City and County of Honolulu, Honolulu, HI Community Development Block Grant Program Office of Audit, Region 9 Audit Report Number: 2016-LA-1009 Los Angeles, CA August 26, 2016 To: Mark A. Chandler, Community Planning and Development Director, 9CD //SIGNED// From: Tanya E. Schulze, Regional Inspector General for Audit, 9DGA Subject: The City and County of Honolulu, HI, Did Not Administer Its Community Development Block Grant 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 City and County of Honolulu’s Community Development Block Grant program. HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on recommended corrective actions. For each recommendation without a management decision, please respond and provide status reports in accordance with the HUD Handbook. Please furnish us copies of any correspondence or directives issued because of the audit. The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its publicly available reports on the OIG Web site. Accordingly, this report will be posted at http://www.hudoig.gov. If you have any questions or comments about this report, please do not hesitate to call me at 213-534-2471. Audit Report Number: 2016-LA-1009 Date: August 26, 2016 The City and County of Honolulu, HI, Did Not Administer Its Community Development Block Grant in Accordance With Requirements Highlights What We Audited and Why We audited the City and County of Honolulu’s (City) Community Development Block Grant (CDBG) program. We conducted the audit because the City was the largest Pacific island recipient of CDBG funds, the U.S. Department of Housing and Urban Development (HUD) had identified problems with the City’s CDBG program, and the Office of Inspector General had never audited the City. Our objective was to determine whether the City administered its CDBG program in accordance with HUD requirements. What We Found The City did not comply with HUD requirements related to cost eligibility and procurement and its own award requirements. Specifically, it allowed the unnecessary acquisition and did not support the cost reasonableness of the Hibiscus Hill Apartments, allowed the unnecessary acquisition of the Kaneohe Elderly Apartments, allowed a subrecipient to award a contract to one of the property owner’s affiliates, restricted competitive procurement, did not follow its award requirements, and did not review program income adequately. This noncompliance occurred because the City did not have an effective grant administration structure in place. As a result, it incurred grant costs of $15.9 million that were unsupported. What We Recommend We recommend that HUD require the City to (1) support that the Hibiscus Hill acquisition was necessary and reasonable or repay its CDBG program line of credit $10 million from non- Federal funds, (2) support that the Kaneohe Elderly Apartments acquisition was necessary or repay its CDBG program line of credit $2.9 million from non-Federal funds, (3) support that the costs for a contract awarded to one of the property owner’s affiliates was reasonable and the integrity of the procurement was not compromised by the relationship or repay its CDBG program line of credit $1.45 million from non-Federal funds, (4) support that the noncompetitively procured fire apparatus costs were reasonable and that potential bidders were not harmed by the City’s arbitrary action or repay its CDBG line of credit $1.6 million from non- Federal funds, (5) review all current CDBG-funded projects for unreported program income and report any to HUD, and (6) implement adequate controls over its program, including consolidating the grant program into one department, and develop citywide written policies and procedures. Table of Contents Background and Objective......................................................................................3 Results of Audit ........................................................................................................5 Finding 1: The City Did Not Administer Its Community Development Block Grant in Accordance With Requirements ................................................................................. 5 Scope and Methodology .........................................................................................13 Internal Controls ....................................................................................................15 Appendixes ..............................................................................................................16 A. Schedule of Questioned Costs .................................................................................. 16 B. Auditee Comments and OIG’s Evaluation ............................................................. 17 C. Criteria ....................................................................................................................... 80 2 Background and Objective The City and County of Honolulu (City) is a consolidated city-county government located in the city of Honolulu on the island of Oahu, HI. Incorporated in 1907 and governed by the provisions of its charter and applicable State law, the City includes the island of Oahu and all other islands in the State of Hawaii that are not included in another Hawaiian county. The Community Development Block Grant (CDBG) program provides communities with resources to address a wide range of unique community development needs. Beginning in 1974, the CDBG program is one of the U.S. Department of Housing and Urban Development’s (HUD) longest continuously running programs. The CDBG program provides annual grants on a formula basis to 1,209 general units of local government and States. The CDBG entitlement program allocates annual grants to larger cities and urban counties to develop viable communities by providing decent housing, a suitable living environment, and opportunities to expand economic opportunities, principally for low- and moderate-income persons. The City receives an annual CDBG grant. It received the following grant awards during the audit period: Program year Grant Amount 2012 (7/1/12 – 6/30/13) B-12-MC-15-0001 $7,530,357 2013 (7/1/13 – 6/30/14) B-13-MC-15-0001 7,817,498 2014 (7/1/14 – 6/30/15) B-14-MC-15-0001 7,593,075 Total $22,940,930 Two City departments share the responsibility of overseeing administrative activities of the CDBG program. The Community Based Development Division of the Department of Community Services is primarily responsible for project implementation, while the Federal Grants Unit of the Department of Budget and Fiscal Services is responsible for planning, reporting, and post development monitoring. HUD considers the Department of Budget and Fiscal Services to be the “grantee” and the primary contact concerning CDBG grant matters. For several years, the City has struggled to pass the CDBG timeliness test. The timeliness test requires that 60 days before the end of the program year, the amount of entitlement grant funds available to the recipient but undisbursed by the U.S. Treasury is not more than 1.5 times the entitlement grant for its current program year. 1 Failure to pass the test for 2 consecutive years may result in the loss of future funding. For several years, the City has had a pattern of passing the 1 24 CFR (Code of Federal Regulations) 570.902 3 timeliness test 1 year and not passing it the next year. Therefore, HUD and the City recently began meeting monthly to monitor the program progress, and HUD identified the City as a high-risk grantee that needs to improve program compliance. In June 2013, HUD engaged the National Association for Latino Community Asset Builders to provide direct technical assistance to the City in connection with its administration of the CDBG program. The Association performed a high-level organizational assessment of the City’s CDBG program administration, focusing primarily on the organization, staffing, and management structure in place. It concluded that “the problems the City continues to face in administering the CDBG program are hampered by the organizational structure and management practices utilized by the City in CDBG program administration.” In July 2014, citing the organizational structure, the Association concluded that roles and responsibilities were unclear, policies and procedures were undocumented, human capital was not deployed in the most efficient manner, and serious issues of communication existed and had impacted staff morale and performance. The Association recommended that the City consider merging the functions of the Department of Community Services and Department of Budget and Fiscal Services in CDBG program administration and create a more efficient, accountable organizational structure for the management of the CDBG program. However, the City had not implemented the recommendation. Our objective was to determine whether the City administered its CDBG program in accordance with HUD requirements. 