oversight

The City of Niagara Falls, NY Had Weaknesses in Controls Over CDBG-Funded Subgrantee Administered Rehabilitation Activities

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-01-07.

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

          The City of Niagara Falls, NY
        Community Development Block Grant Program




Office of Audit, Region 2     Audit Report Number: 2016-NY-1002
New York-New Jersey                              January 7, 2016
To:            William T. O’Connell, Director
               Community Planning and Development Division, Buffalo, NY, 2CD



From:          Kimberly Greene
               Regional Inspector General for Audit, 2AGA
Subject:       The City of Niagara Falls Had Weaknesses in Controls Over CDBG-Funded,
               Subgrantee-Administered Rehabilitation Activities




Enclosed is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG), final audit report on our review of the City of Niagara Falls, NY’s
Community Development Block Grant (CDBG) 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
212-264-4174.
                    Audit Report Number: 2016-NY-1002
                    Date: January 7, 2016

                    The City of Niagara Falls Had Weaknesses in Controls Over CDBG
                    Funded, Subgrantee-Administered Rehabilitation Activities

                    Administer Its Community Development Block Grant Program in
                    Accordance With HUD Requirements
Highlights
What We Audited and Why
We reviewed the City of Niagara Falls’ Community Development Block Grant (CDBG)
program. We selected this auditee based on our risk assessment of CDBG grantees administered
through the Buffalo, NY, field office, which considered the City’s funding, HUD’s risk
assessment of the City, and prior Office of Inspector General (OIG) audits. The City received
more than $2.2 million in each of its program years 2013 and 2014; was ranked medium risk in
HUD’s risk assessment for 2014 and 2015, with a score of 38 and 45, respectively; and had not
recently been audited by OIG.

What We Found
City officials committed and spent CDBG funds for eligible activities but did not establish
sufficient controls to ensure that subgrantee expenditures were always adequately supported;
program income was administered in compliance with HUD regulations; and subgrants were
properly awarded, executed, and monitored. As a result, City officials disbursed $220,538 for
unsupported costs, used $113,733 in CDBG funds when program income was available,
executed subgrants without receiving required documentation and after the start of the subgrant
term, and did not ensure that services costing $2,516 were received during the subgrant period.

What We Recommend
We recommend that the Director of HUD’s Buffalo Office of Community Planning and
Development instruct City officials to (1) provide adequate documentation to support the
eligibility of unsupported disbursements and obligations of $70,538 and $150,000, respectively;
(2) implement monitoring procedures for CDBG-funded subgrantees to ensure compliance with
program requirements; (3) ensure that $2,516 in unexpended funds is reprogrammed for other
eligible CDBG activities; (4) ensure that program income of $113,733 is spent on eligible CDBG
activities before additional CDBG entitlement funds are drawn down; (5) strengthen procedures
to ensure that program income received by grantees is properly reported to HUD and spent
before funds are drawn down from the U.S. Treasury; and (6) strengthen subgrant procedures to
ensure that all required documents are received, explanations are obtained when prior
performance does not meet goals, and subgrants are executed in a timely manner.
Table of Contents
Background and Objectives ....................................................................................3

Results of Audit ........................................................................................................4
         Finding: There Were Weaknesses in the City’s Controls Over CDBG-Funded,
         Subgrantee-Administered Rehabilition Activities ......................................................... 4

Scope and Methodology ...........................................................................................7

Internal Controls ......................................................................................................9

Appendixes ..............................................................................................................11
         A. Schedule of Questionable Costs and Funds To Be Put to Better Use ................... 11

         B. Auditee Comments and OIG Evaluation ................................................................ 12




                                                            2
Background and Objectives
The Community Development Block Grant (CDBG) program was established by Title I of the
Housing and Community Development Act of 1974, Public Law 93-383, as amended, 42 U.S.C.
(United States Code) 5301. The program provides grants to State and local governments to aid
in the development of viable urban communities. Governments can use grant funds to support a
variety of activities directed at improving the physical condition of neighborhoods, such as
housing rehabilitation, public facilities, fostering economic development by providing technical
and financial assistance to local businesses, creating employment, or improving services for low-
or moderate-income households. To be eligible for funding, every activity must meet one of
three national objectives: (1) benefit low- and moderate-income persons, (2) aid in preventing or
eliminating slums or blight, or (3) address a need with a particular urgency because existing
conditions pose a serious and immediate threat to the health or welfare of the community.
The City of Niagara Falls, NY, is a CDBG entitlement grantee that operates under a mayor-council
form of government. The City’s CDBG program is administered by the City’s Department of
Community Development, which contracts directly for services with and through nonprofit
organizations acting as grantees. The Department of Community Development is responsible for
monitoring the grantees’ CDBG activities. During three consecutive program years,1 HUD
awarded the City CDBG funding of more than $2.1 million in 2012, $2.2 million in 2013, and
$2.2 million in 2014.
During the period 2011 through 2014, City officials provided rehabilitation projects with
approximately $3.2 million, or 37 percent, of the more than $8.8 million in CDBG funds
awarded. More than $1.5 million, or 56 percent, of approximately $2.8 million in rehabilitation
program funds drawn down was used for program delivery activities. The remaining 44 percent
was drawn for activities such as single-family and multifamily housing rehabilitation, fair
housing activities, and closing cost assistance activities.
During the period July 1, 2014, through June 30, 2015, the City executed five subgrantee
agreements to carry out CDBG-funded activities. Specifically, two of the subgrantees were to
administer housing rehabilitation programs in targeted areas of the City; one was to administer
program delivery activities; one operated a housing deconstruction program, a housing
rehabilitation program, and a building trades training program; and one was to develop 41 units
of low-income housing.
The objectives of the audit were to determine whether the City officials established and
implemented adequate controls to ensure that (1) CDBG funds were spent for eligible activities
in compliance with HUD regulations and (2) disbursements were for eligible, reasonable, and
adequately supported costs.




