement policies and procedures to obligate, spend, and monitor funds appropriately. Finally, the State did not ensure it reviewed and maintained appropriate documentation to support its decisions and 11 conclusions. Without needed changes that will provide the State with assurance of properly supporting its obligations and expenditures, the State has the potential to misspend the remaining $81.9 million in CDBG-DR funds. Recommendations We recommend that the Acting Deputy Assistant Secretary for Grant Programs require the State to 1A. Develop and implement policies and procedures to document and perform detailed review and testing to establish eligibility, existence, disaster event qualifications, reasonableness of cost estimates, prioritization, and fund allocation, both retroactively and prospectively, which would put $81,982,712 to better use. 1B. Support or properly obligate $11,717,288 in unsupported obligations. 1C. Review and document State determination of compliance with procurement, contract, and environmental requirements for its subrecipients. 1D. Collect, review, and verify supporting source documents for all requests for funds to ensure it supports the expenditure as appropriate for the activity in question. 1E. Document all State procedures performed to verify the appropriateness and accuracy of all subrecipient documentation submitted for payment of program expenditures. 1F. Support or repay $4,394,552 29 in unsupported expenditures. 29 The more than $4.3 million in unsupported expenditures are included in more than $11.7 million in unsupported obligations. Different issues resulted in the multiple unsupported classifications of these obligations and expenditures. If the State supports the obligations, it will still need to provide support for the expenditures. To avoid duplicate counting, we did not include the unsupported expenditures in appendix A. 12 Scope and Methodology Our review period was from December 2013 through January 2016. We performed our audit work from January through July 2016 at the State’s offices at 900 North Stiles, Oklahoma City, OK. To accomplish our audit objective, we • Reviewed relevant Federal and State laws, regulations, policies, and procedures; • Interviewed HUD and State personnel; • Reviewed the State’s action plans for its CDBG-DR funding allocations; • Visited three selected subrecipient sites to observe four of our six initially selected activities; and • Reviewed an internal audit related to the State’s regular CDBG program. Sample Selection As of December 31, 2015, the State had obligated funds for 79 activities totaling more than $49 million.30 We selected six activities for review of obligations and expenditures. We selected • Two activities due to the amount of funds the subrecipient needed to spend within a short amount of time, • One activity because it was a housing development in a smaller city, • Two activities because they were mitigation-resiliency activities near completion, and • One activity because it was complete and the State had monitored the subrecipient. During our initial review, we noted issues surrounding the purchase of fire trucks in Creek County, OK. The State had subrecipients that were located in Creek County that were direct subrecipients. The State relied on information addressing Creek County and its indirect subrecipients for the direct subrecipients. As of January 31, 2016, the State had obligated funds for 99 activities totaling more than $59 million. 31 We selected all activities, an additional eight, which related to the purchase of fire trucks in Creek County, OK, for direct subrecipients. We reviewed the obligations and expenditures related to these eight activities. We did not project our sample to the universe population. 30 The majority of activities had associated administrative obligations. The State listed the activity and administrative obligations as separate activities. 31 Ibid. 13 Scope Limitation 32 We encountered several instances that limited the scope of this audit. We notified the State of missing, incorrect, or inadequate information as discovered during the course of the audit. The State’s handling of these matters raised questions on the accuracy, completeness, and reliability of audit evidence. Specific instances include • The State’s HUD-approved action plan, dated October 3, 2014, included risk assessments for a number of potential casualty events. The individual who prepared the action plan copied the information from an Oklahoma Emergency Management report but amended certain narrative information to increase the probability of occurrence, the magnitude of severity, or both for several risks. The State was unaware of this incorrect and inflated information. The State corrected this information in its action plan without notifying HUD, making it appear that the document was correct from the beginning. It is unknown whether this was a single instance or the State had other inaccuracies in its action plans or made other changes. • The State prepared threshold reviews to support its selection of activities. These documents failed to include support for State approval of the grant. After we discussed this deficiency with the State, it prepared new threshold reviews in a revised format and removed the original inadequate reviews that were used to approve the grant from its official record. The State should not remove its documentation trail. The extent of the documents removed is unknown, which limited our ability to rely upon the accuracy and completeness of the State’s data. • The monitoring review for Lincoln County contained incorrect information. The State performed its monitoring review on August 6, 2015, and noted that the County had appropriately ensured the contractor was eligible. However, the State collected documentation, dated August 7, 2015, which was 1 day after the monitoring review. The August 7, 2015, documentation showed the contractor had not registered and was not eligible to participate in the program. After a meeting with the State, we performed an onsite review of the County. The County representative appeared to have been warned of the problem. When asked, the County representative stated that the County had lost the documentation of the original contractor eligibility review. However, the County maintained documents in triplicate, and this appeared to be the only documentation missing. The State should not prepare subrecipients for auditor’s visits. We conducted the audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. 