oversight

The City of Olathe, KS, Did Not Always Comply With the Requirements of HUD's Neighborhood Stabilization Program, Community Development Block Grant Program, and HOME Investment Partnerships Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-09-28.

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

                     City of Olathe, KS
         Neighborhood Stabilization Program,
    Community Development Block Grant Program, and
        HOME Investment Partnerships Program




September 28, 2016
HUD-OIG Audit Report Number:        Johnson County, KS Audit Report Number:
2016-KC-1005                                                         2016-02
HUD-OIG Office of Audit, Region 7              Johnson County Audit Services
Kansas City, KS                                                  Olathe, KS
To:            Dana Buckner, Director, Office of Community Planning and Development,
               Kansas City, KS, 7AD
               Board of County Commissioners, Johnson County, KS
               County Manager, Johnson County, KS
               //signed//
From:          Ronald J. Hosking, Regional Inspector General for Audit, 7AGA
               //signed//
               Ken Kleffner, County Auditor, Johnson County, KS
Subject:       The City of Olathe, KS, Did Not Always Comply With the Requirements of
               HUD’s Neighborhood Stabilization Program, Community Development Block
               Grant Program, and HOME Investment Partnerships Program


Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) and the Johnson County, KS, Audit Services’ final results of our joint review of
a complaint pertaining to the City of Olathe, KS’s housing programs.
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. Also, it will be posted on the Johnson County, KS, Audit Services’
website, http://www.jocogov.org/audit.
If you have any questions or comments about this report, please do not hesitate to call Ronald
Hosking at 913-551-5870 or Ken Kleffner at 913-715-1833.
              HUD-OIG Audit Report Number: 2016-KC-1005
              Johnson County, KS Audit Report Number: 2016-02
              Date: September 28, 2016

              The City of Olathe, KS, Did Not Always Comply With the
              Requirements of HUD’s Neighborhood Stabilization Program,
              Community Development Block Grant Program, and HOME
              Investment Partnerships Program

Highlights

What We Audited and Why
The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General,
and Johnson County Audit Services, Johnson County, KS, audited the City of Olathe, KS, based
on a hotline complaint. The complaint allegations are discussed further in the background and
objectives section. Our audit objectives were to determine whether (1) the complainant’s
allegations were substantiated, (2) the City listed the proper affordability period for the
Neighborhood Stabilization Program (NSP) homes it sold, and (3) the City received maximum
benefit from the HOME Investment Partnerships Program grant funds it received.

What We Found
We substantiated some of the complainant’s allegations. Specifically, the City did not properly
allocate administrative costs to its housing rehabilitation programs, and it improperly sold an
NSP home to a City employee’s daughter. In addition, the City did not select applicants
appropriately and ensure that its NSP waiting list was accurate and updated. In addition to the
complainant’s allegations, we found the City forgave its NSP promissory notes much sooner than
required, and it did not fully use its HOME funds.

What We Recommend
We recommend that the Director of the Kansas City, KS, Office of Community Planning and
Development work with the State of Kansas and Johnson County to require the City to provide
adequate support for $575,855 in unsupported salary costs and $38,711 in unsupported
management fees or reimburse HUD from non-Federal funds any portion it cannot support. We
also recommend that the City reimburse its NSP $39,500 for the promissory note that it satisfied
when the homeowners sold their home before completion of the correct affordability period and
up to $52,150 from the net proceeds for the promissory note that it satisfied for the home that
went into claim after our review. In addition, we recommend that the City implement detailed
NSP policies and procedures, checklists, and applications that disclose potential conflict-of-
interest relationships. The City should receive monitoring by the appropriate grantee to ensure
that it implements the recommendations. Further, we recommend that the County pursue the
efficiencies to be gained by consolidating the two entities’ HOME programs, and the City should
amend previous HOME agreements to be aligned with the County’s HOME program and release
all loans that have met the 10-year affordability period.
Table of Contents
Background and Objectives ....................................................................................3

Results of Audit ........................................................................................................5
         Finding 1: The City Did Not Properly Allocate Administrative Costs to Its Housing
         Rehabilitation Programs .....................................................................................5

         Finding 2: The City Improperly Sold an NSP Home to a City Employee’s Daughter
          .........................................................................................................................7
         Finding 3: The City Forgave Its NSP Promissory Notes Much Sooner Than
         Required ............................................................................................................9

         Finding 4: The City Did Not Select Applicants Appropriately and Ensure That Its
         NSP Waiting List Was Accurate and Updated ....................................................11

         Finding 5: The City Did Not Fully Use Its HOME Funds ....................................13

Scope and Methodology .........................................................................................16

Internal Controls ....................................................................................................18

Appendixes ..............................................................................................................20
         A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 20