1
    The City’s CDBG program year is January 1 through December 31.



                                                        3
Results of Audit

Finding: There Were Weaknesses in the City’s Controls Over
CDBG-Funded, Subgrantee-Administered Rehabilitation Activities
While City officials committed and spent CDBG funds for eligible rehabilitation activities, they
did not establish sufficient controls to ensure that subgrantees always spent funds for eligible and
supported costs, program income was administered in compliance with HUD regulations, and
subgrants were properly executed. We attributed this deficiency to the City’s lack of monitoring
procedures for the subgrantee-administered rehabilitation program. As a result, City officials
disbursed and obligated $70,538 and $150,000, respectively, for unsupported costs, used
$113,733 in CDBG funds when program income was available, executed subgrants without
receiving required documentation and after the start of the subgrant term, and did not ensure that
services costing $2,516 were received during the subgrant period.
Unsupported Expenditures Were Disbursed to a Subgrantee
City officials lacked adequate monitoring procedures for subgrantees administering their
rehabilitation program. While City officials had formal procedures for monitoring rehabilitation
program activities by the Community Development Office through contracts, there were no
formal monitoring procedures applicable to rehabilitation program activities administered by
subgrantees. Regulations at 24 CFR (Code of Federal Regulations) 85.40(a) provide that
grantees are responsible for managing and monitoring the day-to-day operations of grant- and
subgrant-supported activities and require that they monitor these activities to ensure compliance
with applicable Federal requirements and that performance goals are achieved. Although City
officials provided adequate expense documentation for three sampled rehabilitation program
subgrantees, they were unable to support that the subgrantees had been monitored. In addition,
there was no support for the disbursement of $9,464 to a fourth subgrantee for the director’s
salary and administrative costs. For instance, the salary cost was not validated by timesheets,
cost allocations, or other such documents to determine hours charged. Additionally, there were
no receipts associated with administrative costs, and City officials were unable to explain the
allocation of these costs.

The subgrant budget of $150,000 was apportioned as $50,000 for instructor salaries, $85,000 for
materials, and $15,000 for administrative costs. However, without requesting an amended
budget, the subgrantee spent $111,074 on salaries ($61,074 over the allotment) and $26,946 on
materials. In addition, $2,516 was set aside for services that were not provided or billed before
the subgrant period ended on June 30, 2015; therefore, the funding was not used. As a result, we
regarded the $9,464 in unsupported disbursements and instructor salaries that exceeded the
budget allotment by $61,074 as unsupported costs. Further, the $2,516 in services not provided
and billed by the end of the subgrant period needs to be reprogramed and used for other eligible
CDBG activities so these funds can be put to better use. We attributed these conditions to a lack
of adequate monitoring procedures.




                                                  4
City Officials Did Not Adequately Administer Program Income
City officials did not properly use program income. Specifically, they reported a program
income balance of $113,733; however, through the end of our onsite work in September 2015,
they had made no draws on program income despite drawing from entitlement funds.
Regulations at 24 CFR 570.504(a) require that the receipt and expenditure of program income be
recorded as part of the financial transactions of the grant program, and 24 CFR 570.504(b)(2)(i)
and (ii) require that program income be substantially disbursed before additional cash
withdrawals are made from the U.S. Treasury. We attributed this noncompliance to the lack of
procedures pertaining to the receipt and expenditure of program income received from CDBG
rehabilitation program subgrantees. As a result, $113,733 was unavailable for eligible CDBG
activities.
There Were Weaknesses in Subgrantee Agreement Approval and Execution
The City’s subgrantee approval procedures required that applicants describe the need, objectives,
and goals of a proposed project and submit an independent certified audit report. However, one
subgrantee, approved for $150,000 in two separate timeframes from July 1, 2014, through June
30, 2015, and July 1, 2015, through June 30, 2016, did not submit an annual independent
certified audit of the organization for either period. In addition, the subgrantee did not meet the
graduation rate and job placement goals provided in its subgrantee application for CDBG
funding. The subgrantee specified an 85 percent graduation rate goal and a 75 percent
employment rate goal for the period July 1, 2014, through June 30, 2015; however, it achieved
58 percent and 54 percent rates, respectively. While these were goals, subgrantee files lacked
documentation showing that City officials corresponded with or visited the subgrantee to
determine why goals were not met and how performance could be improved.

