Issue Date
December 8, 1998
Audit Case Number
99-KC-244-1001
TO: William B. Rotert, Director, Office of Community Planning and Development, 7AD
FROM: Jose R. Aguirre, District Inspector General for Audit, 7AGA
SUBJECT: Community Development Block Grant Program
Department of Housing and Community Development
City of Kansas City, Missouri
We have completed our limited review of the Community Development Block Grant (CDBG)
Program administered by the City of Kansas City, Missouri (City). We performed the review to
evaluate City monitoring of subrecipient performance and to evaluate selected subrecipients’
compliance with rules and regulations. This report contains one finding and recommends the City
improve monitoring to ensure subrecipients comply with Federal requirements. We provided the
auditee a copy of this report.
Within 60 days please furnish us, for each recommendation in this report, a status report on:
(1) corrective action taken; (2) proposed corrective action and the date to be completed; or (3) why
action is not necessary. Also, please provide us copies of any correspondence or directives issued
because of the audit.
If you have any questions, please call me or Ron Hosking, Assistant District Inspector General for
Audit at (913) 551-5870.
Management Memorandum
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99-KC-244-1001 Page ii
Executive Summary
We performed a limited review of the City’s CDBG program. The review was not a comprehensive
evaluation of all the activities of the City’s Department of Housing and Community Development.
Rather, the review concentrated on monitoring of subrecipients and the related activities of some
selected subrecipients. Our objectives were to determine whether the City had adequate controls to
ensure that subrecipients carried out activities prescribed in their contract and complied with applicable
Federal requirements.
We found the City made some improvements in its monitoring of subrecipients through changes made
as a result of HUD’s monitoring review last year. Also, the City was in the process of establishing a
new Monitoring Division to further improve its monitoring efforts by focusing on evaluating
performance and compliance of subrecipients.
However, our review showed the City still needs to make further improvements.
The City did not adequately oversee the performance of the
Subrecipient Monitoring Kansas City Downtown Minority Development Corporation
Improvements Needed (Corporation) and did not hold the board responsible for
effecting collections of monies loaned. As a result,
businesses receiving loans seldom made the required
payments; loan repayments were not available to make new
loans; and the Corporation is currently due about
$13 million. We recommended the Director, Office of
Community Planning and Development, verify that the City
implements monitoring procedures and develops,
implements and maintains a loan collection program.
The City did not ensure that the East Meyer Community
Development Corporation complied with contract award
requirements because it did not properly monitor corporation
activities. East Meyer did not have a written contract for a
major sanitary sewer installation. In addition, it did not
properly monitor the contractor’s work. As a result,
East Meyer and the contractor are now in dispute over the
propriety of a $157,000 change order. We recommended
that the Director also verify the City strengthens its
monitoring and provide subrecipients technical assistance on
required Federal contracting requirements.
The City executed contracts with community development
corporations to perform housing activities and included
performance standards that were not met. The City needs
to consider past performance, evaluate reasons for not
Page iii 99-KC-244-1001
Executive Summary
meeting the performance goals, and adjust subsequent
contracts to more realistic goals.
We performed our review from March through July 1998.
We discussed the draft finding with City officials during an
August 8, 1998 exit conference. The City provided written
comments on September 1, 1998 which generally agreed
with the finding and recommendations. The comments are
included in their entirety as Appendix A.
99-KC-244-1001 Page iv
Table of Contents
Management Memorandum i
Executive Summary iii
Introduction 1
Finding and Recommendations 3
Management Controls 9
Follow Up On Prior Audits 11
Appendices
A Auditee Comments 13
B Distribution 17
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Table of Contents
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99-KC-244-1001 Page vi
Introduction
The CDBG Program, established by Title I of the Housing and Community Development Act of
1974, provides grants to units of general local government for development of viable urban
communities. CDBG program objectives are to provide decent housing, suitable living
environments and to expand economic opportunities, primarily for low and moderate income
persons.
The City’s Department of Housing and Community Development administers its CDBG program.
Four divisions report to the Director: administration, planning, small business, and housing.
Department of Housing and Community Development offices and related records are located in
City Hall.
The Department of Housing and Community Development contracts with subrecipients to
perform most CDBG activities. During the most recent program year, the City entered into
43 contracts with subrecipient organizations. Independent public accountants perform annual
audits of the subrecipients.
In 1997, local HUD office monitoring identified weaknesses in the City’s subrecipient monitoring.
The City has since modified its monitoring program.
