HomeMy WebLinkAboutR-98-0250J-98-338
3/17/98
RESOLUTION NO. 9 8 250
A RESOLUTION AUTHORIZING AND DIRECTING THE
CITY MANAGER TO REQUEST FROM THE U.S.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT A
THIRTY (30) DAY EXTENSION OF THE DEADLINE FOR
SUBMITTING THE CITY 'S PROPOSED CONSOLIDATED
PLAN, INCLUDING A FY 1998 ACTION PLAN WITH
PROJECTED USES OF FUNDS FOR THE CITY'S
COMMUNITY DEVELOPMENT BLOCK GRANT, HOME
INVESTMENT PARTNERSHIPS, EMERGENCY SHELTER
GRANT AND HOUSING OPPORTUNITIES FOR PERSONS
WITH AIDS PROGRAMS.
WHEREAS, on March 10, 1998, by Motion No. 98-248 and Motion
No. 98-249, the City Commission approved the City
Administration's recommendations as set forth in the City of
Miami's FY 1998-1999 Proposed Consolidated Plan ("Plan"),
including a FY 1998 Action Plan with projected uses of funds for
the City's Community Development Block Grant (with the exception
of the recommendations for the economic development proposals,
for which the Commission approved the recommendations of the
Economic Development and Transportation Committee), HOME
Investment Partnerships, Emergency Shelter Grant, and Housing
Opportunities for Persons With Aids Programs, with the caveat
that the City Commission reserved the right to modify said
recommendations at a meeting scheduled for March 19, 1998; and
WHEREAS, upon the final adoption of the Plan by the City
Commission, pursuant to federal regulations, said Plan has to be
CITY COMMISSION
MEETING OF
MAR 1 0 1998
Resolution Na
9R- 250
available for the public's review and comment for a thirty (30)
day period prior to the submission of the Plan to the U.S.
Department of Housing and Urban Development ("HUD") for its
approval; and
WHEREAS, HUD established a deadline of April 15, 1998 for
the submission of the Plan; and
WHEREAS, inasmuch as the City Commission will not adopt the
Plan until March 19, 1998, whereby the public's review period
would commence on March 20, 1998 and terminate on April 19, 1998
(four days beyond the deadline for submitting the Plan to HUD);
and
WHEREAS, the City has requested from HUD extensions for the
submission of the City's Plans in previous years; and
WHEREAS, a thirty (30) day extension will afford the City
Commission and the public the opportunity to adequately review
and commend on the Plan;
NOW, THEREFORE, BE IT RESOLVED BY THE COMMISSION OF THE CITY
OF MIAMI, FLORIDA:
Section 1. The recitals and findings contained in the
Preamble to this Resolution are hereby adopted by reference
thereto and incorporated herein as if fully set forth in this
Section.
Section 2. The City Manager is hereby authorized and
directed to request a thirty (30) day extension from the U.S.
Department of Housing and Urban Development for the submission of
the City of Miami's FY 1998-1999 Proposed Consolidated Plan,
including a FY 1998 Action Plan with projected uses of funds for
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98- 250
the City's Community Development Block Grant, HOME Investment
Partnerships, Emergency Shelter Grant and Housing Opportunities
for Persons with Aids Programs.
Section 3. This Resolution shall become effective
immediately upon its adoption.
PASSED AND ADOPTED thislOth day of March , 1998.
JOE CAROLLO, MAYOR
In accordance with Miami Code Sec. 2-36, since the Mayor did not indicate approval of
this legislation by signing it in the designated place provided, said legislation now
becomes effective with the elapse of ten (10) days from the date of Commission action
ATTEST • regarding same, without the Mayor exercisin a ve .
wa r J. F m , City Clerk
WALTER J. FOEMAN
CITY CLERK
PREPARED AND APPROVED BY:
LINDA KELL ARSON
ASSISTANT CITY ATTO EY
APPROVED AS TO FORM AND CORRECTNESS:
' W/
EL EDWARD WELL
ERIM CITY ATTORNEY
LKK/csk/2402
3 98- 250
i.
98-AT-241-1003
Audit Re -port
District Inspector General for Audit
Southeast -Caribbean District
Report: 98-AT-241-1003 18sued: March 26, 1998
TO: Angelo Castillo, Director, Community Planning and Development Division,
Florida State Office, Coral Gables, Florida, 4DD
L/Z. W.
