oversight

The City of New York, NY, Lacked Adequate Controls To Ensure That the Use of Community Development Block Grant Disaster Recovery Funds Was Always Consistent With the Action Plan and Applicable Federal and State Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-12-21.

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

         The City of New York, NY,
      Office of Management and Budget
      Community Development Block Grant Disaster
     Recovery-Funded Interim Assistance Rapid Repairs
                        Program




Office of Audit, Region 2      Audit Report Number: 2017-NY-1004
New York - New Jersey                           December 21, 2016
To:            Stanley A. Gimont
               Acting Deputy Assistant Secretary for Grant Programs, DG

               //SIGNED// Fran Ranzie
                   for
From:          Kimberly Greene
               Regional Inspector General for Audit, 2AGA
Subject:       The City of New York, NY, Lacked Adequate Controls To Ensure That the Use
               of CDBG-DR Funds Was Always Consistent With the Action Plan and
               Applicable Federal and State 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 the City of New York, Office of Management and
Budget’s administration of Community Development Block Grant Disaster Recovery (CDBG-
DR) funds for its Interim Assistance Rapid Repairs Program.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
212-264-4174.
                          Audit Report Number: 2017-NY-1004
                          Date: December 21, 2016

                          The City of New York, NY, Lacked Adequate Controls To Ensure That the
                          Use of CDBG-DR Funds Was Always Consistent With the Action Plan and
                          Applicable Federal and State Requirements

Highlights

What We Audited and Why
We audited the City of New York, Office of Management and Budget’s administration of the
Interim Assistance Rapid Repairs Program, funded with Community Development Block Grant
Disaster Recovery (CDBG-DR) funds provided by the U.S. Department of Housing and Urban
Development (HUD) to assist in the disaster recovery and rebuilding efforts resulting from
Hurricane Sandy. The objective of the audit was to determine whether City officials had
adequate controls to ensure that the use of CDBG-DR funds was consistent with the Interim
Assistance Rapid Repairs Program guidelines established under the HUD-approved action plan,
applicable Federal requirements, and City policy.

What We Found
City officials lacked adequate controls to ensure that the use of CDBG-DR funds was always
consistent with the action plan and applicable Federal and State regulations. Specifically, City
officials disbursed $18.2 million in CDBG-DR funds for State sales tax on repairs and
maintenance services1 that the City was exempt from paying under New York State tax law,
section 1116(a)(1). We attributed this deficiency to City officials’ decision to rapidly implement
an emergency sheltering program and including sales tax in the negotiated contractual unit prices
for repairs and maintenance services. As a result, City officials could not assure HUD that more
than $18.2 million in CDBG-DR funds was disbursed for allowable, reasonable, and necessary
expenses in compliance with the action plan and Federal and State requirements.

What We Recommend
We recommend that HUD instruct City officials to (1) reimburse the Program from non-Federal
funds more than $18.2 million in exempt State sales tax on repairs and maintenance services and
(2) strengthen controls over disbursements to ensure that all costs charged to the Program are
allowable, reasonable, and necessary in compliance with the HUD-approved action plan and
Federal and State requirements.



1
    According to City officials, repairs and maintenance services represent the services and labor provided by the
    Program contractors.
Table of Contents
Background and Objective......................................................................................4

Results of Audit ........................................................................................................6
     Finding: City Officials Lacked Adequate Controls To Ensure That the Use of CDBG-
     DR Funds Was Always Consistent With the Action Plan and Applicable Federal and
     State Requirements ............................................................................................................... 6

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

Internal Controls ....................................................................................................12

Appendixes ..............................................................................................................14
         A. Schedule of Questioned Costs .................................................................................. 14

