oversight

The State of Connecticut Did Not Always Comply With Community Development Block Grant Disaster Recovery Assistance Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-10-12.

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

                The State of Connecticut
        Community Development Block Grant Disaster
               Recovery Assistance Funds




Office of Audit, Region 1      Audit Report Number: 2017-BO-1001
Boston, MA                                       October 12, 2016
To:           Stanley Gimont
              Acting Deputy Assistant Secretary for Grant Programs, DG

              //Signed//
From:         Ann Marie Henry
              Acting Regional Inspector General for Audit, 1AGA

Subject:      The State of Connecticut Did Not Always Comply With Community
              Development Block Grant Disaster Recovery Assistance Requirements


Attached are the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our audit of the State of Connecticut’s Community
Development Block Grant Disaster Recovery assistance 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 contact Tomas
Espinosa, Assistant Regional Inspector General for Audit, at 617-994-8454, or me at 617-994-
8380.
                 Audit Report Number: 2017-BO-1001
                 Date: October 12, 2016

                 The State of Connecticut Did Not Always Comply With Community Development
                 Block Grant Disaster Recovery Assistance Requirements


Highlights

What We Audited and Why
We audited the Community Development Block Grant Disaster Recovery (CDBG-DR)
assistance grant provided to the State of Connecticut by the U.S. Department of Housing and
Urban Development (HUD) to monitor the expenditures of CDBG-DR funds as required by the
Disaster Relief Appropriations Act. Additionally, the State was ranked first in a risk assessment
of the five New England Hurricane Sandy grantees. The audit objective was to determine
whether the State complied with CDBG-DR requirements for its Owner Occupied Rehabilitation
and Rebuilding (rehabilitation) and Owner Occupied Reimbursement (reimbursement) programs.

What We Found
The State did not always comply with CDBG-DR requirements for its rehabilitation and
reimbursement programs. Specifically, procurements were not always executed in accordance
with HUD requirements. The State also did not always support the low- and moderate-income
national objective. Further, not all costs were eligible because the State did not always complete
environmental reviews in accordance with requirements. In addition, the State did not always
properly support and calculate the unmet need of homeowners. This condition occurred because
the State had inadequate controls for its rehabilitation and reimbursement programs. As a result,
more than $2.4 million in CDBG-DR funds was ineligible, and more than $13.5 million was
unsupported. Further, HUD did not have assurance that all environmental hazards were
appropriately identified and addressed or that low- and moderate-income information reported by
the State in HUD’s Disaster Recovery Grant Reporting (DRGR) system was accurate.

What We Recommend
We recommend that HUD instruct State officials to (1) repay from non-Federal funds or support
that the more than $13.3 million awarded for architect, engineer, and construction management
services contracts was fair and reasonable; (2) repay from non-Federal funds the $316,850 in
payments made for services outside the scope of work for seven contracts; (3) repay from non-
Federal funds or support that $227,138 in funds awarded met the low- and moderate-income
national objective; (4) repay from non-Federal funds more than $2.1 million in ineligible CDBG-
DR funds spent without the notice of intent and request for release of funds being published; and
(5) strengthen program controls over procurement, contract scope of work, national objective
documentation, environmental review determinations, and unmet need determinations.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding 1: Procurement Actions Did Not Comply With Federal Requirements ....... 4
         Finding 2: The State Did Not Always Comply With CDBG-DR Requirements for
         Its Owner-Occupied Programs ........................................................................................ 7

Scope and Methodology .........................................................................................13

Internal Controls ....................................................................................................15

Appendixes ..............................................................................................................17
         A. Schedule of Questioned Costs .................................................................................. 17
         B. Auditee Comments and OIG’s Evaluation ............................................................. 18
         C. HUD Comments and OIG’s Evaluation ................................................................. 30




                                                              2
Background and Objective
In January 2013, in response to the extraordinary destruction caused by Hurricane Sandy,
Congress passed and the President signed into law the Disaster Relief Appropriations Act, also
known as Public Law 113-2, which, among other things, appropriated approximately $50 billion
for recovery efforts related to the hurricane and other natural disasters specified in the Act. Of
those funds, approximately $16 billion was set aside for the Community Development Block
Grant Disaster Recovery (CDBG-DR) program to be administered by the U.S. Department of
Housing and Urban Development (HUD).

HUD released its CDBG-DR program allocations and program requirements in the 78 Federal
Register (FR) 14329 (March 5, 2013). This notice established the requirements and the
processes for the initial allocation of $71.82 million in Federal CDBG-DR program funding to
the State of Connecticut for disaster relief. HUD published a supplemental second allocation of
$66 million through 78 FR 69104 on November 18, 2013, and $21.459 million through 79 FR
62182 on October 16, 2014.

The governor of Connecticut designated the Department of Housing as the principal State agency
for administering the funds. The Department oversees the expenditure of funding to assist
impacted residents, organizations, and municipalities with their recovery and rebuilding efforts.
It administers the funding directly to benefit homeowners, property owners, business owners,
and other beneficiaries.

