oversight

The City of Dallas, TX, HOME Investment Partnerships Program Was Not Always Administered in Accordance With Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-05-08.

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

                            City of Dallas,
                             Dallas, TX
             HOME Investment Partnerships Program




Office of Audit, Region 6            Audit Report Number: 2018-FW-1004
Fort Worth, TX                                              May 8, 2018
To:            Shirley J. Henley, Director, Community Planning and Development, 6AD

               //signed//
From:          Kilah S. White, Regional Inspector General for Audit, 6AGA
Subject:       The City of Dallas, TX, HOME Investment Partnerships Program Was Not
               Always Administered in Accordance With 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 Dallas’ HOME Investment Partnerships
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 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
817-978-9309.
                    Audit Report Number: 2018-FW-1004
                    Date: May 8, 2018

                    The City of Dallas, TX, HOME Investment Partnerships Program Was Not
                    Always Administered in Accordance With Requirements



Highlights

What We Audited and Why
We audited the City of Dallas’ HOME Investment Partnerships program, specifically, its
reconstruction program. A City auditor’s report, multiple news articles, and U.S. Department of
Housing and Urban Development (HUD) monitoring reviews identified issues with the City’s
Federal funds and record keeping. Our audit objective was to determine whether the City
followed HOME regulations and its own policies and procedures when it reconstructed 13 homes
and correctly administered its matching contributions.

What We Found
The City did not follow HOME regulations and its own policies and procedures in its
reconstruction program or its administration of its match contributions. The City did not (1)
follow environmental regulations, (2) properly assess contractors or ensure that they followed
contract terms, (3) check the eligibility status of subcontractors, (4) sign loan agreements, or (5)
support and calculate participant income correctly. These conditions occurred because City staff
did not have adequate training or direction on environmental requirements and the City hastily
reprogrammed $1.02 million to its reconstruction program without proper planning because it
believed the money would be recaptured by HUD. As a result, the City rushed projects without
ensuring that it followed HOME regulations or its own policies. Therefore, it misspent more
than $1.3 million to reconstruct 13 single-family homes. Also, the City did not meet all HOME
requirements for its match contributions. This occurred because the City did not believe it had to
meet HOME requirements as the properties receiving match contributions were not HOME
funded. As a result, it claimed more than $2.9 million in ineligible match contributions.

What We Recommend
We recommend that the Fort Worth Office of Community Planning and Development Director
require the City to (1) repay HUD more than $1.3 million that it misspent reconstructing homes,
(2) perform environmental reviews in accordance with HUD regulations, (3) hire a qualified
entity to determine the structural integrity of the reconstructed houses, (4) provide a plan to cover
the costs of any potential warranty work needed on the properties, (5) develop procedures to
include the review of subcontractors, (6) repay more than $2.9 million in match contributions,
and (7) ensure that its employees understand and comply with the HOME income requirements.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: The City Did Not Follow HOME or Its Own Requirements ........................ 4

Scope and Methodology .........................................................................................15

Internal Controls ....................................................................................................17

Appendixes ..............................................................................................................18
         A. Schedule of Questioned Costs .................................................................................. 18
         B. Auditee Comments and OIG’s Evaluation ............................................................. 19
         C. Required Warranties ................................................................................................ 24




                                                                2
Background and Objective
The City of Dallas, an entitlement grantee, received annual allocations of HOME Investment
Partnerships program 1 funds authorized under the Cranston-Gonzalez National Affordable Act as
amended from the U.S. Department of Housing and Urban Development (HUD). HUD allocated
funds by formula among eligible State and local governments (participating jurisdictions) to
strengthen public-private partnerships and to expand the supply of decent, safe, sanitary, and
affordable housing. Participating jurisdictions could use HOME funds, among other things, to
carry out multiyear housing strategies through acquisition, rehabilitation, new construction of
housing, and tenant-based rental assistance. The City must match no less than 12.5 cents 2 of
every HOME dollar it spends on affordable housing, and the contributions must come in the
form of a permanent contribution to affordable housing. The City received more than $8 million
for fiscal years 2016 and 2017.
The City’s HOME activities included a reconstruction program that provided forgivable loans of
up to $103,000 3 for demolition costs and onsite reconstruction for eligible homeowners. Eligible
participants included individuals of 62 years of age or older or persons with disabilities. 4 For
eligible participants, the City provided a list of contractors from which they could choose. The
loan agreement was between the homeowner and the City. The construction contract was
between the homeowner and the selected contractor.
Our audit objective was to determine whether the City administered its HOME program in
accordance with HUD regulations and its own policies and procedures. Specifically, we
reviewed the reconstruction of 13 homes to determine whether the City met HOME and
contractual requirements. Additionally, we reviewed matching contribution requirements for its
HOME funds to determine whether the City correctly administered the claimed amount.




