oversight

Citizen Complaints Eagle/Market Streets Development Corporation Asheville, North Carolina

Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-12-24.

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

                                                    U.S. Department of Housing and Urban Development
                                                    District Office of the Inspector General
                                                    Office of Audit
                                                    Richard B. Russell Federal Building
                                                    75 Spring Street, SW, Room 330
                                                    Atlanta, GA 30303-3388
                                                    (404) 331-3369




December 24, 1998                                                             No. AT-241-1803


TO:           Charles T. Ferebee, Director, Community Planning and Development
                Division, 4FD


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


SUBJECT:      Citizen Complaints
              Eagle/Market Streets Development Corporation
              Asheville, North Carolina

In response to a citizen’s complaints, we reviewed Community Development Block Grant
(CDBG) activities of the City of Asheville, North Carolina, administered by the Eagle/Market
Streets Development Corporation (Corporation). The purpose of our review was to determine
whether the Corporation maintained proper control over CDBG funds, used the funds for eligible
CDBG activities, and complied with applicable laws and regulations.

                                           SCOPE

We interviewed Department of Housing and Urban Development (HUD) North Carolina State
Office Community Planning and Development staff and City Community Development staff and
reviewed their related files and documents. We interviewed Corporation staff and two members
of its Board of Directors, reviewed files and other documents, and toured the South Pack Square
area of Asheville. We also interviewed the complainant.

Our review generally covered the period February 13, 1996, through June 30, 1998. The review
was extended to other periods when appropriate. We conducted our review in July and August
1998.

                                      BACKGROUND

We received several complaints from a citizen beginning in June 1998. The general theme of the
complaints concerned the City and the Corporation not properly controlling CDBG funds, and
using funds for ineligible activities in redeveloping South Pack Square.
The Corporation was organized in June 1994 and received 501(c)(3) tax exempt status in 1995.
The Corporation’s purpose is to address and remedy the blighted condition of South Pack Square,
a historic African-American commercial district also known as “The Block.” The Corporation is
managed by a Board of Directors, limited by its by-laws to 15 members - 5 property owners and 3
renters from the South Pack Square area, and 7 persons from the community at large.

Prior to 1996, the Asheville Housing Authority administered the redevelopment program for
South Pack Square. On February 13, 1996, the City contracted with the Corporation to
administer the program, with CDBG funding of $57,517. The City entered into similar
agreements with the Corporation on November 25, 1996, and July 1, 1997, providing CDBG
funding of $185,688 and $136,255, respectively. The contracts authorized the Corporation to
plan and implement various activities to improve the blighted condition of South Pack Square.
The Corporation also received funding from other sources.

                                          SUMMARY

The Corporation did not administer land acquisition and procurement activities in accordance with
CDBG Program requirements. In acquiring a parcel of land, the Corporation paid $14,000 in
excess of the land’s appraised value to a Board member, creating the appearance of a conflict of
interest. Similarly, it created the appearance of favoritism in awarding a $60,950 consulting
contract by not documenting how it selected the contractor.

The City also paid the Corporation $6,000 for activities not authorized in the City’s contract with
the Corporation.

We are recommending the City repay $14,000 to the CDBG Program and implement certain
program improvements. Details of our findings and recommendations are in Attachment A.

We provided the City a draft of the findings and discussed the need to improve the performance
of the Corporation with the City’s Interim Director of Planning and Development and the
Director of Community Development on September 18, 1998. The City submitted written
comments that generally agreed with the findings. They provided measures the City will take to
ensure that the Corporation implements proper administrative procedures and controls to
effectively use CDBG funds. We summarized the City’s comments in the findings and included
them as Attachment C.

Within 60 days, please give us, for each recommendation in the report, a status report on: (1) the
corrective action taken; (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 this review.

We provided a copy of this memorandum to the City.




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If you have any questions, please contact me at (404) 331-3369, or Bruce Milligan, Senior
Auditor, at extension 4056.


Attachments:
   A - Findings and Recommendations
   B - Program Criteria (Summary)
   C - Auditee Comments
   D - Schedule of Unnecessary/Unreasonable Costs
   E - Distribution




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                                                                                     Attachment A

                           FINDINGS AND RECOMMENDATIONS


Finding 1 - Need to Improve Performance of Subgrantee

The Eagle/Market Streets Development Corporation, a subgrantee, did not administer land
acquisition and procurement activities in accordance with CDBG Program requirements. In
acquiring a parcel of land, the Corporation paid $14,000 in excess of the land’s appraised value to
a Board member, creating the appearance of a conflict of interest. Similarly, it created the
appearance of favoritism in awarding a $60,950 consulting contract by not documenting how it
selected the contractor. The City must ensure the Corporation implements administrative
procedures and controls over use of CDBG funds.

