oversight

The City of Jersey City, NJ's Community Development Block Grant Program Had Administrative and Financial Control Weaknesses

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-03-30.

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

                   City of Jersey City, NJ
        Community Development Block Grant Program




Office of Audit, Region 2       Audit Report Number: 2016-NY-1007
New York-New Jersey                                 March 30, 2016
To:            Annemarie Uebbing
               Director, Office of Community Planning and Development, 2FD

               //SIGNED//
From:          Kimberly Greene
               Regional Inspector General for Audit, 2AGA

Subject:       The City of Jersey City, NJ’s Community Development Block Grant Program
               Had Administrative and Financial Control Weaknesses


Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of the City of Jersey City, NJ’s Community
Development Block Grant.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
212-264-4174.
                      Audit Report Number: 2016-NY-1007
                      Date: March 30, 2016

                      The City of Jersey City, NJ’s Community Development Block Grant
                      Program Had Administrative and Financial Control Weaknesses




Highlights

What We Audited and Why
We audited the City of Jersey City, NJ’s Community Development Block Grant (CDBG)
program in response to a hotline complaint. The objectives of the audit were to determine
whether allegations included in the complaint had merit and whether City officials had
established and implemented adequate controls to ensure that the City’s CDBG program was
administered in compliance with CDBG program requirements.

What We Found
Some complaint allegations had merit, and others could not be substantiated. The City’s CDBG
program was not always administered in compliance with program requirements. Specifically,
(1) program income was not always collected, recorded, or supported; (2) funds were used for
unsupported costs; (3) CDBG activities and the City’s home-ownership program were not
administered in compliance with program requirements; (4) unnecessary drawdowns were made;
and (5) the City’s Integrated Disbursement and Information System (IDIS1) information was not
accurate or traceable to that in its accounting records. As a result, more than $12.6 million2 was
not made available for eligible activities; more than $1.6 million and $9,813 were used for
unsupported and ineligible costs, respectively; more than $1.9 million was spent on properties
without recorded mortgages to ensure compliance with program requirements; $148,000 was
unsupported program income; $605,672 was misclassified in IDIS; and there was no assurance
that more than $1.1 million in future Section 108 income would be recorded in IDIS.

What We Recommend
We recommend that HUD instruct City officials to (1) reimburse more than $11.5 million in
program income to the City’s CDBG bank account, (2) record Section 108 income of $930,241
and program income of $51,860 in IDIS, (3) provide support for more than $1.8 million in
unsupported program income and costs, (4) record mortgages so that HUD’s interest of more
than $1.9 million is protected, (5) reimburse $110,795 to the CDBG line of credit for ineligible
and unreasonable costs, (6) reclassify $605,962 in IDIS, and (7) strengthen controls to ensure
that more than $1.1 million in future Section 108 income will be recorded in IDIS.


1
  IDIS is the drawdown and reporting system for HUD’s Office of Community Planning and Development formula
    grant programs.
2
  This amount consists of amounts included in recommendations 1A, 1B, 1C, and 2B.
Table of Contents
Background and Objectives ....................................................................................3

Results of Audit ........................................................................................................4
         Finding 1: Weaknesses in Program Administration Controls Did Not Ensure
                    Compliance With Program Requirements.................................................. 4

         Finding 2: Weaknesses in Program Financial Controls Did Not Ensure
                        Compliance With Program Requirements ..........................................11

Scope and Methodology .........................................................................................14

Internal Controls ....................................................................................................16

Appendixes ..............................................................................................................18
         A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 18

         B. Auditee Comments and OIG’s Evaluation ............................................................. 20

         C. Complaint Allegations and OIG’s Evalution ......................................................... 29




                                                            2
Background and Objectives
The Community Development Block Grant (CDBG) program was authorized by Title 1 of the
Housing and Community Development Act of 1974 (Public Law 93-383) to provide
communities with resources to address a wide range of unique community development needs.
The annual CDBG appropriation is allocated between States and local jurisdictions based on a
formula composed of several measures of community needs, including the extent of poverty,
population, housing overcrowding, age of housing, and population growth lag in relationship to
other metropolitan areas.
The CDBG program works to ensure decent, affordable housing, provide services to the most
vulnerable in our communities, and create jobs through the expansion and retention of
businesses. The CDBG program is an important tool for helping local governments tackle
serious challenges facing their communities. Each CDBG activity must meet one of the
following national objectives for the program: benefit low- and moderate-income persons,
prevent or eliminate slums or blight, or address community development needs having a
particular urgency because existing conditions pose a serious and immediate threat to the health
or welfare of the community for which other funding is not available.
The U.S. Department of Housing and Urban Development (HUD) awarded the City of Jersey
City more than $5.2 and $5.8 million in CDBG funds in program years 2014 and 2015,
respectively. The City’s CDBG program is administered by its Community Development
Division, which is located at 30 Montgomery Street, Jersey City, NJ.
On December 8, 2014, HUD’s Office of Inspector General (OIG) received a hotline complaint
alleging misappropriation of CDBG funds. Appendix C contains a summary of the results of our
evaluation of these allegations.
The objectives of the audit were to determine whether allegations included in the complaint had
merit and whether City officials had established and implemented adequate controls to ensure
that the City’s CDBG program was administered in compliance with CDBG program
requirements.