         B. Auditee Comments and OIG’s Evaluation ............................................................. 21




                                                                2
Background and Objectives
Olathe, KS, is the second largest city among the 21 communities in Johnson County, KS, and is
located just 20 miles southwest of downtown Kansas City, MO. Since the 1950s, Olathe’s
population has quadrupled, and it is the fifth largest city in Kansas. In 1986, its voters selected a
modified mayor-council-manager form of government.
The City of Olathe, through its Parks and Recreational Department, manages the Housing and
Transportation Services Division. Within this division, the housing rehabilitation staff manages
three U.S. Department of Housing and Urban Development (HUD), Office of Community
Planning and Development, programs. These include the Neighborhood Stabilization Program
(NSP), Community Development Block Grant (CDBG), and HOME Investment Partnerships
Program (HOME).
Title III of the Housing and Economy Recovery Act of 2008 authorized NSP and provided grants
to every State and certain local communities to purchase foreclosed on or abandoned homes and
rehabilitate, resell, or redevelop them to stabilize neighborhoods and stem the declining value of
neighboring homes. The State of Kansas executed a grant agreement with the County for more
than $4.5 million in NSP1 funds. The City was the County’s subrecipient of this NSP1 grant and
received more than $1.9 million. The City used these funds to purchase and rehabilitate
properties for resale and for use as rental units.

Title I of the Housing and Community Development Act of 1974 authorized the CDBG program.
Communities can use the funds to address critical and unmet community needs, including those
for housing rehabilitation, public facilities, infrastructure, economic development, public
services, and more. HUD executed grant agreements with the County totaling more than $6.1
million in CDBG funds from 2011 to 2015. The City was the County’s subrecipient of the
CDBG funds and received more than $1.9 million from 2011 to 2015. The City used these funds
for full- and part-time community enhancement officers, administrative salaries and costs, home
improvement needs, roof replacement, kitchen repair, road repair, and its taxi coupon program.

HOME is a program in which HUD allocates funds by formula among eligible State and local
governments to strengthen public-private partnerships and to expand the supply of decent, safe,
sanitary, and affordable housing with primary attention to rental housing for very low-income
and low-income families. Generally, HOME funds must be matched by non-Federal resources.
HUD executed grant agreements with the County totaling more than $4.8 million in HOME
funds from 2011 to 2015. The City was the County’s subrecipient of the HOME funds and
received more than $554,900 from 2011 to 2015. The City used these funds for housing
rehabilitation projects through a deferred loan program.

We initiated this audit based on a hotline complaint alleging the City’s misuse and mishandling
of CDBG and NSP funds. Some of the allegations included the City’s not properly allocating
administrative costs to its housing rehabilitation programs, conflicts of interest, and preferential



                                                  3
treatment. We substantiated these allegations. In addition, we did not substantiate the
complainant’s allegations on providing assistance to individuals who are not income qualified,
funding projects without environmental reviews, improperly upgrading an individual’s property
who never applied for the program, and failing to place required data into the Consolidated
Annual Performance and Evaluation Report. Also, we could not substantiate another preferential
treatment allegation.
This was a joint audit between HUD’s Office of Inspector General (OIG) and the Johnson
County, KS, Audit Services. We conducted a joint audit because Johnson County, KS, is the
grantee for several of the City’s HUD housing programs.

Our audit objectives were to determine whether (1) the complainant’s allegations were
substantiated, (2) the City listed the proper affordability period for the NSP homes it sold, and
(3) the City received maximum benefit from the HOME grant funds it received.




                                                  4
Results of Audit

Finding 1: The City Did Not Properly Allocate Administrative
Costs to Its Housing Rehabilitation Programs
The City did not properly allocate administrative costs to its housing rehabilitation programs.
This deficiency occurred because the City did not have policies or procedures requiring its staff
to track time spent on activities, and it relied on incorrect guidance on charging management
fees. As a result, HUD lacked assurance that the City properly used $614,566.

The City Did Not Properly Allocate Administrative Costs
The City’s housing rehabilitation staff timesheets did not track time spent among HOME,
CDBG, and NSP. Federal regulations at 2 CFR (Code of Federal Regulations) Part 225,
appendix B, paragraph (8)(h), require employees who work on multiple activities or cost
objectives to use personnel activity reports or equivalent documentation to support their salaries
or wages. The regulations also require these reports or equivalent documentation to reflect an
after-the-fact distribution of the actual activity worked on, account for the total activities for
which an employee is compensated, be prepared at least monthly, and be signed by the
employee. Federal regulations at 2 CFR 200.430(a)(3) requires the total compensation for
individual employees to be determined and supported. Regulations at 2 CFR 200.430 replaced 2
CFR Part 225 in 2014. In addition, the NSP Policy Alert, Guidance on NSP Activity Delivery
and Administrative Costs, dated May 18, 2012, states, “…for staff costs, this includes a timecard,
timesheet, or other time keeping mechanism that demonstrates the time that was spent on the
eligible NSP activity.”

