oversight

Augusta-Richmond County Consolidated Government, Community Development Block Grant, HOME, and Urban Development Action Grant Programs, Augusta, Georgia

Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-12-04.

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-241/242/255-1002       Issued: December 4, 1998


TO:            John L. Perry, Director, Community Planning and Development Division, 4AD


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


SUBJECT:       Augusta-Richmond County Consolidated Government (ARC)
               Community Development Block Grant, HOME, and
               Urban Development Action Grant Programs
               Augusta, Georgia

This report presents the results of our audit of ARC’s administration of the Department of
Housing and Urban Development’s (HUD) Community Development Block Grant, HOME, and
Urban Development Action Grant Programs. The grantee’s comments to the four findings and
associated recommendations are included as Appendix D 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 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 interim actions and the format and content of your reply.

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

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
This audit was conducted in response to a Congressional request concerning HUD funded
programs administered by the City of Augusta (city). Prior to January 1996, the city government
was responsible for administering HUD programs in the Augusta, Georgia, area. On January 1,
1996, the city and county governments combined to form the Augusta-Richmond County
Consolidated Government (ARC). In January 1997, the area served by the consolidated
government became the entitlement community for program funding purposes. Our audit
objectives were to determine whether (1) Community Development Block Grant (CDBG)
expenditures were eligible, properly supported, and met national program objectives, (2) CDBG
economic development loans were properly made and effectively monitored, (3) an Urban
Development Action Grant (UDAG) loan for development of a hotel, office, and convention
center complex was effectively monitored, and (4) HOME funds were properly awarded to
Community Housing Development Organizations (CHDO) and effectively monitored.

Our review disclosed no significant deficiencies regarding the city’s award of HOME funds to
CHDOs and its monitoring. However, we did find serious problems with the city’s management
of CBDG and UDAG funds. We identified about $1.6 million of ineligible and $.6 million of
unsupported costs.

   •   The city’s grant program to improve facades of commercial buildings in the downtown
       area did not meet national objectives of the CDBG Program. Our review of 27 of 46
       construction projects funded by the city during calendar years 1992 through 1997 found
       11 projects totaling about $443,000 that did not address slum and blight and did not
       comply with city program policy. The city did not maintain adequate documentation on
       the other 16 projects totaling about $588,000 to determine whether they met the
       objectives or complied with city policy. (See Appendices A and B) In addition, we
       identified inconsistency in the awards and requirements placed on some property owners
       by the city that had the appearance of favoritism. These deficiencies occurred, in part,
       because the city’s administrative policy for awarding facade grants did not contain
       procedures for documenting files and monitoring and enforcing compliance. Also city
       program officials disregarded policy.

   •   From 1992 through 1996, the city made 10 special economic development loans to 9 for-
       profit entities totaling $559,250. Three of the loans totaling about $208,000 were
       forgiven by the city. At the time of our review in May 1998, seven of the entities (78
       percent) had gone out of business owing the city about $193,000. Recovery is not likely.
       Only one entity was current with its payments. (See Appendix C) Our review revealed
       that the city did not maintain documentation to determine if the loans met program
       requirements and/or national objectives. We found little evidence that the city monitored
       and enforced loan requirements. We also identified inconsistency in how some loans were
       handled that had the appearance of favoritism. (See Finding 1) These deficiencies
       occurred, in part, because the city had no written policies and procedures for making
       economic development loans, documenting files, and monitoring and enforcing

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       compliance. Because of the nature and extent of the deficiencies, we consider $559,250
       ineligible.

   •   The city improperly charged the CDBG Program $548,100 spent for street lighting and
       sidewalk improvements in 1995 and 1996. The city reported to HUD that these
       expenditures benefited low and moderate income persons. However, we determined that
       the projects did not meet this program objective because they were in commercial areas of
       downtown Augusta; not residential areas. The city improperly classified the costs as
       benefiting low and moderate income persons.

   •   The city may have lost millions in potential revenue and significantly reduced program
       benefits when it approved the refinancing of a developer’s first mortgage without
       assessing the impact the refinancing had on the city. The mortgage was part of an
       agreement that the city had with the developer in order for the developer to obtain a 30-
       year $7.5 million no-interest UDAG loan. The funds were needed to build a $45.6 million
       hotel/office/conference center complex on the downtown river front. In return for the
       loan, the developer agreed to: (1) pay the city a percentage of the project’s excess net
       cash flow based on certified financial reports and (2) employ up to 600 persons including
       75 percent low and moderate income persons. We found that in addition to not assessing
       the impact of refinancing, the city had not obtained timely certified financial reports from
       the developer, and was unaware of the number of low and moderate income persons
       employed by the complex. These deficiencies occurred because the city did not effectively
       monitor and enforce agreement provisions.

These deficiencies primarily involved the city administration before consolidation of the city and
county governments. The current administration recognizes that program management
improvements are needed and has taken some corrective actions.

We recommend that you require the ARC to reimburse the CDBG Program for the ineligible
costs, provide supporting documentation to determine eligibility of the unsupported costs (see
Appendix A), and strengthen various management controls.

On August 14, 1998, we held an exit conference with HUD program officials who agreed with the
findings and recommendations. We made several minor revisions to the draft report as a result of
the exit conference held with ARC officials on August 19, 1998. The ARC provided its written
comments on October 5, 1998. The grantee generally agreed with Findings 2 and 3 and disagreed
with the other two findings. Applicable portions of the ARC’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 all but one attachment, is included as Appendix D.