                                                3
Results of Audit

    Finding 1: Weaknesses in Program Administration Controls Did
    Not Ensure Compliance With Program Requirements
City officials did not always ensure that the City’s CDBG activities and Homeowner
Rehabilitation Program (HORP) were administered in compliance with CDBG program
requirements. Specifically our review of 15 CDBG Integrated Disbursement and Information
System (IDIS) activities revealed that (1) program income was not always collected, recorded, or
supported; (2) CDBG funds were used for unsupported costs; and (3) CDBG activities were not
always administered in compliance with program requirements. Further, our review of 10
homeowners assisted by HORP revealed that HORP was not always administered in compliance
with program requirements. We attributed these deficiencies to City officials’ unfamiliarity with
program requirements due to a lack of training and weaknesses in the City’s administrative
controls over monitoring its subgrantees due to inadequate policy and inadequate monitoring of
subgrantees. As a result, more than $12.6 million was not made available for eligible activities,
$1.8 million in costs and program income was unsupported and $9,813 in costs was ineligible,
more than $1.9 million was spent on six real properties and a homeowner unit that did not have
recorded mortgages or liens to ensure compliance with CDBG program requirements, and there
was no assurance that more than $1.1 million in future Section 108 program income would be
recorded in IDIS and used for eligible activities.

Uncollected, Unreported, and Unsupported Program Income
City officials did not always ensure that program income was collected, reported, and supported
in compliance with program requirements. Specifically,

          CDBG program income of more than $11.5 million generated from the disposition of a
           real property, previously assisted with CDBG funds, was neither collected nor reported in
           IDIS. Regulations at 24 CFR (Code of Federal Regulations) 570.505(b) provide that a
           CDBG-funded recipient must reimburse its program for the fair market value of an
           assisted property, less any portion for expenditures of non-CDBG funds for acquisition or
           rehabilitation, if the new use of the assisted property does not meet a CDBG national
           objective.

          Accumulated Section 108 income of $930,241 generated during 2012 through 2015 from
           the refinancing of a guaranteed Section 108 loan was not reported in IDIS or deposited in
           a custodial account to guarantee the repayment of the loan as required by the loan
           contract. Further, Section 108 income of more than $1.1 million3 is expected to be
           generated from 2016 through 2020 from the refinancing of the same loan. Regulations at


3
    This amount was calculated by multiplying the average annual program income from 2012 through 2015 by the
    number of years until loan maturity [($930,241/4) X 5].



                                                         4
       24 CFR 570.504(a) provide that receipt and expenditure of program income must be
       recorded as part of the financial transaction of the grant program and the City’s
       guaranteed Section 108 loan contract provides that Section 108 income shall be deposited
       in a separate identifiable custodial account (Loan Repayment Account) and that the
       income shall be used only to pay interest and principle due on the loan, or other
       obligation under the contract.

      CDBG program income of $2,025 and $49,835 generated from the repayment of CDBG
       relocation assistance and HORP loans, respectively, was not recorded in IDIS.
       Regulations at 24 CFR 570.504(a) provide that the receipt and expenditure of program
       income must be recorded as part of the financial transaction of the grant program.

      Documentation was not maintained to support whether CDBG program income of
       $148,000 was generated from the disposition of real properties acquired with CDBG
       funds. Regulations at 24 CFR 85.20(b)(2) require that grantees maintain adequate
       records to identify the source and application of funds provided for financially assisted
       activities.

We attributed these deficiencies to the City staff’s unfamiliarity with CDBG program
requirements and weaknesses in the City’s administrative controls over reporting program
income in IDIS. As a result, more than $12.5 million in program income was not made available
for eligible CDBG activities, $148,000 in program income was unsupported, and there was no
assurance that more than $1.1 million in future Section 108 income would be recorded in IDIS
and used for eligible activities.

Unsupported CDBG Costs
City officials disbursed more than $1.6 million in CDBG funds to develop 22 affordable
townhouses but did not maintain documentation to support the classification and eligibility of the
costs. Regulations at 24 CFR 570.207(b)(3) provide that CDBG funds cannot be used for
construction of new permanent residential structures except to support housing activities, such as
acquisition and clearance of sites and public improvement on publicly owned properties.
Regulations at 24 CFR 85.20(b)(2) provide that a grantee must maintain records to adequately
identify the source and application of funds provided for assisted activities. We attributed this
deficiency to the City staff’s unfamiliarity with program requirements. As a result, there was no
assurance that the $1.6 million was spent on eligible CDBG costs.

CDBG Activities Not Always Administered in Compliance With Program Requirements
City officials did not always administer CDBG activities in compliance with program
requirements although regulations at 24 CFR 570.501(b) provide that the recipient is responsible
for ensuring that CDBG funds are used in compliance with all program requirements.