         B. Auditee Comments and OIG’s Evaluation ............................................................. 15




                                                                   3
Background and Objective
Hurricane Sandy destroyed homes, left hundreds of thousands of New Yorkers without power, and
damaged critical public and private infrastructure when it hit New York City on October 29, 2012.
On January 29, 2013, Congress enacted the Disaster Relief Appropriations Act of 2013, Public Law
113-2, appropriating $16 billion in Community Development Block Grant Disaster Recovery
(CDBG-DR) funds. The purpose of this funding was to cover necessary expenses occurring from
calendar years 2011 through 2013 that were related to long-term recovery, infrastructure and
housing restoration, and housing and economic revitalization for locations that were declared
disaster areas in accordance with the Robert T. Stafford Disaster Relief and Emergency Assistance
Act of 1974. Of the $16 billion in CDBG-DR funds appropriated, $4.21 billion was awarded
directly to the City.
 In the immediate aftermath of Hurricane Sandy, the Federal Emergency Management Agency
(FEMA) designed the Sheltering and Temporary Essential Power (STEP) Pilot Program to assist
State and local governments in performing work and services essential to saving lives, protecting
public health and safety, and protecting property. FEMA intended STEP to provide essential
power, such as restoration of temporary electricity, heat, and hot water, to affected residences,
thereby reducing the demand for other shelter options and allowing individuals to return to or
remain in their homes.
City and FEMA officials worked together to create and implement STEP as the Interim Assistance
Rapid Repairs Program. The Program assisted residential owners impacted by Hurricane Sandy
with emergency repairs to their private properties needed to alleviate the emergency conditions
affecting the surrounding area caused by the storm. Emergency repairs included restoration of heat,
electrical power, and hot water and other limited repairs to protect a home from further significant
damage. The Program, announced by the mayor of New York City on November 9, 2012, was the
first program of its kind in the country. Repair work began on November 21, 2012 and
approximately 11,800 homes were repaired, representing more than 20,000 units when the Program
ended at the end of March 2013. As of our audit period, March 31, 2016, City officials had
allocated $98 million of that amount to the Program and had disbursed more than $97 million.
FEMA’s Public Assistance Grant Program provided the majority of funding for the Interim
Assistance Rapid Repairs Program. Under FEMA’s public assistance projects, the scope of work
and funding is detailed in a FEMA project worksheet. The cost-sharing agreement between FEMA
and the City provided that FEMA would reimburse the City 90 percent of the eligible costs that fell
under FEMA guidelines. The City used CDBG-DR funds to cover the remaining 10 percent cost
share,2 as well as the other three cost categories, which were not approved on the project worksheet

2
    For the purposes of CDBG-DR funding, cost share represents the share of funds beyond what was spent using
    FEMA, United States Army Corps of Engineers, and other Federal agency contributions. Generally, the costs are
    not paid under another Federal award, except when authorized by Federal statute to be used for cost sharing or
    matching. Section 105(a)(9) of the Housing and Community Development Act of 1974 gives a statutory
    exception, allowing CDBG funds to be used to pay the share of unmet needs.



                                                          4
but the City determined were CDBG-DR eligible. The City referred to the following three cost
categories, which do not fall within FEMA guidelines but are determined to be CDBG-DR eligible,
as breakage items:

          Scope of work – Items that were not identified at the beginning of the Program but were
           reasonable and necessary to achieve the Program’s goal of restoring heat, hot water, and
           power;
          Incentive payments – Bonus payments to motivate contractors to accelerate progress;
           and
          Unit-price differential – New York State sales tax of 6 percent on repairs and
           maintenance services provided by contractors.

Program costs were incurred prior to the preparation of the City’s initial action plan approved by
HUD in May 2013 and prior to interim assistance being identified as a contemplated activity. In
accordance with HUD’s March 5, 2013 Notice, with regard to pre-award requirements, HUD
allowed the City to use CDBG-DR funds for reimbursement of Program costs. The City is subject
to the provisions of regulations at 24 CFR (Code of Federal Regulations) 570.200(h) but may
reimburse itself or its subrecipients for otherwise allowable costs incurred on or after the incident
date of the covered disaster.

