U.S. Department of Housing and Urban Development
Wanamaker Building, Suite 1005
100 Penn Square East
Philadelphia, PA 19107-3380
District Inspector General for Audit
April 29, 1996
Audit Related Memorandum
No. 96-PH-249-1815
MEMORANDUM FOR: Joyce Gaskins, Director, Office of Community
Planning and Development, 3AD
FROM: Edward F. Momorella, District Inspector General
for Audit, Mid-Atlantic, 3AGA
SUBJECT: Limited Review - Delaware County CDBG Program
Penza Tract Fund
Media, PA
INTRODUCTION
We performed a limited review of the subject fund, which was
established from proceeds of the sale of real property originally
acquired by Delaware County (Grantee) with Community Development
Block Grant (CDBG) funds. The purpose of the review was to
determine whether the Penza Tract Fund, including interest
earnings, represents program income due the CDBG program.
The review was performed in March 1996 and covered the period from
January 1977 to the present. We reviewed documents from the HUD
Philadelphia Office and from the Grantee.
SUMMARY
The Grantee sold land in 1979 and 1981 that had previously been
acquired with CDBG funds, but did not credit the net sales proceeds
of $1,262,990 to program income, as required; and, earned a minimum
of $516,309 in interest on the land sales proceeds since April
1988, but did not credit these earnings to CDBG program income, as
required. Part of these interest earnings were transferred to the
Grantee's general fund and subsequently spent on general
governmental activities, contrary to regulations.
2
We recommend you require the Grantee reimburse its CDBG fund
$1,779,299 for the sales proceeds and interest earned from April
1988 to December 1994. We also recommend your staff determine,
based on the Grantee's records, the amount of interest earned on
the sales proceeds after December 1994, and require the Grantee
reimburse this amount to the CDBG program.
Because the conditions cited in this memorandum require corrective
action, the finding will be controlled in accordance with HUD
Handbook 2000.6 REV-2, Audits Management System.
Within 60 days please give us, for each recommendation made in the
memorandum, a status report on: (1) the corrective action taken; or
(2) the proposed corrective action and the date to be completed; or
(3) why action is considered unnecessary. Also, please furnish us
copies of any correspondence or directives issued because of the
review.
BACKGROUND
Purchase of the Penza Tract
In 1977, the Grantee spent $1,855,000 in CDBG funds from Program
Years 2 and 3 to acquire, through condemnation, 56.6 acres of land
known as the "Penza Tract".
The Grantee purchased this property, which is located adjacent to
the county-owned Smedley Park in Nether Providence Township,
ostensibly in order to prevent further development in an
environmentally-sensitive area, and to make up for the anticipated
loss of park land that would result from the planned completion of
Interstate 476, known locally as the "Blue Route". The original
owner of the Penza Tract, Nicole Enterprises, appealed the
compensation amount.
The HUD Philadelphia Office originally disapproved the use of Year
3 funds to complete the acquisition, because it did not meet
criteria set forth in CPD Notice 77-10 regarding compliance with
the primary objectives of the program. The Philadelphia Office
subsequently waived these requirements on August 5, 1977, based on
its approval of the activity in the previous year's CDBG program
and the financial hardship the Grantee would suffer as a result of
a negative decision. The letter indicated, however, that the
Grantee should make every effort to obtain funds for this activity
from other resources.
Establishment of the Penza Fund
In December 1979, the Grantee sold 26.31 acres of Penza Tract land
to the Pennsylvania Department of Transportation for $1,884,600.
On June 10, 1981 the Grantee sold an additional 1.27 acre area to
the Department of Transportation for $103,950.
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The Grantee deposited these sales proceeds into a separate bank
account and established on its books a separate capital projects
fund account known as the "Penza Fund". The agreement of sale gave
the Grantee the right of first refusal if the land was ever resold.
At the time, the highway project had been delayed for a number of
years by litigation and there was concern that it would never be
built. The remainder of the Penza Tract (29.02 acres) was
incorporated into Smedley Park.
In February 1981, a final settlement was reached with Nicole
Enterprises requiring the expenditure of an additional $725,560,
which the Grantee disbursed from the Penza Fund account.
Completion of the Blue Route
The highway was constructed through the Penza land sold to the
Transportation Department and through an eight acre section of
Smedley Park, and was completed and opened to the public in
December 1991. However, the Grantee continued to maintain the
Penza Fund monies in an interest-bearing account. Grantee
representatives told us that a portion of the Penza land sold to
the Transportation Department, but not used for the highway, could
still be offered back to the Grantee and that officials wanted
funds to be available if this occurs.
Status of the Penza Fund
The Penza Fund has earned interest income from 1979 to the present
time. Most of this income was transferred each year from the Penza
Fund to the Grantee's General Fund and expended on general
government activities. Grantee records show that a minimum of
$1,523,416 was transferred between 1982 and 1993. According to
Grantee representatives there were no withdrawals from the Penza
Fund in 1994 and 1995.