The State established the Owner Occupied Rehabilitation and Rebuilding (rehabilitation) and
Owner Occupied Reimbursement (reimbursement) programs to provide assistance to households
damaged by Hurricane Sandy. The rehabilitation program provided funding to homeowners in
need of rehabilitation, reconstruction, and mitigation assistance. Assistance was limited to
$150,000, with the potential for an additional amount of $100,000 for homeowners with
substantially damaged properties located within the 100-year floodplain. The reimbursement
program was designed to reimburse homeowners that used personal funds for the rehabilitation
or reconstruction of their homes, and reimbursement assistance was limited to $150,000. In
addition, the State had budgeted more than $44.7 million of the $159.3 ($71.82 + 66 + 21.459)
million in Sandy funds awarded for its rehabilitation and reimbursement programs as of
September 2015 and disbursed more than $20 million of the $70 million in CDBG-DR funds
under its action plan for home-ownership housing projects.

The audit objective was to determine whether the State complied with CDBG-DR requirements
for its owner-occupied rehabilitation and reimbursement programs. Specifically, we wanted to
determine whether (1) procurements were executed in accordance with Federal regulations, (2)
assistance was provided to eligible households for eligible costs, and (3) unmet need was
properly calculated.




                                                 3
Results of Audit

Finding 1: Procurement Actions Did Not Comply With Federal
Requirements
The State did not comply with Federal procurement requirements when awarding architect,
engineer, and construction management services. 1 Specifically, it did not conduct a cost
reasonableness analysis for $13.65 million to seven contractors for services for its rehabilitation
program. The State also paid $316,850 to perform services outside the contract scope of work.
These deficiencies occurred because of the State’s lack of familiarity with Federal procurement
regulations and because the State’s policies did not always comply with Federal procurement
regulations. As a result, HUD had no assurance that $13.65 million in contracts awarded to these
contractors was at the best available price. Further, $316,850 of $13.65 million in payments
made for services outside of the scope of work was ineligible.

The State Did Not Perform Cost Reasonableness Analysis
The State did not conduct the cost reasonableness analysis for its architect, engineer, and
construction management contracts. Specifically, it awarded a total of $13.65 million to seven
contractors for services without performing an independent cost estimate before solicitation and
cost analysis before awarding the contracts and contract modifications in accordance with 24
CFR (Code of Federal Regulations) 85.36(f)(1). The State awarded $7 million to the seven
contractors, $1 million per contract, in December 2013. The seven contracts were modified in
March 2015 to increase the value of six of the contracts by $1 million each, and one of the
contracts was increased by $500,000. A second modification was made in March 2016 to
increase the value of one of the contracts by $150,000. The total contracts increased from $7
million to $13.65 million, which was a 95 percent increase in the contract amount. The State
used its own procurement contracting manual, which did not include the requirement to conduct
independent cost estimates and cost analyses at the time of the initial contract award, as required
by 24 CFR 85.36(f)(1). However, the State certified to HUD that the State’s procurement
requirements were equivalent to Federal procurement regulations at 24 CFR 85.36. At the time
of the contract modifications, the State had developed a departmental procurement policy that
generally followed Federal procurement requirements, including the requirement to perform a
cost or price analysis in connection with every procurement action. However, the State did not
complete the required cost analysis in accordance with Federal requirements and its own
procurement policy. As a result, HUD had no assurance that the hourly rates included in the
$13.65 million awarded for architect, engineer, and construction management services was fair
and reasonable.




1
 We did not identify procurement deficiencies for the general contractors in our sample of the rehabilitation
program.




                                                          4
In addition, the State did not support the developed final fee schedule. Specifically, when using
the request for proposal method for procurement, proposal evaluation and contractor selection
are based on qualification and price factors in accordance with 24 CFR 85.36(d)(3). The State
stated that the price factors would account for 15 percent of the total bid evaluation in the
request. However, the State did not document its evaluation of the prices and used the fee
schedules provided by the architect, engineer, and construction management contractors to
develop a fee schedule that would be used by all of the contractors. The State’s fee schedule
included hourly rates for various professional services that included reimbursable costs. The
State procurement regulations required that a memorandum be prepared describing the basis of
award, including the principal elements of the negotiations and the significant considerations
relating to price. 2 The State could not provide documentation to support how it determined the
hourly and reimbursable rates in the schedule.

In multiple instances, the State exceeded the hourly rates initially proposed by the architect,
engineer, and construction management contractors. For example, one of the contractors offered
architectural and engineering services at a cost of $120 per hour. The State later contracted with
the contractor at a rate of $140 per hour for architectural services and between $140 and $160
per hour for various engineering services. One of the contractors offered project management
services at $135 per hour, and the State awarded $185 per hour for the service. Regulations at 2
CFR Part 225 3 define a cost as reasonable if in its nature and amount, it does not exceed that
which would be incurred by a prudent person under the circumstances prevailing at the time the
decision was made to incur the cost. It was not a prudent use of CDBG-DR funds to award
hourly rates in excess of prices submitted by the contractors.
Rehabilitation Program Services Were Outside the Contract Scope
The State contracted the architect, engineer, and construction management contractors to provide
services for the rehabilitation program. The contractors also provided services for the
reimbursement program, which were outside the contract scope of work. The rehabilitation
program contracts were later amended to increase funding for the continuation of services.
However, these contracts did not include services for the reimbursement program. One of the
contractors stated that the State discussed a separate contract for the reimbursement program but
that it did not execute a contract for these services. In addition, one of the contractors was not
notified until December 2014 that it would be working on the reimbursement program, which
was a year after the rehabilitation contract had been executed. Only four of the seven contractors
were selected to provide services for the reimbursement program. The State did not document
how it selected the contractors that provided services for the reimbursement program. The State
should have procured these services under a separate procurement action, as the scope of work
was not the same between the two programs and it may have been able to get a better price from
a bigger pool of applicants for the reimbursement program. As a result of its actions, the State