4 Results of Audit Finding 1: The City Did Not Administer Its Community Development Block Grant in Accordance With Requirements The City did not comply with HUD requirements related to cost eligibility and procurement, and its own award requirements. Specifically, it did not support that the acquisition was necessary and did not support the cost reasonableness of the Hibiscus Hill Apartments, did not support that the acquisition of the Kaneohe Elderly Apartments was necessary, allowed a subrecipient to contract with one of the property owner’s affiliates, restricted competitive procurement, did not follow its award requirements, and did not review program income adequately. This noncompliance occurred because the City did not have an effective grant administration structure in place. As a result, it incurred grant costs of $15.9 million that were unsupported. The Hibiscus Hill Apartments Acquisition Costs Were Unsupported The acquisition costs of $10 million for the Hibiscus Hill Apartments appeared unnecessary and unreasonable. In accordance with 2 CFR (Code of Federal Regulations) 200.403(a), the City was required to ensure that all costs charged to the grant were necessary and reasonable for the performance of the award. Regulations at 2 CFR 200.404 further define a cost as reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost. In 2014, the year of the acquisition, the City was at risk of failing the CDBG timeliness test for the second year in a row. Therefore, if it failed the April 2014 test, it might have lost future grant funds. To ensure that it did not fail the next timeliness test, in December 2013, the City amended its consolidated plan to allow for an “alternative selection process” that would bypass its more structured, typical CDBG award process for certain projects such as capital improvement projects or acquisition projects. The new process had few requirements and was subjective. Then, the City conducted a brief request for proposals process in which it solicited a selection of entities to submit proposals for an acquisition project that could be completed within the time allowed. An acquisition project would allow the City to spend funds quickly to pass the timeliness test. Vitus Group, Inc., and EAH, Inc., submitted a proposal for the Hibiscus Hill Apartments in January 2014. The City awarded $10 million for the Hibiscus Hill Apartments acquisition. To provide the $10 million for the acquisition, the City notified previously awarded recipients that it would reprogram their unspent funds. Although some projects were not ready to spend the funds immediately, one was counting on the award and had to delay services or improvements. 5 The $10 million Hibiscus Hill Apartments awards consisted of an $8.5 million grant and a $1.5 million loan. With the City’s and HUD’s approval, the subrecipient loaned the CDBG funds to a newly created entity, A’ohe Pukana La Housing, LLC, which became the property’s owner. It used the award to partially fund the $21 million acquisition. Although the contract with the subrecipient stated that the project’s purpose was to acquire to rehabilitate, the rehabilitation budget was minor. The rehabilitation plan called for a budget of $1 million to rehabilitate all 80 units. The budget included the replacement of roofs, interior cabinetry, and flooring. The $1 million rehabilitation budget was small compared to the property purchase price of $21 million. Vitus was to fund the rehabilitation. As of April 2016, almost 2 years after the purchase, the owner had rehabilitated only 8 of the 80 units at a cost of $146,616, much less than the budgeted $1 million. The relatively low rehabilitation budget and the lack of rehabilitation implementation did not support the stated purpose of the award. Further, although the project proposal cited the potential loss of affordable housing, the seller did not plan to change the complex, convert it to condominiums, or sell it. Vitus approached the seller to purchase the complex. Before that, the complex was not actively marketed for sale, and the seller had not planned to sell it. Additionally, although the proposal stated, “Over the last 3 years the rents at the Project increased 40%,” the subrecipient could not support the claim. The appraiser found that before the sale, complex rents were below HUD’s maximum income threshold and were at the lower end of the local market rental range. The complex previously served low- to moderate-income tenants and was not actively marketed. Further, rents had increased, in some cases significantly, since the purchase. Therefore, the acquisition apparently did not serve a meaningful purpose and the City did not support that it was necessary. City management told us that the reason the City funded the Hibiscus Hill project was to pass the timeliness test. Because of the vague “alternative selection process” requirements, we could not determine the evaluation criteria used in the Hibiscus Hill Apartments award. In addition, the City allowed the purchase of the Hibiscus Hill Apartments for more than its market value. In May 2014, CDBG funds were combined with other debt to acquire the property for $21 million. The purchase price exceeded the appraised or market value by more than $4 million. (See the table below.) The cost of the property exceeded the market value and was not reasonable. The City determined that the subrecipient’s portion of the acquisition was 45 percent 2 and, therefore, its related share of the excess purchase price was $1.9 million. Hibiscus Hill Apartments acquisition Purchase price $21,000,000 Appraised amount 16,730,000 Excess purchase price 4,270,000 Subrecipient portion 45% 1,940,909 2 $10,000,000 investment/$22,000,000 ($21,000,000 cost plus $1,000,000 rehabilitation) = 45 % 6 To account for the excess purchase price, the subrecipient agreed to increase the number of affordable housing units at the property by nine. Thus, of the 80 units, 50 would be affordable. However, as of July 2015, the City determined that the subrecipient had not met the 50 low- and moderate-income rental units required by the agreement. Since the subrecipient did not fulfill the additional units, HUD did not receive an alternative value for the excess cost. Because the City did not support that the acquisition served its stated purpose or was necessary, the excess costs were reasonable, or it received an alternative value for the excess costs, HUD did not have adequate assurance that the City used grant funds in accordance with program requirements. The City appeared to have wastefully spent the funds on an unnecessary acquisition. The unnecessary associated acquisition costs of $10 million, including more than $1.9 million in unreasonable costs, were unsupported. Kaneohe Elderly Apartments Acquisition Costs Were Unsupported The acquisition costs of $2.9 million for the Kaneohe Elderly Apartments appeared unnecessary. In accordance with 2 CFR 200.403(a), the City was required to ensure that all costs charged to the grant were necessary for the performance of the award. The Kaneohe Elderly Apartments were acquired in 2015, in part using $2.9 million CDBG funds. The proposal’s project summary included, “The existing HAP [housing assistance payments] contracts expire in 2021 (6 years) and the affordability restrictions required under the Bond/LIHTC [low-income housing tax credit] program expire in 2028 (13 years). The property is currently being marketed for sale and, given the upcoming expiration of the HAP contract and affordability restrictions, the property is at significant risk of being converted to market rate housing in just 13 years. CDBG funds would secure the preservation of this valuable housing resource.” However, a potential conversion to market rate housing in 13 years was not an immediate risk of losing affordable housing. The City did not document whether the project was necessary. Since the City receives CDBG funds annually, it is reasonable to believe that future funding would be available nearer the dates when the affordability restrictions expired. Some City staff members questioned the appropriateness of the project if there was no immediate need to acquire it. However, the City proceeded with the acquisition because it would mean that the City would pass the timeliness test for a second consecutive year. Because the City did not support that the acquisition was necessary, HUD did not have adequate assurance that it used grant funds in accordance with program requirements. A Subrecipient Awarded a Contract to One of the Property Owner’s Affiliates A subrecipient awarded a construction contract to one of the property owner’s affiliated entity. The City approved the contract award. The subrecipient may not have complied with HUD requirements at 24 CFR 84.42 and 24 CFR 84.43 (appendix C) because it awarded a $3.4 million construction contract to Hunt Building Company, Ltd. This entity may have had an organizational conflict of interest with HCP-ILP, LLC, an ownership entity. The two companies were affiliated through Hunt Companies, Inc. CDBG funded $1.45 million of the contract. 