FROM: Nancy H. Cooper
District Inspector General for Audit-Southeast/Caribbean, 4AGA
SUBJECT: City of Miami
Community Planning and Development Programs
Miami, Florida
We completed a review of the City of Miami's Community Planning and Development (CPD)
Programs for the years 1995 and 1996. Our objectives were to determine whether the City: (1)
complied with Federal laws, Department of Housing and Urban Development (HUD)
regulations, and other requirements; (2) had adequate controls to comply with the requirements;
and (3) carried out its activities in an economical, efficient, and effective manner.
The City of Miami did not have adequate controls to ensure compliance with regulations or
properly manage its CPD funds. As a result, the City spent $5,203,607 of Community
Development Block Grant (CDBG) funds for grant administrative expenses wWxxd proper
support. Also, the City spent $484;999 for ineligible grant administrative expenses. In addition,
because the City did not efficiently and effectively manage its loan programs and did not
safeguard its assets, approximately $9.9 million of its outstanding loan portfolio was in default.
Further, the City allocated $4.75 million of HOME Investment Partnerships (HOME) funds for
an affordable housing development that was not feasible.
Within 60 days, please give us, for each recommendation cited in this report, a stains report on:
(1) the corrective action taken; (2) the proposed corrective action and the date to be completed;
or (3) why action is considered unnecessary. Also, please furnish us copies of any
correspondence or directives issued because of the audit.
9&AT-241-1003
If you have any questions, please contact Sonya D. Lucas, Assistant District Inspector General
for Audit, at (404) 331-3369, or Gerald 1L Kirkland, Senior Auditor, at (904) 232-1226. We are
providing a copy of this report to the City of Miami.
98 AT-241-1009
Executive Summary
We have completed a review of the City of Miami's CPD Programs. The objectives of the
review were to determine whether the City: (1) complied with Federal laws, HUD regulations,
and other requirements; (2) had adequate controls to comply with the requirements; and (3)
carried out its activities in an economical, efficient, and effective manner.
We determined the City did not have adequate controls to ensure compliance with regulations or
properly manage its CPD funds. Also, the City did not efficiently and effectively manage its
programs or adequately safeguard its assets.
Specifically, the review disclosed
• The City spent $5,203,607 of CDBG funds for grant administrative expenses without
proper support. Also, the City spent $484,999 for ineligible grant administrative
expenses. As a result, the City deprived the intended program beneficiaries of
$5,688,606.
• The City did not efficiently and effectively administer its loan programs or
adequately safeguard its assets. As a result, approximately $9.9 million of the City's
outstanding loan portfolio was in default.
• The City allocated $4.75 million of HOME fimds to develop an affordable housing
project that was not feasible. The homes were not affordable for prospective buyers
and fimdmg was insufficient to complete the project. Also, the developer owed the
City $144,538 of program income.
We recommend that HUD require the City to reimburse the CDBG Program and the U.S.
Treasury for all ineligible costs and resolve unsupported costs; submit certified Cost Allocation
Plans; develop and implement controls and procedures to ensure proper administration of its
loan programs and proper safeguarding of its assets; collect all loan payments over 90 days past
due; repay the CDBG Program $686,270 for loan amounts written off as uncollectible; and
demonstrate how the housing project can be made affordable to low and very low income
families by obtaining sufficient subsidies, reconfiguring the project, or reducing the costs. Also,
because of the significance of the findings, we recommend that HUD require the City to develop
a corrective action plan for approval that corrects the systemic weaknesses identified in the
findings.
