oversight

Municipality of Arecibo, Community Development Block Grant and Section 108 Loan Guarantee Assistance Programs, Arecibo, PR

Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-11-05.

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

                             Audit Report
                             District Inspector General for Audit
                             Southeast/Caribbean District
                             Report: 99-AT-241-1001                  Issued: November 5, 1998



TO:            Carmen Cabrera, Director, Community Planning and Development Division, 4ND


FROM:          Nancy H. Cooper
               District Inspector General for Audit-Southeast/Caribbean, 4AGA


SUBJECT:       Municipality of Arecibo
               Community Development Block Grant and
               Section 108 Loan Guarantee Assistance Programs
               Arecibo, Puerto Rico


This report presents the results of our audit of the municipality’s administration of the Department
of Housing and Urban Development’s (HUD) Community Development Block Grant and Section
108 Loan Guarantee Assistance Programs. The municipality’s comments to the three findings and
associated recommendations are included as Appendix B with excerpts and the Office of
Inspector General’s (OIG) response incorporated into the Findings and Recommendations section
of the report.

Please furnish this office a reply within 60 days on each recommendation describing: (1) the
corrective action taken; (2) the proposed corrective action and a planned implementation date; or
(3) why action is not considered necessary. Also, please furnish us copies of any correspondence
or directives issued as a result of the audit. Note that HUD Handbook 2000.06 REV-3 requires
management decisions to be reached on all recommendations within 6 months of report issuance.
It also provides guidance regarding the format and content of your reply.

We are providing a copy of this report to the municipality.

We appreciate the cooperation of your staff during the audit. If you or your staff have any
questions, please contact me or Mike Gill, Assistant District Inspector General for Audit at (404)
331-3369.
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Executive Summary
At the request of HUD, we conducted an audit of the Municipality of Arecibo’s administration of
the Community Development Block Grant (CBDG) and Section 108 Loan Guarantee Assistance
(LGA) Programs. Our objectives were to determine whether the grantee: (a) administered
program activities in an economical, efficient, and effective manner, (b) complied with program
requirements, and (c) established adequate management controls to ensure compliance.

Our review disclosed that the grantee did not manage the programs in an economical, efficient,
and effective manner. The grantee also did not comply with all program requirements. This
occurred because the grantee disregarded requirements and had not established adequate
management controls to ensure compliance. We identified about $6.2 million of ineligible and $.3
million of unsupported costs. Cost efficiencies totaled about $.3 million. (See Appendix A.) We
found serious deficiencies in the administration of HUD funded and guaranteed programs.

       •   The grantee failed to meet program objectives by not completing two major
           construction projects and by allowing properties purchased with LGA funds to
           significantly deteriorate. Since 1988, the grantee has spent about $5.3 million in
           program funds on these projects. In May 1997, the grantee approved the sale of part
           of one of the properties for $250,000. In July, it advertised the remaining part for
           sale, although no value determination had been made. In addition, HUD had not
           approved either sale.

       •   During the period July 1993 through June 1997, the grantee improperly used about
           $768,000 in CDBG funds to pay employees who performed general government
           duties. About $237,000 was budgeted for similar employee services for the 1997-
           1998 fiscal year.

       •   The grantee did not comply with procurement requirements. Contract files were not
           documented to show: (a) how contracts were awarded (e.g., solicited), (b) whether
           contract expenditures addressed program objectives, (c) justification for sole-source
           contracts and contract amendments, (d) that price or cost analyses were performed,
           and (e) contract specifications or detailed contract requirements. The grantee did not
           provide for full and open competition by splitting contracts and routinely awarding
           sole-source contracts to avoid required advertising and bidding.

       •   The grantee paid about $200,000 in LGA funds for poor and incomplete work on six
           construction projects. Contractors were paid for the work although the grantee’s
           inspector had reported significant construction deficiencies. Our subsequent site visits
           found the deficiencies had not been corrected. Some deficiencies were serious safety
           hazards. Final payments were made on four of the contracts. About $6,200 remained
           to be paid on the other contracts.



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       •   The grantee paid about $83,000 in CDBG and HOME funds to a consulting firm for
           services related primarily to general government activities. The semi-annual sole-
           source contracts stated that the firm would assist the grantee to implement
           commercial, industrial, and residential loan programs. Although the grantee had
           received similar services from the firm for over 10 years, no loan programs had been
           established.

       •   The grantee’s financial management system and related controls need immediate
           improvement. Accounting records and reports were not accurate, current, or
           complete. Bank statements were not reconciled timely. Numerous accounting
           adjustments from prior reconciliations were not posted. Grant expenditures reported
           to HUD did not agree with grantee accounting records. Required single audit reports
           were not submitted on time. Similar deficiencies had been reported previously by
           independent public accountants (IPA) and by HUD but the grantee did not provide
           resources to correct the problem. The last IPA who reviewed the grantee’s financial
           statements expressed no opinion on them.

       •   The grantee could not account for program funds in investment accounts totaling
           about $224,000. The grantee had recorded the funds in its accounting system;
           however, investment entity statements did not show the funds being held. The grantee
           did not reconcile these type statements with its accounting records.

We recommend that you sanction the grantee for continuing to disregard program requirements
and for failing to take corrective actions on known deficiencies. We also recommend that you
require the grantee to reimburse the ineligible costs and determine eligibility of the unsupported
costs (see Appendix A) and strengthen various management control systems.

On July 30, 1998, we held an exit conference with HUD program officials who agreed with the
findings and recommendations. On July 21, 1998, we provided the draft audit report to the
grantee and held an exit conference with them on August 12, 1998. The grantee provided its
written comments on September 8, 1998. Except for Finding 1 regarding employee costs charged
to the CDBG Program, the grantee generally agreed with our findings. Applicable portions of the
municipality’s comments are incorporated along with our position into the Findings and
Recommendations section of the report. The full text of the grantee’s comments excluding
appendices, is included as Appendix B.




