oversight

The State of New York Had Weaknesses in Its Administration of the Tourism and Marketing Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-09-16.

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, New York Tourism and
                   Marketing Program




Office of Audit, Region 2     Audit Report Number: 2016-NY-1009
New York – New Jersey                            August 12, 2016
To:            Stan Gimont
               Acting Deputy Assistant Secretary for Grant Programs, DG

               //SIGNED//
From:          Kimberly Greene
               Regional Inspector General for Audit, 2AGA
Subject:       The State of New York Had Weaknesses in Its Administration of the Tourism and
               Marketing Program


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 New York State Tourism and Marketing program. In
accordance with our regular practices, we are forwarding this discussion draft to you for your
review before our scheduled exit conference. At that meeting, we would like to discuss the
results of our efforts and any comments you may have concerning the findings and
recommendations. We encourage you to provide alternative resolutions.
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-1009
                    Date: August 12, 2016

                    The State of New York Had Weaknesses in Its Administration of the Tourism
                    and Marketing Program




Highlights

What We Audited and Why
We audited the New York State Community Development Block Grant Disaster Recovery
(CDBG-DR) assistance-funded New York State Tourism and Marketing program based on the
amount of funds drawn down to date and weaknesses identified in prior Office of Inspector
General audits. State officials allocated $30 million in CDBG-DR funds to the Tourism and
Marketing program, of which $22.4 million had been obligated and disbursed as of September
30, 2015. The objective of the audit was to determine whether State officials established and
maintained financial and administrative controls to ensure efficient and effective program
administration.

What We Found
State officials did not always establish and maintain financial and administrative controls to
ensure efficient and effective program administration. Specifically, cost estimates were not
always obtained for procurements so there was a lack of assurance that almost $22 million in
CDBG-DR funds allocated and disbursed for the Tourism and Marketing program were for
reasonable and necessary costs. In addition, State officials did not ensure subrecipient budgets
were complete so that they could effectively monitor program progress and hold subrecipients
accountable. We attribute these conditions to State officials not placing sufficient emphasis on
ensuring compliance with all procurement requirements and not knowing how the entire CDBG-
DR funds would be spent for the Tourism and Marketing program.

What We Recommend
We recommend that HUD direct State officials to (1) provide documentation showing that
approximately $22 million disbursed for contracts complies with applicable procurement
requirements and repay any amounts determined to be unsupported from non-Federal funds and
(2) include complete budgets in written agreements with subrecipients to ensure that CDBG-DR
funds are used for their intended purposes.
.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: There Were Control Weaknesses in the State’s Tourism and Marketing
         CDBG-DR Program.......................................................................................................... 4

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

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

Appendixes ..............................................................................................................10
         A. Schedule of Questioned Costs .................................................................................. 10
         B. Auditee Comments and OIG’s Evaluation ............................................................. 11




                                                                2
Background and Objective
Congress made available $16 billion in Community Development Block Grant Disaster
Recovery (CDBG-DR) assistance funds through the Disaster Relief Appropriations Act of 2013.
This funding was for necessary expenses related to disaster relief, long-term recovery, restoration
of infrastructure and housing, and economic revitalization. In accordance with the Robert T.
Stafford Disaster Relief and Emergency Assistance Act of 1974, these disaster relief funds were
intended for the most impacted and distressed areas affected by Hurricane Sandy and other
declared major disaster events that occurred during calendar years 2011, 2012 and 2013.

The State of New York requested a waiver to allow it to use CDBG-DR funds to support its
tourism industry and promote travel to communities in the disaster-impacted areas. The State
was granted a tourism waiver, effective April 24, 2013, only to the extent necessary to make
eligible use of no more than $30 million for assistance to the tourism industry.

The New York State Tourism and Marketing program is an industrywide advertising and
marketing campaign to provide immediate support to the State’s tourism industry and promote
travel to communities located in the 13 counties that received major disaster declarations as a
result of Hurricanes Sandy and Irene and Tropical Storm Lee. The focus of the campaign was
for the summer of 2013 (Memorial Day to Labor Day) in the 13 counties.