The Grantee also made withdrawals from the Fund to pay for park-
related purposes, including maintenance and administration
attributable to the Penza land. As of June 30, 1995, the Penza
Fund account totaled $2,139,716, which included $734,095 deposited
in 1989 from the sale of an unrelated parcel known as the Lawton
Tract.
Grantee's Current Position
Grantee representatives acknowledge that at least a portion of the
Penza Fund represents CDBG program income and have offered to
reimburse the CDBG program $762,284 "once all contingencies have
been satisfied", which apparently means once all Penza land not
needed by the Department of Transportation has been repurchased by
the Grantee. This figure is based on a pro-ration of the original
$1,855,000 in CDBG funds utilized for acquisition to the portion
sold to the Department of Transportation, minus estimated park
related expenses, as follows:
4
Original CDBG funds utilized $1,855,000
Pro-ration (26.31/56.6) 862,284
Less: Park-related expenses 100,000
Grantee's offer $762,284
Should you or your staff have any questions, please contact Richard
J. DeCarlo, Assistant District Inspector General for Audit, at 656-
3401.
Attachments
1. Results of Review and Recommendation
2. Schedule of Revenues and Transfers
3. Distribution
5
Attachment 1
RESULTS OF REVIEW AND RECOMMENDATIONS
Proceeds from the Sale of Penza Tract Land
Grantee representatives told us that Delaware County officials
strongly believed they had a moral commitment to their residents to
reacquire Penza Tract land not needed for the highway, in order to
prevent development at this environmentally-sensitive location.
Although they acknowledged that the agreement of sale with the
Department of Transportation did not require the Grantee to
repurchase land, this "moral commitment" apparently became the
basis for the establishment of the Penza fund.
The Grantee should have treated the proceeds from the sale of the
Penza land to the Pennsylvania Department of Transportation as CDBG
program income at the time of sale. The terms of the sales
agreement did not require the Grantee to repurchase land not used
for the highway. Although HUD approved the use of CDBG funds to
pay for a land acquisition, there was no indication that this
approval extended to the use of program income to fund a potential
reacquisition.
According to the Grantee's representative, the $725,560 settlement
with the former owner of the Penza Tract was not paid from program
income, but rather from the increase in land value from 1977 to
1979. The Grantee contends that when land was acquired with CDBG
funds and subsequently sold at a higher price, Federal regulations
prior to 1988 did not require that the gain/difference be paid to
the CDBG fund, which resulted in a windfall to the Grantee.
However, 24 CFR 570.506 includes in the category of other program
income proceeds from the disposition of real property. Other
program income is income which must be retained by the recipient
and spent on eligible program activities. Although the regulation
did not require that land acquired with CDBG funds be sold at fair
market value, it also did not specifically limit the amount of
proceeds when the selling price exceeds the acquisition cost.
Currently, 24 CFR 570.505 requires a Grantee to reimburse the CDBG
program the fair market value when a property is sold or put to a
new use that does not meet a national objective. Consequently, we
believe that the entire land sales proceeds of $1,988,550 must be
considered program income. However, use of sales proceeds to pay
the $725,560 settlement amount to the former owner was appropriate
because it was directly tied to the original condemnation
transaction approved by HUD for CDBG funding.
6
Maintenance and Administrative Costs
Grantee officials presented no justification for deducting
maintenance and administrative costs from land sales proceeds.
24 CFR 570.207(b)(2) provides that expenses for maintenance and
repair of streets, parks, playgrounds etc. and for the payment of
salaries for staff, utility costs and similar expenses necessary
for the operation of public works and facilities are generally
ineligible.
Interest Earnings
Regulations governing the CDBG program did not specifically address
interest accumulated on program income held pending disposition
until the 1988 revision at 24 CFR 570.500(a)(1)(ix) specifically
included such earnings in the definition of program income.
Therefore, all interest earned after April 1988, the date of the
revised Code of Federal Regulations, should be included in program
income.
OIG Position
We believe that the net sales proceeds should be treated as CDBG
program income in accordance with current regulations, as follows:
Total Sales Proceeds $1,988,550
Less: Additional Settlement 725,560
Net Proceeds $1,262,990
Plus: Interest Earnings 516,309
Total $1,779,299
Interest earnings cover the period April 1988 to December 1994.
These figures should be updated to the present, based on the
Grantee's records, with no deductions for maintenance and
administration.
The Grantee should be required to expend the $1,779,299 plus
interest earned after December 31, 1994 on eligible activities
before it draws additional funds on its Letter of Credit.
Recommendations
We recommend that you require the Grantee to:
A. Reimburse the CDBG program $1,779,299, plus interest earned
since December 31, 1994. These funds should be spent on
eligible program activities before additional Letter of Credit
drawdowns are requested.