32 Government Auditing Standards, 2011 Revision, paragraphs 6.09 and 7.11 14 Internal Controls Internal control is a process adopted by those charged with governance and management, designed to provide reasonable assurance about the achievement of the organization’s mission, goals, and objectives with regard to • Effectiveness and efficiency of operations, • Reliability of financial reporting, and • Compliance with applicable laws and regulations. Internal controls comprise the plans, policies, methods, and procedures used to meet the organization’s mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations as well as the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined that the following internal controls were relevant to our audit objective: • Program operations – Policies and procedures that management has implemented to reasonably ensure that a program meets its objectives. • Compliance with laws and regulations – Policies and procedures that management has implemented to reasonably ensure that resource use is consistent with laws and regulations. • 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 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 adequate controls, policies, or procedures in place to ensure it planned and managed CDBG-DR obligations in accordance with requirements to support activity eligibility, existence, disaster event qualification, reasonableness of cost estimates, prioritization, or fund allocation (finding). 15 • The State did not have adequate controls in place or perform adequate procedures to oversee CDBG-DR expenditures in accordance with requirements to determine compliance with procurement requirements or ensure disbursements of Federal funds were appropriate and supported by source documentation (finding). • The State did not have adequate controls to ensure subrecipients performed adequate environmental reviews and supported those reviews with documentation for making environmental determinations (finding). • The State did not have adequate policies and procedures in place to monitor compliance with Federal administrative requirements for grants as set forth in law and regulation (finding). 16 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 $81,982,712 1B 33 $11,717,288 Totals 11,717,288 81,982,712 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, the issues identified were systemic in nature and not limited to sample items tested. The State should recognize cost savings of more than $81.9 million by implementing the necessary and required controls for obligating and spending funds included in this report. 33 The more than $4.3 million in unsupported expenditures are included in more than $11.7 million in unsupported obligations. Different issues resulted in the multiple unsupported classifications of these obligations and expenditures. If the State supports the obligations, it will still need to provide support for the expenditures. To avoid duplicate counting, we did not include the unsupported expenditures in appendix A. 17 Appendix B Auditee Comments and OIG’s Evaluation Ref to OIG Evaluation Auditee Comments 18 Ref to OIG Evaluation Auditee Comments Comment 1 19 Ref to OIG Evaluation Auditee Comments Comment 2 Comment 3 Comment 4 20 Ref to OIG Evaluation Auditee Comments Comment 5 21 Ref to OIG Evaluation Auditee Comments Comment 6 Comment 7 Comment 8 Comment 7 22 Ref to OIG Auditee Comments Evaluation Comment 9 Comment 10 Comment 11 Comment 12 Comment 6 Comment 13 23 Ref to OIG Evaluation Auditee Comments Comment 14 Comment 15 Comment 16 24 Ref to OIG Evaluation Auditee Comments Comment 17 Comment 14 Comment 18 Comment 19 Comment 20 25 Ref to OIG Auditee Comments Evaluation Comment 9 Comment 13 Comment 21 26 Ref to OIG Auditee Comments Evaluation Comment 22 Comment 15 Comment 23 Comment 24 Comment 6 27 Ref to OIG Evaluation Auditee Comments Comment 25 Comment 14 28 Ref to OIG Auditee Comments Evaluation Comment 2 Comment 26 29 Ref to OIG Auditee Comments Evaluation 30 Ref to OIG Auditee Comments Evaluation Comment 6 31 Ref to OIG Evaluation Auditee Comments Comment 27 32 Ref to OIG Evaluation Auditee Comments Comment 27 33 OIG Evaluation of Auditee Comments Comment 1 The State asserted that its written response to the draft report superseded all previous written and verbal representations made by the State to the OIG. We disagree, as those communications made during the audit formed the basis of the audit conclusions. We maintain the conclusions and recommendations in the finding. The State stated that HUD staff were aware of the State’s activities and provided hands-on oversight and guidance. The State also stated that it did not take any definitive action without HUD approval. However, the State did not provide any evidence during the audit that HUD approved any of the noncompliance issues identified in the finding. Comment 2 The State stated that it is making recommended procedural changes to comply with requirements. According to the State, it is now requiring subrecipients