The State of New York, Governor’s Office of Storm Recovery Community Development Block Grant Disaster Recovery Assistance, Small Business Grants and Loans Program Office of Audit, Region 2 Audit Report Number: 2016-NY-1006 New York – New Jersey March 29, 2016 To: Marion Mollegan McFadden Deputy Assistant Secretary for Grant Programs, DG //SIGNED// From: Kimberly Greene Regional Inspector General for Audit, 2AGA Subject: New York State Did Not Always Disburse Community Development Block Grant Disaster Recovery Funds in Accordance With Federal and State Regulations Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector General’s (OIG) results of our review of the New York State Governor’s Office of Storm Recovery’s administration of its Small Business Grants and Loans 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 212-542-7984. Audit Report Number: 2016-NY-1006 Date: March 29, 2016 New York State Did Not Always Disburse Community Development Block Grant Disaster Recovery Funds in Accordance With Federal and State Regulations Highlights What We Audited and Why We audited the State of New York Governor’s Office of Storm Recovery’s administration of the Small Business Grants and Loans program funded with Community Development Block Grant Disaster Recovery (CDBG-DR) funds provided by the U.S. Department of Housing and Urban Development (HUD). The objectives of the audit were to determine whether State officials (1) approved and disbursed CDBG-DR funds for the Small Business Grants and Loans program to assist eligible businesses in accordance with the guidelines established under the HUD-approved action plan and amendments and applicable Federal requirements and (2) established and maintained a financial management system that adequately safeguarded the funds and prevented misuse. What We Found State officials (1) did not always adequately verify the eligibility of award recipients and their awarded funds and (2) did not recapture preliminary award funds disbursed to ineligible businesses in a timely manner. These deficiencies resulted from weaknesses in the State’s administrative controls and State officials’ desire to quickly disburse funds to the businesses. As a result, State officials could not assure HUD that CDBG-DR funds were adequately safeguarded and disbursed for eligible, reasonable, and necessary expenses and that the funds assisted qualified businesses in compliance with program requirements. What We Recommend We recommend that HUD instruct State officials to (1) reimburse the State’s line of credit for the $272,459 in CDBG-DR funds disbursed to 4 businesses for ineligible costs from non-Federal funds, (2) provide documentation to support the $152,703 in CDBG-DR funds disbursed to 4 businesses, (3) strengthen controls over program operations to ensure that costs charged to the CDBG-DR program are for eligible activities and supported by all required documentation at the time of the disbursement, (4) strengthen administrative controls to ensure that ineligibility determinations are reviewed and approved and recapture procedures are carried out in a timely manner, (5) incorporate and implement a recapture policy and procedures, and (6) recapture more than $300,000 in CDBG-DR funds disbursed to 35 businesses. Table of Contents Background and Objectives ....................................................................................3 Results of Audit ........................................................................................................5 Finding 1: State Officials Did Not Always Disburse CDBG-DR Funds in Accordance With Federal and State Regulations ................................. 5 Finding 2: The Preliminary Award Funds Disbursed to Ineligible Businesses Were Not Recaptured in a Timely Manner ...........................10 Scope and Methodology .........................................................................................16 Internal Controls ....................................................................................................18 Appendixes ..............................................................................................................20 A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...20 B. Auditee Comments and OIG’s Evaluation ..........................................21 2 Background and Objectives Congress made available $16 billion in Community Development Block Grant Disaster Recovery (CDBG-DR) assistance funds through the Disaster Relief Appropriations Act of 2013, Public Law 113-2. This funding was for necessary expenses related to disaster relief, long-term recovery, restoration of infrastructure and housing, and economic revitalization in areas most impacted by a major disaster declared under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in calendar years 2011 through 2013. HUD issued Federal Register Notice 78 FR 14330 (March 5, 2013) announcing the initial allocation of $5.4 billion in CDBG-DR funds appropriated by the Disaster Relief Appropriations Act of 2013. Before grantees received funding under the Act, the U.S. Department of Housing and Urban Development (HUD) Secretary was required to certify that grantees maintained sufficient financial controls and procurement processes and procedures for ensuring that any duplication of benefits was identified; funds were spent in a timely manner; Web sites were maintained to inform the public of all disaster activities; and waste, fraud, and abuse of funds were prevented and detected. In addition, grantees were required to develop an action plan for public comment and HUD approval, which described (1) how the proposed use of the CDBG- DR funds would address long-term recovery needs; (2) eligible affected areas and the distribution of CDBG-DR funds to those areas; (3) activities for which funds could be used; (4) the citizen participation process used to develop, implement, and access the action plan; and (5) grant administration standards. On April 3, 2013, New York State submitted its certification of sufficient controls, processes, and procedures to HUD, and on April 25, 2013, HUD approved the State’s partial action plan. On May 14, 2013, HUD executed a grant agreement with New York State Homes and Community Renewal, under which its Office of Community Renewal and Housing Trust Fund Corporation (HTFC)1 would administer the initial award of $1.7 billion in CDBG-DR funds. In June 2013, the governor established the Governor’s Office of Storm Recovery under HTFC to administer the CDBG-DR funds. HUD has since approved 10 amendments to the partial action plan. State officials established and allocated $183.5 million to the Small Business Grants and Loans program, also known as New York Rising Small Business Recovery program,2 which combined four of six business assistance programs consisting of various grants and loan programs under economic development approved in the initial action plan. However, the loan assistance program was never started. Assistance was made available to businesses that suffered eligible 1 HTFC is a subsidiary public benefit corporation of the New York State Housing Finance Agency. 