1
    HUD’s Office of Community Planning and Development administered the HOME program.
2
    Generally the amount is 25 cents per HOME dollar spent, but the City got a waiver.
3
    In 2015, the City increased the loan amount from $103,000 to $110,000 for one loan in our sample.
4
    The City also set aside 10 percent of its HOME funds to be used to assist persons younger than 62 years of age
    or without a disability.



                                                          3
Results of Audit

Finding: The City Did Not Follow HOME or Its Own Requirements
The City did not follow HOME regulations and its own policies and procedures in its
reconstruction program or its administration of its match contributions. The City demolished and
reconstructed 13 homes and did not (1) follow environmental regulations, (2) properly assess
contractors or ensure that they followed contract terms, (3) check the eligibility status of
subcontractors, (4) sign loan agreements, or (5) support and calculate income correctly. These
conditions occurred because City staff did not obtain necessary training or comply with guidance
received and supervisors did not ensure compliance. Further, the City hastily reprogrammed
$1.02 million to its reconstruction program without proper planning because it believed the
money would be recaptured by HUD. The City rushed projects without ensuring that it followed
HOME regulations or its own policies. As a result, the City misspent more than $1.3 million to
reconstruct 13 single-family homes. Also, for its match contributions, the City did not (1)
execute written agreements imposing affordability requirements, (2) monitor HOME match-
eligible housing, or (3) document that the match was made only to the affordable housing units.
Consequently, it had more than $2.9 million in ineligible match contributions because it did not
follow HOME regulations.

The City Did Not Follow Environmental Regulations
The City did not follow environmental regulations. Specifically, it did not perform
environmental reviews 5 or maintain an environmental review record containing all required
documents. 6 This condition occurred because City staff did not have adequate training 7 or
direction on environmental requirements. The City was required to perform an environmental
review of all HUD-assisted projects to ensure that the proposed projects did not negatively
impact the surrounding environment and that the property site itself would not have an adverse
environmental or health effect on end users. The City spent more than $1.3 million to
reconstruct 13 single-family homes without performing the required environmental reviews.
The City used a tiered approach for the reconstruction environmental reviews. Tiering is a
means of making the environmental review process more efficient by allowing parties to
eliminate repetitive discussions of the same issues. 8 A tiered review consists of two stages: a
broad-level review (tier I) and later site-specific reviews (tier II). The tier I reviews should
identify and evaluate the issues that can be fully addressed and resolved before the City selects




5
    24 CFR (Code of Federal Regulations) 58.10
6
    24 CFR 58.38
7
    HUD training attendance records showed that only one of the five inspectors performing the review had been to
    training.
8
    24 CFR 58.15



                                                         4
specific sites. 9 In addition, it must establish the standards, constraints, and processes to be
followed in the tier II reviews. As individual sites are selected, the tier II reviews evaluate the
remaining issues based on the policies established in the tier I review. Together, the tier I and all
tier II reviews collectively comprise a complete environmental review addressing all required
elements.
The City Generally Did Not Perform Environmental Reviews
The City generally did not perform its tier II environmental reviews as required. It was required
to address and document each site’s compliance with 14 statutory items 10 and 3 compliance
items. 11 However, of the 14 statutory items, the City addressed and documented only the items
for historic properties and floodplain management. Of the three compliance items, the City
addressed and documented only the flood disaster protection and coastal barrier improvement.
The reviews relied on a “written strategy” generated by the City’s Housing Department staff.
The strategy outlined the requirements in the statutory checklist. 12 For the items not covered in
the tier I review, the City was required to perform additional steps. However, the City did not
include supporting documentation showing that the property complied with environmental
requirements. 13