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

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

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

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

Findings and Recommendations

         1. The City’s Facade Grant Program Did Not Address Slum and Blight......4

         2. The City Mismanaged Its Special Economic Development Loan
            Program ................................................................................................ 9

         3. Street Lighting and Sidewalk Improvements Did Not Benefit Low
            and Moderate Income Persons............................................................. 12

         4. Inadequate Monitoring of a UDAG Loan Agreement May Have Cost
            the City Millions and Significantly Reduced Program Benefits ............ 14

Management Controls ........................................................................................ 19

Follow-Up on Prior Audits ................................................................................. 20

Appendices

         A.   Schedule of Ineligible and Unsupported Costs .................................... 21
         B.   Ineligible and Unsupported Facade Grants........................................... 22
         C.   Ineligible Special Economic Development Loans................................. 23
         D.   ARC Comments .................................................................................. 24
         E.   Distribution......................................................................................... 50




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Abbreviations

ARC      Augusta-Richmond County Consolidated Government
CDBG     Community Development Block Grant
CFR      Code of Federal Regulations
CHDO     Community Housing Development Organization
FY       Fiscal Year
HUD      Department of Housing and Urban Development
OIG      Office of the Inspector General
UDAG     Urban Development Action Grants




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Introduction
BACKGROUND

We initiated this audit in response to a Congressional request concerning HUD-funded programs
administered by the City of Augusta (city). Prior to January 1996, the city government was
responsible for administering HUD programs in the Augusta, Georgia, area. On January 1, 1996,
the city and county governments combined to form ARC. In January 1997, the area served by the
consolidated government became the entitlement community for program funding purposes.

Title I of the Housing and Community Development Act of 1974 (Public Law 93-383) established
the CDBG Program. The program provides grants to States and local governments to aid in
development of viable urban communities. Governments are to use grant funds to provide decent
housing and suitable living environments and to expand economic opportunities, principally for
persons of low and moderate income. All program projects and activities must meet one of the
three national objectives of the CDBG program: (1) directly benefit low and moderate income
persons, (2) aid in the elimination or prevention of slums and blight, or; (3) meet other community
needs that have a particular urgency. The act requires CDBG recipients to certify that at least 70
percent of all program costs are spent to provide direct benefit to low and moderate income
persons. Annual CDBG allocations to the City of Augusta for Federal fiscal years (FY) 1994
through 1996 were:

                             FY                Allocation
                             1994              $2,376,000
                             1995              $2,376,000
                             1996              $2,309,000

The consolidated government’s CDBG allocations for FY 1997 and 1998 were about $2.9 million
and $2.8 million, respectively.

Section 119 of the Act established the UDAG Program. This program was created to assist cities
and urban counties experiencing severe economic stress. Grants were made to local governments
who used the funds to make loans to private developers for commercial, residential, or industrial
projects. The program no longer exists; however, income from repayment of the loans can be
currently used to fund CDBG-eligible activities (e.g., special economic development loans). Since
program inception, the city has received UDAG grants totaling about $10.2 million.




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        FY        Amount            Project
       1983      $ 1,430,000        Partridge Inn
       1983          500,000        Mark Development Corporation
       1983          200,000        YWCA
       1985          500,000        Summerfield East Project
       1987        7,562,000        Radisson Hotel, Office, Convention Center Complex
       Total     $10,192,000

The HOME Program was created under Title II of the National Affordable Housing Act of 1990.
It is designed to expand the supply of decent and affordable housing to low income citizens and to
extend and strengthen partnerships among all levels of government and the private sector in the
production and operation of affordable housing. The program requires that 15 percent of a
grantee’s annual allocation be set aside and used by non-profit CHDOs. The funds can only be
used for development activities where the CHDO is the developer, sponsor, or owner of the
assisted housing and has management control of the projects. HOME funds allocated to the City
of Augusta for FY 1994 through 1996 were:

                            FY                Allocation
                            1994              $ 593,000
                            1995              $ 630,000
                            1996              $ 591,000

The consolidated government was allocated HOME funds totaling about $1.1 million for FY 1997
and $1.2 million for FY 1998.

AUDIT OBJECTIVES, SCOPE, AND METHODOLOGY

Our overall audit objectives were to determine whether: (1) CDBG expenditures were eligible,
properly supported, and met national program objectives, (2) CDBG economic development loans
were properly made and effectively monitored, (3) the UDAG loan for development of a hotel,
office and convention center complex was effectively monitored, and (4) HOME funds were
properly awarded to CHDOs and effectively monitored.

We conducted the audit at ARC’s Housing and Neighborhood Development Office in Augusta,
Georgia. We visited ARC property tax, planning commission, and city attorney offices. We also
visited various project and activity sites in the community. The audit was primarily directed at
program activities and expenditures in FYs 1995 through 1997. Audit coverage was extended to
June 1998 and to prior periods as necessary to meet our audit objectives. Our field work was
performed between January and May 1998. Sites visited and expenditures reviewed were
judgmentally selected.




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To accomplish our objectives, we:

   •   reviewed applicable laws, regulations and other HUD program requirements,
   •   evaluated city and ARC program policies and procedures,
   •   held discussions with various ARC and HUD officials,
   •   reviewed HUD monitoring and technical assistance reports,
   •   analyzed program action plans, budgets, and performance and expenditure reports,
   •   examined city and ARC project and activity files, and
   •   analyzed management controls including those associated with making loans, awarding
       subgrants, monitoring, accounting, and reporting on HUD-funded activities.