2 This program is referred to many different titles on the State’s Web site and various reports, including the Small Business Grants and Loans program in the State’s Funding Portal; Small Business Grant and Loan Program in the State’s quarterly reports to HUD; and Small Business Grant Program, Small Business Loan Program, Coastal Fishing Industry Program, and Seasonal Tourism Industry Program in the CDBG-DR action plan. 3 uncompensated losses as a direct result of Hurricanes Sandy and Irene or Tropical Storm Lee. State officials published the program policy and distributed it to program partners in February 2014. As of July 31, 2015, the program had drawn $47.9 million. The audit objectives were to determine whether State officials (1) approved and disbursed CDBG-DR funds for the Small Business Grants and Loans program to assist eligible businesses in accordance with the guidelines established under the HUD-approved action plan and amendments and applicable Federal requirements and (2) established and maintained a financial management system that adequately safeguarded the funds and prevented misuse. 4 Results of Audit Finding 1: State Officials Did Not Always Disburse CDBG-DR Funds in Accordance With Federal and State Regulations State officials disbursed CDBG-DR funds for ineligible and unsupported costs. Specifically, $272,459 was disbursed for ineligible costs, and $152,703 was disbursed for unsupported costs for 8 of the 25 files reviewed We attributed these conditions to weaknesses in controls over verifying the program requirements before disbursing the CDBG-DR funds to recipients, compliance with the State’s own program policies and maintenance of adequate documentation. As a result, State officials could not assure HUD that CDBG-DR funds were adequately safeguarded and disbursed for eligible, reasonable, and necessary expenses. CDBG-DR Funds Disbursed for Ineligible Assistance State officials approved and disbursed $272,459 in CDBG-DR funds to four businesses for ineligible costs and contrary to the State’s program policy. Specific details are as follows: Application Number: 103-ED-32248-2013 Questioned Amount: $97,459 In January 2015, the business owner received $50,000 for working capital to cover mortgage costs and $47,459 for construction-related activities. Contrary to Federal regulations and State policies, State officials did not verify whether the applicant had flood insurance coverage and as of October 2015, had not obtained proof of flood insurance coverage. They were aware of the missing documentation and contacted the applicant by phone in June 2015. Federal Register Notice 78 FR 14345 (March 05, 2013) requires that HUD-assisted property located in a special flood hazard area obtain and maintain insurance in the amount and duration prescribed by the Federal Emergency Management Agency’s National Flood Insurance Program and that the grantee implement procedures and mechanisms to ensure that assisted property owners comply with all flood insurance requirements before providing assistance. Section 102(a) of the Flood Disaster Protection Act of 1973 (42 U.S.C. (United States Code) 4012a) requires the purchase of flood insurance protection for any HUD-assisted property within a special flood hazard area. In addition, the State’s policy required a final inspection of the property when construction-related activities or expenses were reimbursed. However, State officials contended that the final inspection would be conducted at the closeout of the grant and if the applicant did not provide proof of flood insurance, either the award amount would be adjusted for other eligible expenses or the funds would be recaptured. However, State officials should have obtained required documents before disbursing the CDBG-DR funds. We attributed this condition to State officials’ lack of procedures to ensure that applicants provided proof of flood insurance before disbursing the funds and weaknesses in the timely closeout of the grant after final disbursement was provided to the applicant. As a result, $97,459 was considered ineligible. 5 Application Number: 103-ED-31974-2013 Questioned Amount: $50,000 In January 2015, State officials disbursed $50,000 for construction-related repairs to an applicant for a business located within a special flood hazard area. According to State officials, the items funded were power posts and driveway repairs, which were not eligible for flood insurance coverage as they were not located in an insurable structure. The photographs of the damage showed only dead shrubbery. However, according to an inspection report, only the flooring, carpet, drywall, and electric outlets were damaged. Further, a transmittal memorandum summary in the State’s database showed that the driveway and power posts were not listed in the inspection report. As a result, $50,000 was considered ineligible. Application Number: 103-ED-916-13 Questioned Amount: $75,000 In September 2013, State officials disbursed $100,000 for working capital to cover the business owner’s wages contrary to the State’s February 2014 policy. Based on the documentation reviewed, the business suffered no physical damage. According to the State’s policy, an applicant that incurred indirect damage caused by a documented power outage, road closures, or the inability to conduct business due to storm-related damages for more than or equal to 120 hours (5 days) could receive assistance of 6 months eligible expenses up to a maximum $25,000, and the owner’s wages were excluded from the calculation of working capital for wages. A letter from the utility company showed that the business did not have power from October 29 through November 2, 2012 (5 days); therefore, the applicant should have received the allowable maximum amount of $25,000. State officials stated that the application was processed and approved under the State’s June 2013 draft policy. However, a review of the State’s policies version control log contradicted this claim as the February 2014 policy manual was the first policy distributed to the State’s program partners and limited assistance to $25,000. As a result, $75,000 ($100,000 - $25,000 maximum cap) was considered ineligible. Application Number: 71-ED-33467-2013 Questioned Amount: $50,000 In April 2015, State officials disbursed $50,000 for working capital to cover mortgage costs that required the applicant to have flood insurance coverage because the property was located in the flood zone. After our inquiry, State officials changed the working capital assistance for mortgage costs to instead be used for property taxes and stated that flood insurance was not required. However, according to Federal regulations, flood insurance is required for property located in a flood zone. In addition, a review of the annual property tax bill showed that the annual property tax was $46,000, and according to the State’s policy, the applicant could receive assistance of $23,000, which was 6 months of eligible expenses. Therefore, $27,000 ($50,000 - $23,000) was initially considered ineligible. However, State officials later stated that they have removed the property tax calculation from the working capital assistance and added back applicant’s original award calculation of $50,000 for the mortgage assistance because they believe that it did not require proof of flood insurance. As a result, we have revised the questioned costs from $27,000 (related to property tax) to $50,000 (mortgage) because mortgage assistance was provided for the property located in the flood zone and State officials did not ensure that the assisted property owner comply with the Federal regulations. 