The City Did Not Maintain a Complete Environmental Review Record
The City’s environmental review record did not include all required documents. HUD required
the City to maintain an environmental review record containing all documents, including public
notices, written determinations or environmental findings, decision-making procedures, and
actions taken pertaining to each project. Contrary to this requirement, the City’s documentation
was scattered throughout its departments. Further, the staff responsible for the tier II reviews
were not aware that a tier I review existed. Instead, the staff generated a strategy for tier II that
was intended to address the required statutes, including those addressed in tier I.

The City Did Not Properly Assess a Contractor or Ensure That It Followed Contract
Terms
The City did not properly assess a contractor to ensure that it had the ability and financial
capacity to fulfil its contractual responsibilities. Despite indications that Dry Quick Restoration,
LLC, had limited financial capacity, the City took no further steps to ensure that Dry Quick had
sufficient capacity to complete eight projects 14 concurrently. Further, the City did not adequately

9
     An example of a statutory item that could be addressed in a tier I review in the City’s program would be coastal
     zone management. Dallas is more than 200 miles from the Texas coast, so this item could be addressed upfront
     before the individual sites are selected.
10
     These 14 items are included on the statutory checklist for compliance with 24 CFR 58.5. For the reconstruction
     program, the City was not required to address the statutory requirements for air quality or explosive and
     flammable operations.
11
     These three items are included on the compliance checklist for 24 CFR 58.6, Other requirements.
12
     The written strategy was a document generated by the Manager II, Inspection Services. It contained
     information regarding the statutory requirements. Although the strategy indicated that the environmental
     review would be tiered, the manager stated that he did not know a tier I review existed.
13
     For example, statutes required that the property comply with noise control and abatement requirements. Only
     one of the files reviewed contained documentation. And in that one instance, the calculation was incorrect.
14
     Seven of eight reconstruction projects included HOME funds. One was funded by Community Development
     Block Grants and not included in our sample.



                                                          5
monitor Dry Quick or ensure that it followed contract terms in performing the reconstruction
projects. In addition, the City tried to avoid its responsibility by including clauses in its contracts
stating that it was not responsible for the contractor’s failure to carry out work in accordance
with requirements. However, those same contracts designated the City as the homeowner’s
attorney with the power to endorse the name of the homeowner on any check or other instrument
to transfer funds to the contractor for work properly performed. Further, the City had the
authority to override a homeowner’s objection to pay the contractor for unsatisfactory work. As
a result, the City paid Dry Quick almost $700,000 for seven reconstruction projects that were
completed late and not in accordance with contract terms.

The City Did Not Properly Assess a Contractor
The City did not properly assess the contractor, Dry Quick, to ensure that it had the experience
and financial capacity to fulfil its contractual responsibilities. The City’s policy 15 required that
new contractors with no previous experience with the City receive limited capacity until they
completed at least one or two successful projects. However, the City allowed Dry Quick to
exceed limited status and start eight reconstruction projects at once. Further, the City had
indications 16 that Dry Quick had limited financial capacity and took no actions to address this
risk. 17 This deficiency resulted in the City’s relying upon a contractor with limited financial
capacity to undertake the majority of the reconstruction projects.

The City Did Not Adequately Monitor Dry Quick
The City did not adequately monitor Dry Quick to ensure that its reconstruction projects
complied with the contract requirements or that homeowners were not financially overburdened
during the reconstruction of their homes. Specifically, the City did not ensure that Dry Quick

     •   completed its projects on time,
     •   completed its projects in a professional manner,
     •   provided the required warranties,
     •   submitted the required paperwork, and
     •   followed the City’s allowed draw schedule for payment.

