OFFICE OF AUDIT REGION VI FORT WORTH, TX

The Texas Department of Housing and Community Affairs, Austin, TX Did Not Always Comply with Neighborhood Stabilization Program Requirements

2012-FW-1013

AUGUST 22, 2012

Issue Date: August 22, 2012 Audit Report Number: 2012-FW-1013

TO:

FROM:

Shirley J. Henley Director, Office of Community Planning and Development, 6AD //signed// Gerald R. Kirkland Regional Inspector General for Audit, Fort Worth Region, 6AGA The Texas Department of Housing and Community Affairs, Austin, TX, Did Not Always Comply with Neighborhood Stabilization Program Requirements

SUBJECT:

Enclosed is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector General (OIG), final results of our review of the Texas Department of Housing and Community Affairs Neighborhood Stabilization Program. HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on recommended corrective actions. For each recommendation without a management decision, please respond and provide status reports in accordance with the HUD Handbook. Please furnish us copies of any correspondence or directives issued because of the audit. The Inspector General Act, Title 5 United States Code, section 8L, requires that OIG post its publicly available reports on the OIG Web site. Accordingly, this report will be posted at http://www.hudoig.gov. If you have any questions or comments about this report, please do not hesitate to call me at 817-978-9309.

August 22, 2012 The Texas Department of Housing and Community Affairs, Austin, TX, Did Not Always Comply with Neighborhood Stabilization Program Requirements

Highlights
Audit Report 2012-FW-0013

What We Audited and Why We audited the U. S. Department of Housing and Urban Development (HUD) Neighborhood Stabilization Program (NSP1) administered by the Texas Department of Housing and Community Affairs. We selected the Department based upon the large amount of NSP1 funding that it received, more than $101 million. Our objective was to determine whether the Department complied with NSP1 requirements for obligations, expenditures, program income, monitoring, and reporting. What We Recommend We recommend that the Fort Worth Director of HUDs Office of Community Planning and Development recapture $42,182 that the Department obligated improperly, and require the Department to provide support for more than $25 million in unsupported obligations and costs.

What We Found The Department improperly obligated $42,182. In addition, it could not support more than $25 million in obligations made by the deadline and $8,767 in expenditures. Further, it did not report on its progress as required and did not appear to be on schedule to spend funds within required timeframes. As a result, the Department could not assure HUD that it properly managed its more than $101 million program.

TABLE OF CONTENTS
Background and Objectives Results of Audit
Finding: The Department Did Not Always Comply with Neighborhood Stabilization Program Requirements 4 17 19 3

Scope and Methodology Internal Controls Appendixes

A. Schedule of Questioned Costs B. Auditee Comments and OIGs Evaluation

21 22

BACKGROUND AND OBJECTIVE

Under the Housing and Economic Recovery Act of 2008, the U. S. Department of Housing and Urban Development (HUD) distributed, through a prescribed formula, $3.92 billion in Neighborhood Stabilization Program (NSP1) funds to States and local governments. While NSP1 had similarities to existing HUD programs, it was a newly created program that required recipients to create or modify procedures and systems to manage and comply with requirements. On March 3, 2009, HUD awarded more than $101 million in NSP1 funds to the State of Texas. The State was to use its NSP1 funds to assist in the rehabilitation of abandoned and foreclosed-upon homes and residential properties. The governor of Texas selected the Department of Housing and Community Affairs as the lead agency for its $101 million program. The Department provides for the public service and housing needs of low- to moderate-income families in Texas. The Department established a multilevel approach for the distribution of the NSP1 funds to communities with the greatest need. For the first level, it directly allocated $76.9 million to local governments and nonprofit agencies in counties identified as having the greatest need. For the second level, the Department competitively awarded $19.9 million to entities in counties with significant needs, referred to as the select pool counties. 1 It entered into a memorandum of understanding with the Texas Department of Rural Affairs, authorizing it to oversee the select pool activities. 2 However, as lead agency, the Department maintained overall responsibility for the entire program. NSP1 required the Department to obligate its funds within 18 months after HUD signed the grant agreement on March 3, 2009. 3 The requirements defined obligations as when the Department placed orders, awarded contracts, received services, and conducted similar transactions. 4 The Department could not obligate funds simply by awarding NSP1 grants to its subrecipients. As table 1 shows, the NSP1 also required the Department to spend its funds within 4 years. As of May 29, 2012, the Department had drawn down only $52 million, which was about 52 percent of its grant, although its grant period for expending the funds was 81 percent completed.
Table 1: Statutory deadlines for the Departments NSP1 grant

Grant number B-08-DN-48-0001

Date funds available March 3, 2009

Obligation deadline set by HUD September 3, 2010

Expenditure deadline March 2, 2013

Our objective was to determine whether the Department complied with NSP1 requirements for obligations, expenditures, program income, monitoring, and reporting.

1 2 3 4

The remaining $5.1 million was for administrative costs. This memorandum of understanding was for the period September 25, 2009, through August 31, 2011. Federal Register Docket Number FR-5255-N-01, section II.B Federal Register Docket Number FR-5255-N-01, section II.A

RESULTS OF AUDIT Finding: The Department Did Not Always Comply with Neighborhood Stabilization Program Requirements
The Department did not adequately manage its NSP1 obligations by not maintaining sufficient records to support obligations reported to HUD. Federal regulations required the Department to establish and maintain sufficient records to support that it complied with requirements. 5 Based on a review of a statistical sample of obligations, the Department did not have valid contracts or other obligating documentation for $631,402 in reported obligations. Also, it entered into agreements with subrecipients that did not complete their activities, resulting in $8,767 of unsupported costs. Further, more than $24.7 million of its reported obligations did not match the subrecipient agreements. In addition, the Department did not report its progress to HUD in a timely manner as required and did not appear to be on track to spend funds by the statutory deadline. These conditions occurred because the Department did not allocate enough resources or establish the effective controls to operate its program. Therefore, the Department did not effectively and efficiently implement its planned program and incurred questioned obligations and costs totaling more than $25 million.