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P"T-241-1003
We presented our findings to the City and HUD officials during the audit. We held an exit
conference on January 21, 1998. The City provided written comments to our findings and has
commendably taken initial steps to correct some deficiencies. The HUD Field Office in Coral
Gables, Florida, also provided written comments to our findings. We considered the responses
in preparing our final report. We included excerpts from the City's responses in each finding
and the complete comments as Appendix D.
iv
9&AT--241.1003
Table of Contents
ManagementMemorandum.............................................................................................. i
ExecutiveSummary ........................................................................................................ iii
Tableof Contents..............................................................................................................v
Introduction...................................................................................................................... I
Findings and Recommendations
1. The City Inappropriately Spent$5,688,606.............................................................3
2. Loan Procedures Needed Improvement.................................................................10
3. The City Allocated $4.75 Million for a Project That Was
NotFeasible..........................................................................................................19
InternalControls.............................................................................................................26
Follow-up on Prior Audits...............................................................................................27
Issues Needing Further Study and Consideration............................................................28
A. Schedule of Ineligible and Unsupported Expenditures..........................................30
B. Schedule of Defaulted Multifamily Rehabilitation Loans ...................................... 31
C. Narrative Case Presentations.................................................................................32
C-1 Ideal Rehab, Inc., and Liberty City Improvement Corporation
C-2 DC Two Exponent, Inc.
C-3 Indian River Investment Management, Inc.
D. Auditee Comments............................................................ 39
...................................
E. Distribution...........................................................................................................44
9&AT-241-1003
Abbreviations:
CDBG Community Development Block Grant
CFR
Code of Federal Regulations
CPD
Community Planning and Development
HOME
HOME Investment Partnerships
HUD
Department of Housing and Urban Development
MFR
Multifamily Rehabilitation
OMB
Office of Management and Budget
PTTI
Principal, Interest, Taxes, and Insurance
SFR
Single Family Rehabilitation
98 AT-241-1003
Introduction
BACKGROUND
The CDBG Program was established by Title I of the Housing and Community Development
Act of 1974. The program provides grants to aid in the development of viable urban
communities by providing decent housing and a suitable living environment and expanding
economic opportunities, principally for persons of low and moderate income. HUD gives the
City of Miami annual entitlement grants to help the City's efforts in carrying out a wide range of
community development activities directed towards neighborhood revitalization, economic
development, and improved community facilities and services.
To be eligible for finding, every CDBG-fimded activity must meet one of the program's three
national objectives. Each activity, except program administration and planning, must:
• Benefit low and moderate income persons; or
• Aid in preventing or eliminating slums or blight; or
• Address a need with a particular urgency because existing conditions pose a serious
and immediate threat to the health or welfare of the community.
The HOME Investment Partnerships Program was created under Title 11 of the National
Affordable Housing Act of 1990. HOME was designed to strengthen public -private partnerships
to expand the supply of decent, safe, sanitary, and affordable housing, with primary attention to
housing for low and very low-income families.
The City of Miami's CPD Programs are administered through its Department of Community
Development. For the audit period, the City's CDBG and HOME entitlement fimds were:
SOURCE OF CPD FUNDS
AMOUNT
Unexpended CDBG funds from prior years
$ 23,508,092
Unexpended HOME fimds from prior years
8,669,711
CDBG Program year May 1996
13,709,000
CDBG Program year May 1997
13,320,000
HOME Program year May 1996
4,038,000
HOME Program year May 1997
4,315,000
Program income, June 1, 1995 through May 31, 1996
3,298,724
Program income, June 1, 1996 through May 31, 1997
3,497,625
Prior period adjustments
76,044
Total
$ 74,432,196
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98 AT-241-1003
The City of Miami is a Municipal Corporation governed by the Mayor and City Commissioners.
The City's fiscal year is October 1 through September 30. The City's CPD Programs are
administered by its Assistant City Manager. The City's books and records are maintained at 444
SW 2°d Avenue, Miami, Florida.
AUDIT OBJECTIVES, SCOPE AND METHODOLOGY
The focus of our review was to determine if the City complied with Federal laws, HUD
regulations, and other requirements in carrying out its CPD Programs. Specifically, objectives
were to determine whether the City:
• Complied with the CPD Program requirements, laws, and regulations;
• Had adequate controls to ensure compliance with HUD regulations; and
• Carried out its activities in an economical, efficient, and effective manner.
To accomplish the objectives, we tested program activities for compliance with program
requirements, interviewed appropriate HUD staff and City officials, and reviewed HUD and
City records related to the CPD Programs. We also reviewed various disbursements for
eligibility, support, and proper allocation; evaluated the City's system of internal controls and
management practices; and performed limited reviews of the City's Grantee Performance
Reports.