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




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Findings and
Recommendations
Finding 1

The City’s Facade Grant Program Did Not Address Slum
and Blight
The city’s grant program to improve facades of commercial buildings in the downtown area did
not meet national objectives of the CDBG Program. Our review of 27 of 46 construction projects
funded by the city during calendar years 1992 through 1997 found 11 projects totaling about
$443,000 that did not address slum and blight and did not comply with city program policy. The
city did not maintain adequate documentation on the other 16 projects totaling about $588,000 to
determine whether they met the objectives or complied with city policy. (See Appendix A and B)
In addition, we identified inconsistency in the awards and requirements placed on some property
owners by the city that had the appearance of favoritism. These deficiencies occurred in part,
because the city’s written administrative policy for awarding facade grants did not contain
procedures for documenting files and monitoring and enforcing compliance. Also city program
officials disregarded policy.

Title 24 of the Code of Federal Regulations (CFR) part 570.208(b) states that CDBG funds can
be used to address slum and blight conditions provided: (1) the project is located in the
designated slum and blight area that contains a substantial number of deteriorating buildings and,
(2) activities (projects) address specific conditions which contributed to the area being designated
a slum and blight area.

According to ARC’s written program policy in effect from 1988 through 1994, objectives of the
city’s Facade Rehabilitation Program included protecting and preserving “as a community
resource the large concentration of historic commercial buildings located in the Central Business
District which has been designated as National Historic District,” (underline added) and
providing “incentive for private property owners to invest their own money in the rehabilitation of
substandard buildings….” (The Broad Street Historic District was the primary historic district
within the city’s Central Business District.) This policy was revised in 1995 to include historic
commercial buildings in other historic districts in the area.

In general, the city required that: (1) grant funds be spent on commercial buildings over 40 years
old located in designated historic districts, (2) grant awards be limited to $15,000 for a front
facade and $30,000 for two sides, if the building was on a corner, (3) owners match grant
amounts with their own funds, and (4) owners sign security deeds which provided that grants be
repaid if the buildings were sold within 5 years (20 percent of the grant was forgiven each year).

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From 1985 through 1997 the city awarded 124 facade grants totaling about $3 million in CDBG
funds. The city justified the use of CDBG funds for the facade program because facade projects
would address slum and blight conditions in a designated area. Using building condition
classifications established by the Richmond County Tax Assessor, the city formally designated
most of the downtown area as an area of slum and blight. This determination was made because
25 percent of the buildings in the area were rated as below average condition (fair or poor).

CDBG Funds Spent On 11 Projects Did Not Address Slum And Blight

Our review of 27 building condition codes recorded on property tax records immediately
preceding the award of the grants showed that 10 of the buildings were rated average or better
(good, excellent). Therefore, the contributing factor the city used to designate the downtown
area being a slum and blight area was not addressed by these grants. Of the 27 projects, 2
projects (including 1 building rated average or better) were located outside the designated slum
and blight area. CDBG funds expended on these 11 projects totaled $443,461. (See Appendices
A and B)

We also found noncompliance with city program policy and many inconsistencies in grant
amounts, areas where buildings were located, match amounts, match funding sources, and funding
provided some owners (see Appendix B). Some inconsistencies had the appearance of favoritism.
For example:

       BL’s Country Kitchen, 1117 Laney-Walker Boulevard - In 1994, a local state legislator
       was given a $75,690 facade grant to help convert a vacant furniture store into a
       restaurant. The building was in the designated slum and blight area but not in the targeted
       historic area (Broad Street Historic District). It was rated as being in good condition by
       the city tax department before the award. The grant amount was more than five times the
       established limit because the city approved work on more than the building’s façade. For
       example, previously undetected roof damage was found during the renovation. The city
       increased the original grant amount to cover the additional work. The city also provided
       the owner a $83,000 economic development loan for work on the building’s interior, an
       expense normally paid by the owner. In addition, the city allowed the owner to use the
       loan to meet the grant matching requirement. The loan was subsequently forgiven by the
       city. In May 1998, the restaurant closed. The owner recently requested another economic
       development loan for $150,000 from the ARC to convert the building into a facility for
       training cooks and other restaurant workers. (See Finding 2)

       The Pilgrim Building, 1143 Laney-Walker Boulevard - The owner of this building also
       owned BL’s Country Kitchen. The building was in the designated slum and blight area but
       outside the targeted historic area. It was rated in good condition before the $30,000 grant
       was funded in 1992. The city gave the owner the maximum amount allowed for facade
       work on a corner building (two sides). However, the funds were used for work on all four
       sides. The city also gave the owner another grant for $60,000 from Special Purpose
       Local Option Sales Tax funds for interior work. This grant was used to satisfy the facade
       grant’s matching requirement. The building currently houses the legislator’s businesses.


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       The Alpha House, 1025 12th Street - This building was in the slum and blight area but
       outside the targeted historic area. It was not a commercial building. It was used as a
       meeting house and activity center by a professional fraternity whose members included
       several local politicians. The building was rated as average condition before the grant was
       awarded in 1994. The $30,000 facade grant was used for work on the whole building
       exterior including putting on a new roof. The city also gave the fraternity a $50,000 grant
       from the sales tax fund that was used to meet the facade grant’s match requirement.

       La Maison Restaurant, 404 Telfair Street - This building housed an upscale French
       restaurant in the slum and blight area but outside the targeted historic area. It was rated in
       good condition by the tax department before the grant was made. In 1994, the owner
       was given $29,165 by the city to repair and paint the building’s exterior. The city waived
       the owner’s matching requirement. There was no documentation to justify the waiver.