The Department Could Not Support the Obligation Amounts That It Reported to HUD The Department did not create and maintain adequate records to support its meeting of the September 3, 2010, statutory obligation deadline. This deficiency occurred because the Department did not allocate the staff and resources necessary to establish the control environment to track and monitor its NSP1 obligations as required by its grant agreement. 6 Further, it could not effectively support its current obligations, which impaired its ability to manage its program. In accepting its NSP1 grant, dated March 3, 2009, the Department certified to HUD that it would obligate its NSP1 funds within 18 months, or by the September 3, 2010, deadline. HUD emphasized the importance to all NSP1 recipients of meeting this deadline so they would not need to return funds. On September 4, 2010, the Department reported in HUDs Disaster Recovery Grant

5 6

24 CFR (Code of Federal Regulations) 570.506 Ibid.

Reporting (DRGR) system 7 that it had obligated 100 percent of its grant, thus meeting the obligation deadline. However, the Department did not establish systems and controls for the obligation of NSP1 funds, which significantly hindered its ability to support its reported obligations. In response to several requests for support of its September 4, 2010, reported obligations, the Department provided a spreadsheet, dated October 17, 2011. It prepared the spreadsheet specifically for this audit using spreadsheets maintained by its program services division. 8 Department staff explained that the data in the program services spreadsheets included information through February 2011, 5 months after the deadline. However, the Department could not substantiate the obligations it reported to HUD as meeting the September 3, 2010, deadline. Specifically, the Department could not provide a contemporaneously prepared or verifiable list of obligation amounts by specific NSP1 activities that equaled its obligations reported in the DRGR system. In attempting to draw an obligation sample, we compared the Departments spreadsheet to the obligations it reported to HUD. 9 For 28 of 38 (74 percent) Department contracts, the amounts did not reconcile. As table 2 shows, the aggregate discrepancy between the Departments records totaled more than $9.4 million.
Table 2: Aggregate discrepancy between obligations the Department reported to HUD and its October 17, 2011, spreadsheet supporting the reported amounts

Contract comparison 17 overstated contracts 11 understated contracts Total of 28 incorrectly reported contracts

Reported in the DRGR system on 09/04/2010 $30,098,073 (16,898,251)

Departments spreadsheet 10/17/2011 $ 34,385,120 (11,759,273)

Aggregate discrepancy $ 4,287,047 5,138,978

$13,199,822

$ 22,625,847

$ 9,426,025

The Department was responsible for maintaining the information supporting what it reported to HUD through the DRGR system. The Department must reconcile its records and resolve the more than $9.4 million in aggregate discrepancies that its records showed. As further evidence that its records were inaccurate, table 3 demonstrates the fluctuations in amounts the Department reported to HUD and
7

HUDs Office of Community Planning and Development designed the DRGR system for its Disaster Recovery program and other special appropriations. Grantees use the system to report their NSP1 obligations and expenditures. HUD uses data from the system to review activities and required reports. The Department provided the program services divisions source spreadsheets on January 19, 2012, 4 months after our initial request. This comparison did not include the Texas Department of Rural Affairs agreements.

the amounts it reported on its Web site for its June 30, 2010, quarterly performance report, which it didnt report until June 22, 2011, almost 1 year late.
Table 3: Fluctuations between amounts the Department reported in the DRGR system and on its Web site for its June 30, 2010, quarterly performance report

Description
Total NSP1 funds budgeted Program funds obligated National objective NSP1 only 25 percent set aside 10

DRGR system as of 10/31/2011

$100,873,093 25,864,303

DRGR system as of 11/16/2011

$84,569,796 24,986,774

Departments Web site on 11/21/2011

$97,974,744 25,864,303

$65,369,757

$51,851,920

$62,524,020

None of the Departments budgeted amounts equaled the grant amount of more than $101 million as they should have. In discussions, Department staff attributed the discrepancies to the DRGR system. However, the DRGR system served as a repository for information that the Department submitted, and HUD used to monitor the Departments program. 11 Therefore, the Department was responsible for allocating the resources to accurately record information into the system. The Department Did Not Obligate NSP1 Grant Funds by the Obligation Deadline The Department could not support that it obligated all NSP1 grant funds within 18 months of the grant award as required. 12 For 20 of 56 (36 percent) grant activities reviewed, the Department incorrectly reported in the DRGR system that it met its obligation deadline for the grant funds awarded. 13 For 3 of the 20 activities, it reported that it obligated $42,182, although there were no executed agreements obligating the funds. For the remaining 17 activities, the Departments system did not contain documentation to support $589,220 in obligations. 14 This condition occurred because the Department did not effectively manage its NSP1 obligations. It did not allocate sufficient staff to implement policies and procedures for processing obligations. As a result, it did not ensure that its subrecipients entered into agreements that clearly obligated the funds by September 3, 2010.
10

11

12 13 14

Federal Register Docket Number FR-5255-N-01, section II.E, required that the Department spend 25 percent of the funds for the purchase and redevelopment of abandoned or foreclosed-upon residential properties to be used to house individuals or families whose incomes did not exceed 50 percent of area median income. HUD reviewed the DRGR system to analyze risk and find anomalies or performance problems that suggested fraud, waste, or abuse of funds. HUD reconciled budgets, obligations, fund draws, and expenditures to the DRGR system. Federal Register Docket Number FR-5255-N-01, section II.B The Department certified that it would obligate the $101 million NSP1 grant amount by September 3, 2010. For example, some subrecipients did not date the signatures on the documents supporting the obligations.