6 CDBG-DR Funds Disbursed for Unsupported Costs State officials approved and disbursed $152,703 in CDBG-DR funds to four businesses for unsupported costs contrary to the State’s program policy. Specific details are as follows: Application Number: 103-ED-483-13 Questioned Amount: $98,378 In March 2014, State officials disbursed $98,378 without obtaining adequate proof of loss. Specifically, $43,378 was disbursed for a vehicle, which the applicant claimed was submerged or lost due to the storm. Based on the motor vehicle registration, it appeared that the applicant still owned the vehicle in 2013. An insurance claim loss reported that the damage to the vehicle was not significant, and the insurance company disbursed only $100 for the insurance claim. An additional $55,000 was disbursed to the applicant for the purchase of a forklift, but there was no evidence that the applicant owned a forklift before the disaster. Further, the documentation on file did not support the loss of either the vehicle or forklift. As a result, $98,378 was considered unsupported. Application Number: 103-ED-32593-2013 Questioned Amount: $23,412 In January and November 2014, State officials disbursed $10,000 and $40,000, respectively, for working capital to cover rent, wages, and utilities. The allocation for rent was $42,000, but the file did not contain adequate documentation to support that the applicant paid the $7,000 monthly rent to its holding company. A review of the 2004 rental agreement showed that the applicant was both the landlord and the tenant and that the location of applicant’s businesses was the same. After our inquiry, State officials removed the rent from the working capital calculation. It appeared that State officials made the change because the applicant’s rent payment to its holding company was not at arm’s length and no documentation was provided to support the rent payment. In addition, State officials disbursed $23,412 in November 2014 for machinery and equipment purchased by the applicant’s holding company, and there was no evidence to support that the applicant reimbursed its holding company. According to the State’s policy, funds are disbursed to business owners based on documentation provided, such as itemized receipts, purchase contracts, proof of payments, etc. State officials stated that their policy did not require the reconciliation of transactions between related parties. However, they should have reimbursed only the costs incurred and paid by the applicant and not the holding company. As a result, $23,412 was considered unsupported. Application Number: 031-ED-32263-2013 Questioned Amount: $28,071 Contrary to the State’s policy and Internal Revenue Service (IRS) guidelines, $16,926 was disbursed to the applicant for working capital to cover mortgage, property tax, and utility costs pertaining to the applicant’s business use of his home. However, copies of the applicant’s tax return did not show a percentage of business use of the home. According to the State’s program policy, working capital completeness review section, the percentage of the home’s mortgage and utility cost noted as used for business on most recent tax returns could be provided for the working capital assistance. According to IRS publication 587, a deduction for a home office is based on the percentage of the home used for business, and home-related itemized deductions are apportioned between Schedule A and Business Schedule C or F. Copies of the applicant’s tax return did not show such allocation. 7 In November 2015, $9,375 was disbursed, and an additional $1,770 had been approved for disbursement based on quotes and estimates, dated February, March, and August 2014. However, State officials did not verify whether the applicant purchased tools related to logging and farming listed on the estimated quotes and whether the prices listed remained valid more than a year later. According to State’s program policy, award amount will be based upon review of estimates for the work to be completed or receipts for work already completed to determine if the cost was necessary, eligible and reasonable. State officials assumed that the price of the items listed in the estimated quotes did not fluctuate over time. As a result, $28,071 was considered unsupported. Application Number: 059-ED-31493-2013 Questioned Amount: $2,842 The business was initially awarded a grant in the amount of $86,164—$8,350 for furniture, fixtures, and equipment (FF&E) and $77,814 for inventory—in August 2013. Of $8,350 disbursed in 2013, only $6,326 was supported. However, in March 2014 State officials awarded an additional $13,836 which was disbursed in November 2014 to satisfy the maximum amount of the grant of $100,000, based solely on the allowable activities inspection report prepared by the State’s contractor. The inspection report was not reliable because the assessor observed that there was no damage at the time of the inspection and estimated the cost of the repairs based on the description of the damages reported by the applicant without knowing the actual damage and repair details. Although the repair had been completed at the time of the inspection, State officials did not request the repair invoice before disbursing the $13,836. However, State officials subsequently obtained additional documentations in the amount of $13,018 for the repair work. As a result, $2,842 ($2,024 for FF&E + $818 for the repair work) was considered unsupported. Conclusion State officials did not establish adequate controls to ensure that CDBG-DR funds were disbursed for eligible costs. Specifically, the State disbursed $272,459 in CDBG-DR funds for ineligible costs and $152,703 for unsupported costs. We attributed these conditions to weaknesses in controls over verifying the program requirements before disbursing the CDBG-DR funds to recipients, compliance with the State’s own program policies and maintenance of adequate documentation. As a result, State officials could not assure HUD that CDBG-DR funds were adequately safeguarded and disbursed for eligible, reasonable, and necessary expenses. Recommendations We recommend that HUD’s Deputy Assistant Secretary for Grant Programs direct State officials to 1A. Reimburse the line of credit for $272,459 in CDBG-DR funds disbursed to four businesses for ineligible costs from non-Federal funds. 1B. Provide adequate documentation to justify $152,703 in CDBG-DR funds disbursed to six businesses. If any amount cannot be adequately supported, it should be reimbursed from non-Federal funds to the State’s line of credit. 8 1C. Strengthen controls over program operations to provide greater assurance that costs charged to the CDBG-DR program are for eligible activities and supported by all required documentation, specifically by requiring recipients to provide receipts or other documentation to support the completed replacement or repair costs. 