       Davidson’s Auto Service, 699 Reynolds Street - This building housed a large auto repair
       facility in the targeted historic area. However, it had no historical significance. It was
       rated in good condition by the tax department before the facade grant was funded in 1992.
       The grant was initially denied but after several meetings with city officials, the owner was
       given $60,000. The garage was in front of a new high-rise condominium complex located
       in Augusta’s river front area; the site of a major city redevelopment project (see Finding
       4). Before and after pictures show that as a result of the grant work, the repair facility’s
       facade more closely resembles the condominium’s. The owner met the grant matching
       requirement using his own funds.

       James H. Williams Building, 935-939 Laney-Walker Boulevard - The building was in the
       slum and blight area and in one of the targeted historic districts. It was rated in average
       condition by the city tax department before the grant was awarded in 1995. The building
       had three store fronts and was located on a corner. The owner could have qualified for a
       $60,000 grant, but received $45,000. While the grant work was ongoing previously
       undetected termite damage was uncovered. The city required the owner to pay for the
       repair. The facade work was halted until the owner complied. The owner also used his
       own money to meet the matching requirement.

The City’s Project Files Were Not Adequately Documented

Project files were not sufficiently documented to justify use of CDBG funds. We determined that
the files did not show the condition classification (e.g., good) of the buildings before facade grants
were awarded or after the work was completed. The city also did not document the specific
structural deficiencies addressed by the grants to improve the buildings’ condition classifications.
Also files were not always documented to show buildings’ historical significance.




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City policy also required that property owners match the grant amount with their own funds.
However, we found that only four of the project files contained evidence that the match
requirement was met by the owners. (ARC subsequently provided match documentation for three
other projects.) For one other project, the city allowed owners to use other CDBG loan funds for
their match and subsequently waived loan repayment. For two projects, the city allowed owners
to use other city funds (e.g., sales tax) for their match. In one other case, the city waived the
match. There was no documentation in the files to justify the waiver. Because the city did not
enforce the match requirement, property owners received a significant benefit at taxpayer’s
expense.

We consider $587,668 unsupported, because the other 16 project files reviewed did not contain
documentation to justify the city’s actions. ( See Appendices A and B )

The compliance deficiencies occurred, in part, because the city’s written policy for awarding
facade grants did not contain procedures for documenting files and monitoring and enforcing
compliance. In addition, city program officials disregarded the policy.

ARC Comments

In its response dated October 5, 1998, the ARC stated that it disagreed with our conclusion that
its Facade Rehabilitation Program did not address slum and blight. The grantee said that the
program did address a condition that attributed to the deterioration of the designated slum and
blight area, namely the rundown exterior condition and appearance of historic properties. It
stated that program files were documented to show the specific building deficiencies that were to
be corrected. The files included copies of architect plans and specifications and demolition notes.
ARC stated that each property was verified as historic. It said that initially the program was
limited to one small area but was later expanded to several historic districts within the slum and
blight area. It stated that the program has always been open, on a first-come first serve basis to
owners of qualifying historic properties located in the designated area. ARC said that it assessed
each grant application to determine eligibility and to identify any violations of the Conflict of
Interest statute. Properties owned by or associated with elected officials were considered as long
as the statute was not violated. ARC provided us documentation to show that match
requirements were met on three additional projects.

OIG Response

ARC provided no information that significantly changed the finding. Several minor revisions were
made to clarify information and adjust figures.




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Recommendations

We recommend that you:

1A.   Require that ARC develop and implement written procedures for documenting files and
      monitoring and enforcing compliance. Assess compliance during future HUD monitoring
      reviews.

1B.   Require that ARC reimburse the CDBG Program from non-federal sources for the
      $443,461 in CDBG funds that did not meet program objectives for 11 facade projects.

1C.   Require that ARC provide support for its actions on the other 16 projects reviewed and
      reimburse the CDBG Program from non-federal sources for all or any part of the
      $587,668 that does not meet program and/or city requirements.

ID.   Require that ARC provide supporting documentation to assess eligibility for the other 19
      projects we did not review and reimburse the CDBG Program for any ineligible
      expenditures.




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Finding 2

The City Mismanaged Its Special Economic Development
Loan Program

From 1992 through 1996, the city made 10 special economic development loans to 9 for-profit
entities totaling $559,250. Three of the loans totaling about $208,000 were forgiven by the city.
At the time of our review in May 1998, seven of the entities (78 percent) had gone out of business
owing the city about $193,000. Recovery is not likely. Only one entity was current with its
payments. (See Appendix C) ARC provided no documentation to determine if the loans met
program requirements and/or national objectives. We found little evidence that the city monitored
and enforced loan requirements. We also identified inconsistency in how some loans were
handled that had the appearance of favoritism. (See Finding 1) These deficiencies occurred in
part, because the city had no written policies and procedures for making economic development
loans, documenting files, and monitoring and enforcing compliance. Because of the nature and
extent of the deficiencies, we consider $559,250 ineligible.

The city used UDAG program income to provide special economic development loans. Use of
these funds is governed by CDBG program requirements. These include meeting one of the three
program objectives and documenting compliance. Title 24 CFR part 570 provides that in making
loans, the city must: (1) determine that assistance would not be excessive or otherwise enrich the
owners, (2) perform a pre-loan analysis of business’ unmet needs from private funding sources,
(3) evaluate the public benefit, and (4) projects’ financial feasibility and likelihood of success.