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Table of Contents
Management Memorandum ................................................................................... i

Executive Summary.............................................................................................. ii

Table of Contents ................................................................................................ iv

Introduction.......................................................................................................... 1

Findings and Recommendations

         1. The Grantee Mismanaged HUD Programs..............................................3
         2. The Grantee Did Not Comply With Procurement Requirements ............12
         3. Immediate Financial Management System and Control
            Improvements Are Needed ................................................................... 21

Follow-up on Prior Audits ....................................................................................25

Appendices
     A. Schedule of Ineligible and Unsupported Costs, and Cost Efficiencies ....26
     B. Municipality Comments.........................................................................27
     C. Distribution...........................................................................................34




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Abbreviations:

Abbreviations

CDBG    Community Development Block Grant
CFR     Code of Federal Regulations
FY      Fiscal Year
GPR     Grantee’s Performance Report
HUD     Department of Housing and Urban Development
IPA     Independent Public Accountant
LGA     Loan Guarantee Assistance




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Introduction
BACKGROUND

The Municipality of Arecibo was organized under the laws of the Commonwealth of Puerto Rico
and is governed by a municipal assembly composed of 16 elected members. The Mayor is Angel
M. Roman. The grantee's Municipal Development Office is responsible for administering the
CDBG and LGA Programs under the direction of Harry Marengo. The programs’ books and
records are maintained at the Municipal Development Office.

Title I of the Housing and Community Development Act of 1974 (Public Law 93-383) established
the CDBG Program. The CDBG Program provides grants to States and units of local
government to aid in the development of viable urban communities. This is accomplished by
providing decent housing and a suitable living environment and expanding economic
opportunities, principally for persons of low and moderate income. All program projects and
activities must either benefit low and moderate income persons, aid in the elimination or
prevention of slums and blight, or meet other community needs having a particular urgency.

The Housing and Community Development Act of 1977 (Public Law 95-128) expanded the
CDBG Program to include loan guarantees. The Section 108 Loan Guarantee Assistance
Program allows communities entitled to CDBG a means to finance up front certain large scale
projects beyond the scope which can be financed only by annual grants. Communities can borrow
up to five times their annual CDBG amount. HUD guarantees the payments on the notes or other
obligations that are used to fund the loans. Grantees are required to pledge current and future
CDBG funds as security. All projects must meet the same national objectives as the CDBG
Program.

The Grantee’s Performance Report (GPR), for the year ending June 30, 1997 (grantee fiscal year
1996), showed CDBG expenditures of about $3.37 million.

                                   Activity                     Expended
                   Section 108 LGA Repayment                     $2,235,004
                   Program Administration                           502,922
                   Public Service                                   333,788
                   Single Unit Housing Rehabilitation               270,775
                   Arecibo Observatory                               25,000
                   Other                                                316
                                                        Total    $3,367,805

The report also reflected 1993 Section 108 LGA expenditures of about $2.34 million with an
unobligated balance of $526,967. The grantee budgeted approximately $4 million for CDBG
program activities for Fiscal Year (FY) 1997.



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AUDIT OBJECTIVES, SCOPE, AND METHODOLOGY

Our objectives were to determine whether the grantee: (1) carried out program activities in an
economical, efficient, and effective manner; (2) complied with program requirements; and (3)
established adequate management controls to ensure compliance.

Our review was conducted at the grantee’s Municipal Development Office. We also made site
visits within the municipality to assess various projects and activities. The audit was primarily
directed at program activities and expenditures during the 12-month period ending June 30, 1997.
Audit coverage was extended to November 30, 1997, and to prior periods as necessary to meet
our audit objectives. Our field work was performed between June 1997 and January 1998. Sites
visited and costs reviewed were judgmentally selected.

To accomplish our objectives we:

       •   reviewed applicable laws, regulations, and other program related requirements,
       •   evaluated HUD monitoring and IPA audit reports,
       •   assessed grantee action plans and performance reports,
       •   interviewed responsible HUD and grantee officials,
       •   visited municipal construction and other activity sites, and
       •   analyzed applicable management controls including those associated with grantee
           monitoring, accounting, and purchasing.

Our audit was conducted in accordance with generally accepted government auditing standards.




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Findings and
Recommendations
Finding 1

The Grantee Mismanaged HUD Programs

The grantee did not manage program activities in an economical, efficient, and effective manner.
It paid for projects, activities, or services that (a) did not meet national program objectives, (b)
were incomplete, and (c) were ineligible. This occurred because the grantee disregarded program
requirements and had inadequate management controls. We determined that program funds
expended totaling $6,040,549 are ineligible, $1,985 are unsupported, and $236,854 are cost
efficiencies (see Appendix A).

Part 570.501(b) of Title 24, Code of Federal Regulations (CFR) provides that the recipient is
responsible for ensuring that grant funds are used in accordance with program requirements.
These requirements include spending funds to meet at least one of the three national program
objectives and in accordance with program eligibility requirements.

Major Construction Projects Were Not Completed

The grantee failed to meet national program objectives by not completing two major construction
projects funded with Section 108 LGA funds totaling about $4.57 million. Properties purchased
with the funds were neglected and vandalized. The projects included a hotel development and a
historical building rehabilitation.

       Hotel Development

       In May 1988, HUD approved the grantee’s application to use $4.5 million in 1987 LGA
       funds to purchase and rehabilitate a property called the Puerto Rico Distillers. The
       property was to be converted to offices and other economic development. In September
       1988, the grantee purchased the property (about 16.5 acres of land and buildings) for $3.3
       million. The remaining funds were to be used for the conversion. When the property was
       purchased, the distillery was operational; however, the purchase did not include the
       distillery equipment.




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The grantee amended its application in April 1989 and transferred the property to
Corporacion de Desarrollo del Atlantico, a non-profit corporation created by the grantee.
The property was to be sold to a private developer for construction of a hotel. Plans were
to create 450 construction jobs and 400 permanent jobs for low and moderate income
persons.