Further, the Department did not establish and maintain a system for recording NSP1 obligations as required. 15 As a result, it could not provide a reliable list of obligations. The 56 sample grant activities were selected from records that the Department and the Texas Department of Rural Affairs provided. 16 The Texas Department of Rural Affairs provided several spreadsheets showing obligations for select pool subrecipients, which it prepared about September 3, 2010, when it entered obligations into the DRGR system. For the remaining obligations, the Department used various sources and took more than a year after the obligation deadline to create a spreadsheet that listed the obligations. The Department did not maintain an accurate obligation record, as more than half of the 56 samples did not match the obligations reported in its housing contract system. In total, its system underreported the sample amount for 34 activities (61 percent) by more than $4.8 million.17 The sample listing contained 25 activities that exceeded its systems obligations and 9 activities for which the listed obligations were less than those reported in its system. 18 This condition occurred because the Department did not have effective systems for reconciling its obligating documents to its system and correcting discrepancies. As a result, it could not support that it obligated its funds by September 3, 2010. The Department Deobligated More Than $21 Million for Activities That It Could Not Complete Of 44 subrecipients, 15 (34 percent) did not complete the planned activities for 24 of 58 (41 percent) grant agreements. This condition occurred because the Department lacked systems and controls for selecting and helping subrecipients complete grant activities within guidelines. 19 As a result, the Department deobligated more than $21 million for activities that it could not complete. 20 The deobligations appear to show that the Department was more interested in meeting the obligation deadline than obligating funds for activities that it could complete. The deobligations may deter its ability to spend funds by March 2, 2013, as required. Table 4 is a summary of deobligated agreements.

15

16 17

18 19

20

Under 24 CFR 570.506, the Department was required to maintain a historical record of funds obligated to meet the deadline. The Department managed 43, and the Texas Department of Rural Affairs oversaw the remaining 13. The sample amount showed total obligations of $35.3 million, while the Departments system reported a total of $30.4 million. The Department had taken one sample item in the amount of $106,315 out of its housing contract system. As a result, we did not compare that sample amount to the system. The total absolute variance was more than $5.3 million. Common business practice would require the Department to select only those subrecipients that could complete the proposed work while complying with Federal regulations. HUD had not deobligated those funds from the Departments award.

Table 4: Funds deobligated by the Department from its subrecipients

Reason for deobligations Agreement terminated Agreement expired Amended agreement reduced the amount Totals

Number of agreements 9 11 4 24

Funds drawn down for lapsed contracts $ 41,621 801,070

Amount deobligated $11,597,964 6,189,830 3,595,891 $21,383,685

$842,691

The Department deobligated more than $12.3 of the $101 million that HUD awarded (12 percent) within 27 days following the September 3, 2010, obligation deadline. On September 4, 2010, the Department reported in the DRGR system that it had obligated all the awarded funds. However, its quarterly performance report for the quarter ended September 30, 2010, 26 days later, 21 showed obligations of only $89.6 million. The Department explained that there are many fluctuations in real estate transactions and the amounts obligated were only estimates that changed upon closing. It also explained that there was no existing requirement that the Department maintain its obligations after the obligation deadline. However, this did not clearly explain what happened to the reported obligations in such a short time period. The $12.3 million in deobligated funds are shown in the following table.
Table 5: Funds deobligated in 26 days following the obligation reporting

Type of activity Renovations-new construction Land banks Acquisitions Administrative fees (about 8%) Demolitions Rehabilitation Total

NSP1 funds deobligated ($9,466,215) (2,874,858) 1,024,762 (955,464) (143,839) 28,809 ($12,386,805)

HUD regulations specified the documents the Department must have when it obligated NSP1 funds. 22 Those documents had to be signed and dated. For instance, under NSP1 the Department could report an obligation when; a subrecipient had a signed purchase offer accepted by the seller for an acquisition of real property,

21 22

The Department did not submit this report until November 15, 2011. NSP Policy Alert dated April 23, 2010

a subrecipient had either a construction contract or other action that was legally binding for rehabilitation of property owned by the subrecipient, a subrecipient awarded a construction contract for new housing construction on vacant or demolished property, or a subrecipient awarded a demolition contract for a specific property.

All of the required documents mentioned above were legally binding to a subrecipient. Thus, it was unclear why the amounts obligated for these transactions would change so much and often during the short time period without the activities being completed or written amendments to the documents. Before the Department deobligated NSP1 funds from the remaining balances of two subrecipient agreements, it paid the subrecipients for questionable costs. As a result, the Department spent $8,767 on unsupported payroll and administrative costs for those agreements that it cancelled. Unsupported Payroll Costs Timesheets did not reflect total activity required in fulfillment of the employees responsibilities to the subrecipients, and there was nothing to indicate that the employees only worked on NSP1 activities. As a result, employees did not report their total activities as required. 23 Unsupported Administrative Costs Two subrecipients charged indirect costs to NSP1 based on a calculated percentage. When using the direct allocation method for allocating indirect costs under 2 CFR 230, subrecipients were required to prorate costs individually as direct costs to each activity using a base most appropriate to the particular cost being prorated. The base used must accurately measure the benefits provided to each activity and must be supported by current data. However, the Departments housing contract system did not have documentation to support that its subrecipients complied with the regulations. Further, in one instance, a subrecipient did not have a hotel receipt supporting more than $300.