The City of New York’s Office of Management and Budget is the primary agency within the City
that has responsibility for the CDBG-DR grant. This office also directly manages the Interim
Assistance Rapid Repairs Program, which is part of the larger Infrastructure and Other City Services
Program. The Office of Management and Budget’s responsibilities include implementing Program
policies and procedures for financial management, determining and ensuring the eligibility of
funded activities, overseeing the compliance and monitoring of the Program, and ensuring that the
program files comply with all applicable HUD and other Federal regulations.
The objective of the audit was to determine whether City officials had adequate controls to ensure
that the use of CDBG-DR funds was consistent with the Interim Assistance Rapid Repairs
Program guidelines established under the HUD-approved action plan, applicable Federal
requirements, and City policy.




                                                  5
Results of Audit

Finding: City Officials Lacked Adequate Controls To Ensure That
the Use of CDBG-DR Funds Was Always Consistent With the
Action Plan and Applicable Federal and State Requirements

City officials lacked adequate controls to ensure that the use of CDBG-DR funds was always
consistent with the Interim Assistance Rapid Repairs Program guidelines established under the
action plan and applicable Federal and State regulations. Specifically, City officials disbursed
$18.2 million in CDBG-DR funds for State sales tax on repairs and maintenance services that the
City was exempt from paying under New York State tax law, section 1116(a)(1). We attributed
this deficiency to City officials’ decision to rapidly implement an emergency sheltering program
and including sales tax in the negotiated contractual unit prices for repairs and maintenance
services. As a result, City officials could not assure HUD that more than $18.2 million in
CDBG-DR funds was disbursed for allowable, reasonable, and necessary expenses in
compliance with the HUD-approved action plan and Federal and State requirements.

CDBG-DR Funds Used for Exempt State Sales Tax Costs
According to City officials, the City was faced with emergency situations that required rapid
solutions to protect the life and safety of the public as a result of Hurricane Sandy. City officials
rapidly implemented a first-in-the-Nation emergency sheltering program with the objective to
safely shelter tens of thousands of residents from the post-Sandy environment. To achieve their
goals and quickly implement the Program, the City needed construction contractors capable of
providing the personnel and financial resources necessary to work on a large number of private
residences. Once contractors were procured, the City needed to establish fair and reasonable unit
prices that could be equally accepted by all contractors involved in the Program. By December
24, 2012, the City completed the negotiation process to establish unit prices based on values
obtained from a national cost estimate database adjusted for the New York City construction
market and risk factors identified in the field. The unit prices were for all direct work items in
the homes, which included replacing circuit breakers, hot water heaters, and boilers.
Additionally, the unit prices were to be all inclusive, including all taxes, markups, overhead and
profit, labor, material, equipment, travel costs, tools, and incidentals necessary to perform the
work as indicated.

City officials maintained that during the unit price negotiations, they were aware of a sales tax
exemption for repairs and maintenance services; however, they could not find a solution to avoid
including the 6 percent sales tax in the unit prices. Officials stated that the sales tax cost was
necessary to get all contractors to accept the unit prices and complete the emergency work on
time. According to City officials, the contractors would have balked if the unit prices had been
reopened and the sales tax had been deducted from the unit price. Additionally, City officials
asserted that the negotiated unit prices represented fair and reasonable costs given the program



                                                  6
goals. Officials maintained that the City’s main focus was to protect the life and safety of the
public and it would not have been possible to rapidly implement the program without including
the sales tax in the unit prices. In addition, City officials were confident that FEMA, with which
they worked closely throughout the implementation of the Program, would find that the Program
was implemented in line with the intent and requirements of STEP.

The Program was completed at the end of March 2013. However, when FEMA issued its revised
project worksheet in March 2014, City officials realized that FEMA would not reimburse the
sales tax on services. The revised project worksheet validated other costs for reimbursement,
including direct work, repair and scope assessments, and integrity monitoring. City officials did
not ask FEMA to explain why the sales tax was not allowable since it understood that FEMA
would not reimburse the City for all of its incurred Program expenses. City officials stated that
they became aware that CDBG-DR funds were available and decided to use those funds to cover
the sales tax costs. During the period April through August 2015, City officials disbursed more
than $18.2 million in CDBG-DR funds to pay for the sales tax on the Program repair and
maintenance services.