The corporation returned the property to the grantee in June 1991 and was subsequently
dissolved. According to an audit report issued by the Puerto Rico Comptroller’s Office
(Audit Report No. M-93-29 dated June 30, 1993), the corporation could not get the
necessary hotel construction permits because of zoning restrictions. Also toxic materials
were found on the property.

Our visit to the property in August 1997 found that the buildings had significantly
deteriorated due to neglect and vandalism. All that remained were walls and roofs. Some
sections of the buildings had been destroyed by fire.




                  Puerto Rico Distillers Property-Arecibo, P.R.




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                         Puerto Rico Distillers Property-Arecibo, P.R.

       The grantee leased part of the property for $15,000 per year. In May 1997, the grantee
       approved the sale of the leased property (.4 acres) for $250,000. In July, the grantee
       advertised the remaining property for sale. However, no assessment had been made to
       determine its value. These transactions were done without HUD approval.

       The grantee disbursed $5,177,430 in CDBG funds from July 1991 through July 1994, to
       repay the LGA loan. We consider these costs ineligible because the grantee failed to meet
       program objectives and allowed the buildings to deteriorate.

       Alvarez Rossi Historic Building Rehabilitation

       In September 1994, the grantee used $75,000 in 1993 LGA funds to purchase a building
       to rehabilitate and use as a public archive. Rehabilitation of the property was to be
       financed with $750,000 Puerto Rican government funds approved in May 1995. As of
       August 1997, the grantee had not done any work on the building. The Director of the
       Municipal Development Office was not aware when rehabilitation of the building would
       occur. Our site visit found the building abandoned and significantly deteriorated due to
       neglect and vandalism. We consider the $75,000 paid ineligible because the grantee failed
       to meet program objectives and allowed the building to deteriorate.

CDBG Funds Were Spent For Ineligible Activities

The grantee used program funds to carry out ineligible activities. It disregarded program
requirements and failed to establish adequate management controls to ensure program activities
met eligibility requirements.



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General Municipal Operating Costs Were Improperly Paid With Program Funds

During the period of July 1993 through June 1997, the grantee improperly charged
general local government operating costs totaling $767,594 as CDBG Program costs. The
funds were improperly expended for salaries and fringe benefits of employees carrying out
duties of a general government nature and charged to the program as public services. The
grantee also budgeted $236,854 for similar services in FY 1997.

Title 24 CFR 570.207(a)(2) provides that expenses required to carry out the regular
responsibilities of general government nature are not eligible for assistance under this part.
Title 24 CFR 570.201(e) states that in order to be eligible for CDBG assistance a public
service must be either a new service or a quantifiable increase of an existing service on
behalf of the general local government. The services provided must also meet a national
objective of the CDBG Program (e.g., assist low and moderate income persons).

We determined that during FY 1993 through 1996 the grantee charged as Crime
Prevention and Educational Services $767,594 for salaries and fringe benefit costs of
employees that performed general local government services. There was no evidence that
these services were new or in addition to existing services.

   Public
   Service       FY 1993        FY 1994       FY 1995        FY 1996        Total
    Crime
 Prevention       $142,708       $103,248        $95,929       $85,115    $427,000
 Education
 al Services        51,448         97,511       106,741         84,894     340,594
     TOTAL        $194,156       $200,759      $202,670       $170,009    $767,594

The grantee charged as Crime Prevention $427,000 for guards to protect municipal
buildings such as the public works, civil defense, multipurpose center, hospital, and
lighthouse buildings. Guard duties included turning on and off lights, raising and lowering
flags, verifying that gates and doors were closed, and other general guard duties. Some
guards worked in municipal parks. These duties were the general municipal government’s
responsibility and not an authorized public service activity. The grantee informed HUD
the funds were for the municipal police. The guards did not carry guns and were not part
of the municipal police force. In FY 1997, the grantee budgeted $141,727 as Crime
Prevention for guards, three clerks and a laborer. The clerks and laborer worked at the
grantee’s administrative offices and at a museum.




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In addition, the grantee improperly charged $340,594 during the period as Educational
Services for costs of clerks, guards, drivers, a secretary, and a laborer. These employees
worked in different units of the municipality such as the animal shelter, the road
construction division, the art museum, the multipurpose center, and financial and
administrative offices. They did not provide educational services. The grantee budgeted
$95,127 for similar services in FY 1997.

Road Improvements Were Made In Other Than Low or Moderate Income Areas

The grantee improperly spent 1993 Section 108 LGA funds totaling $15,894 in FY 1996
for road improvements. The funds were required to be spent for services in low and
moderate income areas. Because grantee files did not show that the funds were spent in
these type areas, we conducted site inspections. We found improvements made in two
areas that were not low and moderate income .

                                AREA           COST
                           College Park        $9,363
                           Valle Verde          6,531
                                              $15,894

The Director of the Municipal Development Office acknowledged that some
improvements were made in other than low and moderate income areas. He indicated that
he was aware of the grant requirements. He said that the roads were in bad condition and
the municipality did not have local funds to repair them.

Ineligible Road Maintenance Costs Were Paid With Program Funds

In FY 1996, the grantee charged $1,931 in 1993 Section 108 LGA funds for debris
removal near a state road (PR 10). The invoice indicated the expense was for general
municipal operations. This expense cannot be paid with program funds.

Costs for a Canvas Canopy are Ineligible

The grantee improperly paid $2,700 from the 1993 Section 108 LGA funds in FY 1997
for a 4 foot by 8 foot canvas canopy. The canopy was for a small coffee shop located on
the municipal plaza. It replaced an existing canopy damaged by Hurricane Hortence. The
purchase did not address any program objective. The Director acknowledged that this
was not a proper use of program funds. He said the purchase was directed by the Mayor.
A claim will be made with the Federal Emergency Management Agency.