2
  Regulations of Connecticut State Agencies Title 4A State purchasing procedures under Sec. 4a-52-16.
3
  2 CFR Part 225 – Cost Principles for State, Local, and Indian Tribal Governments. 2 CFR Part 225 was
incorporated into 2 CFR 200 –Uniform Administrative Requirements, Cost Principles, and Audit Requirements for
Federal Awards effective December 26, 2014.




                                                       5
paid $316,850 in ineligible costs to the contractors for work that was outside their contract scope
of work.
Conclusion
The State did not comply with Federal procurement requirements when awarding architect,
engineer, and construction management services. This condition occurred because of the State’s
lack of familiarity with Federal procurement regulations. In addition, the State’s policies did not
always comply with Federal regulations. As a result, HUD had no assurance that $13.65 million
in contracts awarded to architect, engineer, and construction management contractors was at the
best available price. Further, the State incurred $316,850 in ineligible costs by paying for
services outside the scope of work.
Recommendations
We recommend that the HUD’s Acting Deputy Assistant Secretary for Grant Programs instruct
State officials to

           1A.     Support that the $13,333,151 4 awarded for the architect, engineer, and
                   construction management services contracts was fair and reasonable in
                   accordance Federal procurement requirements or repay to HUD from non-Federal
                   funds any amounts not supported.

           1B.     Repay to HUD from non-Federal funds the $316,850 in payments made for
                   services outside the scope of the seven contracts.

           1C.     Strengthen controls over procurement to ensure that procurement activities meet
                   Federal requirements.

           1D.     Strengthen controls to ensure that services are provided in accordance with
                   contract scopes of work.




4
    We reduced the $13.65 million that was unsupported by the ineligible costs in recommendation 1B.




                                                          6
Finding 2: The State Did Not Always Comply With CDBG-DR
Requirements for Its Owner-Occupied Programs
The State did not always comply with CDBG-DR requirements when providing rehabilitation
and reimbursement assistance to owner-occupied households impacted by Sandy. Specifically,
the State did not always adequately support the low- and moderate-income national objective
used. It did not support that all costs were eligible because it did not always complete
environmental reviews in accordance with requirements. In addition, it did not always properly
support and calculate the unmet need of homeowners. These deficiencies occurred because the
State had inadequate controls for its owner-occupied rehabilitation and reimbursement
programs. As a result, more than $2.1 million in CDBG-DR funds was ineligible, and $259,536
was unsupported. Further, HUD did not have assurance that all environmental hazards were
appropriately identified and addressed or that low- and moderate-income information for its
rehabilitation and reimbursement programs reported in the Disaster Recovery Grant Reporting
(DRGR 5) system was accurate.

National Objectives Were Not Supported
Although homeowners were eligible for assistance, the State did not adequately support the low-
and moderate-income 6(LMI) national objective used for two of the reimbursement projects and
one of the rehabilitation projects reviewed. Specifically, the State obtained 2012 tax returns
when the reimbursement applicants applied for assistance; however, it did not obtain updated
income information before awarding assistance in 2015 for the two reimbursement applicants to
ensure that they still qualified as low- and moderate-income households. 7 The State obtained the
2013 tax return data before awarding assistance to the rehabilitation applicant in 2014. The tax
return data showed that the applicant’s income exceeded the low income limit for the area;
however, the applicant was still classified as meeting the LMI national objective. This condition
occurred because State staff disregarded the State’s reimbursement and rehabilitation policies
and procedures and Federal regulations. As a result, $379,751 8 in CDBG-DR funds under the
low- and moderate-income national objective was not supported. Further, HUD relies on
national objective information reported by the State in its DRGR system to determine whether
the State meets the Disaster Relief Appropriations Act, 2013 (Pub. L. 113–2) requirement that at
least 50 percent of the CDBG-DR grant award be used for projects that benefit low- and
moderate-income persons. 9


5
  The DRGR system was developed by HUD’s Office of Community Planning and Development for the CDBG-DR
program and other special appropriations, such as the Neighborhood Stabilization Program. Grantees use this
system to draw down funds and report program income.
6
  Per 24 CFR Part 570.3, a low- and moderate-income household is defined as a household having an income equal
to or less than the Section 8 low-income limit established by HUD.
7
  24 CFR Part 570.3 states that grantees must estimate the annual income of a family or household by projecting the
prevailing rate of income of each person at the time assistance is provided for the individual, family, or household
(as applicable). Estimated annual income shall include income from all family or household members, as
applicable.
8
  Expenditures of $379,751 include ineligible costs of $152,613. Refer to the subheading, “Environmental Reviews
Were Not Completed in Accordance with Requirements.”
9
  The grant award is not complete and the final percentage has not been determined.