to submit all source documentation to the State, implementing additional written procedures, and re-working its Compliance Monitoring Handbook. We acknowledge the State’s efforts towards resolving the issues identified in the finding; however, we did not review the validity or the adequacy of the State’s efforts. When fully implemented along with the other recommendations in the finding, these changes should improve the State’s management of its programs. The State will need to submit supporting documentation to HUD to verify its compliance and work with HUD during the audit resolution process to satisfy the recommendations. Comment 3 The State asserted that it had an extremely short time period to provide its response. We disagree. The initial days to respond provided to the State is standard OIG procedure. In addition, during the audit and before we issued the discussion draft report, we provided several opportunities for the State to provide additional documentation and explanations to address the issues identified in the finding through discussions, emails, and the presentation of the finding outline. The State will need to submit supporting documentation to HUD to verify its compliance and work with HUD during the audit resolution process to satisfy the recommendations. Comment 4 The State repeated the position it has taken throughout the audit and as described in the finding. The State’s response offered no new criteria or other evidence to address or refute the criteria used or conclusions reached in this finding. We added additional criteria further supporting the conclusions in the finding. We maintain our position as described in the finding. Comment 5 The State commented that we did not address the technical assistance provided by HUD in the report. However, we did not assess the quality of technical assistance provided by HUD and conducted the audit based upon the State’s requirements 34 outlined in its grant agreement with HUD and the documentation maintained in the State’s files. Comment 6 The State disagreed with our finding that State threshold reviews failed to support obligations. As discussed with the State throughout the audit and in the finding, the State’s original threshold reviews, used to justify the obligation of Federal funds, did not provide sufficient documentation to support the obligation. Accordingly, we deemed the obligation of these funds as unsupported. After bringing this deficiency to the State’s attention, it created new threshold reviews. The State based the new threshold reviews on its disaster recovery plans with them generally comprised of cut and paste information from other documents without verification. The State’s efforts to determine the eligibility and appropriateness of an obligation significantly after it being made did not eliminate the finding that the initial obligation was unsupported. Further, the State’s actions justified an existing obligation rather than a determination of whether the obligation was the best use of disaster funds in the initial obligation. The State removed the original threshold reviews from its system and replaced them with the new threshold reviews. However, deleting the original threshold reviews from its files was incorrect as they represented a significant part of the obligation history and supported key decisions. Without an accurate history of events, the State created the scope limitation discussed in the Scope and Methodology section of the report. Comment 7 While the State disagreed with our terminology use, its response did not address the conditions cited or refute the conclusions in the report. We maintain our position. Comment 8 The State stated that the elderly complex in Mannford, OK will meet a national objective and cites the criteria that at least 51 percent or greater of the units will be occupied by low-moderate income people. However, the State did not address the issues outlined in the finding. For instance, the State was unaware that the construction of the complex did not meet the proposed national objective until we informed them. The State initially stated that the units would be occupied by 100 percent low-income elderly individuals that were displaced due to the disaster. City of Mannford staff stated they planned for the complex to be occupied by elderly tenants paying market rent, which would not meet a national objective. However, the State took no action, such as a survey, to determine the reasonableness or viability of its objective. Therefore, we maintain our position. Comment 9 The State stated that it “continuously worked to update the narrative to meet the expectation of the OIG request.” However, the State, as the grantee, had the responsibility of complying with requirements before it obligated or expended funds. As discussed in the finding and comment 13, the State did not comply with requirements to tie back the fire equipment with the disaster. 