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The Grantee Did Not Properly Administer Its Housing Rehabilitation Program

In FY 1996, the grantee spent $270,784 in CDBG funds to help 363 municipal residents repair
their homes. The assistance ranged between $48 and $2,770 per resident. We found that
participant files did not (a) contain documentation to show how residents were selected to
participate in the program, (b) reflect all repair needs, and (c) show that repairs were made. In
addition, the grantee did not maintain a waiting list of eligible participants.

The grantee did not establish procedures to ensure that repairs were made. For example, in
November 1997, we visited five program participant residences to determine whether repairs were
completed. Our visits identified one participant that had received materials valued at $1,985 in
October 1996, but had performed no work. Some of the materials were on the property, however
the house looked abandoned. The $1,985 is unsupported pending a HUD eligibility
determination.

Municipality Comments

In its response to the draft report, the grantee stated on September 8, 1998, that: The
Municipality has analyzed all of the activities in a way that will permit them to comply with all
objectives and regulations. This analysis will be implemented during FY98. Operations
manuals that specify procedures and deadlines have been written and implemented for the
HOME Program and similar manuals are being written for all CDBG programs individually.
These latter manuals will be completed during FY98.

       Hotel Development

       The grantee stated that it had intended to use the Puerto Rico Distillers’ property
       purchased in 1988 to house its offices. However, in 1991 it found the property
       contaminated with hazardous waste including oil, asbestos, and PCB’s. Drums left on the
       property were later determined to contain non-toxic materials. The cleanup was
       completed in 1994 and a final inspection report was issued by the Environmental
       Protection Agency in September 1997. A final clearance certification has not been issued.
       The grantee plans to sell the property when it gets the final certification and reprogram the
       proceeds.

       Alvarez Rossi Historic Building

       The Puerto Rican legislature appropriated $750,000 for the grantee to rehabilitate the
       building for use as a public record depository. The winning bid to begin rehabilitation
       was ratified by the Municipal Assembly on December 9, 1997.




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     General Municipal Operating Costs

     According to the grantee, information available to us at the time of our field work was
     incorrect. Activities of employees paid by Public Services and charged as Crime
     Prevention and Educational Services were charged in accordance with the municipality’s
     CDBG plan approved by HUD. The grantee provided employee job descriptions to
     support its statement.

     Road Improvement Costs

     The grantee acknowledged that LGA funds were spent on road improvements that were
     not in low and moderate income areas. It stated that use of the funds was justified in an
     emergency because water that collected on the roads attracted mosquitoes (a potential
     health problem) and caused access problems for the elderly and low-income persons.

     Road Maintenance and Canopy Costs

     The grantee said that the LGA funds improperly spent for road debris removal and for a
     canopy have been reimbursed to the program.

     Housing Rehabilitation Program

     According to the grantee, it has strengthened management controls over its Housing
     Rehabilitation Program by 1) developing a program operations manual, 2) revising forms,
     and 3) appointing a three-member board to administer the eligibility process. A waiting
     list of eligible participants will also be used.

     The grantee said that it followed up with the program participant in our review for over 2
     months. Near the end of this period it learned that materials purchased with program
     funds had been stolen. It provided a copy of the police report to support its claim. It said
     that any unused materials should be returned for use by other participants.

OIG Response

     Hotel Development

     The grantee attributed the delay in developing the Puerto Rico Distillers’ property to time
     required to clean up hazardous waste found on the property and to obtain a final clearance
     certification. However, it did not provide any information on the environmental
     assessment that should have been conducted prior to purchasing this high risk property.
     Also, there was no comment on the current condition of the property and what had been
     done in the past to maintain and secure it. Because of the nature and extent of this
     deficiency, HUD should recover the CDBG funds spent on this project.




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      Alvarez Rossi Historic Building Rehabilitation

      It is encouraging to learn that subsequent to our field work the grantee approved a bid to
      begin rehabilitation work on the property. However, the Puerto Rico legislature
      approved funding for the work in May 1995. HUD should confirm that the work has
      begun and determine what efforts the grantee has taken to maintain and secure the
      property to reduce further deterioration.

      General Municipal Operating Costs

      Our review found that the grantee used CDBG funds to pay the costs of many employees
      who provided only general government services. It provided no support to show that these
      costs met program objectives. The municipality’s CDBG plan provided only a general
      description regarding use of funds for Educational Services. We did not question any costs
      of employees who provided these type services. Under Crime Prevention, the plan stated
      that funds would be used to expand the municipality’s police force. We did not question
      costs of municipal police. Our analysis of the job descriptions provided us for five
      employees found one employee who was not included in our review. There was nothing in
      the duties of the other four employees to change our position.

      Road Improvement Costs

      The grantee originally claimed the costs benefited low and moderate income persons.
      However, it now acknowledges that the improvements were not made in low and
      moderate income areas. The information that was presented also did not support that the
      costs were incurred to meet a community development need having a particular urgency.
      The information presented also did not show a serious condition or that the road
      conditions were of recent origin.

      Housing Rehabilitation Program

      Our review of the police report regarding the missing material showed that the theft took
      place in April 1998, 16 months after the participant received the assistance. In addition,
      the description of the stolen items did not reconcile with the materials provided. Our visit
      in November 1997 showed unused materials at the site. HUD should determine whether
      the grantee has implemented an adequate participant monitoring system to ensure work is
      properly and timely completed.

Recommendations

We recommend that you:

1A.   Sanction the grantee for disregarding program requirements and for failing to take
      corrective actions (also see Findings 2 and 3).




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1B.   Require that the grantee submit a work plan to ascertain that responsible CDBG officials
      become familiar with CDBG and LGA program requirements.

1C.   Require that the grantee establish management controls to ensure activities meet eligibility
      requirements and program objectives and files are adequately documented. Assess
      compliance during the next monitoring visit.

