oversight

City of Chicago Empowerment Zone Program, Chicago, IL

Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-10-15.

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

                                                                      Issue Date
                                                                              October 15, 1998
                                                                      Audit Case Number
                                                                              99-CH-259-1002




TO:            Dennis Kane, Coordinator of the EZ/EC Initiative, Office of Community
                 Planning and Development, DEEZ


FROM:          Dale L. Chouteau, District Inspector General for Audit, Midwest

SUBJECT:       City of Chicago
               Empowerment Zone Program
               Chicago, Illinois

We completed an audit of the City of Chicago’s Empowerment Zone Program. The objectives of our
audit were to determine whether the City: (1) efficiently and effectively used Empowerment Zone
funds to meet the objectives of its Strategic Plan; and (2) accurately reported the accomplishments of
its Empowerment Zone Program to HUD. We performed the audit based upon our Fiscal Year 1998
annual audit plan.

Based on our review of 26 of the 84 activities reported to HUD in its June 30, 1997 Performance
Review, we concluded that the City did not maintain adequate control over its Empowerment Zone
Program to assure efficient and effective use of the funds or accurate reporting of the Program’s
accomplishments. The City: inappropriately used $670,417 of Empowerment Zone funds and was
billed $121,590 that did not benefit Zone residents; did not have documentation to show that another
$892,484 of Zone funds paid and $120,012 billed to the City benefited Zone residents or were
reasonable and necessary expenses; inaccurately reported the accomplishments of its Empowerment
Zone activities; and reported to HUD 15 projects as Empowerment Zone activities when they were
not. As a result, Empowerment Zone funds were not used efficiently and effectively, and the
impression exists that the benefits of the City’s Empowerment Zone Program were greater than
actually achieved.

Within 60 days, please provide us, for each recommendation made in this report, a status report on: (1)
the corrective action; (2) the proposed corrective action and the date to be completed; or (3) why
action is considered unnecessary. Also, please provide us copies of any correspondence or directives
issued because of the audit.

Should you or your staff have any questions, please contact me at (312)353-7832.
Executive Summary
We completed an audit of the City of Chicago’s Empowerment Zone Program. The objectives of our
audit were to determine whether the City: (1) efficiently and effectively used Empowerment Zone
funds to meet the objectives of its Strategic Plan; and (2) accurately reported the accomplishments of
its Empowerment Zone Program to HUD. We performed the audit based upon our Fiscal Year 1998
annual audit plan.

We concluded that the City did not use its Empowerment Zone funds appropriately and did not
correctly report the accomplishments of its Empowerment Zone Program to HUD. Specifically, the
City: inappropriately used $670,417 of Empowerment Zone funds and was billed $121,590 that did not
benefit Zone residents; did not have documentation to show that another $892,484 of Zone funds paid
and $120,012 billed to the City benefited Zone residents or were reasonable and necessary expenses;
inaccurately reported the accomplishments of its Empowerment Zone activities; and reported 15
projects as Empowerment Zone activities when they were not.


                                       As previously mentioned, the City of Chicago did not
 The City Did Not Have                 maintain adequate oversight over Empowerment Zone
 Adequate Control Over                 funds. Nine of the 26 activities we reviewed incurred
 Zone Funds                            inappropriate      or   unsupported       expenditures  of
                                       Empowerment Zone funds. The problems occurred because
                                       the City: did not adequately monitor its Empowerment Zone
                                       activities to ensure the use of Empowerment Zone funds
                                       benefited Zone residents or were reasonable and necessary;
                                       and encouraged an administering entity to provide services
                                       outside of the Zone.

                                       The City of Chicago overstated the amount of estimated
 The City Overstated The               leveraged funds in the June 1997 Performance Review. The
 Amount Of Leveraged                   Review’s Attachments estimated that the City’s 84
 Funds By Over $143                    Empowerment Zone activities should leverage $176.1 million.
 Million                               However, supporting documentation included with the Review
                                       showed the 84 activities would only leverage $36.6 million, a
                                       difference of $139.5 million. The information was presented so
                                       it appeared that the $176.1 million shown in the Attachments
                                       was the total of the supporting documentation. The City also
                                       overstated the projected funding by $3.7 million for 12 of 49
                                       activities for which the City requested funding confirmations.
                                       As a result, the City overstated the projected leveraged funding
                                       by $143.2 million ($139.5 million + $3.7 million). The problem
                                       occurred because: (1) the City’s reporting process lacked
                                       effective oversight and controls to ensure the accuracy of
                                       information presented in the Performance Review; and (2) the
                                       City’s staff used outdated information to complete the financial
                                       sections of the Review. Since the amount of leveraged funding

                                                Page iii                               99-CH-259-1002
Executive Summary


                           is an important indicator of the Empowerment Zone Program’s
                           success, the inaccurate information presented a false impression
                           of the Program’s benefits.

                           The City of Chicago incorrectly reported that 15 of 84
 Activities Were           activities in its June 30, 1997 Performance Review were
 Incorrectly Reported As   Empowerment Zone Program activities. The 15 activities were
 Empowerment Zone          not located within the City’s Federally-designated
 Activities                Empowerment Zone and received funding from the State of
                           Illinois’ Enterprise Community grant. Because the City
                           included the 15 activities in the Performance Review, over $7
                           million in funding was incorrectly reported as leveraged funds.
                           The problem occurred because the City’s reporting process
                           lacked effective oversight and controls to ensure the validity
                           and reliability of the information included in the Performance
                           Review. As a result, the City did not accurately report to HUD
                           its Empowerment Zone Program’s accomplishments, which
                           created the impression that the benefits of the Program were
                           greater than actually achieved.

                           The City of Chicago incorrectly reported the actual status
 The City Incorrectly      and progress for 11 of the 26 activities we reviewed from
 Reported The              the June 30, 1997 Performance Review. The Review
 Accomplishments Of Its    contained inaccuracies related to: nine activities’
 Zone Activities           performance measures; nine activities’ funding; six
                           activities’ performance milestones; and two activities’
                           participating entities. The inaccuracies occurred because
                           the City did not: (1) use the actual accomplishments
                           submitted by the activities’ administering entities; (2) verify
                           the accuracy of the information included in the Performance
                           Review; or (3) obtain the status of the activities from the
                           administering entities.

                           We recommend that the Coordinator of the EZ/EC
 Recommendations           Initiative, in conjunction with officials from the Department
                           of Health and Human Services, assure that the City of
                           Chicago reimburses the Empowerment Zone Program for
                           the inappropriate use of Zone funds and implements
                           controls to correct the weaknesses cited in this report.

                           We presented our draft findings to the Executive Director
                           of the City’s Empowerment Zone Program and HUD’s staff
                           during the audit. We held an exit conference with the City’s
                           Executive Director on August 18, 1998. The City provided
                           written comments to our draft findings. We included

99-CH-259-1002                    Page iv
                                 Executive Summary


excerpts of the comments with each finding and the
summary of Empowerment Zone activities reviewed (see
Appendix B). The complete text of the comments are
included in Appendix C.




  Page v                           99-CH-259-1002
Table of Contents

Management Memorandum                                                    i


Executive Summary                                                     iii


Introduction                                                             1


Findings

1    The City Did Not Have Adequate Control Over
     Empowerment Zone Funds                                          5


2    The City Overstated Estimated Leveraged Funding By
     Over $143 Million                                              17


3    Activities Were Incorrectly Reported As Empowerment
     Zone Activities                                                21


4    The City Inaccurately Reported The Accomplishments
     Of Its Empowerment Zone Activities                             25



Management Controls                                                  31


Follow Up On Prior Audits                                           33

Appendices
      A Schedule of Questioned Costs                                35

      B Activities Reviewed                                         37


                                Page vii                   99-CH-259-1002
Table of Contents


        C Audit Comments                81

        D Distribution                 105




99-CH-259-1002             Page viii
Introduction
The City of Chicago was designated as an urban Empowerment Zone effective December 21,
1994. The objective of the Empowerment Zone Program is to rebuild communities in poverty-
stricken inner cities and rural areas by developing and implementing strategic plans. The plans are
required to be based upon the following four principles: (1) creating economic opportunity for
Empowerment Zone residents; (2) creating sustainable community development; (3) building
broad participation among community-based partners; and (4) describing a strategic vision for
change in the community.

The Empowerment Zone Program was authorized by the Omnibus Budget Reconciliation Act of
1993. The Reconciliation Act provided funding for the Empowerment Zone Program under Title
20 of the Social Security Act. The Program was designed to provide $250 million in tax benefits
with $100 million of Social Services Block Grant funds from the Department of Health and
Human Services. As of June 30, 1998, the City of Chicago drew down $11,297,031 in
Empowerment Zone funds from the Social Services Block Grant and had spent $10,855,045.

The City of Chicago is a municipal corporation governed by a mayor and a city council. The
City’s fiscal year is January 1 through December 31. The City’s Department of Planning and
Development administers its Empowerment Zone Program.

The Mayor of the City of Chicago is the Honorable Richard M. Daley. The Executive Director of
the City’s Empowerment Zone Program is Avery L. Goodrich, Jr. The Commissioner of the
City’s Department of Planning and Development is Christopher R. Hill.             The City’s
Empowerment Zone books and records are located at 20 North Clark, Chicago, Illinois.



                                      The objectives of our audit were to determine whether the
 Audit Objectives                     City: (1) efficiently and effectively used Empowerment Zone
                                      funds to meet the objectives of its Strategic Plan; and (2)
                                      accurately reported the accomplishments of its Empowerment
                                      Zone Program to HUD.

                                      We performed our on-site work between March and August
 Audit Scope And                      1998. To determine whether the City efficiently and
 Methodology                          effectively used Empowerment Zone funds and accurately
                                      reported the accomplishments of its Empowerment Zone
                                      Program, we interviewed staff from HUD, the City, and
                                      administering entities of the City’s Zone activities. Based
                                      upon the activities’ funding and reported accomplishments,
                                      we judgmentally selected 26 of the City’s 84 activities
                                      reported in the June 30, 1997 Performance Review. The
                                      following table shows the 26 activities reviewed:




                                               Page 1                               99-CH-259-1002
Introduction


                                                 Activity
                  1. Mexican Fine Arts Museum Expansion
                  2. Job Link Program
                  3. Family Life Community Network
                  4. 21st Century Community Learning Centers
                  5. Better Days for Youth and Nuevos Futuros
                  6. Employer Assisted Housing Program
                  7. Northwest Industrial Corridor
                  8. Community Services West Workforce and Life Preparation
                  9. The Storehouse Distributions Center
                 10. Arts Business Incubator
                 11. Chicago Neighborhood Plan Program
                 12. Self-Sufficiency Project
                 13. Holistic Connection
                 14. Youth Economic Alternatives
                 15. Linking to the Service Delivery Network
                 16. Brownfields Redevelopment Institute
                 17. Woodworker/Shipping Training
                 18. Expansion of Services for Connections of Adult Learning Center
                 19. Fresh Start Program
                 20. Comprehensive Service Delivery Network
                 21. Street Intervention Program
                 22. Duncan YMCA Children’s Arts & Education
                 23. Vocational Education & Community Development Program
                 24. Violence Prevention Program
                 25. Community Youth Development Activity Network
                 26. West Side Residential Rehabilitation

                             To evaluate the City’s Empowerment Zone Program, we
                             reviewed records maintained by HUD, the City’s
                             Department of Planning and Development, and the
                             administering entities. We reviewed: HUD’s guidance and
                             instructions for the Program; the City’s June 1997
                             Performance Review, files, reports, and approved payment
                             requests related to the activities; and the administering
                             entities’ voucher payments, monitoring files, and supporting
                             documentation. We visited the administering entities for 11
                             of the 26 activities to review their documentation, reports,
                             and correspondence. We did not conduct site visits to the
                             remaining 15 activities since the activities were not related
                             to the City’s Empowerment Zone Program (see Finding 3).

                             The audit covered the period July 1, 1996 to June 30, 1997.
                             This period was adjusted as necessary. We conducted our


99-CH-259-1002                       Page 2
                                              Introduction


audit in accordance with generally accepted government
auditing standards.

We provided a copy of this report to the Mayor of the City,
the Executive Director of the City’s Empowerment Zone
Program, and the Commissioner of the City’s Department
of Planning and Development. We also provided a copy of
this report to the Acting Director of the Office for Civil
Rights, Department of Health and Human Services.




           Page 3                           99-CH-259-1002
                                                                                         Finding 1


 The City Did Not Have Adequate Control Over
          Empowerment Zone Funds
The City of Chicago did not maintain adequate oversight over Empowerment Zone funds. Nine
of the 26 activities we reviewed incurred inappropriate or unsupported expenditures. The
inappropriate or unsupported expenditures accounted for 49.2 percent of the Empowerment Zone
funds allotted to the 26 activities. The City: (1) inappropriately used $670,417 of Empowerment
Zone funds and was billed another $121,590 for services that did not benefit Zone residents; and
(2) lacked documentation to show that $892,484 of Zone funds paid and $120,012 billed to the
City benefited Zone residents or were reasonable and necessary expenses. The problems occurred
because the City: did not have an adequate monitoring system for its Empowerment Zone
activities that ensured the use of Zone funds benefited Zone residents; and encouraged an
administering entity to provide services outside of the Zone. As a result, Empowerment Zone
funds were not used efficiently and effectively.


                                    Title 20 of the United States Code, Section 2007(c)(1)(B)
  United States Code                requires that Empowerment Zone funds be used in accordance
                                    with the Strategic Plan. Section 2007(c)(1)(C) also requires
                                    that Empowerment Zone funds be used for activities that
                                    benefit Zone residents.

                                    For the purpose of our audit, we concluded activities did not
                                    benefit Empowerment Zone residents if the activities served
                                    less than 51 percent of Zone residents, or if the activities did
                                    not provide benefits to Zone residents when the activity
                                    administrator had control over who received the benefit of their
                                    services.

                                    24 CFR Part 597.200(d)(ii) requires that Empowerment Zone
  HUD’s Requirements                funds must be used to achieve or maintain the goals of the
                                    Strategic Plan. 24 CFR Part 597.200(f) states activities
                                    included in the Plan may be funded from any source which
                                    provides assistance to the nominated area.

                                    The City of Chicago’s Empowerment Zone Strategic Plan
  Strategic Plan’s                  required that the following activities benefit Empowerment
  Requirements                      Zone residents: Mexican Fine Arts Museum Expansion
                                    project; Job Link Program; Family Life Community
                                    Network project; 21st Century Community Learning
                                    Centers; Better Days for Youth and Nuevos Futuros
                                    program; and the Employer Assisted Housing Program.


                                              Page 5                                99-CH-259-1002
Finding 1


                                    The City of Chicago did not maintain adequate oversight for
  Oversight Of Zone Funds
                                    nine of the 26 activities we reviewed. Specifically, the City
  Was Not Adequate
                                    used $670,417 of Empowerment Zone funds and was billed
                                    another $121,590 for services that did not benefit Zone
                                    residents, and did not have documentation to support that
                                    $892,484 Zone funds paid and $120,012 billed to the City
                                    benefited Zone residents or were reasonable and necessary
                                    expenses. The following table shows the amount of
                                    inappropriate and unsupported Zone funds for the nine
                                    activities and the page number where a detailed summary of
                                    each activity is located:

                                                                      No Support For
                                                                        Benefit Or
                                                          No          Reasonableness  Page
                                    Activity            Benefit        And Necessity Number
                              Mexican Fine Arts          $186,396      $   607,606        38
                               Job Link Program           148,622          340,165        43
                             Family Life Network          123,321            3,717        48
                             21st Century Centers         114,755                0        52
                             Better Days for Youth        113,686            7,540        56
                              Employer Housing             43,653            8,468        61
                             Northwest Industrial          36,171                0        66
                         Community Services West           25,403                0        69
                            Storehouse Distributions              0        45,000         73
                                    TOTAL                $792,007       $1,012,496

                                    The Mexican Fine Arts Museum Expansion project
 Empowerment Zone                   inappropriately expensed $186,396 to the Empowerment
 Funds Did Not Benefit              Zone Program. The City paid the project $148,756 of
 Zone Residents                     Empowerment Zone funds for services that did not benefit
                                    Zone residents. The Museum’s contract and the City’s
                                    Strategic Plan required the services to be provided to Zone
                                    residents. Specifically, the Museum used $85,057 of
                                    Empowerment Zone funds to pay non-Zone youths through
                                    March 1998. The Museum also used $63,699 of Zone funds
                                    to pay 100 percent of seven employees’ salaries and benefits
                                    when the employees did not spend all of their time working on
                                    the project. Additionally, the Museum submitted invoices
                                    totaling $37,640 to pay non-Zone youths ($24,654) and

99-CH-259-1002                              Page 6
                                                        Finding 1


employees’ salaries ($12,986) from April to June 1998. As
of July 31, 1998, the invoices had not been paid.

The Job Link Program used $148,622 of Empowerment
Zone funds to pay for job placement services ($60,769) and
job skills training ($87,853) to non-Zone residents.
However, Job Link’s contract and the City’s Strategic Plan
required Job Link to provide services to Zone residents.

The Family Life Community Network project used $123,321
of Empowerment Zone funds to provide career and educational
services to non-Zone youths. The City’s Strategic Plan and the
project’s contract required the services to be provided to Zone
residents. During a monitoring review in October 1997, the
City’s Department of Human Services identified that the
project was not providing services to Zone youths as required.
However, the Department did not take corrective action nor
did it notify the appropriate City staff administering the
Empowerment Zone Program. The City did not have policies
or procedures to share information on problems identified by
various City departments during monitoring reviews.

The 21st Century Community Learning Centers used $114,755
of Empowerment Zone funds to establish learning centers at 10
schools not located within the Zone. The City’s Strategic Plan
and the Centers’ contract required that the learning centers be
established at schools within the Empowerment Zone. During
the term of the contract, there were at least 33 additional
schools in the Empowerment Zone that could have participated
in the program. The City encouraged the Board of Education,
the Centers’ administering entity, to establish training centers at
schools located outside of the Zone.

The City executed a contract with Chicago Commons
Association, the administering entity for the Better Days for
Youth and Nuevos Futuros program, to provide services to
Empowerment Zone residents. However, the program used
$48,219 of Zone funds for career and educational services
($47,294) and employment stipends ($925) to non-Zone
residents. Additionally, the program submitted invoices
totaling $65,467, which had not been paid, for additional
educational services ($37,023) and employment stipends
($28,444) to non-Zone residents.




            Page 7                                99-CH-259-1002
Finding 1


                         The Employer Assisted Housing Program inappropriately
                         used $25,170 of Empowerment Zone funds for home
                         ownership services ($22,170) and construction repairs
                         ($3,000). The services did not support the goal of
                         promoting and supporting home ownership in the Zone as
                         required by the Program’s contract and the City’s Strategic
                         Plan. The construction repairs were made to a house not
                         related to the Program. Additionally, the Program submitted
                         invoices requesting $18,483 of Zone funds to pay two of its
                         employees when the two employees did not work on the
                         Program during the time period of the invoices.

                         The Northwest Industrial Corridor program used $30,107
                         of Empowerment Zone funds to pay for the services of an
                         Administrative Assistant. However, the Assistant had never
                         worked on the program. The City also inappropriately used
                         $6,064 of Empowerment Zone funds for lead abatement
                         removal services that were not part of the Northwest
                         Industrial Corridor program.

                         The City advanced Bethel New Life, the administering entity
                         for the Community Services West Workforce and Life
                         Preparation program, $25,403 of Empowerment Zone
                         funds. However, Bethel did not perform any of the services
                         required by its contract with the City. Bethel New Life used
                         the Empowerment Zone funds for operations that were not
                         related to the program.

                         The Mexican Fine Arts Center Museum used $502,078 of
 Documentation Did Not   Empowerment Zone funds for 21 employees’ salaries.
 Exist To Show           However, there was no supporting documentation to show that
 Empowerment Zone        the employees’ services benefited the Empowerment Zone
 Funds Benefited Zone    Program. Additionally, the Museum submitted an invoice
 Residents               requesting reimbursement for another $105,528 for the 21
                         employees’ salaries during April to June 1998. The invoice had
                         not been paid as of July 31, 1998.

                         The City paid the Job Link Program $340,165 of
                         Empowerment Zone funds to provide services to Zone
                         residents. The Program used Zone funds for job placement
                         services ($125,166), job skills training ($1,515), and
                         miscellaneous services ($213,484). Neither the City nor the
                         Program had documentation to show the services benefited
                         Zone residents.


99-CH-259-1002                   Page 8
                                                                               Finding 1


                           The City and the Family Life Community Network project did
                           not have documentation to support that $3,717 of
                           Empowerment Zone funds were used to provide career and
                           educational services to Zone residents. The City’s Strategic
                           Plan and the project’s contract required the services to be
                           provided to Zone residents.

                           The City and the Better Days for Youth and Nuevos Futuros
                           program did not have documentation to show that
                           Empowerment Zone residents benefited from $1,524 in Zone
                           funds used for the career and educational services ($1,359) and
                           employment stipends ($165). Additionally, the program lacked
                           supporting documentation to show that Zone residents were
                           the recipients of $6,016 in outreach services ($1,064) and
                           employment stipends ($4,952) that had been billed to the City
                           but not paid.

                           The Employers Assisted Housing Program requested $8,468 of
                           Empowerment Zone funds to pay 100 percent of the
                           Program’s Project Director’s salary, payroll taxes, and health
                           insurance benefits from January 1 to March 31, 1998.
                           However, the Project Director did not spend all of her time
                           working on the Program. The City and the Program did not
                           have documentation to show the time spent by the Project
                           Director on the Program.

                           The City reimbursed The Storehouse Distribution Center
                           project $45,000 for the Administrative Director, Warehouse
                           Manager, and the Corporate Relations Manager’s salaries.
                           However, the City and the Distribution Center did not maintain
                           documentation that identified the employees’ time spent on the
                           project or other activities.

                           The problems occurred because the City did not have an
                           adequate monitoring system for its Empowerment Zone
                           activities that ensured the use of Zone funds benefited Zone
                           residents. The City also inappropriately encouraged an
                           administering entity, the Chicago Board of Education, to
                           provide services outside of the Zone.


                           The Empowerment Zone Program was established to
Empowerment Zones
                           stimulate the creation of new jobs, particularly for the
Were Intended To Benefit
                           disadvantaged and long-term unemployed, and to promote
Zone Residents
                           revitalization of economically distressed areas. The United

                                      Page 9                              99-CH-259-1002
Finding 1


                    States Code requires that Empowerment Zone funds must
                    be used in accordance with the Strategic Plan and for
                    activities that benefit Zone residents.

                    To effectively accomplish the Empowerment Zone
                    Program’s objectives, Zone resources need to be spent in
                    the nominated area and to the benefit of Zone residents to
                    the maximum extent possible. Where the nature of an
                    activity is such that it affects both Empowerment Zone and
                    non-Zone residents, such as the creation of a grocery store,
                    then the City needs to demonstrate that the activity
                    primarily benefits Zone residents. Because the City did not
                    adequately monitor its Empowerment Zone activities to
                    ensure that the activities benefited Zone residents to the
                    maximum extent possible, the impact of the Empowerment
                    Zone expenditures on Zone residents was diminished.

                    The funds that were not efficiently and effectively used were
                    Title 20 funds from the Department of Health and Human
                    Services. Since all Federal officials have a fiduciary
                    responsibility to ensure the efficient and effective use of
                    Federal funds, we recommend that the funds that were not
                    appropriately used or supported be reimbursed to the
                    Empowerment Zone Program. Reimbursement to the
                    Program should not impede the goals of the Empowerment
                    Zone Program since the funds will be available for
                    appropriate Zone activities.