35 Comment 10 The State asserted that the survey documentation provided by the City of Sapulpa supported the low-moderate income national objective claimed by the City of Sapulpa. We disagree. The City of Sapulpa provided only summary figures and a color-coded map without supporting documentation and explanatory notes. The State did not review this documentation and require corrective action. Therefore, we maintain our position. Comment 11 The State claimed it was incorrect for us to assert that the road was unpaved before the disaster. However, the State did not have any documentation in its file to show the condition of the road during our review. Lincoln County had one picture of what appeared to be an unpaved road. The State was responsible before obligating the funds to determine and document that the activity was eligible for disaster funding. The State still needs to provide evidence that the road was damaged as a result of the May 2013 disaster. We maintain our position. (See Comment 27) Comment 12 The State believed it complied with the cost estimate requirements. However, the State only had Mannford’s uploaded 1-page cost estimate. The State did not review or evaluate the cost estimate for reasonableness. The State did not require sufficient procurement documents that would allow reconciling the cost estimates with the bids. As with other documentation, the State did not believe it had an obligation to review and evaluate the completeness or appropriateness of such documentation, which would be a contributing cause of why the State did not realize that this activity did not meet the intended national objective. We maintain our position. Comment 13 The State stated that it acted appropriately with respect to the fire equipment. We disagree. The State did not establish an appropriate level of tie back to the wildfire disaster. In addition, not all of the fire equipment purchased was suited for fighting wildfires in a rural county with a limited road and water distribution network. Fire equipment purchased cannot simply be useful in fighting fires; it must be usable in fighting wildfires. For example, ladder trucks did not appear to meet this purpose. The State was responsible for determining applicability for equipment requests against wildfire disasters. To clarify, we did not imply that a tanker truck would not be acceptable wildfire fighting equipment. We used the tanker trucks as an example of the type of trucks that the State should permit as opposed to ladder trucks with a very limited water tank. We maintain our position. Comment 14 The State stated that it was not required to maintain all supporting documentation for environmental review, procurement, or expenditures of each subrecipient and each activity. We disagree. HUD guidance, effective April 2012, 34 required that 34 Basically CDBG for States, Chapter 18.3.7 36 states must maintain drawdown requests with source documentation including invoices and purchase orders for each funded local government activity. In addition, the same guidance 35 required the State to maintain financial management records, including procurement documentation, and environmental review records. We included additional criteria to the finding. Comment 15 The State stated that it always required subrecipients to conduct contractor eligibility checks. However, for our initial sample of six activities, the State’s records contained one eligibility check showing the contractor not being registered to receive Federal contract awards. Once we notified the State of this deficiency, the State required its subrecipients to submit the eligibility checks. Regulations 36 clearly required the eligibility check before entering into a contract to avoid contracting with an ineligible contractor. We maintain our position. (See Comment 23) Comment 16 The State disagreed with our conclusions regarding the procurement of the fire equipment; however, we disagree. HUD requirements held the State responsible for ensuring that subrecipients procured goods and services in accordance with Federal requirements. Despite repeated requests, the State did not provide any documentation that cities and towns could use this purchasing intermediary. In addition, subrecipients sole-sourced the fire equipment. As such, we maintain our position. Comment 17 The State stated that it was inappropriate for us to comment on a program that is subject to CDBG rules and regulations. We disagree, as we included the information to demonstrate that the State had been informed previously of its lack of documentation and mismanagement of programs. Comment 18 The State stated that it had sufficient evidence to release funds. However, the State also stated that this information was not included in its system due to size limitations. As stated in the finding, the State did not provide the necessary environmental review documentation to support the release of funds. Additionally, the State did not provide any support that Mannford posted the notice of finding of environmental review before releasing funds. Further, the State did not provide documentation to support that CDBG contracts entered into after May 1, 2016, required subrecipients to follow requirements. While the State’s position would be an improvement, the State needs to ensure that all of its contracts comply with Federal requirements. Comment 19 The State stated that its system would not allow it to alter documents. As stated in the finding, the State verbally agreed to altered payment amounts outside of its 35 Basically CDBG for States, Chapter 18.3.8 36 48 CFR 4.1103 37 system without requiring Mannford to correct supporting documentation. The State needs to ensure payment amounts agree to supporting documentation. Comment 20 The State stated that subrecipients did not have to comply with 24 CFR 58.6 for acquisition of fire equipment. We disagree. In addition to being required to comply with 24 CFR 58.6, the State of Oklahoma CDBG Project Management Guide, Requirement 403.II.B, required subrecipients to address the requirements of the cited regulation. The guide specifically uses the purchase of equipment, fire trucks, and ambulances as examples. Therefore, we maintain our position. Comment 21 The State stated that regulations did not prohibit an entity from preparing a more stringent environmental determination. As stated in the finding, Lincoln County did not have appropriate documentation to support the less stringent, and appropriate, environmental review. The State should not have released Federal funds to Lincoln County until it had the appropriate documentation to