From January 2011 through August 2015, City staff members did not track their time spent
among HOME, CDBG, and NSP. In September 2015, they began to track time to their various
activities. The City charged most of the salaries and benefits to its CDBG administrative grants.
The City’s salaries and benefits totaled $575,855 from 2011 through 2015. The table below
shows the salaries and benefits.


                           Year        Salary         Benefits        Totals

                           2011         $90,241          $25,573      $115,814
                           2012          95,843           26,468       122,311
                           2013          88,650           29,719       118,369
                           2014          86,729           36,117       122,846
                          2015*          67,147           29,368        96,515
                          Totals        428,610          147,245       575,855
                           *Salaries and benefits were prorated for 2015 because
                         the City began tracking activities on September 28, 2015.




                                                     5
Also, the City’s housing services manager did not document her timesheets to track time spent
among her duties with the City’s housing rehabilitation programs and as the City’s housing
authority executive director.

In addition, the City improperly charged a 10 percent management fee for managing its NSP
properties, with 5 percent allotted to the housing rehabilitation staff and 5 percent to the Olathe
Housing Authority. The City stated that it used the Olathe Housing Authority portion to pay the
housing services manager’s salary. From January 1, 2011, to December 31, 2015, the City
received $38,711 in improper management fees.
The City Did Not Have Policies and Procedures and Relied on Incorrect Guidance on
Management Fees
The City did not have policies or procedures for tracking time spent on HOME, CDBG, and NSP
activities until September 2015. During our review, the housing services manager began
tracking time spent on specific activities. In addition, the City relied on an incorrect form the
State of Kansas provided concerning the use of management fees. City staff members stated that
they completed NSP rental property income and expenses statements and these statements listed
management fees. The City completed this form and sent it to the State; however, the State did
not inform the City that the management fees were improper.
HUD Lacked Assurance That the City Properly Used $614,566
The accurate way to allocate salaries to individual grants is to allocate the costs based on the
actual amount of time staff spends working on each grant. Because the City did not properly
allocate costs to its housing rehabilitation activities, HUD lacked assurance that it properly used
$614,566 in administrative costs.

Recommendations
We recommend that the Director of HUD’s Kansas City, KS, Office of Community Planning and
Development work with the State of Kansas and the County to require the City to

       1A.     Provide adequate support for $575,855 in CDBG unsupported salary costs or
               reimburse the affected programs from non-Federal funds any portion it cannot
               support.

       1B.     Provide adequate support for $38,711 in unsupported NSP management fees or
               reimburse the City’s NSP program from non-Federal funds any portion it cannot
               support.

       1C.     Implement a detailed tracking system to ensure that it properly tracks activities.

       1D.     Receive training on salary distribution methods and documentation requirements
               for Federal grants.

       1E.     Receive monitoring by the appropriate grantee to ensure that it establishes and
               implements a new activity tracking system.



                                                  6
Finding 2: The City Improperly Sold an NSP Home to a City
Employee’s Daughter
The City improperly sold an NSP home to a City employee’s daughter. This deficiency occurred
because the City’s NSP policies and procedures, checklists, and application did not require City
employees or applicants to disclose potential conflict-of-interest relationships. This sale resulted
in a loss of public trust.

The City Improperly Sold an NSP Home to a City Employee’s Daughter
On February 19, 2010, an NSP applicant submitted her application to buy an NSP home. She
met the income and other requirements. However, the applicant’s mother worked on the housing
rehabilitation staff that managed the NSP housing rehabilitations and home sales. On March 5,
2010, HUD sold a foreclosed on home to the City for $158,000. The City rehabilitated the
home, and the applicant signed a sales contract to purchase the property on April 10, 2010, for
$118,500. On June 28, 2010, the applicant and the City executed the settlement statement for
$118,500, and on June 30, 2010, the City and the applicant signed a 3-year promissory note for
$39,500 to meet the City’s $158,000 purchase price.

Although the City stated that the employee handled only the NSP rehabiliation duties, this action
violated various Federal and local conflict-of-interest policies. Federal regulations at 24 CFR
570.611(b) state, “…no person who is in a positon to participate in a decision making process or
gain inside information with regard to such activities may obtain a financial interest or benefit or
those whom they have business or immediate family ties, during their tenure or for one year
thereafter.” In addition, 24 CFR 570.611(c) states that this applies to “subrecipients that are
receiving funds under this part.” Also, 24 CFR 570.611(d) states that HUD may grant an
exception on a case-by-case basis when it has satisfactorily met the threshold requirements.
However, the City did not submit a waiver request to HUD.