                    Excerpts from the City of Chicago’s comments on our draft
 Auditee Comments   finding follow. Appendix C, page 81, contains the complete
                    text of the comments.

                    The monitoring improvements being implemented reflect a
                    policy of containment of problematic contracts from the
                    Chicago Empowerment Zone’s first funding cycle,
                    introduction of new monitoring requirements for first
                    funding cycle contracts that have not yet been executed;
                    and, incorporation of new monitoring requirements up-front
                    – as part of the application process – for the second funding
                    cycle.

                    The specific improvements made to the original monitoring
                    and reporting requirements include:


99-CH-259-1002              Page 10
                                                                         Finding 1


                    1.    Clear procedures to tie distribution of funds to actual
                          performance of subrecipients

                    2.    Standardization of previously problematic definitions,
                          such as primarily serving Empowerment Zone
                          residents, leveraged funds, job creation, etc.

                    3.    Increased coordination with and cooperation from
                          lead agencies within the City regarding monitoring
                          (i.e., increased utilization of existing expertise and
                          relationships with subrecipients)

                    4.    Budgeting for the hiring of two additional
                          Empowerment Zone staff in Fiscal Year 1999 for
                          monitoring activities

                    5.    Revised procedures for granting advances, consistent
                          with HUD’s Cash Management Improvement Act

                    6.    Immediate initiation of corrective actions against
                          subrecipients who are out of compliance.

                    The Chicago Empowerment Zone staff currently is
                    conducting site visits with all Empowerment Zone
                    subrecipients.      Those subrecipients that are not in
                    compliance with their contracts face several possible
                    consequences. Per the contract with the subrecipients, the
                    City of Chicago may invoke any or all of the following
                    remedies: the right to take over and complete the services;
                    the right to terminate the agreement; the right of specific
                    performance, and injunction or other appropriate equitable
                    remedy; monetary damages; the right to deem the
                    contractor non-responsible in future contracts awarded by
                    the City; and the right to demand a refund of any funds not
                    used in accordance with the terms of the agreement. When
                    the results of the staff analyses are complete -- consistent
                    with appropriate definitions of applicable terms -- we will
                    initiate all necessary corrective actions.

                    The City indicated that it is implementing improvements to: (1)
OIG Evaluation of   tie the distribution of funds to the actual performance by
Auditee Comments    subrecipients; (2) standardize problematic definitions; (3)
                    increase coordination and cooperation from the City’s lead
                    agencies; (4) hire two additional Zone staff for monitoring
                    activities; (5) revise procedures for granting advances; and (6)

                              Page 11                               99-CH-259-1002
Finding 1


                     initiate corrective actions against subrecipients who are out of
                     compliance. The City’s actions should improve the oversight
                     of Empowerment Zone funds, if the City properly implements
                     and enforces its improvements. The City’s improvements to
                     remedy any non-compliance issues need to include
                     reimbursement by the City to the Empowerment Zone Program
                     from non-Federal funds for the inappropriate or unsupported
                     use of Zone funds.


                     The HUD Inspector General audit team indicates that
 Auditee Comments    Empowerment Zone funds may be used only for the benefit
                     of Zone residents. Chicago’s Empowerment Zone, in
                     consultation with HUD’s Empowerment Zone Program
                     Office, has proceeded on the basis that the use of Zone
                     funds should benefit Zone residents primarily. HUD’s
                     Empowerment Zone Program Coordinator confirmed this
                     interpretation at the audit exit conference in Chicago on
                     August 18. In fact, the instruction distributed by HUD with
                     the round II designation application forms, states all
                     programs, services, and activities financed in whole or in
                     part with round II funds must be structured to benefit Zone
                     residents primarily; the programs, services and activities
                     may also benefit nonresidents.

                     The initial working assumption of benefit shared by HUD
                     and Chicago’s Empowerment Zone as a round I designee
                     has been confirmed in the round II instructions.

                     We believe that the auditors have too narrowly defined the
                     term benefit. Two types of activities identified by the
                     auditors as problematic – new housing development and
                     the expansion of an important cultural institution in the
                     Empowerment Zone – benefit Zone residents in numerous
                     ways, including bringing new money into the local economy,
                     new amenities into the neighborhood, and by improving
                     previously undeveloped or under-used properties. In
                     addition, both activities are consistent with the Strategic
                     Plan for Chicago’s Empowerment Zone. Under the audit
                     team’s overly narrow definition, these very real and
                     meaningful benefits would not be considered to flow from
                     the Empowerment Zone Program.

 OIG Evaluation of   HUD’s regulations and the City’s contracts required the
 Auditee Comments    activities to benefit Empowerment Zone residents. For the

99-CH-259-1002               Page 12
                                                                               Finding 1


                        purpose of this audit, we concluded activities did not benefit
                        Empowerment Zone residents if the activities served less than
                        51 percent of Zone residents, or if the activities did not provide
                        benefits to Zone residents when the activity’s administrators
                        had control over who received the benefit of the services.
                        Since the activities had control over who received the benefits
                        of their services, they should have provided the services to
                        Zone residents. HUD’s Coordinator of the EZ/EC Initiative
                        said his comments that Empowerment Zone funds should
                        primarily benefit Zone residents does not relieve the City from
                        its contractual obligations to serve just Zone residents. We
                        adjusted our audit findings to remove the requirement that
                        services be provided to only Zone residents.


                        The auditors assumption that the City lost the opportunity
    Auditee Comments    to use funds for other activities when first cycle
                        subrecipients did not implement approved projects in a
                        timely manner was in error. Chicago’s Empowerment Zone
                        did not allocate all available funds during the first funding
                        cycle of the 10-year Empowerment Zone Program. No
                        Zone activity has been stalled for lack of funding
                        availability.

                        The auditors’ opinion that commingling of funds is not
                        allowed is inconsistent with the Office of Management and
                        Budget’s regulations which clearly allow subrecipients to
                        combine funds for several different programs in one account
                        provided the agency maintains an accurate account of
                        project funds.

    OIG Evaluation of   We determined that Bethel New Life, the administering entity
    Auditee Comments    for the Community Services West Workforce and Life
                        Preparation program, used Empowerment Zone funds for
                        services that were not related to the program. We explained in
                        our finding that Bethel New Life commingled Zone funds with
                        other funds; however, we did not take exception to this since
                        Bethel properly accounted for the funds.
.
                        Our conclusion that the City lost the opportunity to use funds
                        for other activities is based on the fact that the City
                        inappropriately used Zone funds and until the funds are
                        reimbursed to the Empowerment Zone Program, the funds are
                        not available for appropriate Zone activities.


                                   Page 13                                99-CH-259-1002
Finding 1



                     We disagree with the auditors’ opinion that a subrecipient
 Auditee Comments    receiving funds for staff salaries must document that a
                     specified percentage of a staff person’s time funded by an
                     Empowerment Zone grant was actually spent on the Zone
                     project. In the case cited by the audit team, the subrecipient
                     performed all tasks/deliverables in less time than it had
                     anticipated. Barring an unreasonable estimate of time to
                     perform agreed upon services, we should not seek to
                     penalize staff of a subrecipient for being efficient.
                     Empowerment Zone staff will, of course, be diligent in
                     reviewing subrecipients’ estimates of staff time needed to
                     perform required tasks and produce required deliverables.

                     We acknowledge that the subrecipient exceeded its
 OIG Evaluation of   deliverables; however, the administering entity could not
 Auditee Comments    support that the salary reimbursements were reasonable and
                     necessary to provide the deliverables. We believe the City
                     needs to provide documentation to support the reasonableness
                     and necessity of the expenses paid with Zone funds or
                     reimburse the Empowerment Zone Program from non-Federal
                     funds.



 Recommendations     We recommend that the Coordinator of the EZ/EC Initiative,
                     in conjunction with officials from the Department of Health and
                     Human Services, assure the City of Chicago:

                     1A.    Reimburses the Empowerment Zone Program
                            $645,014 from non-Federal funds that the Mexican
                            Fine Arts Center ($148,756), Job Link Program
                            ($148,622), Family Life Community Network
                            ($123,321), 21st Century Community Learning Centers
                            ($114,755), Better Days for Youth and Nuevos
                            Futuros ($48,219), Employer Assisted Housing
                            ($25,170), and Northwest Industrial Corridor
                            ($36,171) inappropriately used for services provided to
                            non-Zone residents.

                     1B.    Does not use $121,590 of Empowerment Zone funds
                            to reimburse the Mexican Fine Arts Center ($37,640),
                            Better Days for Youth and Nuevos Futuros ($65,467),
                            and Employer Assisted Housing ($18,483) for services
                            billed but provided to non-Zone residents.


99-CH-259-1002               Page 14
                                                   Finding 1


1C.   Requires Bethel New Life to immediately initiate the
      Community Services West Workforce and Life
      Preparation program or reimburse the Empowerment
      Zone Program $25,403 from non-Federal funds for the
      advance to Bethel.

1D.   Provides documentation to support that the Mexican
      Fine Arts Center Program ($502,078), the Job Link
      Program ($340,165), Family Life Community Network
      ($3,717), the Better Days for Youth and Nuevos
      Futuros ($1,524), and the Storehouse Distribution
      Center Program ($45,000) used $892,484 of
      Empowerment Zone funds to benefit Zone residents. If
      adequate documentation cannot be provided, then
      reimburse the Empowerment Zone Program from non-
      Federal funds.

1E.   Does not use $120,012 of Empowerment Zone funds
      to reimburse the Mexican Fine Arts Center ($105,528),
      Better Days for Youth and Nuevos Futuros ($6,016),
      and Employer Assisted Housing ($8,468) for services
      billed without documentation to support that the funds
      were used to benefit Zone residents.

1F.   Establishes procedures and controls to monitor
      activities under the Empowerment Zone Program to
      ensure that monies are used efficiently and effectively.

1G.   Requires the activities’ administering entities to
      maintain documentation to show that Empowerment
      Zone funds are used to benefit Zone residents.

1H.   Establishes procedures and controls to ensure that
      corrective action is taken in regard to grantees who do
      not provide the required services.




        Page 15                               99-CH-259-1002
                                                                                             Finding 2


       The City Overstated Estimated Leveraged
            Funding by Over $143 Million
The City of Chicago overstated the amount of estimated leveraged funds in the June 1997 Performance
Review. The Review’s Attachments estimated that the City’s 84 Empowerment Zone activities should
leverage $176.1 million. However, supporting documentation included with the Review showed the
84 activities would only leverage $36.6 million, a difference of $139.5 million. The information was
presented so it appeared that the $176.1 million shown in the Attachments was the total of the
supporting documentation. The City also overstated the projected funding by $3.7 million for 12 of 49
activities for which the City requested funding confirmations. As a result, the City overstated the
projected leveraged funding by $143.2 million ($139.5 million + $3.7 million). The problem occurred
because: (1) the City’s reporting process lacked effective oversight and controls to ensure the accuracy
of information presented in the Performance Review; and (2) the City’s staff used outdated information
to complete the financial sections of the Review. Since the amount of leveraged funding is an
important indicator of the Empowerment Zone Program’s success, the inaccurate information
presented a false impression of the Program’s benefits.


                                       Page 4 of the June 23, 1997 EZ/EC Performance Review
 HUD’s Requirements                    instructions issued by HUD states for funding, Empowerment
                                       Zones should describe the major sources of funding, the
                                       amounts, and the status of the commitment at the time the
                                       report is submitted.

                                       The City overstated the amount of estimated leveraged funding
 The City Overstated                   for its 84 Empowerment Zone activities by $143,230,803. The
 Estimated Leveraged                   City reported, in Attachments 2 and 3 of the 1997 Performance
 Funds                                 Review, that the estimated leveraged funding for the activities
                                       was $176,142,458. However, the supporting documentation
                                       included with the Review showed that the leveraged funds for
                                       the activities totaled only $36,657,669, a difference of
                                       $139,484,789. The Attachments were presented in a manner
                                       that lead the reader to conclude the total of the projected
                                       leveraged funds on Attachments 2 and 3 was a summarization
                                       of the supporting information.

                                       Based upon the City’s June 1997 Performance Review, HUD’s
                                       Illinois State Office of Community Planning and Development
                                       used inaccurate information to assess the City’s Empowerment
                                       Zone performance. HUD’s progress report dated November 7,
                                       1997 showed that $43 million of Empowerment Zone funds
                                       would leverage $176 million from public and private agencies.


                                                 Page 17                                99-CH-259-1002
Finding 2


                 The following graph shows the relationship between the total
                 of leveraged funds in Attachments 2 and 3 and the total from
                 the supporting documents:


                                     Estimated Leveraged Funding
                                       1997 Performance Review

                               180
                               160                     $176,142,458
                               140
                               120




                     Million
                               100
                                80
                                60
                                                                      $36,657,669
                                40
                                20
                                 0
                                         Attachments                  Supporting
                                             2&3                      Documents



                 In addition, the $36,657,669 in leveraged funds reported in the
                 supporting documentation was not accurate. The City sent a
                 survey to 49 Empowerment Zone activities to confirm the
                 status and funding source information for the Performance
                 Review. The City could not explain why the survey was not
                 sent to all 84 Zone activities. Thirty-eight of the 49 Zone
                 activities submitted confirmations to the City. We compared
                 the data in the confirmations with the information shown in the
                 Review and identified inconsistencies for 12 of the 38 activities.
                 The net effect of the inconsistencies was that the estimated
                 leveraged funding was $3,746,014 more than the amount of
                 leveraged funds confirmed by the activities. As a result,
                 leveraged funding was overstated a total of $143,230,803
                 ($139,484,789 + $3,746,014). The City could not explain why
                 the information in the Review did not agree with the
                 confirmations for the 12 activities.

                 The Assistant Commissioner for the City’s Department of
                 Planning and Development said the City did not verify the
                 accuracy of any funding information submitted by the Zone
                 activities because of staff shortages. We believe the City had
                 adequate staff to verify the accuracy of information it presented
                 in its Review. The City had all eight budgeted staff positions
                 filled during the reporting year with the exception of one
                 position that was vacant for two and one-half months. At the
                 time the Review was prepared, the City was fully staffed and

99-CH-259-1002                 Page 18
                                                                            Finding 2


                        had four more individuals working under an internship
                        program.

                        The City’s Program Coordinator said the leveraged funding
Leveraged Funding       amounts reported in the 1997 Performance Review were
Amounts Were Based On   obtained from the activities’ original proposals because they
Outdated Information    were the best source of funding information when the Review
                        was prepared. However, the proposals were submitted to the
                        City in December 1995. As of June 30, 1997, the funding
                        information was at least nineteen months old and the
                        confirmations of funding information that the City had received
                        indicated some of the information was not accurate. The City
                        also lacked adequate supervisory oversight to ensure the
                        accuracy and reliability of the Performance Review.


                        Excerpts from the City of Chicago’s comments on our draft
Auditee Comments        finding follow. Appendix C, page 92, contains the complete
                        text of the comments.

                        At the time the 1997 Performance Review was submitted,
                        the best funding estimates available were either from the
                        original proposals submitted by subrecipients or from the
                        investment worksheet collected from subrecipients between
                        the date HUD issued the Performance Review instructions
                        (June 23, 1997) and the date the Performance Review was
                        due to HUD (July 30, 1997). In the future, subrecipients’
                        reports will be verified by Empowerment Zone staff to
                        ensure accurate reporting of leveraged funds.

                        Procedures and controls have been established to ensure
                        accurate reporting of funding amounts and commitments
                        consistent with HUD’s instructions and to verify the
                        accuracy of information submitted to HUD. The specific
                        improvements made by the Chicago Empowerment Zone to
                        the original monitoring and reporting requirements include
                        training of all Empowerment Zone staff and lead agency staff
                        involved in monitoring and reporting regarding HUD’s
                        reporting procedures.




                        The City’s actions to establish procedures and controls should
OIG Evaluation of       improve reporting accuracy, if the procedures and controls
Auditee Comments        adequately address HUD’s Performance Review instructions
                                   Page 19                             99-CH-259-1002
Finding 2


                   and require verification of the accuracy of information provided
                   to HUD.       The City’s training should address HUD’s
                   instructions for reporting current funding amounts and
                   commitments.


 Recommendations   We recommend that the Coordinator of the EZ/EC Initiative
                   assures that the City of Chicago:

                   2A.    Establishes procedures and controls to follow HUD’s
                          instructions and report current funding amounts and
                          commitments in Performance Reviews.

                   2B.    Establishes procedures and controls to verify the
                          accuracy of information submitted to HUD for the
                          Empowerment Zone Program.




99-CH-259-1002             Page 20
                                                                                                Finding 3


         Activities Were Incorrectly Reported As
             Empowerment Zone Activities
The City of Chicago incorrectly reported that 15 of 84 activities in its June 30, 1997 Performance
Review were Empowerment Zone Program activities. The 15 activities were not located within the
City’s Federally-designated Empowerment Zone and received funding from the State of Illinois’
Enterprise Community grant. Because the City included the 15 activities in the Performance Review,
over $7 million in funding was incorrectly reported as leveraged funds. The problem occurred because
the City’s reporting process lacked effective oversight and controls to ensure the validity and reliability
of the information included in the Performance Review. As a result, the City did not accurately report
to HUD its Empowerment Zone Program’s accomplishments, which created the impression that the
benefits of the Program were greater than actually achieved.


                                         Page 3 of the December 21, 1994 Memorandum of Agreement
 HUD’s Requirements                      between HUD and the City of Chicago requires the City to
                                         submit reports to HUD on the progress made in carrying out
                                         activities specified in the Strategic Plan for the Empowerment
                                         Zone Program.

                                         The City of Chicago incorrectly reported that 15 of the 84
  City Incorrectly Reported
                                         activities in the June 1997 Performance Review were
  15 Projects As Zone
                                         Empowerment Zone activities. The 15 activities were not
  Activities
                                         located within the City’s Federally-designated Empowerment
                                         Zone. Because the City included the 15 activities in the
                                         Performance Review, over $7 million in leveraged funding was
                                         incorrectly reported as leveraged Zone funds. The following
                                         chart lists the 15 activities and their reported funding levels:




                                                                                              Funding
                                                         Activity Name
                                          Arts Business Incubator                             $693,000

                                                  Page 21                                  99-CH-259-1002
Finding 3


                     Chicago Neighborhood Plan Program                  712,925
                     Self-Sufficiency Project                            34,300
                     Holistic Connection                                 77,142
                     Youth Economic Alternatives                      1,087,449
                     Linking to the Service Delivery Network            544,000
                     Brownfields Redevelopment Institute                602,188
                     Woodworker/Shipping Training                       600,000
                     Expansion of Services for Connections of
                       Adult Learning Center                             91,300
                     Fresh Start Program                                106,750
                     Comprehensive Service Delivery Network             250,931
                     Street Intervention Program                        286,140
                     Duncan YMCA Children’s Arts & Education          1,882,667
                     Vocational Education & Community
                       Development Program                             181,866
                     Violence Prevention Program                        55,251
                                   Total                            $7,205,909

                    The inaccurate reporting by the City also occurred in the June
                    1996 Performance Review.

                    The errors occurred because the individual who prepared the
                    City’s June 1997 Performance Review did not recognize that
                    the Enterprise Community activities were not part of the
                    Federally-designated Empowerment Zone Program. HUD’s
                    instructions cover both Federally-designated Empowerment
                    Zones and Enterprise Communities; therefore, the City of
                    Chicago included both Zone and Enterprise Community
                    activities in the 1996 and 1997 Performance Reviews. The
                    City’s Performance Reviews to HUD should not have included
                    the Enterprise Community activities since the activities were
                    located outside of the Federally-designated Zone. The
                    Assistant Commissioner for the City’s Department of Planning
                    and Development said the City’s management staff, who was
                    responsible for administering the Empowerment Zone Program
                    and the State Enterprise grant, did not examine the
                    Performance Reviews for accuracy.         As a result, the
                    accomplishments of the Empowerment Zone Program were
                    not accurately reported to HUD and an impression was created
                    that the benefits of the Program were greater than actually
                    achieved.

                    Excerpts from the City of Chicago’s comments on our draft
 Auditee Comments   finding follow. Appendix C, page 90, contains the complete
                    text of the comments.

99-CH-259-1002              Page 22
                                                                         Finding 3



                    Fourteen (not 15) of the 84 activities in the 1997
                    Performance Review were located in Chicago’s three
                    Enterprise Communities (not a designated Enterprise
                    Community under the Federal program), rather than one of
                    the three clusters of the Chicago Empowerment Zone.
                    Evaluations conducted to date confirm that several of the 14
                    Enterprise Community activities benefit Empowerment
                    Zone residents, based on clients served lists or the agency’s
                    reporting of the geographic area they served. Contrary to
                    the audit team’s report, the Chicago Empowerment Zone
                    recognizes that the Enterprise Communities are not a part of
                    the Empowerment Zone Program, hence: two sets of
                    boilerplate contracts, two systems for assigning contract
                    numbers, two systems for assigning fund numbers, two
                    monthly expenditure reporting systems to the State, and two
                    sets of community representatives on the Coordinating
                    Council.

                    Procedures and controls have been established to ensure
                    that only Empowerment Zone activities are reported to
                    HUD and to verify the accuracy of information submitted to
                    HUD. The specific improvements made by the Chicago
                    Empowerment Zone to the original monitoring and
                    reporting requirements include training of all Empowerment
                    Zone staff and lead agency staff involved in monitoring and
                    reporting regarding HUD’s reporting procedures, and clear
                    separation of activities funded by Federal Empowerment
                    Zone dollars from Empowerment Zone and Enterprise
                    Community activities funded by State dollars.


                    The City did not indicate which one of the 15 activities that we
OIG Evaluation of   reported as a non-Zone activity it believed was an
Auditee Comments    Empowerment Zone activity. Our review showed that the City
                    reported 15 State Enterprise Community activities as
                    Empowerment Zone activities in the June 1997 Performance
                    Review even though the activities were located outside of the
                    Federally-designated Empowerment Zone area.
                    We agree that the City knew Enterprise Community activities
                    were not part of the Empowerment Zone Program. However,
                    the person who prepared the Performance Review did not
                    recognize the difference. We adjusted the wording in our
                    finding to indicate that the individual who prepared the
                    Performance Review was unaware of the difference.

                              Page 23                               99-CH-259-1002
Finding 3



                   We do not disagree that an Enterprise Community activity that
                   occurs within the Empowerment Zone may benefit Zone
                   residents, or that the benefit can be reported as a positive action
                   occurring in the Zone. However, the source of the benefit
                   should be clearly shown so that HUD can accurately assess the
                   progress of the Empowerment Zone Program. The City
                   reported its Enterprise Community activities’ funding and
                   progress as if they were part of the Empowerment Zone
                   Program.

                   The City’s actions to establish procedures and controls should
                   improve reporting accuracy, if the procedures and controls
                   adequately address HUD’s Performance Review instructions
                   and require verification of the accuracy of information provided
                   to HUD.       The City’s training should address HUD’s
                   instructions for reporting Empowerment Zone activities to
                   HUD.


 Recommendations   We recommend that the Coordinator of the EZ/EC Initiative
                   assures that the City of Chicago:

                   3A.     Establishes procedures and controls to only report
                           Empowerment Zone Program activities to HUD.

                   3B.     Establishes procedures and controls to verify the
                           accuracy of information submitted to HUD for the
                           Empowerment Zone Program.