The Departments Subrecipient Agreements Did Not Support the Obligations As previously noted, the Department did not maintain adequate records to support its September 3, 2010, obligations. In an attempt to determine which, if any, funds were not properly obligated by September 3, 2010, we compared the
23

Under 2 CFR 230, each time report account for the total activity for which employees were compensated. The time report must show the total time required in fulfillment of their obligations to the organization.

obligations reported in the DRGR system to the individual subrecipient and developer agreements that were effective on that day. The agreements would help the Department ensure that it spent funds in accordance with program requirements. 24 However, the agreements did not support the obligations reported in the DRGR system and the Department could not reconcile the differences. For instance, of the 58 obligations reported, 38 did not agree with the amounts in the subrecipient grant agreements. Ten agreements, 17 percent, were for less, and 28 agreements, 48 percent, were for more than the reported obligations. In addition, the Department entered into a developer agreement that it did not report. The aggregate amount of the obligation differences totaled more than $24.7 million, which was unsupported.
Chart 1: Thirty-eight agreements had different amounts than reported in DRGR

Subrecipient and Developer Agreements

35% 17% 10 reported less than the obligations in the DRGR system 28 reported more than the obligations in the DRGR system 48% 20 equaled the obligations reported in the DRGR system

To worsen the situation, 22 of the 58 agreements showed that planned grant activities did not match the obligated activities. These differences gave the appearance that the Department did not know what activities it was going to pursue. The variances occurred because the Department did not allocate the staff and resources necessary to create systems and controls for processing, tracking, and reconciling obligations. As a result, it did not ensure that its grant agreements matched the obligation information it reported. Since the agreements differed from the information submitted to HUD, the Department could not effectively monitor its performance under the submitted plans 25 or support that it met the obligation deadline.

24 25

24 CFR 570.501(b) Before the Department gave funds to its subrecipients, 24 CFR 570.503 required that the Department enter into subrecipient agreements with its subrecipients. The agreements were required to include a detailed description of the planned work, a schedule for completing the work, and a budget. The subrecipients were also required to provide adequate information for the Department to monitor performance under the agreements.

10

HUD cautioned grantees that adequate subrecipient agreements, which are required, are essential management tools for measuring the subrecipients performance and verifying regulatory compliance. HUD explained that the Department should amend its written agreement when there was an unwritten agreement to change the scope of work. Neglecting to amend an agreement places the Department at risk because the agreement is no longer an effective tool for monitoring and enforcing performance standards. For agreements that have more activities than obligated, the agreement may continue to legally bind the subrecipient to the activities that both parties agreed were no longer a responsibility of the subrecipient. According to the guidance, [c]larifying or correcting these misunderstandings after the fact can be both disruptive and costly. 26 Since the Department did not amend its 38 agreements, it could not support $24.7 million obligated. The Department Did Not Report on Its Progress as Required The Department did not report its progress toward meeting its NSP1 goals as required. HUD required the Department to submit quarterly performance reports using its DRGR system within 30 days following the end of each quarter. It also required the Department to post prominently the quarterly performance report on the States official Web site at the time of submission. 27 As table 6 shows, only 2 of the Departments 12 quarterly performance reports met the reporting requirement.
Table 6: Status of required quarterly performance report submissions as of July 12, 2012

Status Submitted timely (2 reports)

Quarterly performance report 06/30/2009 03/31/2012 09/30/2009 12/31/2009 03/31/2010 06/30/2010 09/30/2010 12/31/2010 03/31/2011 06/30/2011 09/30/2011 12/31/2011

Due date 07/30/2009 04/30/2012 10/30/2009 01/30/2010 04/30/2010 07/30/2010 10/30/2010 01/30/2011 04/30/2011 07/30/2011 10/30/2011 01/30/2012

Date submitted to HUD 07/28/2009 04/26/2012 11/12/2009 02/02/2010 06/11/2010 06/22/2011 11/15/2011 11/22/2011 01/17/2012 03/19/2012 03/28/2012 04/03/2012

Number Report of days submitted late on time? 0 Yes 0 13 3 42 327 381 296 262 233 150 64 Yes No No No No No No No No No No

Submitted late (10 reports)

26 27

Managing CDBG: A Guidebook for Grantees on Subrecipient Oversight Federal Register Docket Number FR-5255-N-01, section II.O

