oversight

Luzerne County, PA, Did Not Always Use Disaster Funds in Accordance With HUD and Federal Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-06-18.

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

     Luzerne County, Wilkes-Barre, PA
      Community Development Block Grant – Disaster
                   Recovery Grant




Office of Audit, Region 3     Audit Report Number: 2016-PH-1004
Philadelphia, PA                                    June 18, 2016
To:            Nadab O. Bynum, Director, Office of Community Planning and Development,
               Philadelphia Regional Office, 3AD
               //signed//
From:          David E. Kasperowicz, Regional Inspector General for Audit, Philadelphia
               Region, 3AGA
Subject:       Luzerne County, PA, Did Not Always Use Disaster Funds in Accordance With
               HUD and Federal Requirements




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of Luzerne County, PA’s Community Development
Block Grant Disaster Recovery funds.
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 215-
430-6734.
                    Audit Report Number: 2016-PH-1004
                    Date: June 18, 2016

                    Luzerne County, PA, Did Not Always Use Disaster Funds in Accordance
                    With HUD and Federal Requirements




Highlights

What We Audited and Why
We audited Luzerne County, PA’s Community Development Block Grant Disaster Recovery
grant provided through the Disaster Relief Appropriations Act of 2013. We selected the County
for review because (1) it had obligated the most disaster funds of the three Pennsylvania grantees
that received funds through the Act and (2) the U.S. Department of Housing and Urban
Development (HUD) had disbursed approximately $2.1 million to the County as of August 2015.
Our audit objective was to determine whether the County used its disaster funds in accordance
with applicable HUD and Federal requirements.

What We Found
The County did not always use its disaster funds in accordance with applicable HUD and Federal
requirements. Specifically, it did not ensure that subrecipients followed procurement
requirements, and it lacked documentation to support funds disbursed for a building
rehabilitation project. These conditions occurred because the subrecipients were not familiar
with the requirements and the County did not have sufficient controls to ensure that they
followed all requirements and provided adequate supporting documentation before disbursing
funds to them. As a result, HUD and the County did not have assurance that $227,413 disbursed
for contracts related to street improvements and flood drainage facilities was spent for costs that
were fair and reasonable and that $109,423 disbursed for a building rehabilitation project was
used in accordance with HUD and Federal requirements.

What We Recommend
We recommend that HUD direct the County to provide documentation to show that the $227,413
disbursed for three contracts was for costs that were fair and reasonable and provide
documentation to support $109,423 disbursed for the building rehabilitation project or repay
HUD from non-Federal funds for any amount that it cannot support. Further, HUD should
require the County to provide training to its subrecipients on Federal procurement and cost
principle requirements and improve its controls to ensure that it obtains adequate documentation
to demonstrate compliance with Federal procurement and cost principle requirements before
disbursing Block Grant disaster funds to subrecipients.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................5
         Finding: The County Did Not Always Use Disaster Funds in Accordance With
         HUD and Federal Requirements .................................................................................... 5

Scope and Methodology ...........................................................................................9

Internal Controls ....................................................................................................11

Appendixes ..............................................................................................................12
         A. Schedule of Questioned Costs .................................................................................. 12

         B. Auditee Comments and OIG’s Evaluation ............................................................. 13




                                                             2
Background and Objective
In September 2011, Luzerne County, PA, witnessed historical flooding from Tropical Storm Lee.
This flooding resulted in more than $100 million in residential, commercial, and infrastructure
damage. The U.S. Department of Housing and Urban Development (HUD) identified the
County as one of Pennsylvania’s five most impacted areas.

Through the Disaster Relief Appropriations Act of 2013, 1 Congress made available $16 billion in
Community Development Block Grant funds 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 to be used in 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.

On May 29, 2013, HUD issued a Federal Register notice, 2 which advised the public of the
allocation of $514 million in Block Grant funds appropriated by the Disaster Relief
Appropriations Act for the purpose of assisting recovery in the most impacted and distressed
areas declared a major disaster in 2011 or 2012. HUD awarded the County $9.7 million. On
July 21, 2014, HUD approved the County’s initial action plan and a grant agreement that
obligated all $9.7 million of the County’s disaster funds. As of January 14, 2016, the County
had budgeted more than $8.7 million for 10 projects as shown in the following chart.