                                                          7
Costs Were Not Always Eligible or Supported
The State did not always support that all costs were eligible because it did not always complete
environmental reviews in accordance with requirements and did not always properly support and
calculate the unmet need of homeowners. As a result, the State spent more than $2.1 million 10 in
ineligible and $32,398 in unsupported costs.
Environmental Reviews Were Not Completed in Accordance With Requirements
The State did not always complete environmental reviews in accordance with CDBG-DR
requirements for its reimbursement program. Specifically, the State did not publish the required
notice of intent and request for release of funds or obtain HUD approval for 35 reimbursement
projects reviewed before committing and spending more than $2.2 million 11 in CDBG-DR funds.
The State was required to complete a notice of intent and request for release of funds for each
project that was categorically excluded subject to 24 CFR 58.5 and 58.6. Further, two of these
projects were shown as exempt but should have been classified as categorically excluded subject
to 58.5 and 58.6 because additional consultation was required.

Regulations at 24 CFR 570.200(a)(4) state that the environmental review procedures at 24 CFR
Part 58 must be completed for each activity (or project as defined in 24 CFR Part 58) as
applicable. Regulations at 24 CFR 58.22 state that neither a recipient nor any participant in the
development process may commit HUD assistance under a program listed in 24 CFR 58.1(b) on
an activity or project until HUD has approved the recipient’s request for release of funds and the
related certification from the responsible entity. The purpose of the environmental review
process is to analyze the effect a proposed project will have on the people and the natural
environment within a designated project area and the effect the material and social environment
may have on a project.

Additionally, the State did not always adequately support the determinations made on the
checklist to show compliance with all of the various Federal laws and authorities cited for the
reimbursement projects. In some cases, the assigned architect, engineer, and construction
management contractor completed the review with minimal documentation to support the items
on the checklist. In other cases, the assigned contractor prepared the environmental review
statutory checklists for the State and provided documentation to support some of the 27 items on
the checklist, such as maps, consultation letters, radon testing results, or a report from an
environmental company. For one project, the environmental review file included only a State
Historical Preservation Office exemption form and incomplete lead and asbestos applicability
forms. The file for each project should adequately support the determinations for the items on
the checklist. Based on our discussion with one of the contractors, the contractor stated that it
did not believe it was qualified to complete the environmental review without using an



10
   Expenditures of $2,143,525 include ineligible costs of $2,138,469 (refer to the subheading, “Environmental
Reviews Were Not Completed in Accordance with Requirements”) and ineligible costs of $5,056 (refer to the
subheading, “Unmet Need Was Not Always Properly Supported and Calculated).”
11
   Of the more than $2.2 million spent, $121,002 was repaid by one homeowner to the program.




                                                         8
environmental consultant and that the State would not reimburse it at the higher rate if it got the
licensed environmental consultant to complete the work.

Further, for one reimbursement activity reviewed, an environmental company used by the
architect, engineer, and construction management contractor identified lead and possible
asbestos-containing material and recommended that these issues be addressed. However, there
was no further action taken by the State to ensure that these issues were adequately addressed
before reimbursing the homeowner. The State required only that the homeowner sign a lead
acknowledgement form before it awarded the funds.

These deficiencies occurred because the State lacked knowledge of the environmental
requirements and did not have adequate protocols for its reimbursement program to ensure that
environmental determinations were properly completed and documented in accordance with
Federal requirements. Additionally, the State believed that the reimbursement program was
covered under its tier 1 environmental review for its rehabilitation program, which did not
require it to complete a notice of intent and request for release of funds for each project
(activity). As a result of the deficiencies identified, HUD had no assurance that the
environmental review was performed in accordance with requirements and that all environmental
hazards were addressed. At least $2.1 million in CDBG-DR funds was for ineligible costs due to
the lack of public notice and approval from HUD for each reimbursement project.

Unmet Need Was Not Always Properly Supported and Calculated
The Stafford Act and 76 FR 71061 (November 16, 2011) required grantees to ensure that
assistance be provided to a person having a need for disaster recovery assistance only to the
extent to which this need was not fully met by other assistance. This requirement prevents
duplication of disaster recovery benefits. However, the State did not always support and
properly calculate the determination for unmet need for 3 of the 10 rehabilitation projects
reviewed and 6 of the 8 reimbursement projects reviewed. Specifically, the State included
ineligible costs in its calculations, including luxury items or items not covered by CDBG-DR
guidance and the State’s policies, 12 such as landscaping and fences. In some cases, it did not
deduct the correct amount of other sources from the total costs. As a result, the State overpaid at
least $48,135 13 in ineligible funds to seven homeowners in excess of their unmet need causing a
duplication of benefits. Additionally, $201,888 14 in costs was not adequately supported by the
documentation provided by the homeowners causing a potential duplication of benefits.




12
   HUD’s Homeowner Rehabilitation Program Implementation Tool #2 states that assistance will not be used for
luxury items. The Stated rehabilitation program and reimbursement program guidelines both state that luxury items,
landscaping, and fences are ineligible items.
13
   Expenditures of $48,135 include ineligible costs of $43,079. Refer to the subheading, “Environmental Reviews
Were Not Completed in Accordance with Requirements.”
14
   Expenditures of $201,888 include ineligible costs of $169,490. Refer to the subheading, “Environmental Reviews
Were Not Completed in Accordance with Requirements.”




