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. 99-AT-241/242/255-1002 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 ii 99-AT-241/242/255-1002 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. iii 99-AT-241/242/255-1002 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 iv 99-AT-241/242/255-1002 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 v 99-AT-241/242/255-1002 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. 1 99-AT-241/242/255-1002 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. 2 99-AT-241/242/255-1002 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. 3 99-AT-241/242/255-1002 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). 4 99-AT-241/242/255-1002 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. 5 99-AT-241/242/255-1002 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. 6 99-AT-241/242/255-1002 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. 7 99-AT-241/242/255-1002 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. 8 99-AT-241/242/255-1002 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. 9 99-AT-241/242/255-1002 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: 10 99-AT-241/242/255-1002 …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. 11 99-AT-241/242/255-1002 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. 12 99-AT-241/242/255-1002 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. 13 99-AT-241/242/255-1002 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. 14 99-AT-241/242/255-1002 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 15 99-AT-241/242/255-1002 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. 16 99-AT-241/242/255-1002 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. 17 99-AT-241/242/255-1002 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. 18 99-AT-241/242/255-1002 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. 19 99-AT-241/242/255-1002 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. 20 99-AT-241/242/255-1002 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. 21 99-AT-241/242/255-1002 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. 22 99-AT-241/242/255-1002 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. 23 99-AT-241/242/255-1002 Appendix D ARC COMMENTS 24 99-AT-241/242/255-1002 25 99-AT-241/242/255-1002 26 99-AT-241/242/255-1002 27 99-AT-241/242/255-1002 28 99-AT-241/242/255-1002 29 99-AT-241/242/255-1002 30 99-AT-241/242/255-1002 31 99-AT-241/242/255-1002 32 99-AT-241/242/255-1002 33 99-AT-241/242/255-1002 34 99-AT-241/242/255-1002 35 99-AT-241/242/255-1002 36 99-AT-241/242/255-1002 37 99-AT-241/242/255-1002 38 99-AT-241/242/255-1002 39 99-AT-241/242/255-1002 40 99-AT-241/242/255-1002 41 99-AT-241/242/255-1002 42 99-AT-241/242/255-1002 43 99-AT-241/242/255-1002 44 99-AT-241/242/255-1002 45 99-AT-241/242/255-1002 46 99-AT-241/242/255-1002 47 99-AT-241/242/255-1002 48 99-AT-241/242/255-1002 49 99-AT-241/242/255-1002 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 50
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)