                                  Project                            Amount budgeted

          West Pittston Borough (street improvements)                    $2,319,642
          Shickshinny Borough (street improvements)                       1,661,578
       Shickshinny Borough (water-sewer improvements)                     1,460,884
             Luzerne County (street improvements)                         1,400,000
       West Pittston Borough (water-sewer improvement)                     576,949
           Plymouth Township (street improvements)                         534,400
           Hunlock Township (street improvements)                          300,000
            Nanticoke City (flood drainage facilities)                     205,350
         Wilkes-Barre City (water-sewer improvements)                      191,671
Luzerne County Redevelopment Authority (building rehabilitation)           134,020
                                   Total                                 $8,784,494



1
    Public Law 113-2, dated January 29, 2013
2
    78 FR 32263, dated May 29, 2013



                                                3
The County consists of 4 cities, 36 boroughs, and 36 townships. It is governed by a county
manager and an 11-member county council. The County is a Block Grant entitlement grantee
and administers its disaster funds through its Office of Community Development located at 54
West Union Street, Wilkes-Barre, PA. While the County had awarded the majority of its funds
to subrecipients for street improvements, water and sewer improvements, flood drainage
facilities, and building rehabilitation, 24 CFR (Code of Federal Regulations) 85.40 states that
grantees are responsible for managing the day-to-day operations of grant- and subgrant-
supported activities. Further, regulations at 24 CFR 570.501 state that grantees are responsible
for ensuring that funds are used in accordance with all program requirements, including when
they use subrecipients.

Our audit objective was to determine whether the County used its disaster funds in accordance
with applicable HUD and Federal requirements.




                                                4
Results of Audit

Finding: The County Did Not Always Use Disaster Funds in
Accordance With HUD and Federal Requirements
The County did not demonstrate that it used all disaster funds in accordance with applicable
HUD and Federal requirements. Specifically, it did not ensure that subrecipients followed
procurement requirements, and it lacked documentation to support funds disbursed for a building
rehabilitation project. These conditions occurred because the subrecipients were not familiar
with requirements and the County did not have sufficient controls to ensure that they followed all
requirements and provided adequate supporting documentation before disbursing funds to them.
As a result, HUD and the County did not have assurance that $227,413 disbursed for contracts
related to street improvements and flood drainage facilities was spent for costs that were fair and
reasonable and that $109,423 disbursed for a building rehabilitation project was used in
accordance with HUD and Federal requirements.

The County Did Not Ensure That Its Subrecipients Followed Procurement Requirements
Contrary to 24 CFR 85.40(a) and 24 CFR 570.501(b), the County did not ensure that its
subrecipients procured services in accordance with the procurement standards at 24 CFR 85.36.
Specifically, it did not ensure that its subrecipients followed the following requirements:

    •    For the West Pittston Borough street improvements project, the subrecipient did not show
         that it negotiated a fair and reasonable compensation with the contractor it selected to
         provide engineering services. While 24 CFR 85.36(d)(3)(v) allowed the use of a
         qualifications-based method of procurement for architectural or engineering contracts,
         when price is not used as a selection factor, the procurement was subject to the
         negotiation of fair and reasonable compensation. Regulations at 24 CFR 85.36(f)(1) also
         required the subrecipient to perform a cost analysis for architectural or engineering
         services contracts. The subrecipient did not provide documentation demonstrating that it
         had negotiated the compensation with the selected contractor or that it had determined
         that the cost was fair and reasonable. Without this documentation, the $181,838 paid for
         engineering services was unsupported, and HUD and the County did not have assurance
         that up to $156,262 in future expenditures 3 would be spent for costs that were fair and
         reasonable. Further, the process the subrecipient used for this procurement was unusual
         because it evaluated the sole proposals that it received from two separate requests for
         proposals. Normally, only one request for proposal is issued at a time for a procurement
         action. Lastly, the subrecipient improperly included language in the contract allowing the
         contractor to be reimbursed for cost plus a percentage of cost, which is prohibited by 24
         CFR 85.36(f)(4), although it had not disbursed funds for this type of reimbursement.