7 The City did not have adequate policies and procedures in place to ensure that a potential organizational conflict of interest did not affect the integrity of the procurement process. If an affiliated entity bidding for a contract had access to inside information about the project or bidding process, the procurement may have been compromised. Because of the contractor’s affiliation with an owner, a real or apparent conflict of interest may have existed. HUD did not have adequate assurance that the City used grant funds in accordance with program requirements. Therefore, we determined that the $1.45 million was unsupported. The City Restricted Competitive Procurement The City arbitrarily amended two requests for bids. Regulations at 24 CFR 85.36 required that the City conduct all procurement transactions in a manner to provide open and free competition. These regulations further identified arbitrary actions in the procurement process to be restrictive of competition. The City did not comply with these requirements because it arbitrarily amended the requests for bids to eliminate further evaluation of additions to the brand or trade name section of the scope of work to allow the City to obligate Federal funds by a certain date. On the first request, the City solicited bids for five “Triple Combination Pumper Engine Apparatus with Compressed Air Foam Systems,” or fire trucks. The City paid for one with CDBG funds. On the second request, the City solicited bids for a “Tiller Apparatus with Tractor-Drawn Heavy Duty Aerial Ladder” for the Honolulu Fire Department. The procurement process for both solicitations generally followed the same dates, involved the same bidders, and involved the same potential bidder. The requests for bids issued on February 21, 2013, allowed submission of requests for clarification or substitution until March 15, 2013, and allowed the issuance of addenda through March 18, 2013. Later, the City changed the last addenda issuance date to March 22, 2013. For both solicitations, Fire Truck Headquarters, a potential bidder, submitted a request for substitution on March 15, 2013, asking to add the Smeal Sirius I and II cab and chassis to the list of preapproved cabs. On March 28, 2013, 6 days after the last date to issue addenda, the City issued addendum five, changing the last date to issue addenda to April 2, 2013. On April 2, 2013, the City issued addendum six to the brand or trade name section of the scope of work. Its sole change to the section was, “Due to the City is required to obligate Federal funds by April 30, 2013, the City is unable to complete any further evaluations and pre-qualify new manufacturers. Prospective bidders and manufacturers may submit complete specifications for evaluation by the City for future solicitations,” and denied Fire Truck Headquarters’ request. In the addendum, the City cited that the Smeal products did not meet certain specifications. Through addendum six, the City excluded the Smeal products offered by Fire Truck Headquarters as well as any other new manufacturers from further evaluation. In the end, Fire Truck Headquarters did not submit bids for either solicitation. Although a potential bidder, Fire Truck Headquarters, submitted a timely request for a change to the materials, the City amended the requests for bids to eliminate further evaluations and prequalification of new manufacturers. It arbitrarily amended the requests after the allowable date so that it could obligate funds before a certain date. The City opened the bids on April 8, 2013, but did not award the contracts to the winning bidder, Kovatch Mobile Equipment Corp., until May 13, 2013, and May 17, 2013, and did not execute them until June 2013. Several 8 months after it opened the bids, the City issued the notices to proceed. Since it did not issue the notices until significantly later and it specifically cited the need to obligate funds by April 30, 2013, it appeared that the City’s motivation was to speed the award process. By doing so, it did not provide full and open competition as required. Significant fire truck procurement dates Date Description 2/21/13 The City issued the request for bids. 3/15/13 Requests for clarification or substitution were allowed through this date. 3/15/13 Fire Truck Headquarters submitted a request for substitution. 3/21/13 The City issued addendum three, changing the scope of work and 3/22/13 specifications; some based on requests related to other brands 3/22/13 Last addenda issuance date 3/28/13 The City issued addendum five, changing the last date to issue addenda to 4/2/13. 4/2/13 The City issued addendum six to the brand or trade name section of the scope of work, saying, “Due to the City is required to obligate Federal funds by April 30, 2013, the City is unable to complete any further evaluations and pre-qualify new manufacturers. Prospective bidders and manufacturers may submit complete specifications for evaluation by the City for future solicitations,” and denied Fire Truck Headquarters’ request. 4/8/13 The City opened the bids. 4/30/13 The City claimed it needed to obligate Federal funds by this date. 5/13/13 and Contracts were awarded to the winning bidder, Kovatch Mobile 5/17/13 Equipment Corp. 6/13 Contracts were executed. 1/14 Notices to proceed were issued. The City used CDBG funds of $1.6 million for the inappropriately procured items. Because the City’s arbitrary actions restricted competition, HUD has no assurance that the costs complied with HUD requirements. The City Did Not Follow Its Award Requirements The City did not follow its award requirements when it made the Kaneohe Elderly Apartments award. The request for proposals required that submissions be stamped as received by the Purchasing Department on or before a given date and time. Although the request for proposals was clear about the requirements, the Kaneohe Elderly Apartments proposal received did not have such a stamp and instead received a stamp from the Community Services Division. The submission guidelines stated that applications that were not received by the submission deadline, as evidenced by a valid Division of Purchasing date and time stamp, would not be considered for funding under the request for proposals. It further explained that it was the applicant’s responsibility to receive such a stamp. 