99-CH-259-1002              Page 24
                                                                                         Finding 4


       The City Inaccurately Reported The
   Accomplishments Of Its Empowerment Zone
                   Activities
The City of Chicago incorrectly reported the actual status and progress for 11 of the 26 activities
we reviewed from the June 30, 1997 Performance Review. The Review contained inaccuracies
related to: nine activities’ performance measures; nine activities’ funding; six activities’
performance milestones; and two activities’ participating entities. The inaccuracies occurred
because the City did not: (1) use the actual accomplishments submitted by the activities’
administering entities; (2) verify the accuracy of the information included in the Performance
Review; or (3) obtain the status of the activities from the administering entities. As a result, the
City did not accurately report the accomplishments of its Empowerment Zone Program to HUD. The
impression exists that the benefits of the City’s Empowerment Zone Program were greater than
actually achieved.


                                      Page 3 of the December 21, 1994 Memorandum of Agreement
  HUD’s Requirements                  between HUD and the City of Chicago requires the City to
                                      submit reports to HUD on the progress made in carrying out
                                      activities specified in the Strategic Plan. Page 3 of the
                                      Agreement also requires the City to provide HUD with a
                                      narrative summarizing the progress made and obstacles
                                      encountered in carrying out the Plan during each year of
                                      designation.

                                      The 1997 EZ/EC Performance Review instructions issued by
                                      HUD on June 23, 1997, page 4, state for performance
                                      measures, Empowerment Zones will report the final products
                                      produced or other measurable outcomes of the activity. Zones
                                      should describe: the major sources of funding, the amounts,
                                      and the status of the commitment at the time the report is
                                      submitted; and the major entities responsible for financing,
                                      managing, and operating the activity. For performance
                                      milestones, Empowerment Zones should also report both
                                      projected and actual dates for key interim actions that will
                                      result in the completion of the activity.

                                      The City of Chicago inaccurately reported the
  The City Incorrectly
                                      accomplishments for 11 of the 26 activities we reviewed
  Reported The Progress Of
                                      from the June 1997 Performance Review. The remaining 15
  Empowerment Zone
                                      activities although reported as Empowerment Zone
  Activities
                                      activities were not (see Finding 3). The following table

                                               Page 25                               99-CH-259-1002
Finding 4


                                     shows the incorrect reporting by performance category for
                                     the 11 activities and the page number where a detailed
                                     summary for each activity is located:

                                                                       Participating     Page
                  Activity         Measures Funding Milestones           Entities       Number
             Mexican Fine Arts        X           X                                        38
                 Job Link             X           X           X                            43
            Family Life Network       X                       X                            48
            21st Century Centers      X           X           X                            52
            Better Days/ Nuevos       X           X           X                            56
                  Futuros
             Employer Assisted        X           X           X              X             61
                 Housing
            Northwest Industrial      X           X           X                            66
              Workforce/Life                      X                          X             69
               Preparation
                Storehouse            X                                                    73
               Distributions
            Community Youth           X           X                                        76
               Network
                West Side                         X                                        79
               Rehabilitation
                   Totals             9           9           6              2

                                     The City incorrectly reported the performance measures for
  The City Inaccurately              nine activities. Performance measures are the final products
  Reported Activities’               produced or other measurable outcomes of the activity. For
  Performance Measures               example, the City reported in the June 1997 Performance
                                     Review that the Northwest Industrial Corridor program was
                                     expected to assist 105 individuals to obtain employment and
                                     place at least 100 Empowerment Zone residents in jobs.
                                     However, the two performance measures were being
                                     performed by another Empowerment Zone activity, the Job
                                     Link Program. Since the projections were reported by both
                                     programs, the impression exists that more individuals will be
                                     assisted than actually planned.




99-CH-259-1002                               Page 26
                                                                                       Finding 4


                                  The Performance Review also showed that one of the
                                  Northwest Industrial Corridor program’s performance
                                  measures was to advise 50 businesses of the wage tax
                                  credits available under the Empowerment Zone Program.
                                  As of June 1997, the City did not report any
                                  accomplishments for this measure. Bethel New Life, the
                                  program’s administering entity, had documentation in its
                                  files that showed 17 businesses had been informed of the tax
                                  credits by June 30, 1997.

                                  The City over reported nine activities’ funding in the June 1997
The City Over Reported            Performance Review. Funding consists of Empowerment
The Activities’ Funding           Zone monies, non-Zone Federal funds, State and local funds,
By Over $2 Million                private donations, and in-kind contributions. The Performance
                                  Review showed that the funding for the nine activities included
                                  $7,902,290; however, the activities’ funding included
                                  $5,674,238 as of June 30, 1997. The net affect was an over
                                  reporting of $2,228,052. The City also overstated the
                                  projected leveraged funding for its Empowerment Zone
                                  Program by over $143 million (see Finding 2). The following
                                  table shows the incorrect reporting by activity:

                                                         Amount          Amount Over/Under
                                Activity                 Reported       Supported Reported
                           Mexican Fine Arts            $           0 $ 544,400 $ (544,400)
                               Job Link                     1,000,000        2,500       997,500
                          21st Century Centers               416,000      953,674      (537,674)
                    Better Days/ Nuevos Futuros              143,799       48,779         95,020
                     Employer Assisted Housing              $210,000            $0     $210,000
                          Northwest Industrial               600,000             0       600,000
                    Workforce/Life Preparation               271,211             0       271,211
                    Community Youth Network                  261,300      224,885         36,415
                      West Side Rehabilitation              5,000,000   3,900,000      1,100,000
                                 Totals                 $7,902,310 $5,674,238        $2,228,072

                                  Because of inaccurate reporting, a false impression was created
                                  that more funds were committed to the activities than actually
                                  were. Since one of the measures of success for the
                                  Empowerment Zone Program is to leverage funds and
                                  contributions, we believe it is imperative that the City
                                  accurately reports the funding of its activities.

                                            Page 27                               99-CH-259-1002
Finding 4



                             The City inaccurately reported six activities’ performance
  The City Incorrectly       milestones. Performance milestones are the key interim actions
  Reported The Activities’   that will result in the completion of the activity. For example,
  Performance Milestones     the City inaccurately reported the 21st Century Community
                             Learning Centers’ performance milestones. The City did
                             not report that 19 of 21 project milestones for the
                             Community Learning Centers were completed. The Centers
                             informed the City in the January 31, 1997 progress report
                             that the 19 milestones were completed. As a result, HUD
                             was not provided an accurate picture of the Centers’
                             progress.

                             The City inaccurately reported two activities’ participating
  The City Incorrectly       entities. Participating entities are the major entities responsible
  Reported Participating     for financing, managing, and operating an activity. The City
  Entities                   reported that Heinz Neighborhood Development was a
                             participating entity in the Employer Assisted Housing Program.
                             However, the Vice President of Development for Bethel
                             New Life, the Program’s administering entity, said she was
                             not familiar with Heinz Neighborhood Development. The
                             City used information included in the Program’s proposal to
                             report the projected participating entities in the Performance
                             Review.

                             The City also reported that the Polk Brothers Foundation,
                             MacArthur Foundation, and Surdna Foundation were
                             participating entities of the Community Services West
                             Workforce and Life Preparation program. The Senior Vice
                             President of Programs at Bethel New Life, the program’s
                             administering entity, said the three foundations were past
                             contributors and showed interest in the program, but did not
                             fund the program.

                             The incomplete and inaccurate reporting occurred because: (1)
                             inexperienced staff prepared the City’s Performance Review;
                             (2) the City did not request performance information; and (3)
                             the City’s management staff, who was responsible for the
                             administering the Empowerment Zone Program, did not
                             examine the Performance Review for accuracy. As a result, the
                             City did not accurately report the accomplishments of its
                             Empowerment Zone Program to HUD. The impression exists
                             that the benefits of the City’s Empowerment Zone Program
                             were greater than actually achieved.


99-CH-259-1002                        Page 28
                                                                      Finding 4



                    Excerpts from the City of Chicago’s comments on our draft
Auditee Comments    finding follow. Appendix C, page 81, contains the complete
                    text of the comments.

                    We acknowledge that mistakes were made in reporting in
                    our July 30, 1997 Performance Report (covering the period
                    July 1, 1996 through June 30, 1997). Fortunately, we
                    became aware of those problems and started to implement
                    solutions shortly after the 1997 Performance Report was
                    filed – long before the audit was announced.

                    Improvements to our reporting system already have been
                    implemented, which will result in accurate reporting of
                    accomplishments.      The reporting improvements being
                    implemented by the Chicago Empowerment Zone are the
                    introduction of new reporting requirements for first funding
                    cycle contracts that have not yet been executed, and
                    incorporation of the new reporting requirements up-front –
                    as part of the application process – for the second funding
                    cycle.

                    The specific improvements made to the original reporting
                    requirements (“the new system”) include:

                    1.    Clear communication of reporting requirements (both
                          substantive and procedural) to subrecipients and lead
                          agencies which have monitoring responsibilities

                    2.    Creation and distribution of standardized monitoring
                          and reporting forms -- to aid compliance and produce
                          results that permit apples-to-apples analysis and
                          reporting of accomplishments and leveraging

                    3.    Site visits by Empowerment Zone staff to every
                          subrecipient to determine/verify progress and status

                    4.    Training of all Empowerment Zone staff and lead
                          agency staff involved in reporting regarding HUD’s
                          reporting procedures.

                    We do not know when the City became aware of the
OIG Evaluation of   inaccuracies in its June 30, 1997 Performance Review.
Auditee Comments    However, the City took no action to inform HUD of the
                    inaccuracies or to prepare a corrected Performance Review.

                              Page 29                            99-CH-259-1002
Finding 4



                   The actions the City says it has planned or taken should
                   improve the reporting inaccuracies, if properly implemented
                   and followed. However, the City needs to establish procedures
                   and controls to ensure that the person who prepares the City’s
                   Performance Review to HUD uses the actual accomplishments
                   for each activity as provided by the administering officials. The
                   City also needs to amend the contract for the Northwest
                   Industrial Corridor Program to accurately reflect the
                   performance measures the administering entity is
                   responsible to complete.


                   We recommend that the Coordinator of the EZ/EC Initiative
 Recommendations   assures the City of Chicago:

                   4A.     Establishes procedures and controls to ensure that the
                           person who prepares the City’s Performance Review to
                           HUD uses the actual accomplishments for each activity
                           as provided by the administering officials.

                   4B.     Provides training on HUD’s reporting requirements
                           to the staff who are responsible for preparing the
                           Empowerment Zone Performance Review.

                   4C.     Establishes procedures and controls to verify the
                           accuracy of information submitted to HUD for the
                           Empowerment Zone Program.

                   4D.     Amends the contract for the Northwest Industrial
                           Corridor Program to accurately reflect the
                           performance measures the administering entity is
                           responsible to complete.




99-CH-259-1002             Page 30
Management Controls
In planning and performing our audit, we considered the management controls of the City of Chicago
in order to determine our auditing procedures, not to provide assurance on the 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 the systems for measuring, reporting, and
monitoring program performance.


                                       We determined the following management controls were
 Relevant Management
                                       relevant to our audit objectives:
 Controls

                                       ·   Program Operations - Policies and procedures that
                                           management has implemented to reasonably ensure that a
                                           program meets its objectives.

                                       ·   Validity and Reliability of Data - Policies and procedures
                                           that management has implemented to reasonably ensure
                                           that valid and reliable data are obtained, maintained, and
                                           fairly disclosed in reports.

                                       ·   Compliance with Laws and Regulations - Policies and
                                           procedures that management has implemented to
                                           reasonably ensure that resource use is consistent with laws
                                           and regulations.

                                       ·   Safeguarding Resources - Policies and procedures that
                                           management has implemented to reasonably ensure that
                                           resources are safeguarded against waste, loss, and misuse.

                                       We assessed all of the relevant controls identified above.

                                       It is a significant weakness if management controls do not
                                       provide reasonable assurance that the process for planning,
                                       organizing, directing, and controlling program operations will
                                       meet an organization’s objectives.

                                       Based on our review, we believe the following items are
 Significant Weaknesses
                                       significant weaknesses:




                                                Page 31                                 99-CH-259-1002
Management Controls


                      ·   Program Operations.

                          The City did not use all Empowerment Zone funds to
                          benefit Zone residents or the Zone (see Finding 1).

                      ·   Validity and Reliability of Data.

                          The City: overstated the estimated amount of leveraged
                          funding; inaccurately reported 15 activities as
                          Empowerment Zone activities when they were not; and
                          incorrectly reported the actual status and progress for
                          11 of the 26 activities we reviewed from the June 30,
                          1997 Performance Review (see Findings 2, 3, and 4).

                      ·   Compliance with Laws and Regulations.

                          The City did not follow the United States Code, HUD’s
                          regulations, and the City’s Strategic Plan.
                          Empowerment Zone funds were used that did not
                          benefit Zone residents and without supporting
                          documentation (see Finding 1).

                      ·   Safeguarding Resources.

                          The City: (1) inappropriately used $670,417 for services
                          from Empowerment Zone funds, and was billed
                          $121,590 for services provided, but the services did not
                          benefit Zone residents; and (2) lacked documentation to
                          show that $892,484 of Zone funds paid and $120,012
                          billed to the City benefited Zone residents or were
                          reasonable and necessary expenses (see Finding 1).




99-CH-259-1002                Page 32
Follow Up On Prior Audits
This is the first audit of the City of Chicago’s Empowerment Zone Program by HUD’s Office of
Inspector General. The latest single audit for the City covered the fiscal year ended December 31,
1996. The report contained 25 findings. None of the findings related to the Empowerment Zone
Program.




                                              Page 33                              99-CH-259-1002
                                                                                    Appendix A


Schedule Of Questioned Costs
         Recommendation                  Type of Questioned Costs
           Number                      Ineligible 1/ Unsupported 2/


            1A                          $645,014
            1B                           121,590
            1C                            25,403
            1D                                          $892,484
            1E                                           120,012
           Total                        $792,007      $1,012,496


1/   Ineligible costs are costs charged to a HUD program or activity that the auditor believes
     are not allowable by law, contract, or Federal, State, or local policies or regulations.

2/   Unsupported costs are costs charged to a HUD program or activity and eligibility cannot
     be determined at the time of audit. The costs are not supported by adequate
     documentation or there is a need for a legal or administrative determination on the
     eligibility of the cost. Unsupported costs require a future decision by HUD program
     officials. This decision, in addition to obtaining supporting documentation, might involve a
     legal interpretation or clarification of Departmental policies and procedures.




                                        Page 35                                   99-CH-259-1002
                                                                                     Appendix B


Activities Reviewed
This appendix contains the individual evaluations for the activities we reviewed. We judgmentally
selected 26 of the City of Chicago’s 84 activities reported in the June 30, 1997 Performance
Review. We found that the City inappropriately used or lacked documentation to support the use
of Empowerment Zone funds, or inaccurately reported the accomplishments of its Program to
HUD for all 26 activities. The following table shows the 26 activities that had problems, the
location of their evaluation in this report, and the finding(s) they relate to:

                                 Activity                                    Page      Finding
  1. Mexican Fine Arts Museum Expansion                                       38       1 and 4
  2. Job Link Program                                                         43       1 and 4
  3. Family Life Community Network                                            48       1 and 4
  4. 21st Century Community Learning Centers                                  52       1 and 4
  5. Better Days for Youth and Nuevos Futuros                                 56       1 and 4
  6. Employer Assisted Housing Program                                        61       1 and 4
  7. Northwest Industrial Corridor                                            66       1 and 4
  8. Community Services West Workforce and Life Preparation                   69       1 and 4
  9. The Storehouse Distributions Center                                      73       1 and 4
 10. Arts Business Incubator                                                              3
 11. Chicago Neighborhood Plan Program                                                    3
 12. Self-Sufficiency Project                                                             3
 13. Holistic Connection                                                                  3
 14. Youth Economic Alternatives                                                          3
 15. Linking to the Service Delivery Network                                              3
 16. Brownfields Redevelopment Institute                                                  3
 17. Woodworker/Shipping Training                                                         3
 18. Expansion of Services for Connections of Adult Learning Center                       3
 19. Fresh Start Program                                                                  3
 20. Comprehensive Service Delivery Network                                               3
 21. Street Intervention Program                                                          3
 22. Duncan YMCA Children’s Arts & Education                                              3
 23. Vocational Education & Community Development Program                                 3
 24. Violence Prevention Program                                                          3
 25. Community Youth Development Activity Network                              76         4
 26. West Side Residential Rehabilitation                                      79         4




                                           Page 37                                  99-CH-259-1002
Appendix B


  Controls Over the Mexican Fine Arts Museum
     Expansion Project Were Not Adequate
The City of Chicago did not maintain adequate controls over the Mexican Fine Arts Museum
Expansion project. The City inappropriately used $148,756 of Empowerment Zone funds that did
not benefit Zone residents and did not have adequate documentation to support that another
$502,078 of services paid for with Zone funds benefited Zone residents. The City also
inaccurately reported the actual progress of the project in the June 30, 1997 Performance Review.
The inaccuracies related to performance measures and funding. The problems occurred because
the City did not have an adequate monitoring system. The City also did not obtain the status of
the project or verify the accuracy of the information included in the Performance Review. As a
result, Empowerment Zone funds were not used efficiently and effectively. The City also did not
provide HUD with an accurate description of the project’s accomplishments.


                                     The City of Chicago executed a contract with the Mexican
  The City Did Not Have              Fine Arts Center Museum, the administering entity for the
  Adequate Controls Over             project, to provide career and educational services to
  Zone Funds                         Empowerment Zone residents for the period September 12,
                                     1996 to September 30, 1998. The contract required that
                                     services be provided to support the goal of providing
                                     cultural diversity to Zone residents for employment
                                     opportunities. However, services were provided to non-
                                     Zone residents. The services were not in accordance with
                                     the Museum’s contract and the City’s Strategic Plan. The
                                     Museum used Empowerment Zone funds that did not
                                     benefit Zone residents. The City and the Museum also did
                                     not have adequate documentation to ensure that additional
                                     Zone funds were used for services that benefited Zone
                                     residents.

                                     The following table shows the amount of Empowerment
                                     Zone funds that were inappropriately used by the Museum
                                     totaled $148,756 and the amount of Zone funds that lacked
                                     supporting documentation was over $500,000:


                                        Use of Zone Funds      Inappropriate Unsupported
                                      Non-Zone Youths            $ 85,057        $       0
                                      Museum’s Employees            63,699         502,078
                                      Total                      $148,756        $502,078
                                     As of June 15, 1998, the Mexican Fine Arts Center Museum
  Empowerment Zone                   received $1,102,736 in Empowerment Zone funds to provide
  Funds Were Used To Pay
99-CH-259-1002
  Non-Zone Residents                         Page 38
                                                                             Appendix B


                           career and educational services to Zone residents. The
                           Museum’s records showed that 16 (21.3 percent) of 75 youth
                           interns employed were Zone residents. However, the City’s
                           contract required the Museum to employ Zone youths. The
                           Museum used $85,057 of Empowerment Zone funds to pay
                           the non-Zone youths through March 1998. Additionally, the
                           Museum submitted an invoice requesting $24,654 of Zone
                           funds to pay non-Zone youths from April to June 1998. As of
                           July 31, 1998, the invoice had not been paid.

                           The Mexican Fine Arts Center Museum also paid employees’
Inappropriate Or           salaries with Empowerment Zone funds when the services
Unsupported Employee       provided either did not benefit Zone residents ($63,699) or
Salaries Were Paid Using   there was no support to show that they benefited Zone
Empowerment Zone           residents ($502,078). The Museum used Zone funds to pay 50
Funds                      percent of one employee’s and 100 percent of 17 employees’
                           salaries, payroll taxes, and health insurance benefits between
                           January 1997 and March 1998. Additionally, Zone funds were
                           used to pay 100 percent of three part-time employees’ salaries
                           and payroll taxes during the same period.

                           During our audit, the Museum provided a schedule of the 21
                           employees’ estimated time spent on the project and other
                           activities. The Museum’s schedule showed that seven of the
                           21 employees that were paid 100 percent from Empowerment
                           Zone funds did not spend all of their time working on the
                           project. The time spent by the seven employees on non-Zone
                           activities was 20 percent by the Receptionist, 45 percent by the
                           Custodian, 23 percent each by three part-time Custodians, 53
                           percent by the Publicist, and 45 percent by the Building
                           Operations Manager. Based upon the Museum’s schedule,
                           $63,699 of Empowerment Zone funds was used to pay the
                           seven employees for non-Zone activities between January 1997
                           and March 1998. The Museum also submitted an invoice
                           requesting $12,986 of Zone funds to pay the seven employees
                           for time spent working on non-Zone activities from April to
                           June 1998. The invoice had not been paid as of July 31, 1998.

                           According to the Museum’s schedule, the remaining 14
                           employees worked 100 percent of their time charged on
                           Empowerment Zone activities. We interviewed two employees
                           to verify whether they spent 100 percent of their time on Zone
                           activities. The two employees were the Education Director
                           and the Assistant Development Director. Both indicated that
                           they did not spend 100 percent of their time on Empowerment

                                     Page 39                               99-CH-259-1002
Appendix B


                             Zone work, but could not provide an estimate of the time they
                             did spend working on Zone activities. The City and the
                             Museum did not maintain documentation that accounted for
                             the employees’ time. Since the Museum’s mission also
                             involved providing similar services under other programs,
                             HUD and the City lack assurance that $502,078 in
                             Empowerment Zone funds were spent to benefit Zone
                             residents. Additionally, the Museum submitted an invoice
                             requesting reimbursement for another $105,528 for the services
                             of the 21 employees from April to June 1998. The invoice had
                             not been paid as of July 31, 1998.

                             The Assistant Commissioner for the City’s Department of
                             Planning and Development said the City did not monitor the
                             project because it lacked sufficient monitoring procedures.

                             The City did not report that 16 Empowerment Zone youths
  The City Did Not Report    obtained employment from the project as of the June 30,
  The Number Of Youths       1997 Performance Review. The project did not report the
  Employed By The Project    information to the City because the City only requested
                             information related to funding and did not request
                             information related to performance measures. HUD’s
                             instructions for the Performance Review required the City
                             to report measurable outcomes of an activity. The Assistant
                             Commissioner of the City’s Department of Planning and
                             Development said the City did not request the performance
                             measure results because it did not have sufficient staff to
                             verify the accuracy of the information. We believe the City
                             had adequate staff to verify the accuracy of information.
                             The City had all eight budgeted staff positions filled during
                             the reporting year with the exception of one position that
                             was vacant for two and one-half months. At the time the
                             Review was prepared, the City was fully staffed and had
                             four more individuals working under an internship program.
                             The interns were hired to perform special projects. One
                             intern’s sole responsibility was to prepare the Performance
                             Review.




                             The City inaccurately reported the project’s funding in the
  The City Under Reported    June 1997 Performance Review. The City reported that the
  The Project’s Funding By   project’s only funding source was $2.8 million of
  $544,400                   Empowerment Zone funds. The Performance Review did

99-CH-259-1002                       Page 40
                                                                      Appendix B


                    not show that the project had commitments of: (1) $60,000
                    from the State of Illinois; (2) $61,400 from the City; and (3)
                    $423,000 from private entities. The private funding was
                    provided by 25 organizations such as Kraft Foods, The
                    Chicago Community Trust, MacArthur Foundation, and
                    The Nathan Cummings Foundation. As a result, the City
                    under reported the project’s funding by $544,400.

                    The incomplete and inaccurate reporting of performance
                    measures and funding occurred because: (1) inexperienced
                    staff prepared the City’s Performance Review; (2) the City
                    did not request performance information; and (3) the City’s
                    management staff, who was responsible for administering
                    the Empowerment Zone Program, did not review the
                    Performance Review for accuracy. Since the overall
                    measure of success of the Empowerment Zone Program is
                    to assist Zone residents and leverage funding, we believe it
                    is imperative that the City accurately reports performance
                    measures and funding of its activities.


