oversight

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)

                                 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.



                                                                3

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.




       7


                                                           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