      A registered mortgage was not imposed on a rental property that received $426,296 in
       CDBG funds for rehabilitation costs. The City subgrantee agreement required that
       properties have recorded mortgages and executed mortgage notes if they received more
       than $50,000 in CDBG funds for construction or rehabilitation.



                                                 5
          Liens or deed restrictions were not imposed on five properties that received more than
           $1.4 million in CDBG funds for acquisition and demolition costs. Regulations at 24 CFR
           84.37 provide that HUD may require recipients to record liens or other appropriate
           notices of record on properties that are acquired or improved with Federal funds. As a
           result of the materiality of the uncollected and unreported program income cited in
           finding 1, liens or other appropriate notices need to be imposed on the five properties to
           protect the City’s and HUD’s interest.

          City subgrantees awarded five contracts without maintaining documentation, such as bids
           received, bid analysis reports, cost estimates, contracts, and other applicable
           documentation, to support compliance with procurement requirements at 24 CFR 84.44-
           48. Regulations at 24 CFR 84.46 provide that procurement records and files for
           purchases exceeding the small purchase threshold must include at least the following: the
           basis for contractor selection, justification for lack of competition when bids or offers are
           not obtained, and the basis for award cost or price.

          A City subgrantee awarded three contracts funded from a single CDBG activity to three
           single bidders without documentation to justify these awards. Regulations at 24 CFR
           84.43 provide that all procurement transactions must be conducted in a manner that
           provides, to the maximum extent practical, open and free competition.

          The eligibility of 64 of 10 tenants occupying housing units at a residential property
           assisted with CDBG funds was questionable since 3 of the 6 were not low- to moderate-
           income households and the remaining 3 tenants’ income eligibility was unsupported. The
           subgrantee agreement between the City and its subgrantee provided that 40 of the 43
           units available at the property were low- to moderate-income housing units.

          Four contractors funded from a single CDBG activity paid their laborers lower wage rates
           than those required by the Davis-Bacon Act. Regulations in appendix A to 24 CFR Part
           84 provide that a contractor must be required to pay wages to laborers and mechanics at a
           rate not less than the minimum wages specified in a wage determination that is made by
           the Secretary of Labor.
We attributed these deficiencies to the City staff’s unfamiliarity with program requirements and
City officials’ inadequate monitoring of subgrantees. As a result, there was no assurance that the
6 properties would remain in compliance with program requirements, the 8 contracts were
procured in compliance with procurement requirements , and the 40 housing units were all rented
to low- and moderate-income households as required. Further, laborers were not paid prescribed
wages according to the Davis-Bacon Act.




4
    The six tenants were certified by the City’s subgrantee to be low- to moderate-income households.



                                                           6
HORP Not Administered in Compliance With Program Requirements
City officials did not always administer HORP in compliance with program requirements.
Specifically,

      Bank statements for a homeowner were not maintained as required by sections 2.2,
       entitled income eligibility, and 3.2, entitled required documentation, of the City’s
       homeowner rebate program policy and procedures manual (HORP policy) to support the
       homeowner’s income eligibility to receive $30,600 in CDBG funds.

      A registered mortgage was not imposed as required by section 3.10, entitled mortgage
       placement, of the City’s HORP policy on a homeowner property assisted with $21,195 in
       CDBG funds.

      A homeowner of a single-unit home received $9,730 above the CDBG assistance limit of
       $24,900 imposed by section 3.8, entitled loan amount, of the City’s HORP policy.

      CDBG assistance was disbursed for two homeowner rehabilitation contracts in amounts
       exceeding cost estimates by 10 percent, or an additional $83, although the City’s HORP
       policy provided that homeowners were responsible for those excess costs.

      A homeowner rehabilitation contract was awarded to a bidder that was allowed to submit
       two bids with two different prices for a single contract without justification. Specifically,
       the first bid was higher than the second bid, and the second bid was submitted after a
       lower bid from another source was received. Regulations at 24 CFR 84.43 provide that
       all procurement transactions must be conducted in a manner to provide, to the maximum
       extent practical, open and free competition.

      Procurement documentation, such as New Jersey State business registration, liability
       insurance, references, licenses, and other documents, was not maintained as required by
       section 7.2 of the City’s HORP policy to support the eligibility of three contractors
       awarded HORP contracts in program years 2012 and 2013.

We attributed these deficiencies to weaknesses in the City’s administrative controls over
monitoring City staff administering HORP. Therefore, there was no assurance that the $30,600
was awarded to an eligible homeowner, the $21,195 would be reimbursed to the City’s CDBG
line of credit if the assisted property was sold before the end of the affordability period, the
contract awarded to the bidder with two different submitted bids was awarded in compliance
with procurement requirements, and the three contractors awarded HORP contracts in program
years 2012 and 2013 were qualified to participate in HORP. Further, $9,813 in CDBG funds
was spent on rehabilitation costs exceeding the CDBG subsidy limit and 10 percent of the cost
estimate.
Conclusion
City officials did not always ensure that the City’s CDBG activities and HORP were
administered in compliance with CDBG program requirements. Specifically, program income
was not always collected, recorded, or supported; Section 108 income was not deposited in a
custodial account to guarantee the repayment of the City’s Section 108 loan; CDBG funds were