                    Excerpts from the City of Chicago’s comments on our draft
Auditee Comments    finding follow. Appendix C, page 97, contains the complete
                    text of the comments.

                    It is important to note that the contract does not require 100
                    percent of Empowerment Zone resident participation for
                    youth internships. At the time the 1997 Performance
                    Review was submitted, the best funding estimates available
                    were either from the original proposals submitted by
                    subrecipients or from the investment worksheets collected
                    from subrecipients between the date HUD issued the
                    Performance Review instructions (June 23, 1997) and the
                    date the Performance Review was due to HUD (July 30,
                    1997).

                    Federal law and the Museum’s contract required the Museum
OIG Evaluation of
                    to employ Zone youths. Since only 21.3 percent of the youth
Auditee Comments    interns were Zone residents, the Museum did not primarily
                    benefit Zone residents. For the purpose of this audit, we
                    concluded activities did not benefit Empowerment Zone
                    residents if the activities served less than 51 percent of Zone
                    residents, or if the activities did not provide benefits to Zone
                    residents when the activity’s administrators had control over
                    who received the benefit of the services. In the case of the

                              Page 41                               99-CH-259-1002
Appendix B


                                     Mexican Fine Arts Museum Expansion project, the Museum
                                     had control over who received the benefits of the internships.

                                     While the City indicates that it used the best funding estimates
                                     to prepare the Performance Review, we found the Museum
                                     had updated funding information that the City did not request.


                                     Procedures have been established requiring all subrecipients
 Auditee Comments                    to maintain records documenting benefits to Zone residents.
                                     Source documentation has been requested to verify
                                     compliance with the contract and to substantiate staff
                                     involvement. If the subrecipient is not in compliance with
                                     the contract, the Chicago Empowerment Zone will take
                                     necessary corrective actions to remedy any non-compliance
                                     issues. Procedures and controls have been established to
                                     ensure that funds are used efficiently and effectively.
                                     Training will be provided for existing and future staff.
                                     Procedures and controls have been established to ensure
                                     that project accomplishments are accurately reported and to
                                     verify the accuracy of information submitted to HUD.

                                     The City indicated that it has established procedures and
 OIG Evaluation of                   controls to ensure that: (1) funds are used efficiently and
 Auditee Comments                    effectively; (2) project accomplishments are accurately
                                     reported; and (3) information submitted to HUD is verified for
                                     accuracy. Additionally, the City indicated that it established
                                     procedures to require subrecipients to maintain records to
                                     document benefits to Zone residents. The City did not include
                                     the procedures or controls with its comments. The City’s
                                     corrective actions to remedy any non-compliance issues need
                                     to include reimbursement by the City to the Empowerment
                                     Zone Program from non-Federal funds for the inappropriate or
                                     unsupported use of Zone funds.


 Controls Over the Job Link Program Were Not
                   Adequate
The City of Chicago did not maintain adequate controls over the Job Link Program. The City
inappropriately used $148,622 of Empowerment Zone funds that did not benefit Zone residents
and did not have documentation to support that another $340,165 of Zone funds benefited Zone
residents. The City also inaccurately reported the actual progress of the Program in the June 30,
1997 Performance Review. The inaccuracies related to performance measures, funding, and

99-CH-259-1002                               Page 42
                                                                                   Appendix B


performance milestones. The problems occurred because the City did not have an adequate
monitoring system. The City also did not obtain the status of the Program or verify the accuracy
of the information included in the Performance Review. As a result, Empowerment Zone funds
were not used efficiently and effectively. The City also did not provide HUD with an accurate
description of the Program’s accomplishments.


                                    The City of Chicago executed a contract with Bethel New
  The City Did Not Have             Life to administer the Job Link Program. The Program was
  Adequate Controls Over            established to provide job placement services and job skills
  Zone Funds                        training to Empowerment Zone residents for the period of
                                    March 1, 1997 to February 28, 1999. On March 24, 1997,
                                    a contract modification was executed to change the
                                    administering entity to West Side Job Link. The contract
                                    required that services be provided to support the goal of
                                    training Zone residents for employment opportunities.
                                    However, services were provided to non-Zone residents.
                                    The services were not in accordance with Job Link’s
                                    contract and the City’s Strategic Plan. Job Link used
                                    Empowerment Zone funds that did not benefit Zone
                                    residents. The City and Job Link also did not have
                                    documentation to ensure that additional Zone funds were
                                    used for services that benefited Zone residents.

                                    The following table shows the amount of Empowerment
                                    Zone funds that were inappropriately used by Job Link
                                    totaled $148,622 and the amount of Zone funds that lacked
                                    supporting documentation was over $340,000:




                                               Use of Zone
                                                  Funds          Inappropriate    Unsupported
                                              Job Placement
                                              Services                 $60,769        $125,166
                                              Job Skills
                                              Training                  87,853            1,515
                                              Miscellaneous
                                              Services                      0          213,484
                                              Total                  $148,622         $340,165




                                               Page 43                           99-CH-259-1002
Appendix B


                             As of March 16, 1998, West Side Job Link received $553,538
  Inappropriate Or           in Empowerment Zone funds to provide job placement
  Unsupported Job            services and job skills training to Zone residents. Job Link’s
  Placement Services Were    records showed that only 43 (17.3 percent) of the 248 residents
  Paid Using Zone Funds      who received job placement services were Zone residents.
                             However, the City’s contract required Job Link to provide
                             services to Zone residents. Job Link used $60,769 of
                             Empowerment Zone funds to pay for the services to the non-
                             Zone residents between March 1997 and May 1998. The City
                             and Job Link also lacked documentation to show that $125,166
                             of Empowerment Zone funds used to provide job placement
                             services to 138 individuals benefited Zone residents. The City
                             and Job Link could not provide documentation which showed
                             the 138 individuals’ addresses.

                             West Side Job Link also used Empowerment Zone funds to
  Inappropriate Or           pay for job skills training when the training either did not
  Unsupported Job Skills     benefit Zone residents ($87,853) or there was not support to
  Training Were Paid Using   show that they benefited Zone residents ($1,515). Job Link’s
  Zone Funds                 records showed that only 17 (22.4 percent) of the 76
                             individuals who received job skills training between March and
                             November 1997 were Zone residents. However, the City’s
                             contract required Job Link to provide training only to Zone
                             residents. The City and Job Link also could not provide
                             documentation to show that one person who received training
                             was an Empowerment Zone resident.

                             Of the $553,538 in Empowerment Zone funds provided to
  Unsupported Services       West Side Job Link, the City and Job Link lacked
  Were Paid Using Zone       documentation to support the use of $213,484, or the benefits
  Funds                      provided to Zone residents. Since the City and Job Link did
                             not have documentation to support the use of the $213,484,
                             there was no assurance that Zone funds were used in
                             accordance with the contract and to benefit Zone residents.
                             The Assistant Commissioner for the City’s Department of
                             Planning and Development said the City did not monitor the
                             Program because it lacked sufficient monitoring procedures.

                             The City did not report the fact that the Program provided
  The City Did Not Report    Empowerment Zone residents with job skills training or that
  The Program’s              Zone residents obtained employment as of June 30, 1997.
  Performance Measures       Job Link’s records showed that nine Empowerment Zone
                             residents received job skills training and three Zone
                             residents were employed as of June 1997. However, this


99-CH-259-1002                       Page 44
                                                                           Appendix B


                          was not reported in the City’s June 1997 Performance
                          Review.

                          The City also did not report the fact that four businesses in
                          the Zone received information on wage and work tax credits
                          available through the Empowerment Zone Program.

                          The Program did not report the information to the City
                          because the City only requested information related to
                          funding and did not request information related to
                          performance measures.         HUD’s instructions for the
                          Performance Review required the City to report measurable
                          outcomes of an activity. The Assistant Commissioner of the
                          City’s Department of Planning and Development said the
                          City did not request the performance measure results
                          because it did not have sufficient staff to verify the accuracy
                          of the information.

                          We believe the City had adequate staff to verify the
                          accuracy of information. The City had all eight budgeted
                          staff positions filled during the reporting year with the
                          exception of one position that was vacant for two and one-
                          half months. At the time the Review was prepared, the City
                          was fully staffed and had four more individuals working
                          under an internship program. The interns were hired to
                          perform special projects. One intern’s sole responsibility
                          was to prepare the Performance Review.

                          The City inaccurately reported the Program’s funding in the
The City Over Reported    June 1997 Performance Review. The City reported that the
The Program’s Funding     Program’s projected private funding was $1 million.
By $997,500               However, Job Link provided a report to the City that
                          showed only $2,500 in private funds was received from
                          First Chicago Bank as of June 30, 1997. The City’s staff
                          could not provide an explanation of where the reported
                          funding information came from. As a result, the City over
                          reported the Program’s funding by $997,500.

                          The City did not report the Program’s performance
The City Did Not Report   milestones in the June 1997 Performance Review. The
The Program’s             Review did not show when the Program planned to: (1)
Performance Milestones    develop job linkages with commercial and industrial
                          employers; (2) perform case management, placement, and
                          referral services; and (3) monitor and improve the training
                          system. The Director of West Side Job Link said the City

                                    Page 45                              99-CH-259-1002
Appendix B


                     should have reported that the three performance milestones
                     would be completed on February 28, 1999. The City also
                     did not report in the June 1997 Performance Review that
                     the Program had developed an organizational structure.
                     The Director of Job Link said the organizational structure
                     was developed on March 15, 1997.

                     The incomplete and inaccurate reporting of performance
                     measures, funding, and performance milestones occurred
                     because: (1) inexperienced staff prepared the City’s
                     Performance Review; (2) the City did not request
                     performance information; and (3) the City’s management
                     staff, who was responsible for administering the
                     Empowerment Zone Program, did not review the
                     Performance Review for accuracy. Since the overall
                     measure of success of the Empowerment Zone Program is
                     to assist Zone residents and leverage funding, we believe it
                     is imperative that the City accurately reports performance
                     categories of its activities.


                     Excerpts from the City of Chicago’s comments on our draft
 Auditee Comments    finding follow. Appendix C, page 102, contains the complete
                     text of the comments.

                     At the time the 1997 Performance Review was submitted,
                     the best funding estimates available were either from the
                     original proposals submitted by subrecipients or from the
                     investment worksheets collected from subrecipients between
                     the date HUD issued the Performance Review instructions
                     (June 23, 1997) and the date the Performance Review was
                     due to HUD (July 30, 1997).


                     While the City indicates that it used the best funding estimates
 OIG Evaluation of
                     to prepare the Performance Review, we found the Job Link
 Auditee Comments    Program had provided the correct funding information to the
                     City prior to the submission of the Performance Review.


                     Procedures have been established requiring all subrecipients
 Auditee Comments    to maintain records documenting benefits to Zone residents.
                     Source documentation has been requested to verify
                     compliance with the contract and to substantiate staff
                     involvement. If the subrecipient is not in compliance with
99-CH-259-1002               Page 46
                                                                                    Appendix B


                                    the contract, the Chicago Empowerment Zone will take
                                    necessary corrective actions to remedy any non-compliance
                                    issues. Procedures and controls have been established to
                                    ensure that funds are used efficiently and effectively.
                                    Training will be provided for existing and future staff.
                                    Procedures and controls have been established to ensure
                                    that project accomplishments are accurately reported and to
                                    verify the accuracy of information submitted to HUD.

                                    The City indicated that it has established procedures and
 OIG Evaluation of                  controls to ensure that: (1) funds are used efficiently and
 Auditee Comments                   effectively; (2) project accomplishments are accurately
                                    reported; and (3) information submitted to HUD is verified for
                                    accuracy. Additionally, the City indicated that it established
                                    procedures to require subrecipients to maintain records to
                                    document benefits to Zone residents. The City did not include
                                    the procedures or controls with its comments. The City’s
                                    corrective actions to remedy any non-compliance issues need
                                    to include reimbursement by the City to the Empowerment
                                    Zone Program from non-Federal funds for the inappropriate or
                                    unsupported use of Zone funds.




     Controls Over the Family Life Community
       Network Project Were Not Adequate
The City of Chicago did not maintain adequate controls over the Family Life Community
Network project. The City inappropriately used $123,321 of Empowerment Zone funds that did
not benefit Zone residents and did not have documentation to support that another $3,717 of
services paid for with Zone funds benefited Zone residents. The City also inaccurately reported
the actual progress of the project in the June 30, 1997 Performance Review. The inaccuracies
related to performance measures and milestones. The problems occurred because the City did not
have an adequate monitoring system. The City also did not obtain the status of the project or
verify the accuracy of the information included in the Performance Review. As a result,


                                              Page 47                              99-CH-259-1002
Appendix B


Empowerment Zone funds were not used efficiently and effectively, and the City did not provide
HUD with an accurate description of the project’s accomplishments.


                                    The Boys and Girls Club of Chicago, the administering
  The City Did Not Have             entity for the Family Life Community Network project, used
  Adequate Controls Over            $123,321 of Empowerment Zone funds that did not benefit
  Zone Funds                        Zone residents. The City and the Club also did not have
                                    documentation to ensure that an additional $3,717 of Zone
                                    funds was used for services that benefited Zone residents.
                                    The City executed a contract with the Boys and Girls Club
                                    to provide career and educational services to Empowerment
                                    Zone youths for the period January 1 to December 31,
                                    1997. However, services were provided to non-Zone
                                    youths which was not in accordance with the City’s
                                    Strategic Plan and the Club’s contract. The contract
                                    required that services be provided to support the goal of
                                    preparing Empowerment Zone residents for employment.
                                    As of June 30, 1998, the City was in the process of
                                    executing a new contract with the Club to continue the
                                    program for a second year.

                                    The Boys and Girls Club received $166,615 in Empowerment
                                    Zone funds to provide career and educational services to Zone
                                    youths through December 31, 1997. The Club’s records
                                    showed that 181 (23.8 percent) of 762 youths served were
                                    Zone residents and the Club did not have adequate records to
                                    show the residency of another 17 youths. Therefore,
                                    documentation supported that only $39,577 of the Zone funds
                                    spent were related to services provided to Empowerment Zone
                                    youths. The City’s Department of Human Services performed
                                    a monitoring review of the project in October 1997. The
                                    Department identified that the Club was not providing services
                                    to Zone youths as required, but it did not take corrective action
                                    against the Club nor did it notify the City’s staff responsible for
                                    administering the Empowerment Zone Program. The City did
                                    not have policies or procedures to share information on
                                    problems identified by the various City departments during
                                    their monitoring reviews. As a result, Empowerment Zone
                                    funds were not used efficiently and effectively.

                                    The City did not report that nine Empowerment Zone
  The City Did Not Report           youths were served by the project as of the June 30, 1997
  The Number Of Youths              Performance Review. The project did not report the
  Served By The Project             information to the City because the City only requested

99-CH-259-1002                               Page 48
                                                                        Appendix B


                         information related to funding and did not request
                         information related to performance measures. HUD’s
                         instructions for the Performance Review required the City
                         to report measurable outcomes of an activity. The Assistant
                         Commissioner of the City’s Department of Planning and
                         Development said the City did not request the performance
                         measure results because it did not have sufficient staff to
                         verify the accuracy of the information. We believe the City
                         had adequate staff to verify the accuracy of information.
                         The City had all eight budgeted staff positions filled during
                         the reporting year with the exception of one position that
                         was vacant for two and one-half months. At the time the
                         Review was prepared, the City was fully staffed and had
                         four more individuals working under an internship program.
                         The interns were hired to perform special projects. One
                         intern’s sole responsibility was to prepare the Performance
                         Review.

                         The City inaccurately reported the project’s performance
The City Inaccurately    milestones in the June 1997 Performance Review. The City
Reported The Project’s   reported that the project’s proposal was approved by the
Performance Milestones   Coordinating Council on July 12, 1996. However, the
                         City’s files showed that the Council approved the project’s
                         proposal on June 4, 1996. The City also did not report the
                         project’s projected completion date for performance
                         milestones related to: (1) career exploration; (2) improved
                         access to health care; (3) social recreation; (4) community
                         safety; and (5) educational opportunities for youths.

                         The incomplete and inaccurate reporting of performance
                         measures and milestones occurred because: (1)
                         inexperienced staff prepared the City’s Performance
                         Review; (2) the City did not request performance
                         information; and (3) the City’s management staff, who was
                         responsible for administering the Empowerment Zone
                         Program, did not review the Performance Review for
                         accuracy. Since the overall measure of success of the
                         Empowerment Zone Program is to assist Zone residents, we
                         believe it is imperative that the City accurately reports
                         performance measures and milestones of its activities.


                         Excerpts from the City of Chicago’s comments on our draft
Auditee Comments         finding follow. Appendix C, page 93, contains the complete
                         text of the comments.

                                   Page 49                             99-CH-259-1002
Appendix B



                     The contract for second year of this project is being
                     renegotiated so that the services provided over the total
                     contract period will, in fact, benefit the originally anticipated
                     number of Zone residents. If the renegotiation is unsuccessful,
                     the Empowerment Zone will take all necessary corrective
                     actions to remedy the non-compliance issues.

                     Procedures have been established requiring all subrecipients
                     to maintain records documenting benefits to Zone residents.
                     Source documentation has been requested to verify
                     compliance with the contract and to substantiate staff
                     involvement. If the subrecipient is not in compliance with
                     the contract, the Chicago Empowerment Zone will take
                     necessary corrective actions to remedy any non-compliance
                     issues. Procedures and controls have been established to
                     ensure that funds are used efficiently and effectively and that
                     corrective action is taken against grantees who do not
                     provide the required services. Training will be provided for
                     existing and future staff. Procedures and controls have been
                     established to ensure that project accomplishments are
                     accurately reported and to verify the accuracy of
                     information submitted to HUD.


                     The City indicated that it has established procedures and
 OIG Evaluation of   controls to ensure that: (1) funds are used efficiently and
 Auditee Comments    effectively; (2) corrective action is taken against grantees who
                     do not provide the required services; (3) project
                     accomplishments are accurately reported; and (4) information
                     submitted to HUD is verified for accuracy. Additionally, the
                     City indicated that it established procedures to require
                     subrecipients to maintain records to document benefits to Zone
                     residents. The City did not include the procedures or controls
                     with its comments. The City’s corrective actions to remedy
                     any non-compliance issues need to include reimbursement by
                     the City to the Empowerment Zone Program from non-Federal
                     funds for the inappropriate or unsupported use of Zone funds.




99-CH-259-1002               Page 50
                                                                                  Appendix B




   The City Lacked Adequate Controls Over the
    21st Century Community Learning Centers
                    Project
The City of Chicago did not have adequate controls over the 21st Century Community Learning
Centers. The City did not ensure that $114,755 of Empowerment Zone funds benefited schools
within the Zone. The City also inaccurately reported the actual progress of the Centers in the
June 30, 1997 Performance Review. The inaccuracies related to performance measures,
milestones, and funding. The problems occurred because the City: (1) encouraged the Board of
Education for the City of Chicago, the Centers’ administering entity, to establish Community
Learning Centers at non-Zone schools; (2) lacked an adequate monitoring system; and (3) did not
use the actual accomplishments submitted by the Centers’ administering entity or verify the
accuracy of the information included in the Performance Review. As a result, Empowerment
Zone funds were not used efficiently and effectively. The City also did not provide HUD with an
accurate description of the Centers’ progress.




                                              Page 51                           99-CH-259-1002
Appendix B


                          The Board of Education for the City of Chicago used
 The City Did Not Have    $114,755 of Empowerment Zone funds that did not benefit
 Adequate Controls Over   Zone schools. The City executed a contract with the Board
 Zone Funds               of Education to establish learning centers at Empowerment
                          Zone schools between July 1, 1996 and September 30,
                          1997. However, centers were established at non-Zone
                          schools which was not in accordance with the contract and
                          the City’s Strategic Plan. The City’s Plan required that
                          learning centers be established at schools located within the
                          Empowerment Zone.

                          The Board of Education received $741,538 in
                          Empowerment Zone funds to establish learning centers at
                          37 Zone schools through September 30, 1997. The Board’s
                          records showed that 10 (27 percent) of 37 schools that
                          established learning centers were not located in the
                          Empowerment Zone.            Documentation showed that
                          $114,755 of the Zone funds spent were related to centers
                          established at the 10 schools.

                          The City inappropriately encouraged the Board of
                          Education to expand the 21st Century Community Learning
                          Centers outside of the Empowerment Zone. In a letter
                          dated February 13, 1996 to the Board, the City suggested
                          that the activity include more schools, especially in the State
                          of Illinois’ Enterprise Communities. During the term of the
                          contract, there were at least 33 additional schools in the
                          Empowerment Zone that could have participated in the
                          program.

                          The Assistant Commissioner for the City’s Department of
                          Planning and Development said the City knew that some of
                          the schools were not located in the Empowerment Zone.
                          The City believed the Centers met the guidelines established
                          by its Empowerment Zone Coordinating Council that
                          required 51 percent of the clients served be Zone residents.
                          However, the City’s Strategic Plan required that the
                          Community Learning Centers be established at Zone
                          schools. The Assistant Commissioner also said the City did
                          not monitor the activity because it lacked sufficient
                          monitoring procedures. As a result, Empowerment Zone
                          funds were not used efficiently and effectively.

                          The City reported that the performance measures related to
  The City Incorrectly    the Centers’ summer camp program were expected to be
  Reported The Centers’
  Performance Measures
99-CH-259-1002                    Page 52
  And Milestones
                                                                         Appendix B


                        completed by September 1997 even though the measures
                        related to the camp program were completed in 1996. The
                        Centers reported in the September 30, 1996 progress report
                        that the measures were completed. The Centers reported
                        that it implemented the summer camp program at 20
                        schools and finished the performance measure.

                        The City also inaccurately reported the Centers’
                        performance milestones. The City did not report that 19 of
                        21 project milestones for the Community Learning Centers
                        were completed. The Centers informed the City in the
                        January 31, 1997 progress report that the 19 milestones
                        were completed. The City did not use the progress report
                        to prepare the Performance Review or verify the accuracy
                        of the data it reported in the Review. As a result, HUD was
                        not provided with an accurate status of the Centers’
                        progress.

                        The City inaccurately reported the funding for the 21st
The City Incorrectly    Century Community Learning Centers. The City reported
Reported The Centers’   the 21st Century Learning Centers were projected to receive
Funding                 $416,000 of State/Local funds. However, the Centers’
                        Director said the Community Learning Centers did not have
                        a commitment or receive any State/Local funds. The
                        Director also said her office did not receive a request from
                        the City to confirm the Centers’ funding amounts. The
                        City’s Performance Review also did not show the non-Zone
                        Federal funds and private donations received by the Centers.
                        As of June 30, 1997, the Centers’ records showed that
                        $446,190 in Federal funds and $507,484 of corporate and
                        in-kind donations were received. As a result, the City under
                        reported the Centers’ funding by $537,674 ($446,190 +
                        $507,484 - $416,000).

                        The incomplete and inaccurate reporting of the performance
                        and financial information occurred because the City did not
                        use the actual accomplishments submitted by the Centers’
                        administering entity.     The City also lacked adequate
                        supervisory oversight to ensure the accuracy and reliability of
                        the information reported.


                        Excerpts from the City of Chicago’s comments on our draft
Auditee Comments        finding follow. Appendix C, page 96, contains the complete
                        text of the comments.

                                  Page 53                              99-CH-259-1002
Appendix B



                     Benchmarks are currently being reevaluated to confirm that the
                     majority of the program participants were, in fact,
                     Empowerment Zone residents even though 10 of the 37
                     facilities were not located within the Zone. If the project is not
                     in compliance with the regulations, appropriate actions will be
                     made, including using other sources of funds for this project.