9 Finding 2: The Preliminary Award Funds Disbursed to Ineligible Businesses Were Not Recaptured in a Timely Manner State officials did not recapture preliminary award funds disbursed to ineligible businesses in a timely manner. We attributed these deficiencies to State officials’ desire to quickly disburse funds without sufficient planning and their focus on disbursing rather than recapturing funds. As a result, State officials did not adequately ensure that the funds were disbursed for eligible businesses and ineligible costs could be promptly recaptured. Weak Administrative Controls over Program Operations State officials started the Preliminary Award Initiative program in 2013 to support the small business community through an initial grant of $10,000. State officials provided all business owners that applied to the program the opportunity to apply for a preliminary award payment of $10,000 without proper verification of eligibility while a full program application was completed. Preliminary award recipients were required to submit their full application within 60 days of receiving the funds. The cutoff date to submit a full application was later extended to December 31, 2014. State officials reported that as of August 6, 2015, 253 of 466 preliminary award recipients had received additional grants. The remaining 213 businesses had received only preliminary award grants and were subject to eligibility determination for other grants. During the walk-through of the grant review process, State officials explained that the applications were received by Small Business Development Center (SBDC)3 staff, which determined whether a business was eligible for a grant. To deny the application and start the recapture procedure, a determination was made by SBDC staff and approved by State officials. State officials indicated that staffs from both SBDC and the State monitored the applications for delayed progress in the IntelliGrants4 system. They further stated that in addition to the IntelliGrants system, the program maintained an internal tracker to assist with the program progress metrics. However, during a review of 89 preliminary award recipients in the IntelliGrants system, we noted a number of instances of delayed progress and inaccurate current status. The owners of a home-based business received $70,931 for repair of the house from the NY Rising Housing Recovery Program and also received a $10,000 preliminary award in January 2014. However, as of December 1, 2015, there were no business-related documents, such as tax returns or proof of loss, and no receipts in the IntelliGrants system. The applicant document checklist in the IntelliGrants system was last updated in April 2015, and no further action had been taken. The status of this grant in the IntelliGrants system was “face value review,” which showed that SBDC staff was reviewing the file to collect documents and put together a request for assistance. 3 SBDC, the State’s subrecipient, is responsible for conducting applicant case management, collecting application documents, and packaging applications for State approval. 4 The IntelliGrants system is the record-keeping system used by the State for its Rising Small Business Recovery program. 10 One business was determined to be ineligible on November 24, 2014, because the applicant failed to provide proof of legal residency. State officials sent out the recapture letter on January 21, 2015. However, as of December 1, 2015, the status of the business in the IntelliGrants system was marked “face value review” rather than “not eligible.” Two businesses were ineligible to receive grant funds because their gross sales amounts were less than $25,000 in accordance with the small business policy manual. State officials made the ineligible determination for one business on April 6, 2015, but had not notified the business as of December 1, 2015. Further, State officials had not reviewed the other business, and the current status of this business as of December 1, 2015 was marked “face value review.” We attributed these conditions to weaknesses in administrative controls over program operations, whereby (1) State officials did not follow the cutoff date to submit a full application, (2) there were no specific written review procedures to follow the status of the preliminary award recipients, and (3) there was no evidence of an internal tracker to monitor the applications for delayed progress in the IntelliGrants system. As a result, State officials did not adequately ensure that the program always met its objectives and the required financial management system had been maintained to safeguard the funds and prevent misuse. Insufficient Recapture Policy State officials included the recapture policy in the small business policy manual. However, this policy did not specify the procedures for recapturing funds and, therefore, had not been implemented. Regulations at 24 CFR (Code of Federal Regulations) 85.20(b)(5) require that Federal funds be used for allowable costs in accordance with agency program regulations. State officials should recapture at least $300,000 from 35 of 89 preliminary award recipients (businesses), according to our review, based on the information provided in the IntelliGrants system. There was one additional business from which State officials had recaptured $10,000. Application ID IntelliGrants Reason for recapture from Recapture $ status as of IntelliGrants as of amount December 1, 2015 December 1, 2015 1 007-ED-32481- Not eligible Material misrepresentation $10,000 2013 2 059-ED-31492- Not eligible Debarred from 11/2013 to $10,000 2013 11/2014 by NY State Dept. of Labor 3 059-ED-32551- Face value review Approved grant amount of $7,238 2013 $2,762 4 059-ED-54-13 Face value review Approved grant amount of $1,917 $8,083 5 059-ED-191-13 Face value review Missing full application $10,000 6 059-ED-31699- Not eligible Gross sales amount is less $10,000 2013 than $25,000. 11 Application ID IntelliGrants Reason for recapture from Recapture $ status as of IntelliGrants as of amount December 1, 2015 December 1, 2015 7 059-ED-32501- Not eligible Duplication of benefits $10,000 2013 8 059-ED-31948- Face value review Missing full application $10,000 2013 9 059-ED-32170- Face value review No proof of legal residency $10,000 2013 10 059-ED-39-13 Not eligible Closed business $10,000 11 059-ED-266-13 Preclosing review Approved grant amount of $3,834 $6,166 12 059-ED-32114- Face value review Missing full application $10,000 2013 13 059-ED-252-13 Face value review Gross sales amount of $2,850 $10,000 in 2011, $4,105 in 2012, and $0 in 2013. No proof of damage 14 059-ED-32428- Verification in Approved grant amount of $6,323 2013 process $3,677 15 059-ED-161-13 Verification in Approved grant amount of $3,345 process $6,655 16 059-ED-108-13 In progress Missing full application $10,000 17 059-ED-513-13 Face value review Missing full application $10,000 18 059-ED-440-13 Face value review Missing full application $10,000 19 059-ED-76-13 Face value review Missing full application $10,000 20 059-ED-31536- Inactive Missing full application $10,000 2013 21 059-ED-32091- Face value review