In the City’s employee handbook, dated March 3, 2010, section 2-8 addresses conflicts of
interest and states, “…employees have an obligation to conduct business within guidelines that
prohibit actual or potential conflicts of interest. An actual or potential conflict of interest occurs
when an employee is in a position to influence a decision that may result in a personal gain for
that employee or for a relative as a result of the City’s business dealings. A relative is any
person who is related by blood, marriage, or adoption.”

Also, the City’s Code of Conduct states, “…employees shall not engage in any business
transaction or have financial or other personal interest, direct or indirect, which is incompatible
with the proper discharge of their duties, or would tend to impair their independence of judgment
or action in the performance of their duties.” In addition, the City’s Code of Ethics tells
employees to “…avoid conflicts of interest by refraining from participating in dccisions or being
involved in transactions in which they or their family has an interest, and make full disclosure of
association when involvement cannot be avoided.”




                                                   7
The housing services manager believed this was not a conflict of interest because the employee
was not directly involved in the application or sales transaction. The City employee stated that
she worked primarily on clerical duties on the rehabilitation portion. However, several emails
showed that she had influenced repairs on the property before and after it was sold. After the
house was sold, the employee’s supervisior told the employee that only the daughter should
request the repairs.

Further, the City did not list the correct affordability period on the promissory note for this
property. The promissory note listed 3 years, but it was supposed to be 10 years. The City
attempted to have the daughter sign a new promissory note with a 10-year affordability period,
but she refused to sign the new promissory note. The homeowner sold the house in June 2016.
We addressed this issue in finding 3.

Potential Conflict-of-Interest Relationships Were Not Disclosed
The City’s NSP policies and procedures, checklists, and application did not require City
employees or applicants to disclose potential conflict-of-interest relationships. The 2015 and
2010 NSP policies and procedures did not address actual or potential conflict-of-interest
relationships.

Public Trust Was Damaged
This NSP home sale resulted in a loss of public trust. The public expects its government to use
tax dollars wisely, fairly, and for the intended purpose.

Recommendations
We recommend that the Director of HUD’s Kansas City, KS, Office of Community Planning and
Development work with the State of Kansas to require the City to
       2A.     Develop and implement detailed NSP policies and procedures, checklists, and
               applications that require City employees or applicants to disclose potential
               conflict-of-interest relationships.
       2B.     Receive conflict-of-interest training that addresses Federal regulations.
       2C.     Receive monitoring by the appropriate grantee to ensure that it establishes and
               implements detailed NSP policies and procedures, checklists, and applications
               that require City employees or applicants to disclose potential conflict-of-interest
               relationships.




                                                 8
Finding 3: The City Forgave Its NSP Promissory Notes Much
Sooner Than Required
The City forgave its NSP promissory notes much sooner than required. This condition occurred
because the City did not have a system for obtaining current guidance from HUD. As a result, it
could not recapture the $91,650 in financial assistance provided to two NSP homeowners.

The City Forgave Its NSP Promissory Notes Much Sooner Than Required
According to the NSP Policy Alert, Guidance on NSP-Supported Homeownership:
Affordability, Financial Structure, and Program Income, dated March 3, 2009, when an NSP
applicant qualifies for an NSP home, the NSP grantee reviews the applicant’s income to
determine an affordable mortgage payment for the home. In many cases, a subsidy in the form
of a reduced sales price or a second mortgage at favorable terms may be required to make the
transaction initially affordable for the family.

The amount of subsidy to make the house initially affordable becomes the basis for determining
continued affordability. Based on HOME or stricter standards, the house must remain affordable
for 5, 10, 15, or more years. When the family sells the house, the NSP grantee must determine
whether the period of continued affordability has been completed. If the family meets the
affordability terms, it owes no money and may sell the house free of conditions. If the family
does not meet the affordability terms, the NSP grantee may recapture the funds. The following
table lists the affordability period for owner-occupied homes.

                        Home-ownership                 Minimum period of
                   assistance amount per unit         affordability in years
                         Under $15,000                          5
                        $15,000-$40,000                        10
                        More than $40,000                      15

The City sold three NSP homes, and each home initially had a promissory note listing a 3-year
affordability period. One homeowner had a $15,000 promissory note, one had a $39,500
promissory note (see finding 2), and one had a $52,150 promissory note. The promissory notes
should have included affordability restrictions for 10 years, 10 years, and 15 years, respectively.
In 2011, the City was notified that it was using the wrong affordability period. The City tried to
renegotiate the promissory notes and was able to get one homeowner to change the $15,000
promissory note to the correct 10-year period. The other two homeowners refused to sign a new
promissory note.