Reconstructions Exceeded Construction Deadlines
Dry Quick exceeded the contract completion date on all of its reconstruction projects by 9 to 18
months. This condition likely occurred because Dry Quick did not have the capacity to begin
eight projects concurrently and complete them in a timely manner. Further, the City did not take
appropriate action to mitigate capacity issues or enforce contract terms. In addition to poor
contract administration, the delays caused a hardship for the homeowners that the program was


15
     The City’s policy required contractors to satisfactorily complete one or two projects before being approved to
     operate at full financial capacity. A contractor was allowed to have no more than two projects underway until
     full status was authorized.
16
     The contractor’s file contained an internal email indicating a City official expressed concerns about Dry Quick’s
     financial capacity.
17
     The file contained an approved waiver for Dry Quick to exceed the limited status. However, the waiver stated
     that the Inspection Services Division ensured the quality and financial capacity of the contractor.



                                                           6
designed to help. The eligible homeowners were 62 years of age or disabled and had very
limited income. 18 During reconstruction, homeowners were responsible for any relocation costs.
Therefore, homeowners had to obtain housing for an unanticipated extended period due to the 9-
to 18-month delays. The City should have been more diligent in ensuring that the projects were
completed in a timely manner to avoid unnecessary hardships.

Reconstruction Projects Were Not Completed in a Professional Manner
The Dry Quick reconstruction projects were not completed in a professional manner. Many of
the Dry Quick reconstructed homes were incomplete and had defects or signs of substandard
work. For example, at one house, the frame extended beyond the slab by several inches, and Dry
Quick used brick mortar to support an exterior wall. (See photographs below.)



                                                                         The frame of the house extended
                                                                         over the slab by inches.




18
     The highest income reported by any of these participants was $25,056.




                                                         7
                                                            An exterior brick wall was
                                                            supported by what appeared to be
                                                            brick mortar.




In addition, two houses reconstructed by Dry Quick had flooding issues. For one house, it
appeared that the flooding was because the air conditioner condensate line had been installed
above the back patio. (See photographs below.) At both houses, the back patios sloped toward
the house, causing water to puddle and leak into the home.

                                                               The air conditioning condensate
                                                               drain line emptied onto the back
                                                               patio. Although the house was
                                                               new, condensation was
                                                               consistently draining onto the
                                                               patio according to the
                                                               homeowner. In addition, the
                                                               back patio sloped toward the
                                                               home. This issue caused water
                                                               to seep into the home. The
                                                               homeowner had a bucket on the
                                                               patio to stop the water from
                                                               getting into the house. (See
                                                               photograph below.)




                                               8
                                                               A bucket was placed on the
                                                               patio by the homeowner to
                                                               collect air conditioner drainage.




In addition to structural issues with the homes, it did not appear that the yards were graded or
cleaned before the contractor left. Many of the yards observed contained construction debris and
trash. One homeowner stated that the yard could not be mowed due to the construction debris.
Also, there were large pieces of broken concrete left at one house. (See photographs below.)

                                                                          The debris left in the
                                                                          yards of the homes
                                                                          included a large piece
                                                                          of pipe coming out of
                                                                          the backyard.




                                                9
                                                                                           The contractor left
                                                                                           debris in a lot next to
                                                                                           the home. The debris
                                                                                           included large pieces
                                                                                           of broken concrete.




Dry Quick Did Not Provide Warranties
Dry Quick did not provide warranties or warranty documentation for any of the seven
reconstruction projects. The City required Dry Quick to provide warranties on mechanical and
structural components as well as workmanship, materials, and fixtures. 19 Dry Quick was also
required to register the homeowners online for any potential extended warranties available. Dry
Quick’s failure to provide these warranties represented a material breach of contract. In addition
to being contractually required, the State of Texas required certain warranties. 20

It did not appear likely that Dry Quick would be able to cover any warranty work on the
properties. Some subcontractors had filed liens against the properties for nonpayment, and Dry
Quick told the City that it did not have the money to settle the claims. In addition, some of the
warranties covering structural components of the house are required for 10 to 25 years. Yet there
was no documentation showing that those warranties existed.