Missing full application; $10,000 2013 phone disconnected 12 Application ID IntelliGrants Reason for recapture from Recapture $ status as of IntelliGrants as of amount December 1, 2015 December 1, 2015 22 059-ED-32836- Face value review Missing full application $10,000 2013 23 059-ED-31612- Preclosing review Approved grant amount of $7,176 2013 $2,824 24 059-ED-32531- Face value review No proof of damage $10,000 2013 25 059-ED-31570- Submit application Missing full application $10,000 2013 26 059-ED-32746- Not eligible Missing full application $10,000 2013 27 059-ED-31583- Not eligible Missing full application $10,000 2013 28 059-ED-181-13 Face value review Missing full application $10,000 29 059-ED-32745- Not eligible Missing full application $10,000 2013 30 087-ED-680-13 Preclosing review Approved grant amount of $6,546 $3,454 31 103-ED-531-13 Preclosing review Approved grant amount of $2,362 $7,638 32 103-ED-32037- Not eligible No damage from the storm $10,000 2013 33 103-ED-711-13 Not eligible Home-based business without $10,000 the necessary license or permit 34 103-ED-32834- Preclosing review Approved grant amount of $3,683 2013 $6,317 35 103-ED-32199- Face value review Missing full application $10,000 2013 36 119-ED-31865- Preclosing review Recreational facility yacht $10,000 2013 club, which “is not open to (recaptured) the public that targets a predominantly higher income clientele.” Total (excluding the $302,424 recaptured amount) 13 State officials reported on July 28, 2015, that 6 recapture letters were sent to the businesses, although 18 businesses were determined to be ineligible and subject to recapture. However, as of November 5, 2015, State officials had not sent recapture letters to the remaining 12 (18 minus 6) businesses. State officials also reported that they had confirmed one more ineligible business, had been reviewing 14 businesses regarding a final ineligibility determination after the initial ineligible determination, and had been waiting for more information to be submitted by SBDC staff for 7 additional businesses. The majority of preliminary award recipients received their funding from December 2013 to April 2014, but State officials had not finalized their review of all preliminary award recipients, including those determined to be ineligible by SBDC staff and those that did not submit all of the required documents along with a full application. State officials explained on December 17, 2015, that they were developing the recapture procedure. This insufficient recapture procedure caused the delay in recapturing funds from the ineligible businesses. The specific details of the delay in recapture are as follows: One business receiving the preliminary award funds was debarred by the New York State Department of Labor. This information was verified on May 22 and July 14, 2014, and the final ineligible determination was made on January 23, 2015, but State officials had not notified the business. State officials sent out the recapture letter to one business on January 21, 2015, followed by the ineligibility determination on September 23, 2014, because the applicant received insurance money for two cars that were claimed as a significant loss and used to support the grant. However, as of December 1, 2015, State officials had not begun collection efforts, and the $10,000 remained outstanding. State officials lost contact with at least two businesses while waiting for the businesses to submit required documentation. Specifically, one business was no longer at the address listed, and the phone number for the other business had been disconnected. State officials had not sent recapture letters to either business. We attributed this deficiency to State officials’ lack of planning for the preliminary award program. Further, State officials focused on disbursing the funds rather than recapturing them. As a result, they did not adequately ensure that the funds were disbursed for eligible businesses and ineligible costs could be promptly recaptured. Conclusion State officials did not maintain a financial management system that adequately safeguarded funds and prevented their misuse. Specifically, they did not 1) have adequate administrative controls over the Preliminary Award program operation and 2) develop sufficient recapture policies and procedures. We attributed these deficiencies to State officials’ desire to quickly disburse funds without sufficient planning and their focus on disbursing rather than recapturing funds. As a result, State officials did not adequately ensure that the funds were disbursed for eligible businesses and ineligible costs could be promptly recaptured. Recommendations We recommend that HUD’s Deputy Assistant Secretary for Grant Programs instruct State officials to 14 2A. Strengthen administrative controls to ensure that any ineligibility determination is immediately followed by the next level of management for further action and the current status in the IntelliGrants system is accurate. 2B. Incorporate and implement recapture policies and procedures to ensure that funds disbursed for ineligible businesses and costs are promptly recovered. 2C. Immediately recapture more than $300,000 in CDBG-DR funds disbursed to 35 businesses that was subject to full or partial recapture, thus ensuring that these funds will be put to their intended use. 15 Scope and Methodology We performed our audit fieldwork at the Governor’s Office of Storm Recovery located at 25 Beaver Street, New York, NY, from May to December 2015. The audit generally covered the period September 3, 2013, through March 31, 2015, and was extended as necessary to meet the objectives of the review. To accomplish our objectives, we Reviewed relevant CDBG-DR program requirements and applicable Federal regulations, including the Disaster Relief Appropriations Act of 2013, implementing regulations announced through Federal Register notices, and HUD guidance pertaining to the use of CDBG-DR funds. Reviewed the HUD-approved April 2013 State certifications and the May 2013 grant agreement executed between HUD and the State. Interviewed State officials to gain an understanding of the program. Obtained an understanding of the State’s management controls and processes by analyzing its responses to a management control questionnaire. Obtained an understanding of the control environment and operations by reviewing the State’s organization chart for administering its CDBG-DR grant and its CDBG-DR program policies, different versions of policy and procedures manuals, and procurement policy. Reviewed HUD’s monitoring reports for the period August 2013 to August 2014. Reviewed quarterly performance reports for the period July 2013 to March 2015 to document the amount spent and activity accomplished for the Small Business Grants and Loans program. Reviewed the State’s quality assurance reports related to the Small Business Recovery program. Reviewed the State’s audited financial statements for the period ending March 31, 2014. Reviewed the State’s board minutes and resolutions related to the Small Business Recovery program for the period April 2013 to March 2015. Reviewed reports from DRGR5 to obtain CDBG-DR expenditure information for the period September 2013 to March 2015. 