oversight

The North Carolina Department of Commerce, Raleigh, NC, Generally Administered Its Grant Program in Accordance With HUD Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-04-16.

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

           North Carolina Department of
             Commerce, Raleigh, NC
     Small Cities Community Development Block Grant




Office of Audit, Region 4     Audit Report Number: 2018-AT-1003
Atlanta, GA                                        April 16, 2018
To:            Matthew King, Director, Office of Community Planning and Development, 4FD

                  //Signed//
From:          Nikita N. Irons, Regional Inspector General for Audit, 4AGA
Subject:       The North Carolina Department of Commerce, Raleigh, NC, Generally
               Administered Its Grant Program in Accordance With HUD Regulations


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 North Carolina Small Cities Community
Development Block Grant.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG website. 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
404-331-3369.
                    Audit Report Number: 2018-AT-1003
                    Date: April 16, 2018

                    The North Carolina Department of Commerce, Raleigh, NC, Generally
                    Administered Its Grant Program in Accordance With HUD Regulations



Highlights

What We Audited and Why
We audited the North Carolina Department of Commerce’s Small Cities Community
Development Block Grant (CDBG). We began our review of the Department of Commerce’s
administration of its CDBG program because it aligns with a goal in the U.S. Department of
Housing and Urban Development (HUD), Office of Inspector General’s annual audit plan to
improve HUD’s execution of and accountability for grant funds. Our audit objectives were to
determine whether the Department of Commerce (1) awarded funds to local governments that
met a CDBG national objective, (2) spent funds only for activities that were eligible and
supported, and (3) included all methods of distribution in its action plan.

What We Found
The Department of Commerce generally administered its Small Cities CDBG funds in
accordance with HUD regulations. It ensured that each activity reviewed met its national
objective and was eligible and that funds were supported and used for eligible expenses.
However, it did not include the Main Street Revitalization grant program as a part of its 2015
annual action plan method of distribution as required. This condition occurred because
Department of Commerce management did not follow the requirement. It believed the grant
program was similar to other programs identified in the action plan and no amendment was
necessary. As a result, the Department of Commerce was not transparent to the public and did
not consistently allow citizens an opportunity to provide input on the distribution of Federal
funds.

What We Recommend
We recommend that the HUD Director of the Greensboro Office of Community Planning and
Development require the North Carolina Department of Commerce to (1) amend its 2015 annual
action plan to include the Main Street Revitalization program and (2) implement controls and
procedures to ensure that all future action plans include all methods of distributing grant funds or
amend the plan as required if programs are added after approval.
Table of Contents
Background and Objectives ....................................................................................3

Results of Audit ........................................................................................................4
         Finding 1: The Department of Commerce Generally Administered Its Grant
         Program in Accordance With HUD Regulations ......................................................... 4

Scope and Methodology ...........................................................................................6

Internal Controls ......................................................................................................8

Appendix ...................................................................................................................9
         A. Department of Commerce Projects Reviewed ..................................................9

         B. Auditee Comments and OIG’s Evaluation ............................................................. 10
Background and Objectives
Under the State Community Development Block Grant (CDBG) program, States award grants to
smaller units of general local government that develop and preserve decent, affordable housing
to provide services to the most vulnerable in our communities and to create and retain jobs.
Annually, each State develops funding priorities and criteria for selecting projects. Since States
are in the best position to know and respond to the needs of local governments, Congress
amended the Housing and Community Development Act of 1974 in 1981 to give each State the
opportunity to administer its CDBG funds for nonentitlement areas. Nonentitlement areas
include those units of general local government that do not receive CDBG funds directly from
the U.S. Department of Housing and Urban Development (HUD). Nonentitlement areas are
cities with populations of less than 50,000 (except cities that are designated as principal cities of
metropolitan statistical areas) and counties with populations of less than 200,000.
North Carolina General Statutes 143B-431(d)(3) gave the North Carolina Department of
Commerce authority to pledge current and future Federal fund appropriations to the State from
the CDBG program. The Department of Commerce’s Division of Community Assistance
administered the CDBG program until it was reorganized in 2013 to become the Rural Economic
Development Division. In 2013, the General Assembly of North Carolina mandated, through
legislation, 1 that CDBG funds be divided between the Department of Commerce and the
Department of Environmental Quality, formerly the Department of Environment and Natural
Resources. The Department of Commerce would distribute grant funds to local governments
pertaining to economic development, while the Department of Environmental Quality would
distribute grant funds concerning infrastructure. The Department of Commerce 2 serves as the
grantee for the State of North Carolina and is ultimately responsible for the administration of
CDBG funds.
The Department of Commerce received more than $174 million in CDBG funding for fiscal
years 2013-2016. As of February 20, 2018, it had drawn down more than $35 million and had
more than $139 million available to draw. 3
Our audit objectives were to determine whether the Department of Commerce (1) awarded funds
to local governments that met a CDBG national objective, (2) spent funds only for activities that
were eligible and supported, and (3) included all methods of distribution in its action plan.