Dry Quick Did Not Submit Required Paperwork
Dry Quick did not submit required paperwork, such as lien waivers, bills paid affidavits, and an
updated list of subcontractors. The contract required that Dry Quick provide lien waivers and
bills paid affidavits from each individual or entity for which payment was sought. However, the
files contained only some of the lien waivers. Further, the only invoices in the file were from
Dry Quick. Lastly, Dry Quick did not provide updated lists of subcontractors as required. 21




19
     See appendix C for warranties.
20
     Texas Property Code, Title 16, chapter 430, required certain warranties and stated that the warranties could be
     no less stringent than the standards required by HUD programs as set forth in 24 CFR Sections 203.202 –
     203.206.
21
     Texas Property Code, Title 5, also requires that an updated list of subcontractors be provided to the owner no
     later than the 15th day after the date on which a subcontractor or supplier is added or deleted.



                                                           10
Dry Quick Did Not Follow the City’s Allowed Draw Schedule
The City did not hold Dry Quick responsible for following its normal draw schedule for
payment. The contract documents stated that Dry Quick was allowed to make five draws, not
including retainage. However, the City allowed Dry Quick to make as many as 13 draws for
each project due to Dry Quick’s limited financial capacity and its inability to pay for work
without making additional draws.

The City Hastily Reprogrammed Funds for Reconstruction Projects
Many of the deficiencies with the reconstruction projects occurred because the City hastily
reprogrammed $1.02 million. 22 On August 26, 2015, the City Council authorized the funds to
start construction on the houses because it believed the money would be recaptured by HUD.
During this period, the City Council reduced the amount of funding for an individual house from
$110,000 to $103,000, causing some contractors not to participate. As a result, the City may not
have had sufficient time to plan these projects.
The City Did Not Comply With Other HOME Requirements
The City did not comply with other HOME requirements. Specifically, it did not meet all
HOME requirements imposed on match contribution projects, obtain a signed agreement, check
subcontractors’ eligibility status, or properly support or calculate income. This condition
occurred because the City did not believe match contribution projects had to meet any
requirements other than providing money for affordable housing and because of a lack of
attention to detail. As a result, the City had more than $2.9 million in ineligible match
contributions, as well as unsigned contracts, no process to check for subcontractors on the
federally excluded list, and unsupported income documentation.

Match Properties Did Not Meet All HOME-Imposed Requirements
The City did not meet HOME requirements 23 imposed on non-HOME-assisted projects used as
HOME match contributions. Specifically, the City did not (1) execute a written agreement that
imposed HOME affordability requirements, (2) monitor HOME match-eligible housing to ensure
income eligibility compliance, and (3) document that the match was made only to the affordable
housing units in mixed-income projects. The City did not believe that it had to meet HOME
requirements as the properties receiving the match contributions were not HOME-funded
projects. However, HOME regulations require that HOME affordability requirements apply to
HOME match contribution projects. HUD reported the same type of finding in an onsite
monitoring report in 2017. 24 HUD’s finding stated that during the period of affordability, the
City must perform onsite inspections and verify information submitted annually by the owners.
As a result, the City claimed $2,967,568 in match contributions that did not meet HOME
requirements.




22
     The $1.02 million paid for 11 of the 13 homes included in our sample.
23
     24 CFR 92 219 and 24 CFR 92 252
24
     Costs identified in HUD’s report were not include in this report.



                                                          11
The Loan Agreements Were Not Signed
In 10 of 13 reconstruction projects, the loan agreement was not signed by the prior city manager
or prior city attorney. HUD regulations stated that the City must enter into a written agreement
before disbursing HOME funds. 25 The City had a similar finding in a HUD monitoring review,
dated June 15, 2017. The City stated at the time that the loan agreement was not rerouted to the
appropriate signing officials for signature. The majority of the unsigned loan agreements
appeared to be attributable to the rush by the City to reprogram money as this issue did not occur
in the 2016 reconstruction loan documents. As a result, the 10 loan documents may have been
invalid.

The City Did Not Check the System for Award Management for Subcontractors
The City did not check the System for Award Management (SAM) in 12 of 13 projects reviewed
to determine whether subcontractors were on the Federal excluded list. HUD regulations 26
required that the City ensure that no suspended or ineligible contractors worked on federally
funded projects. The City believed it was responsible to check only for the prime contractor on
the SAM list. Later, the City checked for subcontractors and in two instances, found
subcontractors on the list for Internal Revenue Service registration failure but did not document
any action taken. As a result, the City may have indirectly paid subcontractors that were
excluded from receiving Federal awards.