Our review methodology included a judgmental selection of five multifamily rehabilitation
loans. The City wrote off two of the loans as uncollectible. Also, one loan was past due and
the City restructured the loan terms of the last two loans.
Our audit covered the period June 1, 1995, through December 31, 1996; however, we extended
the audit period as necessary. We performed the audit field work between January and August
1997. We conducted our audit in accordance with generally accepted government auditing
standards.
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98 Ar-241-1009
Findings
Finding 1
The City Inappropriately Spent $5,688,606
The City spent $5,203,607 of CDBG funds for grant administrative expenses without proper
support. Also, the City spent $484,999 for ineligible grant administrative expenses. This
occurred because the City shifted grant administrative costs between grants; exceeded the 20
percent grant administration limit; and paid indirect costs without supporting cost allocation
plans, prior to receiving services, and prior to the central service departments incurring costs.
As a result, the City deprived the intended program beneficiaries of $5,688,606.
HUD REQUIREMENTS
Title 24 of the Code of Federal Regulations (CFR), Part 570.200 (ax5) requires that costs
incurred, whether direct or indirect costs, must conform to Office of Management and Budget -
(OMB) Circular A-87 (A-87). Costs allocable to a particular grant cannot be charged to other
grants. Indirect costs must be supported by a certified Cost Allocation Plan. For fiscal years
beginning after September 1, 1995, A-87 requires Grantees to submit a certified plan to the
cognizant agency. HUD is the City's cognizant agency. If the City has not submitted a certified
plan, HUD may disallow all indirect costs.
THE CITY SHIFTED COSTS BETWEEN GRANTS TO AVOID EXCEEDING
EXPENDITURE LIMITS
The City shifted costs between grants to avoid exceeding the 20 percent grant administrative
expense limit. Because the City elected not to comply with requirements., the City deprived the
intended program beneficiaries of $2,133,797.
A-87 stipulates that any excess costs over the Federal contribution under one award agreement
are unallowable under other award agreements. Similarly, A-87 states any cost allocable to a
particular grant or cost objective may not be shifted to other Federal grant programs to overcome
fund deficiencies, avoid restrictions imposed by law or grant agreements, or for other reasons.
Also, A-87 stipulates that amounts not recoverable as indirect costs or administrative costs under
one Federal award may not be shifted to another Federal award unless specifically authorized by
Federal legislation or regulation. Further, Title 24 CFR 570.200(g) limits expenditures for
planning and administrative costs to 20 percent of the sum of any grant plus program income.
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98 AT-241-1003
Based on a July 1991 inter -office memorandum, the City's Finance Department withdrew
$1,850,997 from the May 1992 program year CDBG grant. The fiords included cumulative
indirect costs that Finance claimed it undercharged for fiscal years 1987 through 1991.
In July 1992, Finance charged another $215,382 of indirect costs to the program year. Thus, the
City charged $2,066,379 of indirect costs to the May 1992 program year. The estimated indirect
costs for the program year were $552,689.
Indirect costs are part of the grant administrative costs which are subject to a 20 percent limit.
Because the City charged the cumulative indirect costs, the City exceeded the 20 percent limit
for program year May 1992.
The HUD Jacksonville Area Office reviewed the Grantee Performance Report for the program
year. In a June 14, 1993, letter the HUD Office disclosed the City apparently exceeded the 20
percent limit.
In an October 25, 1993, inter -office memorandum a former City Community Development
Director requested Finance to transfer the over charges to the May 1992 program year indirect
costs account. On October 26, 1993, Finance transferred indirect costs of $1,266,066 to other
program years to avoid exceeding the 20 percent limit. The transfers included $1,166,329 to
program year 1994; $99,589 to program year 1991; and $148 to program year 1987. In addition,
the City transferred $36,482 to other expenses in the May 1992 program year.
Also, for program years May 1994 through May 1997 the City continued the practice of
transferring costs to other grants to avoid exceeding the 20 percent limit. Generally, the City
transferred grant administrative expenses that exceeded the total amount budgeted. The costs
transferred included indirect costs and other grant administrative costs that caused the City to
exceed the total grant won budget. Because the City transferred the excessive costs
before the end of the program year, the costs were not reported to HUD on the City's Grantee
Performance Report.