5 DRGR was developed by HUD’s Office of Community Planning and Development for the CDBG-DR program and other special appropriations.. Grantees use the system to draw down funds and report program income. Data from the system are used by HUD staff to review activities funded under these programs and for required quarterly reports to Congress. 16 As of March 31, 2015, the State had disbursed $41.1 million in grant funds from 153 voucher drawdowns related to the Small Business Grants and Loans program and had processed 765 applications, consisting of 54 denied applications and 711 approved applications. We selected and reviewed a statistical sample of 36 voucher drawdowns totaling $9.6 million to determine whether all drawdowns were supported with the contracts, invoices, timesheets, etc. The sample consisted of 20 vouchers related to program delivery (27.9 percent of $9.6 million) and 16 vouchers related to grants (72.1 percent of $9.6 million) to 204 approved businesses. The results of our detailed testing was limited to the 36 vouchers reviewed and cannot be projected to the universe. Of the 204 businesses, we selected and reviewed a nonstatistical sample of 25 businesses to determine the eligibility of the business and expenses. The sample criteria were that each business received $50,000 or more in program funds and was randomly selected from the sampled 16 vouchers for grants. The 25 businesses selected for review were awarded $2.1 million in grant funds, with individual awards ranging from $50,000 to $100,000. For the preliminary award program, we identified 269 applicants awarded only $10,000 from a listing of all 711 applicants approved and assisted as of March 31, 2015, using ACL software and selected a random statistical sample of 90 of 269 applicants (90 percent confidence interval with 10 percent error rate) to determine whether State officials had reviewed the preliminary award recipients’ files. Of those 90 applicants, 89 were preliminary award recipients. We reviewed the 89 files to determine whether the applicants were eligible grant recipients in accordance with the small business program policy manual. If a business was determined by State officials to be ineligible, we reviewed whether steps were taken by State officials to recapture funds disbursed to recipients. The results of our detailed testing was limited to the 89 files reviewed and cannot be projected to the universe. We relied in part on computer-processed data primarily for obtaining background information on the State’s disbursement of program funds. We performed a minimal level of testing and found the data to be adequate for our purpose. We conducted the audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective(s). We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. 17 Internal Controls Internal control is a process adopted by those charged with governance and management, designed to provide reasonable assurance about the achievement of the organization’s mission, goals, and objectives with regard to Effectiveness and efficiency of operations, Reliability of financial reporting, and Compliance with applicable laws and regulations. Internal controls comprise the plans, policies, methods, and procedures used to meet the organization’s mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations as well as the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined that the following internal controls were relevant to our audit objectives: Program operations – Policies and procedures that management has implemented to reasonably ensure that a program meets its objectives. Compliance with laws and regulations – Policies and procedures that management has implemented to reasonably ensure that resource use is consistent with laws and regulations. Validity and reliability of data – Policies and procedures that management has implemented to reasonably ensure that valid and reliable data are obtained, maintained, and fairly disclosed in reports. Safeguarding 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: State officials did not implement adequate internal controls to always ensure that resource use was consistent with laws and regulations as they did not always approve and disburse CDBG-DR funding in accordance with regulations (findings 1 and 2). 18 State officials did not implement adequate controls to ensure the validity and reliability of data in the IntelliGrants system as the data were not always accurate (finding 2). State officials did not implement adequate controls to ensure that funds were always safeguarded against fraud, waste, and abuse. They used CDBG-DR funds for ineligible and unsupported costs and did not recapture ineligible CDBG-DR funds disbursed in a timely manner (findings 1 and 2). 19 Appendixes Appendix A Schedule of Questioned Costs and Funds To Be Put to Better Use Recommendation Funds to be put Ineligible 1/ Unsupported 2/ to better use 3/ number 1A $272,459 1B $152,703 2D $300,000 Totals $272,459 $152,703 $300,000 1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the auditor believes are not allowable by law; contract; or Federal, State, or local policies or regulations. 2/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program or activity when we cannot determine eligibility at the time of the audit. Unsupported costs require a decision by HUD program officials. This decision, in addition to obtaining supporting documentation, might involve a legal interpretation or clarification of departmental policies and procedures. 3/ Recommendations that funds be put to better use are estimates of amounts that could be used more efficiently if an Office of Inspector General (OIG) recommendation is implemented. These amounts include reductions in outlays, deobligation of funds, withdrawal of interest, costs not incurred by implementing recommended improvements, avoidance of unnecessary expenditures noted in preaward reviews, and any other savings that are specifically identified. In this instance, more than $300,000 disbursed to ineligible businesses should be recaptured and put to its intended use. 20 Appendix B Auditee Comments and OIG’s Evaluation Ref to OIG Auditee Comments Evaluation 21 Comment 1 22 Comment 1 Comment 2 23 Comment 3 Comment 4 Comment 5 24 Comment 5 Comment 1 Comment 6 Comment 7 25 Comment 7 Comment 8 Comment 9 26 Comment 9 Comment 10 Comment 11 27 Comment 11 Comment 12 28 Comment 13 29 Comment 13 Comment 14 Comment 15 Comment 16 30 Comment 17 Comment 18 31 Comment 19 Comment 20 Comment 21 Comment 22 32 Comment 22 33 OIG Evaluation of Auditee Comments Comment 1 State officials disagreed with the finding and stated that the program employed and implemented a multi-pronged approach to documentation collection and processing that includes various stages of review. State officials acknowledged, however, that the majority of applications referenced in the report were processed early in the life of the program, and where OIG cited deficiencies in documentation, the Program has since collected the majority of necessary documentation and where necessary implemented updated policies and procedures to ensure such documentation is collected in the