In accordance with New York State tax law, section 1116(a)(1), the City was exempt from
paying sales tax when it was the purchaser, user, or consumer of services or when it was a
vendor of services or property of a kind not ordinarily sold by private persons. The City was the
purchaser of the Program services, for which contractors provided repair and maintenance
services under the Program and invoiced the City. The City paid for the services provided by the
contractors; thus, the charges for the repair and maintenance services performed as part of the
Program were not subject to sales tax.
Regulations at 2 CFR (Code of Federal Regulations) Part 225, appendix A, paragraph C(1)(a),
and the HUD-approved action plan provide that to be allowable under Federal awards, costs
must be necessary and reasonable for the proper and efficient performance and administration of
Federal awards and must be authorized or not prohibited under State or local laws or regulations.
Contrary to 2 CFR Part 225, appendix B, section 40(a), which states that taxes a governmental
unit is legally required to pay are allowable, the City was not legally required to pay the State
sales tax. Therefore, the $18.2 million in CDBG-DR funds disbursed for sales tax was ineligible.
Conclusion
City officials disbursed more than $18.2 million in CDBG-DR funds for State sales tax on
Program repairs and maintenance services that the City was not legally required to pay under
New York State tax law. Federal requirements state that to be allowable under Federal awards,
costs must be necessary, reasonable, and authorized or not prohibited under State or local laws or
regulations. We attributed this deficiency to City officials’ decision to rapidly implement an
emergency sheltering program and including sales tax, which the officials were aware was
exempt, in the negotiated contractual unit prices for repairs and maintenance services. As a
result, City officials could not assure HUD that more than $18.2 million in CDBG-DR funds was
disbursed for allowable, reasonable, and necessary expenses.




                                                 7
Recommendations
We recommend that HUD’s Acting Deputy Assistant Secretary for Grant Programs instruct City
officials to
      1A.    Reimburse the Program from non-Federal funds $18,274,054 in exempt State
             sales tax on repairs and maintenance services.
      1B.    Strengthen controls over disbursements to ensure that all costs charged to the
             Program are allowable, reasonable, and necessary in compliance with the HUD-
             approved action plan and Federal and State regulations.




                                             8
Scope and Methodology
The review generally covered the period November 9, 2012, through March 31, 2016, and
was expanded as necessary. Audit fieldwork was performed onsite from April through July
2016 at the City’s Office of Management and Budget located at 255 Greenwich Street,
New York, NY.

To accomplish our audit objective, we

         Reviewed New York State tax law, relevant CDBG-DR program requirements, and
          applicable Federal regulations, including the Disaster Relief Appropriations Act of 2013,
          Federal Register notices, HUD Office of Community Planning and Development notices,
          CFR requirements, and HUD guidance.

         Reviewed FEMA Recovery Program guidance for STEP and FEMA project worksheets.

         Reviewed the City’s HUD-approved action plan and applicable amendments.

         Reviewed the City’s written policies and procedures, including the Financial
          Management and Procurement Compliance Manual, Guidance on Invoice Preparation
          and Supporting Documentation, and the City of New York’s Cost Reasonable
          Justification for the Rapid Repairs Sheltering Program.

         Met with City officials to obtain an understanding of the Program’s operations and
          internal controls.

         Reviewed HUD’s monitoring report, dated February 5, 2016.

         Reviewed quarterly performance reports for the period October 1 to December 31, 2015,
          generated from the Disaster Recovery Grant Reporting system3 to obtain background
          information on the City’s activities and disbursement of CDBG-DR funds only. We did
          not assess the data.
         Reviewed the City’s single audit report and management letter for the year ending in June
          2015.
         Reviewed the U.S. Department of Homeland Security, Office of Inspector General, audit
          report on FEMA’s STEP Pilot Program, dated December 7, 2012.


3
    The Disaster Recovery Grant Reporting system was developed by HUD’s Office of Community Planning and
    Development for the CDBG-DR program and other special appropriations. Data from the system are used by
    HUD staff to review activities funded under these programs and for required quarterly reports to Congress.