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WAT-241-1003
As shown in the following chart the City transferred excess administrative expenses totaling
$2,133,797.
DESCRIPTION
Program Year May 1987
Excess coats transferred from program year May 1992
$148
Program Year Max 1991
Excess costs transferred from program year May 1992
99, 589
PBr dram Year May 1992
Retroactive adjustment
$1,850,997
Additional charge
215,382
Less:
Estimated indirect cost
(552.689)
Transfer to program year May 87
(149)
Transfer to program year May 91
(99,589)
Transfer to program year May 94
(1,166 3
Excess costs charged to program year May 1992
247,624
Program Year May 1994
Transfer from program year May 1992
1,166,329
Less: Transfer to program year May 1995
(1,786.436)
Excess costs charged to program year May 1994
01
Program Year Mav 1995
Transfer from program year May 1994
1,786,436
Less: Transfer to program year May 1996
(1,459,464)
Excess costs charged to program year May 1995
326,972
Program Year May 19%
Transfer from program year May 1995
1,459,464
Less: Transfer to program year May 1997
(869336)
Excess costs charged to program year May 19%
590,128
Program Year May 1997
Excess costs transferred from program year May 1996
charged to program year May 1997
869,336
TOTAL EXCESS COSTS
$24339797
In order to avoid the 20 percent limit, the City transferred out more than was transferred in. Thus, no exceu
costs resulting from the transfers remained in program year May 94.
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98 AT-241-1003
The City believed it was acceptable to shift administrative costs between grant years. Although
the City acknowledged the provisions of A-87, the City claimed it, as well as HUD, had
administered the CDBG Program rules and regulations as a single Federal award. Any shifting
of indirect costs that may have taken place always occurred within the Grant, rather than
between two grant programs. The City also believed it was acceptable to charge indirect costs
for previous years as long as the charges did not contribute to the City exceeding the 20 percent
grant administration limit.
In the past HUD has allowed recovery of indirect costs from previous years. Based on a June
24, 1986, memorandum from Alfred C. Moran, former Assistant Secretary, Community
Planning and Development, if a Grantee exceeded the 20 percent requirement in a program year,
the Grantee would be considered to be in compliance with the requirement if it could allocate its
planning and administrative expenditures to each source year of the CDBG fiords and thereby
demonstrate that it had not exceeded the 20 percent limit. In order to recover such excess costs,
the Grantee would have to account for its expenditures on a grant by grant basis.
We discussed the matter with the HUD CPD Entitlement Division. The Assistant Director
agreed that in order to recover such costs the City would have to account for its administrative
costs on a grant by grant basis, support the undercharged amounts, and remain under the 20
percent limit for each applicable program year. Also, the City would have to show for each
program year which administrative costs were applicable to each activity administered.
However, in no case could any undercharged amounts from prior years be charged to the current
year or future years.
We agreed that if the City could demonstrate that it would not have exceeded the 20 percent
limit for 1987 through 1991 in which the City claimed it had undercharged the indirect costs, we
would consider allowing the costs. The City provided documentation to support the 20 percent
limit would not have been exceeded. However, the documentation is not sufficient to fully
resolve the issues. Therefore the City did not adequately support $2,133,797 of grant
administrative expenses that were transferred between program years.
THE CITY EXCEEDED THE 20 PERCENT GRANT ADNW[STRATION LEWT
The City exceeded the 20 percent grant administration limit for program years May 1992 and
1994. Because the City failed to comply with requirements and report all expenses, the City
expended $484,999 in excess of the grant administration limit. Thus, the City deprived the
intended program beneficiaries $484,999.
The total administrative costs for program year May 1992 exceeded the 20 percent limit. The
program year grant was $12,502,000 and program income was $1,937,187. The City also
received an additional $697,016 for the program year. Thus, the maximum grant administrative
expense allowed was $3,027,241. According to the Grantee Performance Report, the City
charged $3,177,555 for grant administrative expenses. Therefore, the City exceeded the 20
percent limit by $150,314.
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98 AT-241-1003
Also, on May 9, 1994, Finance transferred $551,600 from its May 1994 program year indirect
cost line item to its Disaster Grant. However on September 15, 1994, Finance reversed the May
9, 1994, journal entry and transferred the $551,600 back to the May 1994 program year grant.