The City’s promissory note stated that if the borrower sold the property or transferred title during
the 3-year affordability period, the City would be entitled to recapture the entire loan amount at
zero percent interest. If a property went into foreclosure, the City was entitled to recapture the
entire loan amount from net proceeds. The net proceeds were the sales price minus repayments
on any primary or first mortgage loan and any closing costs. If the net proceeds were insufficient
to repay the investment due, the City would only recapture its investment amount up to the



                                                 9
amount of the available net proceeds. If there were no net proceeds, the City would not receive
any repayment.

In this case, the homeowner with the $39,500 promissory note sold the home in June 2016. The
home with the $52,150 promissory note went into foreclosure proceedings in January 2016 but
was still active as of July 28, 2016.

The City Did Not Have a System for Obtaining Current HUD Guidance
The City received its guidance from the State of Kansas’s NSP frequently asked questions Web
site and NSP training slide. One of the frequently asked questions stated, “…soft loans for
prospective homebuyers should be for not less than three years and will be forgiven on a pro-
monthly basis.” The Web site still showed this information as of August 2016. In addition, the
City referenced an NSP training slide that listed a 3-year recapture period for properties sold to
homeowners. The NSP Policy Alert, Guidance on NSP-Supported Homeownership:
Affordability, Financial Structure, and Program Income, dated March 3, 2009, listed the correct
affordability period; however, the City could not find the NSP Policy Alert in its NSP notebook
with applicable policies and procedures. The City did not have a system for obtaining current
guidance from HUD.

The City Could Not Recapture the $91,650 in Financial Assistance
By listing the incorrect affordability period on the promissory note, the City could not recapture
$39,500 when one NSP homeowner sold her home after the incorrect 3-year affordability period
but within the correct 10-year affordability period. In addition, the City would not be able to
recapture any of the $52,150 when the bank completed foreclosure proceedings on another NSP
home after the incorrect 3-year affordability period but within the correct 15-year affordability
period. As a result, the City could not recapture the $91,650 in financial assistance provided to
the NSP homeowners.

Recommendations
We recommend that the Director of HUD’s Kansas City, KS, Office of Community Planning and
Development work with the State of Kansas to require the City to
       3A.     Reimburse its NSP $39,500 from non-Federal funds for the promissory note that
               it satisfied when the homeowner sold her home before completing the correct
               affordability period.
       3B.     Once the foreclosure proceedings are complete, reimburse its NSP from non-
               Federal funds up to $52,150 from the net proceeds for the promissory note that it
               satisfied for the home that went to claim after our review.
       3C.     Develop a system to ensure that it is informed about NSP policy alerts and other
               related guidance.
       3D.     Receive monitoring by the appropriate grantee to ensure that it develops a system
               to receive NSP policy alerts and other related guidance.




                                                 10
Finding 4: The City Did Not Select Applicants Appropriately and
Ensure That Its NSP Waiting List Was Accurate and Updated
The City did not select applicants appropriately and ensure that its NSP waiting list was accurate
and updated. This deficiency occurred because the City’s NSP policies and procedures were
incomplete and its housing management staff did not always provide the necessary oversight. As
a result, there was an appearance of preferential treatment.

The City Did Not Select Applicants Appropriately and Its Waiting List Was Not Accurate
The City’s housing rehabilitation staff managed eight NSP rental properties. The City used its
NSP waiting list to track applicants wishing to rent the properties. Although the City does have a
current NSP waiting list, the City created one version of its NSP waiting list on February 23,
2010, and last modified it on April 16, 2010. According to the City’s NSP application policies
and procedures created on February 19, 2010, “…placement on the waiting list will not take
place until a household has met all of the eligibility requirements… Households will be placed
on the waiting list according to the date their file was determined to [be] complete and approved
by the Housing Services Office according to NSP guidelines. If more than one family is
approved on the same date, then they will be placed on the waiting list according to the date and
time they submitted an application.”

The City’s NSP waiting list that was modified on April 16, 2010, contained names of eligible
applicants who had applied before June 2010. Although the NSP waiting list recorded some
applicants as no-shows or ineligible, there was no indication of resolution for some applicants on
the NSP waiting list. When the City initially selected tenants for the eight rental properties, it
approved three applicants to live in the NSP rental properties who were not listed on the waiting
list.

One of these applicants was another City employee’s son. He applied for an NSP home, and the
City declared him an eligible applicant in June 2010. He signed a lease agreement with the City
in July 2010. In addition, there were two applicants without an apparent affiliation with the City
who submitted their applications in September 2010 and were selected to live in the NSP rental
properties without their names appearing on the NSP waiting list.

We interviewed the last applicant listed on the NSP waiting list, with an application dated April
15, 2010. The applicant’s file included a letter, dated June 4, 2010, stating that the applicant was
eligible and two homes were available. However, the applicant stated that he did not receive
notification of his family’s eligibility. He stated that his family would have accepted the home.