                     The Chicago Empowerment Zone’s actions were consistent
                     with the spirit of the Zone initiative. Our advice was
                     intended to promote similar benefits to Enterprise
                     Community residents and did not encourage, condone, or
                     authorize the inappropriate use of Zone funds. Source
                     documentation has been submitted by the subrecipient to
                     verify compliance with the contract. If the subrecipient is
                     not in compliance with the contract, the Chicago
                     Empowerment Zone will take the necessary corrective
                     actions to remedy any non-compliance issues.

                     Procedures and controls have been established to ensure
                     that funds are used efficiently and effectively. Procedures
                     and controls have been established to ensure that project
                     accomplishments are accurately reported and to verify the
                     accuracy of information submitted to HUD.


                     The Center’s contract and the City’s Strategic Plan required
 OIG Evaluation of   the Center to establish training centers within the Zone. Since
 Auditee Comments    27 percent of the training centers were located outside the
                     Zone, the City did not enforce the requirements of the contract
                     and the Strategic Plan. During the term of the Centers’
                     contract, there were at least 33 additional schools in the Zone
                     that could have participated in the project. We believe the City
                     should reimburse the Empowerment Zone Program from non-
                     Federal funds for the inappropriate use of Zone funds.

                     We do not agree that the City’s actions were consistent with
                     the Zone initiative. The City’s Strategic Plan called for the
                     training centers to be placed within the Zone. However, the
                     City’s February 13, 1996 letter to the Board of Education
                     suggested that training centers could be located in the
                     Enterprise Communities.

                     The City indicated that it has established procedures and
                     controls to ensure that: (1) funds are used efficiently and
99-CH-259-1002                Page 54
                                                                                    Appendix B


                                    effectively; (2) project accomplishments are accurately
                                    reported; and (3) information submitted to HUD is verified for
                                    accuracy. The City did not include the procedures or controls
                                    with its comments. The City’s corrective actions to remedy
                                    any non-compliance issues need to include reimbursement by
                                    the City to the Empowerment Zone Program from non-Federal
                                    funds for the inappropriate use of Zone funds.




   Controls Over the Better Days for Youth and
   Nuevos Futuros Program Were Not Adequate
The City of Chicago did not maintain adequate controls over the Better Days for Youth and
Nuevos Futuros program. The City inappropriately used $48,219 of Empowerment Zone funds
that did not benefit Zone residents and did not have documentation to support that another
$1,524 of Zone funds benefited Zone residents. The City also inaccurately reported the actual
progress of the program in the June 30, 1997 Performance Review. The inaccuracies related to
performance measures, funding, and performance milestones. The problems occurred because the
City did not have an adequate monitoring system. The City also did not obtain the status of the
program or verify the accuracy of the information included in the Performance Review. As a
result, Empowerment Zone funds were not used efficiently and effectively. The City also did not
provide HUD with an accurate description of the program’s accomplishments.


                                    The City of Chicago executed a contract with Chicago
  The City Did Not Have             Commons Association, the administering entity for the
  Adequate Controls Over            program, to provide career and educational services to
  Zone Funds                        Empowerment Zone youths for the period January 1, 1997
                                    to June 30, 1998. The contract required that services be
                                    provided to support the goal of providing outreach and
                                    assistance to Zone youths for advanced education and
                                    employment opportunities.     However, services were
                                    provided to non-Zone youths. The services were not in

                                              Page 55                              99-CH-259-1002
Appendix B


                         accordance with the Association’s contract and the City’s
                         Strategic Plan. The Association used Empowerment Zone
                         funds that did not benefit Zone residents. The City and the
                         Association also did not have documentation to ensure that
                         additional Zone funds were used for services that benefited
                         Zone residents.

                         The following table shows the amount of Empowerment
                         Zone funds that were inappropriately used by the
                         Association totaled $48,219 and the amount of Zone funds
                         that lacked supporting documentation was $1,524:




                                    Use of Zone
                                      Funds           Inappropriate    Unsupported

                                  Youth Services            $47,294           $1,359

                                  Youth Stipends                925              165
                                      Total                 $48,219           $1,524

                         As of January 23, 1998, the Chicago Commons Association
  Inappropriate Or       received $138,448 in Empowerment Zone funds to provide
  Unsupported Services   career and educational services to Zone residents. The
  Were Paid Using Zone   Association’s records showed that 201 (64.2 percent) of 313
  Funds                  youths served were Zone residents. However, the City’s
                         contract required the Association to provide services to Zone
                         youths. The Association used $47,294 of Empowerment Zone
                         funds to pay for the services to the non-Zone youths between
                         April and December 1997. The City and the Association also
                         lacked documentation to show that $1,359 of Empowerment
                         Zone funds used to provide services to three youths benefited
                         Zone residents. The City and the Association could not
                         provide documentation to show the three youths’ addresses.
                         The Association has submitted three invoices, which have not
                         yet been paid, for $37,023 in Empowerment Zone funds to pay
                         for the services to non-Zone youths from January to May
                         1998. The Association also requested $1,064 to pay for
                         services to the three youths that lacked supporting
                         documentation.


99-CH-259-1002                   Page 56
                                                                           Appendix B


                          The Chicago Commons Association also paid employment
Inappropriate Or          stipends to youths with Empowerment Zone funds when the
Unsupported Zone Funds    stipends either did not benefit Zone residents ($925) or there
Were Used To Pay          was no support to show that they benefited Zone residents
Youths                    ($165). The Association’s records showed that nine (47.4
                          percent) of 19 youths that were paid stipends between April
                          and December 1997 were Zone residents. However, the City’s
                          contract required the Association to provide stipends to Zone
                          residents. The City and the Association also could not provide
                          documentation to show that two youths that received stipends
                          were Empowerment Zone residents. The Association has
                          submitted three invoices, which have not been paid, requesting
                          $28,444 of Zone funds to pay non-Zone youths from January
                          to May 1998. The Association also requested $4,952 to pay
                          stipends to 13 youths; however, the Association did not have
                          documentation to support that the youths were Zone residents.

                          The Assistant Commissioner for the City’s Department of
                          Planning and Development said the City did not monitor the
                          program because it lacked sufficient monitoring procedures.

                          The City did not report the fact that the program served
The City Did Not Report   Empowerment Zone youths or that Zone youths obtained
The Program’s             paid internships as of June 30, 1997. The Association’s
Performance Measures      records showed that 14 Empowerment Zone youths were
                          provided career and educational services and seven Zone
                          youths were employed as of June 1997. However, this was
                          not reported in the City’s June 1997 Performance Review.
                          The program did not report the information to the City
                          because the City only requested information related to
                          funding and did not request information related to
                          performance measures.         HUD’s instructions for the
                          Performance Review required the City to report measurable
                          outcomes of an activity. The Assistant Commissioner of the
                          City’s Department of Planning and Development said the
                          City did not request the performance measure results
                          because it did not have sufficient staff to verify the accuracy
                          of the information. We believe the City had adequate staff
                          to verify the accuracy of information. The City had all eight
                          budgeted staff positions filled during the reporting year with
                          the exception of one position that was vacant for two and
                          one-half months. At the time the Review was prepared, the
                          City was fully staffed and had four more individuals
                          working under an internship program. The interns were


                                    Page 57                              99-CH-259-1002
Appendix B


                            hired to perform special projects. One intern’s sole
                            responsibility was to prepare the Performance Review.

                            The City inaccurately reported the program’s funding in the
  The City Over Reported    June 1997 Performance Review. The City reported that the
  The Program’s Funding     program’s projected private funding was $143,779. The
  By $95,000                private funding consisted of $95,000 from the State of
                            Illinois and $48,779 from various private entities. However,
                            the State funding was not dedicated specifically to the
                            program and the Association could not provide
                            documentation showing that the State funds benefited the
                            program. As a result, the City over reported the program’s
                            funding by $95,000.

                            The City did not report the program’s performance
  The City Did Not Report   milestones in the June 1997 Performance Review. The
  The Program’s             Review did not show when the Association’s proposal was
  Performance Milestones    approved by the Coordinating Council. However, the
                            City’s files indicated the proposal was approved on
                            September 3, 1996. The Review also did not show the
                            program’s planned completion date for the project
                            milestones. The Association’s Program Evaluator said the
                            June 1997 Performance Review should have shown that the
                            planned completion date for the project milestones would be
                            March 31, 1998.

                            The incomplete and inaccurate reporting of performance
                            measures, funding, and milestones occurred because: (1)
                            inexperienced staff prepared the City’s Performance
                            Review; (2) the City did not request performance
                            information; and (3) the City’s management staff, who was
                            responsible for administering the Empowerment Zone
                            Program, did not examine the Performance Review for
                            accuracy. Since the overall measure of success of the
                            Empowerment Zone Program is to assist Zone residents and
                            leverage funding, we believe it is imperative that the City
                            accurately reports the performance of its activities.


                            Excerpts from the City of Chicago’s comments on our draft
 Auditee Comments           finding follow. Appendix C, page 99, contains the complete
                            text of the comments.

                            It is important to note that the contract does not require 100
                            percent of Empowerment Zone resident participation for

99-CH-259-1002                      Page 58
                                                                      Appendix B


                    youth internships. At the time the 1997 Performance
                    Review was submitted, the best funding estimates available
                    were either from the original proposals submitted by
                    subrecipients or from the investment worksheets collected
                    from subrecipients between the date HUD issued the
                    Performance Review instructions (June 23, 1997) and the
                    date the Performance Review was due to HUD (July 30,
                    1997).

                    The program’s contract and the City’s Strategic Plan required
OIG Evaluation of
                    the program to employ Zone youths. Since 35.8 percent of the
Auditee Comments    youths served and 52.6 percent of youth stipends were
                    provided to non-Zone residents, the program did not fully
                    benefit Empowerment Zone residents. For the purpose of this
                    audit, we concluded activities did not benefit Empowerment
                    Zone residents if the activities served less than 51 percent of
                    Zone residents, or if the activities did not provide benefits to
                    Zone residents when the activity’s administrators had control
                    over who received the benefit of the services. Since the Better
                    Days for Youth and Nuevos Futuros program had control over
                    who received the benefits of the services and the stipends, we
                    believe Empowerment Zone funds were inappropriately used.

                    While the City indicates that it used the best funding estimates
                    to prepare the Performance Review, we found the program had
                    updated funding information that the City did not request.


                    Procedures have been established requiring all subrecipients
Auditee Comments    to maintain records documenting benefits to Zone residents.
                    Source documentation has been requested to verify
                    compliance with the contract and to substantiate staff
                    involvement. If the subrecipient is not in compliance with
                    the contract, the Chicago Empowerment Zone will take
                    necessary corrective actions to remedy any non-compliance
                    issues. Procedures and controls have been established to
                    ensure that funds are used efficiently and effectively.
                    Training will be provided for existing and future staff.
                    Procedures and controls have been established to ensure
                    that project accomplishments are accurately reported and to
                    verify the accuracy of information submitted to HUD.

                    The City indicated that it has established procedures and
OIG Evaluation of   controls to ensure that: (1) funds are used efficiently and
Auditee Comments    effectively; (2) project accomplishments are accurately

                              Page 59                               99-CH-259-1002
Appendix B


                                    reported; and (3) information submitted to HUD is verified for
                                    accuracy. Additionally, the City indicated that it established
                                    procedures to require subrecipients to maintain records to
                                    document benefits to Zone residents. The City did not include
                                    the procedures or controls with its comments. The City’s
                                    corrective actions to remedy any non-compliance issues need
                                    to include reimbursement by the City to the Empowerment
                                    Zone Program from non-Federal funds for the inappropriate or
                                    unsupported use of Zone funds.

  Controls Over the Employer Assisted Housing
          Program Were Not Adequate
The City of Chicago did not maintain adequate controls over the Employer Assisted Housing
Program. The City inappropriately used $25,170 of Empowerment Zone funds that did not
benefit the Zone. The City also inaccurately reported the actual progress of the Program in the
June 30, 1997 Performance Review. The inaccuracies related to performance measures, funding,
performance milestones, and participating entities. The problems occurred because the City did
not have an adequate monitoring system. The City also did not obtain the status of the Program
or verify the accuracy of the information included in the Performance Review. As a result,
Empowerment Zone funds were not used efficiently and effectively. The City also did not provide
HUD with an accurate description of the Program’s accomplishments.


                                    The City of Chicago executed a contract with Bethel New
  The City Did Not Have             Life, Incorporated, the administering entity for the
  Adequate Controls Over            Employer Assisted Housing Program, to provide services
  Zone Funds                        that would promote housing in the Empowerment Zone for
                                    the period October 23, 1996 to December 31, 1997. The
                                    contract required that services be provided to promote and
                                    support home ownership in the Zone.                However,
                                    Empowerment Zone funds paid for services that did not
                                    benefit the Zone. The services also were not in accordance
                                    with Bethel’s contract and the City’s Strategic Plan.

                                    The following table shows the amount of Empowerment
                                    Zone funds that were inappropriately used by Bethel totaled
                                    $25,170:


                                            Use of Zone Funds         Inappropriate
                                           Home Ownership
                                           Services                          $22,170
                                           Construction Repairs                3,000

99-CH-259-1002                              Page 60
                                                                            Appendix B


                                  Total                             $25,170

                           Bethel New Life used $22,170 of Empowerment Zone funds to
Inappropriate Services     pay for the cost of three of its employees to provide home
Were Paid Using Zone       ownership services through the Program. The three employees
Funds                      were the former and current Administrative Assistants to the
                           Vice President of Development and a Development Specialist.
                           The costs included the employees’ salaries, payroll taxes, and
                           health insurance benefits from January 1 to September 30,
                           1997. However, the Administrative Assistants and the
                           Development Specialist did not work on the Program.

                           Bethel has submitted three additional invoices, which have not
                           been paid, for $18,483 in Empowerment Zone funds to pay for
                           the Program’s Project Director from October 1 to December
                           31, 1997 ($8,468) and the current Administrative Assistant
                           from October 1, 1997 to March 31, 1998 ($10,015).
                           However, neither of the individuals worked on the Program
                           during these time periods. Bethel also requested $8,468 in
                           Zone funds to pay 100 percent of the Program’s Project
                           Director’s salary, payroll taxes, and health insurance benefits
                           from January 1 to March 31, 1998. However, the Project
                           Director said she did not spend all of her time working on the
                           Program. The City and Bethel did not have documentation to
                           support the time spent by the Project Director on the Program.

                           The Assistant Commissioner for the City’s Department of
                           Planning and Development said the City did not monitor the
                           Program because it lacked sufficient monitoring procedures.

                           Bethel also used $3,000 in Empowerment Zone funds to pay
Inappropriate Zone Funds   for repairs to a house not related to the Program. The City’s
Were Used To Pay           staff acknowledged that they were aware of the inappropriate
Construction Repairs       payment and had deducted $3,000 from one of Bethel’s
                           invoices to correct the problem. However, we found that the
                           deduction was not made. A Program Coordinator for the
                           City’s Empowerment Zone Program could not explain why the
                           deduction was not made.

                           The City did not report the Program’s performance
The City Did Not Report    measures in the June 1997 Performance Review. As of June
The Program’s              1997, Bethel New Life’s records showed that the Program:
Performance Measures       (1) identified and marketed 14 housing units; (2) sold one
                           home in the Empowerment Zone; and (3) leveraged
                           $91,000 in mortgage funds. However, this information was

                                     Page 61                              99-CH-259-1002
Appendix B


                            not reported in the Performance Review. The City also
                            inaccurately reported the projected completion date for the
                            Program’s performance measures. The Review showed that
                            the Program’s performance measures were expected to be
                            completed in September 1997. However, Bethel’s Vice
                            President of Development said the June 30, 1997 Review
                            should have shown a planned completion date of December
                            31, 1997 for the performance measures.

                            The Program did not report the information to the City
                            because the City only requested information related to
                            funding and did not request information related to
                            performance measures.         HUD’s instructions for the
                            Performance Review required the City to report measurable
                            outcomes of an activity. The Assistant Commissioner of the
                            City’s Department of Planning and Development said the
                            City did not request the performance measure results
                            because it did not have sufficient staff to verify the accuracy
                            of the information. We believe the City had adequate staff
                            to verify the accuracy of information. The City had all eight
                            budgeted staff positions filled during the reporting year with
                            the exception of one position that was vacant for two and
                            one-half months. At the time the Review was prepared, the
                            City was fully staffed and had four more individuals
                            working under an internship program. The interns were
                            hired to perform special projects. One intern’s sole
                            responsibility was to prepare the Performance Review.

                            The City over reported the Program’s funding in the June
  The City Over Reported    1997 Performance Review.        Based upon information
  The Program’s Funding     provided by Bethel, the City reported that the Program
  By $210,000               planned to receive $210,000 in private funding. However,
                            Bethel’s Vice President of Development said private funds
                            were not involved in the Program. The Vice President of
                            Development could not explain why Bethel inaccurately
                            reported the Program’s private funding to the City. The
                            over reporting of the Program’s funding occurred because
                            the City did not verify the accuracy of the information
                            provided by Bethel.

                            The City’s June 1997 Performance Review did not show the
  The City Did Not Report   progress made by the Program. The City did not report the
  The Program’s             Program’s performance milestones that were completed as
  Performance Milestones    of June 30, 1997. For example, the Review showed the
                            Program planned to identify financial institutions to

99-CH-259-1002                      Page 62
                                                                       Appendix B


                         participate in the Program by December 16, 1996.
                         However, Bethel’s records showed that First Chicago Bank,
                         the Program’s first participating institution, was not
                         identified until March 1997. The City’s Performance
                         Review also reported that workshops for home buyers were
                         planned to begin in March 1997. However, Bethel’s
                         records showed that the first workshop was held on January
                         4, 1997. The City also did not report the fact that the
                         Program held five workshops for home buyers as of June
                         30, 1997.

                         The City also inaccurately reported the Program’s projected
                         completion date for its performance milestones. The City’s
                         June 1997 Performance Review showed that the Program
                         planned to: (1) identify employer groups to participate in
                         the Program by December 16, 1996; and (2) complete the
                         development of a spin-off program by June 16, 1997.
                         However, Bethel’s Vice President said the June 30, 1997
                         Review should have reported a planned completion date of
                         December 31, 1997 for both performance milestones.

                         The City inaccurately reported the Program’s participating
The City Inaccurately    entities. The June 1997 Performance Review showed that
Reported The Program’s   Heinz Neighborhood Development was a participating
Participating Entities   entity in the Program. However, Bethel’s Vice President of
                         Development said she was not familiar with Heinz
                         Neighborhood Development. The City used information
                         included in the Program’s proposal to report the projected
                         participating entities in the Performance Review.

                         The incomplete and inaccurate reporting of performance
                         measures, funding, performance milestones, and
                         participating entities occurred because: (1) inexperienced
                         staff prepared the City’s Performance Review; (2) the City
                         did not request performance information; and (3) the City’s
                         management staff, who was responsible for administering
                         the Empowerment Zone Program, did not examine the
                         Performance Review for accuracy. Since the overall
                         measure of success of the Empowerment Zone Program is
                         to assist Zone residents and leverage funding, we believe it
                         is imperative that the City accurately reports the
                         performance of its activities.




                                   Page 63                            99-CH-259-1002
Appendix B


                     Excerpts from the City of Chicago’s comments on our draft
 Auditee Comments    finding follow. Appendix C, page 101, contains the complete
                     text of the comments.

                     At the time the 1997 Performance Review was submitted,
                     the best funding estimates available were either from the
                     original proposals submitted by subrecipients or from the
                     investment worksheets collected from subrecipients between
                     the date HUD issued the Performance Review instructions
                     (June 23, 1997) and the date the Performance Review was
                     due to HUD (July 30, 1997).

                     While the City indicates that it used the best funding estimates
 OIG Evaluation of   to prepare the Performance Review, we found the City did not
 Auditee Comments    verify the accuracy of the information provided to HUD. The
                     City was unaware the information was not accurate.


                     Procedures have been established requiring all subrecipients
 Auditee Comments    to maintain records documenting benefits to Zone residents.
                     Source documentation will be submitted by the subrecipient
                     to verify staff involvement in the project. If the subrecipient
                     is not in compliance with the contract, the Chicago
                     Empowerment Zone will take necessary corrective actions
                     to remedy any non-compliance issues. Funding has been
                     withheld until the necessary documentation is submitted.
                     The $3,000 in funds will be added to the advance total as a
                     liability. Procedures and controls have been established to
                     ensure that funds are used efficiently and effectively.
                     Training will be provided for existing and future staff.
                     Procedures and controls have been established to ensure
                     that project accomplishments are accurately reported and to
                     verify the accuracy of information submitted to HUD.

                     The City indicated that it has established procedures and
 OIG Evaluation of   controls to ensure that: (1) funds are used efficiently and
 Auditee Comments    effectively; (2) project accomplishments are accurately
                     reported; and (3) information submitted to HUD is verified for
                     accuracy. Additionally, the City indicated that it established
                     procedures to require subrecipients to maintain records to
                     document benefits to Zone residents. The City did not include
                     the procedures or controls with its comments. The City’s
                     corrective actions to remedy any non-compliance issues need
                     to include reimbursement by the City to the Empowerment


99-CH-259-1002               Page 64
                                                                                       Appendix B


                                      Zone Program from non-Federal funds for the inappropriate or
                                      unsupported use of Zone funds.


Controls Over the Northwest Industrial Corridor
          Program Were Inadequate
The City of Chicago did not have adequate controls over the Northwest Industrial Corridor
program. The City inappropriately reimbursed Bethel New Life, the administering entity of the
Northwest Industrial Corridor program, $36,171 from Empowerment Zone funds for costs that
were not related to the program. The City also did not accurately report the actual status and
progress of the program in the June 30, 1997 Performance Review. The Review contained
inaccuracies related to performance measures, funding, and performance milestones. The
problems occurred because the City did not have an adequate monitoring system, and it lacked a
reporting process with effective oversight and controls to ensure the reliability of the information
included in the Performance Review. As a result, Empowerment Zone funds were not used
effectively and efficiently, and the City did not provide HUD with an accurate description of the
program’s position and objectives.


                                      Bethel New Life used $30,107 of Empowerment Zone funds
  The City Did Not Have               to pay for the cost of its Administrative Assistant to the
  Adequate Controls Over              Senior Vice President of Operations. The costs included the
  Empowerment Zone                    Assistant’s salary and health benefits between January 1,
  Funds                               1997 and December 31, 1997.                    However, the
                                      Administrative Assistant had never worked on the
                                      Northwest Industrial Corridor program. The City also
                                      inappropriately used $6,064 of Empowerment Zone funds to
                                      reimburse Bethel for other services not related to the program.
                                      The services related to lead abatement removal that were not
                                      part of the City’s Empowerment Zone Program. The
                                      Assistant Commissioner for the City’s Department of
                                      Planning and Development said the City did not monitor the
                                      program because it lacked sufficient monitoring procedures.
                                      As a result, $36,171 of Empowerment Zone funds were not
                                      used efficiently and effectively.

                                      The City incorrectly reported the program’s performance
  The City Inaccurately               measures in the June 1997 Performance Review. The
  Reported The Program’s              Review showed that the program was expected to: (1) assist
  Performance Measures                105 individuals to obtain employment; and (2) place at least
                                      100 Empowerment Zone residents in jobs. However,
                                      Bethel’s Vice President of Development said the two
                                      measures were being performed by another Empowerment

                                                 Page 65                             99-CH-259-1002
Appendix B


                           Zone activity, the Job Link Program. The Job Link
                           Program included projections for the two measures as part
                           of its Program. Therefore, the projections were reported
                           twice and the impression exists that more individuals will be
                           assisted than actually planned.