support it followed environmental regulations. The State stated that it does not pay from spreadsheets. However, according to the State’s policy, 37 subrecipients were instructed not to upload to the State’s system, supporting documentation for payment requests. State officials provided us the unlabeled spreadsheet as support for the payment. As previously discussed, the State collected information without review and in this instance when shown the spreadsheet, a State official did not understand the spreadsheet or why Lincoln County had provided it. HUD requirements held the State responsible for reviewing and retaining basic documentation supporting payments. After we notified the State of the deficiencies, it collected an appropriate invoice. (See Comment 22) The State stated that Lincoln County’s contract contained all of the necessary Federal provisions. As noted in the finding, Lincoln County’s procurement documents did not contain the required provisions. We maintain our position. Comment 22 The State stated that it reviewed pertinent documentation while monitoring Lincoln County. During our initial review and after the State’s monitoring review, the State did not have evidence to support its conclusions for its monitoring review. Subsequent to our discussions with the State regarding its deficiencies, Lincoln County and other subrecipients uploaded some documentation to the State’s system. However, these actions did not correct the systemic deficiencies of the State’s management and operation of the CDBG-DR program discussed in this finding. (See Comment 21) Comment 23 The State acknowledged that it should not have allowed subrecipients to use self- certifications to perform contractor eligibility. According to the State, it will revise its process by implementing a new form and instructions for all 37 State of Oklahoma CDBG Project Management Guide, Requirement 406.II.G.2 38 subrecipients. We acknowledge the State’s efforts towards resolving the issues identified in the finding; however, we did not review the validity or the adequacy of the State’s efforts. To make its improvements more effective, the State needs to specify what procedures it will perform on documentation that it receives from subrecipients as stated in our recommendations. The State will need to submit supporting documentation to HUD to verify its compliance and work with HUD during the audit resolution process to satisfy the recommendations. Comment 24 The State stated that the updated spreadsheet documentation we referred to in the finding only included Lincoln County, as the updated documentation also included other subrecipients. While the finding section did not specifically address Lincoln County, we did specifically note for two subrecipients that the updated information was still missing. Further, the finding section noted that the State did not have evidence that it reviewed any of the subrecipients’ updated information. The State will need to submit supporting documentation to HUD to verify its compliance and work with HUD during the audit resolution process to satisfy the recommendations. Comment 25 The State provided a list of criteria it used to review the applications and determine funding. However, the State’s support that activities met the criteria was insufficient. The State did not have adequate documentation to support how it made its funding determinations or determined project eligibility. It did not verify the information in the applications by requiring pictures or other supporting documentation. The State also did not visit any of its subrecipients to verify requested activities. Comment 26 The State stated that there was no malicious intent concerning the incorrect information for the risk assessments of potential casualty events. Instead of addressing the issues resulting in the scope limitation, the State’s response referred to the scope limitation as “unsubstantiated” and “grossly exaggerated.” The State agreed that it replaced the original information without an audit trail. Consequently, the State’s ability to replace information without an audit trail on previously approved documents, maliciously or not, created the scope limitation. Comment 27 The State provided pictures with a captured image date of July 2008 of a road supporting that it was paved before the disaster. The State obtained these pictures on September 1, 2016, the day after we issued our draft report to the State. However, these images did not support tie back to the disaster as required. The State will need to provide evidence that the road was damaged as a result of the May 2013 disaster. We maintain our position that the obligation was unsupported. 39 Appendix C Schedule of Original Obligations and Funds Spent by Subrecipient No. Subrecipient Funding Activity Obligated Spent 1 Bristow Round 7 Fire Equipment $ 249,650 $ 0 2 Creek County (Olive) Round 4 Fire Equipment 374,027 367,136 3 Drumright Round 4 Fire Equipment 341,175 0 4 Drumright Round 7 Fire Equipment 110,000 0 5 Kiefer Round 3 Fire Equipment 77,742 77,742 6 Kiefer Round 7 Fire Equipment 192,280 0 7 Lincoln County Round 1 Road Resurfacing 268,230 228,834 8 Mannford Round 3 Housing Complex 5,000,000 699,140 9 Mounds Round 4 Fire Equipment 128,176 0 10 Oilton Round 3 Fire Equipment 146,942 146,942 11 Oilton Round 7 Fire Equipment 237,000 0 12 Oklahoma City Round 1 Road Resurfacing 1,433,533 810,000 13 Oklahoma City Round 1 Drainage Projects 713,533 0 14 Sapulpa Round 4 Fire Equipment 2,445,000 2,064,757 Total 11,717,288 4,394,552 40
The State of Oklahoma Did Not Obligate and Spend Its Community Development Block Grant Disaster Recovery Funds in Accordance With Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-09-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)