1
    North Carolina Sessions Laws 2013-363 states that the Federal block grant funds allocated to the infrastructure
    category must be transferred from the Department of Commerce to the Department of Environment and Natural
    Resources.
2
    The Community Development Block Grant Programs Department of the Rural Economic Development Division
    of the North Carolina Department of Commerce is responsible for administering the State CDBG program.
3
    The North Carolina Department of Commerce received more than $43 million for its 2017 CDBG funding on
    September 25, 2017.




                                                         3
Results of Audit

Finding 1: The Department of Commerce Generally Administered
Its Grant Program in Accordance With HUD Regulations
The Department of Commerce ensured that each CDBG activity met its national objective and
that funds were used for eligible expenses and supported. However, it did not include the Main
Street Revitalization grant program as a part of its 2015 annual action plan method of
distribution as required. This condition occurred because Department of Commerce
management did not follow the requirement. It believed the grant program was similar to other
programs identified in the action plan and no amendment was necessary. As a result, the
Department of Commerce was not transparent to the public and did not consistently allow
citizens an opportunity to provide input on the distribution of Federal funds.

Grant Activities Met National Objectives, Were Eligible, and Were Properly Supported
The Department of Commerce’s CDBG activities reviewed (see appendix A) properly met a
national objective, and the funds were eligible and properly supported. We reviewed five
activities that received more than $12 million in CDBG funds. All five activities met the
national objective of either low-and-moderate-income clientele, job creation, or low-and-
moderate-income area. All five projects were also eligible to receive grant funds because the
Department of Commerce’s action plans allocated funds to be used for both economic
development and infrastructure. In addition, all five projects were properly supported by
drawdown requests and invoices.

The Main Street Program Was Not Included in the Annual Action Plan
The Department of Commerce did not always distribute grant funds according to its 2015 action
plan. Specifically, it did not include the Main Street Revitalization grant program as a part of its
2015 annual action plan method of distribution. According to 24 CFR (Code of Federal
Regulations) 91.320(k)(1), the action plan must set forth the Department of Commerce’s method
of distribution and include a description of how all CDBG resources will be allocated among
funding categories and the threshold factors and grant size limits that are to be applied.

According to Department of Commerce staff, the former Assistant Secretary for Commerce
suggested that the staff use the grant funds for the Main Street Revitalization program because it
was difficult to meet the 80 percent deadline for the timely obligation of CDBG funds. The
Main Street Revitalization grant program was designed to return vacant or underused
commercial buildings to economic use for new or expanded businesses. The goal of the program
was to prevent or eliminate urban blight. To receive this grant, a local government must partner
with a private for-profit business to submit a project to renovate a vacant or underused
downtown building for commercial or mixed-use development. Grants were awarded at a
maximum of $500,000. The Department of Commerce awarded 14 Main Street Revitalization
grants totaling more than $6 million, using fiscal year 2015 grant funds. As of January 29, 2018,




                                                 4
more than $1.3 million had been spent, and $450,000 had been deobligated, leaving a balance of
more than $4.2 million.

Although the Main Street Revitalization program is considered an eligible use of fiscal year 2015
funds, the Department of Commerce did not identify this program or the method of distribution
in its annual action plan. The economic development section of the Department of Commerce’s
2015 annual action plan had opportunities listed for cities and towns, which included revolving
loan funds and grants (forgivable loans) for businesses that restored vacant buildings and
resulted in the creation or retention of permanent, full-time jobs by the company. These grant
amounts were to be calculated based on a per job rate for businesses and tax credit eligibility.
However, the Main Street Revitalization grant was designated for main street and small town
main street communities, and the grant amounts were not based on per job rates or tax credit
eligibility.

Although this program was not initially included in the action plan, Department of Commerce
management had the opportunity to amend its action plan but did not follow the requirements
because it believed the grant program was similar to other programs identified in the action plan.
Consolidated plan regulations at 24 CFR 91.505(a) require that a jurisdiction amend its approved
plan whenever it makes a change in its allocation priorities or the method of distribution of
funds.