3
    According to the contract, the subrecipient planned to use $338,100 in disaster funds for engineering services.



                                                           5
    •    For the Nanticoke City flood drainage facilities project, the subrecipient did not prepare a
         cost analysis in connection with a $40,000 change order that increased the cost of a
         contract from $89,633 to $129,633. Regulations at 24 CFR 85.36(f)(1) stated that a cost
         analysis was necessary for contract modifications or change orders unless price
         reasonableness could be established on the basis of a catalog or market price of a
         commercial product sold in substantial quantities to the general public or based on prices
         set by law or regulation. In this case, the contractor provided a quote with five line items
         for services related to sediment removal as follows:




         While the subrecipient stated that it had negotiated a fair price related to the change
         order, it did not provide documentation to show that the price was fair and reasonable.
         Without this documentation, the $40,000 paid was unsupported.

    •    For the West Pittston Borough street improvements project, the subrecipient did not use
         the proper method of procurement for an administrative consulting services contract.
         Regulations at 24 CFR 85.36(d)(3)(v) allowed the use of a qualifications-based
         procurement for architectural or engineering contracts. However, the subrecipient used
         the qualifications-based procurement method for a contract that was not for architectural
         or engineering services. Instead, the scope of services included providing assistance with
         basic record keeping and basic project management; compliance with program guidelines
         and regulations; the procurement of construction activities; and the execution of
         necessary local, State, and Federal contracts. Because the subrecipient did not use the
         proper procurement method, HUD and the County did not have assurance that the
         contract award was the most advantageous to the program, with price and other factors
         considered. The effect of using an improper method of procurement for services may be
         illustrated by the fact that the subrecipient received only one proposal after soliciting for
         services twice. Further, because the subrecipient did not provide documentation showing
         that it had negotiated the compensation with the selected contractor as required by 24
         CFR 85.36(d)(3)(v) and did not perform an independent cost estimate and cost analysis in
         connection with the procurement as required by 24 CFR 85.36(f)(1), HUD and the
         County did not have assurance that $5,575 in disaster funds disbursed for the contract and
         up to $184,425 in future expenditures were fair and reasonable. 4

4
    According to the contract, the subrecipient planned to use $190,000 in disaster funds for administrative
    consulting services.



                                                           6
The County Lacked Documentation To Support Funds Disbursed for Building
Rehabilitation
Contrary to 2 CFR Part 225, appendix A, paragraph C(1)(j), the County did not have
documentation to show how $109,423 in disaster funds was used for a building rehabilitation
project at its Redevelopment Authority. The Authority provided documentation showing it paid
more than $800,000 for the building rehabilitation project, including funds from HUD, the
Federal Emergency Management Agency (FEMA), and insurance companies. However, the
documentation did not show which costs related to the $109,423 in Block Grant Disaster
Recovery funds. Without this documentation, the $109,423 in Block Grant Disaster Recovery
funds paid for the building rehabilitation project was unsupported. For example, if the funds
were used toward a contract, the subrecicipent needed to document compliance with Federal
procurement requirements and the Davis-Bacon Act. The documentation provided by the
subrecipient did not show that it met these requirements.

The Subrecipients Were Not Familiar With Requirements and the County Did Not Have
Sufficient Controls
The issues described above occurred because the subrecipients were not familiar with
requirements and the County did not have sufficient controls to prevent or detect the issues
identified. For example, the cooperation agreements with the subrecipients stated that the
County reserved the right to monitor activity to ensure compliance with applicable Federal and
State regulations, and the job description for the County’s municipal projects manager stated that
he was responsible for overseeing all bidding documents, requests for proposals, and other
documents to ensure that subrecipients complied with procurement requirements. However, the
County’s files did not demonstrate involvement with its subrecipients’ procurement processes or
monitoring of the subrecipients related to HUD procurement requirements. Further, the County
did not have adequate controls to ensure that it had obtained adequate supporting documentation
to demonstrate compliance with Federal procurement and cost principle requirements before
disbursing funds to its subrecipients. The County did not devote significant resources to manage
the day-to-day operations of the $9.7 million in disaster funds it was awarded through the
Disaster Relief Appropriations Act of 2013. As of April 2016, it had used less than $52,000 for
planning and administration, and it had recently reduced the amount of funds budgeted for
planning and administration from $976,300 to $102,813. 5

Conclusion
The County did not always disburse its disaster funds in accordance with HUD and Federal
requirements. This condition occurred because its subrecipients were not familiar with the
requirements and the County did not have sufficient controls to ensure that they followed all
requirements and provided adequate supporting documentation before disbursing funds to them.