Audit Objectives Our objectives were to determine whether:
• The City had adequate controls to ensure subrecipient
compliance with HUD regulations.
• Subrecipients carried out activities as shown in their
contracts economically, efficiently and effectively.
• Subrecipients complied with Federal program
requirements, laws and regulations.
We performed our on-site work from March 1998 through
Audit Scope and July 1998. We interviewed HUD and City staff. We also
Methodology reviewed 43 contracts, valued at $11.1 million, awarded to
subrecipients during program year 23 (April 1, 1997
through March 31, 1998).
Based on reviews of contract files, we selected five
subrecipients for further study: Old Northeast Community
Development Corporation, the Community Development
Corporation of Kansas City, East Meyer Community
Development Corporation, Kansas City Downtown
Minority Development Corporation, and the Maintenance
Reserve Corporation. While on-site at the community
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Introduction
development corporations, we reviewed documentation
supporting grant expenditures and activities for compliance
with Federal regulations and the City contracts. We
reviewed and evaluated loan collection policies and
procedures of the Kansas City Downtown Minority
Development Corporation and evaluated the need for large
reserves at the Maintenance Reserve Corporation.
Our review generally covered the period from April 1, 1997
through March 31, 1998 and was conducted in accordance
with generally accepted government auditing standards.
We provided a copy of the draft finding to the HUD
program staff and the City on August 17, 1998. The City
provided written comments on September 1, 1998. Their
comments generally agreed with our finding and are
included in their entirety as Appendix A.
99-KC-244-1001 Page 2
Finding and Recommendations
City Needs to Strengthen Oversight Of
Subrecipients
The City did not adequately oversee the performance of its subrecipients to ensure subrecipients
complied with their contractual requirements or with applicable regulations. In 24CFR570.501 it
states that the grant recipient is responsible for ensuring that CDBG funds are used in accordance
with all program requirements, even if it uses subrecipients to administer the funds. The City is
also responsible for determining the adequacy of performance under subrecipient agreements and
for taking actions when performance problems arise.
As a result, subrecipients have not spent CDBG funds as effectively and efficiently as desired.
More specifically, we found that:
• The Kansas City Downtown Minority Development Corporation did not pursue
collections on loans made to businesses.
• East Meyer Community Development Corporation did not follow required contracting and
contract monitoring procedures.
• The City contracted with community development corporations but did not adjust
subsequent contracts to more realistic goals.
The City did not adequately oversee the performance of the
K.C. Downtown Minority Kansas City Downtown Minority Development Corporation
Development Corporation (Corporation) and did not hold the governing board
responsible for collecting moneys loaned. As a result,
businesses receiving loans seldom made the required
payments and loan repayments were not available to make
new loans. The corporation was owed about $13 million
from these loans.
The Corporation has been involved in three types of
Corporation Provided
assistance to businesses. Initially, the Corporation
Three Types of Assistance
administered Urban Development Action Grants to
businesses. Some of these grants generated loan
repayments to the Corporation. The Corporation used loan
repayments as well as CDBG funds to make direct loans to
businesses. The last direct loan was made in 1996. After
that, the Corporation purchased certificates of deposit and
pledged the certificates as security to banks making business
loans. The Corporation recently started a new program
Page 3 99-KC-244-1001
Finding and Recommendations
with $1 million in State of Missouri economic development
grant funds and used the funds to purchase certificates of
deposits to guarantee new business loans.
Since July 1993, businesses have paid only about $150,000
Businesses Have Not on the $13 million in outstanding loans. The following table
Made Loan Payments shows the types of loan assistance and the number of
borrowers making payments since July 1993.
Source of Number of Loans With Payments
Funds Loans Made Since July, 1993
UDAG 5 1
CDBG 2 0
UDAG 21 8
Repayments
The Corporation has not pursued collections on delinquent
loans. Available documentation at the City and the
Corporation’s attorney showed no collection efforts since
about 1994. The prior efforts were letters from the attorney
to delinquent borrowers. Many loans are likely
uncollectible because the businesses have closed. However,
operating businesses that have not made payments in years,
and the amounts owed, include a shopping center
($2 million), national charity ($355,000), distributorship
($584,000) and mortuary ($85,000).
A Corporation official told us the new board of directors is
aware of the problem and intends to pursue collections.
The City should develop and implement a monitoring plan
that would help ensure the Corporation takes appropriate
efforts to collect on the loans.