The City Did Not Support and Calculate Income Correctly
The City did not support or calculate income correctly for 4 of 13 instances. This condition
occurred because of the rush to encumber reconstruction funds and the City’s lack of attention to
detail. As a result, the City could not ensure that homeowners always met eligibility
requirements.

The City did not calculate income correctly for two families. HUD regulations required that the
City calculate the annual income of the family. 27 In one of the two instances, the City calculated
income incorrectly because it did not recalculate income, although updated income
documentation was included in the file. In the other instance, when the City averaged income for
one homeowner, 28 it used tax returns, which were not considered income source documentation. 29
HUD noted this same finding in a 2017 monitoring review. This condition occurred because the
homeowner’s original contractor terminated his September 2015 contract in November 2015 and
the process had to begin again, including City Council approval. In September 2016, the City
completed the process, and a new contractor began the reconstruction project. In the interim, the
homeowner’s income rose to $50,817, which exceeded the 2016 HOME eligibility requirement
of $40,150. As a result, to meet the eligibility requirements the City averaged the homeowner’s
income. 30


25
     24 CFR 92.504.(b)
26
     24 CFR 92.350(a) and 2 CFR 200.213
27
     24 CFR 92.203(d)(2)
28
     This homeowner was not 62 years of age or disabled.
29
     24 CFR 92.203(a)(2)
30
     This was the only instance in which the City averaged the income.



                                                          12
The City did not obtain current income documentation for two families. HUD required that the
participating jurisdiction reevaluate income if more than 6 months had elapsed since the family
qualified as income eligible. 31 The City provided HOME assistance to homeowners in 2015 and
2016 without updating income documentation. The City could not explain the oversight. As a
result, the City could not ensure that all recipients were income eligible.

Conclusion
The City did not follow HOME regulations and its own requirements in its reconstruction
program or its administration or calculation of its match contributions. As shown in the table
below, the City demolished and reconstructed 13 homes and did not (1) follow environmental
regulations, (2) properly assess contractors or ensure that they followed contract terms, (3) check
the eligibility status of subcontractors, (4) sign loan agreements, or (5) always obtain current
income documentation.

Summary of deficiencies
 IDIS*       Did not follow      Did not search     Unsigned    Lacking    Unsupported     Total HOME,
 number      environmental       for                loan        warranty   and             CDBG,**
             regulations         subcontractor      agreement              incorrectly     and liens paid
                                 on Federal                                calculated
                                 excluded list                             income
 12278               x                 X                   x                                    $108,146
 12309               x                 X                   x       x                             102,842
 12310               x                 X                   x       x            x                103,000
 12311               x                 X                   x       x                             102,071
 12312               x                 X                   x       x                             102,821
 12313               x                 X                   x       x                              92,700
 12314               x                 X                   x       x                             103,000
 12316               x                 X                   x       x                              92,700
 12317               x                 X                   x                    x                103,000
 12318               x                 X                   x                                     103,000
 12630               x                 x                                        x                103,000
 12631               x                 x                                                         103,000
 12633               x                                                          x                103,000
 Total               13                 12                 10      7            4             1,322,280
* IDIS = Integrated Disbursement and Information System
** CDBG = Community Development Block Grant

These conditions occurred because the City staff did not obtain necessary training or comply
with guidance received and supervisors did not ensure compliance. Further, the City hastily
reprogrammed $1.02 million to its reconstruction program without proper planning because it
believed the money would be recaptured by HUD. Also, for its match contributions, the City did
not (1) execute written agreements imposing affordability requirements, (2) monitor HOME
match-eligible housing, or (3) document that the match was made to only the affordable housing
units. As a result, the City misspent more than $1.3 million to reconstruct 13 single-family


31
     24 CFR 92.203



                                                      13
homes. In addition, the City had more than $2.9 million in ineligible match contributions
because it did not follow HOME regulations.