                                                 7
used for unsupported costs; and CDBG activities and HORP were not administered in
compliance with program requirements. We attributed these deficiencies to City officials’
unfamiliarity with program requirements and weaknesses in the City’s administrative controls
over monitoring its subgrantees and supervising its staff. As a result, CDBG funds that were
available for eligible CDBG activities were instead spent on unsupported and ineligible costs.
Further, there was no assurance that future Section 108 income would be recorded in IDIS and
used for eligible CDBG activities and CDBG-assisted properties would remain in compliance
with program requirements.
Recommendations
We recommend that the Director of HUD’s Newark, NJ, Office of Community Planning and
Development instruct City officials to
       1A.    Reimburse the City’s CDBG local bank account for the $11,532,769 in
              uncollected program income generated from the disposition of real property
              previously assisted with CDBG funds, thus ensuring that these funds can be used
              for eligible activities.
       1B.    Record $930,241 in Section 108 income generated from the refinancing of the
              Section 108 loan in IDIS, thus ensuring that $930,241 in Section 108 income is
              properly accounted for and put to better use.
       1C.    Strengthen administrative controls to ensure that future Section 108 income of
              $1,162,801 will be recorded in IDIS, thus ensuring that these funds can be used
              for eligible activities.
       1D.    Record $51,860 in program income generated from the relocation activity and
              repayment of HORP loans in IDIS, thus ensuring that $51,860 in program income
              is properly accounted for and put to better use.
       1E.    Provide documentation to support whether $148,000 in CDBG program income
              was generated from the disposition of real properties acquired with CDBG funds
              so that HUD can determine eligibility. Any recognized program income should
              be reimbursed to the City’s local bank account and recorded in IDIS, thus
              ensuring that these funds can be put to better use.
       1F.    Provide documentation to support the $1,652,223 in CDBG funds used for
              developing the 22 affordable townhouses. Any amount determined to be
              ineligible should be reimbursed to the City’s CDBG program line of credit from
              non-Federal funds.
       1G.    Strengthen administrative controls over record keeping to ensure that
              documentation is maintained to support the eligibility of costs paid with CDBG
              funds.
       1H.    Record the mortgage on the CDBG-assisted rental property that was rehabilitated
              or reimburse the $426,296 from non-Federal funds to the City’s CDBG program
              line of credit, thus ensuring that the funds are put to their intended use.


                                               8
1I.   Record the mortgages on the five CDBG-assisted properties that were demolished
      and acquired with CDBG assistance of $1,475,674, thus ensuring that these
      properties are administered in compliance with program requirements.
1J.   Provide documentation, such as proof of advertising, bids received, bid analysis
      reports, cost estimates, contracts, and other applicable records, to support
      compliance with Federal procurement regulations in the awarding of the five
      contracts.
1K.   Provide documentation to support compliance with Federal procurement
      regulations when contracts were awarded to the three single bidders.
1L.   Provide documentation to support the eligibility of the three tenants occupying
      low- to moderate-income housing units at a residential property assisted with
      CDBG funds.
1M.   Provide documentation to support the review of the remaining 30 tenants’
      eligibility to occupy low- and moderate-income housing units.
1N.   Provide documentation to support that those laborers employed by the four
      contractors are compensated in accordance with Davis-Bacon wage rates. If
      documentation cannot be provided, the City’s line of credit should be reimbursed
      from non-Federal funds for disbursements made to the four contractors.
1O.   Strengthen administrative controls over the City’s CDBG program to ensure
      compliance with program income and procurement requirements.
1P.   Provide documentation to support the income eligibility of the homeowner who
      received $30,600 in CDBG funds related to the rebate program. If documentation
      cannot be provided, the City’s CDBG program line of credit should be reimbursed
      $30,600 from non-Federal funds.
1Q.   Provide a registered mortgage for the homeowner property assisted with $21,195
      in CDBG funds. If a registered mortgage cannot be provided, the City’s CDBG
      program line of credit should be reimbursed $21,195 from non-Federal funds.
1R.   Reimburse $9,730 from non-Federal funds to the City’s CDBG program line of
      credit for the ineligible homeowner rehabilitation assistance provided that
      exceeded the subsidy limit.
1S.   Reimburse $83 from non-Federal funds to the City’s CDBG program line of
      credit for disbursements made for the two contracts exceeding 10 percent of the
      cost estimate.
1T.   Provide documentation to support compliance with Federal procurement
      regulations when a winning bidder was allowed to submit two bids with different
      prices for a single contract. If documentation cannot be provided, the City’s line




                                       9
      of credit should be reimbursed from non-Federal funds for disbursements made to
      the contractor.
1U.   Provide documentation, such as a New Jersey State business registration, liability
      insurance, licenses, and other documentation, to support the eligibility of the three
      contractors awarded HORP contracts in program years 2012 and 2013.
1V.   Strengthen administrative controls over HORP to ensure compliance with
      program requirements.
1W.   Provide training to City staff responsible for administering the City’s CDBG
      program to strengthen the staff’s awareness of CDBG program requirements.