11

The Department submitted acceptable June and September 2010, quarterly performance reports nearly 1 year late. However, it did not maintain records or implement a system for summarizing its progress. This condition occurred because the Department did not effectively plan to manage its NSP1 by implementing systems to properly record obligations thereby allowing it to accurately report its performance to HUD in a timely manner. It did not assign enough staff members to run the program and it did not adequately prioritize the requirement for accurate and timely reporting of results. As a result, the NSP1 manager submitted the quarterly performance reports whenever time allowed. The September 2010 quarterly performance report would have informed the public of the Departments obligation status. The Department did not report its obligations to HUD monthly as it should have. HUD required grantees that were not 100 percent obligated by June 30, 2010, to report monthly on their progress. 28 Specifically, HUD required the Department to submit monthly reports until HUD accepted a report demonstrating 100 percent obligation. The Departments September 2010 quarterly performance report established obligations as of the obligation deadline. However, the Department did not submit the September 2010 quarterly performance report until November 15, 2011. Therefore, the Department should have submitted monthly reports on its obligations from June 30, 2010, through October 30, 2011. In addition, the Department could not support that it met its performance goals that it reported in the DRGR system. The Departments housing contract system showed detailed information on each grant activity. However, it did not summarize the information for easy reporting. Additionally, the Department did not have a system for reconciling its data with the DRGR system; thus, it did not reconcile its actual activities shown in its housing contract system to the activities that it reported in the DRGR system. As a result, it did not have readily available records to support that it met its performance goals, including the requirement to spend at least 25 percent of its funds to benefit individuals and families whose incomes did not exceed 50 percent of the area median income. The Department also did not have records to show that its subrecipients met their milestones and thresholds as required by their grant agreements. In August 2011, the Department implemented policies and procedures for monitoring subrecipient progress toward meeting program goals, and it had created a database to track subrecipient performance as of January 31, 2012. 29 However, it had not implemented policies and procedures for summarizing its total progress. HUD required the Department to meet grant performance goals for several years after expending grant funds. If the Department does not keep

28

29

Federal Register Docket Number FR-5255-N-01, section II.O.1(b)(i). HUD awarded the funds on March 3, 2009. The end of the 15th month following that date was June 30, 2010. Since the Department had just begun using the database, we did not review the systems effectiveness for tracking performance measures.

12

records supporting its accomplishments, HUD has no assurance that the Department will comply with these requirements. In addition, the Departments program division did not have written procedures for tracking and reporting program income. According to the NSP1 manager, the Department had unwritten procedures. When the financial administration division received program income, it notified program staff by email. After receiving notification, one loan specialist entered the information into the DRGR system; another entered the information into the Departments system. According to management, staff continually reconciled the entries. Without formalized program income policies and procedures, the Department could not support that it tracked program income as required. The Department Had Incomplete Guidelines To Verify Eligibility The Departments policies and procedures for verifying tenant and homeowner eligibility before approving draw requests for homeowner loans were incomplete. Also, the procedures did not have a timeline for the quality assurance staff to complete their reviews. According to management, properties were set up in the Departments system to comply with the area median income requirements. The subrecipients set up activities in the system, and the specialists reviewed and approved the activity setups. As a result, specialists needed to confirm that each property met its eligibility requirements and quality assurance staff did a second review before requesting NSP1 funds for homebuyer loans. Without clear written procedures for processing setups and draws, the Department may not be able to ensure that its staff understand the requirements and that its subrecipients have the resources necessary to complete their grant activities in a timely manner. The Department Was Not on Track To Spend Funds in a Timely Manner Based on the expended funds and progress as of May 29, 2012, the Department did not appear to be spending its NSP1 funds in a timely manner. Federal regulations 30 required that the Department spend the total funds awarded within 4 years, or by March 2, 2013. 31 HUD would recapture all funds not expended by that date. Although it was 3.2 years (81 percent) through the grant, the Department had spent only $52 million (52 percent) of its grant funds. The Department put itself at risk of not spending the grant funds on time when it selected subrecipients that did not have the capacity to administer the program activities. At least 34 percent of the subrecipients either did not have the capacity
30 31

Federal Register Docket Number FR-5255-N-01, section II.M.2 The 4-year expenditure period began on March 3, 2009, when HUD signed the States NSP1 grant agreement.

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or were not willing to complete their NSP1 activities. This problem caused the Department to deobligate at least $21 million. As table 7 shows, the Department had obligated only $84 of the $101 million grant (approximately 83 percent) as of May 29, 2012.
Table 7: The Departments total drawdowns for NSP1 activities as of May 29, 2012

Activity Acquisition multifamily properties Land banks Demolition Acquisition single-family properties Financing Administrative fees Rehabilitation or reconstruction multifamily properties New construction or rehabilitation single-family properties Totals

Obligated $21,154,879 8,362,291 2,433,838 14,640,381 995,566 8,220,142 8,636,639

Funds drawn down $20,288,081 6,531,276 1,666,694 10,348,427 413,482 4,898,421 3,368,867

Activity percentage completed 96% 78% 68% 71% 42% 60% 39%

20,158,340 $84,602,076

5,357,223 $52,872,471

27%

Although the Department seemed to be completing the purchase of properties for multifamily residences and land banks in a timely manner, it was not progressing as well on the other activities. For example, the Department was slow to complete its acquisition, new construction, and rehabilitation goals for single family homes. It had spent only $15 of $34 million (approximately 45 percent) obligated for those activities. In another example, the City of Huntsville did not appear to be able to complete its activities. As of May 24, 2012, Huntsville had drawn down only $155,490 (10 percent) of its $1.5 million in obligated funds. Funds were not drawn down in a timely manner because there seemed to be delays in receiving guidance to carry out the programs, entering information into the system, getting timely approvals to carry out program activities, and obtaining funds for expenses. The Departments inability to use its funds could make funds unavailable for capable entities that could complete viable NSP1 activities. Conclusion The Department did not always follow requirements when obligating and reporting on its NSP1 funds. It did not keep reliable records to support that it met the statutory obligation deadline. The Department obligated $42,182 without valid agreements and $589,220 without complete obligating documents. In 14