future. However, our review of the sampled applicants’ files, which disclosed several deficiencies, covered the period September 2013 through March 2015; thus, our review was not limited only to the early phase of the program. Further, the report reflects a snapshot in time based upon the results of sampled disbursements and assisted businesses during the period of the audit scope. Any information provided concerning corrective action taken subsequent to the completion of the audit fieldwork that we could verify has been reflected in the report; otherwise, verification will have to occur during the audit resolution process. Comment 2 State officials stated that the requirement for flood insurance for assistance with mortgage expenses was revised during the audit period to no longer be required. However, no such statement or revised policy was mentioned or provided during the course of our fieldwork. Further, state officials acknowledged that proof of flood insurance should have been obtained, and if the applicant does not provide such prior to closeout of the grant, the applicant’s applicable assistance may be subject to recapture. Therefore, we maintain the position that State officials provided $97,459 to the applicant contrary to Federal regulations6. Comment 3 State officials stated that $50,000 was awarded for repairs that were not located in an insurable structure and as a result, flood insurance was not required. According to the officials, the program inspection scope was limited to building damages only, therefore, repairs related to power posts and driveway were not included in the inspection report and assumptions of damage were made. While repairs related to the power posts and driveway were not eligible for flood coverage and coverage was not required, the officials did not provide an explanation for not providing the award for the building damage, which is an insurable structure. Further, State officials did not obtain canceled checks as required to support that the applicant had incurred the expenses. Instead, officials 6 The National Flood Insurance Act of 1968, as amended, and the Flood Disaster Protection Act of 1973, as amended, 42 U.S.C. 4003 defines financial assistance for acquisitions or constructions purpose as any form of financial assistance which is intended in whole or in part for the acquisition, construction, reconstruction, repair, or improvement of any publicly or privately owned building or mobile home, and for any machinery, equipment, fixtures and furnishings contained or to be contained, and shall include the purchase or subsidization of mortgages or mortgage loans. 34 verified over the telephone with the vendor that the incurred expenses were paid in full. Regulations 24 CFR 85.20 (b) (2) require that grantees and subgrantees maintain record that adequately identify the source and application of funds provided for financially assisted activities. We also noted that one invoice did not appear to include repair costs pertaining to the power posts or driveway related items and instead detailed items related to a boat docking marina. As a result, $50,000 was considered ineligible. Comment 4 State officials stated that the application was approved in the fall of 2013 and the $100,000 disbursed in September 2013 was in accordance with the June 2013 draft policy. However, the State’s action plan, dated April 2013, provides that the business must have suffered eligible uncompensated losses as a direct result of Hurricane Sandy, Hurricane Irene or Tropical Storm Lee. Our review of the documents in the applicant file did not disclose that the applicant suffered any physical or economical loss but suffered business interruption (power outage for 5 days). The June 2013 draft version of the State’s policy requires the financial analysis of business operations to determine the working capital need and states that the applicant must have applied, or will apply, for all other disaster recovery assistance funds available through the Federal government. There was no evidence on file to indicate that such requirements were met. The State’s February 2014 policy reflects a simplified working capital award calculation, tiered funding based on the damage and limited assistance to $25,000. Therefore, the $75,000 disbursed was considered ineligible. Comment 5 State officials stated that the applicant’s original award calculation of $50,000 for the mortgage assistance was allowable and would not require proof of flood insurance. We maintain that flood insurance is required per the Flood Disaster Protection Act of 1973 (42 U.S.C. 4012a) (refer to footnote 6). State officials also stated that they have removed the property tax calculation from the working capital assistance award. We had considered $27,000 as an ineligible cost that was related to property tax assistance, we revised the ineligible questioned costs from $27,000 to $50,000. Comment 6 State officials stated that the applicant’s file contained several items documenting the ownership, damage and repair of the vehicle and forklift. Review of the April 2011 receipt for the purchase of the forklift detailed a handwritten invoice from the vendor for a pre-owned forklift without further detail. Also, it appears that the vendor operates a marine repair business and is not an authorized forklift dealer. Therefore, the authenticity of the handwritten invoice for the purchase of the forklift is questionable. Further, the damage to the vehicle was not considered significant by the insurance company. The documents and pictures related to proof of loss did not support damage or loss of the vehicle and forklift. Therefore, $98,378 is considered unsupported. Comment 7 State officials stated that the operating company and holding company were under common ownership, and that the operating company filed an application for the 35 assistance and its holding company did not. State officials assumed that funds from the holding company may have been used to support recovery of the operating company. As noted in the finding, State officials disbursed $23,412 for the items purchased by the holding company and there was no evidence to support that the operating company reimbursed its holding company. Since the items were purchased by the holding company, we conclude that the operating company did not have uncompensated loss or unmet need The Stafford Act, and 76 FR 71061 (November 16, 2011), requires grantees to ensure that assistance is provided to a person having the need for disaster recovery assistance only to the extent to which this need was not fully met by other assistance. As a result, $23,412 is considered unsupported. Comment 8 State officials stated that the majority of the property pertaining to the family farm operated by the applicant is for commercial use, the size of the home was equal to less than 1 percent of the land being attributed to residential use, and it was assumed the home was utilized for business operations related to the farm. Our review of documents on file did not provide evidence that the home was actively used for business operations. Copies of the applicant’s tax return did not show the applicable percentage allocation of the business