                                        10
Finding 2: Weaknesses in Program Financial Controls Did Not
Ensure Compliance With Program Requirements
City officials did not always maintain a financial management system in compliance with
Federal regulations. Specifically, Line of Credit Control System (LOCCS)5 drawdowns were
made without documented needs, and the City’s IDIS information was not always accurate or
traceable to its accounting records. We attributed these deficiencies to weaknesses in the City’s
implementation of financial controls over approving LOCCS drawdowns and the City staff’s
unfamiliarity with program requirements due to a lack of training. As a result, $100,982 was not
available for eligible CDBG activities, the City’s book balance of available CDBG funds was
overstated by $397,031, and neither the City’s financial reports nor its IDIS reports accurately
and completely disclosed the financial results of the City’s CDBG program.

LOCCS Drawdowns Made Without Need
City officials did not always draw down CDBG funds from LOCCS in compliance with program
requirements. Specifically,

          On January 13, 2011, City officials drew down $387,600 in CDBG funds from LOCCS
           to acquire three properties for the creation of affordable housing, although the three
           properties were acquired between October 2011 and February 2015. Regulations at 24
           CFR 85.20(b)(7) require a recipient’s financial management system to follow procedures
           to minimize the time between the transfer of funds from the U.S. Treasury and
           disbursements made by grantees and subgrantees.

          City officials drew down $100,982 in CDBG entitlement funds to pay costs that had been
           paid with CDBG program income. Regulations at 2 CFR Part 225, appendix (A)(C)(1),
           provide that allowable costs must be necessary and reasonable for proper administration
           of Federal awards.

We attributed these deficiencies to weaknesses in the City’s financial controls over approving
LOCCS drawdown requests. As a result, the City’s CDBG funds were not used in a timely
manner as required, and the $100,982 was not available for eligible CDBG activities.

IDIS Information Not Always Accurate or Traceable to Accounting Records
City officials did not ensure that information recorded in IDIS was accurate and traceable to that
in the City’s accounting records. Specifically,

          City officials did not record the receipt or use of a LOCCS drawdown of $397,031 in the
           City’s accounting records or properly classify the drawdown to an IDIS activity for
           repayment of a Section 108 loan.




5
    LOCCS is the system HUD uses to disburse and track the payment of grant funds to grant recipients.



                                                           11
      City officials drew down $81,475 from the City’s CDBG program line of credit for a
       CDBG activity to acquire properties related to the creation of affordable housing.
       However, the officials mistakenly recorded the drawdown in IDIS for another activity
       related to creating economic opportunities.

      City officials mistakenly classified the use of $127,166 for code enforcement and tenant
       assistance activities in IDIS as CDBG planning and administrative activities.

Regulations at 24 CFR 85.20(b) provide that a subgrantee’s financial reporting system must
produce an accurate, current, and complete disclosure of financially assisted activities in
accordance with financial reporting requirements of the grant. We attributed these deficiencies
to the City staff’s unfamiliarity with program requirements due to a lack of training and
weaknesses in the City’s implementation of financial controls over reconciling information
reported in IDIS to that recorded in the City’s accounting records. As a result, the available
balance of CDBG funds recorded in the City’s accounting records was overstated by $397,031,
$81,475 was not traceable to the correct IDIS activity, and the misclassification of $127,166 for
code enforcement and tenant assistance activities created the appearance that the City’s use of
CDBG funds for planning and administrative costs exceeded the 20 percent threshold limit
imposed by Federal regulations.
Conclusion
City officials did not always maintain a financial management system that complied with Federal
regulations. Specifically, unnecessary LOCCS drawdowns were made, and the City’s financial
information reported in IDIS was not accurate or reconcilable to information reported in the
City’s accounting records. We attributed these deficiencies to weaknesses in the City’s financial
controls over approving LOCCS drawdowns and the City staff’s unfamiliarity with program
requirements. As a result, CDBG funds were not always available for eligible CDBG activities,
and the City’s CDBG financial and IDIS reports did not accurately and completely disclose the
financial results of the City’s CDBG program.

Recommendations
We recommend that the Director of HUD’s Newark, NJ, Office of Community Planning and
Development instruct City officials to
       2A.     Strengthen financial controls over cash flow to ensure that the time between
               making and spending LOCCS drawdowns is minimized.
       2B.     Reimburse the City’s CDBG program line of credit for $100,982, which was used
               to pay costs that had been paid with CDBG program income, thus ensuring that
               these funds can be used for eligible activities.
       2C.     Record the receipt and expense of $397,031 in the City’s accounting records and
               correctly classify the amount in IDIS to show the use of the City’s CDBG funds
               for repayment of a guaranteed Section 108 loan, thus ensuring that the funds were
               put to their intended use.