addition, the Department entered into grant agreements with subrecipients that could not complete their NSP1 activities, resulting in $8,767 in unsupported expenditures. Also, it entered into subrecipient grant agreements that were not the same as the obligations reported in the DRGR system. The aggregate amount of the obligation differences totaled more than $24.7 million. Further, the Department needs to strengthen its written policies and procedures for program specialists and quality assurance staff during the homebuyer loan process. Also, the Department did not appear to be spending its NSP1 funds in a timely manner. As a result, it did not carry out its activities as planned and could not adequately monitor the activities that it reported to HUD. In addition, the Department did not report on its progress as required. This condition occurred because the Department did not allocate sufficient staff and resources to implement adequate policies and procedures for its NSP1 obligations, thereby putting the program at risk of misappropriated funds. Recommendations We recommend that the Fort Worth Director of the Office of Community Planning and Development 1A. Recapture and reallocate $42,182 in ineligible obligations and require the Department to reimburse HUD from non-Federal funds for any NSP1 proceeds spent on these obligations. 32 1B. Require the Department to support that $589,220 in obligations existed as of September 3, 2010, or repay HUD for funds drawn down. The Director should take additional corrective action as appropriate. 33 These were obligations that we reviewed for which the Departments system did not have the required obligating documents. 1C. Require the Department to provide documentation to support $8,767 in unsupported costs or repay any unsupported amounts to HUD. 1D. Require the Department to support that $24.7 million in obligations existed as of September 3, 2010, or repay HUD for funds drawn down. Further, the Director should take additional corrective action as appropriate. 34 These were developer and subrecipient agreements that did not agree with the amounts and activities the Department obligated in the DRGR system.

32

33 34

According to Federal Register Volume 75, Number 201, section I.B.2, HUD is required to recapture and reallocate up to $19.6 million in improper obligations. HUD may take other corrective action for funds in excess of $19.6 million. Ibid. Ibid.

15

1E. Require the Department to implement adequate procedures and controls For processing, documenting, tracking, and reconciling its obligations to its subrecipient grant agreements and information reported to HUD and tracking and reporting its program income. For selecting subrecipients that have the capacity to complete grant programs. For tracking its progress toward meeting its NSP1 performance goals and completing and submitting quarterly performance reports to the DRGR system so that HUD knows the programs status.

1F. Require the Department to revise its standard operating procedures for its performance specialists and quality assurance staff to ensure loans and drawdowns are processed in a timely manner and to clearly explain the procedures for approving homebuyer activities for loans and drawdowns. The procedures should include the types of supporting documentation that must be reviewed, incorporating the NSP Homebuyer Workbook, 35 and clarifying what checklist(s) will be used and when to determine eligibility. The procedures for quality assurance staff should include a timeline for completing the review. 1G. Monitor the Departments progress toward meeting its March 2, 2013, expenditure deadline and follow up on any delays.

35

According to the Department, subrecipients submit this workbook, along with source documentation, when sending household information to the Department for review and approval.

16

SCOPE AND METHODOLOGY

We performed our fieldwork at the Departments office located in Austin, TX, and our office in Oklahoma City, OK, from July 2011 through May 2012. Our audit scope was January 2009 through July 2011. We expanded our scope to July 12, 2012, for DRGR system reporting progress and May 29, 2012, for expenditure progress. To accomplish our objectives, we performed the following related to the Departments NSP1 grant funds: Reviewed relevant laws, regulations, and HUD guidance; Reviewed the Departments policies and procedures; Reviewed and analyzed the Departments NSP1 grant agreement and the States substantial amendment to its annual action plan for Federal fiscal year 2008; Reviewed internal audit reports and the February 15, 2011, NSP1 needs assessment report prepared by Training and Development Associates, an independent contractor for HUD; Reviewed the Departments monitoring reports of its subrecipients and the Texas Department of Rural Affairs; Reviewed the expenditures of 10 subrecipient grant agreements that either expired or were terminated; Reviewed 35 percent of the Departments NSP1 obligations as of September 3, 2010, to ensure that the Authority met its obligation requirements; Reviewed 13 NSP1 expenditures to determine whether the Department met expenditure requirements; Reviewed the status of the Departments NSP1 quarterly performance reports as of November 1, 2011, and the April 2011 annual Section 3 reports 36 for timely reporting; Interviewed HUD, Department, and Texas Department of Rural Affairs staff and NSP1 subrecipients; and Conducted 26 site visits to properties (5 multifamily properties and 21 single family homes) financed with NSP1 funds.

For the obligation sample review of approximately $75 million in obligations directly overseen by the Department, we used a spreadsheet prepared by the Department more than 1 year following the obligations. The spreadsheet apparently showed the obligations, listed by subrecipient grant activity, which existed as of September 3, 2010, the obligation deadline. For the approximate $19 million in obligations initially administered by the Texas Department of Rural Affairs, we used spreadsheets prepared by its staff when it entered the September 3, 2010, obligations into the DRGR system. Using the spreadsheets, we identified and reviewed a statistical sample of 56 activities. The sample amount was more than $35.3 million. The sample universe included 1,430 activities that totaled more than $93.7 million. These activities
36

The Department certified that it would submit Section 3 reports to HUD showing that, to the greatest extent feasible, it provided job training, employment, and contracting opportunities for low- or very-low income residents in connection with projects and activities in their neighborhoods.

