oversight

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)

                                                                    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

                                         Page 1                            99-KC-244-1001
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

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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




                   Page 13   99-KC-244-1001
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