                                                        9
                                Applicant        Ineligible funds        Unsupported
                                 number             over paid            expenditures
                                    1065                 -                $31,363
                                    1266             $1,138                  1,035
                                    1377               3,918                   -
                                    1964               8,004                   -
                                    1182                 -                   5,348
                                    1251                 -                  21,075
                                    1071               6,524                12,556
                                    1332                 -                 125,411
                                    2099              28,551                  5,100

                                   Totals             48,135               201,888


Additionally, for the reimbursement program, the State could not provide documentation to show
that it performed a review for cost reasonableness before awarding the funds to the applicant as
required by CDBG-DR regulations and the State’s reimbursement program policies and
guidelines. The State did not follow its guidelines, which provide the following as an example of
the importance of determining cost reasonableness to avoid the payment of unreasonable costs:
“if the reasonable cost of a light fixture is determined to be $200, and the homeowner replaced
the fixture with a $1,500 crystal chandelier, the program would only reimburse the $200.” As a
result, the State may have included unreasonable costs in its calculations, thereby awarding funds
in excess of the homeowners’ unmet need. 15

This weakness occurred as a result of inadequate controls to ensure that only eligible, reasonable,
and supported costs were included in the calculation of unmet need. Additionally, the State
believed that the architect, engineer, and construction management contractors reviewed for cost
reasonableness. However, the State’s service contracts did not cover the reimbursement
program, and two contractors stated that they were not required to review for cost
reasonableness.




15
     We were unable to quantify the effect the lack of a review for cost reasonableness had on our sample.




                                                             10
Conclusion
The State did not always comply with CDBG-DR requirements when providing rehabilitation
and reimbursement assistance to owner-occupied households impacted by Hurricane
Sandy. This condition occurred because the State had inadequate controls for its rehabilitation
and reimbursement programs. As a result, more than $2.1 million in CDBG-DR funds was
ineligible and $259,536 was unsupported. Further, HUD did not have assurance that all
environmental hazards were appropriately identified and addressed or that low- and moderate-
income information reported in DRGR for its owner-occupied programs was accurate.
Recommendations
We recommend that the HUD’s Acting Deputy Assistant Secretary for Grant Programs instruct
State officials to

        2A.      Repay or support that $227,138 16 in funds awarded met the low- and moderate-
                 income national objective.

        2B.      Strengthen controls over properly documenting income information to ensure that
                 the low- and moderate-income national objective is properly supported.

        2C.      Repay to HUD from non-Federal funds the $2,138,469 in ineligible CDBG-DR
                 funds committed and spent without publishing the required notice of intent and
                 request for release of funds.

        2D.      Strengthen controls over environmental review determinations for its
                 reimbursement program to ensure that they are completed in accordance with
                 Federal requirements.

        2E.      Repay HUD from non-Federal funds $5,056 17 in ineligible duplicative assistance
                 provided to program applicants.

        2F.      Support or repay to HUD from non-Federal funds $32,398 18 in duplicative
                 assistance provided to program applicants.

        2F.      Strengthen controls over duplication of benefits determinations to ensure that
                 unmet need is properly calculated.

        2G.      Ensure that low- and moderate-income information reported in DRGR for its
                 rehabilitation and reimbursement programs is accurate.



16
   The $379,751 was reduced by $152,613 in ineligible costs cited in recommendation 2C.
17
   The $48,135 was reduced by $43,079 in ineligible costs cited in recommendation 2C.
18
   The $201,888 was reduced by $169,490 because this amount is included in the total amount in recommendation
2C.




                                                       11
We also recommend that the HUD’s Acting Deputy Assistant Secretary for Grant Programs

      2H.    Coordinate with the regional environmental officer to perform environmental
             review monitoring over the State’s reimbursement program and projects to ensure
             that projects complied with Federal environmental requirements.




                                             12
Scope and Methodology
The audit focused on whether the State established and implemented adequate controls to ensure
that its CDBG-DR owner-occupied housing programs were administered in accordance with
program requirements. We performed the audit fieldwork from November 2015 to June 2016 at
the State’s Office of Housing, 505 Hudson Street, Hartford, CT, and at four of the seven
architect, engineer, and construction management contractors’ offices. Our audit covered the
period October 2012 through September 30, 2015, and was extended when necessary to meet our
audit objective. While we used the data obtained from HUD’s DRGR system, our assessment of
the reliability of the data was limited to the data reviewed. Therefore, we did not assess the
reliability of this system. We performed a minimal level of testing and found the data to be
sufficiently reliable for our purposes.

To accomplish our audit objective, we

       •   Reviewed the Disaster Relief Appropriations Act of 2013, the implementing regulations
           and HUD guidance pertaining to the use of CDBG-DR funds, and the State’s policies and
           procedures for administering the CDBG-DR grant.

       •   Obtained an understanding of the State’s financial controls over CDBG-DR funds’
           obligation and disbursement.

       •   Interviewed State employees responsible for administering the disaster grant to document
           the State’s policies and procedures for administering the CDBG-DR funds.

       •   Interviewed four of the seven architect, engineer, and construction management
           contractors for the rehabilitation and reimbursement programs to obtain an understanding
           of their procedures for the programs.

       •   Reviewed the State’s action plan and amendments, quarterly disaster reports, and grant
           agreement with HUD to identify the CDBG-DR grant requirements.

       •   Reviewed HUD monitoring reports, dated March 26, 2014, and April 22, 2015.