Since the City transferred the costs on May 9, 1994, and the City's CDBG Program year ended
May 31, 1994, the City did not report the $551,600 of administrative costs on its Grantee
Performance Report.
The May 1994 program year grant was $12,571,000 and program income was $3,274,913.
Thus, the maximum allowable grant administrative expense was $3,169,183. According to the
Grantee Performance Report, the grant administrative costs were $2,952,268 for the program
year. However, the City did not report the $551,600 that was transferred. Since the City
expended the $551,600, it should have been reported on the Grantee Performance Report. If the
City reported the $551,600, the total grant administrative costs would have been $3,503,868.
Thus, the City exceeded the 20 percent limit by $334,685.
THE CITY DID NOT HAVE COST ALLOCATION PLANS TO SUPPORT INDIRECT
COSTS
The City did not have plans to support $3,069,810 of indirect costs charged to its CDBG grants.
A 87 requires the Grantee to prepare and maintain a plan to support indirect cost charges. For
fiscal years beginning after September 1, 1995, A-87 requires the Grantee to prepare an indirect
cost rate proposal and related documentation to support indirect costs. The indirect cost rate
proposal must be developed and submitted to HUD within 6 months after the close of the fiscal
year.
A. Indirect Costs of $2,518.210 Were Charggd- to CDBG Without Sup op�rt
The City did not prepare plans for approval to support indirect costs charged to its
CDBG grants for program years May 1995 through May 1997. Also, indirect costs
for program years May 1996 and May 1997 were based on costs for fiscal years
beginning after September 1, 1995. Thus, the City was required to submit its indirect
cost rate to HUD for approval.
The City did not have approved plans; however, it charged $2,518,210 of indirect
costs to program years May 1995 through May 1997. Typically, the City withdrew
funds from its line of credit early in the program year to pay its indirect costs. Since
the City did not prepare the plans, the City based the amount withdrawn on plans from
previous fiscal years. For example, the City initially charged $758,551 as indirect
costs for program year May 1995, which also represented fiscal year 1995. The City
based the $758,551 on its fiscal year 1992 plan. Once the fiscal year 1993 plan was
prepared, the City adjusted the May 1995 program year indirect costs charged to
closely reflect the 1993 plan. The City performed the same projections for the May
1996 and May 1997 program years. The City recently received the fiscal year 1994
plan. Thus, we anticipate the City will adjust the indirect cost for program years May
1995 through May 1997 to closely reflect the 1994 plan.
98-AT•241-1003
The City's staff explained the plans cannot be prepared and submitted within 6
months of the end of the fiscal year. The plans are not developed until the City's
audited financial statements are prepared. Thus, the City typically does not receive
the plans until years after the respective program years have ended. This is further
complicated by the fact the City's program year is June 1 through May 31, whereas its
fiscal year is October 1 through September 30. Because the plans are not prepared
timely, the City justified withdrawing the estimated indirect costs from the line of
credit based on plans from previous fiscal years. The City did not have an approved
provisional rate.
A-87 permits Grantees to use a provisional rate as a temporary indirect cost rate
applicable to a specified period pending the establishment of a final rate for that
period. The provisional rate must be approved. Also, A-87 permits Grantees to use a
predetermined rate based on an estimate of the costs to be incurred during the period
However, predetermined rates may not be used by Grantees that have not submitted
and negotiated the rate with the cognizant agency. HUD did not approve either a
provisional rate or a predetermined rate.
B. Indirect Costs of $551,600 Were Charged to a Disaster Grant Without a Plan
On September 21, 1994, Finance charged $551,600 of indirect costs to the Disaster
Grant. The City did not have a plan to support the charges. Coincidentally, the
$551,600 represented the maximum grant administrative expense that could be
charged to the Disaster Grant to meet the 20 percent limit. Thus, it appeared the City
charged the $551,600 in order to maximize the administrative expense.
THE CITY PAID INDIRECT COSTS PRIOR TO RECEIVING SERVICES
The City paid indirect costs for program years May 1996 and May 1997 prior to receiving
services. A-87 provides that a cost is allocable to a cost objective if the goods or services
involved are chargeable or assignable in accordance with relative benefits received. Costs must
be necessary and reasonable for proper and efficient grant administration. In determining
reasonableness, consideration must be given to sound business practices.