9 The day after the submissions were due, the Department of Community Services requested that the Purchasing Department accept the proposal for consideration. In addition to not having the appropriate stamp, the proposal did not include all required documentation. However, although the Federal Grants Unit questioned the proposal’s eligibility, the City awarded the requestor $2.9 million for the proposal. In addition, the proposal requested only $1 million. Another proposal, submitted by the same entity, requested $1.9 million for a different project. City staff told us that the City decided to fund only one project and awarded the project $2.9 million, nearly triple the amount requested, due to concerns of meeting timeliness requirements in closing two acquisitions. The project’s budgeted cost did not change because of the increased CDBG funding; rather, the project borrowed less than it originally anticipated. The City was motivated to award funds to meet the upcoming timeliness deadline. Because the City did not follow its award process, HUD did not have adequate assurance that the City awarded grant funds in accordance with program requirements. Program Income Was Not Reviewed Adequately The City did not review program income adequately. Regulations at 24 CFR 570.504 required that program income be recorded as part of the financial transactions of the grant program. Regulations at 24 CFR 85.20 required that the financial results of financially assisted activities be accurate, current, and complete. According to City employees, the City did not review project activities for program income until the project was closed in HUD’s records. In some cases, the projects would not be closed in HUD’s records until the affordability restrictions of 10 years expired. Therefore, the program income, if applicable, would not have been reported currently. We reviewed an open project for unreported program income and found that for the 2 years we reviewed, there was none to report. City employees indicated that because program income was not reviewed, it may have been underreported. Because the City did not review active projects for program income, HUD had no assurance that the City reported all program income. We did not determine whether the City reported all program income. Any unreported program income would have provided the City’s CDBG program with additional funding that must be used before making additional cash withdrawals from the U.S. Treasury. The City Lacked an Effective Grant Administration Structure The problems discussed above occurred because the City did not have an effective grant administration structure in place. The City’s decentralized grant administration process created dysfunction, inefficiency, and wasted grant funds. The dysfunction and inefficiency caused the City to be repeatedly at risk of failing the HUD timeliness test. The City made decisions based upon its need to spend grant funds, which resulted in noncompliance with requirements and wasting grant funds. The two departments involved with the CDBG program did not function well with each other, and the additional layer of the second department slowed grant administration. For example, some aspects of project implementation, such as environmental compliance, had to be reviewed by both departments and frequently required excessive time. This process delayed 10 implementation, which then delayed cost reimbursements. Therefore, expenditures would not be as substantial as planned, leading to timeliness issues. Due to unresolved issues that the two departments could not agree on, projects could sit idle for a significant length of time. The two departments’ directors were supposed to resolve issues among the departments. However, the City had not clearly defined which department was responsible for specific program administration, the directors had equal authority, and there was no clear resolution process. Further, the City’s lack of current written policies and procedures for the grant program functions added to the CDBG administration problems. For example, the Department of Community Services did not have any written policies and procedures for reviewing backup documentation and drawing down subrecipient funds. Although the National Association for Latino Community Asset Builders review 3 identified similar issues in 2014, the issues continued. While the City has made recent improvements, it lacked procedures to ensure that funding decisions were objective, necessary, and reasonable. It did not have objective criteria for funding selections and did not evaluate whether projects were necessary and reasonable. There were no clear procedures to establish a method of dispute reconciliation or determine project necessity or reasonableness. The City did not have effective controls in place to ensure that it complied with cost eligibility, procurement, and award requirements. Conclusion The City failed to follow cost eligibility, procurement, award, and program income requirements, resulting in unsupported CDBG grant costs totaling $15.9 million. We attributed these deficiencies to the City’s ineffective grant administration structure. Because the City did not have adequate documentation to support the eligibility of these costs, HUD did not have adequate assurance that the City used grant funds for eligible purposes in accordance with program requirements. 3 See Background and Objective section. 11 Recommendations We recommend that the Director of HUD’s Hawaii Office of Community Planning and Development require the City to 1A. Support that the Hibiscus Hill Apartments acquisition was necessary and served the purpose intended and support that the premium paid for the acquisition over the market value was reasonable and that HUD received an adequate value, or repay its CDBG program line of credit $10,000,000 from non-Federal funds. 1B. Support that the Kaneohe Elderly Apartments acquisition was necessary or repay its CDBG program line of credit $2,853,393 from non-Federal funds. 1C. Support that the costs for a contract awarded to one of the property owner’s affiliates was reasonable and the integrity of the subrecipient’s procurement was not compromised by the relationship or repay its CDBG program line of credit $1,450,000 from non-Federal funds for the subrecipient’s procurement violation. 1D. Support that the noncompetitively procured fire apparatus costs were reasonable and that potential bidders were not harmed by the City’s arbitrary action or repay its CDBG program line of credit $1,615,516 from non-Federal funds for the noncompetitively procured fire apparatus contracts. 1E. Review all current CDBG-funded projects, open CDBG projects, and projects subject to CDBG use restrictions for unreported program income. If the City and HUD determine that there was unreported program income for the audit period or CDBG use restriction period, the City should report the program income to HUD and record receipt of the CDBG program income in the Integrated Disbursement and Information System. 1F. Consolidate the grant program into one department under leadership with a proven record of compliance with clearly defined lines of authority and responsibility. 1G. Develop citywide written policies and procedures that govern the CDBG program and ensure compliance with CDBG requirements. 1H. Implement adequate controls to ensure compliance with applicable regulations related to cost eligibility, procurement, and program income for any further activities involving the use of CDBG funding. 1I. Implement adequate controls to ensure compliance with the City’s own process for awarding HUD funding and to ensure that potential conflicts of interest are mitigated to protect procurement integrity. 12 Scope and Methodology We performed our audit fieldwork at the City’s offices in Honolulu, HI, our Phoenix, AZ, office, and our Los Angeles, CA, office from December 2015 to June 2016. Our audit covered grant activity from July 1, 2012, through June 30, 2015. To accomplish our objective, we • Reviewed relevant CDBG program requirements and applicable Federal regulations; • Interviewed officials from the Honolulu, HI, Office of Community Planning and Development, City officials, subgrantees, contractor officials, and the seller of the Hibiscus Hill Apartments; • Obtained an understanding of the City’s management controls and procedures; • Reviewed the City’s CDBG-related organizational charts and written policies and procedures; • Reviewed City agreements; • Reviewed subrecipient payment requests and related supporting documentation; • Reviewed the City’s program income records and HUD’s related Integrated Disbursement and Information System 4 records; • Visited subrecipient project sites; • Reviewed available procurement documentation for the several transactions; and • Researched the Accurint public records database and Hawaii Department of Commerce and Consumer Affairs Business Registration Division Web site for possible affiliations and conflicts of interest. We selected a nonstatistical sample of 16 CDBG expenditures and 2 CDBG fund drawdowns for review. We selected our sample based on varying risk factors, such as (1) high dollar amounts; (2) type of activity, including construction, consulting, salaries and wages, contract workers, fringe benefits, rent, machinery allocations, and supplies; (3) potential sole-source procurement; and (4) other grants identified in the expense description. We intended the sample to provide a broad spectrum of CDBG activity for review. The results of the sample testing were limited to the expenditures and drawdowns reviewed and cannot be projected to the universe. Additionally, we reviewed all awards during the audit period, all expenditures related to procurement exceptions identified in the sample review, and all wage expenditures for a subrecipient. 