Recommendations
We recommend that the Fort Worth Office of Community Planning and Development Director
require the City to

          1A.     Repay its HOME program from non-Federal funds $1,322,280, which it misspent
                  reconstructing homes. 32
          1B.     Ensure that staff responsible for environmental reviews understands and complies
                  with environmental requirements.
          1C.     Hire a qualified entity to determine and correct deficiencies related to 13
                  reconstructed homes, including the structural integrity of the homes.
          1D.     Provide a detailed plan for covering the cost of any potential warranty work
                  needed on these 13 properties for the entire statutory warranty period.
          1E.     Support or reduce its match contributions by $2,967,568 and review its HOME
                  match contributions for the past 5 years for compliance with HOME regulations
                  and report the results to the Fort Worth Office of Community Planning and
                  Development.
          1F.     Develop and adopt policies and procedures to address HOME match contribution
                  requirements.
          1G.     Ensure that the loan agreements are signed and valid legal instruments.
          1H.     Develop policies and procedures, to include the review of all subcontractors in
                  SAM.
          1I.     Ensure that its staff understands and complies its policies and procedures
                  including HOME income requirements.




32
     Specifically, the City should repay $1,170,081 to its HOME program and $152,199 to its Community
     Development Block Grant program.



                                                        14
Scope and Methodology
We performed our audit work between August 2017 and March 2018 at the Dallas City Hall
located at 1500 Marilla Street, Dallas, TX, and at the HUD Fort Worth office located at 801
Cherry Street, Fort Worth, TX. The audit period was January 1, 2015, through December 31,
2017. We expanded the audit period as needed to accomplish our objective.
To accomplish our objective, we
     •    Reviewed relevant HOME program requirements and applicable Federal regulations to
          gain an understanding of the HOME administration requirements, including match
          requirements.
     •    Reviewed relevant HUD environmental requirements.
     •    Reviewed the City’s policies and procedures pertaining to its reconstruction program.
     •    Reviewed the reconstruction loan agreement and Texas Property Code.
     •    Reviewed prior audits and reviews performed by the city auditor and HUD.
     •    Interviewed staff from the City’s Housing-Community Services Department, the City’s
          Budget and Management Services Department, the Office of the City Auditor, and HUD.
     •    Obtained an understanding of the City’s management controls and procedures through
          interviews with City Housing-Community Services Department employees.
     •    Reviewed the City’s consolidated annual performance and evaluation reports, action
          plans, and grant agreements for HOME fiscal years 2012 to 2016.
     •    Conducted onsite observations of the 13 reconstruction homes in our sample in January
          and February 2018.
     •    Interviewed 10 homeowners during the onsite observations of the 13 reconstruction
          homes. 33
     •    Reviewed the application, construction, and environmental files maintained for the 13
          reconstruction properties.
     •    Reviewed the City’s tier I and tier II environmental documentation.
     •    Reviewed the contractor’s application and financial files.
     •    Obtained and reviewed reports from HUD’s Integrated Disbursement and Information
          System to obtain a universe of HOME projects.


33
     One interview was conducted over the phone. The homeowner was not home at the time of the onsite
     observation but called later for an interview.



                                                        15
   •   Obtained and reviewed payments to the contractors and liens paid on the 13
       reconstruction homes.
   •   Reviewed supporting match contribution documentation.
   •   Reviewed City Council resolutions pertaining to the 13 reconstruction homes and the
       reprograming of HOME funds from the City’s HOME housing development loan
       program to the reconstruction program on May 27, 2015.
We reviewed 100 percent of the 13 homes that the City reconstructed during the audit period.

Scope Limitation
During our review of the City’s environmental review documentation, City staff altered a
statutory checklist. The alteration was made to make the property “exempt.” It was essential
that the files provided an accurate and true representation of the original documentation
generated. We informed the City of the tampering, and the City’s housing director sent an email
to City staff, explaining that “original documents should never be deleted or altered.”
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.




                                                16
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 implemented by
    the City to ensure that it complied with environmental requirements.
•   Effectiveness and efficiency of operations – Policies and procedures implemented by the City
    to ensure that it effectively administered its HOME program activities, including monitoring
    its contractors to ensure that they followed guidance and contract terms.
•   Compliance with applicable laws and regulations – Policies and procedures implemented by
    the City to ensure that it administered and adequately documented its HOME program
    activities in compliance with HUD requirements, including its match contributions

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:

•   The City did not have adequate controls to ensure that it followed environmental
    requirements.
•   The City did not have adequate controls to ensure that contractors followed guidance and
    contract terms.
•   The City did not have adequate controls to ensure the proper administration and
    documentation of its HOME program, including its match contributions.