                                                 12
2D.   Reclassify $81,475 used for the creation of affordable housing in IDIS to the
      correct activity, thus ensuring that these funds were put to their intended use.
2E.   Change the IDIS matrix code for the use of $127,166 for code enforcement and
      tenant assistance activities to show that the City did not use more than 20 percent
      of its CDBG funds for planning and administrative costs, thus ensuring that these
      funds were put to their intended use.
2F.   Provide training to City staff responsible for reporting in IDIS and making
      drawdowns from LOCCS, thus ensuring compliance with CDBG program
      requirements.
2G.   Strengthen financial controls to ensure that LOCCS drawdowns are charged to the
      correct IDIS activities and traceable to the City’s accounting records.




                                        13
Scope and Methodology
The audit focused on whether the complaint allegations had merit and whether City officials had
established and implemented adequate controls over the City’s CDBG program to ensure that the
program was administered in compliance with CDBG program requirements. We performed our
audit fieldwork from May through October 2015 at the City’s Division of Community
Development located at 30 Montgomery Street, Room 404, Jersey City, NJ. Our audit generally
covered the period April 1, 2012, through March 31, 2014, and was extended as needed to meet
our audit objectives.
To accomplish our objectives, we
          Reviewed relevant CDBG program requirements and applicable Federal regulations to
           gain an understanding of the CDBG administration requirements.
          Interviewed officials from the HUD Newark, NJ, Office of Community Planning and
           Development, the City, and a City subgrantee.
          Obtained an understanding of the City’s management controls and procedures through
           analysis of the City’s responses to management control questionnaire.
          Reviewed the City’s consolidated annual performance and evaluation reports and action
           plan for CDBG program years 2012 and 2013 to gather data on the City’s expenditures
           and planned activities.
          Reviewed reports from IDIS to obtain CDBG disbursement and program income data for
           the audit period and reports from LexisNexis6 to obtain information related to real
           properties assisted with CDBG funds and contractors awarded HORP rehabilitation
           contracts. Our assessment of the reliability of IDIS and LexisNexis data was limited to
           the data sampled, and the data were reconciled with data in the City’s accounting records.
           Therefore, we did not assess the reliability of these systems.
          Reviewed the City’s organizational chart for its CDBG program and its CDBG policies,
           including its policies and procedures, grant administration procedures, and homeowner
           rebate program policy and procedures manual.
          Reviewed the most recent audited financial statements for the years ending December 31,
           2013 and 2012, the latest HUD monitoring report for the City’s CDBG and HOME
           Investment Partnerships Program, and city council resolutions for program years 2012
           and 2013.
          Selected and reviewed a nonstatistical sample of more than $2.4 million, or 16 percent, of
           the City’s total CDBG funds drawn down in program years 2012 and 2013 and more than
           $3.3 million from the City’s drawdowns made before or after 2012 and 2013. The


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                                                           14
       sample was selected based on one of the following risk factors: projects were
       progressing slowly, a lien was not imposed on the assisted property, significant program
       income appeared to be generated from the disposition of real property previously assisted
       with CDBG funds but immaterial program income was reported in IDIS, and a project
       was reported canceled in IDIS after CDBG funds were drawn down for the project.
      Reviewed documentation, including subgrantee agreements, environmental reviews,
       appraisal reports, procurement documents, monitoring reports, invoices, and contractor
       requests for payment, to support the eligibility of 15 IDIS CDBG activities included in
       our sample and costs associated with these 15 IDIS CDBG activities.
      Reviewed bank statements associated with the City’s CDBG program and traced deposits
       to IDIS reports. Our assessment of the reliability of data included in bank statements and
       IDIS reports was limited to the data sampled, which were reconciled among different
       sources. Therefore, we did not assess systems generating the data.
      Selected and reviewed a nonstatistical sample of 10 of 27 case files of homeowner
       rehabilitation funded under HORP in 2012 and 2013, April 1, 2012, through March 31,
       2014. The result of the sample testing was limited to the case files reviewed and cannot
       be projected to the universe. The 10 case files were selected based on one of the
       following risk factors: materiality of assistance provided to each property, lack of an
       imposed lien on an assisted property, and assistance provided in excess of the maximum
       assistance limit.
      Reviewed the eligibility of tenants of units at a rental property rehabilitated with
       assistance from the City’s CDBG program.
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.




                                                 15
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:

   Compliance with laws and regulations-Policies and procedures that management has
    implemented to reasonably ensure that resource use is consistent with laws and regulations.
   Safeguarding resources-Policies and procedures that management has implemented to
    reasonably ensure that resources are safeguarded against waste, loss, and misuse.
   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.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiencies
Based on our review, we believe that the following items are significant deficiencies:

    City officials did not always establish or implement adequate internal controls to ensure that
    resources were used in compliance with laws and regulations because (1) program income
    was not always collected, recorded in IDIS, and supported as required; (2) CDBG funds were
    disbursed without supporting documentation; (3) a recorded mortgage was not imposed on a
    real property rehabilitated with assistance from the City’s CDBG program; (4) CDBG funds
    were awarded and disbursed to contractors without documentation to support compliance



                                                  16
    with procurement requirements; (5) tenants who were not income eligible or whose income
    eligibility was unsupported were allowed to occupy low- and moderate-income housing
    units; (6) contractors that were awarded CDBG rehabilitation contracts paid their laborers
    lower than the Davis-Bacon wage rates; and (7) bank statements were not maintained to
    support the income eligibility of a homeowner who received homeowner rehabilitation
    assistance from HORP (finding 1).
   City officials did not always establish or implement adequate controls to ensure that
    resources were safeguarded against waste, loss, and misuse as CDBG funds were used for
    ineligible, unsupported, and unreasonable costs and program income was not collected and
    deposited into the City’s CDBG local bank account (findings 1and 2).
   City officials did not always establish or implement adequate controls to ensure the validity
    and reliability of data because information in the City’s accounting records was not always
    complete and reconciled with that in IDIS, information listed in IDIS was not always
    accurate, and the receipt of program income was not always reported IDIS (findings 1 and 2).




