oversight

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)

    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