1D.   Require that the grantee reimburse $6,040,549 in ineligible costs spent during FY’s 1993
      through 1996 (see Appendix A).

1E.   Determine the eligibility of $236,854 budgeted for general local government services in
      FY 1997 and $1,985 spent in FY 1996 for housing rehabilitation (see Appendix A).
      Recover any ineligible costs.




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Finding 2

The Grantee                Did       Not       Comply           With        Procurement
Requirements
The grantee did not comply with program procurement requirements. We determined that the
grantee (a) failed to provide full and open competition by splitting contracts and awarding sole-
source contracts to avoid advertising and bidding, (b) amended contracts without proper
justification, and (c) performed no price or cost analyses. It also paid contractors for poor and
incomplete work, and nonexistent services and equipment. Because the grantee disregarded
procurement requirements and controls, there was no assurance that quality goods and services
were obtained at the most advantageous terms. We determined that $202,648 in program funds
are ineligible, $83,116 are unsupported, and $58,101 are cost efficiencies (see Appendix A).

Program regulations provide that recipients shall comply with HUD procurement standards
contained in Title 24 CFR 85.36. Grantees can use their own procurement procedures, provided
procurements conform to these standards. Standards include conducting procurements using full
and open competition, performing price or cost analyses, fully documenting all procurement
activities, and ensuring quality services and equipment are received prior to payment. The
municipal law required that procurements totaling over $40,000 must be advertised and bid.

We analyzed 14 contracts awarded during the period of July 1995 through June 1997, paid with
LGA and CDBG funds. No price or cost analyses were performed and contract files generally
were not documented to show how contracts were solicited and awarded. In addition, we found
other significant procurement deficiencies.

Bid Splitting and Sole-Source Contracts

In 1997, the grantee awarded 2 fixed-price contracts to Constructora Santiago, totaling $73,466
for the improvements to 22 roads. It requested that the contractor submit separate quotations
within 17 days of each other. The grantee was aware of all roads needing improvement when the
first request was made.

                                                                   Number
                         Quote           Contract      Contract      of
                      Request Date         Date        Amount       Roads
                        01/28/97         04/08/97       $34,121       7
                        02/13/97         06/18/97        39,345      15
                                        Total           $73,466      22

The grantee did not advertise and bid the work. Grantee files showed that three companies were
solicited for each project; however, only one other company submitted a quote related to the
April 1997 contract.


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The grantee also gave a $137,157 sole-source fixed-price contract on July 22, 1996, to the
same construction company to improve six roads. This work was not advertised and bid as
required. Another company was solicited to do work; however, it submitted a quote for only
one of the six roads.

The Director of the Municipal Development Office said that he did not advertise and bid the
work because other contractors were not interested in doing it. He said that HUD had
approved this procurement method. HUD said that it was not aware of the grantee’s
procurement practice and did not waive the requirements. Contract files were not documented
to support and justify the actions taken on this contract.

Unsupported Contract Amendments

We identified four construction contracts where the grantee approved contract amendments that
significantly increased contract costs without justification. Cost increases ranged from 18 to 25
percent. For three of the contracts, amendments were made within 8 days of the original awards.

                                 Original   Contract   Amended    Contract      Increase
  Contractor        Project      Amount      Date      Amount      Date      Amount   Percentage
                   Hato Viejo
  Pro-Solder       Basketball     $27,283   10/16/96    $34,104   10/23/96    $6,821      25
                     Court
    Ruben         Palo Blanco
  Rodriguez        Basketball     $39,900   10/22/96    $47,200   10/26/96    $7,300      18
  Construction       Court
                    Parcelas
    Ruben           Bithorn       $39,900   10/22/96    $49,800   10/27/96    $9,900      25
  Rodriguez        Basketball
  Construction       Court
                    Parcelas
   Sammy            Nuevas        $37,500   10/30/96    $46,875   03/14/97    $9,375      25
  Construction   Baseball Park



Payments Were Made for Poor and Incomplete Work The grantee paid $200,318 in 1993
Section 108 LGA funds for poor and incomplete construction work. Payments were made
although a grantee inspector had reported the defective work. Our site visits conducted in August
and September 1997, found that the construction deficiencies had not been corrected. Final
payments were made on four of the six projects.




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                                     CONTRACT
                      PERFORMANCE
     PROJECT             PERIOD         AMOUNT      PAID1                    DEFICIENCIES
                                                              missing 64 foot X 63 foot wall, construction
 Parcelas Bithorn       10/23/96-                             debris not cleared, court floor not properly
 Basketball Court       12/16/96         $49,800    $49,800   leveled, septic tank installed without
                                                              drainage system
                                                              smaller diameter pipes substituted, angle of
 Palo Blanco            10/23/96-                             boards not properly inclined, regular
 Basketball Court       12/16/96                              plywood used instead of treated wood,
                                          47,200     48,456   construction debris not cleared, court floor
                                                              not even
 Sabana Hoyos                                                 reinforcement rods exposed, all storm pipes
 Storm Sewer            08/16/96-                             were not installed, concrete not properly
 System                 10/25/96          15,300     13,770   spread
                                                              short fence gate, sections of supporting wall
                                                              holding the fence were in the air, fence welds
 Parcelas Nuevas        10/31/96-                             not properly treated and rusted, $1,700
 Baseball Park          05/21/97                              charged for an improperly constructed
                                          46,875     42,188   pitcher’s mound
                                                              handicap ramp was short, falling plaster,
 Los Caños              09/05/96-                             sink not properly installed, electrical fire in
 Bathroom               11/07/96                              main breaker, neighbors completed plumbing
 Facilities                               12,000     12,000
 Hato Viejo              10/17/96-        34,104     34,104   reinforcement rods exposed- a serious safety
 Basketball Court        12/03/96                             hazard
                           Total         205,279   $200,318
1
  Amount paid as of December 1997




Parcelas Bithorn Basketball Court-Construction debris not cleared and court floor not properly
leveled causing water to stand on the court




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                                                           99-AT-241-1001




Palo Blanco Basketball Court      Sabana Hoyos Storm Sewer System
Construction debris not cleared   Concrete not properly spread




                                      Parcelas Nuevas Baseball Park-
                                      Pitcher’s mound improperly
                                      constructed (almost flat). The
                                      contractor charged $1,700 for this
                                      work. The mayor concurred that the
                                      cost was excessive.