5
    The County initially budgeted $488,150 for planning and $488,150 for administration. During our audit, it
    reduced the budgeted amounts to $21,132 for planning and $81,681 for administration.



                                                         7
As a result, HUD and the County did not have assurance that $227,413 disbursed 6 for contracts
was spent for costs that were fair and reasonable and that $109,423 disbursed for a building
rehabilitation project was used in accordance with HUD and Federal requirements.

Recommendations
We recommend that the Director of HUD’s Philadelphia Office of Community Planning and
Development direct the County to

         1A.      Provide documentation to show that the $227,413 disbursed for three contracts
                  was for costs that were fair and reasonable or repay HUD from non-Federal funds
                  for any amount that it cannot support.

         1B.      Provide documentation to show that the contract prices for the engineering
                  services and administrative consulting services related to the West Pittston
                  Borough street improvements project were fair and reasonable and if not,
                  implement controls to ensure that it does not use Block Grant Disaster Recovery
                  funds to pay for any amounts that are not fair and reasonable.

         1C.      Implement controls to ensure that it does not use Block Grant Disaster Recovery
                  funds to pay for engineering costs related to the West Pittston Borough street
                  improvements project billed as reimbursement of cost plus a percentage of cost.

         1D.      Provide documentation to support $109,423 disbursed for the building
                  rehabilitation project or repay HUD from non-Federal funds for any amount that it
                  cannot support.

         1E.      Provide training to its subrecipients on Federal procurement and cost principle
                  requirements.

         1F.      Improve its controls to ensure that it obtains adequate documentation to
                  demonstrate compliance with Federal procurement and cost principle
                  requirements before disbursing Block Grant Disaster Recovery funds to
                  subrecipients.




6
    The $227,413 included $181,838 disbursed for an engineering contract on the West Pittston Borough street
    improvements project, $40,000 disbursed for the change order on the Nanticoke City flood drainage facilities
    project, and $5,575 disbursed for the administrative services contract on the West Pittston Borough street
    improvements project. The $227,413 does not include up to $156,262 and $184,425 in possible future
    expenditures for the contracts.



                                                          8
Scope and Methodology
We conducted the audit from September 2015 through March 2016 at the County’s office located
at 54 West Union Street, Wilkes-Barre, PA, and at our office located in Philadelphia, PA. The
audit covered the period May 2013 through January 2016.

To achieve our audit objective, we reviewed

   •   Relevant background information;
   •   Applicable regulations, HUD notices, and the County’s policies and procedures;
   •   The Disaster Relief Appropriations Act, Public Law 113-2;
   •   The County’s Block Grant Disaster Recovery action plan as approved by HUD on
       July 21, 2014, along with approved action plan amendments;
   •   The funding agreement between HUD and the County, dated July 21, 2014;
   •   Cooperation agreements between the County and its subrecipients; and
   •   A HUD management review report, dated July 13, 2015.

We interviewed responsible employees of the County and HUD staff located in Philadelphia,
PA.

As of January 14, 2016, the County had budgeted more than $8.7 million for 10 projects, and
HUD had disbursed more than $2.9 million to the County for 9 of the projects.

                                                          Total          Total      Percentage
                        Project
                                                         budgeted      disbursed    disbursed
    West Pittston Borough (street improvements)*         $2,319,642    $187,474          8
     Shickshinny Borough (street improvements)            1,661,578     141,877          9
  Shickshinny Borough (water-sewer improvements)          1,460,884     156,382          11
       Luzerne County (street improvements)*              1,400,000    1,400,000        100
  West Pittston Borough (water-sewer improvement)          576,949       55,037          10
     Plymouth Township (street improvements)*              534,400      405,674          70
      Hunlock Township (street improvements)*              300,000      300,000         100
      Nanticoke City (flood drainage facilities)*          205,350      129,647          63
   Wilkes-Barre City (water-sewer improvements)            191,671         0             0
      Luzerne County Redevelopment Authority
                                                          134,020       134,020         100
               (building rehabilitation)*
                          Totals                         $8,784,494   $2,910,111
* Projects selected for review