The State received an initial allocation of more than $1.7 billion on March 2013, a supplemental
allocation of almost $2.1 billion on November 2013, and a second supplemental allocation of
more than $600,000 on October 2014. More than $4.4 billion in CDBG-DR funds has been
allocated to the State, as of October 21, 2014, of which $30 million was allocated to the Tourism
and Marketing program. As of September 30, 2015, State officials had obligated and disbursed
more than $22.4 million for the Tourism and Marketing program.

The audit objective was to determine whether State officials established and maintained financial
and administrative controls to ensure efficient and effective program administration.




                                                 3
Results of Audit

Finding: There Were Control Weaknesses in The State’s Tourism
and Marketing CDBG-DR Program
State officials did not always establish and maintain adequate controls to ensure compliance with
procurement requirements and complete budgets. Specifically, independent cost estimates were
not conducted and program budgets in subrecipient agreements were not complete. We attributed
this condition to State officials’ not placing sufficient emphasis on ensuring compliance with all
procurement requirements and not knowing how the entire CDBG-DR funds would be spent for
the Tourism and Marketing program. As a result, there was a lack of assurance that almost $22
million allocated and disbursed for the Tourism and Marketing program was for reasonable and
necessary costs. Also, the State’s ability to effectively monitor program progress and hold
subrecipients accountable was lessened.


Independent Cost Estimates Were Not Conducted
State officials did not have documentation to support compliance with all procurement
requirements for the Tourism and Marketing program. There were two subrecipient agreements,
one with Empire State Development Corporation (ESDC) and another with the City of Long
Beach. The first subrecipient agreement was between the State and ESDC for conducting the
Tourism and Marketing program. ESDC had two subcontracts, one with BBDO1 and another
with Dream Catcher (both executed before Hurricane Sandy). The State explained that the two
subcontracts were open, valid, and in place at the time of Hurricane Sandy. Therefore, State
officials determined that since these subcontracts already existed and had similar scopes, they
could be paid for from Hurricane Sandy funds. Empire State executed two amendments, one
with BBDO and another one with Dream Catcher.2 The second subrecipient agreement was
between the State and the City of Long Beach. The City of Long Beach applied for and was
awarded CDBG-DR funds for the marketing and advertising campaign. The City of Long Beach
executed two subcontracts, one with Zimmerman-Edelson, Inc. and another with Creative
Advertising Concepts.3

Regulations at 24 CFR (Code of Federal Regulations) 85.36(f)(1) provide that grantees and
subgrantees must perform a cost or price analysis in connection with every procurement action,
to include contract modification. The method and degree of analysis depends on the facts
surrounding the particular procurement situation, but as a starting point, grantees must make
independent estimates before receiving bids or proposals. The Governor’s Office of Storm
Recovery certification states that units of general local government, State agencies and


1
  Batten, Barton, Durstine & Osborn
2
  The two amendments were executed on May 14 and July 9, 2013.
3
  The two subcontracts were executed on July 1 and August 2, 2013.



                                                        4
authorities, or subrecipients of State CDBG-DR assistance must demonstrate compliance with 24
CFR 85.36. However, State officials were not able to provide independent cost estimates that
were completed prior to the execution of the contracts or after the October 29, 2012, date of
Hurricane Sandy. The existing contracts had been amended to include promotional efforts related
to Hurricane Sandy without any cost estimates or additional competitive procurement to
determine if the costs were reasonable. We attributed this deficiency to State officials’ not
placing sufficient emphasis on ensuring compliance with all procurement requirements. As a
result, there was no assurance that approximately $22 million in CDBG-DR funds allocated and
disbursed for the Tourism and Marketing program was for reasonable and necessary costs.
Subrecipient Agreements Did Not Include Complete Program Budget Information
The subrecipient agreements did not contain complete program budgets for the two subrecipient
agreements. The first subrecipient agreement, dated May 15, 2013, was not to exceed the
CDBG-DR funding total of $40.5 million. This funding total was composed of several
programs: $30 million to promote tourism, $7.5 million to promote State of New York recovery,
and $3 million for small business mentorship and consulting. However, the agreement budget
showed that $21 million would be used to promote tourism, $7.5 million to promote State of
New York recovery programs, and $3 million for a small business mentorship and consulting
program. Overall, the agreement budget did not agree with the funding and did not contain
sufficient details. The second subrecipient agreement was dated June 19, 2013, for CDBG-DR
funds of $500,000 and did not include a detailed budget. Regulations at 24 CFR 570.503(b)(1)
provide that agreements must include a description of the work to be performed, a schedule for
completing the work, and a budget. These items must be in sufficient detail to provide a sound
basis for the recipient to effectively monitor performance under the agreement. We attributed
these deficiencies to State officials not ensuring budgets had sufficient details to facilitate
effective monitoring of performance. As a result of the deficiencies described above, there was a
lack of assurance that the State could effectively monitor performance under the agreements and
that the program was conducted in an efficient manner.