       •   Reviewed the State’s financial statements ending June 30, 2011, and June 30, 2012. 19

       •   Reviewed the State’s procurement of its architect, engineer, and construction
           management service contractors and general contractors for our sample to assess
           compliance with procurement requirements.




19
     The reports for June 30, 2013 and 2014, were not available at the time of our review.




                                                             13
     •   Performed a limited review of environmental requirements for the rehabilitation and
         reimbursement programs. 20

     •   Reviewed more than $3.2 million in disbursements made for the rehabilitation and
         reimbursement programs, which represented 33 percent of more than $9.6 million in
         CDBG-DR funds allocated by the State and used to fund 18 owner-occupied
         rehabilitation 21 and reimbursement 22 projects. The projects were selected based on risks
         identified with higher dollar projects and risks with rehabilitation and reimbursement
         programs. We did not perform a statistical sample; therefore, our results were not
         projected.

     •   Performed a limited review of more than $1.4 million in disbursements made for the
         reimbursement program, which represented 15 percent of more than $9.6 million in
         CDBG-DR funds allocated by the State and used to fund 27 projects. The projects were
         based on identified deficiencies in our detailed review of our reimbursement sample. We
         selected all of the reimbursement disbursements that exceeded $10,000. We did not
         perform a statistical sample; therefore, our results were not projected.

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.




20
   There may be additional environmental review issues that were not identified in our limited review.
21
   We performed a detailed review of 10 rehabilitation projects with funds spent of more than $2.3 million through
November 19, 2015.
22
   We performed a detailed review of eight reimbursement projects with funds spent of $842,014 through November
19, 2015.




                                                         14
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 applicable laws and regulations – Policies and procedures that management
    has implemented to reasonably ensure that the use of funds is consistent with laws and
    regulations.

•   Program operations – Policies and procedures that management has implemented to
    reasonably ensure that a program meets its objectives.

•   Safeguarding resources – Policies and procedures that management has implemented to
    reasonably ensure that resources are safeguarded against waste, loss, and misuse.

We assessed the relevant controls identified above.

A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.

Significant Deficiencies
Based on our review, we believe that the following items are significant deficiencies:




                                                  15
•   The State did not have adequate controls over compliance with laws and regulations when it
    did not ensure that it followed Federal procurement and CDBG-DR requirements (findings 1
    and 2).

•   The State did not have adequate controls over safeguarding resources when it did not ensure
    that funds were disbursed for supported, eligible, and reasonable costs (findings 1 and 2).

•   The State did not have adequate controls over program operations when it could not support
    that the national objective used was met, environmental reviews were conducted in
    accordance with requirements, and assistance amounts were supported and properly
    calculated (finding 2).




                                                16
Appendixes

Appendix A


                          Schedule of Questioned Costs
                 Recommendation                    Unsupported
                                   Ineligible 1/
                     number                            2/
                         1A                                $13,333,151
                         1B               $316,850
                         2A                                    227,138
                         2C              2,138,469
                         2E                   5,056
                          2F                                    32,398
                        Totals           2,460,375         13,592,687



1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.
2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                              17
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




Comment 1




Comment 6


Comment 7




                               18
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 8


Comment 8
and 10



Comment 11


Comment 11




                               19
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 9




                               20
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2




Comment 3




                               21
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4




Comment 5




Comment 6




                               22
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 7




Comment 8




                               23
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 9


Comment 10




Comment 11




Comment 12




                               24
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               25
                         OIG Evaluation of Auditee Comments


Comment 1   State officials provided the basis for their agreement and disagreement with the
            report’s recommendations; we provided our response below where they provided
            their basis.

Comment 2   State officials disagreed with the finding that they did not perform a cost analysis.
            State officials maintain that a cost analysis was conducted prior to entering in any
            contracts and that a significant level of supporting documentation was provided to
            us. We maintain the position that a cost analysis was not completed before
            awarding the contracts. The State provided inadequate documentation to support
            that the costs were reasonable. State officials stated that they conducted a request
            for qualifications (RFQ), in which qualifications are evaluated and the most
            qualified competitor is selected, subject to negotiation of fair and reasonable
            compensation, for architectural, engineering, and construction management
            services. However, this procurement was advertised and shown as a request for
            proposals (RFP), in which price and qualification are included as selection
            factors, on the procurement documents. Further, as stated in Finding 1, the State
            did not complete a cost estimate prior to issuing the request for proposals to
            ensure the proposed fees were reasonable. Additionally, the method used to
            determine the fee schedule was not consistent with Federal procurement
            requirements.

Comment 3   State officials indicated that contract modifications were executed as the work
            progressed and a review of the contract fee schedules was not deemed relevant
            because there was no significant change in the market condition or opportunity
            had occurred. We disagree with the State’s position and maintain that the State
            did not conduct a cost analysis in connection with the contract modifications in
            accordance with regulations at 24 CFR 85.36(f)(1).