17

consisted of 1,203 activities administered by the Department and 227 activities initially administered by the Texas Department of Rural Affairs. Twenty-one activities, involving 4 subrecipient grant agreements, were not included in the universe because the information provided by the Department designated them as cancelled. The spreadsheet that the Department prepared was not reliable. There were many discrepancies between the contract amounts and activities shown on the spreadsheet and those shown in the DRGR system. As a result, we did not project the results of the review. We selected a nonstatistical, representative sample of 52 of the Departments 1,136 NSP1 administrative draws and expenditures. The 52 samples, valued at almost $1 million, represented almost 3 percent of the more than $37 million in administrative draws and expenditures. For the survey, we tested 13 of the 52 expenditures with no exceptions. As a result, we did not review the remaining 39. We used a nonstatistical sample because we were evaluating whether the Department kept documentation that supported its expenditures and we were not projecting the results. We conducted the audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective.

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INTERNAL CONTROLS
Internal control is a process adopted by those charged with governance and management, designed to provide reasonable assurance about the achievement of the organizations mission, goals, and objectives with regard to Effectiveness and efficiency of operations, Reliability of financial reporting, and Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the organizations mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations as well as the systems for measuring, reporting, and monitoring program performance.

Relevant Internal Controls We determined that the following internal controls were relevant to our audit objective: Policies and procedures that the Departments management had implemented to ensure that its program met its objectives. Policies and procedures that the Departments management had implemented to ensure that its subrecipients and developers complied with laws and regulations. Policies and procedures that the Departments management had implemented to ensure that its resource use was consistent with laws and regulations and that its resources were safeguarded against waste, loss, and misuse.

We assessed the relevant controls identified above. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, the reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or efficiency of operations, (2) misstatements in financial or performance information, or (3) violations of laws and regulations on a timely basis.

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Significant Deficiencies Based on our review, we believe that the following items are significant deficiencies: The Department did not establish systems and controls for processing, documenting, tracking, and reconciling its obligations to its subrecipient grant agreements and information reported to HUD (finding). The Department did not establish systems and controls for tracking and reporting its program income (finding). The Department did not establish systems and controls for selecting subrecipients that had the capacity to complete its NSP1 activities (finding). The Department did not have a system in place to ensure that it had adequate staff to oversee its NSP1 activities and its subrecipients (finding). The Department did not implement policies and procedures for its program specialists to verify tenant or homeowner eligibility before approving NSP1 draws (finding).

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APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS

Recommendation number 1A 1B 1C 1D Totals Ineligible 1/ $42,182 $ 589,220 8,767 24,706,604 Unsupported 2/

$42,182

$25,304,591 37

1/

Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the auditor believes are not allowable by law; contract; or Federal, State, or local policies or regulations. Unsupported costs are those costs charged to a HUD-financed or HUD-insured program or activity when we cannot determine eligibility at the time of the audit. Unsupported costs require a 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.

2/

37

According to Federal Register Volume 75, Number 201, HUD is required to recapture and reallocate up to $19.6 million in improper obligations. HUD may take additional corrective actions related to any amount of unused funds greater than $19.6 million.

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Appendix B AUDITEE COMMENTS AND OIGS EVALUATION

Ref to OIG Evaluation

Auditee Comments

Comment 1

22

Comment 2

Comment 3 Comment 2

Comment 4 Comment 2

23

Comment5 Comment 2

Comment2

Comment 6

24

Comment 7

Comment 8

Comment 9

Comment 10

25

Comment 11

Comment 12

Comment 13

26

Comment 14

Comment 15

Comment 16

Comment 17

Comment 18

Comment 19

27

Comment 20

Comment 21

28

Comment 6

29

30

31

32

OIG Evaluation of Auditee Comments Comment 1 The Department questioned some of the language in the draft report as being emotionally charged and pointed; but, it did not provide any specific examples. We made several revisions to the report language to attempt to address the Departments concern. The Department provided an expanded response in its Addendum One. We address these comments there. The comment that HUD does not require grantees to keep the same obligations throughout the NSP1 grant period is valid. However, this was not an issue raised in the draft report. HUD required the Department to have valid obligations for its more than $101 million award by September 3, 2010. The report concluded that the Department did not have adequate support for its September 3, 2010, obligations. It also concluded that the September 3, 2010, obligations entered into the DRGR system did not match obligations that existed on that date. We provided clarification in the finding. As discussed in the report, the Department did not maintain records or implement a system for summarizing its progress and reconciling its obligations to the DRGR system. HUD required the Department to establish and maintain sufficient records to enable HUD to determine whether it complied with applicable requirements. The Department acknowledged that it was responsible for all of the NSP1 funds awarded. In October 2011, more than a year after the obligation deadline, the Department notified HUD that it had improperly obligated funds at September 3, 2010. If it had implemented a system for tracking and reconciling the obligations reported in the DRGR system, it would have identified 'contracts of concern' earlier in the process before it entered them as valid obligations in the DRGR system. We appreciate the Department providing additional information and clarification. After reevaluation of the evidence, we removed the draft finding from the report. We did not dispute the definition of an obligation. The Department was responsible for supporting the obligations it reported to HUD at the September 3, 2010, obligation deadline. However, as detailed throughout the finding, the Departments records were inaccurate and it could not support or reconcile the obligations it reported to HUD on September 4, 2010. To date, the Department has still been unable to support those obligations in summary form or otherwise. We maintain our position.