                                               9
During the initial phase of our review, we selected the three projects with the highest percentage
of budgeted funds disbursed as of August 31, 2015. However, during the audit phase, we
expanded this number to include the five projects with the highest percentage of budgeted funds
disbursed as of January 14, 2016, along with the West Pittston Borough project because it had
the largest amount budgeted. We used a nonstatistical sample design because it allowed us to
select projects that represented the highest risk to HUD based on the amounts budgeted and
disbursed. Although this approach did not allow us to make a projection to the entire population,
the 6 projects selected represented more than 55 percent of the funds the County had budgeted
for the 10 projects and 87 percent of the funds that HUD had disbursed to the County for the 9
projects. We reviewed files for the six projects to determine whether the County had used
disaster funds in accordance with applicable HUD and Federal requirements. We also performed
site visits to three of the six projects selected for review, including the Luzerne County street
improvements project, the Plymouth Township street improvements project, and the Luzerne
County Redevelopment Authority building rehabilitation project.

To achieve our audit objective, we relied in part on computer-processed data contained in HUD’s
Disaster Recovery Grant Reporting system 7 and provided by the County. We used the data to
select projects for review and to review the disbursements for those projects. Although we did
not perform a detailed assessment of the reliability of the data, 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 objective.




7
    The Disaster Recovery Grant Reporting system was developed by HUD’s Office of Community Planning and
    Development for the Block Grant Disaster Recovery funds and other special appropriations. Grantees use the
    system to submit action plans, drawdown funds, report program income, and submit quarterly performance
    reports. Data from the system are used by HUD staff to review activities funded under these programs and for
    required quarterly reports to Congress.



                                                         10
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:

•   Program operations – Policies and procedures that management had implemented to
    reasonably ensure that a program meets its objectives, while considering cost effectiveness
    and efficiency.
•   Compliance with laws and regulations – Policies and procedures that management has
    implemented to reasonably ensure that program implementation 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:

•   The County did not establish and implement procedures to ensure that it complied with all
    applicable procurement and cost principle requirements.




                                                  11
Appendixes

Appendix A


                             Schedule of Questioned Costs
                           Recommendation
                                             Unsupported 1/
                               number
                                   1A              $227,413
                                   1D               109,423

                                 Totals            $336,836



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.




                                              12
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comments 1
and 2

Comment 3

Comment 4




                               13
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation



Comment 5
Comment 6




Comment 6




Comment 5




                               14
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 6




Comment 7




                               15
                         OIG Evaluation of Auditee Comments


Comment 1   The County contended that an independent cost estimate will show that the price
            for the engineering contract for the West Pittston Borough street improvements
            project was fair and reasonable. During the audit, the subrecipient did not provide
            documentation demonstrating that it had negotiated the compensation with the
            selected contractor or that it had determined that the cost was fair and reasonable.
            As part of the normal audit resolution process, HUD will need to assess any
            documentation the County has obtained to determine whether it shows that the
            $181,838 disbursed for this contract was for costs that were fair and reasonable,
            and if not, direct the County to repay HUD from non-Federal funds any amount
            that it cannot support.

Comment 2   The County contended that West Pittston Borough received two proposals in
            response to its second advertisement for the engineering services contract. During
            the audit, we requested all documentation related to the procurement of the
            engineering services contract, including all requests for proposal and proposal
            submissions. In November 2013, West Pittston Borough issued a request for
            qualifications with a due date of November 25, 2013. It received one response,
            dated November 22, 2013. In December 2013, West Pittston Borough issued
            another request with a due date of December 26, 2013. It received one response,
            dated December 26, 2013. As noted in the audit report, West Pittston Borough
            evaluated the sole proposals that it received from two separate requests for
            proposal. The County and the subrecipient did not provide any additional
            documentation to show that it had received two submissions from the December
            2013 request. As part of the normal audit resolution process, HUD will need to
            assess any documentation the County has obtained to determine whether it shows
            that the $181,838 disbursed for this contract was for costs that were fair and
            reasonable, and if not, direct the County to repay HUD from non-Federal funds
            any amount that it cannot support.

Comment 3   The County indicated that an independent cost estimate was forthcoming for the
            Nanticoke City flood drainage project. HUD will need to assess the independent
            cost estimate and any other documentation provided after the audit to determine
            whether it shows that the $40,000 disbursed for the change order was for costs
            that were fair and reasonable, or direct the County to repay HUD from non-
            Federal funds any amount that it cannot support.