                                                 17
Appendixes

Appendix A


                            Schedule of Questioned Costs
                         Recommendation
                                              Ineligible 1/
                             number
                                 1A               $1,322,280
                                 1E                2,967,568

                               Totals              4,289,848



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.




                                             18
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




Comment 1




                               19
Ref to OIG   Auditee Comments
Evaluation


Comment 2




Comment 2




Comment 2




Comment 3




Comment 2




                            20
Ref to OIG   Auditee Comments
Evaluation




Comment 2




Comment 2




Comment 3




                            21
Ref to OIG   Auditee Comments
Evaluation




                            22
                         OIG Evaluation of Auditee Comments


Comment 1   The City disagreed with recommendation 1A. The City stated that the funds were
            used to demolish dilapidated and beyond repair homes with reconstructed homes.
            The City acknowledged its mistakes and deficiencies. The City further indicated
            that it would allocate non-federal funds to address needed repairs and to ensure
            that homeowners receive all terms identified in their contracts including
            mitigation of any findings resulting from conducting the appropriate
            environmental reviews. The City requested an opportunity to cure the
            deficiencies through training and internal controls rather than repayment of
            federal funds.

            We appreciate that the City will take actions to ensure that it complies with
            requirements and ensure that the homeowners will receive everything under the
            contract. Since the City did not refute the finding that it misspent the funds, we
            maintain our position and recommendation that the City repay its HOME program
            from non-Federal funds that it misspent reconstructing homes. The City should
            work with HUD to resolve the noncompliance with requirements and ensure that
            the homeowners receive all contracted items.
Comment 2   The City agreed with recommendations 1B, 1C, 1D, 1F, 1G, and 1H. We
            appreciate that the City has outlined a corrective action plan to resolve the
            deficiencies and help the homeowners negatively impacted. The City will need
            to work with HUD to ensure that the plan is implemented and the deficiencies
            corrected.
Comment 3   The City agreed with recommendations 1E and 1I. Based upon its and HUD’s
            response, we modified the recommendations to include that the City review the
            prior 5 years of match contributions and ensure that its staff understands and
            complies with its policies and procedures. The City should report to HUD the
            results of the review of its match contributions and work with HUD to ensure that
            its policies and procedures are implemented and the deficiencies corrected.




                                             23
Appendix C
                                             Required Warranties


                                            Required warranties
             Warranty                    Construction     Section 19 reconstruction program
                                           contract             construction requirements
 Materials, fixtures, equipment,        1 year                  18 months
 workmanship
 Mechanical delivery systems            2 years
 (plumbing, electrical, heating,
 ventilation, air conditioning
 Major structural components            10 years
 3rd-party foundation                                           10 years
 Warranty of habitability               10 years
 Labor, material, and equipment                                 18 months
 Roofs, mechanical equipment,                                   Must be registered online with the manufacturer to
 major appliances                                               gain the extended warranty. Mechanical equipment
                                                                will be registered online with the manufacturer for
                                                                no less than 10 years. Proof of registration must be
                                                                provided to the housing inspection at the final punch
                                                                list. 34 Major appliances include water heaters,
                                                                ranges, dishwashers, and refrigerators (if
                                                                applicable).

 Mechanical service agreement                                   The contractor will provide an 18-month mechanical
                                                                service (maintenance) agreement from a 3rd party.
                                                                The contractor is required to ensure that the service
                                                                agreement is scheduled and completed twice a year –
                                                                spring and fall – and provide two minimum merv 9 35
                                                                air filters to the homeowner in the spring and fall for
                                                                18 months.
 Roofing material                       Minimum 25 years        Manufacturer warranty and installation required
                                                                online with manufacturer




34
     A punch list is a document prepared near the end of a construction project listing work not conforming to
     contract specifications that the contractor must complete prior to final payment.
35
     Merv refers to the maximum efficiency reporting value for air filters.



                                                           24