                           The Performance Review also showed that one of the
                           program’s performance measures was to advise 50
                           businesses of the wage tax credits available under the
                           Empowerment Zone Program. As of June 1997, the City
                           did not report any accomplishments for this measure.
                           Bethel’s files showed that 17 businesses had been informed
                           of the tax credits by June 30, 1997.

                           The City over reported the program’s funding in the June
  The City Over Reported   1997 Performance Review. Based upon a worksheet
  The Program’s Funding    provided by Bethel New Life, the City reported in the
  By $600,000              Performance Review that the program expected to receive
                           $600,000 in private funds. The City did not verify the
                           accuracy of the information provided and Bethel New Life
                           did not have documentation to support the reported private
                           funding.

                           The City reported that the Northwest Industrial Corridor
  The City Inaccurately    program planned to establish an industrial training program
  Reported The Program’s   by June 1, 1997 as contained in the contract with Bethel
  Performance Milestones   New Life. However, the Vice President of Development for
                           Bethel said the training program was not expected to be
                           established until March 1, 1998. The City did not request
                           information related to performance milestones when it
                           prepared the Performance Review.

                           The City also reported that the Northwest Industrial
                           Corridor program would establish a job database by June 1,
                           1997 as required by the contract. However, the database
                           was created by another Empowerment activity, the Job Link
                           Program, and had been completed by June 30, 1997. Since
                           the City did not verify the information it reported in its
                           Performance Review, it did not detect that the database had
                           already been created and it did not alter Bethel’s contract to
                           eliminate the requirement.

                           The incomplete and inaccurate reporting of performance
                           measures, funding, and milestones occurred because: (1)
                           inexperienced staff prepared the City’s Performance

99-CH-259-1002                     Page 66
                                                                    Appendix B


                    Review; (2) the City did not request performance
                    information; and (3) the City’s management staff, who was
                    responsible for administering the Empowerment Zone
                    Program, did not examine the Performance Review for
                    accuracy. Since an important measure of success for the
                    Empowerment Zone Program is the amount of assistance
                    provided to Zone residents and leveraged private funding,
                    we believe it is imperative that the City accurately reports
                    the performance information for its activities.


                    Excerpts from the City of Chicago’s comments on our draft
Auditee Comments    finding follow. Appendix C, page 95, contains the complete
                    text of the comments.

                    Source documentation has been requested to substantiate
                    staff involvement with the project. If the subrecipient is not
                    in compliance with the contract, the Chicago Empowerment
                    Zone will take necessary corrective actions to remedy any
                    non-compliance issues. Performance measures will be
                    reestablished with the subrecipient to reflect the desired
                    output. Funding has been withheld pending submission of
                    the appropriate deliverables. Procedures and controls have
                    been established to ensure that funds are used efficiently and
                    effectively. Training will be provided for existing and future
                    staff. Procedures and controls have been established to
                    ensure that project accomplishments are accurately reported
                    and to verify the accuracy of information submitted to
                    HUD.


                    The City indicated that it has established procedures and
OIG Evaluation of   controls to ensure that: (1) funds are used efficiently and
Auditee Comments    effectively; (2) project accomplishments are accurately
                    reported; and (3) information submitted to HUD is verified for
                    accuracy. The City did not include the procedures or controls
                    with its comments. The City’s corrective actions to remedy
                    any non-compliance issues need to include reimbursement by
                    the City to the Empowerment Zone Program from non-Federal
                    funds for the inappropriate use of Zone funds.




                              Page 67                              99-CH-259-1002
Appendix B




      Controls Over Community Services West
      Workforce and Life Preparation Were Not
                     Adequate
The City of Chicago did not maintain adequate controls over the Community Services West
Workforce and Life Preparation program. The City advanced $25,403 of Empowerment Zone
funds to Bethel New Life, the program’s administering entity, and no services were subsequently
performed. Bethel New Life commingled the Empowerment Zone funds with funds from their
other activities and used the Zone funds for operations that were not related to the program. The
City did not adequately monitor the program to ensure services were provided. Additionally, the
City inaccurately reported the program’s funding and participating entities encountered in the
June 30, 1997 Performance Review. The City reported the program had $271,211 in private
funds when it had none; and that the program had not encountered any obstacles when it had a
significant obstacle. The inaccurate reporting occurred because the individual who prepared the
Performance Review was inexperienced and the City did not examine the Performance Review for
accuracy prior to submission. As a result, the City did not efficiently and effectively use the
Empowerment Zone funds it advanced for the program. The City also did not provide HUD with
a realistic description of the program’s position to achieve its objectives.


                                     The City did not exercise adequate control over Empowerment
 Controls Over Advances              Zone funds. The City advanced Bethel New Life $25,403 of
 Were Not Adequate                   Empowerment Zone funds in April 1997, even though the
                                     contract between the City and Bethel did not have a
                                     provision for an advance. Bethel did not perform any
                                     services as required by the contract. Bethel New Life
                                     deposited the Empowerment Zone funds in an account and
                                     commingled them with funds from their other activities.
                                     From our review of the account’s transactions, we
                                     determined that Bethel used the Empowerment Zone funds
                                     for operations that were not related to the program.

                                     The Assistant Commissioner for the City’s Department of
                                     Planning and Development said the problem occurred because
                                     the City did not adequately monitor the progress of
                                     Community Services West due to a shortage of staff. The
                                     Director of Contracts Management for Chicago Mayor’s
                                     Office of Workforce Development said Bethel New Life did
                                     not submit quarterly progress reports, since they had nothing to
                                     report. The City did not recognize that the lack of reporting


99-CH-259-1002                               Page 68
                                                                          Appendix B


                         reflected a lack of progress and the City had not performed any
                         on-site verification.

                         The City advanced the funds to Bethel New Life as part of its
                         standard operating procedure. Under the City’s procedures,
                         upon execution of a contract, subgrantees may request an
                         advance amount based on 45 days of operations or 12 and one-
                         half percent for a one-year contract. Since no action had been
                         taken by Bethel New Life to meet the objectives of the
                         program, it had no need for an advance. The City did not
                         verify the need for a cash advance.

                         Since Bethel New Life commingled the Empowerment Zone
                         funds and used the funds for operations that were not
                         related to the program, the City the lost the opportunity to
                         use the funds on a project that was actively working to
                         achieve Empowerment Zone objectives.

                         In the June 30, 1997 Performance Review on the Community
The City Incorrectly     Services West Workforce and Life Preparation program, the
Reported The Program’s   City of Chicago incorrectly reported the program received
Commitments and          $271,211 in commitments from private investors. The
Participating Entities   worksheet provided to the City by Bethel New Life showed
                         that there was no private funding for the program.

                         The City reported that the Polk Brothers Foundation,
                         MacArthur Foundation, and Surdna Foundation were
                         participating entities. A note on the worksheet stated the
                         grants of the participating organizations had been exhausted
                         prior to the program starting due to time delays. The Senior
                         Vice President of Programs at Bethel New Life said the three
                         foundations were past contributors and showed interest in the
                         program, but did not fund the program. Therefore, the receipt
                         of $271,211 in private funding was erroneously reported. The
                         lack of private funding is a major obstacle blocking the
                         program from meeting its objectives.

                         The Assistant Commissioner for the City’s Department of
                         Planning and Development said the inaccurate reporting
                         occurred because the Performance Review was prepared by
                         inexperienced staff. She said the City’s management staff, who
                         was responsible for administering the Empowerment Zone
                         Program, did not examine the Review for accuracy.




                                   Page 69                              99-CH-259-1002
Appendix B


                     Excerpts from the City of Chicago’s comments on our draft
 Auditee Comments    finding follow. Appendix C, page 91, contains the complete
                     text of the comments.

                     The contract has been extended to enable the subrecipient
                     to fully implement the project. If the subrecipient does not
                     comply with the contract, the Chicago Empowerment Zone
                     will take necessary corrective actions to remedy any non-
                     compliance issues. Advance procedures have been revised
                     and are consistent with the Cash Management Improvement
                     Act. Procedures and controls have been established to
                     ensure that funds are used efficiently and effectively, and
                     quarterly reports are received from all subrecipients.
                     Training will be provided for existing and future staff.
                     Procedures and controls have been established to ensure
                     that project accomplishments are accurately reported and to
                     verify the accuracy of information submitted to HUD.

                     The City disagrees that the subrecipient incorrectly
                     deposited Zone funds into an account with funds from other
                     sources. According to the Office of Management and
                     Budget’s Circular A-110, separate depository accounts are
                     not required for Empowerment Zone funds.                   The
                     subrecipient acknowledges that the advance is a liability.


                     Our review questioned the use of Empowerment Zone funds.
 OIG Evaluation of   We determined that Empowerment Zone funds were used for
 Auditee Comments    services that were not related to the Community Services West
                     program. We did not take exception to the subrecipient
                     depositing Zone funds in an account with funds from other
                     sources. The City indicated that it has established procedures
                     and controls to ensure that: (1) funds are used efficiently and
                     effectively; (2) project accomplishments are accurately
                     reported; (3) information submitted to HUD is verified for
                     accuracy; and (4) quarterly reports are received from all
                     subrecipients. The City did not include the procedures or
                     controls with its comments. The City’s corrective actions to
                     remedy any non-compliance issues need to include
                     reimbursement by the City to the Empowerment Zone Program
                     from non-Federal funds for the inappropriate use of Zone
                     funds.

                     The Cash Management Improvement Act does not apply to the
                     City. We adjusted our finding accordingly.

99-CH-259-1002               Page 70
                                      Appendix B




Controls Over The Storehouse Distributions
    Center Project Were Not Adequate

                    Page 71          99-CH-259-1002
Appendix B


The City of Chicago did not have adequate controls over The Storehouse Distributions Center
project. The City reimbursed The Storehouse Distributions Center $45,000 from Empowerment
Zone funds for three of its employee’s salaries; however, there was no documentation to support
the reimbursement was a benefit to the Zone. The Storehouse’s three employees were the
Administrative Director, Warehouse Manager, and the Corporate Relations Manager. The City
also did not report the actual status of the project’s performance measures in the June 30, 1997
Performance Review. The problems occurred because the City did not have an adequate
monitoring system. The City also lacked a reporting process with effective oversight and controls
to ensure the reliability of the information included in the Performance Review. As a result, HUD
lacks assurance that Empowerment Zone funds were used efficiently and effectively, and was not
provided with an accurate description of the project’s progress.


                                     The City of Chicago could not support that $30,000 of
 The City Did Not Have
                                     reimbursements for two of The Storehouse’s employees’
 Adequate Controls Over
                                     salaries benefited the Empowerment Zone. The City used
 Zone Funds
                                     Zone funds to pay the salaries of The Storehouse’s
                                     Warehouse Manager and Corporate Relations Manager.
                                     The reimbursements were for 50 percent of the Managers’
                                     salaries between October 1, 1996 and September 30, 1997.
                                     However, the City and The Storehouse did not maintain
                                     documentation that showed the time the Managers spent on
                                     The Storehouse project or other activities.

                                     The City also inappropriately used $15,000 of
                                     Empowerment Zone funds to reimburse The Storehouse for
                                     50 percent of its Administrative Director’s salary. The City
                                     and The Storehouse did not maintain documentation to
                                     support the time the Administrative Director spent on The
                                     Storehouse project or other activities. Additionally, the
                                     City reimbursed another Empowerment Zone activity, the
                                     Job Link Program, for the Administrative Director’s time.
                                     The Administrative Director provided training and
                                     enrollment services to the Job Link Program. In relation to
                                     the Administrative Director’s training responsibilities, we
                                     were able to use training records to determine that the
                                     Administrative Director provided 48 hours of employment
                                     training under the Job Link Program. The Job Link
                                     Program used Empowerment Zone funds to reimburse The
                                     Storehouse $1,000 for the Director’s training services.

                                     The City did not have an adequate monitoring system that
                                     required the review of supporting documentation and
                                     evaluation of the appropriateness of payments in all
                                     instances. Appropriateness of payments were not evaluated

99-CH-259-1002                               Page 72
                                                                            Appendix B


                          when grantees were associated with more than one
                          Empowerment Zone activity, but the activities were
                          monitored by different City departments. The Mayor’s
                          Office of Workforce Development monitored the Job Link
                          Program, and the City’s Department of Planning and
                          Development monitored The Storehouse Distributions
                          Center.

                          The Assistant Commissioner for the City’s Department of
                          Planning and Development said the City needed to improve
                          monitoring reviews. She also said the City needed to
                          incorporate controls into its monitoring system to address the
                          situation where grantees have multiple Empowerment Zone
                          contracts that are monitored by different City Departments. As
                          a result, HUD lacks assurance that Empowerment Zone funds
                          were used efficiently and effectively.

                          The City did not report the actual progress of the project’s
The City Did Not Report   performance measures in the June 1997 Performance
The Project’s Progress    Review. The Storehouse Distribution Center provided a
                          report dated July 18, 1997 to the City that showed The
                          Storehouse had exceeded its performance measures as of June
                          30, 1997. However, the Performance Review did not reflect
                          that The Storehouse increased its membership by 221
                          members, the number of donors by 74 organizations, and the
                          amount of its operation handling fees by $82,803.

                          The Assistant Commissioner for the City’s Department of
                          Planning and Development said the Performance Review
                          was prepared by an intern for the City. She also said the
                          City’s management staff, who was responsible for
                          administering the Empowerment Zone Program, did not
                          examine the Performance Review for accuracy. Since the
                          overall measure of success of the Empowerment Zone
                          Program is to assist Zone residents, we believe it is
                          imperative that the City accurately reports performance
                          measures of its activities. As a result, the City understated the
                          progress of The Storehouse project.

                          Excerpts from the City of Chicago’s comments on our draft
Auditee Comments          finding follow. Appendix C, page 94, contains the complete
                          text of the comments.

                          The subrecipient agreement was based upon output as
                          measured by the benchmarks. It is critical to note that the

                                     Page 73                               99-CH-259-1002
Appendix B


                                   subrecipient not only met, but exceeded, all the agreed upon
                                   benchmarks.      Specifically, the subrecipient’s planned
                                   benchmarks were: increase membership to 270 members
                                   (ACTUAL 409); increase donors to 75 (ACTUAL 110);
                                   and increase the amount of operation handling fees to
                                   $75,000 (ACTUAL $168,129). Therefore, the salary
                                   reimbursements were justified.

                                   Procedures and controls have been established to ensure
                                   that funds are used efficiently and effectively. Training will
                                   be provided for existing and future staff. Procedures and
                                   controls have been established to ensure that project
                                   accomplishments are accurately reported and to verify the
                                   accuracy of information submitted to HUD.


                                   We acknowledge that the project exceeded its deliverables;
 OIG Evaluation of                 however, the administering entity could not support that the
 Auditee Comments                  salary reimbursements were reasonable and necessary to
                                   provide the deliverables.    The City needs to provide
                                   documentation to support the reimbursements, or reimburse
                                   the Empowerment Zone Program from non-Federal funds.

                                   The City indicated that it has established procedures and
                                   controls to ensure that: (1) funds are used efficiently and
                                   effectively; (2) project accomplishments are accurately
                                   reported; and (3) information submitted to HUD is verified for
                                   accuracy. The City did not include the procedures or controls
                                   with its comments.




    Accomplishments of the Community Youth
      Development Activity Network Were
              Incorrectly Reported
The City of Chicago did not accurately report the actual status and progress of the Community
Youth Development Activity Network program. The City’s June 30, 1997 Performance Review

99-CH-259-1002                             Page 74
                                                                                         Appendix B


contained inaccuracies related to the program’s performance measures and funding. The
inaccuracies occurred because the City’s reporting process lacked effective oversight and controls to
ensure the validity and reliability of the information included in the Performance Review. As a result,
HUD was not provided an accurate picture of the program.


                                       The City of Chicago did not report the number of youths
  The City Did Not Report              served by the program in the June 1997 Performance
  That 597 Youths Were                 Review to HUD. The program served 597 youths as of
  Served                               June 30, 1997. The Network did not report the information
                                       to the City because the City only requested information
                                       related to investments and did not request information
                                       related to performance measures.             The Assistant
                                       Commissioner of the City’s Department of Planning and
                                       Development said the City did not request the performance
                                       information because it did not have sufficient staff to verify
                                       the accuracy of the information. HUD’s instructions for the
                                       Performance Review required the City to report measurable
                                       outcomes of an activity.      As a result, HUD was not
                                       provided an accurate picture of the benefit of the program.

                                       The City of Chicago’s Performance Review showed the
  The City Overstated The              program’s planned private funding was $261,300.
  Program’s Funding                    However, in a report provided to the City by the Executive
                                       Director of AGAPE Youth Development and Family
                                       Services, the entity administering the program, AGAPE
                                       estimated it would receive only $138,695 in private funding.

                                       AGAPE also reported that it received $25,799 in State of
                                       Illinois funding and $20,000 in City funds. The City did not
                                       report these amounts in the Performance Review.
                                       Additionally, AGAPE received $40,391 of in-kind
                                       contributions but did not report this, since the City did not
                                       request the information. As a result, the City understated
                                       $25,799 in State funding, $20,000 in City funds, and
                                       $40,391 of in-kind contributions for the program.

                                       The following table shows that the net effect of the
                                       inaccurate reporting was an overstatement of $36,415:

                                                          Over            Under
                                         Funding        Reported         Reported        Net Effect
                                        Private         $122,605
                                        State                           ($25,799)
                                        City                             (20,000)

                                                  Page 75                              99-CH-259-1002
Appendix B


                      In-kind                          (40,391)
                      Total            $122,605       ($86,190)          $36,415

                     The incomplete and inaccurate reporting of performance
                     and financial data occurred because: (1) inexperienced staff
                     prepared the City’s Performance Review; (2) the City did
                     not request the performance information because, as
                     previously mentioned, it did not have the staff to verify the
                     information; and (3) the City’s management staff, who was
                     responsible for administering the Empowerment Zone
                     Program, did not examine the Performance Review for
                     accuracy. Since the overall measure of success of the
                     Empowerment Zone Program is to assist Zone residents by
                     leveraging private funds and contributions, we believe it is
                     imperative that the City accurately reports performance
                     measures and funding of its activities.


                     Excerpts from the City of Chicago’s comments on our draft
 Auditee Comments    finding follow. Appendix C, page 91, contains the complete
                     text of the comments.

                     At the time the 1997 Performance Review was submitted,
                     the best funding estimates available were either from the
                     original proposals submitted by subrecipients or from the
                     investment worksheets collected from subrecipients between
                     the date HUD issued the Performance Review instructions
                     (June 23, 1997) and the date the Performance Review was
                     due to HUD (July 30, 1997). Training will be provided for
                     existing and future staff. Procedures and controls have been
                     established to ensure that project accomplishments are
                     accurately reported and to verify the accuracy of
                     information submitted to HUD.


                     While the City indicates that it used the best funding estimates
 OIG Evaluation of   to prepare the Performance Review, we determined the City
 Auditee Comments    had updated funding information in its files which it did not use
                     for the Review.

                     The City indicated that it has established procedures and
                     controls to ensure that project accomplishments are accurately
                     reported, and information submitted to HUD is verified for
                     accuracy. The City did not include the procedures or controls
                     with its comments.

99-CH-259-1002               Page 76
                                                                                  Appendix B




         Funding for the West Side Residential
         Rehabilitation Project was Inaccurately
                        Reported
The City of Chicago did not accurately report the leveraged funding amounts for the West Side
Residential Rehabilitation project in the 1997 Performance Review to HUD. The City did not
report the project had a $1.1 million pending commitment from the City’s Department of
Housing. The City also over reported the project’s planned private funding by $2.2 million. The
net effect was an overstatement of $1.1 million in planned funding. The problem occurred
because the City lacked adequate controls over its reporting process. As a result, the City

                                              Page 77                           99-CH-259-1002
Appendix B


provided HUD with an unrealistic picture of the funds that will be applied to the West Side
Residential project.


                                  The City’s June 1997 Performance Review showed the
  Funding For The Project         project’s planned funding from the City was $1.1 million. The
  Was Overstated By $1.1          project’s officials provided a report to the City, prior to the
  Million                         June 1997 Performance Review, that showed the project
                                  received $1.1 million from the City and had the City’s
                                  commitment for an additional $1.1 million. The City did not
                                  include the additional $1.1 million of committed funds because
                                  its procedures required that only actual funds provided should
                                  be reported, not commitments. However, HUD’s instructions
                                  require that Zones report confirmed commitments.

                                  The City’s Performance Review also reported that the project’s
                                  planned private funding was $3.9 million. The project’s report
                                  to the City showed that only $1.7 million in private funding was
                                  planned. The private funding consisted of $600,000 from the
                                  Resurrection Trust Fund and $1.1 million from the First
                                  National Bank of Chicago. City officials could not provide an
                                  explanation for the inaccurate reporting of the project’s private
                                  funding.

                                  Because of inaccurate reporting, a false impression was created
                                  that more funds were committed to the project than actually
                                  were. The Empowerment Zone Program is intended to
                                  leverage outside sources of funds. When the planned
                                  funding data is inaccurate, HUD cannot make a proper
                                  assessment of the Program’s progress.

                                  Excerpts from the City of Chicago’s comments on our draft
 Auditee Comments                 finding follow. Appendix C, page 90, contains the complete
                                  text of the comments.

                                  At the time the 1997 Performance Review was submitted,
                                  the best funding estimates available were either from the
                                  original proposals submitted by subrecipients or from the
                                  investment worksheets collected from subrecipients between
                                  the date HUD issued the Performance Review instructions
                                  (June 23, 1997) and the date the Performance Review was
                                  due to HUD (July 30, 1997). Procedures and controls have
                                  been established to ensure accurate reporting of leveraged
                                  funds and to verify the accuracy of information submitted to
                                  HUD.

99-CH-259-1002                            Page 78
                                                                      Appendix B




                    While the City indicates that it used the best funding estimates
OIG Evaluation of   to prepare the Performance Review, we determined the City
Auditee Comments    had updated funding information in its files which it did not use
                    for the Review.

                    The City indicated that it has established procedures and
                    controls to ensure accurate reporting of leveraged funds, and
                    the information submitted to HUD is verified for accuracy.
                    The City did not include the procedures or controls with its
                    comments.




                               Page 79                               99-CH-259-1002
                                                                                     Appendix C


Auditee Comments
September 2, 1998

Via Overnight Delivery

Mr. Heath Wolfe
Senior Auditor
U.S. Department of Housing and Urban Development
Office of Inspector General for Audit, Midwest
200 North High Street, Room 334
Columbus, Ohio 43215-2499

RE:   Chicago’s Empowerment Zone – Response to Draft Audit Findings

Dear Mr. Wolfe:

Thank you for the opportunity to respond to the draft audit findings promulgated by the audit
team. We are glad to provide clarity about the Chicago Empowerment Zone’s accomplishments
and the improvements we have made to our original operations and procedures. We also
appreciate the opportunity to point out items where we disagree with the interpretations
employed and conclusions drawn by the auditors.

All efforts of Chicago’s Empowerment Zone have been focused on the four key principles
established by HUD at the inception of the Empowerment Zone initiative and underlying the
formation of its strategic plan (per 24 CFR 597.200(c)):

       1.    Economic opportunity
       2.    Sustainable community development
       3.    Community-based partnerships
       4.    Strategic vision for change.

Chicago’s Empowerment Zone is proud of our progress to date. We remain committed to
ever-increasing efficiency and effectiveness in reaching the critically important goals of the
EZ initiative for the benefit of some of the neediest communities in our city. A summary of
the accomplishments of Chicago’s EZ during its first funding cycle is attached hereto as Exhibit
A and made a part hereof. Highlights of those accomplishments include:

•            In the first funding cycle, the Chicago’s EZ/EC Coordinating Council approved 73
             programs and projects within seven Strategic Initiatives identified in Chicago’s
             Strategic Plan. More than $43 million of EZ funds have been committed to these
             programs and projects.