East East The City did not ensure that East Meyer Community
East Meyer Community Development Corporation complied with contract award
Development requirements because it did not properly monitor corporation
Corporation activities. East Meyer did not have a written contract for a
major sanitary sewer installation. In addition, it did not
properly monitor the contractor’s work. As a result,
East Meyer and the contractor are now in dispute over the
propriety of a $157,000 change order.
99-KC-244-1001 Page 4
Finding and Recommendations
Federal regulations (24CFR84.84) require a contract which
No Formal Contract defines a sound and complete agreement and requires that a
system be maintained to ensure contractor compliance with
contract terms, conditions and specifications.
East Meyer solicited bids for the sewer project by
telephone, but did not document the firms contacted. Two
firms responded; the low bid, $63,709, stated “All rock
excavation will be extra.” East Meyer awarded the job
based on this bid but did not prepare a written contract.
The scope of work was based on plans prepared by an
Scope of Needed Work engineering firm. These plans did not anticipate any rock
Not Known excavation. After contractor selection, East Meyer hired a
geological engineering firm to conduct site tests and
determine rock content. The tests showed a moderate
amount of rock would be encountered during excavation.
Despite these results, East Meyer did not prepare a written
contract addressing the rock problem.
After construction started, the contractor notified
Weak Contract East Meyer it encountered rock during excavation. When
Monitoring East Meyer’s engineering firm first visited the job site, much
of the work was complete and most of the trench had been
back filled. Later, the contractor submitted a $157,081
change order for rock excavation.
The engineers believed far more rock was encountered than
anticipated by their geological testing. However, they did
not agree with the contractor’s method of calculating the
change order amount. The absence of contract terms
specifying an acceptable method for calculating change
order amounts has made it difficult to resolve the dispute.
The City official responsible for monitoring East Meyer
reviews their contracting efforts once a year but did not
review the sanitary sewer contract.
The City needs to improve technical assistance and
monitoring to ensure subrecipients become aware of and
implement applicable procurement regulations.
The City executed contracts with community development
Completion of Contract corporations to perform housing activities and included
Activities performance goals that were not met. When executing
Page 5 99-KC-244-1001
Finding and Recommendations
subsequent contracts, the City did not take into
consideration the reasons for unmet goals and did not adjust
subsequent contracts to be more realistic. The City needs to
consider past performance when renewing contracts with
community development corporations.
Each year the City enters into a contract with each
community development corporation to pay program
administrative costs. These contracts contain services to be
performed as well as performance standards.
We compared new single family homes built or rehabilitated
during the program year ended May 31, 1998 with
performance standards in the contracts at three community
development corporations: Old Northeast, East Meyer and
the Community Development Corporation of Kansas City.
Progress reports submitted by these corporations showed
none of them would complete the number of homes in their
contracts. For example, the Community Development
Corporation of Kansas City was to complete and sell eight
homes during the recently completed contract period. The
Corporation had five homes under construction but had not
sold any during the period.
Community Development Corporation staff attributed
Causes of Lack of shortfalls to the time it takes to get construction financing
Performance approved, staff turnover, contractors not completing work
timely, and lack of citizen interest. City monitoring reports
disclosed this problem and recognized reasons for not
achieving contract goals. However, the City did not
consider past performance or current construction
impediments when developing goals for subsequent periods.
We believe the City should evaluate the justifications for
goals not met and adjust subsequent contracts to more
realistic goals.
The City agreed with our recommendation that they need
Auditee Comments better collection efforts at the Downtown Minority
Development Corporation. Also, the City said procedures
have been implemented to provide additional technical
contracting assistance and oversight to subrecipients.
However, the City believes that in reviewing annual
performance and awarding subsequent contracts, it does review
99-KC-244-1001 Page 6
Finding and Recommendations
the performance of each organization and makes adjustments
accordingly.
The City needs to improve annual performance reviews and
OIG Evaluation of make appropriate adjustments to subsequent contracts. For
Auditee Comments example, during Program Year 22, the Community
Development Corporation of Kansas City was required to
begin construction of seven single family homes. The
Corporation started construction on two homes. In spite of
this performance, their Program Year 23 contract was
increased, calling for the construction and sale of eight single
family homes.
Recommendations
We recommend that you:
1A. Verify City implementation of monitoring procedures that will help
ensure the Kansas City Downtown Minority Development
Corporation develops, implements and maintains a loan collection
program. This program should provide for writing off loans
determined to be uncollectible.