4 The Integrated Disbursement and Information System (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 draw down and reporting system for the Community Development Block Grant program. 13 We conducted the audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective(s). We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. 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: • Effectiveness and efficiency of operations – Organizational structure, policies, and procedures that management has implemented to ensure that a program meets its objectives. • Compliance with applicable laws and regulations – Policies and procedures that management has implemented to ensure that program participants comply with program laws and regulations. We assessed the relevant controls identified above. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, the reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or efficiency of operations, (2) misstatements in financial or performance information, or (3) violations of laws and regulations on a timely basis. Significant Deficiencies Based on our review, we believe that the following items are significant deficiencies: • The City lacked an effective organizational structure to ensure that program activities complied with HUD and City requirements (finding). • The City lacked controls, including written policies and procedures to ensure effective, efficient, and timely operations (finding). • The City lacked controls, including written policies and procedures to ensure that program activities complied with HUD and City requirements (finding). 15 Appendixes Appendix A Schedule of Questioned Costs Recommendation Unsupported 1/ number 1A $10,000,000 5 1B 2,853,393 1C 1,450,000 1D 1,615,516 Totals $15,918,909 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. 5 The entire $10,000,000 of unsupported costs was unnecessary; however, $1,940,909 of this amount was also unreasonable. The $1,940,909 was not double counted in the total unsupported cost. 16 Appendix B Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 17 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 1 18 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 1 Comment 2 19 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 3 Comment 4 Comment 5 Comment 6 20 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 7 Comment 8 Comment 9 21 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 22 Auditee Comments and OIG’s Evaluation Ref to OIG Evaluation Auditee Comments 23 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 10 Comment 11 24 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 12 Comment 12 25 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 26 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 13 27 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 14 Comment 14 Comment 15 Comment 16 Comment 17 Comment 14 28 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 18 29 Auditee Comments and OIG’s Evaluation Ref to OIG Evaluation Auditee Comments Comment 19 Comment 20 Comment 21 Comment 22 * Names redacted for privacy reasons 30 Auditee Comments and OIG’s Evaluation Ref to OIG Evaluation Auditee Comments * Names redacted for privacy reasons 31 Auditee Comments and OIG’s Evaluation Ref to OIG Evaluation Auditee Comments Comment 23 * Names redacted for privacy reasons 32 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 24 33 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 25 Comment 26 34 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 35 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 27 36 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 26 37 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 28 38 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 29 39 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 40 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 30 41 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 42 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 43 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 44 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 31 Comment 32 45 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 33 46 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 47 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 34 Comment 35 Comment 36 48 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 37 Comment 38 Comment 39 49 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 40 Comment 40 Comment 38 50 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 38 Comment 38 Comment 41 51 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 52 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 53 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 54 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 55 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 42 56 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 57 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 58 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 43 Comment 43 59 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 43 60 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 44 61 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 33 Comment 45 62 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 63 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 46 64 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 65 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 66 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 47 67 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 68 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 48 69 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 70 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 1 Comment 49 71 Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation Comment 23 72 Auditee Comments and OIG’s Evaluation Ref to OIG Evaluation Auditee Comments * Exhibits and attachments available upon request 73 OIG Evaluation of Auditee Comments Comment 1 We do not agree that these items are facts. Our comments below address our specific disagreements with the City’s statements. Comment 2 We do not fault the City for making reprogramming decisions. Rather, our finding specifically cites noncompliance with program criteria. Comment 3 We disagree. The alternative selection process does not provide detailed selection requirements and is, therefore, subjective. Comment 4 We disagree. The seller had told us that at the time of the sale, the seller was not considering a conversion to condominiums, the property was not actively listed, and there were no other contending purchasers. Comment 5 The City’s statement does not address the excessive purchase price. As mentioned in the report, Federal cost principles require that costs be reasonable and necessary. We questioned the reasonableness of paying significantly more than the professionally appraised value of a property, as was the case with Hibiscus Hills. Comment 6 We do not disagree that the affordability restrictions were extended. We questioned the necessity of the acquisition, given the extended period before the property would be at risk. Comment 7 As detailed in the finding above, the organizational relationships may have affected the integrity of the procurement. Comment 8 The issue is compliance with the Federal procurement rules, not the City’s. Comment 9 We disagree. The City’s request for proposal clearly states that the submission deadline was January 28, 2015, at 4:00 p.m. and that “All proposals must be received by the City’s Purchasing Division located at: Honolulu Hale [,] 530 South King Street, Room 115[,] Honolulu, Hawaii…Applications that are not received by the submission deadline, as evidenced by a valid Division of Purchasing date and time stamp, will not be considered for funding under this RFP [request for proposal].” Therefore, the City did not act in accordance with its established award requirements when it accepted the proposal received by a department other than the Division of Purchasing. Comment 10 In the cases of capital improvement projects or acquisition projects, under the alternative selection process, they do not go through the normal CDBG award process and are not required to have been previously approved through that process. Therefore, in those instances, the typical CDBG award process is bypassed. We have added additional language to the report to clarify that the award process is bypassed in certain cases. 