Comment 2

Comment 3

Comment 4

Comment 5

Comment 6

Comment 7

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Comment 8

We prepared the spreadsheet from information provided by the Department. Based on the Departments comments, we clarified and made changes as appropriate to the finding. The Department acknowledged that it entered into 38 written agreements with its subrecipients that did not total the amounts in the subrecipient grant agreements, 28 of which exceeded the obligations. The Department entered actual obligations into the DRGR system as of September 3, 2010. However, its grant agreements and contracts with its subrecipients and developers for the same period were not for the same activities and amounts as those reported in the DRGR system. Even though the Department entered into 14 of the 38 agreements between 6 months and 1 year before the September 3, 2010, obligation deadline, it entered into 11 agreements within 5 months before the deadline and the remaining 13 agreements within 1 to 2 months before the deadline. The Department did not amend any of the agreements to match the actual obligations entered into the DRGR system. This caused fluctuations between the agreements and information in the DRGR system. The Department did not keep records to show where the fluctuations existed. If it had been properly managing its NSP1, its records would have shown what changed in the obligations and how the changes reconciled to the DRGR system. Under the written agreements, the Department was bound to spend NSP1 funds for the activities and amounts included in the agreements. As a result, it obligated funds that were not available when it entered into subrecipient agreements that exceeded the obligated funds reported in the DRGR system. We did not revise the finding based on the Departments comment.

Comment 9

Comment 10 The Department agreed that it made errors when it entered obligation information into the DRGR system. If it had a system in place that reconciled the obligations in the subrecipient agreements to the obligations reported in its housing contract system and the DRGR system it could have identified the discrepancies earlier in the process. The regulations 38 required that the Department enter into a written agreement with each subrecipient before disbursing HUD funds. The agreement must remain in effect during the time that the subrecipient has control over the funds. The written agreement must include a description of the work to be performed, a schedule for completing the work, and a budget. The information should be in sufficient detail to provide a sound basis for the Department to effectively monitor performance under the agreement. NSP1 regulations required additional documents to obligate funds, such as purchase offers and construction contracts. In response to the Department's comments, we made no changes to the report.
38

24 CFR 570.503

34

Comment 11 The Department was responsible for maintaining the information it reported to HUD through the DRGR system. HUD required the Department to submit its June 30, 2010, quarterly performance report on July 30, 2010. As table 3 of the report showed, over a 22-day period 39 between October 31, 2011, and November 21, 2011, the amounts the Department reported to HUD fluctuated significantly. These significant fluctuations over such a short timeframe, along with the Department submitting the reports more than a year after they were due, further support the conclusion that the Department did not have adequate controls over its obligations. Comment 12 Obligated NSP1 funds should have appropriate supporting documentation for both total obligations and individual activities. As required in the grant agreement, funds would be obligated no later than September 3, 2010. Further, the Department agreed that funds were obligated for an activity when orders were placed, contracts were awarded, services were received, and similar transactions had occurred that required payment by the Department or subrecipient during the same or a future period. The Department could not obligate funds into the DRGR system for an activity when it entered into subawards (e.g., grants to subrecipients or to units of local government). Therefore, as stated in the report, we tested sample activities the Department recorded as obligated by the deadline and concluded that the Departments system of record did not contain supporting documentation for its obligations. HUD required the Department to establish and maintain sufficient records to enable HUD to determine whether it complied with applicable requirements. 40 The Department should record accurate obligation amounts in its system of record, which should also reconcile with the DRGR system. Therefore, it is necessary for the Department to track and record changes as needed in a timely manner in its housing contract system to ensure that a valid obligation exists. Further, the tracking of obligations and subsequent expenditures assists the Department in monitoring subrecipients progress and should improve its ability to administer the grant. Comment 13 We clarified the criteria in the finding. Comment 14 We added clarification in the finding. Comment 15 The Department did not provide support for the $6,425 in costs. Comment 16 We updated the finding to include information provided by the Department in its comments and verified in the DRGR system. We also updated table 6 to reflect the Departments submission of its late quarterly performance reports. However, we did not test the accuracy of the information reported in these submissions.
39 40

This was more than 15 months after the quarterly performance report due date. 24 CFR 570.506

35

Comment 17 Monthly reporting submissions were not required for grantees for which HUD had accepted a quarterly performance report that reflected that it had met the 100 percent obligation requirement. The Departments reporting was late and when the monthly reporting requirement began, it did not have a HUD-approved quarterly performance report showing that it had obligated 100 percent of its grant funds. We made clarifying changes, as needed, to the finding. Comment 18 We disagree that there was little performance activity during the audit. All NSP1 activities were essential to completing the program as planned. Thus, the acquisition, land banking, demolition, renovation, and construction activities were all necessary. HUD required the Department to establish and maintain sufficient records to enable HUD to determine whether it complied with applicable requirements. 41 The Department should capture the entire population in a single system or report to identify the information needed by HUD to monitor the program. We did not change the finding based on the comments. Comment 19 The Department needs to show that it spent funds as budgeted and obligated. It should implement a system for tracking its overall progress towards meeting the 25 percent setaside requirement as budgeted. We did not change the finding based on the Departments comments. Comment 20 We made changes, as appropriate, to the finding. After the Department provided the NSP Homebuyer Workbook, we recommended that it incorporate the workbook into its standard operating procedures. Comment 21 While we based the audit analysis on the reported drawdowns shown in the DRGR system, the Department did not submit documentation with its response to show that it had spent more than the $52 million discussed in the report. We did not change the finding based on the Departments response.

41

24 CFR 570.506

36