                                                          9
As of March 31, 2016, City officials had disbursed more than $97 million in CDBG-DR funds to
contractors to complete repair work on approximately 11,800 homes. The universe of
disbursements consisted of 24 voucher drawdowns containing hundreds of work orders. To gain
a general understanding of the City’s internal controls, we selected a nonstatistical4 sample of 38
work orders totaling more than $1 million, based on the highest invoice amounts for four cost
categories: FEMA 10 percent match, scope of work, incentive payments, and the unit-price
differential.



          Cost categories                    CDBG-DR                 Sampled              Sampled work
                                             funds disbursed         invoice              orders
                                                                     amounts
          FEMA 10 percent match              $56,318,274              $840,629            10
          Scope of work                       17,941,315               178,389             8
          Incentive payments                    5,672,232                      0          10
          Unit-price differential             17,197,575                70,912            10

          Totals                              97,129,396             1,089,930            38


We reviewed 10 work orders from the FEMA 10 percent match and 8 work orders from the
scope of work cost categories. We also reviewed 10 work orders from the incentive payment
cost category to determine whether the contractor completed the single-family dwelling repairs,
based on the City’s required period covering December 27, 2012, and January 17, 2013. The
incentive payments were bonuses that City officials offered to the contractors to accelerate
progress on home repairs. We did not include incentive payment invoice amounts since CDBG-
DR funds were not used to pay for the invoices in the incentive payment files. In addition, we
reviewed 10 work orders from the unit-price differential cost category. While we selected a
nonstatistical sample to accomplish our objective, the results from these samples related only to
the items sampled and could not be projected to the population.

City officials calculated the New York State sales tax as approximately 6 percent of the
negotiated unit costs. Specifically, City officials disbursed nearly $17.2 million for State sales
taxes on repairs and maintenance services attributed to unit-price differential. In addition, they
disbursed more than $1 million ($17,941,315 x 6%) for State sales tax on repairs and
maintenance services attributed to scope of work. In total, City officials disbursed more than
$18.2 million ($17,197,575 + $1,076,479) in CDBG-DR funds for State sales tax on repairs and
maintenance services that were not required under New York State tax law, section 1116(a)(1).


4
    A nonstatistical sample is appropriate when the auditor knows enough about the population to identify a relatively
    small number of items of interest. The results of procedures applied to items selected under this method apply
    only to the selected items and must not be projected to the portion of the population that was not tested.



                                                            10
Based on the work order files and disbursement data City officials provided, we concluded that
the computer-processed data City officials provided were sufficiently reliable. Our assessment of
the reliability of the data was limited to the data reviewed; therefore, we did not assess the
reliability of HUD’s Disaster Recovery Grant Reporting system. We performed a minimal level
of testing and found the data to be adequate for our purposes. We were able to trace the
contractual unit prices for repairs and maintenance services to the work order files and reconcile
the disbursement data provided by City officials to HUD’s Disaster Recovery Grant Reporting
system to confirm that more than $97 million in CDBG-DR funds were disbursed for Program
costs.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our finding
and conclusion based on our audit objective.




                                                 11
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 has implemented to
    reasonably ensure that a program meets its objectives.
   Compliance with laws and regulations - Policies and procedures that management has
    implemented to reasonably ensure that resource use is consistent with laws and regulations.
   Validity and reliability of data - Policies and procedures that management has implemented
    to reasonably ensure that valid and reliable date are obtained, maintained, and fairly
    disclosed in reports.
   Safeguarding resources - Policies and procedures that management has implemented to
    reasonably ensure that resources are safeguarded against waste, loss, and misuse.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiencies
Based on our review, we believe that the following items are significant deficiencies:

   City officials did not have adequate controls to ensure compliance with laws and regulations
    since they did not always disburse CDBG-DR funds in accordance with the Program
    guidelines established under the HUD-approved action plan and applicable Federal and State
    regulations.


                                                  12
   City officials did not have adequate controls to ensure that funds were always safeguarded
    against fraud, waste, and abuse as CDBG-DR funds were used for New York State sales tax
    that the City was exempt from paying.