1B. Verify the City has strengthened its monitoring procedures and
provided technical assistance to subrecipients on required Federal
contracting requirements.
1C. Require that the City: consider subrecipient performance when
awarding new contracts, evaluate reasons for not meeting
performance goals, and, if warranted, adjust subsequent contracts
to more realistic goals.
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Finding and Recommendations
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99-KC-244-1001 Page 8
Management Controls
In planning and performing our audit, we considered the City’s management controls 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 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.
Relevant Management
Controls
We determined the following management controls were
relevant to our audit objectives:
• Controls over compliance with laws and regulations .
• Controls over safeguarding resources.
• Controls over subrecipient program operations.
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
Significant Weaknesses meet an organization’s objectives.
Based on our review, we believe the City’s monitoring of
subrecipients is a significant control weakness (see Finding).
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Management Controls
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99-KC-244-1001 Page 10
Follow Up On Prior Audits
The most recent financial audit covering the City’s CDBG Program was for the year ended April 30,
1997. That report contained eight findings. Only one finding, dealing with controls over receipt of
subrecipient audit reports, pertained to our audit objectives. The City has since implemented
procedures to verify receipt of subrecipient audit reports.
The most recent OIG audit report was issued in February 1991. That review examined City and
subrecipient handling of CDBG program income. The report identified significant problems with
the City’s handling of program income. Since our current audit objectives did not address
program income, we did not follow up on the deficiencies cited in the 1991 audit.
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Follow Up On Prior Audits
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99-KC-244-1001 Page 12
Appendix A
Auditee Comments
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Auditee Comments
99-KC-244-1001 Page 14
Auditee Comments
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Auditee Comments
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99-KC-244-1001 Page 16
Appendix B
Distribution
Secretary’s Representative, 7AS
CPD Special Advisor Controller-DOT (Rm. 7228)
Director, Office of Community Planning and Development, 7AD
Director, Administrative Service Center, 7AAR
Assistant to the Deputy Secretary for Field Management, SDF (Rm. 7106)
Management Analyst, 6AFI (3)
Director Field Accounting Center 6AFA
FHA Comptroller, HF (Room 5132)
Associate General Counsel, CD (Room 8162)
Acquisitions Librarian, Library, AS (Room 8141)
Chief Financial Officer, F (Rm. 10164) (2)
Deputy Chief Financial Officer for Finance, FF (Rm. 10164) (2)
AIG, Office of Audit, GA (Rm. 8286)
Deputy AIG, Office of Audit, GA (Rm. 8286)
Director, Program Research and Planning Division, GAP (Rm. 8180)
Director, Financial Audits Division, GAF (Rm. 8286)
Central Records, GF (Rm. 8266) (4)
Semi-Annual Report Coordinator, GF (Rm. 8254)
Counsel to the Inspector General, GC (Rm. 8260)
OIG Webmanager
Inspector General, G (Rm. 8286)
Public Affairs Officer, G (Rm. 8286)
Deputy Assistant to the Secretary for Labor Relations, SLD (Rm. 7118)
Director, Office of Budget, FO (Room 3270)
Deputy Assistant Secretary for Operations, HO (Rm. 9138)
Director, Housing and Community Development Issue Area
Attention: Judy England-Joseph
U. S. GAO
441 G Street, NW - Room 2474
Washington, D. C. 20548
Director, HUD Enforcement Center
1240 Maryland Ave., Suite 200
Washington, D.C. 20024
The Honorable John Glenn
Ranking Member, Committee on Governmental Affairs
United States Senate; Washington, D. C. 20515-4305
The Honorable Fred Thompson
Chairman, Committee on Governmental Affairs
United States Senate; Washington, D. C. 20515-4305
Page 17 99-KC-244-1001
Distribution
Mr. Pete Sessions
Government Reform and Oversight Committee
Congress of The United States; House of Representatives; Washington, D. C. 20510-6250
Ms. Cindy Sprunger
Subcommittee on Oversight and Investigations
Room 212, O’Neil House Office Building; Washington, D. C. 20515
Honorable Dan Burton
Chairman; Committee on Government Reform and Oversight
House of Representatives; Washington, D. C. 20515-614
Department of Housing and Community Development
414 East 12th Street
Kansas City, Missouri 64106
99-KC-244-1001 Page 18
Community Development Block Grant Program Department of Housing and Community Development, City of Kansas City, Missouri
Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-12-08.
Below is a raw (and likely hideous) rendition of the original report. (PDF)