The City Had No Documentation To Support Eligibility

The city did not maintain documentation to determine whether the loans met program
requirements and/or national objectives. We also found no evidence that the city exercised
prudent lending practices. For example, none of the loans files contained formal loan applications,
financial statements, credit reports, or business plans. We found no analyses of entities’ economic
viability, financial needs, or proposed use of the funds in meeting program objectives. Most files
contained only letters requesting the loans. Few files contained any documentation that promised
jobs were provided to low and moderate income persons.

The City Did Not Monitor and Enforce Compliance With Loan Requirements

We found no evidence that the city conducted site visits to verify promised employment of low
and moderate income persons. For most loans that became delinquent, files contained no
reminder or collection notices. There was also no indication that the city made any effort to
recover pledged collateral.




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Inconsistency In How Some Loans Were Handled Had The Appearance of Favoritism

Three entities’ loans totaling $208,000 were forgiven by the city. Two of these loans were
significantly more than other loans that were not forgiven. The loan files contained no
justification for treating these entities different than the others. The two entities that received the
large loans also received facade grants (see Finding 1). The city allowed one of the entities (BL’s
Country Kitchen) to use loan funds to meet its match requirement on the facade grant. As a result,
the entity’s owner (a State Senator) received a total of about $159,000 from the city with few
strings attached. The entity promised to employ at least 20 low and moderate income persons.
At the time of our review in May 1998, BL’s Country Kitchen was out of business.

The City Had No Written Policies And Procedures

At the time of our review, five of the seven entities that received repayable loans were out of
business owing the city about $193,000. Recovery is not likely. Only one of the entities was
current with its payments. Some of the problems with these loans could have been avoided if the
city had written policies and procedures for making these type loans, documenting files, and
monitoring and enforcing compliance.

In 1996, the city developed comprehensive written policies and procedures. Subsequent loan
applications were processed in accordance with these requirements.

ARC Comments

In response to the draft report, the ARC stated on October 5, 1998, that it agreed with the
finding regarding lack of documentation and written policies and procedures. The ARC said that
subsequent to consolidation of the city and county governments, it analyzed the outstanding loans
to determine whether they could be collected but the documentation problem hindered the
process. Some actions were taken to collect on several of the loans. The grantee stated that it
objected to reimbursing the CDBG Program $559,250 because the noncompliance occurred
under a former administration and because OIG could not determine if the loans met program
requirements. In addition, the ARC said that it had strengthened management controls including
developing and implementing written policies and procedures for awarding economic
development loans. It did not comment on the three loans to two entities totaling $208,000 that
were forgiven by the city. These actions had the appearance of favoritism.

OIG Response

As reported, actions taken by ARC to strengthen management controls in this area have been
effective. Subsequent loans we reviewed were processed in accordance with written policies and
procedures. However, taking corrective actions and attributing lack of documentation to a
former administration are not adequate reasons to waive repayment for noncompliance. The
grantee is required to have effective management controls in place including maintaining sufficient
documentation to support eligibility. It is also liable for the actions of the former administration.
The ARC admitted in its response that it has no additional documentation than was provided to us
during the audit. It stated that:

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…ARC in not in a position to dispute or otherwise respond to the OIG’s Finding 2 as to the
former City’s actual practices and procedures for approving these loans, as all of these events
occurred prior to consolidation and the individuals responsible for administering these loan
programs are no longer employed by ARC.

Therefore, our recommendation regarding reimbursement of the ineligible costs is justified.

Recommendations

We recommend that you:

2A.    Require that when ARC writes off the uncollectible loans they send 1099 forms to the
       recipients.

2B.    Require that ARC reimburse its CDBG Program $559,250 from non-federal sources for
       the 10 special economic development loans that did not meet program requirements.




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Finding 3

Street Lighting and Sidewalk Improvements Did Not Benefit
Low and Moderate Income Persons

The city improperly charged the CDBG Program $548,100 spent for street lighting and sidewalk
improvements in 1995 and 1996. The city reported to HUD that these expenditures benefited low
and moderate income persons. However, we determined that the projects did not meet this
program objective because they were in commercial areas of downtown Augusta; not residential
areas. The city improperly classified the costs as benefiting low and moderate income persons.

Title 24 CFR part 570 provides that at least 70 percent of costs spent on program activities must
benefit low and moderate income persons. The area served by the activities must be primarily
residential.

The city inappropriately charged $393,163 to CDBG funds in 1995 and 1996 for costs of
upgrading and replacing street lights in the downtown Augusta area; Broad Street (5th to 10th
Street) and 11th and 12th Streets (Broad Street to Greene Street). It also charged $154,937 to
the CDBG Program for repairing and replacing sidewalks and curbs on Broad Street between 5th
and 6th Streets during the same period. However, we determined that the areas in which the
improvements were made were primarily commercial; not residential. For example, Broad Street
between 5th and 6th Street is in the heart of the business district in downtown Augusta.

In order to show that 70 percent of CDBG costs benefited low and moderate income persons and
avoid possible sanctions, in 1995 and 1996 the city reclassified costs of several of its street
lighting and sidewalk improvement projects. In prior years the city had properly shown costs of
similar projects in the downtown area as helping to improve its slum and blight areas. Because
the costs did not benefit low and moderate income persons, we consider $548,100 expended on
these improvements ineligible program costs.

ARC Comments

On October 5, 1998, the ARC stated that it agreed with the finding. It said that it has taken
action to ensure that future costs meet program requirements. However, rather than reimburse
the CDBG Program $548,100 for the ineligible program costs claimed in FYs 1995 and 1996, it
requested that HUD allow revisions to its 1995 and 1996 certifications and show subsequent year
(e.g., FY 1997) costs incurred in excess of 70 percent that benefited low and moderate income
persons.