                                               13
Appendixes

Appendix A


                            Schedule of Questioned Costs
                          Recommendation
                                              Ineligible 1/
                              number
                                  1A              $18,274,054


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.




                                             14
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




                               15
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               16
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 2




                               17
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2




Comment 3




Comment 4




                               18
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4




Comment 5


Comment 6


Comment 7




Comment 5




                               19
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 3




                               20
                 OIG Evaluation of Auditee Comments


Comment 1   City officials provided historical background related to Hurricane Sandy
            and the implementation of the Interim Assistance Rapid Repairs program.
            City officials stated that the unit price is an acceptable method to meet the
            Federal government’s requirements for demonstrating costs are necessary
            and reasonable. We agree with City officials, however unit price costs
            have to meet Federal and State requirements as well.
Comment 2   According to City officials, after they received clarification from the New
            York State Department of Taxation and Finance that the City was exempt
            from paying sales tax on labor, the officials notified the contractors that
            the 6 percent sales tax would be deducted from the unit price. Later, the
            City officials met with FEMA and received approval from FEMA to
            reduce the unit prices by the 6 percent sales tax. However, City officials
            reversed their initial decision and paid the 6 percent sales tax to the
            contractors after FEMA approved them to reduce the unit prices by 6
            percent. Thus, City officials should use non-Federal funds of $18.2
            million to cover the State sales tax on repairs and maintenance services.
Comment 3   City officials firmly believed that they had adequate controls to ensure that
            the use of CDBG-DR funds was always consistent with the HUD-
            approved action plan and applicable Federal and State requirements.
            Additionally, officials stated the use of CDBG-DR funds was
            demonstrated to be necessary and reasonable. However, in addition to the
            use of funds being necessary and reasonable, Federal requirements provide
            that to be allowable under Federal awards, costs must be authorized or not
            prohibited under State or local laws or regulations. Therefore, while we
            agree with City officials that the CDBG-DR funding for the Program
            addressed an identified Sandy need and was used to cover the costs not
            reimbursed by other sources, CDBG-DR funds should not be used for
            State sales tax costs that the City is not legally required to pay.
Comment 4   City officials cited 2 CFR 200.404 pertaining to cost reasonableness.
            However, 2 CFR 200.404 further provides that consideration must be
            given to requirements imposed by Federal and state laws and regulations.
            In addition, City officials were not in compliance with 2 CFR 200.404
            when they significantly deviated from their established practices and
            policies regarding the incurrence of exempt sales tax costs.
Comment 5   City officials stated that CDBG-DR funds were not used for exempt sales
            tax costs, but rather, were used to cover a portion of a negotiated unit
            price. However, documentation provided by City officials supported that
            $18.2 million in CDBG-DR funds was used to cover the State sales tax on
            repairs and maintenance services which the City was not legally required
            to pay. Accordingly, we recommend that City officials reimburse the


                                       21
            Program from non-Federal funds of $18.2 million in exempt State sales
            tax on repairs and maintenance services.
Comment 6   City officials stated that many factors went into the deliberations regarding
            establishing the unit price including the potential impact of 8.875 percent
            sales tax, but the ultimate unit price was accepted by the contractors as all-
            inclusive of a wide range of factors. However, City officials failed to find
            a solution to avoid including the 6 percent sales tax in the unit prices.
Comment 7   According to City officials, New York State Department of Taxation and
            Finance advised that contractors did not have to pay sales tax on the
            negotiated unit price and did not offer further opinion as to whether the
            sales tax portion of the unit should be removed. Further, City officials
            stated it would have been difficult to factor a portion of the price which
            the contractors did not have to pay sales tax. On the contrary, FEMA
            approved the City’s request to reduce the unit prices to account for sales
            tax on labor. It was the City’s decision to pay the contractors for the sales
            tax on labor. Therefore, the City should use non-Federal funds of $18.2
            million to cover the State sales tax on repairs and maintenance services.




                                       22