Conclusion
State officials did not comply with all procurement requirements and did not ensure subrecipient
budgets were detailed and complete. Specifically, independent cost estimates were not
conducted for all contracts and program budgets in subrecipient agreements were not complete
or sufficiently detailed. We attributed these conditions to State officials’ not knowing how the
entire CDBG-DR funds would be spent for the Tourism and Marketing program and placing
sufficient emphasis on ensuring compliance with all procurement requirements. As a result,
State officials did not always have assurance that all CDBG-DR funds were necessary and the
State was not always able to effectively monitor program performance.

Recommendations
We recommend that HUD’s Deputy Assistant Secretary for Grant Programs direct State officials
to

       1A.    Provide documentation showing that the approximately $22 million disbursed for
              the identified procurements complied with the applicable procurement



                                                5
      requirement at 24 CFR 85.36(f) and repay any amounts determined to be
      unsupported from non-Federal funds.
1B.   Obtain independent cost estimates before receiving bids or proposals for contract
      procurement.
1C.   Include complete budgets in written subrecipient agreements to ensure that
      CDBG-DR funds are used for their intended purpose.




                                       6
Scope and Methodology
The audit focused on whether State officials established and maintained financial and
administrative controls to ensure efficient and effective program administration. We performed
our audit fieldwork from November 2015 to April 2016 in the State’s office at 25 Beaver Street,
New York, NY. Our audit generally covered the period of January 29, 2013, through September
30, 2015, and was extended as necessary to meet the audit objective.
To accomplish our objective, we
          Reviewed relevant CDBG-DR program requirements and applicable Federal regulations
           to gain an understanding of CDBG-DR requirements.
          Obtained an understanding of the State’s management controls and processes through
           analysis of its responses to a management control questionnaire.
          Obtained an understanding of the control environment and operations through review of
           the State’s organizational chart for administration of its CDBG-DR grant and the CDBG-
           DR Tourism and Marketing program.
          Reviewed HUD’s monitoring reports related to the Tourism and Marketing program for
           the period August 2013 to August 2015 to identify deficiencies requiring corrective
           action.
          Reviewed quarterly performance reports related to the Tourism and Marketing program
           for the period October 2013 to June 2015 to document the amount spent and activities
           accomplished.
          Reviewed the State’s audited financial statements for the period ending March 31, 2014,
           and March 31, 2015.
          Selected and reviewed two drawdowns during the period January 2013 through
           September 2015, when more than $19.4 million was disbursed, representing
           approximately 87 percent of total disbursements for the Tourism and Marketing program.
           The results of the tests of the sampled drawdowns cannot be projected.
          Reviewed all six contracts, which included two subrecipient agreements and four
           subcontracts, related to the Tourism and Marketing Program for CDBG-DR funding. The
           total amount of the contracts related to CDBG-DR was $30 million.
          Reviewed reports from the Disaster Recovery Grant Reporting system4 to obtain CDBG-
           DR disbursement information for the audit period. Assessment of the reliability of the


4
    The Disaster Recovery Grant Reporting system is used for the CDBG-DR program and other special
     appropriations. It is used by grantees to draw down funds, report program income, and submit their action plans.