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OIG Response

To reach management decision, HUD should 1) review the eligibility of all costs incurred in FY
1997 and used to make up the shortfall in FYs 1995 and 1996 and 2) assess the adequacy of
corrective actions taken by the grantee to ensure future costs meet program requirements.

Recommendations

We recommend that you:

3A.    Require that ARC implements management controls to ensure that CDBG expenditures
       are properly classified.

3B.    Require that ARC reimburse its CDBG Program $548,100 from non-federal sources for
       the costs of ineligible street lighting and sidewalk improvements.




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Finding 4

Inadequate Monitoring of a UDAG Loan Agreement May
Have Cost the City Millions and Significantly Reduced
Program Benefits

The city may have lost millions in potential revenue and significantly reduced program benefits
when it approved the refinancing of a developer’s first mortgage without assessing the impact the
refinancing had on the city. The mortgage was part of an agreement that the city had with the
developer in order for the developer to obtain a 30-year $7.5 million no-interest UDAG loan. The
funds were needed to build a $45.6 million hotel/office/conference center complex on the
downtown river front1. In return for the loan, the developer agreed to: (1) pay the city a
percentage of the project’s excess net cash flow based on certified financial reports and (2)
employ up to 600 persons including 75 percent low and moderate income persons. We found that
in addition to not assessing the impact of refinancing, the city had not obtained timely certified
financial reports from the developer, and was unaware of the number of low and moderate income
persons employed by the complex. These deficiencies occurred because the city did not
effectively monitor and enforce agreement provisions.

Inadequate Monitoring May Have Cost the City at Least $8 Million in Future Revenue

In November 1987, the city entered into an agreement with the Augusta Riverfront Limited
Partnership for a $7.5 million interest free UDAG loan. No payment was required until the first
mortgage was paid-off. The term of the $16 million first mortgage which began in 1992 was for 5
years with an option to extend it to 30 years if the developers did not obtain financing through
private syndication. In 1996, the developers decided that they would refinance the first mortgage
for 12 years rather than syndicate it or extend it to 30 years because the project was generating
significant revenue. (As of December 31, 1996, the project had accumulated nearly $7 million in
its short-term investments.) The mortgage was refinanced for $17 million.

As part of the 1987 agreement, the developer was to pay the city 20 percent of the project’s
annual excess net cash flow as contingent interest computed as follows:

        Annual Gross Revenue
        Less: Total Operating Expenses (exclusive of depreciation and amortization)
               Debt Service
        Net Cash Flow
        Less: 15 Percent Return of the Developer’s Investment Equity
        Excess Net Cash Flow



1
 In addition to the UDAG loan, the city also put $9.9 million into the project with improvements to the river front
and parking facilities.
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The project did not generate sufficient net cash flow the first 4 years of operation (1992 through
1995) to provide a return to the city. However, as of May 31, 1996, the project had an excess
net cash flow of $369,090. The city’s share was determined to be $73,818.

In September 1996, the city as second lien holder approved the developer’s request for
refinancing. The reduced loan term and increased loan amount increased debt service and
reduced the project’s net cash flow substantially. As a result, the city will not receive any return
for 1997 and its return in future years will be substantially reduced.

                            Before Refinancing                        After Refinancing
       Year*         Net Cash Flow**      Due to City         Net Cash Flow**       Due to City
     1996                 $ 1,884,641          $73,818             $1,884,641           $73,818
     1997                   2,013,195          103,525               1,339,128                 0
     1998                   2,077,314          116,352               1,392,693                 0
     1999                   2,160,406          132,971               1,448,401                 0
     2000-2007             20,702,730        1,747,661             11,897,492           285,724
     2008                   3,074,932          315,876
     2009-2020             48,031,459        6,020,965

                    Total                   $ 8,511,168                                $ 359,542

*       As of May 31

**      In determining future net cash flow, we used the actual net cash flow from the developer’s
        1996 financial report as of May 31. We conservatively assumed revenue and expenses
        would remain at 1996 levels adjusted for inflation at 4 percent annually (the amount of
        increase used in developer’s proposal). However, we noted that the developer’s financial
        statements for the fiscal year ending December 31, 1997, showed that the project’s net
        profit almost doubled from the prior year.

We found no evidence that the city considered the impact that refinancing would have on its
future revenue. This may have occurred because the city had not obtained timely certified
financial reports that were due 90 days after close of the operating year. The first check the city
received from the developer for excess net cash flow for 1996 (12 months ending May 31, 1996)
was not paid the city until March 1997. As a result, the city may not have been aware that the
project’s revenue and net cash flow had increased significantly since it began operations and was
close to generating revenue for the city. For example, the project’s net cash flow had increased
84 percent in 2 years (May 1993 through May 1995).