Comment 4   State officials disagreed that proposal evaluation and contactor selection for the
            architect, engineer, and construction management contractors should have been
            based on qualification and price factors in accordance with 24 CFR 85.36(d)(3).
            They stated that 24 CFR 85.36(d)(3)(v) allowed for a qualifications-based
            procurement of contractor services. However, 24 CFR 85.36(d)(3)(v) provides
            that this method, in which price is not used as a selection factor and final award is
            subject to later negotiations of fair and reasonable compensation, may be used
            only in the procurement of architectural/engineering services. Services in the
            contracts included environmental review and construction management services
            which do not qualify as architectural/engineering services under the regulation.
            As a result, we maintain our position that price should have been an evaluated
            factor for each proposal submitted, in accordance with 24 CFR 85.36(d)(3) and
            the State’s own request for proposals.




                                              26
Comment 5   State officials maintained that price was an evaluation factor and that the
            methodology used to evaluate the price for each competitor was provided to us.
            We discussed the evaluation of this procurement with a State official on
            December 15, 2015. The State official stated that the fee schedules submitted by
            the contractors were not evaluated to determine whether the costs were fair and
            reasonable. Instead, the evaluations were based on whether or not a fee schedule
            was complete and provided for the professional services in the request for
            proposals, regardless of cost. In addition, although a request for proposals was
            issued, it was treated by the State as though it was a request for qualifications.
            Our review of the procurement evaluation sheets confirmed this position.

Comment 6   State officials disagreed that services to the reimbursement program were outside
            of the rehabilitation scope of work contract, that a separate procurement was
            necessary, and that it could have received a lower rate from a larger pool of
            applicants. They disagreed because the reimbursement program is subset of
            Owner Occupied program. However, we found that the State’s personal service
            agreement for the services specifically stated, in the complete description of
            service, that the contractors agree to provide architectural, engineering, and
            construction management services for the Owner Occupied Rehabilitation and
            Rebuilding program (rehabilitation), which is a different program than the Owner
            Occupied Reimbursement (reimbursement) program. The State did not amend the
            contract to include services for the reimbursement program. The services were
            less complicated as the State contends; therefore, the State may have been able to
            obtain a larger pool of qualified firms at a lower rate. We maintain our position
            that reimbursement program services were outside the contract scope of work.

Comment 7   State officials disagreed that the low-moderate income national objective was not
            adequately supported for three projects. The State agreed that the updated
            information was not available at the time of our review and did not provide us
            adequate income information during the audit that showed the homeowners met
            the low-moderate income national objective used at the time of assistance. If the
            State was unable to obtain verification from the Internal Revenue Service, the
            State had other methods it could have used to obtain income information that
            were in accordance with their policies. For example, the State’s rehabilitation
            policies and procedures states that applicants may present consecutive check
            stubs, pension statements, social security statements, and completed household
            income worksheets, which can be confirmed with information received from the
            Connecticut Department of Revenue Services. The State officials disregarded
            their policies and procedures and Federal regulations. As such, we maintain our
            position that the national objective was not supported.

Comment 8   State officials disagreed with the finding which stated that they did not publish the
            required notice of intent and request for release of funds or obtain HUD approval
            for Owner Occupied Reimbursement (reimbursement) projects. Further, they
            stated that the initial notice of intent and request for release of funds satisfied the




                                               27
              publication requirement. We maintain our position that the State did not comply
              with environmental requirements. The notice of intent (NOI) issued to the public,
              request for release of funds (RROF), HUD approval, and Tier 1 environmental
              review were specific to the Owner Occupied Rehabilitation and Rebuilding
              (rehabilitation) program and did not include the State’s Owner Occupied
              Reimbursement (reimbursement) program. If the State intended that
              reimbursements were included in the $30 million in owner occupied housing
              assistance available to homeowners impacted by the storm as part of the NOI and
              RROF, this should have been adequately explained in the information provided to
              the public.

              Additionally, the June 2013 action plan allocation of $30 million for Owner
              Occupied Housing (rehabilitation and mitigation) was the amount indicated in the
              NOI issued to the public and RROF for the rehabilitation program. Owner
              Occupied Reimbursement was not shown as an activity until the State’s action
              plan dated April 2014; however, the NOI, RROF, and HUD approval for the
              rehabilitation program were dated January and February 2014. Further, the April
              2014 action plan showed Owner Occupied Housing (unmet rehabilitation need
              and mitigation) as one activity, and Owner Occupied Reimbursement (completed
              rehabilitation and mitigation) as another activity.

Comment 9     The State did not provide us with supporting documentation that the issue had
              been resolved with HUD’s environmental review officer. Based on a discussion
              we had with a HUD official on September 21, 2016, the current environmental
              review officer had not yet started the environmental review.

Comment 10 The State indicated in its response that it believed the documentation was
           sufficient to meet the environmental requirements in all cases, but acknowledged
           inconsistencies with the documentation due to contractor performance. We
           disagree with the State that the documentation in all cases was sufficient to meet
           the requirements. Although the State’s contractors completed some of the
           environmental requirements as part of their contract, the State was the responsible
           entity, and therefore, was required to ensure that in all cases the statutory
           checklist was completed correctly and adequately supported the determinations.

Comment 11 The State disagreed with the finding. We acknowledge that the State completed a
           duplication of benefits analysis for the projects reviewed, and we recognize that
           insurance claims include items not associated with building cost repairs.
           However, some costs used in the State’s calculations were not always eligible or
           adequately supported, and the State did not always include the correct amount of
           insurance proceeds in the calculation. We maintain the position that the State did
           not always support and properly calculate unmet need determinations. The State
           has additional information for the nine projects and HUD will need to confirm
           whether additional information provided by the State supports the CDBG-DR




                                               28
              funds expended.