•             The EZ is revitalizing industrial and commercial corridors, improving the

                                            Page 81                                99-CH-259-1002
Appendix C


               attractiveness of industrial areas and assisting small businesses through
               entrepreneurial training. Eleven programs are providing job training and placement
               services to EZ residents. Services provided through these programs include
               workforce readiness, specific skills training, and job placement follow-up.

•              More than 400 housing units, including owner-occupied and rental property, and
               100 units of single-room apartments are being constructed by seven community-
               based development organizations to help meet the needs of low and very-low
               income EZ residents.

•              Six community-based health centers are increasing their capacity to serve EZ
               residents by building new facilities or expanding services at existing facilities.

•              Five day care centers will be constructed in the EZ to provide safe, affordable, high-
               quality day care to more than 1,100 children. The parents of many of these children
               are returning to or entering the job market for the first time under welfare-to-work.


                           RESPONSE TO HUD AUDIT FINDINGS

The audit team’s findings fall into two basic categories: (1) inaccurate reporting and (2) improper
or unsupported use of funds. The audit team identified three broad findings of inaccurate reporting
– regarding actual progress and status of funded programs, non-Empowerment Zone activities, and
leveraged funds. We acknowledge that mistakes were made in reporting in our July 30, 1997
Performance Report (covering the period July 1, 1996 through June 30, 1997). Fortunately, we
became aware of those problems and started to implement solutions shortly after the 1997
Performance Report was filed – long before the audit was announced.

Despite some serious problems and setbacks which we experienced during the first three years of
the program (including a complete overhaul of our coordinating council and the tenure of three
different directors), we now are on the right track in both our substantive and administrative
activities. We are confident that the specific improvements and corrections (detailed below) will
address all of the problems experienced during the beginning phase of Chicago’s EZ program and
that our reporting hereafter will accurately reflect the actual progress and status of funded
programs, only EZ activities, and all leveraged funds.

Regarding the allegations of improper or unsupported use of EZ funds, we detail below our
disagreement with certain pertinent definitions and assumptions employed by the auditors and with
certain conclusions derived therefrom that are relevant to these allegations. As explained below,
efforts are underway by the EZ staff to determine compliance or non-compliance of each program
and project on the basis of definitions and interpretations that are consistent with the


spirit of the EZ initiative and confirmed by the HUD EZ program office. When the analysis is
complete, we will immediately take any necessary corrective actions.

99-CH-259-1002                                   Page 82
                                                                                         Appendix C



A.     Improvements to our monitoring and reporting system already have been
       implemented, which will result in accurate reporting of accomplishments, EZ
       activities only, and leveraging in the future.

The monitoring and reporting improvements being implemented by the Chicago EZ reflect a three-
part strategy: first, a policy of “containment” of problematic contracts from the Chicago EZ’s first
funding cycle; second, introduction of the new monitoring and reporting requirements for first
funding cycle contracts that have not yet been executed; and, third, incorporation of the new
monitoring and reporting requirements up-front – as part of the application process – for the
second funding cycle.

The specific improvements made by the Chicago EZ to the original monitoring and reporting
requirements (“the new system”) include:

1.     Clear communication of reporting requirements (both substantive and procedural) to sub-
       recipients and lead agencies which have monitoring responsibilities

2.     Creation and distribution of standardized monitoring and reporting forms -- to aid
       compliance and produce results that permit apples-to-apples analysis and reporting of
       accomplishments and leveraging

3.     Clear procedures to tie distribution of funds to actual performance of sub-recipients

4.     Standardization of previously problematic definitions, such as “primarily serving EZ
       residents,” leveraged funds, job creation, etc.

5.     Site visits by EZ staff to every sub-recipient to determine/verify progress and status

6.     Increased coordination with and cooperation from lead agencies within the City re:
       monitoring (i.e., increased utilization of existing expertise and relationships with sub-
       recipients)

7.     Budgeting for the hiring of two additional EZ staff in FY 1999 for monitoring activities

8.     Training of all EZ staff and lead agency staff involved in monitoring and reporting
       regarding HUD’s reporting procedures

9.     Clear separation of activities funded by federal EZ dollars from EZ/EC activities funded by
       state dollars

10.    Revised procedures for granting advances, consistent with HUD’s Cash Management
       Improvement Act
11.    Immediate initiation of corrective actions against sub-recipients who are out of compliance,
       as required.

                                                  Page 83                              99-CH-259-1002
 Appendix C



B.     Areas of Disagreement in Interpretation.

1.      EZ Funds Should Benefit EZ Residents Primarily.

The HUD IGA audit team indicates that EZ funds may be used only for the benefit of EZ residents.
Chicago’s EZ, in consultation with HUD’s EZ program office, has proceeded on the basis that the
use of EZ funds should benefit EZ residents primarily. HUD’s EZ Program Coordinator confirmed
this interpretation at the Audit Exit Conference in Chicago on August 18. In fact, the instruction
distributed by HUD with the Round II Designation application forms (entitled Preliminary
Guidelines Round II EZ/EC SSBG Grants for Empowerment Zones) specifically states:

       Resident Benefit: All programs, services and activities financed in whole or in part
       with Round II EZ/EC SSBG funds must be structured to benefit EZ residents
       primarily; the programs, services and activities may also benefit nonresidents.
       (Emphasis added.)

The initial working assumption of “benefit” shared by HUD and Chicago’s EZ as a Round I
designee has been confirmed in the Round II instructions.

2.     The Definition of “Benefit” Should Be Broader.

In addition, we believe that the auditors have too narrowly defined the term “benefit.” Two types
of activities identified by the auditors as problematic – new housing development and the
expansion of an important cultural institution in the EZ – benefit Zone residents in numerous ways,
including by bringing new money into the local economy, new amenities into the neighborhood,
and by improving previously undeveloped or under-used properties. In addition, both activities are
consistent with the Strategic Plan for Chicago’s EZ. Under the audit team’s overly narrow
definition, these very real and meaningful benefits would not be considered to flow from the EZ
program.

3.     Appropriate Combination of Funds in One Account is Authorized.

The auditors’ opinion that commingling of funds is not allowed is inconsistent with the Office of
Management and Budget regulations which clearly allow sub-recipients to combine funds for
several different programs in one account provided the agency maintains an accurate account of
project funds. (See OMB Circular A-110, (i) (1))

4.      Chicago’s Empowerment Zone Did Not Lose Any Opportunity to Fund Other Activities.

The auditors assumption that the City lost the opportunity to use funds for other activities when
first cycle sub-recipients did not implement approved projects in a timely manner was in error.
Chicago’s EZ did not allocate all available funds during the first funding cycle of the 10-year EZ
program. No EZ activity has been stalled for lack of funding availability.


 99-CH-259-1002                                Page 84
                                                                                          Appendix C


5.      Chicago’s EZ Has Focused on Deliverables Contained in Each Project’s Contract.

We disagree with the auditors’ opinion that a sub-recipient receiving funds for staff salaries must
document that a specified percentage of a staff person’s time funded by an EZ grant was actually
spent on the EZ project. In the case cited by the audit team, the sub-recipient performed all
tasks/deliverables in less time than it had anticipated. Barring an unreasonable estimate of time to
perform agreed upon services, we should not seek to penalize staff of a sub-recipient for being
efficient. EZ staff will, of course, be diligent in reviewing sub-recipients’ estimates of staff time
needed to perform required tasks and produce required deliverables.

C.     The Chicago Empowerment Zone will take all appropriate action to ensure that sub-
       recipients are in compliance with all contractual obligations.

The Chicago EZ staff currently is conducting site visits with all EZ sub-recipients. Those sub-
recipients that are not in compliance with their contracts face several possible consequences. Per
the contract with the sub-recipients, the City of Chicago may invoke any or all of the following
remedies: the right to take over and complete the services; the right to terminate the agreement;
the right of specific performance, and injunction or other appropriate equitable remedy; monetary
damages; the right to deem the contractor non-responsible in future contracts awarded by the City;
and the right to demand a refund of any funds not used in accordance with the terms of the
agreement. When the results of the staff analyses are complete -- consistent with appropriate
definitions of applicable terms -- we will initiate all necessary corrective actions.

Please see Exhibit B, attached hereto and made a part hereof, for our specific responses to the
draft audit findings and recommendations.

In conclusion, Chicago’s Empowerment Zone is proceeding into the second phase of its 10-year
life span having clarified our direction within the spirit of the EZ initiative, as confirmed with the
HUD EZ program office. We invite anyone with questions about the audit or our response or the
Chicago EZ program, in general, to contact me directly at (312) 744-9623.

Very truly yours,



Avery L. Goodrich, Jr.
Empowerment Zone Director


c.c.   The Honorable Richard M. Daley, Mayor
       Christopher R. Hill, Commissioner of Planning and Development

                                        EXHIBIT A:
                           A Summary of Chicago Empowerment Zone
                         Accomplishments During its First Funding Cycle

                                                   Page 85                               99-CH-259-1002
Appendix C


                                     (By Strategic Initiative)

Economic Empowerment

.      The Fund for Community Redevelopment is developing a 75,000 square foot shopping
       center in the North Kenwood/Oakland communities using $472,909 in EZ funds. The site
       will be anchored by a grocery store and bank and will be supported by smaller stores
       offering neighborhood goods and services.

.      Gappie Development Corporation created a retail center at the intersection of King Drive
       and 35th Street. This is a $1.7 million project receiving $300,000 in EZ funds.

.      The West Humboldt Park Community Development Council was awarded $100,000
       toward the revitalization of the Chicago Avenue Commercial Corridor from Kedzie to
       Pulaski.

.      The Lawndale Coalition was awarded $100,000 toward the revitalization of three
       commercial areas in the Lawndale community.

.      The Eighteenth Street Development Corporation was awarded $521,000 toward the
       revitalization of commercial areas in the Pilsen community.

Affordable and Accessible Housing

.      The St. Edmund’s Redevelopment Corporation received $1.5 million to rehabilitate six
       multi-family buildings. This project will provide sixty-six new residential units for low and
       very-low income residents in the Washington Park community.

.      The Fund for Community Redevelopment received $1,272,990 to rehabilitate two vacant
       multi-family apartment buildings located at 811 E. 46th Street and 4001 S. Ellis Avenue in
       the Kenwood/Oakland area. This project will provide 102 units of affordable and
       accessible housing to low-income families.

.      The Renaissance Corporation was awarded $3 million dollars to rehabilitate the
       historically significant Wabash YMCA building in the Douglas community area. The
       project will provide 101 single-room occupancy units to serve homeless, elderly, mobility-
       impaired, and chronically mentally ill people. This project will also provide comprehensive
       health and human services to residents as well as community members at a well equipped,
       on-site health and recreational facility.

Linking Health and Human Services

·      Six new child and family service centers, each receiving between $1.2 and $1.5 million,
       will be built in the Empowerment Zone in 1999 by the grantees listed below:

99-CH-259-1002                                Page 86
                                                                                     Appendix C



              The Center for New Horizon will rehabilitate a portion of the historic Singer
              Mansion in the 4500 block of South Drexel.

              El Hogar del Nino will expand existing day care services in the Pilsen/Little Village
              Cluster of the Empowerment Zone.

              The Family Resource Center Partnership will assist in building a child care center
              in the Lawndale community.

              The Westside Planning and Development Corporation will acquire and rehabilitate
              a 3-story building at 4920 West. Madison.

              The YMCA will build a new child care center at 825 South Kedzie.

              The Chicago Housing Authority will renovate the Charles Hayes Center at Robert
              Taylor Homes. In addition to the day care center, this site will also house the
              Family Investment Center which provides employment counseling, training, and
              placement through CHA’s Resident Employment Development Initiative (REDI)
              Program.

.      The Westside Primary Health Care Expansion Project is the result of a collaboration
       between four community health centers–Circle Family Care, Erie Family Health Center,
       Miles Square Health Center, and Sinai Family Health Center–operating six sites serving
       Empowerment Zone residents. This project will receive $2,243,238 to expand access to
       health care by increasing staff, hours of operation, and outreach to the community.

.      Komed Health Center, in cooperation with the Chicago Department of Public Health, will
       receive $750,000 to build a new center to serve the Kenwood/Oakland and Grant
       Boulevard communities.

.      Alivio Medical Center will receive $1,700,000 to add six exam rooms to the current health
       center and to develop a second primary care center.

.      St. Anthony Hospital, in partnership with The Resurrection Project, will receive $997.049
       to construct and operate a family health center as part of the larger Little Village Family
       Resource Center.

.      Sinai Family Health Center will receive $885,000 to relocate and expand services currently
       provided at its 3,000 square foot El Centro facility into a 15,000 square foot facility.

Building on Cultural Diversity

.      The Chicago Park District will receive $1,458,700 to create a multi-purpose facility within

                                                Page 87                             99-CH-259-1002
Appendix C


       the historic Garfield Park Conservatory. This project will provide space to organizations
       for community meetings, receptions, lectures, large group training and other educational
       and cultural activities, and will also provide training and internships for community
       residents.

.      Little Black Pearl received $466,020 to develop a workshop to introduce African-
       American children to art as a means of personal expression and as a potential career path.

.      St. Malachy School received $550,900 to establish an arts education program that
       integrates intensive music training visual arts, wood workshops and dance with its existing
       academic curriculum.

.      Tobacco Road, Inc. was awarded $1,000,000 to develop a cultural center, including a
       theater, on 47th Street.

Youth Futures

.      The Community TV Network will receive $154,140 to develop a training program for
       Zone youth at Garfield Alternative High School. This project will also provide low-cost
       production services to Empowerment Zone businesses and organizations.

.      Cristo Rey High School in the Pilsen/Little Village Cluster of the Empowerment Zone will
       receive $400,000 to create a school-to-work training program that places students at the
       work site one full day each week, with the remaining four days spent in the classroom.

.      Community Services West will receive $211,962 to develop a training program targeted to
       high school drop-outs.

.      The Boys and Girls Club of Chicago will receive $145,410 to establish a job center in the
       West Cluster of the Empowerment Zone that will provide school-to-work programs for
       high school students and employment programs for adults and out-of-school youth.

.      Instituto del Progreso Latino was awarded $543,724 to design and implement entry-level
       technical training and post-secondary technical training programs for Empowerment Zone
       youth in the Pilsen/Little Village Cluster of the Empowerment Zone.

.      Chicago Youth Centers was awarded $90,000 to expand the Elliot Donnelly Youth Center
       in the South Cluster of the Empowerment Zone.

.      Allison Foundation for Better Living will receive $430,000 to rehabilitate an 18,000
       square foot building that will be used as a multi-functional youth center.

.      The Youth and Family Resource Center will receive $761,900 to expand their Youthnet

99-CH-259-1002                               Page 88
                                                                               Appendix C


         Program in the North Kenwood/Oakland communities.

.        West Humboldt Park Family and Community Development will receive $175,000 to
         develop an After-School Youth Center at 744 N. Monticello.




                                        EXHIBIT B:
                          Chicago’s Empowerment Zone’s Response
                              to Specific Draft Audit Findings

    Draft Audit Finding : “Activities Were Incorrectly Reported As Empowerment Zone
    Activities”


                                             Page 89                         99-CH-259-1002
Appendix C


Response: Fourteen (not 15) of the 84 activities in the 1997 Performance Review were located
in Chicago’s three Enterprise Communities (not a designated EC under the Federal program),
rather than one of the three clusters of the Chicago Empowerment Zone. Evaluations conducted
to date confirm that several of the 14 EC activities benefit EZ residents, based on “clients
served” lists or the agency’s reporting of the geographic area they served. Contrary to the
audit team’s report, the Chicago EZ recognizes that the ECs are not a part of the EZ program,
hence: two sets of boilerplate contracts, two systems for assigning contract numbers, two
systems for assigning fund numbers, two monthly expenditure reporting systems to the State,
and two sets of community representatives on the Coordinating Council. Responses to the
specific recommendations are:

 HUD IG Recommendations                         Chicago Empowerment Zone’s Response
 A. Establish procedures and controls to only   Procedures and controls have been
    report EZ program activities to HUD.        established to ensure that only EZ activities
                                                are reported to HUD.
  B. Establish procedures and controls to       Procedures and controls have been
     verify the accuracy of information         established to verify the accuracy of
     submitted to HUD for the Empowerment       information submitted to HUD.
     Zone Program.

Draft Audit Finding: “Funding for West Side Residential Rehabilitation project was
inaccurately reported.

Response: At the time the 1997 Performance Review was submitted, the best funding estimates
available were either from the original proposals submitted by sub-recipients or from the
investment worksheet collected from our sub-recipients between the date HUD issued the
Performance Review instructions (June 23, 1997) and the date the Performance Review was due
to HUD (July 30, 1997). In the future, sub-recipients’ reports will be verified by EZ staff to
ensure accurate reporting of information. Responses to the specific recommendations are:




 HUD IG Recommendations                         Chicago Empowerment Zone’s Response
 A. Establish procedures and controls to        Procedures and controls have been
    follow HUD’s instructions for reporting     established to ensure reporting of activity’s
    activity’s investments in the Performance   investments according to HUD instructions.
    Review.
 B. Establish procedures and controls to        Procedures and controls have been
    verify the accuracy of information          established to verify the accuracy of

99-CH-259-1002                             Page 90
                                                                                        Appendix C


      provided to HUD.                              information submitted to HUD.

Draft Audit Finding: “Accomplishments of the Community Youth Development Activity
Network were incorrectly reported.”

Response: At the time the 1997 Performance Review was submitted, the best funding estimates
available were either from the original proposals submitted by sub-recipients or from the
investment worksheet collected from sub-recipients between the date HUD issued the
Performance Review instructions (June 23, 1997) and the date the Performance Review was due
to HUD (July 30, 1997). In the future, sub-recipients’ reports will be verified by EZ staff to
ensure accurate reporting of leveraged funds and project deliverables. Responses to the specific
recommendations are:

 HUD IG Recommendations                             Chicago Empowerment Zone’s Response
 A. Provide training on HUD’s reporting             Training will be provided for existing and
    requirements to the staff who are               future staff.
    responsible for preparing the
    Empowerment Zone Performance
    Review.
 B. Establish procedures and controls to            Procedures and controls have been
    ensure the person who prepares the City’s       established to ensure that project
    Performance Review to HUD uses the              accomplishments are accurately reported.
    actual accomplishments for each
    Empowerment Zone activity provided by
    the administering officials.
 C. Establish procedures and controls to            Procedures and controls have been
    verify the accuracy of information              established to verify the accuracy of
    provided to HUD.                                information submitted to HUD.

Draft Audit Finding : “Controls over Community Services West Workforce and Life
Preparation were not adequate.”

Response: The City disagrees with the auditors’ finding that the sub-recipient incorrectly
deposited EZ funds into an account with funds from other sources. According to OMB Circular
A110, separate depository accounts are not required for EZ funds. The sub-recipient
acknowledges that the advance is a liability and the Chicago EZ has extended the contract to
allow for full implementation of the project. In the future, sub-recipients’ reports will be verified
by EZ staff to ensure accurate reporting of leveraged funds, project deliverables, and obstacles
encountered. Responses to the specific recommendations are:

 HUD IG Recommendations                             Chicago Empowerment Zone’s Response
 A. Establish procedures and controls to            Procedures and controls have been
    monitor activities funded under the             established to ensure that funds are used
    Empowerment Zone Program to ensure              efficiently and effectively.

                                                 Page 91                              99-CH-259-1002
Appendix C


      that monies are used efficiently and
      effectively.
 B.   Require Bethel New Life to immediately      The contract has been extended to enable the
      initiate the Community Services West        sub-recipient to fully implement the project.
      Workforce and Life Preparation Program      If the sub-recipient does not comply with
      or reimburse the Empowerment Zone           contract requirements, the Chicago EZ will
      Program $25,403 from non-Federal funds      take necessary corrective actions to remedy
      for the advance to Bethel.                  any non-compliance issues.
 C.   Revise its procedures on giving advances    Advance procedure has been revised and is
      of Empowerment Zone funds to be             consistent with the Cash Management
      consistent with the Cash Management         Improvement Act.
      Improvement Act.
 D.   Establish procedures and controls to        Procedures and controls have been
      ensure quarterly progress reports or        established to ensure quarterly reports from
      negative reports are submitted by           all sub-recipients.
      grantees.
 E.   Provide training on HUD’s reporting         Training will be provided for existing and
      requirements to the staff who are           future staff.
      responsible for preparing the
      Empowerment Zone Performance
      Review.
 F.   Establish procedures and controls to        Procedures and controls have been
      ensure the person who prepares the City’s   established to ensure that project
      Performance Review to HUD uses the          accomplishments are accurately reported.
      actual accomplishments for each
      Empowerment Zone activity provided by
      the administering officials.
 G.   Establish procedures and controls to        Procedures and controls have been
      verify the accuracy of information          established to verify the accuracy of
      provided to HUD.                            information submitted to HUD.


Draft Audit Finding: “The City overstated leveraged funding by over $143 million.”

Response: At the time the 1997 Performance Review was submitted, the best funding estimates
available were either from the original proposals submitted by sub-recipients or from the
investment worksheet collected from sub-recipients between the date HUD issued the
Performance Review instructions (June 23, 1997) and the date the Performance Review was due
to HUD (July 30, 1997). In the future, sub-recipients’ reports will be verified by EZ staff to
ensure accurate reporting of leveraged funds. Responses to the specific recommendations are:

 HUD IG Recommendations                           Chicago Empowerment Zone’s Response
 A. Establish procedures and controls to          Procedures and controls have been
    follow HUD’s instructions and report          established to ensure accurate reporting of

99-CH-259-1002                               Page 92
                                                                                     Appendix C


    current funding amounts and                   funding amounts and commitments
    commitments in Performance Reviews.           consistent with HUD instructions.
 B. Establish procedures and controls to          Procedures and controls have been
    verify the accuracy of information            established to verify the accuracy of
    submitted to HUD for the Empowerment          information submitted to HUD.
    Zone Program.

Draft Audit Finding: “Controls over the Family Life Community Network project were not
adequate.”

Response: The contract for the second year of this project is being renegotiated so that service
provided over the total contract period will, in fact, benefit the originally agreed upon number of
Zone residents. If the renegotiations are unsuccessful, the EZ will take all necessary corrective
actions to remedy non-compliance issues. In the future, sub-recipients’ reports will be verified
by EZ staff to ensure accurate reporting of leveraged funds and project deliverables. Responses
to the specific recommendations are:

 HUD IG Recommendations                          Chicago Empowerment Zone’s Response
 A. Require the Boys and Girls Club to           Procedures have been established requiring all
    maintain documentation to show that          sub-recipients to maintain records
    Empowerment Zone funds are used to           documenting benefits to Zone residents
    benefit Zone residents.                      consistent with appropriate definitions of
                                                 “benefit to Zone residents.”
 B. Reimburse the Empowerment Zone               Source documentation has been requested and
    Program $123,321 from non-Federal            will be verified for compliance with contract.
    funds for services inappropriately           If sub-recipient is not in compliance with
    provided to non-Zone youths.                 contract, the Chicago EZ will take necessary
                                                 corrective actions to remedy any non-
                                                 compliance issues.