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Parcelas Nuevas Baseball Park -
Fence gate with 3 foot gap.




                                         Parcelas Nuevas Baseball Park
                                         Fence welds were not properly treated. Grantee
                                         inspector indicated that the fence will soon
                                         collapse because of the rust.




Los Caños Bathroom Facilities
Improperly installed sinks in the
bathroom (not handicapped accessible).
Park neighbors completed plumbing.




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                                                               Hato Viejo Basketball Court
                                                               Retaining wall with exposed
                                                               reinforcement rods, a serious
                                                               safety hazard.




Contractor solicitation documents, contracts, and project files contained no specifications or
detailed project requirements. The Director of the Municipal Development Office acknowledged
that the work was defective and payments were approved without ensuring that work was
properly completed and that reported deficiencies were corrected.

The grantee paid $1,256 more for the Palo Blanco basketball court than the modified contract
amount. There was no support for the excess cost. We consider $200,318 spent on these
projects ineligible, and $6,217 that remained to be paid a cost efficiency.

Payments Were Made For Services and Equipment That Were Not Received In January
1997, the grantee paid $1,700 in CDBG funds for an employee’s computer training. The training
was paid for in advance. However, it was canceled before it was scheduled to start and no
reimbursement was sought by the grantee. In August 1996, the grantee paid $630 in CDBG
funds for an 8 gallon water cooler. The voucher was approved without an invoice and a receiving
document. The grantee could not locate the cooler.

Unsupported Consulting Services Between July 1995 and June 1997, the grantee executed
five sole-source contracts with the National Development Council for consulting services. The
contracts required the consultants to assist the grantee to implement commercial, industrial, and
residential loan programs.

                                      Contract                    Amount
                        Date           Period         Amount       Paid1
                     06/26/97 07/01/97-06/30/98        $45,000      $3,750
                     01/01/97 01/01/97-06/30/97         22,500      16,153
                     07/01/96 07/01/96-12/31/96         22,500      21,975
                     01/01/96 01/01/96-06/30/96         22,500      22,238
                     07/01/95 07/01/95-12/31/95         22,500      19,000
                                        Total         $135,000     $83,116
                     1
                       Paid as of October 1997



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Reports submitted by the consultant showed services provided were associated with general
government activities such as attendance at meetings with the grantee and comptroller’s office to
discuss audits and with other government and banking officials to discuss financing alternatives.
Although the grantee had received similar services from the contractor for over 10 years, no loan
programs have been established.

The grantee did not document how the services were procured and we could not determine from
available documentation the amount of ineligible services that were provided. Therefore, we
consider the $83,116 paid unsupported, and $51,884 unpaid a cost efficiency, pending a HUD
eligibility determination.

Municipality Comments

On September 8, 1998, the municipality stated in its response that: The CDBG Program has
adopted the procedures used by the Municipality for all future contracts. These rules were
established by the Municipal Secretary and published on May 6, 1997. They require the
department directors to assume responsibility for all contracts and purchases but also require
that all contracts be approved by the Municipal Bid Board.

       Bid Splitting and Sole-Source Contracts

       The grantee stated that the bid request was for repairs to both major and minor roads.
       Only one company bid for the work because the other companies did not have the proper
       size equipment to work on the minor (smaller) roads. It said that HUD approved use of
       the sole-source contract. It provided a copy of a letter sent to a HUD official as support.

       Contract Amendments

       The grantee stated that the amendments significantly increasing costs for four construction
       contracts were properly approved and adequately documented. It provided various
       documents to justify its conclusion.

       Payments Were Made for Poor and Incomplete Work

       The grantee stated that it has inspected the cited projects and except for the Sabana Hoyos
       Project, all construction deficiencies have now been corrected at no additional cost. It
       provided photographs to show that the work had been done. The grantee said that it
       withheld the last payment and the 10 percent retention on the Sabana Hoyos Project and
       requested bids to complete the work. It said that it has implemented new management
       controls to ensure future projects are properly completed.

       Payments Were Made for Services and Equipment That Were Not Received

       According to the grantee, it has requested reimbursement for the computer training that
       was not received. It said that it is also investigating disposition of the missing water
       cooler and supporting payment documents.

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                                                                                99-AT-241-1001

     Unsupported Consulting Services

     The grantee said that although objectives of the consultant contract have changed, funds
     were spent in accordance with program requirements.

OIG Response

     Bid Splitting and Sole-Source Contracts

     The grantee did not address the issue of bid-splitting or show that the 22 roads were
     included in the original bid request. Also the grantee did not provide any evidence to
     show that the sole-source contract for improvements to six roads was advertised and bid
     as required. As previously discussed in the report, the HUD official was not aware of the
     grantee’s procurement practice. Also the letter to HUD was dated August 12, 1996; the
     contract was awarded July 22, 1996.

     Contract Amendments

     The documents provided by the grantee did not show that the amendments were justified.
     The documents were only certifications of project completion.

     Payments Were Made for Poor and Incomplete Work

     The grantee’s reply did not address weaknesses cited in the report regarding documenting
     files and making payments for poor and incomplete work. Also there were no comments
     on what actions it will take to recover project costs from the Sabana Hoyos Project
     contractor and to recover $1,256 in excess funds paid another contractor. In addition, the
     photographs provided did not show that the cited deficiencies were corrected. In reaching
     management decisions, HUD should 1) inspect the projects to confirm that the work was
     done and 2) determine whether the grantee’s new management controls over project
     completion are adequate.