NSP Policies and Procedures Were Incomplete and There Was a Lack of Management
Oversight
The City’s NSP policies and procedures were incomplete, and housing management staff did not
always provide the necessary oversight. The City’s NSP policies and procedures did not
adequately address the NSP waiting list procedures, and the City did not have an updated NSP
waiting list at the time the preferential treatment took place.




                                                  11
Further, the NSP applicant files did not always indicate proper followup. Management
involvement may have prevented these problems. Although the housing services manager stated
that she was heavily involved in the foreclosed-on home acquisitions, she did not handle the
program’s daily involvement.

There Was an Appearance of Preferential Treatment
The City’s selection of the three applicants not listed on the NSP waiting list was not
appropriate. As a result, there was an appearance of preferential treatment.

Recommendations
We recommend that the Director of HUD’s Kansas City, KS, Office of Community Planning and
Development work with the County to require the City to

       4A.     Develop and implement detailed waiting list procedures to prevent future waiting
               list difficulties.

       4B.     Receive monitoring by the appropriate grantee to ensure that its waiting list
               policies and procedures are implemented and the NSP waiting list is accurate and
               updated.




                                                 12
Finding 5: The City Did Not Fully Use Its HOME Funds
The City did not fully use its HOME funds. This deficiency occurred because the City did not
always direct adequate resources to its HOME program. As a result, it did not offer more than
$420,900 in grant funding to homeowners for assistance with housing restoration needs.

The City Did Not Fully Use Its HOME Funds
For program years 2011 through 2015, the City received $554,927 in HOME allocations from
the County and $313,583 in program income from homeowners repaying their loans, totaling
$868,510 in available funds. Yet, the City distributed only $331,738 (38 percent) of that amount
to eligible homeowners.

The City and the County have a memorandum of understanding that identifies the method for
determining the City’s HOME allocation. As the grantee, the County has the responsibility to
monitor the City’s administration and execution of the HOME program. The memorandum
further states that the City must remain in compliance with the County’s HOME policies and
procedures, with the exception of a repayment provision in the City’s policy.

Since the beginning of the HOME program and continuing until 2014, the City provided interest-
free loans to eligible HOME applicants and required 100 percent of the loan be repaid when the
title transferred or the homeowner was no longer the owner and occupant of the home. Loan
repayments are referred to as program income and are required to be redistributed before each
year’s County allocation is drawn. As of July 2016, the City had more than $1.9 million in
outstanding HOME loans that would become program income at some time in the future.

In 2014, the City changed its HOME repayment requirement. Instead of requiring 100 percent
repayment, HOME loan recipients are now required to repay only 50 percent of the loan if they
remain in the home for 7 years. In contrast, the County forgives the loan at a rate of 10 percent
each year. The County forgives the entire amount of the loan if the recipient remains in the
home for 10 years.

In 2011 and again in 2013, 2014, and 2015, the County reported to the City its concerns that the
City was not using its available HOME funds for loan assistance. County staff recommended
that the City consider increasing outreach efforts, changing loan payback requirements to
broaden the program’s appeal, and monitoring funding levels quarterly to ensure timely spending
and compliance.

The City Did Not Always Direct Adequate Resources to Its HOME Program
City officials said they had advertised the HOME program to residents via the local City
television channel, the City’s newsletter, and targeted mailings over the past 6 years to increase
outreach efforts. Officials also noted that the City accomplished the revision to the repayment
requirements in 2014 to broaden the program’s appeal to future applicants.

City officials said they completed seven HOME loan projects in 2011, five in 2012, three in
2013, one in 2014, and two in 2015. They recognized that the program’s recent performance had



                                                 13
not been successful and cited the following reasons as obstacles: program income (criteria and
amount), employee turnover, and poor employee performance. The City did not provide
sufficient evidence of a plan to overcome the obstacles to ensure successful program execution in
the future. The HOME program waiting list was an indicator of performance as it identified 12
applicants, the oldest of which dated back to June 11, 2015. HOME funds were available for
these applicants, but the applicants remained on the waiting list.

The City Did Not Offer More Than $420,900 to City Homeowners for Assistance
HOME funds carry a 2-year commitment deadline. In 2011, the County amended its
memorandum of understanding with the City to include a provision that if the City did not
commit its HOME funds within 18 months, the County would recapture the HOME funding and
use it during the remaining 6-month period in other areas within the County. This action does
not violate HUD rules as HUD allows the proper recapture of HOME funds. However, the City
did not receive maximum benefit from its HOME funds since they were being returned to the
County and its citizens could no longer use these funds.

The table below shows the City’s HOME grant funds, HOME program income, total available,
amount spent, and amount the County recaptured by the year noted.