Although City officials did not disburse funds until after subgrants were administered,
agreements with four rehabilitation program subgrantees were executed after the subgrant term
started (as noted in the table below). City officials attributed this deficiency to delays in the
approval process for the municipal grant and subgrant. Without an executed subgrantee
agreement, (1) the ability of City officials to enforce subgrant provisions is diminished, and (2)
the potential for litigation is possible if any services were provided before the subgrant
agreement was executed.

                       Subgrant           Subgrant             Date of
                        amount              term              subgrant
                                                             execution
                       $150,000       7/1/14 -6/30/15        8/26/2014
                       $190,000       7/1/14-6/30/15         9/11/2014
                       $140,000       7/1/14-6/30/15         9/22/2014
                       $ 50,000       7/1/14-6/30/15        10/14/2014
                       $ 15,000       7/1/14-6/30/15        10/14/2014




                                                  5
City officials did not monitor four subgrantees2 to which they disbursed CDBG funds. We
attributed this deficiency to the City’s lack of monitoring procedures for the CDBG rehabilitation
program administered by subgrantees.
Conclusion
City officials did not establish and implement adequate controls to ensure that CDBG funds were
spent for eligible activities in compliance with HUD regulations and disbursements were for
eligible, reasonable, and adequately supported costs. As a result, City officials (1) could not
support actual and planned spending of $220,538 ($150,000 + $61,074 + $9,464), (2) disbursed
$113,733 in CDBG funds when program income was available, (3) approved subgrants without
adequate justification, (4) did not fully spend $2,516 in subgrant funds during the subgrant
period, and (5) executed subgrants after the term of the subgrant started.

Recommendations
We recommend that the Director of the HUD’s Buffalo Office of Community Planning and
Development instruct City officials to
        1A.      Provide documentation to adequately support that $70,538 disbursed and
                 $150,000 obligated were for eligible costs. Any costs determined to be ineligible
                 should be reimbursed from non-Federal funds.
        1B.      Strengthen monitoring procedures for CDBG-funded subgrantees to ensure
                 compliance with program requirements.
        1C.      Reprogram unexpended funds of $2,516 on a subgrantee agreement that expired
                 June 30, 2015, for use by other eligible CDBG activities so that these funds can
                 be put to better use.
        1D.      Spend program income of $113,733 on eligible CDBG activities before drawing
                 down additional CDBG entitlement funds, thus ensuring that these funds are put
                 to better use.
        1E.      Implement procedures to ensure that program income received by subgrantees is
                 properly reported in HUD’s Integrated Disbursement and Information System3
                 and spent before funds are drawn down from the U.S. Treasury.
        1F.      Strengthen subgrant procedures to ensure that all required documents are
                 received, explanations are obtained when prior performance does not meet goals,
                 and subgrants are executed in a timely manner.




2
  Five subgrants were executed with four subgrantees. The $50,000 and the $15,000 subgrants were executed with
the same subgrantee.
3
  The Integrated Disbursement and Information System is the drawdown and reporting system for all of HUD’s
community planning and development formula grant programs.



                                                       6
Scope and Methodology
We performed the audit fieldwork from February through September 2015 at the City’s Department
of Community Development offices in the Carnegie Building, 1022 Main Street, Niagara Falls, NY.
The audit scope covered the period January 1, 2013, through December 31, 2014, and was
extended for payments made to a subgrantee in 2015 based on concerns identified in our survey
review with the City’s subgrantee administered rehabilitation program. We relied in part on
computer-processed data primarily for obtaining background information on the City’s
expenditure of Federal funds. We performed a minimal level of testing and found the data to be
adequate for our purposes. To accomplish our objective, we

       Reviewed relevant HUD regulations, guidebooks, and files to gain an understanding of the
        CDBG program.

       Interviewed HUD officials to identify any HUD concerns with the City’s operations.

       Reviewed the City’s policies, procedures, and practices to gain an understanding of both the
        City’s general controls and those relating to the administration of CDBG program funds.

       Interviewed key personnel in the City’s Department of Community Development, who were
        responsible for accounting for and overseeing CDBG funds, to gain an understanding of the
        control environment.