                                                17
Appendixes

Appendix A


           Schedule of Questioned Costs and Funds To Be Put to Better Use
Recommendation                                    Unreasonable or      Funds to be put
                Ineligible 1/ Unsupported 2/       unnecessary 3/      to better use 4/
    number
      1A                                                                        $11,532,769
      1B                                                                            930,241
      1C                                                                           1,162,801
      1D                                                                          51,860
       1E                             $148,000
       1F                             1,652,223
      1H                                                                           426,296
       1I                                                                        1,475,674
       1P                                30,600
      1Q                                                                            21,195
      1R             $9,730
       1S                83
      2B                                                   $100,982
      2C                                                                          397,031
      2D                                                                            81,475
       2E                                                                          127,166

     Totals          $9,813            $1,830,823          $100,982             $16,206,508



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.



                                                 18
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/   Unreasonable or unnecessary costs are those costs not generally recognized as ordinary,
     prudent, relevant, or necessary within established practices. Unreasonable costs exceed
     the costs that would be incurred by a prudent person in conducting a competitive
     business.
4/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an 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, if HUD directs City officials to implement our recommendations to

        Ensure that program income is collected and reported in IDIS, more than $11.5
         million in CDBG program income will be available for eligible CDBG activities.
        Ensure that program income is reported in IDIS, $930,241 in Section 108 income will
         be available to guarantee timely repayment of a Section 108 loan, and $51,860 in
         CDBG program income will be available for eligible CDBG activities.
        Strengthen the City’s administrative controls over reporting program income in IDIS,
         more than $1.1 million in future Section 108 income will be available to guarantee
         the timely repayment of Section 108 loans.
        Require that a mortgage be recorded for the six real properties rehabilitated, acquired,
         or demolished with CDBG assistance, HUD’s and the City’s interest of more than
         $1.5 million in CDBG funds will be protected, and program requirements will be
         enforced.
        Require that a mortgage be recorded for a homeowner property assisted with CDBG
         funds, HUD’s and the City’s interest of $21,195 in CDBG funds will be protected,
         and program requirements will be enforced.
        Record the receipt and expense of a CDBG drawdown that was used to repay a
         Section 108 loan, $397,031 will be properly recorded and disclosed in the annual
         financial results of the City’s CDBG program.
        Reclassify the CDBG drawdown in IDIS, HUD can be assured that $81,475 has been
         properly recorded in IDIS.
        Change the IDIS matrix code for IDIS activities, HUD can be assured that $127,166
         has been properly classified in IDIS.




                                               19
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               20
Ref to OIG   Auditee Comments
Evaluation