74 Comment 11 The recommendations that the City repay funds were not based on the alternative selection process. Rather, we based them on conformance with Federal regulations specifically cited throughout the report. Comment 12 The City says that it “started with agencies that had proposed projects that were vetted but not funded, and the small number of well-established nonprofit agencies that had the capacity and experience to consummate and execute large projects.” It also identifies Vitus Group as one of those agencies. However, according to our interviews, at that time, Vitus Group had not proposed a project that was vetted but not funded, and it was not a nonprofit agency. Comment 13 Although the City claims that resolution 14-11 reprogrammed funds based on the committee’s ranking, it did not. The Family Justice Center received a much lower score than 11 of the 13 submissions. However, through the resolution, the City awarded the project $8.5 million. Thus, the City did not base the award on objective criteria equally applied to all proposals. Additionally, the proposal requested only $6.8 million, $1.7 million less than awarded. Comment 14 The receiving department declined the award because the project had an incomplete environmental assessment and could not meet the CDBG timeliness deadline. Therefore, the City did not identify a project that would meet CDBG objectives while supporting a timely drawdown of funds. This is another example of the problems with the City’s award process. The project had not been effectively vetted by the City before the award. Comment 15 Since the letters requesting proposals went out on December 23, 2013, a written response was due December 31, 2013, and proposals were due January 6, 2014, we categorized the process as brief. Adding to the brief number of days to submit a lengthy proposal, such as the 178-page document submitted by Vitus, the proposal period fell over the holiday season. As shown by the items discussed in comments 10 and 13, the process was subjective and did not have many requirements. Comment 16 According to the City’s own response, it selected the agencies that could apply for the funding, and it was not open to all. Comment 17 We agree. The City pointed out that it received 13 responses. Therefore, we removed our statement that it received few responses. Comment 18 We can provide the City and HUD with the specific information upon request.Comment 19 A property that is always available for sale “at the right price” is different from an actively marketed property. “The right price” might mean that the price is significantly higher than the market value. In that situation, many owners would likely be willing to sell. 75 Comment 20 Offers in the past do not equate to current competing offers. According to both the buyer and the seller, the property was not actively marketed, and there were no competing offers at the time of the purchase agreement. Comment 21 The seller had listed the property on the open market in the past. However, he changed his mind and withdrew the listing, deciding to leave it as an affordable housing project. Therefore, if the seller had desired to sell the property, there would be no reason not to relist it. The seller informed us that he was not looking to sell, which corresponds to the fact that the property was not listed. Comment 22 We stand by our statement that the property was not actively marketed, which also corresponds to our discussions with the parties involved in the transaction. Comment 23 We disagree. Through our interview with the seller, the seller stated that when contacted by Vitus, the property was not for sale and there was no active listing. This statement was confirmed with the buyer. Further, although the seller considered condominium conversions in prior years, it was not considered during the time immediately before the sale. Comment 24 The information provided does not support that the excess price difference of $4.3 million, or 25.5 percent, was reasonable. The regulations partially define reasonableness as whether a prudent person would incur the cost. The item cited by the City in the appraisal alludes only to the motivation of the buyer, not the reasonableness of the price. Comment 25 As discussed in the report, the agreed number of designated units had not been met as of July 2015. Comment 26 The local HUD office was not aware of all of the facts surrounding the purchase. For example, the staff was unaware that the property was not actively listed. If the staff had been informed of the circumstances, the HUD response may have been different. Comment 27 HUD has an open finding from its 2015 fiscal year monitoring that the number of units required has not been met. In a July 2016 letter to the City, regarding the open finding HUD states, “The City needs to ensure that Hibiscus Hill Apartments complies with the CDBG national objective requirements by renting at least 50 of its units to low and moderate income households in accordance with the written agreement.” The documentation provided by the City does not support that the subrecipient met the required occupancy. For example, the documentation shows that in March 2016, only 43 CDBG-designated units were occupied. Comment 28 HUD allows assistance to profit entities to acquire property for the purpose of rehabilitation. The profit entity, Vitus, agreed to rehabilitate the Hibiscus Hills property with its own funds of $1 million. Since it has not done so, it has not complied with the contract. According to HUD, a preliminary determination of 76 compliance with a national objective may be based on the planned use of the activity. However, the final determination must be based on the actual use of the property. Therefore, since the actual use of the property does not support that the purpose was to rehabilitate according to the agreement, HUD may consider the activity not in compliance with a national objective. Comment 29 The amount provided by the City differs from the amount determined through our audit work. As indicated in the finding, the information provided to us during audit fieldwork identifies the rehabilitation costs as $146,616. Comment 30 We do not dispute that the rents were within the allowable range. Our discussion of the increased rents relates to the statements made by the subrecipient before the award in the proposal. The proposal states, “An acquisition of the Hibiscus Hills using CDBG will… insulate the residents from the escalating rental market.” However, the subrecipient did not insulate the residents from escalating rents. Comment 31 When we asked the City during audit fieldwork whether it determined that a potential conversion in 13 years justified the cost, it responded, “The City did not do a specific analysis to consider the merits of a conversion.” Comment 32 The lease extension related to other financing, not to the CDBG funding. In addition, providing more funding than necessary or requested for an acquisition results in less funding being available for eligible CDBG activities with more immediate needs. Comment 33 The documentation provided by the City did not show that the City assessed the amount of CDBG funds for appropriateness. There was no indication that HUD was informed that more funds were provided than had been requested. Comment 34 Although the contract date may have been before the audit period, CDBG funds were spent for the contract during the audit period. Our review considered the procurement related to the transactions during the audit period. Therefore, the issues identified were within the audit scope. In addition, although we did not expand our scope in this instance, OIG has the discretion to expand its scope as necessary during the course of an audit. Comment 35 While technically HCP-ILP LLC may not have been an owner until March 1, 2012, it had a financial interest in the project before that date as shown by a payoff of a $360,000 “PreDev Loan” to Hunt Capital Partners cited on the financing documents. Further, before the executed partnership, Vitus entered into a letter of intent. It is clear that the subrecipient knew that HCP-ILP LLC would be the tax credit investor before the partnership was executed. The City approved the contract on May 14, 2012, well after HCP-ILP LLC formally became an owner. 