Conclusion
The Department of Commerce did not always distribute CDBG funds according to its 2015
action plan as required. Since management believed the Main Street grant program was similar
to other programs identified in the action plan, it did not amend its action plan as required.
Consequently, the Department of Commerce was not transparent to the public and did not
consistently allow citizens an opportunity to provide input on how the grant funds were
distributed.
Recommendations
We recommend that the HUD Director of the Greensboro Office of Community Planning and
Development require the Department of Commerce to

       1A.     Amend its 2015 annual action plan to include the Main Street Revitalization
               program.

       1B.     Implement controls and procedures to ensure that all future action plans include
               all methods of distributing grant funds or amend the plan as required if programs
               are added after approval.




                                                5
Scope and Methodology
We performed our fieldwork at the North Carolina Department of Commerce at 301 North
Wilmington Street, Raleigh, NC. We performed our audit work from August 2017 through
February 2018. Our audit period was October 1, 2012, through September 30, 2016. We
expanded the audit period as needed to accomplish our objectives.
To accomplish our objectives, we
   •   Reviewed and obtained an understanding of the Department of Commerce’s policies and
       procedures, relevant laws, regulations, grant agreements with HUD, and HUD’s
       guidance.
   •   Obtained and reviewed Department of Commerce organization charts.
   •   Reviewed HUD monitoring reports.
   •   Reviewed the Department of Commerce’s annual action plans and consolidated annual
       performance and evaluation reports for its fiscal years 2012 through 2016.
   •   Reviewed the Department of Commerce’s audit and internal reports for its fiscal years
       2013 through 2015.
   •   Reviewed CDBG project applications, activity files, and financial documents, including
       but not limited to financial statements, vendor invoices, and drawdown requests.
   •   Interviewed Department of Commerce employees, subgrantees, and HUD staff.
We selected five CDBG activities awarded during our audit period to determine whether they
met the national objectives and were eligible and whether funds were used for eligible expenses
and supported. We selected three activities that were categorized under economic development,
while the remaining two were selected to ensure that we reviewed activities associated with
infrastructure. We randomly selected one infrastructure activity from fiscal year 2014 and one
from fiscal year 2015. These five activities totaled more than $12 million in grant funds.
We selected a nonstatistical sample of five Main Street Revitalization grants totaling $2.15
million to determine whether the Department of Commerce distributed CDBG funds that were
not identified in its action plan. The Department of Commerce awarded 14 Main Street
Revitalization grants totaling more than $6 million, using fiscal year 2015 grant funds. This
amount represented approximately 36 percent of the Main Street grant universe.
The results of the audit apply only to items selected for review and cannot be projected to the
universe or population.
We relied in part on computer-processed data in the Department of Commerce’s system to
achieve our audit objective. Although we did not perform detailed assessments of the reliability
of the data, we performed minimal levels of testing and found the data to be adequately reliable
for our purposes. The tests for reliability included but were not limited to comparing computer-
processed data to vendor payments, financial records, and other supporting documentation.




                                                 6
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                                7
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

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

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

•   Effectiveness and efficiency of operations – Policies and procedures that management has
    implemented to reasonably ensure that file maintenance, expenditure, and financial reporting
    activities are conducted in accordance with applicable laws and regulations.
•   Reliability of financial reporting – Policies and procedures that management has
    implemented to reasonably ensure that valid and reliable data are obtained, maintained, and
    fairly disclosed in reports.
•   Compliance with applicable laws and regulations – Policies and procedures that management
    has implemented to reasonably ensure that expenditure and financial reporting activities
    comply with applicable laws and regulations.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:

•   The Department of Commerce did not include the Main Street Revitalization grant program
    in its action plan (finding).




                                                  8
Appendixes

Appendix A

                   Department of Commerce Projects Reviewed

Project   Recipient            Project          National           Grant amount
number                         activity         objective
    1     Town of Butner       Economic         Low-and-           $ 7,857,496
                               development      moderate-
                                                income clientele
    2     Polk County          Economic         Job creation           211,387
                               development
    3     Forest City          Economic         Job creation           600,000
                               development
    4     Town of Maxton       Infrastructure   Low-and-             2,600,000
                                                moderate-
                                                income area
    5     Town of Dover        Infrastructure   Low-and-               737,200
                                                moderate-
                                                income area
  Total                                                             12,006,083




                                       9
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments


Comment 1




                              10
                        OIG Evaluation of Auditee Comments


Comment 1   The Department of Commerce agreed to make the necessary changes based on the
            recommendations noted in the report once the report is final.
            We acknowledge the Department of Commerce’s agreement with our finding and
            recommendations. The Department of Commerce should make sure the required
            documentation is provided to HUD to clear the recommendations during the audit
            resolution process.




                                          11