 C. Provide documentation to support that        Source documentation has been requested and
    the $3,717 of career and educational         will be verified for compliance with contract.
    services which were paid with                If sub-recipient is not in compliance with
    Empowerment Zone funds benefited             contract, the Chicago EZ will take necessary
    Zone residents. If adequate                  corrective actions to remedy any non-
    documentation cannot be provided, then       compliance issues.
    the City should reimburse the
    Empowerment Zone Program $3,717
    from non-Federal funds.
 D. Establish procedures and controls to         Procedures and controls have been established
    ensure that: (1) Activities funded under     to (1) ensure that funds are used efficiently
    the Empowerment Zone Program use             and effectively, and (2) ensure that corrective

                                                Page 93                             99-CH-259-1002
Appendix C


    moneys efficiently and effectively; and       action is taken against grantees who do not
    (2) Corrective action is taken against        provide required services.
    grantees who do not provide the
    required services.
 E. Provide training on HUD’s reporting           Training will be provided for existing and
    requirements to the staff who are             future staff.
    responsible for preparing the
    Empowerment Zone Performance
    Review.
 F. Establish procedures and controls to          Procedures and controls have been established
    ensure the person who prepares the            to ensure that project accomplishments are
    City’s Performance Review to HUD              accurately reported.
    uses the actual accomplishments for each
    Empowerment Zone activity provided by
    the administering officials.
 G. Establish procedures and controls to          Procedures and controls have been established
    verify the accuracy of information            to verify the accuracy of information submitted
    submitted to HUD                              to HUD.

Draft Audit Finding: “Controls over the Storehouse Distributions Center project were not
adequate.”

Response: The sub-recipient agreement was based upon output as measured by the contract
benchmarks. It is critical to note that the sub-recipient not only met, but exceeded all agreed
upon benchmarks. Therefore, the salary reimbursements were justified. Future contract
provisions will address deliverables, rather than staff time required to meet the deliverables. In
the future, sub-recipients’ reports will be verified by EZ staff to ensure accurate reporting of
project accomplishments. Responses to the specific recommendations are:




 HUD IG Recommendations                          Chicago Empowerment Zone’s Response
 A. Establish procedures and controls to         Procedures and controls have been established
    ensure that activities funded under the      to ensure that funds are used efficiently and
    Empowerment Zone Program use                 effectively.
    monies efficiently and effectively.
 B. Provide documentation to support the         The sub-recipient agreement was based upon
    salary reimbursements of $45,000 for         output as measured by the benchmarks. The
    the Storehouses’s Administrative             sub-recipient not only met, but exceeded, all
    Director, Warehouse Manager, and the         agreed upon benchmarks. Specifically, the sub-

99-CH-259-1002                                Page 94
                                                                                       Appendix C


     Corporate Relations Manager. If             recipient planned benchmarks were: increase
     adequate documentation cannot be            membership to 270 members (ACTUAL 409);
     provided, then reimburse the                increase donors to 75 (ACTUAL 110); and
     Empowerment Zone Program $45,000            increase amount of operation handling fees to
     from non-Federal funds.                     $75,000 (ACTUAL $168,129). Therefore, the
                                                 salary reimbursements were justified.
 C. Provide training on HUD’s reporting          Training will be provided for existing and
    requirements to the staff who are                future staff.
    responsible for preparing the
    Empowerment Zone Performance
    Review.
 D. Establish procedures and controls to         Procedures and controls have been established
    ensure the person who prepares the           to ensure that project accomplishments are
    City’s Performance Review to HUD             accurately reported.
    uses the actual accomplishments for
    each Empowerment Zone activity
    provided by the administering officials.
 E. Establish procedures and controls to         Procedures and controls have been established
    verify the accuracy of information           to verify the accuracy of information submitted
    submitted to HUD                             to HUD.

Draft Audit Finding: “Controls over the Northwest Industrial Corridor Program were
inadequate.”

Response: Performance measures will be re-established with sub-recipient to reflect desired
output. Administrative controls have been put in place by the EZ staff to address sub-recipient
progress deficiencies. Funding has been withheld pending submission of appropriate
deliverables. In the future, sub-recipients’ reports will be verified by EZ staff to ensure accurate
reporting of leveraged funds, performance measurements, and project accomplishments.
Responses to the specific recommendations are:




 HUD IG Recommendations                            Chicago Empowerment Zone’s Response
 A. Establish procedures and controls to           Procedures and controls have been
    monitor activities funded under the            established to ensure that funds are used
    Empowerment Zone Program to ensure             efficiently and effectively.
    that monies are used efficiently and
    effectively.
 B. Reimburse the Empowerment Zone                 Source documentation has been requested to
    Program $36,171 from non-Federal funds         substantiate staff involvement with the
    for inappropriate payment of the               project. If sub-recipient is not in compliance

                                                 Page 95                             99-CH-259-1002
Appendix C


    Administrative Assistance’s salary and         with contract, the Chicago EZ will take
    health benefits and the lead abatement         necessary corrective actions to remedy any
    removal.                                       non-compliance issues.
 C. Amend the contract with Bethel New Life        Performance measures will be re-established
    to accurately reflect the performance          with sub-recipient to reflect desired output.
    measures Bethel New Life is responsible
    to complete.
 D. Establish procedures and controls to           Procedures and controls have been
    ensure the person who prepares the City’s      established to ensure that project
    Performance Review to HUD uses the             accomplishments are accurately reported.
    actual accomplishments for each
    Empowerment Zone activity provided by
    the administering officials.
 E. Establish procedures and controls to           Procedures and controls have been
    verify the accuracy of information             established to verify the accuracy of
    submitted to HUD                               information submitted to HUD.

Draft Audit Finding: “The City lacked adequate controls over the 21st Century Community
Learning Centers project.”

Response: Benchmarks are currently being reevaluated to confirm that the majority of the
program participants were in fact EZ residents even though 10 of the 37 facilities were not
located within the EZ. If this project is not in compliance, appropriate corrective actions will be
taken, including using other sources of funds for this project. In the future, sub-recipients’
reports will be verified by EZ staff to ensure accurate reporting of leveraged funds,
performance measurements, and project accomplishments. Responses to the specific
recommendations are:




 HUD IG Recommendations                            Chicago Empowerment Zone’s Response
 A. Do not advise administering entities to        Our advice was intended to promote similar
    provided services to individuals and           benefits to EC residents and did not
    organizations outside of the                   encourage, condone, or authorize
    Empowerment Zone.                              inappropriate use of EZ funds. We
                                                   acknowledge that EZ funds will be used only
                                                   for activities that benefit primarily Zone
                                                   residents.


99-CH-259-1002                                 Page 96
                                                                                      Appendix C


 B. Establish procedures and controls to           Procedures and controls have been
    monitor activities funded under the            established to ensure that funds are used
    Empowerment Zone Program to ensure             efficiently and effectively.
    that monies are used efficiently and
    effectively
 C. Reimburses the Empowerment Zone                Source documentation has been requested of
    Program $114,755 from non-Federal              sub-recipient to verify compliance with
    funds for the Community Learning               contract. If sub-recipient is not in
    Centers established at non-Zone schools.       compliance with contract, the Chicago EZ
                                                   will take necessary corrective actions to
                                                   remedy any non-compliance issues.
 D. Establish procedures and controls to           Procedures and controls have been
    ensure the person who prepares the City’s      established to ensure that project
    Performance Review to HUD uses the             accomplishments are accurately reported.
    actual accomplishments for each
    Empowerment Zone activity provided by
    the administering officials.
 E. Establish procedures and controls to           Procedures and controls have been
    verify the accuracy of information             established to verify the accuracy of
    submitted to HUD                               information submitted to HUD.

Draft Audit Finding: “Controls over the Mexican Fine Arts Center Museum expansion
project were not adequate.”

Response: Supporting documents will be submitted by sub-recipient to verify compliance with
contract. The City will remedy any non-compliance issues once the review is complete.
However, it is important to note that the contract does not require 100% EZ resident
participation for youth internships. Funding has been withheld until these issues are resolved.
At the time the 1997 Performance Review was submitted, the best funding estimates available
were either from the original proposals submitted by sub-recipients or from the investment
worksheet collected from sub-recipients between the date HUD issued the Performance Review
instruction s (June 23, 1997) and the date the Performance Review was due to HUD (July 30,
1997 In the future, sub-recipients’ reports will be verified by EZ staff to ensure accurate
reporting of leveraged funds and project accomplishments. Responses to the specific
recommendations are:


 HUD IG Recommendations                            Chicago Empowerment Zone’s Response
 A. Require the Mexican Fine Arts Center           Procedures have been established requiring
    Museum to maintain documentation to            all sub-recipients to maintain records
    show that Empowerment Zone funds are           documenting benefits to Zone residents.
    used to benefit Zone residents.
 B. Reimburse the Empowerment Zone                 Source documentation has been requested to
    Program $148,756 from non-Federal funds        verify compliance with contract and to
    for the inappropriate payments to the non-     substantiate staff involvement. If sub-

                                                 Page 97                            99-CH-259-1002
Appendix C


    Zone youth ($85,057) and the cost of the      recipient is not in compliance with contract,
    seven employees ($63,699) that were           the Chicago EZ will take necessary corrective
    inappropriately paid with Zone funds.         actions to remedy any non-compliance issues.
 C. Provide documentation to support that the     Source documentation has been requested to
    $502,078 of career and educational            verify compliance with contract. If sub-
    services that were paid with Empowerment      recipient is not in compliance with contract,
    Zone funds benefited Zone residents. If       the Chicago EZ will take necessary corrective
    adequate documentation cannot be              actions to remedy any non-compliance issues.
    provided, then the City should reimburse
    the Empowerment Zone Program
    $502,078 from non-Federal funds.
 D. Do not use Empowerment Zone funds to          Source documentation has been requested to
    reimburse the Mexican Fine Arts Center        verify compliance with contract and to
    Museum $62,294 for the cost of the non-       substantiate staff involvement. Funding has
    Zone youths($24,654) and the Museums          been withheld until necessary documentation
    seven employees that worked on non-Zone       is submitted to EZ staff. If sub-recipient is
    activities ($37,640) during April to June     not in compliance with contract, the Chicago
    1998.                                         EZ will take necessary corrective actions to
                                                  remedy any non-compliance issues.
 E. Require Mexican Fine Arts Center              Source documentation has been requested to
    Museum to provide documentation to            verify compliance with contract and to
    support the request for reimbursement of      substantiate staff involvement. Funding has
    $105,528 for the 17 employees during          been withheld until necessary documentation
    April to June 1998 benefitted                 is submitted to EZ staff. If sub-recipient is
    Empowerment Zone residents. If                not in compliance with contract, the Chicago
    documentation cannot be provided, the         EZ will take necessary corrective actions to
    City cannot use Empowerment Zone funds        remedy any non-compliance issues.
    to reimburse the Museum.
 F. Establish procedures and controls to          Procedures and controls have been
     monitor activities funded under the          established to ensure that funds are used
     Empowerment Zone Program to ensure           efficiently and effectively.
     that monies are used efficiently and
     effectively.

 G. Provide training on HUD’s reporting           Training will be provided for existing and
    requirements to the staff who are             future staff.
    responsible for preparing the
    Empowerment Zone Performance Review.
 H. Establish procedures and controls to          Procedures and controls have been
    ensure the person who prepares the City’s     established to ensure that project
    Performance Review to HUD obtains             accomplishments are accurately reported.
    information on the actual accomplishments
    for each Empowerment Zone activity.
 I. Establish procedures and controls to verify   Procedures and controls have been

99-CH-259-1002                                Page 98
                                                                                        Appendix C


    the accuracy of information submitted to         established to verify the accuracy of
    HUD.                                             information submitted to HUD.

Draft Audit Finding: “Controls over the Better Days for Youth and Nuevos Futuros
program were not adequate.”

Response: Response: Supporting documents will be submitted by sub-recipient to verify
compliance with contract. The City will remedy any non-compliance issues once the review is
complete. However, it is important to note that the contract does not require 100% EZ resident
participation for youth internships. At the time the 1997 Performance Review was submitted, the
best funding estimates available were either from the original proposals submitted by sub-
recipients or from the investment worksheet collected from sub-recipients between the date HUD
issued the Performance Review instruction s (June 23, 1997) and the date the Performance
Review was due to HUD (July 30, 1997. In the future, sub-recipients’ reports will be verified by
EZ staff to ensure accurate reporting of leveraged funds, performance measurements, and
project accomplishments. Responses to the specific recommendations are:

 HUD IG Recommendations                              Chicago Empowerment Zone’s Response
 A Require the Chicago Commons                       Procedures have been established requiring
    Association to maintain documentation to         all sub-recipients to maintain records
    show that Empowerment Zone funds are             documenting benefits to Zone residents.
    used to benefit Zone residents.
 B. Reimburse the Empowerment Zone                   Source documentation has been requested to
    program $48,219 from non-Federal funds           verify compliance with contract. If sub-
    for the services inappropriately provided to     recipient is not in compliance with contract,
    non-Zone youths ($47,294) and the                the Chicago EZ will take necessary corrective
    stipends that were inappropriately paid to       actions to remedy any non-compliance issues.
    the non-Zone youths ($925).

 C. Provide documentation to support that the        Source documentation has been requested to
    $1,359 of career and educational services        verify compliance with contract. If sub-
    and $165 of stipends that were paid with         recipient is not in compliance with contract,
    Empowerment Zone funds benefitted Zone           the Chicago EZ will take necessary corrective
    residents. If adequate documentation             actions to remedy any non-compliance issues.
    cannot be provided, then the City should
    reimburse the Empowerment Zone
    Program $1,524 from non-Federal funds.
 D. Do not use Empowerment Zone funds to             Source documentation has been requested to
    reimburse the Chicago Commons                    verify compliance with contract. Funding has
    Association $65,476 for the services             been withheld until necessary documentation
    provided to non-Zone youths ($37,023)            is submitted. If sub-recipient is not in
    and the stipends paid to non-Zone youths         compliance with contract, the Chicago EZ
    ($28,444) from January to May 1998.              will take necessary corrective actions to
                                                     remedy any non-compliance issues.


                                                   Page 99                            99-CH-259-1002
Appendix C


 E. Require Chicago Commons Association to        Source documentation has been requested
    provide documentation to support the          and will be review by EZ staff. If sub-
    request for reimbursement of $1,064 for       recipient is not in compliance with contract,
    the services provided to three youths and     the Chicago EZ will take necessary corrective
    $4,952 for the stipends paid to 13 youths     actions to remedy any non-compliance issues.
    from January to May 1998 benefitted
    Empowerment Zone residents. If
    documentation cannot be provided, the
    City cannot use Empowerment Zone funds
    to reimburse the Association.
 F. Establish procedures and controls to          Procedures and controls have been
    monitor activities funded under the           established to ensure that funds are used
    Empowerment Zone Program to ensure            efficiently and effectively.
    that monies are used efficiently and
    effectively.
 G. Provides training on HUD’s reporting          Training will be provided for existing and
    requirements to the staff who are               future staff.
    responsible for preparing the
    Empowerment Zone Performance Review.
 F. Establish procedures and controls to          Procedures and controls have been
    ensure the person who prepares the City’s     established to ensure that project
    Performance Review to HUD obtains             accomplishments are accurately reported.
    information on the actual accomplishments
    for each Empowerment Zone activity.
 G. Establish procedures and controls to verify   Procedures and controls have been
    the accuracy of information submitted to      established to verify the accuracy of
    HUD.                                          information submitted to HUD.




Draft Audit Finding: “Controls over the Employer Assisted Housing program were not
adequate.”

Response: Administrative controls have been put in place to address subrecipient progress
deficiencies. The contract was renegotiated and funding has been withheld pending submission
of appropriate deliverables and documentation. At the time the 1997 Performance Review was
submitted, the best funding estimates available were either from the original proposals submitted
by sub-recipients or from the investment worksheet collected from sub-recipients between the
date HUD issued the Performance Review instruction s (June 23, 1997) and the date the
Performance Review was due to HUD (July 30, 1997). In the future, sub-recipients’ reports will
be verified by EZ staff to ensure accurate reporting of leveraged funds, performance
measurements, project accomplishments, and participating entities. Responses to the specific
recommendations are:


99-CH-259-1002                                Page 100
                                                                                        Appendix C


HUD IG Recommendations                             Chicago Empowerment Zone’s Response
A. Establish procedures and controls to            Procedures and controls have been established
   monitor activities funded under the             to ensure that funds are used efficiently and
   Empowerment Zone Program to ensure              effectively.
   that monies are used efficiently and
   effectively.
B. Reimburse the Empowerment Zone                  Source documentation will be submitted by
   Program $22,170 from non-Federal funds          sub-recipient to substantiate staff involvement
   for Bethel New Life’s three employees           in the project. If sub-recipient is not in
   that were inappropriately paid from Zone        compliance with contract, the Chicago EZ will
   funds.                                          take necessary corrective actions to remedy
                                                   any non-compliance issues.
C. Deduct the $3,000 of construction repairs       $3,000 in funds will be added to advance total
   that were inappropriately paid with the         as a liability.
   Empowerment Zone funds from Bethel
   New Life’s future reimbursements. If the
   City does no make the necessary
   deductions, then the City should
   reimburse the Empowerment Zone
   Program $3,000 from non-Federal funds
   for the inappropriate use of Zone funds.
D. Do not use Empowerment Zone funds to            Source documentation will be submitted by
   reimburse Bethel New Life $18,483 for           sub-recipient to verify staff involvement in the
   the Administrative Assistant’s ($10,015)        project. If sub-recipient is not in compliance
   and the Project Director’s ($8,468) salar       with contract, the Chicago EZ will take
   costs while they did not work on the            necessary corrective actions to remedy any
   Program.                                        non-compliance issues.
E. Require Bethel New Life to provide              Source documentation will be submitted by
   documentation to support the request for        sub-recipient to verify staff involvement in the
   the $8,468 for the salary costs paid to the     project. Funding has been withheld until
   Program’s Project Director from January         necessary documentation is submitted. If sub-
   to March 1998. If documentation cannot          recipient is not in compliance with contract,
   be provided, the City cannot use                the Chicago EZ will take necessary corrective
   Empowerment Zone funds to reimburse             actions to remedy any non-compliance issues.
   Bethel.
F Provide training on HUD’s reporting              Training will be provided for existing and
   requirements to the staff who are                 future staff.
   responsible for preparing the
   Empowerment Zone Performance
   Review.
G. Establish procedures and controls to            Procedures and controls have been established
   ensure the person who prepares the City’s       to ensure that project accomplishments are
   Performance Review to HUD obtains               accurately reported.
   information on the actual

                                                 Page 101                             99-CH-259-1002
Appendix C


    accomplishments for each Empowerment
    Zone activity.
 H. Establish procedures and controls to         Procedures and controls have been established
    verify the accuracy of information           to verify the accuracy of information submitted
    submitted to HUD.                            to HUD.

13 Draft Audit Finding: “Controls over the Job Link program were not adequate.”

Response: Supporting documents will be submitted by sub-recipient to verify compliance with
contract. The City will remedy any non-compliance issues once the review is complete. At the
time the 1997 Performance Review was submitted, the best funding estimates available were
either from the original proposals submitted by sub-recipients or from the investment worksheet
collected from sub-recipients between the date HUD issued the Performance Review instruction
s (June 23, 1997) and the date the Performance Review was due to HUD (July 30, 1997). In the
future, sub-recipients’ reports will be verified by EZ staff to ensure accurate reporting of
leveraged funds, performance measurements, and project accomplishments. Responses to the
specific recommendations are:

 HUD IG Recommendations                          Chicago Empowerment Zone’s Response
 A Require West Side Job Link to maintain        Procedures have been established requiring
    documentation to show that                   all sub-recipients to maintain records
    Empowerment Zone Funds are used to           documenting benefits to Zone residents.
    benefit Zone residents.
 B. Reimburse the Empowerment Zone               Source documentation has been requested to
    Program $148,622 from non-Federal            verify compliance with contract. If sub-
    funds for job placement services             recipient is not in compliance with contract,
    ($60,769) and the job skills training that   the Chicago EZ will take necessary corrective
    were inappropriately provided to the non-    actions to remedy any non-compliance issues.
    Zone residents ($87,853).
 Provide documentation to support that the       Source documentation has been requested and
 $125,166 of job placement services, $1,515      will be review by EZ staff. If sub-recipient is
 of jobs skills training, and the $213,484 of    not in compliance with contract, the Chicago
 miscellaneous services that were paid with      EZ will take necessary corrective actions to
 Empowerment Zone funds benefitted Zone          remedy any non-compliance issues.
 residents. If adequate documentation cannot
 be provided, then the City should reimburse
 the Empowerment Zone Program $340,165
 from non-Federal funds.
 D. Establish procedures and controls to         Procedures and controls have been
    monitor activities funded under the          established to ensure that funds are used
    Empowerment Zone Program to ensure           efficiently and effectively.
    that monies are used efficiently and
    effectively.
 E. Provide training on HUD’s reporting          Training will be provided for existing and

99-CH-259-1002                               Page 102
                                                                                     Appendix C


   requirements to the staff who are                future staff.
   responsible for preparing the
   Empowerment Zone Performance
   Review.
F. Establish procedures and controls to          Procedures and controls have been
   ensure the person who prepares the City’s     established to ensure that project
   Performance Review to HUD obtains             accomplishments are accurately reported.
   information on the actual
   accomplishments for each Empowerment
   Zone activity.
G. Establish procedures and controls to          Procedures and controls have been
   verify the accuracy of information            established to verify the accuracy of
   submitted to HUD.                             information submitted to HUD.




                                               Page 103                            99-CH-259-1002
                                                                                Appendix D


Distribution
Secretary's Representative, Midwest
Director of Community Planning and Development, Illinois State Office
Director of Field Accounting, Midwest
Deputy Secretary, SD
Assistant Secretary for Congressional and Intergovernmental Relations, J (Room 10120)
Deputy Assistant Secretary for Public Affairs, W (Room 10220)
Chief of Staff, S (Room 10000)
Director, Office of Budget, ARB (Room 3270)
Counselor to the Secretary, S (Room 10234)
Senior Advisor to the Secretary for Communications and Policy, S (Room 10222)
Field Comptroller, Midwest
Assistant General Counsel, Midwest
Assistant to the Deputy Secretary for Field Management, SDF (Room 7106)
Director of Administrative Service Center 1, New York State Office
Assistant Secretary for Community Planning and Development, D (Room 7100)
Audit Liaison Officer for Community Planning and Development, COM (Room 7228) (3)
Assistant to the Secretary for Labor Relations, (Acting), SL (Room 7118)
Acquisitions Librarian, Library, AS (Room 8141)
Chief Financial Officer, F (Room 10164) (2)
Deputy Chief Financial Officer for Finance, FF (Room 10164) (2)
General Counsel, C (Room 10214)
Associate General Counsel, Office of Assisted Housing and Community Development, CD
    (Room 8162)
Director, Housing and Community Development Issue Area, U.S. GAO, 441 G Street N.W.,
    Room 2474, Washington DC 20548
The Honorable John Glenn, Ranking Member, Committee on Governmental Affairs, United
    States Senate, Washington DC 20515-4305
The Honorable Fred Thompson, Chairman, Committee on Governmental Affairs, United
    States Senate, Washington DC 20515-4305
The Honorable Dan Burton, Chairman, Committee on Government Reform and Oversight, United
    States House of Representatives, Washington DC 20515-6143
Mr. Pete Sessions, Government Reform and Oversight Committee, Congress of the United
    States, House of Representatives, Washington DC 20510-6250
Ms. Cindy Sprunger, Subcommittee on General Oversight and Investigations, Room 212,
    O'Neil Office Building, Washington DC 20515
Acting Director of the Office for Civil Rights, Department of Health and Human Services,
    200 Independence Avenue S.W., Room 515, Washington DC 20201
Inspector General, Department of Health and Human Services, 330 Independence Avenue S.W.
    Room 5246, Washington DC 20201
Executive Director, City of Chicago Empowerment Zone
Mayor, City of Chicago
Commissioner of the Department of Planning and Development, City of Chicago


                                        Page 105                              99-CH-259-1002