77 Comment 36 Although HCP-ILP LLC may have been technically a limited partner, its 99.99 percent ownership and investment of $9.4 million for the $12.3 million project indicate that it had a significant financial interest in the project. Comment 37 We disagree. A real or apparent organizational conflict of interest may have existed. Further, the procurement documentation does not show that the subrecipient attempted to mitigate a possible conflict of interest. Additionally, the Hunt Building procurement documentation does not agree with other procurement documentation. For example, the bid itself was a lump sum bid of $3,720,600. However, the contract totaled $3,394,862. The schedule of values used for payment requests shows an original contract of $3,394,862 and change order 2 of $325,738 totaling $3,720,600. It is unusual that the contract amount would be less than the bid and then that a change order would increase the contract value back to the bid amount. This issue further gives the appearance of a conflict of interest. However, we changed our categorization of the costs from ineligible to unsupported and adjusted the recommendations accordingly. Comment 38 We compared the procurement to the Federal criteria required by the CDBG program, not the City’s. Regulations at 24 CFR 85.36(b) required that the City use its own procurement procedures, which reflect applicable State and local laws and regulations, provided that the procurements conform to applicable Federal law and the standards identified in this section. Therefore, any City requirements should conform to the Federal requirements. Comment 39 Although the City discusses five bid amendments here, two pages later it discusses six. As noted on page 35 of the City’s response, there were six bid amendments. Comment 40 The City had 7 days between the March 15, 2013, deadline and the March 22, 2013, last date to issue addenda deadline. As the City states, the March 15, 2013, deadline was well past. Therefore, there was no need to remind bidders that “[t]he City shall not accept any further submissions for questions, clarification, or request for substitutions.” We asked the City for all related procurement documentation. The City did not indicate that there were requests for clarification or substitution that it received during that time, nor did it provide any such documentation. Therefore, unless it received requests during this timeframe that it did not provide to us, all requests should have been received before March 15, and a reminder based on late submissions would not be necessary. Comment 41 The draft report states that the addendum cited that the Smeal products did not meet certain specifications. Comment 42 The City’s implication that the unchanged March 15, 2013, date should affect our statement that “[it] arbitrarily amended the requests after the allowable date so that it could obligate funds before a certain date” is incorrect. The sole addendum that followed addendum 5 was addendum 6. The arbitrary change of the last addenda issuance date was solely for the City to amend the solicitation via 78 addendum 6 to say, “Due to the City is required to obligate Federal funds by April 30, 2013, the City is unable to complete any further evaluations and pre-qualify new manufacturers. Prospective bidders and manufacturers may submit complete specifications for evaluation by the City for future solicitations.” Addendum 6 included the response to the Smeal request for clarification purposes. Its sole change to the solicitation was guided by the Federal funds obligation date. However, we changed our categorization of the costs from ineligible to unsupported and adjusted the recommendations accordingly. Comment 43 While the Department of Community Services (DCS) claimed it made an error, the responsibility of the submission was solely on the submitter, not DCS. The request for proposal submission guidelines explicitly state, “Agencies must submit their completed application to the Division of Purchasing by Wednesday, January 28, 2015 at 4:00 p.m.” The proposal was late according to the City’s requirements as identified in the request for proposal. Comment 44 The City had previously identified the subrecipient as, “…with a proven track record and the organizational capacity to execute a large transaction within a limited time frame…” This seems to conflict with the City’s statement. Comment 45 In relation to program income, we amended recommendation 1E to include open CDBG projects and CDBG use restricted projects. Comment 46 We cannot speak to the administration issues that existed in 1984 as they are out of our audit scope. However, as detailed in the finding above, the City has significant issues with its current organizational structure. In accordance with recommendation 1F, the City can work with HUD through the audit resolution process to improve its grant administration. Comment 47 With its comments to the draft report, the City provided a “CDBG Program Policy and Procedures Manual” with a revision date of 1986. Some City processes do not agree with the manual. Throughout the audit, we repeatedly requested written policies and procedures governing the CDBG activity but were told, “The process works and [are] institutionalized, so it doesn’t need to be written down” and “[the City] does not have written policies and procedures for routine stuff that are largely institutionalized.” We amended the report accordingly. Comment 48 We agree that the City has made recent improvements and added a statement to that effect to the report. Comment 49 We disagree. We would not categorize the solicitation as broad. Further, since the City could not provide the scoring sheet used for the Hibiscus Hills project, we could not determine whether the score it received was objective and reasonable. 79 Appendix C Criteria 24 CFR Part 570, Community Development Block Grants §570.200, General policies (a) Determination of eligibility. An activity may be assisted in whole or in part with CDBG funds only if all of the following requirements are met: (5) Cost principles. Costs incurred, whether charged on a direct or an indirect basis, must be in conformance with OMB [Office of Management and Budget] Circulars A-87, “Cost Principles for State, Local and Indian Tribal Governments”; A-122, “Cost Principles for Non-profit Organizations”; or A-21, “Cost Principles for Educational Institutions,” as applicable. All items of cost listed in Attachment B of these Circulars that require prior Federal agency approval are allowable without prior approval of HUD to the extent they comply with the general policies and principles stated in Attachment A of such circulars and are otherwise eligible under this subpart C, except for the following: (f) Means of carrying out eligible activities. (1) Activities eligible under this subpart, other than those authorized under §570.204(a), may be undertaken, subject to local law: (i) By the recipient through: (A) Its employees, or (B) Procurement contracts governed by the requirements of 24 CFR 85.36; or (ii) Through loans or grants under agreements with subrecipients, as defined at §570.500(c); §570.501, Responsibility for grant administration (b) The recipient is responsible for ensuring that CDBG funds are used in accordance with all program requirements. The use of designated public agencies, subrecipients, or contractors does not relieve the recipient of this responsibility. The recipient is also responsible for determining the adequacy of performance under subrecipient agreements and procurement contracts, and for taking appropriate action when performance problems arise… §570.502, Applicability of uniform administrative requirements (a) Recipients and subrecipients that are governmental entities (including public agencies) shall comply with the requirements and standards of OMB Circular No. A-87, “Cost Principles for State, Local, and Indian Tribal Governments”; OMB Circular A-128, “Audits of State and Local Governments” (implemented at 24 CFR part 44); and with the following sections of 24 CFR part 85 “Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments” or the related CDBG provision, as specified in this paragraph: (1) Section 85.3, “Definitions”; 80 (4) Section 85.20, “Standards for financial management systems,” except paragraph (a); (6) Section 85.22, “Allowable costs”; (12) Section 85.36, “Procurement,” except paragraph (a); (14) Section 85.40, “Monitoring and reporting program performance,” except paragraphs (b) through (d) and paragraph (f); (b) Subrecipients, except subrecipients that are governmental entities, shall comply with the requirements and standards of OMB