Land Acquisition Requirements Not Followed

In acquiring the first parcel of land for its program on April 15, 1998, the Corporation did not
comply with the following acquisition requirements:

    a) The Corporation acquired the land from a Corporation Board member. CDBG
       regulations (Attachment B) prohibit officials of CDBG sub-recipients from receiving a
       financial interest or benefit from land acquisitions. HUD may waive the prohibition if the
       recipient demonstrates that an exception would further the objectives of the CDBG
       Program. The Corporation did not request the City to seek a waiver. The Corporation
       paid the Board member $14,000 more than the land’s appraised value.

    b) The Corporation did not properly document the basis for the $85,000 purchase price.
       HUD procedures (Attachment B) require the recipient to obtain an appraisal of the
       property’s value, establish just compensation, and give the owner a written statement of
       the basis for the offer. If the owner refuses the offer, the recipient may pay a higher price
       if an authorized Corporation official approves the settlement as reasonable, prudent, and
       in the public interest. The Corporation obtained one appraisal which valued the property
       at $71,000. The Corporation did not document its files with the basis for the $85,000
       price, did not give the owner a written statement of the basis for the offer, and did not
       obtain HUD approval of the price.

The cost of the property appeared excessive, and the Corporation’s actions created the
appearance of favoritism.

Selection of Consultant Not Properly Documented

The Corporation did not document adherence to procurement procedures in awarding a contract
for consulting services. As a result, the award created the appearance of favoritism.




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The original contract was awarded September 4, 1996, for $60,950. After reducing the scope of
services, the Corporation paid the consultant $50,950. A subgrantee must document the history
of each procurement. It must publish a request for proposals, identify all evaluation factors, and
make the award to the responsible firm whose proposal is most advantageous to the program
(Attachment B). The Corporation did not comply as follows:

   a) The Corporation did not describe the work to be included in the proposed contract, did
      not advertise for proposals, and did not document how it otherwise solicited proposals
      from interested consultants.

   b) The Corporation had written proposals from two consultants, but the proposals could not
      be effectively evaluated because they did not include the same scope of services or
      proposed fee information. One of the proposals was submitted to a local church instead of
      the Corporation. The Corporation provided documents submitted by two other
      consultants; however, the documents were not proposals.

   c) The Corporation did not document its reason for selecting the consultant who was
      awarded the contract.

Improvements Needed in Administrative Procedures

The City’s contract with the Corporation required the Corporation to comply with CDBG
Program requirements; however, the City is responsible for ensuring such compliance occurs
(Code of Federal Regulations, Title 24, Part 570.501 [CFR]). The City did not ensure that the
Corporation established administrative controls to assure adherence to acquisition procedures,
and the Corporation did not have written procurement procedures (Attachment B). Corporation
staff and board members needed training in land acquisition and procurement procedures.

City Comments (Summary)

The City generally agreed with the finding. It stated it received unclear guidance from HUD
about the Corporation’s conflict of interest policy with the result that the City did not require the
Corporation to obtain a waiver before acquiring the property. The City planned to issue a written
reminder to all subgrantees of conflict of interest provisions in HUD’s regulations, and to
emphasize the correct procedures in future subgrantee training.

Regarding the land purchase price, the City stated that Corporation staff and Board members
mistakenly thought the property appraised at $78,000, and the Corporation followed incorrect
advice from a consultant about the amount which could be paid. The City also stated it
mistakenly approved the payment request without reviewing the appraisal. The City plans to
provide Corporation staff technical assistance in acquisition procedures, and to review all future
acquisition documentation.




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Regarding selection of the consultant, the City believed the Corporation acted in good faith but
lacked experience in procurement procedures. The City stated it would require the Corporation
to develop a formal procurement policy which the City would review for adequacy, and the City
would emphasize procurement in future monitoring and technical assistance to the Corporation.
The full text of the City’s comments is included in Attachment C.

Evaluation of Response

The City’s comments were positive and responsive to the finding, but do not support payment of
$14,000 more than appraised value for the land. When implemented, the City’s planned steps to
improve the performance of the Corporation in procurement and land acquisition procedures
should be sufficient to ensure compliance with requirements.

Recommendations

We recommend that you require the City to:

1A.    Repay $14,000 to the CDBG Program for payment in excess of appraised land value.

1B.    Complete its planned steps to (a) provide a written reminder and training to all
       subgrantees about conflict of interest regulations, (b) provide the Corporation technical
       assistance in property acquisition procedures, and (c) implement procedures to review all
       future acquisition documentation.

1C.    Complete its plans to provide the Corporation technical assistance in procurement
       requirements, and to require the Corporation to develop a formal procurement policy.




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Finding 2 - Activities Not Authorized by Contract

The City paid the Corporation $6,000 for activities not authorized in its contract with the
Corporation. The activities involved eligible uses of CDBG funds; however, failure to include
them in the contract weakened the City’s control over the activities and left the eligibility of the
payments unsupported.