     Payments Were Made for Services and Equipment That Were Not Received

     HUD should ensure that the training funds are reimbursed the program and the grantee
     provides support for receipt of the water cooler.

     Unsupported Consulting Services

     The grantee did not show that all contract costs met program objectives. There was also
     no comment on how the services were procured.




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Recommendations

We recommend that you:

2A.   Ensure that the grantee has written procurement procedures that conform to HUD
      requirements and establishes management controls to ensure it pays only for quality
      services and equipment received.

2B.   Assess procurement practices during the next monitoring visit.

2C.   Require that the grantee reimburse ineligible costs of $202,648 paid for poor and
      nonexistent services and equipment (see Appendix A).

2D.   Determine the eligibility of $83,116 spent on consultant services and $58,101 obligated for
      construction and consultant services (see Appendix A). Recover any ineligible costs.




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                                                                                    99-AT-241-1001


Finding 3
Immediate Financial Management System and Control
Improvements Are Needed
The grantee did not adequately account for and report on program activities. Accounting records
and reports were not accurate, current, or complete. Similar deficiencies have been identified in
prior IPA and HUD monitoring reports; however, deficiencies continue to exist. The grantee has
not provided sufficient resources to correct the problem. We identified LGA funds totaling
$224,223 that the grantee could not account for (see Appendix A).

Title 24 CFR 85.20(b)(1) provides that accurate, current, and complete disclosure of the financial
results of assisted activities must be made in accordance with financial reporting requirements of
the program.

We identified serious management control weaknesses and financial deficiencies:

       •   The grantee did not reconcile its CDBG and LGA Program bank statements timely.
           At the time of our review in November 1997, the last reconciliation was July 1997.
           According to the grantee, reconciliations were not done because accounting
           adjustments from prior reconciliations had not been made. We found numerous
           adjustments from reconciliations dating back to 1992 that had not been posted. In
           addition, the grantee did not reconcile investment statements received from several
           entities as part of its reconciliation process. If the grantee had instituted proper
           reconciliation procedures, differences could have been promptly investigated and
           resolved. The grantee’s failure to (a) reconcile bank statements timely, (b) investigate
           and resolve inconsistencies promptly, and (c) include investment statements in the
           reconciliation resulted in the following deficiencies:

                 1. The grantee’s accounting records did not show the disposition of LGA
                    funds totaling $223,873. The grantee’s register used to record cash receipts
                    showed the funds invested at two entities. However, statements from the
                    entities did not reflect any funds invested. The grantee had no records to
                    support disposition of the funds. The grantee said that the discrepancy may
                    have been caused by a posting error, but no reconciliation and subsequent
                    resolution had been made. Accordingly, $223,873 is unsupported.

                 2. A reconciliation made in July 1997 of cash receipts from July, August, and
                    September 1996 found $350 on the cash register that was not on the bank
                    statements. The grantee did not know what happened to the funds.
                    Accordingly, $350 is unsupported.




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                                                                                   99-AT-241-1001

       •   The grantee did not submit its single audit reports timely. For example, the report on
           the grantee’s 1991 and 1992 financial statements was submitted June 7, 1995.


                       Financial                       Date
                       Statements             Due               Received
                       1991-1992          June 30, 1993       June 7, 1995
                       1992-1993          June 30, 1994       June 7, 1995
                       1993-1994          June 30, 1995     February 5, 1998
                       1994-1995          June 30, 1996           No
                       1995-1996          June 30, 1997           No

       •   Expenditures shown in the FY 1995 GPR dated November 12, 1996, did not agree
           with amounts in the general ledger.

                 ACTIVITY           GENERAL LEDGER           GPR        DIFFERENCE
           Arecibo Observatory                    $0        $293,794       $293,794
           Educational Services             $133,179        $132,959         <$220>
           Crime Prevention                 $274,008        $273,326         <$682>

           The FY 1996 GPR report was submitted after our field work.

       •   The 1995 GPR did not include $15,000 from the lease of part of the Puerto Rico
           Distillers complex which was acquired with LGA funds. However, the funds were
           recorded in the general ledger as program income.

Previous IPA and HUD monitoring reports reflected similar deficiencies related to the grantee’s
financial management system; however, the grantee did not correct the problem. For example, the
IPA reports for 1991-1992 and 1992-1993 stated that the grantee’s (a) accounting records that
did not provide timely, accurate, and complete financial information, and (b) bank reconciliations
were not made timely. The IPA gave a qualified opinion on the grantee’s financial statements.
No opinion was rendered on the grantee’s 1993-1994 financial statements by another IPA because
of the condition of the grantee’s financial management system and related reports.

A HUD monitoring report dated March 7, 1996, stated:

       •   General ledgers were not accurate and complete.
       •   There was no assurance assets were used solely for authorized purposes because of a
           lack of control and accountability for all grants and subgrants.
       •   Program bank accounts were not reconciled timely.
       •   Receipts and expenditures involving all CDBG activities were not properly accounted
           for.
       •   Program financial results reported were inaccurate, untimely and incomplete.



                                                                                               22
                                                                                   99-AT-241-1001

We found that the grantee’s financial management system and controls did not ensure the
propriety of program costs. The grantee expended funds for activities that did not address
national objectives, improperly charged the program general local government costs, and paid for
poor, incomplete and nonexistent services and equipment (see Findings 1 and 2). These
deficiencies will continue to occur unless management controls are strengthened.

Municipality Comments

The municipality in its response dated September 8, 1998, stated that: The Municipality is
undertaking a complete reorganization of its financial management system for federal
accounting. This process is being supervised by CPA Ramon Marrero who performed the
Municipality’s Single Audits. Mr. Marrero is required to submit a certification of the
reorganization process and as soon as the Municipality receives this certification a copy will be
forwarded.