Circular No. A-122, “Cost Principles for Non- profit Organizations,” or OMB Circular No. A-21, “Cost Principles for Educational Institutions,” as applicable, and OMB Circular A-133, “Audits of Institutions of Higher Education and Other Nonprofit Institutions” (as set forth in 24 CFR part 45). Audits shall be conducted annually. Such subrecipients shall also comply with the following provisions of the Uniform Administrative requirements of OMB Circular A-110 (implemented at 24 CFR part 84, “Uniform Administrative Requirements for Grants and Agreements With Institutions of Higher Education, Hospitals and Other Non-Profit Organizations”) or the related CDBG provision, as specified in this paragraph: (1) Subpart A—“General”; (2) Subpart B—“Pre-Award Requirements,” except for §84.12, “Forms for Applying for Federal Assistance”; (3) Subpart C—“Post-Award Requirements,” except for: (iii) Section 84.24, “Program Income.” In lieu of §84.24, CDBG subrecipients shall follow §570.504; §570.504, Program income (a) Recording program income. The receipt and expenditure of program income as defined in §570.500(a) shall be recorded as part of the financial transactions of the grant program. (b) Disposition of program income received by recipients. (1) Program income received before grant closeout may be retained by the recipient if the income is treated as additional CDBG funds subject to all applicable requirements governing the use of CDBG funds. § 570.902, Review to determine if CDBG-funded activities are being carried out in a timely manner HUD will review the performance of each entitlement, HUD-administered small cities, and Insular Areas recipient to determine whether each recipient is carrying out its CDBG- assisted activities in a timely manner. (a) Entitlement recipients and Non-entitlement CDBG grantees in Hawaii. (1) Before the funding of the next annual grant and absent contrary evidence satisfactory to HUD, HUD will consider an entitlement recipient or a non-entitlement CDBG grantee in Hawaii to be failing to carry out its CDBG activities in a timely manner if: (i) Sixty days prior to the end of the grantee’s current program year, the amount of entitlement grant funds available to the recipient under grant agreements but undisbursed by the U.S. Treasury is more than 1.5 times the entitlement grant amount for its current program year; and 81 (ii) The grantee fails to demonstrate to HUD’s satisfaction that the lack of timeliness has resulted from factors beyond the grantee’s reasonable control. 2 CFR Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards §200.403, Factors affecting allowability of costs Except where otherwise authorized by statute, costs must meet the following general criteria in order to be allowable under Federal awards: (a) Be necessary and reasonable for the performance of the Federal award and be allocable thereto under these principles. (g) Be adequately documented. §200.404, Reasonable costs A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost. The question of reasonableness is particularly important when the non-Federal entity is predominantly federally-funded. In determining reasonableness of a given cost, consideration must be given to: (a) Whether the cost is of a type generally recognized as ordinary and necessary for the operation of the non-Federal entity or the proper and efficient performance of the Federal award. (b) The restraints or requirements imposed by such factors as: sound business practices; arm’s length bargaining; Federal, state and other laws and regulations; and terms and conditions of the Federal award. (c) Market prices for comparable goods or services for the geographic area. (d) Whether the individuals concerned acted with prudence in the circumstances considering their responsibilities to the non-Federal entity, its employees, where applicable its students or membership, the public at large, and the Federal government. (e) Whether the non-Federal entity significantly deviates from its established practices and policies regarding the incurrence of costs, which may unjustifiably increase the Federal award’s cost. 24 CFR Part 84, Uniform Administrative Requirements for Grants and Agreements With Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations §84.42, Codes of conduct No employee, officer, or agent shall participate in the selection, award, or administration of a contract supported by Federal funds if a real or apparent conflict of interest would be involved. Such a conflict would arise when the employee, officer, or agent, any member of his or her immediate family, his or her partner, or an organization which employs or is about to employ any of the parties indicated herein, has a financial or other interest in the firm selected for an award. §84.43, Competition 82 All procurement transactions shall be conducted in a manner to provide, to the maximum extent practical, open and free competition. The recipient shall be alert to organizational conflicts of interest as well as noncompetitive practices among contractors that may restrict or eliminate competition or otherwise restrain trade. 24 CFR Part 85, Administrative Requirements for Grants and Cooperative Agreements to State, Local and Federally Recognized Indian Tribal Governments §85.20, Standards for financial management systems (a) A State must expand and account for grant funds in accordance with State laws and procedures for expending and accounting for its own funds. Fiscal control and accounting procedures of the State, as well as its subgrantees and cost-type contractors, must be sufficient to— (b) The financial management systems of other grantees and subgrantees must meet the following standards: (1) Financial reporting. Accurate, current, and complete disclosure of the financial results of financially assisted activities must be made in accordance with the financial reporting requirements of the grant or subgrant. (2) Accounting records. Grantees and subgrantees must maintain records which adequately identify the source and application of funds provided for financially- assisted activities. These records must contain information pertaining to grant or subgrant awards and authorizations, obligations, unobligated balances, assets, liabilities, outlays or expenditures, and income. (3) Internal control. Effective control and accountability must be maintained for all grant and subgrant cash, real and personal property, and other assets. Grantees and subgrantees must adequately safeguard all such property and must assure that it is used solely for authorized purposes. §85.36, Procurement (b) Procurement standards. (1) Grantees and subgrantees will use their own procurement procedures which reflect applicable State and local laws and regulations, provided that the procurements conform to applicable Federal law and the standards identified in this section. (c) Competition. (1) All procurement transactions will be conducted in a manner providing full and open competition consistent with the standards of §85.36. Some of the situations considered to be restrictive of competition include but are not limited to: (i) Placing unreasonable requirements on firms in order for them to qualify to do business, (iii) Noncompetitive pricing practices between firms or between affiliated companies, (v) Organizational conflicts of interest, (vii) Any arbitrary action in the procurement process. (f) Contract cost and price. (1) Grantees and subgrantees must perform a cost or price analysis in connection with every procurement action including contract modifications. 83 HUD’s CDBG Guide to National Objectives & Eligible Activities for Entitlement Communities Complying with National Objectives – Acquisition of Real Property A preliminary determination of compliance may be based on the planned use. The final determination must be based on the actual use of the property, excluding any short-term, temporary use. Rehabilitation Eligible Activities - CDBG funds may be used to finance the costs of rehabilitation as shown below. Eligible types of assistance Property acquisition—Assistance to private individuals and entities (whether profit or not-for-profit) to acquire for the purpose of rehabilitation and to rehabilitate properties for use or resale for residential purposes. 84
The City and County of Honolulu, HI, Did Not Administer Its Community Development Block Grant in Accordance With Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-08-26.
Below is a raw (and likely hideous) rendition of the original report. (PDF)