On December 20, 1995, the City paid the Corporation $2,000 for appraisals of two parcels of
land. The City’s first contract with the Corporation was not executed until February 13, 1996.
On May 3 and June 21, 1996, respectively, the City paid the Corporation $2,798 for cleaning a
property, and $1,202 for an asbestos and lead survey of three properties. The contract with the
Corporation did not include the cleaning and survey activities.

Eligible CDBG Program activities include removal of slums and blight and land acquisition. Thus,
with contractual authorization, use of CDBG funds for the subject services was allowable.

Procurement regulations require a grantee to ensure contractors perform in accordance with their
contracts (Attachment B), and 24 CFR 85.20(b)(3) requires a grantee to maintain effective
control over all grant funds.

City Comments (Summary)

The City agreed with the finding. The City provided an example of changes made in the format of
the scope of work in its grant agreements to make them more specific and performance related.
The City also provided steps it will implement to ensure subgrantee activities are within the
authorized scope of services prior to reimbursement. The full text of the City’s comments is in
Attachment C.

Evaluation of Response

The City’s comments and planned steps were responsive to the finding.

Recommendation

2A.    We recommend you follow up to determine that the City implements its planned improved
       procedures for review of requests for reimbursement.




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                                                                                      Attachment B

                             PROGRAM CRITERIA (SUMMARY)

Conflict of Interest

The Code of Federal Regulations for the CDBG Program, Title 24, Part 570, prohibits appointed
officials of CDBG sub-recipients from receiving a financial interest or benefit from the proceeds
of a CDBG assisted activity, including acquisitions of real property. HUD may grant exceptions
to the conflict of interest provisions on a case-by-case basis upon receipt of a satisfactory written
request from the grant recipient. The recipient must provide documentation of the nature of the
conflict and assurance that there has been public disclosure of the conflict. In determining
whether to grant an exception, HUD is required to determine whether an exception will further
the purposes of the CDBG Program (24 CFR 570.611).

Land Acquisition

Land acquisition requirements are in HUD Handbook 1378, Tenant Assistance, Relocation, and
Real Property Acquisition, Chapter 5, which is a restatement of Code of Federal Regulations,
Title 49, Part 24.

The agency must obtain at least one appraisal of the property’s value (two appraisals are
encouraged), establish the amount it believes to be just compensation, and give the owner a
written offer, along with a statement of the basis for the offer. The purchase price for the
property may exceed the amount offered when reasonable efforts to negotiate an agreement at
that amount fail and an authorized agency official approves the higher amount as reasonable,
prudent, and in the public interest. Written justification explaining the basis for the settlement
shall be included in the files (Paragraph 5-2 of the Handbook).

If the property owner has a conflict of interest, the agency must establish safeguards to prevent
the appearance of the owner being motivated by personal gain. One safeguard recommended is
HUD price concurrence after review of appraisals and the determination of just compensation
(Paragraph 5-9 of the Handbook).

Procurement

The Code of Federal Regulations, Part 85, Administrative Requirements for Grants and
Cooperative Agreements With States and Local Governments, Section 85.36(b), covers
procurement by grantees and subgrantees other than States. Grantees and subgrantees must have
written selection procedures for procurement transactions and must maintain records sufficient to
detail the significant history of a procurement. The records should include the rationale for the
method of procurement, selection of contract type, contractor selection or rejection, and the basis
for the contract price. When the competitive proposal method of procurement is used, requests
for proposals must be publicized and must identify all evaluation factors and their relative
importance. Grantees and subgrantees must have a method for conducting technical evaluations
of the proposals received and for selecting awardees. Awards must be made to the responsible
firm whose proposal is most advantageous to the program, price and other factors considered.
Grantees and subgrantees must maintain a contract administration system to ensure contractors
perform in accordance with the terms, conditions and specifications of their contracts.
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                   Attachment C

Auditee Comments




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                                                                                              Attachment D



                            Schedule of Unnecessary/Unreasonable Costs



                  Recommendation                          Unnecessary/Unreasonable1

                           1A                                        $ 14,000




1
    Unnecessary costs are those not generally recognized as ordinary, relevant, and/or necessary within
    established practices. Unreasonable costs exceed the costs that would be incurred by the ordinarily prudent
    person in the conduct of a competitive business.
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                                                                                Attachment E

                                         Distribution


Secretary's Representative, 4AS
State Coordinator, North Carolina State Office, 4FS
Director, Office of Community Planning and Development, 4FD
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 20510-6250
The Honorable John Glenn, Ranking Member, Committee on Governmental Affairs,
   United States Senate, Washington DC 20510-6250
The Honorable Jesse Helms, United States Senator, United States Senate, Washington DC 20510-
6250
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 20515-4305
Ms. Cindy Sprunger, Subcommittee on General Oversight and Investigations, Room 212,
   O'Neil Office Building, Washington DC 20515
City Manager, City of Asheville, P.O. Box 7148, Asheville, North Carolina 28802




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