use of the home. As a result, the provision of $16,926 for working capital to cover mortgage, property tax and utility costs pertaining to the business use of the home is contrary to IRS publication 587 and the State’s policy pertaining to the working capital completeness review. State officials stated that in addition to the original estimates, the applicant provided receipts for proof of purchases. However, the $9,375 disbursed in November 2015, and the additional $1,770 approved for disbursement, were based on outdated estimates from February, March, and August 2014 and there were no proof of purchase receipts. Regulations at 24 CFR 85.20(b)(6) require that accounting records be supported by source documents, such as paid bills, canceled checks, payroll and attendance records etc. As a result, $28,071 ($16,926+$9,375+$1,770) was considered unsupported. Comment 9 State officials stated that they obtained additional documentation from the applicant. We have reviewed the documentation provided on February 29, 2016 and determined that the additional documentation included some duplicate receipts that we had already considered. Nevertheless, we have adjusted the unsupported amount to $2,842. Comment 10 State officials provided documentation on February 29, 2016 to show the questioned assistance was not duplicative. We have verified such and therefore have removed reference to these two applicants from the final audit report. Comment 11 Based on the State officials’ explanation, we have removed the deficiency related to inadequate verification of duplication of benefit from the final audit report. 36 Comment 12 State officials agreed that the program did not verify benefits received prior to disbursement of the awards to the two farm businesses. State officials stated that due to program operations and timing related to processing applications, the majority of the program applicants would receive two verification of benefits (VOB) reviews. The State’s VOB policy, drafted in May 2015, requires confirmation of all sources of assistance disclosed by the applicant. However, State officials did not require the program to review the various source of income reported on the tax returns. It was not until we questioned the source of the benefit amounts that State officials realized that the two applicants received such benefits from the USDA. These benefits were not disclosed in the Duplication of Benefits Affidavits completed by the applicants. This demonstrates a weakness in the State’s VOB procedures. However, we have removed related discussion from our final audit report as it is immaterial for reporting purposes. Comment 13 State officials disagreed that the preliminary award program was not sufficiently reported to HUD and stated that although the initial documentation requirements between the Preliminary Award and full grant application were different, the grant initiative was 1) a subcomponent of full grant application which was described in the State’s Action Plan, , and 2) described in the Program’s Policy and Procedure Manuals, which were reviewed by HUD during HUD’s monitoring visit in February 2014. Accordingly, we have removed any discussion pertaining to the preliminary award program not reported to HUD from the final audit report. Comment 14 State officials disagreed that there were weak administrative controls over program operations and stated that they could routinely provide metrics related to the status of both preliminary award and full award applications and reviewed the program for opportunities to increase administrative controls through data analysis and comparison, application reviews, and oversight of general program progress. However, as noted in the report, State officials did not successfully assure that all preliminary award recipients applied for the full grants and the funds disbursed to the businesses which failed to meet the requirements of the program were recaptured in a timely manner. Comment 15 State officials explained that due to the nature of the program’s application population, the program extended deadlines to submit a full application and they had a cut-off date. However, the cutoff date of December 31, 2014 in the Small Business policy and procedure was not followed. Comment 16 State officials stated that the February 2014 Procedure Manual listed the processing procedures of the Preliminary Award application and the resulting full award application. However, the updated March 2014 Procedure Manual and its subsequent Procedure Manual did not include the same processing procedure for the Preliminary Award application. Further, there was no written follow up procedure including a reasonable time frame between the initial determination and the final determination dates. 37 Comment 17 State officials stated that the program had close oversight on the Preliminary Award population; however, we did not note any monitoring activities for the delayed progress pertaining to our sample in IntelliGrants. Comment 18 State officials stated that any files determined to be subject to recapture would be transferred to the applicable recapture status in IntelliGrants and sent any corresponding notifications upon full implementation of the recapture procedure. This is responsive to our finding. Comment 19 State officials stated that they formally launched the recapture process and the status of the Preliminary Award files were transferred to a “Payment Review” status. Further, as soon as this recapture process was operationalized, the first set of Preliminary Award recapture applicants were converted to the “Payment Review” status in IntelliGrants. The officials’ actions are responsive to our finding. However, State officials should strengthen their controls by prescribing a time frame between the first and second (or final) review and approval and describing the reason if not done within the time frame to avoid any unreasonable delays during the recapture process. Comment 20 State officials disagreed that the recapture policy was insufficient and they stated that they have spent considerable effort to develop a comprehensive and thoughtful recapture process and began to recapture the Preliminary Awards from the applicants starting February 16, 2016. Since the recapture process began after the end of our audit period, we did not verify the actual recapture process. Therefore, HUD will have to verify the State’s actions during the audit resolution process. Comment 21 State officials stated that of the 36 recapture files noted in our report, 12 were converted to “Payment Review” status in IntelliGrants, 5 of the 12 were sent recapture letters on February 16, 2016, and the remaining 7 were sent recapture letters on February 24, 2016. Further State officials stated that the recapture letters for the remaining 24 would be sent in March 2016. This is responsive to our finding. Comment 22 This is responsive to our finding. 38
New York State Did Not Always Disburse Community Development Block Grant Disaster Recovery Funds in Accordance With Federal and State Regulations
Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-03-29.
Below is a raw (and likely hideous) rendition of the original report. (PDF)