     Year*             2011            2012           2013             2014        2015        Total

    HOME
                     $129,735        $103,484        $104,636        $111,357      $105,715    $554,927
   allocation
    HOME
    program             23,127          78,417        120,439           56,361       35,239     313,583
    income
      Total
                       152,862         181,901        225,075          167,718      140,954     868,510
   available
     Spent             106,283          78,417          69,042          52,911       25,085     331,738
 Recaptured             46,579         103,484        156,033          114,807            **    420,903
* The year reflects the City’s activity during the 18-month program fund period.
** The 2015 HOME allocation commitment period expires on January 30, 2017.

The audit identified $420,903 in HOME funds the County recaptured. The County used these
funds to fund other HOME projects outside the City’s boundaries.

Recommendations
This finding contains no HUD violations; therefore, it does not include recommendations to
HUD. However, the finding does contain County recommendations since the City should be
using its HOME funds to their maximum benefit.




                                                         14
Johnson County Audit Services recommends that the County

      5A.    Work with the City to pursue the efficiencies to be gained by consolidating the
             two entities’ HOME programs.

Johnson County Audit Services recommends that the City

      5B.    Amend previous HOME agreements to a 10-year affordability period with 10
             percent loan forgiveness each year to be aligned with Johnson County’s HOME
             program affordability period and release all loans that have already met the 10-
             year affordability period.




                                              15
Scope and Methodology
Our audit period generally covered January 1, 2011, through December 31, 2015. However, we
expanded our review through July 2016 to review the NSP waiting list. We conducted fieldwork
at the City’s Housing Services offices located at 200 West Santa Fe Street, Olathe, KS. We also
visited the County offices located in Lenexa, KS, and Olathe, KS.

To accomplish our audit objectives, we

      Interviewed the hotline complainant and reviewed the complainant’s documents;
      Interviewed management and staff at the City, County, and HUD’s Office of Community
       Planning and Development (CPD) in Kansas City, KS;
      Interviewed NSP staff in the State of Kansas and CPD staff in HUD headquarters;
      Reviewed the applicable public laws, CFR regulations, Federal Register notices, HUD
       guidebook, CPD notices, NSP policy alerts, HOME frequently asked questions, and
       CDBG memorandum;
      Reviewed the City’s employee handbook and other policies and procedures, files, payroll
       records, and timesheets;
      Reviewed the memorandum of understandings and subrecipient agreements the County
       executed with the City;
      Reviewed HUD’s monitoring reviews of the County and the County’s monitoring
       reviews of the City; and
      Reviewed the City’s audited financial statements.

The City received $555,458 in voucher drawdowns for its CDBG housing rehabilitation
administration grants for grant years 2011-2015. The vouchers list the amount of funds obtained
for administrative expenses from each CDBG grant. We selected the City’s smallest voucher
amount drawn down from each grant year for review because it met our audit objectives while
using fewer audit resources than reviewing larger drawdowns. Our sample consisted of five
CDBG vouchers totaling $44,989, or 8.1 percent of the total voucher drawdowns. Our results
apply only to the items reviewed and cannot be projected to the portion of the population that we
did not test.

We primarily used hardcopy data from the City’s files to meet our audit objectives. In addition,
we used HUD’s Integrated Disbursement and Information System (IDIS). As a nationwide
database, IDIS provides HUD with current information regarding the program activities
underway across the Nation, including funding data. HUD uses this information to report to
Congress and to monitor grantees. IDIS is the drawdown and reporting system for CDBG and
HOME, among others. We determined that the IDIS data were sufficiently reliable to meet our
objectives.




                                                16
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.




                                                17
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:

   Controls over the City’s allocation of administrative costs to its housing rehabilitation
    programs.
   Controls over the City’s NSP policies and procedures, applications, checklists, and waiting
    lists.
   Controls over receiving guidance.
   Controls over the use of HOME funds.

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 City did not have policies and procedures requiring staff to track time spent on activities
    (finding 1).
   The City did not have detailed NSP policies and procedures, applications, and checklists that
    required City employees or applicants to disclose potential conflict-of-interest relationships
    (finding 2).
   The City did not have a system for obtaining current HUD guidance (finding 3).



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   The City did not have detailed NSP waiting list policies and procedures and lacked proper
    management oversight (finding 4).
   The City did not direct adequate resources to its HOME program (finding 5).

Separate Communication of Minor Deficiencies
We reported minor deficiencies to the auditee in a separate management memorandum, dated
September 28, 2016.