       Reviewed the city council board meeting minutes and resolutions for our audit period to gain
        an understanding of the City’s operations, plans, and project progress.

       Reviewed the City’s fiscal years 2011-2013 independent audits and consolidated annual
        performance and evaluation reports and fiscal year action plans from 2013 to 2015 to
        determine whether there were any noted program weaknesses and to document how the City
        allocated and spent CDBG funds.

       As part of our survey review, we selected an initial sample of expenditures, which
        included seven Line of Credit Control System4 fund draws. Specifically we chose the
        three largest clearance and demolition draws from program year 2012 funds, the three
        largest rehabilitation draws from program year 2013 funds, and the largest program
        administration draw from program year 2012.




4
 The Line of Credit Control System (LOCCS) is the U.S. Department of Housing and Urban Development’s (HUD)
primary grant disbursement system, handling disbursements for the majority of HUD programs.



                                                    7
     Reviewed the five City CDBG-funded subgrantee applications and executed agreements for
      rehabilitation activities that were executed in 2014 to determine whether CDBG funds were
      obligated for eligible activities and spent for eligible and adequately supported costs. We
      also reviewed the 2015 application and agreement for one of the subgrantees based on
      concerns identified in our review.


     Reviewed a sample of payments to the four rehabilitation program subgrantees to which
      the City disbursed CDBG funds. We sampled $199,169, or more than 36 percent, of the
      $545,000 disbursed to the four rehabilitation program subgrantees. This included one
      LOCCS draw for three of the subgrantees and all of the draws for one grantee based on
      concerns identified in our survey review with the City’s subgrantee administered
      rehabilitation program.

     Reviewed the Integrated Disbursement and Information System’s program income details
      report for the audit period, which included all receipts and draws of program income
      reported by City officials. We also reviewed supporting documentation for rehabilitation
      program expenses to identify program income earned by subgrantees.

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.




                                                8
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to
   Effectiveness and efficiency of operations,
   Reliability of financial reporting, and
   Compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.
Relevant Internal Controls
We determined that the following internal controls were relevant to our audit objectives:

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

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

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

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

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:

   City officials did not have adequate controls over program operations when they did not
    adequately monitor their subgrantee activities (see finding).


                                                   9
   City officials did not have adequate controls to ensure the reliability of financial information
    when they did not accurately report and use program funds (see finding).
   The City did not have adequate controls over compliance with laws and regulations when it
    drew down CDBG funds when program income was available (see finding).




                                                    10
Appendixes

Appendix A


           Schedule of Questioned Costs and Funds To Be Put to Better Use
                Recommendation                      Funds to be put
                                   Unsupported 1/ to better use 2/
                     number
                         1A              $220,538
                         1C                                  $2,516
                         1D                                 $113,733
                       Totals            $220,538           $116,249


1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.
2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this case, if the $113,733 in program income is spent
     before additional entitlement funds are drawn down for eligible activities and if the
     $2,516 in unexpended funds is reprogrammed to other eligible activities, the funds will
     be put to better use.




                                              11
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1



Comment 2




                               12
Comment 1




Comment 3




Comment 4




            13
14
                         OIG Evaluation of Auditee Comments


Comment 1   City officials stated that CDBG funds used by the subrecipient were for activities
            that were both consistent with the stated national objectives and the City’s
            contract with the subgrantee. However, while the funds may have been used for
            eligible activities, $9,464 was unsupported and $61,074 exceeded the amounts
            authorized in the line item budget. Consequently, City officials will need to
            provide supporting documentation and approval of an amended budget during the
            audit resolution process to support the costs.

Comment 2   City officials stated that they allowed the subrecipient to use a higher percentage
            of the contract amount for instruction costs versus building materials and that the
            City had adjusted funding levels for contracted, eligible project components in the
            past. However, the City’s agreement with the subrecipient didn’t include
            guidance for spending above the budget allotment, and the subrecipient didn’t
            submit an amended budget for spending outside the prescribed budget allotments.
            Consequently, City officials will need to provide supporting documentation for an
            amended budget during the audit resolution process to support the costs.
Comment 3   City officials requested clarification of the $220,538 stated on page 4 in the report
            because this amount includes 2015 CDBG funds that have not yet been
            distributed. We revised the report to distinguish between unsupported costs that
            were disbursed ($70,538) and those that were obligated ($150,000) but not yet
            disbursed. Weaknesses identified in the approval of $150,000 for the 2015
            subrecipient grant application caused us to question the amount obligated for this
            agreement.
Comment 4   City officials agreed that a better program income expenditure procedure is
            needed, that program income must be more clearly presented in annual plan
            budgets, and that they are already working with the HUD local office to
            implement a procedure to ensure that program income is properly recorded in the
            Integrated Disbursement and Information System and expended prior to drawing
            down funds from the U.S. Treasury.




                                              15