       Bank Reconciliation and GPR Amounts

       The grantee stated that it has adjusted its accounting records for the 1) $223,873
       difference in invested funds caused by a posting error, 2) $350 difference in cash receipts
       caused by a posting error, and 3) various differences between GPR and general ledger
       amounts.

       Single Audit Reports

       The grantee said that single audit reports for 1994-1995 and 1995-1996 have now been
       submitted. The report for 1996-1997 was submitted on time and work is progressing on
       the 1997-1998 report.

OIG Response

       Bank Reconciliation and GPR Amounts

       The documentation submitted by the grantee was not sufficient to ascertain that the
       accounting discrepancies resulted from posting errors. The grantee also did not address
       the reasons for the differences in amounts reported in the GPR and amounts shown in the
       accounting records.

Recommendations

We recommend that you:

3A.    Require that the grantee provide the necessary resources to correct the financial
       management deficiencies cited in this report.




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                                                                                 99-AT-241-1001

3B.   Require that the grantee provide a IPA certification that it has developed and implemented
      a financial management system that complies with the requirements prescribed in 24 CFR
      Part 85.20.

3C.   Require that the grantee submit, for review, documentation to show the reconciliation and
      disposition of LGA funds totaling $223,873 recorded as invested and $350 in cash
      receipts (see Appendix A). Recover any ineligible costs.




                                                                                             24
                                                                                  99-AT-241-1001


Follow-up on Prior Audits
The grantee’s single audit reports were not submitted timely. On June 7, 1995, the grantee
submitted to HUD the single audit reports for fiscal years ending June 30, 1992 and 1993. The
IPA gave a qualified opinion on the financial statements for the year ended June 30, 1993.
Reported findings were similar to those identified during our review (see Finding No. 3). All of
the findings remained open when we ended our site work. The single audit report for fiscal year
ending June 30, 1994, was submitted on February 5, 1998, after our field work was completed.
The IPA gave a disclaimer on the grantee’s financial statements.




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                                                                                                    99-AT-241-1001


   Appendices
                                                                                              Appendix A
      Schedule Of Ineligible and Unsupported Costs, And Cost
                             Efficiencies

                                                                                                              Cost
Recommendation                      Description                    Ineligible       Unsupported          Efficiencies
                      LGA and CDBG funds paid for two                $6,040,549
                      projects that failed to meet national
                      objectives ($5,252,430), for general
         1            government employee salaries that were
                      the grantee’s responsibility ($767,594),
                      and for other ineligible costs paid
                      ($20,525).
                      CDBG funds budgeted ($236,854) for FY                                    $1,985          $236,854
                      1997 for employee salaries and paid for
         1            housing rehabilitation activity for which
                      repairs were not done ($1,985).
                      Funds paid to contractors for poor (LGA            202,648
                      $200,318) and nonexistent (CDBG
         2            $2,330) services and equipment.
                      CDBG ($76,116) and HOME ($7,000)                                         83,116            58,101
                      funds paid for consulting services and
         2            $51,884 obligated for the services.
                      $6,217 in LGA funds obligated for poor
                      construction.
                      LGA funds recorded in the books as                                      224,223
                      invested, but not supported ($223,873)
         3            and unsupported cash receipts ($350).
                                                                      $6,243,197             $309,324          $294,955


   Ineligible        Costs not allowable by law, regulation, contract, or HUD or local agency policy.
   Unsupported       Costs contested because they lack adequate documentation to support eligibility.
   Cost Efficiency   An action to prevent an ineligible obligation or expenditure, or to increase revenue.




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                          99-AT-241-1001

                        Appendix B

MUNICIPALITY COMMENTS




                                     27
99-AT-241-1001




           28
99-AT-241-1001




           29
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           30
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           31
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           32
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           33
                                                                                  99-AT-241-1001


                                                                             Appendix C

Distribution

Secretary's Representative, 4AS
Caribbean Coordinator, San Juan Area Office, 4NS
Director, Office of Community Planning and Development, 4ND
Audit Liaison Officer, 3AFI
Director, Administrative Service Center, 4AA
Acquisitions Librarian, Library, AS (Room 8141)
General Counsel, C (Room 10214)
Associate General Counsel, Office of Assisted Housing and Community Development, CD
 (Room 8162)
Assistant Secretary for Community Planning and Development, D (Room 7100)
Office of Community Planning and Development, DG ATTN: Audit Liaison Officer
 (Room 7214)
Chief Financial Officer, F (Room 10164) (2)
Deputy Chief Financial Officer for Finance, FF (Room 10164) (2)
Director, Office of Budget, FO (Room 3270)
Director, Housing and Community Development Issue Area, U.S. GAO, 441 G Street N.W.,
 Room 2474, Washington DC 20548 ATTN: Judy England-Joseph
Counsel to the IG, GC
Public Affairs Officer, G
HUD OIG Webmanager-Electronic format cc:mail- Morris_F._Grissom@Hud.Gov
Director, HUD Enforcement Center, 1240 Maryland Avenue, Suite 200, Washington, DC 20024
Assistant to the Deputy Secretary for Field Management, SDF (Room 7106)
Assistant to the Secretary for Labor Relations, SLD (Room 7118)
The Honorable Fred Thompson, Chairman, Committee on Governmental Affairs,
  United States Senate, Washington DC 20515-4305
The Honorable John Glenn, Ranking Member, Committee on Governmental Affairs,
  United States Senate, Washington DC 20515-4305
The Honorable Dan Burton, Chairman, Committee on Government Reform and Oversight,
  United States House of Representatives, Washington DC 20515-6143
Mr. Pete Sessions, Government Reform and Oversight Committee, Congress of the United States,
  House of Representatives, Washington, DC 20510-6250
Ms. Cindy Sprunger, Subcommittee on General Oversight and Investigations, Room 212,
  O'Neil Office Building, Washington DC 20515
Mayor, Municipality of Arecibo, Arecibo, Puerto Rico




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