City officials stated that they had little choice but to approve the refinancing. We agree, as
second lien holder on the first mortgage, the city had to subordinate its claim or the new lender
would not have paid off the first mortgage. In a memorandum to ARC dated June 7, 1996, the
new lender stated that “SouthTrust will require, as a condition to making the SouthTrust loan,
that the security deed securing the UDAG loan be subordinated to the new security deed that will



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secure the SouthTrust loan. By subordinating the security deed securing the UDAG loan to the
security deed securing the SouthTrust Loan, Augusta-Richmond County will maintain its current
status as the second mortgage lender with respect to the Riverfront Center.” However, in
subordinating its claim, the city had an opportunity that it did not take advantage of. We believe
that the city could have negotiated some compensation for the lost revenue or amendments of
other less favorable agreement provisions. Under the agreement, the developer pays the city
nothing for its exclusive use of the convention center for 50 years. The developer also receives
50 percent of the fees charged other center users. The remaining revenue is deposited into an
escrow account to be used to pay the center’s operating expenses and capital improvements. The
city gets no direct revenue from the convention center. Also for 30 years the city cannot
unilaterally increase the per vehicle parking fee charged the developer for use of an adjacent city
parking lot.

Financial Data Submitted by the Developer Did Not Comply With the Loan Agreement

The city did not enforce provisions of the loan agreement that required that the developer submit
timely certified financial reports. The agreement stated that the developer shall provide the city an
annual financial report from an independent public accountant within 90 days after close of the
operating year certifying to: (1) the project’s gross revenue, operating expenses (including debt
service), and net cash flow, (2) developer’s investment equity, and (3) the amount of excess net
cash flow due the city. The city did not obtain timely financial reports or annual audited financial
statements from the developer. During our review, we obtained the project’s audited financial
statements for 1992 through 1997 (ending December 31). The statements did not contain any net
cash flow analyses.

We determined that the developer’s net cash flow analyses used to compute the city’s share since
1992 did not comply with the agreement. The developer used a different reporting period than
required. It used a fiscal year ending May 31 rather than December 31 (end of the project
operating year) used in preparing the developer’s financial statements. The developer claimed
that a different reporting period was necessary because the project management company’s fiscal
year was different. We found no reason that the cash flow analysis report could not be prepared
for the same time period as the financial statements. There were several problems with using
different reporting periods. The net cash flow analyses were prepared by an independent public
accountant but were not certified as were the financial statements. Also, the analyses data could
not be compared to data in the financial statements because the data was from different
accounting periods.

The City Did Not Ensure That 75 Percent of Project Employees Were Low And Moderate
Income

In its application for the UDAG loan, the developer estimated that 600 permanent jobs would be
created by the project. Low and moderate income persons would fill 75 percent of these
positions. The loan agreement stated that the developer would use its “best efforts” to achieve
this employment. However, the agreement did not define “best efforts” and provided no penalty
for not meeting employment goals.


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We found no evidence the city assessed whether the developer achieved its employment goals.
There were no employment studies or reports in the file. We determined that the project only
created about 200 jobs. City officials did not know how many of these employees were low and
moderate income. During our review ARC requested the developer periodically gather and report
this data to them.

This project has been very successful for the developer. The city has shared some of this success.
However, its share could have been much greater if it had better monitored and enforced
agreement provisions.

ARC Comments

In its response dated October 5, 1998, the ARC objected to our conclusion that in subordinating
its claim the city had some leverage and an opportunity to negotiate more favorable terms in
return for potential revenue lost to the city. It stated that there was never any intent nor legal
right for the city or HUD to exercise such leverage. The grantee said that we gave no
consideration to the benefit the city would receive from repayment of the UDAG loan after 12
years instead of 30 years. It also stated that all financial reporting requirements were met by the
developer including timely reporting and correctly computing the project’s net cash flow. ARC
did not comment on its assessment of the project’s employment goals.

OIG Comments

As stated in the report, we agree that ARC had to subordinate its claim or the new lender would
not have paid off the first mortgage. Also because of the 1990 amendment to the agreement,
ARC was legally obligated to subordinate the claim. However, we continue to believe that
although the city had no legal leverage at the time, it did have an opportunity and an obligation
(had it assessed the monetary impact of the refinancing on the city) to negotiate more favorable
agreement terms in return for the lost revenue. In addition, in developing our projections, we did
consider the benefit the city would have received by repayment of the UDAG loan after 12 years
versus 30 years. However, this benefit was offset by the future value of the projected lost
revenue (conservatively estimated) before and after year 2008. Therefore, we did not show these
amounts in our projections. The agreement terms are clear regarding the developer’s financial
reporting responsibilities. ARC needs to enforce them.

We revised the report regarding computation of the net cash flow.

Recommendations

We recommend that you:

4A.    Require that ARC develop written policies and procedures for monitoring and enforcing
       compliance with agreement provisions.




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4 B.   Require that ARC obtain timely the annual certified financial reports as specified by the
       agreement.

4C.    Assess the adequacy of city monitoring during the next on site HUD review.




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Management Controls
Management controls include the plan of organization, methods, and procedures adopted by
management to ensure that its goals are met. Management controls include the processes for
planning, organizing, directing, and controlling program operations. They include systems for
measuring, reporting, and monitoring program performance.

In planning and performing our audit, we considered the grantee’s management controls to
determine our audit procedures and not to provide assurance on the controls. Management is
responsible for establishing effective controls.

We determined that the controls most relevant to our audit objectives pertained to the following:

       1.   Ensuring eligibility with program requirements.
       2.   Documenting compliance with the requirements including meeting national objectives.
       3.   Awarding and monitoring sub-recipients including recipients of subgrants and loans.
       4.   Establishing and implementing written program policies and procedures.

We assessed controls in place. We obtained an understanding of the auditee’s procedures and
HUD requirements and performed various substantive tests of the controls.

A significant weakness exists if controls do not give reasonable assurance that resource use is
consistent with laws, regulations, and policies; that resources are safeguarded against waste, loss,
and misuse; and that reliable data are obtained, maintained, and fairly disclosed in reports.