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Attachment 2
Delaware County CDBG Program
Penza Tract Fund
SCHEDULE OF REVENUES AND TRANSFERS
Proceeds Interest Transfers Interest
Year from Sale Earnings Expenditures from Fund Due Program
1979 $1,884,600 * * *
1980 * * *
1981 (725,560) * * *
103,950
1982 $219,568 $200,000
1983 136,213 200,000
1984 152,698 125,000
1985 124,240 125,000
1986 100,022 125,000
1987 92,228 125,000
1988 151,286 125,000 71,482 (1)
1989 190,971 125,000 120,312 (2)
1990 174,700 125,000 110,061 (2)
1991 129,212 125,000 81,404 (2)
1992 73,835 74,923 75,000 46,516 (3)
1993 59,693 2,596 48,416 37,607 (3)
1994 61,789 38,927 (2)
$1,262,990 $1,666,455 $77,519 $1,523,416 $516,309
* Indicates data not available from records provided by the Grantee
Notes:
(1) Grantee deposited a net amount of $734,095 from the sale of an
unrelated tract of land (Lawton Tract) into the Penza Fund
during the year.
Interest due Program based on a 37 to 63 percent pro-ration
which was the ratio of Lawton Tract net proceeds to Penza Tract
net proceeds.
Amount due Program was based on 75 percent of interest earned
on Penza proceeds during the year in order to reflect the
period from April to December 1988.
(2) Interest based on a 37 to 63 percent pro-ration which was the
ratio of Lawton Tract net proceeds to Penza Tract net proceeds.
8
(3) Information on expenditures was not available from records
provided by the Grantee.
Interest based on a 37 to 63 percent pro-ration which was the
ratio of Lawton Tract net proceeds to Penza Tract net proceeds.
9
Attachment 3
Distribution
Secretary's Representative, Mid-Atlantic, 3AS
Internal Control & Audit Resolution Staff, 3AFI
Director, Field Accounting Division, 3AFF
Director, Office of Community Planning and Development, 3AD
Assistant to the Secretary for Field Management, SC (Room 7106)
Audit Liaison Officer, COM (Room 7228) (3)
Acquisitions Librarian, Library, AS (Room 8141)
Chief Financial Officer, F (Room 10166) (2)
Deputy Chief Financial Officer for Operations, FO (Room 10166) (2)
Associate General Counsel, Office of Assisted Housing and Community
Development, GC, (Room 8162)
Assistant Director in Charge, US GAO, 820 1st St., NE Union Plaza,
Bldg. 2, Suite 150, Washington, DC 20002
Attn: Mr. Cliff Fowler (1)
Mr. Paul G. Mattus, Chairman, Delaware County Council, Government
Center Building, Media, PA 19063
REPORT NAME: Limited Review - Delaware County CDBG
Program
Penza Tract Fund
REPORT NO: 96-PH-249-1815
ISSUE DATE: April 29, 1996
REGIONAL OFFICE (NON-OIG)
Secretary's Representative, Mid-Atlantic, 3AS 1
Internal Control & Audit Resolution Staff, 3AFI 1
Director, Office of Community Planning and Development, 3AD 1
Director, Field Accounting Division, 3AFF 1
HEADQUARTERS (NON-OIG)
Assistant Secretary for Field Management, SC (Room 7106) 1
Associate General Counsel, Office of Assisted Housing and Community 1
Development, GC (Room 8162)
Jo Ann Stanton, Audit Liaison Officer, COM (Room 7228) 3
Acquisitions Librarian, Library, AS (Room 8141) 1
Chief Financial Officer, F (Room 10166) 2
Deputy Chief Financial Officer for Operations, 2
F (Room 10166)
HEADQUARTERS (OIG)
Michael R. Phelps, Deputy Assistant Inspector General, GA (Room 8286) 1
James M. Martin, Director, Program Analysis & Special Projects Division, 1
GAP (Room 8180)
Central Files, (Room 8260) 2
Semi-Annual Report Coordinator (Room 8254) 1
DISTRIBUTION OUTSIDE HUD
Assistant Director in Charge, US GAO, 820 1st St. NE Union 1
Plaza, Bldg. 2, Suite 150, Washington, DC 20002
Attn: Mr. Cliff Fowler
Mr. Paul G. Mattus, Chairman, Delaware County Council, Government Center 1
Building, Media, PA 19063 21
From:
Edward F. Momorella, DIGA, Mid-Atlantic
Wanamaker Building, Suite 1005
100 Penn Square East
Philadelphia, PA 19107-3380
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CC:OSWALD
3AGA:DECARLO:AMP:04/18/96
Correspondence Code
3AGA
Concurrence DECARLO
Date
Delaware City Penza Tract Fund, Media, PA
Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-04-29.
Below is a raw (and likely hideous) rendition of the original report. (PDF)