Comment 4   The County indicated that it had performed a cost analysis for the West Pittston
            Borough consulting services contract and found that the rates charged were fair
            and reasonable when compared to other consulting firms for similar services. As
            noted in the audit report, because the subrecipient did not use the proper
            procurement method, HUD and the County did not have assurance that the
            contract award was the most advantageous to the program, with price and other



                                              16
            factors considered. Further, the subrecipient did not provide documentation
            showing that it had negotiated the compensation with the selected contractor as
            required by 24 CFR 85.36(d)(3)(v) and had performed an independent cost
            estimate and cost analysis in connection with the procurement as required by 24
            CFR 85.36(f)(1). As part of the normal audit resolution process, HUD will need
            to assess the cost analysis described by the County and any other documentation
            provided after the audit to determine whether it shows that the contract price, and
            the $5,575 disbursed for the consulting services contract was for costs that were
            fair and reasonable, or direct the County to repay HUD from non-Federal funds
            any amount that it cannot support. Further, if the contract price was not fair and
            reasonable, HUD should require the County to implement controls to ensure that
            it does not use Block Grant Disaster Recovery funds to pay for any amounts that
            are not fair and reasonable.

Comment 5   The County contended that the $109,423 it disbursed for a building rehabilitation
            project was not subject to Federal procurement and Davis-Bacon requirements
            because the payment was a reimbursement to the subrecipient for expenses that
            were incurred prior to the award of the Block Grant Disaster Recovery funds. We
            disagree. In a March 5, 2013, Federal Register notice (78 FR 14342), HUD
            indicated that the provisions of 24 CFR 570.489(b) are applied to permit a State to
            reimburse itself for otherwise allowable costs incurred by itself or its recipients
            subgrantees or subrecipients on or after the incident date of the covered disaster.
            A November 18, 2013, Federal Register notice (78 FR 69109) indicated that in
            addition to the March notice, grantees are subject to CPD Notice 2013-05 which
            permitted grantees and subrecipients to reimburse themselves for allowable costs.
            A July 11, 2014, Federal Register notice (79 FR 40134) further clarified that the
            information about reimbursement of costs contained in the March notice applied
            to the County. While the County could disburse funds for pre-award costs, the
            guidance required the costs to be allowable and did not exempt the County from
            following other requirements, such as Federal procurement and Davis-Bacon
            requirements. Further, while the County indicated that the subrecipient incurred
            all $818,692 of costs in 2011 and 2012, we found that 12 invoices valued at
            approximately $70,000 were dated in 2013 and were for work performed in 2013.
            Lastly, while the County indicated that the subrecipient had paid all $818,692 in
            2011 and 2012, the information provided showed that only $725,211 had been
            paid during that period. The remaining $93,481, which included the $70,000
            discussed above plus retainage from earlier invoices, was paid between April
            2013 and August 2013.

Comment 6   The County contended that it was not required to maintain documentation
            showing how more than $818,692 the subrecipient paid for rehabilitation work
            through December 2012 was allocated between HUD, FEMA, and insurance
            funding sources. Both the grant agreement between HUD and the County dated
            July 21, 2014, and CPD Notice 2013-05 required the County to comply with
            requirements at 2 CFR Part 225, appendix A, paragraph C(1)(j) and document



                                              17
            costs adequately. The subrecipient provided documentation showing it paid
            $818,692 for the building rehabilitation project, using funds from HUD, FEMA,
            and insurance companies. Because the subrecipient used multiple funding
            sources, each of which may have had different requirements applicable to it, it
            was important that the County identify the specific costs for which it used
            $109,423 in Block Grant Disaster Recovery funds. Without this documentation,
            HUD cannot determine whether the costs met applicable HUD and Federal
            requirements.

Comment 7   The County acknowledged that files were not documented as thoroughly as
            possible and indicated that it would be formally requesting technical assistance
            from HUD to better strengthen its processes related to procurement standards and
            internal controls. We commend the County for its plan to request technical
            assistance. Regulations at 24 CFR 570.501 state that grantees are responsible for
            ensuring that funds are used in accordance with all program requirements,
            including when they use subrecipients. Therefore, it is important that the County
            provide adequate guidance to subrecipients, and that it implements controls to
            ensure that it obtains adequate documentation to demonstrate compliance with
            Federal procurement and cost principle requirements before disbursing Block
            Grant Disaster Recovery funds to subrecipients.




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