Based on our review, we believe that significant weaknesses existed in all four management
control areas mentioned above. Specific control weaknesses are discussed in the findings.




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Follow-up on Prior Audits
This is the first Office of Inspector General audit of the grantee’s CDBG , UDAG, and HOME
Programs.

The grantee’s latest single audit report for the year-ended December 31, 1997, contained no
current findings or unresolved prior findings related to any federally funded program.




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Appendices
                                                                                        Appendix A

              Schedule Of Ineligible and Unsupported Costs



   Recommendation                        Description                           Ineligible     Unsupported
        1B             CDBG funded facade grants that did not meet               $443,461
                       program objectives.
          1C           CDBG funded facade grants that were not                                      $587,668
                       adequately documented.
          2B           CDBG funded special economic development                   559,250
                       loans that did not meet program requirements.
          3B           CDBG funds paid for street lighting and                    548,100
                       sidewalk improvements that did not meet
                       program objectives.
                       TOTAL                                                  $1,550,811            $587,668


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.




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                                                                                        Appendix B

                 Ineligible and Unsupported Facade Grants

                                               Historic    Condition
  Description                      Year        District    Code              Match     Ineligible   Unsupported
  553, 557, 559 Broad Street       1992        Yes-4       Unknown           No                         $40,000
  699 Reynolds Street              1992        Yes-5       Good              Yes         $60,000
  1143 Laney-Walker Blvd.          1992        No-6        Good              1            30,000
  247-257 Broad Street             1992        No-6        Unknown           Yes                         32,354
  1108 Phillips Street             1992        No-6        Average           Yes          40,226
  968 Broad Street                 1993        Yes-5       Fair              Yes                         21,045
  1298-1298 ½ Broad Street         1992        Yes-3       Fair              Yes                         33,500
  533 9th Street                   1993        No-6        Fair              No                          30,000
  1033 -1039 Broad Street          1993        Yes-3       Good              No           44,000
  1520-1522 12th Street            1993        No-6, 7     Average           No           29,380
  904-908 Broad Street             1993-94     Yes-5       Unknown           No                          63,000
  974 Broad Street                 1993        Yes-4       Fair              No                          15,000
  976-978 Broad Street             1994        Yes-4       Fair              No                          35,000
  1006-1024 Broad Street           1993        Yes-3       Fair              No                          91,412
  302 6th Street                   1993        Yes-6       Fair              Yes                          7,722
  1009-1015 Broad Street           1994        Yes-4       Average           No           30,000
  404 Telfair Street               1994        No-6        Good              Waived       29,165
  1025 12th Street                 1994        No-6        Average           1            30,000
  1117 Laney-Walker Blvd.          1994        No-6        Good              2            75,690
  1257-1261 Broad Street           1994        Yes-5       Unknown           No                          45,000
  1800 Broad Street                1994        No-6, 7     Unknown           No           30,000
  1248 Broad Street                1994        Yes-3       Fair              No                          32,635
  204 13th Street                  1994        No-6        Fair              No                          30,000
  935-939 Laney-Walker Blvd.       1995        Yes-6       Average           Yes          45,000
  952 Broad Street                 1995        Yes-3       Fair              No                          21,000
  954-956 Broad Street             1995        Yes-3       Fair              No                          30,000
  1030-1036 Broad Street           1995        Yes-3       Fair              No                          60,000
                                                                             Total      $443,461      $ 587,668




1 - Match provided by the city from Special Purpose Local Option Sales Tax funds.
2 - Match provided by the city from a forgiven economic development loan.
3 - Historically significant per Broad Street Historic District Inventory.
4 - Some historical significance.
5 - Not historically significant.
6 - Unknown historical significance.
7 - Outside the designated slum and blight area.




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                                                                           Appendix C

           Ineligible Special Economic Development Loans


Recipient                         Date         Amount Balance   Status
Jema’s Creative Learning Center   08/26/92    $ 15,000  $10,514 Delinquent-Out of
                                                                Business*
Dent’s Funeral Home               09/22/92      47,400   35,547 Delinquent-Still in
                                                                Business
Wisteria Flowers and Gifts        12/08/92      46,460   41,200 Delinquent-Out of
                                                                Business*
Ergo Sum Gallery                  11/01/93      42,168   36,984 Delinquent-Out of
                                                                Business*
BL’s County Kitchen               07/18/94      83,222   N/A    Forgiven-Out of Business
Homer Joe’s Fried Chicken         09/22/94      25,000   N/A    Forgiven-Out of Business
Betty’s Boutique                  10/17/94      25,000   29,614 Delinquent-Out of
                                                                Business*
Ronlyn Corporation                12/13/95     100,000   94,611 Current-Still in Business
Southeastern Security Systems     12/29/95      75,000   75,000 Delinquent-Out of
                                                                Business
Ronlyn Corporation                10/09/96     100,000   N/A    Forgiven-Still in Business
                                  Total      $ 559,250 $323,470


*      No recovery expected.




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                 Appendix D

ARC COMMENTS




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                                                                              Appendix E
Distribution

Secretary's Representative, 4AS
Director, Office of Community Planning and Development, 4AD
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 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
Mr. Charles Norwood, Congress of the United States, House of Representatives, 1056 Claussen Road,
  Suite 226, Augusta, GA 30907
Ms. Cindy Sprunger, Subcommittee on General Oversight and Investigations, Room 212,
  O'Neil Office Building, Washington DC 20515
Mayor, City of Augusta, 530 Greene Street, Augusta, GA 30911




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