Comment 1




Comment 2




Comment 3




Comment 4




Comment 5




                            21
Ref to OIG   Auditee Comments
Evaluation


Comment 5


Comment 6




Comment 7




Comment 8




Comment 7




                            22
Ref to OIG   Auditee Comments
Evaluation


Comment 7




Comment 9




Comment 7




                            23
Ref to OIG   Auditee Comments
Evaluation




Comment 7




Comment 10


Comment 11




                            24
Ref to OIG   Auditee Comments
Evaluation



Comment 12

Comment 13


Comment 7




Comment 6




                            25
Ref to OIG   Auditee Comments
Evaluation


Comment 6




Comment 7




                            26
                         OIG Evaluation of Auditee Comments


Comment 1   City officials asserted that the estimate of reportable program income is closer to
            $2 million, not $11.5 million. However, City officials have not provided
            documentation to support their assertion. Therefore, City officials need to
            provide such documentation to HUD during the audit resolution process or
            reimburse the $11.5 million to the City’s CDBG local bank account.
Comment 2   City officials stated that the CDBG program should not be the beneficiary of the
            appreciated value of the property at the time of its disposition. Regulations at 24
            CFR 570.505(b) provide that a CDBG-funded recipient must reimburse its
            program for the fair market value of an assisted property, less any portion for
            expenditure of non-CDBG funds for acquisition or rehabilitation, if the new use
            of the assisted property does not meet a CDBG national objective. Therefore,
            City officials need to comply with regulations at 24 CFR 570.505(b) by
            reimbursing $11.5 million to the City’s CDBG program local bank account.
Comment 3   City officials requested that any sum realized from the sale of the property be
            converted to a lien on the new property purchased by the subgrantee. City
            officials need to submit a request for such to HUD during the audit resolution
            process.
Comment 4   City officials stated that the City has receipted in the Section 108 loan funds of
            $930,241 received for the MLK loan that is to be held as an asset for the life of
            the 108 loan. However, the Section 108 income cited in recommendation 1B is
            associated with the Section 108 funds received for the Hyatt hotel loan.
            Therefore, City officials need to provide HUD with documentation to support that
            Section 108 income of $930,241 for the Hyatt hotel was recorded in IDIS.
Comment 5   City officials’ actions are responsive to the recommendation. However, City
            officials need to provide HUD with the City’s policy that includes all procedures
            cited in the actions.
Comment 6   City officials’ action is responsive to the recommendation.
Comment 7   City officials’ planned corrective action is responsive to the recommendation.
            However, supporting documentation will need to be provided to HUD during the
            audit resolution process.
Comment 8   City officials stated that soft costs may also be eligible. However, City officials
            did not obtain HUD’s wavier as required to use the City’s CDBG funds for certain
            soft costs. Therefore, City officials need to request a waiver, if applicable, from
            HUD.
Comment 9   City officials provided documentation to support that the subgrantee status was
            reinstated by the State of New Jersey in 2013 after the subgrantee paid all prior



                                              27
              years’ annual reporting and reinstatement fees. Therefore, this noncompliance
              issue along with the related recommendation was deleted from the audit report.
Comment 10 City officials confirmed that CDBG assistance expended on the property
           exceeded the limit for one unit. Therefore, City officials need to reimburse
           $9,730 to the City’s CDBG program line of credit from non-Federal funds.
Comment 11 City officials stated that the $83 represents a rounding error. Therefore, City
           officials need to reimburse the $83 to the City’s CDBG program line of credit
           from non-Federal funds.
Comment 12 City officials stated that the initial bidding was separated into two parts and rebid
           and confirmed that there were two bids from one contractor as it related to Part B
           but no explanation. Therefore, City officials need to provide documentation to
           support compliance with regulations at 24 CFR 84.43, or reimburse the City’s
           CDBG program line of credit from non-Federal funds for disbursements made to
           the contractor.
Comment 13 City officials stated that the HORP grant guidelines provide that homeowners
           may select the contractor of their choosing, which does not have to be the lowest
           bid. The homeowner, associated with recommendation 1U, selected a contractor
           whose two bids exceeded cost estimates by more than 10 percent although the
           HORP program policy provides that the homeowner is responsible to pay for bid
           costs in excess of 10 percent of the cost estimate.




                                                28
Appendix C
                         Complaint Allegations and OIG’s Evaluation
CDBG Funds Had Been Misappropriated for at Least 2 Years
Evaluation: The allegation has merit. City officials spent CDBG funds on ineligible and
unsupported costs. Further, City officials did not (1) collect program income or report it in IDIS,
(2) record the mortgage on a property rehabilitated with assistance from the City’s CDBG
program to protect HUD’s and the City’s interest and enforce program requirements, (3) ensure
the City subgrantees’ compliance with procurement requirements when contracts were awarded,
and (4) monitor a subgrantee to ensure the income eligibility of tenants occupying housing units
rehabilitated with assistance from the City’s CDBG program.

Two Employees Were Paid From HUD Funds but Worked Full Time for Other City
Offices
Evaluation: The allegation has merit; however, payroll costs associated with the City’s housing
inspector and lead risk assessor are considered eligible CDBG delivery and code enforcement
costs. In addition to the HORP-assisted homes, which were inspected by the two employees,
other home inspections were assigned by the City’s Code Enforcement division to the two
employees. Therefore, the two employees’ compensation could be considered HORP delivery
costs or code enforcement costs.

The City Lacked a Construction Manager To Monitor American Institute of Architects
Documents and Review CDBG Rehabilitation Projects and Contractor Bids
Evaluation: The allegation could not be substantiated. City officials (1) awarded and disbursed
CDBG funds to City subgrantees for rehabilitation and demolition activities and (2) created and
funded HORP to provide rehabilitation assistance to eligible homeowners. The City had a
program analyst, who was responsible for monitoring American Institute of Architects
documents submitted by the subgrantees as well as monitoring the subgrantees’ progress in
completing CDBG activities. Further, the City had a housing inspector-cost estimator and a cost
estimator supervisor, who were responsible for creating, reviewing, and approving cost estimates
and administrating the bid process for rehabilitation contracts funded under HORP. Therefore,
although the City did not have a position entitled “construction manager,” there were three
different positions to monitor CDBG rehabilitation projects and contractor bids.

HORP Contracts Are Steered to a Related Contractor
Evaluation: The allegation could not be substantiated because our review did not show special
favoritism toward the contractor listed in the complaint. However, City officials did not always
follow procurement requirements when procuring rehabilitation contracts funded by HORP.




                                                 29
The City’s Lead Risk Assessor Is Not Qualified and Had Not Produced Monitoring Reports
for Projects Funded Under HORP
Evaluation: This allegation has merit and was addressed in a separate interim memorandum
(Audit Memorandum 2016-NY-1801, issued February 11, 2016).




                                             30