                                                19
Appendixes

Appendix A


                          Schedule of Questioned Costs
                  Recommendation
                                   Ineligible 1/ Unsupported 2/
                      number
                          1A                                     $575,855
                          1B                                       38,711
                          3A                  $39,500
                          3B                   52,150

                        Totals                $91,650            $614,566



1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.
2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                              20
Appendix B
             Auditee Comments and Auditor Evaluation



Ref to
Auditor        Auditee Comments
Evaluation




Comment 1




                                21
             Auditee Comments
Ref to
Auditor
Evaluation




Comment 1




Comment 2




Comment 3




                            22
Appendix B



Ref to
Auditor      Auditee Comments
Evaluation




Comment 2




Comment 4




                            23
Ref to       Auditee Comments
Auditor
Evaluation




Comment 5




                            24
Ref to       Auditee Comments
Auditor
Evaluation




Comment 6




                            25
Ref to       Auditee Comments
Auditor
Evaluation
Comment 7

Comment 8




                            26
Ref to       Auditee Comments
Auditor
Evaluation




                            27
Ref to       Auditee Comments
Auditor
Evaluation




                            28
                       Auditor Evaluation of Auditee Comments


Comment 1   We disagree with the City that the allocation was proper and that it properly
            supported $614,566 in salary costs and management fees. The City’s housing
            rehabilitation staff members did not track their time spent among HOME, CDBG,
            and NSP activities. Also, the City’s housing services manager did not document
            her timesheets to track her time spent among her duties with the City’s housing
            rehabilitation programs and as the City’s housing authority executive director. In
            addition, the City improperly charged a 10 percent management fee. The City
            acknowledged these facts. However, Federal regulations at 2 CFR Part 225,
            appendix B, paragraph (8)(h), require employees who work on multiple activities
            or cost objectives to use personnel activity reports or equivalent documentation to
            support their salaries or wages. Federal regulations at 2 CFR 200.430(a)(3)
            require the total compensation for individual employees to be determined and
            supported. Regulations at 2 CFR 200.430 replaced 2 CFR Part 225 in 2014. In
            addition, the NSP Policy Alert, Guidance on NSP Activity Delivery and
            Administrative Costs, dated May 18, 2012, states, “…for staff costs, this includes
            a timecard, timesheet, or other time keeping mechanism that demonstrates the
            time that was spent on the eligible NSP activity.” There were seven different
            housing rehabilitation staff members that had a total of $614,566 in salary and
            benefit costs from January 1, 2011 through September 27, 2015 and not just two
            employees as the City indicated.

Comment 2   The City acknowleged the finding and provided the steps it has taken to prevent
            further occurrence of the violations. All recommendations are currently open.
            HUD needs to coordinate with the appropriate grantee and verify the
            recommendations are implemented.

Comment 3   We disagree with the City. The sale of an NSP home to a City employee’s
            daughter violated Federal and local conflict-of-interest policies.

Comment 4   We disagree with the City. It forgave its NSP promissory notes much sooner than
            required when it sold three NSP homes with initial promissory notes listing a 3-
            year affordability period. However, the initial 3-year affordability period was not
            correct. Instead, the affordability period is based on the amount of assistance.
            One homeowner had a $15,000 promissory note, one had a $39,500 promissory
            note, and one had a $52,150 promissory note. The promissory notes should have
            included affordability restrictions for 10 years, 10 years, and 15 years,
            respectively. The City was only able to sucessfully renegotiate the $15,000
            promissory note to the correct 10-year period. In addition, the guidance that the
            soft second loan should be for not less than three years was also incorrect.

Comment 5   We acknowledge the City relied on guidance which lead to the City’s
            misunderstanding; however, we disagree with the City’s assertion that it had a



                                              29
            system for obtaining HUD guidance. If a proper system had been in place, the
            City would have known about the proper affordability period in the NSP Policy
            Alert, Guidance on NSP-Supported Homeonwership: Affordability, Financial
            Structure, and Program Income, dated March 3, 2009. During our audit, the City
            acknowledged it could not find this NSP Policy Alert in its NSP notebook with
            applicable policies and procedures.

Comment 6   We acknowledge HUD OIG reviewed the State of Kansas NSP program (report
            2010-KC-1006 issued August 20, 2010). We disagree with the City’s assertion
            that HUD OIG should have identified the affordability period as a finding, and the
            City would have then made corrections in its NSP promissory notes. The NSP
            affordability period was outside of the scope of the aforementioned HUD OIG
            audit.

Comment 7   We disagree with the City’s assertion that the applicants were selected
            appropriately and the NSP waiting list was accurate and updated. When the City
            initially selected tenants for eight rental properties, it approved three applicants to
            live in the NSP rental properties who were not listed on the waiting list while
            appearing to skip over other applicants on the waiting list with no indication of
            resolution for those applicants.

Comment 8   We disagree with the City’s assertion that it provided the necessary oversight for
            the NSP waiting list. During our review, we found management oversight was
            lacking. With proper management oversight, all applicants on the NSP waiting
            list would have experienced some type of resolution. Also, an interview with an
            NSP applicant determined he did not receive notification of his family’s
            eligibility. We also disagree with the City’s assertion that a waiting list was not
            necessary. The City appeared to skipped over other applicants on the waiting list
            with no indication of resolution for those applicants.




                                               30