                                                            7
       data in the State’s system was limited to the data sample, which were reconciled to the
       auditee records. While we used the data obtained from this system for informational
       purposes, our assessment of the reliability of the data in the system was limited to the
       data reviewed. Therefore, we did not assess the reliability of this system.


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 finding
and conclusion based on our audit objective.




                                                8
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

   Effectiveness and efficiency of operations,
   Reliability of financial reporting, and
   Compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.

Relevant Internal Controls
We determined that the following internal controls were relevant to our audit objective:

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

   State officials did not have adequate controls to ensure that they obtained required cost
    estimates for procurements and complied with all requirements related to subrecipient
    budgets.




                                                  9
Appendixes

Appendix A


                             Schedule of Questioned Costs
                           Recommendation
                                             Unsupported 1/
                               number
                                   1A              $21,958,549

                                 Totals            21,958,549



1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                              10
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




                               11
Comment 1




            12
Comment 1


Comment 1




Comment 1


Comment 1


Comment 1




            13
Comment 1




Comment 1




Comment 1


Comment 1




            14
Comment 2




Comment 2




            15
Comment 2


Comment 2


Comment 3




Comment 3
Comment 3


Comment 3




            16
17
                         OIG Evaluation of Auditee Comments


Comment 1   State officials disagreed with the finding and explained that ESD performed a
            price analysis to determine the price of the contracts were reasonable. We
            disagree because for ESD, there was no independent cost estimate and cost or
            price analysis conducted for the Tourism and Marketing program funded with
            CDBG-DR funds. The price analysis referenced in the GOSR response refers to
            the 2011 procurement done prior to Hurricane Sandy. The State cannot ensure
            that the cost and price analysis were reasonable. We do not consider the use of
            cost proposals submitted by the proposing firms to be an independent analysis
            conducted before receiving bids or proposals. Regulations at 24 CFR 85.36 (f)
            (1) provide that grantees and subgrantees must perform a cost or price analysis in
            connection with every procurement action including contract modification. The
            method and degree of analysis is dependent on the facts surrounding the particular
            procurement situation, but as a starting point, grantees must make independent
            estimates before receiving bids or proposals
Comment 2   State officials disagreed with the finding and explained the City published a
            request for proposal on March 27, 2013. The City received four proposals, and a
            selection committee chose the two companies that represented the best value,
            Creative Advertising Concepts and Zimmerman/Edelson, to provide a regional
            and marketing advertising campaign. The cost effectiveness was a factor in the
            City of Long Beach decision-making. We do not consider the use of cost
            proposals submitted by the proposing firms to be an independent analysis
            conducted before receiving bids or proposals. Regulations 24 CFR 85.36 (f) (1)
            provides that grantees and subgrantees must perform a cost or price analysis in
            connection with every procurement action including contract modification. The
            method and degree of analysis is dependent on the facts surrounding the particular
            procurement situation, but as a starting point, grantees must make independent
            estimates before receiving bids or proposals.
Comment 3   State officials disagreed with the finding and explained that the fact that the
            detailed budget was less than the full subrecipient agreement did not limit the
            State’s ability to monitor performance since the State disbursed less than the limit
            of the detailed budget. We disagree because the subrecipient agreements did not
            contain complete program budget information. The ESDC subrecipient agreement
            dated May 15, 2013, provided a budget of $21 million to promote tourism, $7.5
            million to promote State of New York Recovery Programs, and $3 million for
            small business mentoring and consulting. The second subrecipient agreement
            dated June 19, 2013, provided CDBG-DR funds of $500,000. The budgets were
            not in sufficient detail to provide a basis for the recipient to effectively monitor
            performance with the agreement and did not agree with the total amount of
            funding. Regulations at 24 CFR 570.503 (b) (1) state that agreements shall



                                              18
include a description of the work to be performed, a schedule for completing the
work, and a budget. These items shall be in sufficient detail to provide a sound
basis for the recipient to effectively monitor performance under the agreement.




                                 19