Comment 12 State officials disagreed with the significant control deficiencies. We maintain
           that the deficiencies noted were significant because, if not corrected, these
           deficiencies may put the State’s CDBG-DR program at risk of not meeting the
           grants requirement to fund necessary expenses related to disaster relief, long term
           recovery, restoration of infrastructure, housing, and economic revitalization.
           Further, there is no assurance that grant funds will be used, to the maximum
           extent possible, to benefit the public’s recovery from the Sandy disaster.




                                               29
Appendix C
             HUD Comments and OIG’s Evaluation



Ref to OIG
Evaluation   HUD Comments




Comment 1




                             30
             HUD Comments and OIG’s Evaluation




Ref to OIG   HUD Comments
Evaluation




Comment 2




Comment 3




                             31
             HUD Comments and OIG’s Evaluation




Ref to OIG   HUD Comments
Evaluation




Comment 4


Comment 5




                             32
                          OIG Evaluation of HUD Comments


Comment 1   HUD officials stated that if they determine that the State did not follow the
            requirements of its procurement policy, the Department will issue sanctions to
            remedy the noncompliance. In addition, they stated that it is not clear from the
            OIG's report whether the State did not comply with its procurement requirements
            or whether the OIG believes the State did not comply with the procurement
            requirements at 24 CFR 85.36(b) through (i). We maintain our position that the
            State did comply with the requirements at 24 CFR 85.36 or requirements set forth
            in its procurement policies.

Comment 2   HUD officials stated that the OIG audit appears to treat the State's evaluation of a
            Request for Qualifications (RFQ) the same as evaluating construction bids.
            Additionally, HUD officials stated that both programs required the same skillset,
            which was not atypical for units of government to bid unit cost work. The
            procurement was advertised and shown as a request for proposals (RFP), in which
            price and qualification are included as selection factors, and we evaluated the
            procurement as an RFP. Further, 24 CFR 85.36 (d)(3)(v) states that this method
            in which price is not used as a selection factor and final award is subject to later
            negotiations of fair and reasonable compensation may be used only in the
            procurement of architectural/engineering services. Services in the contracts
            included environmental review and construction management services which do
            not qualify as architectural/engineering services under the regulation. In addition,
            HUD’s guidebook, “Basically CDBG for Entitlements” dated July 2012,
            specifically states that some engineering firms also provide construction and
            grants management services. In that situation, an RFQ cannot be used and either
            the small purchases (if it is less than $100,000) or a RFP must be used. Further,
            the contracts were specific to the Owner Occupied Rehabilitation and Rebuilding
            program (rehabilitation), which is a different program from the Owner Occupied
            Reimbursement (reimbursement) program. The State did not amend the contract
            to include services for the reimbursement program. The services were less
            complicated as the State contends; therefore, the State may have been able to
            obtain a larger pool of qualified firms at a lower rate. We maintain our position
            that the reimbursement program services were outside the contract scope of work.

Comment 3   HUD officials stated that if HUD or the State determines that the households are
            no longer income eligible, the State may elect to classify the assistance to the
            households under the urgent need CDBG national objective, consistent with the
            program requirements in the State's Action Plan. However, OIG’s conclusion that
            the State’s use of income information collected at the time of application was not
            still valid at the "time of assistance" is not based on a CDBG regulatory
            requirement or definition of "time of assistance."
            We agree that the State can reclassify the assistance to Urgent Need in accordance
            with its action plan; however, at the time of our review, the State used the low-




                                              33
            moderate income national objective, which was not supported with income at the
            time of assistance in accordance with regulations. 24 CFR Part 570.3 states that
            estimated annual income of a family or household is determined by projecting the
            prevailing rate of income of each person at the time assistance is provided for the
            individual, family, or household (as applicable). Therefore, we maintain our
            position that the State should have obtained updated income information to show
            that the applicant met the low-moderate income national objective at the time the
            assistance was provided to the applicant.
Comment 4   HUD officials stated that the OIG's comments regarding unmet need are based on
            criteria that do not exist in the CDBG-DR program. Specifically, the OIG
            indicates that luxury items are not covered by CDBG- DR and that landscaping
            and fences are not covered. HUD’s “Homeowner Rehabilitation Program
            Implementation Tool #2” states that assistance will not be used for luxury items,
            including but not limited to garage door openers, security systems, swimming
            pools, fences, and television satellite dishes. In addition, HUD’s “Guide to
            National Objectives and Eligible Activities for State CDBG Programs” chapter 2
            states that rehabilitation does not include installation of luxury items, or costs of
            equipment, furnishings, or other personal property not an integral structural
            fixture. Furthermore, the State’s policies procedures consider these items
            ineligible.
Comment 5   HUD officials stated that the OIG does not identify/quantify the unmet need for
            any households included in its review nor does the OIG indicate whether there is a
            duplication of benefits. The overpayments of $48,135 in ineligible funds to seven
            homeowners was in excess of their unmet need, as cited in finding 2, and were a
            duplication of benefits. The $201,888 in costs which were not adequately
            supported by the documentation provided by the homeowners, cited in finding 2,
            and were potential duplication of benefits.




                                              34