The City's CDBG Program year is June 1 through May 31. The City's fiscal year is October 1
through September 30. The City's plans are based on the actual costs for the fiscal year.
Because of the differing time periods, the indirect costs charged to the CDBG Program did not
match the periods in which the services were received.
Although we do not take exception to the differing periods, we do not believe the City should
pay indirect costs prior to receiving services and prior to the central service departments
incurring related costs. For example, on June 9, 1995, the City withdrew $987,746 from its line
of credit for indirect costs for program year May 1996. The City paid the $987,746 to the
general fund. The payment was for indirect costs for services to be provided from June 1, 1995,
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98 AT-241-1003
through May 31, 1996. Thus, the City paid the full program year's indirect costs in June 1995
for services that had not been rendered and for which the central service departments had not
incurred costs. We do not believe this represents sound business practice.
In September 1996, the City paid $987,746 for indirect costs for program year May 1997.
Again, the City paid the indirect costs even though no services had been received and no costs
had been incurred by the central service departments.
The City believed it was acceptable to pay indirect costs in advance. The City was informed by
the consulting firm that prepares its plans that the practice was common in the industry.
According to an OMB Policy Analyst, indirect costs cannot be paid until costs for services are
incurred. If a provisional rate were approved, the City could pay its applicable portion of the
indirect costs incurred based on the provisional rate.
AUDTTEE COMMENTS
The City generally agreed with the finding. The City provided documentation to support that the
20 percent limit would not have been exceeded for years 1987 through 1991.
OIG EVALUATION
Based on the City's comments, we made revisions to the finding. We commend the City's
positive efforts to resolve the weaknesses. Although the City provided documentation to try to
show the 20 percent limit would not have been exceeded, the documentation was not sufficient
to fully resolve the issues.
RECOMMENDATIONS
We recommend you require the City to:
IA. Provide adequate support for $2,133,797 of grant administrative expenses that were
transferred between program years or repay any unsupported costs to the CDBG
Program.
1B. Reimburse the CDBG Program for ineligible costs of $484,999.
IC. Submit certified Cost Allocation Plans as required to support indirect costs charges of
$2,518,210 for program years May 1995 through May 1997 or repay any unsupported
costs to the CDBG Program.
1D. Provide support for the $551,600 of administrative costs charged to the Supplemental
Disaster Relief Grant or repay any unsupported costs to the U.S. Treasury.
lE. Submit for approval a corrective action plan to correct the systemic weaknesses
identified in the finding.
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98 AT-241-1003
Finding 2
Loan Procedures Needed Improvement
The City's loan procedures needed improvement. The City's underwriting and collection
procedures were inadequate. In addition, the City failed to pursue legal remedies to cure
defaults and recover losses, as well as protect its interests upon foreclosure. Also, loan decisions
made by the City Commissioners were not in the City's best interest. As a result, about $9.9
million, or 36 percent, of the City's outstanding loan portfolio was in default. The City's failure
to collect the loans reduced the amount of program income available to carry out its CDBG
activities.
HUD REQUIREMENTS
A-87, Paragraph A, 2.a, requires efficient and effective administration of Federal awards through
the application of sound management practices. Title 24 CFR, Part 85.20(ax3) requires
Grantees to maintain effective control and accountability for all grant and subgrant cash and
other assets. Grantees must adequately safeguard all such property.
LOAN PORTFOLIO ACTIVITY
The City administered several loan programs including multifamily rehabilitation (MFR), single
family rehabilitation (SFR), rental rehabilitation, new construction, and various smaller
programs. As of May 30, 1997, the City's portfolio contained 634 loans with an outstanding
principal balance of $27,658,117. Approximately 187 or 30 percent of the loans were in
defame. The outstanding balance of the defaulted loans was $9,904,456 or 36 percu t of the
offing loan portfolio balance. Further, $5,987,960 of the defaulted balance was over 90 days
past due. The past due payments on all loans, including late fees, totaled $ 1,509,138.
The following table shows the City's complete loan portfolio.
Loan payments were at least 30 days past due.
10
98-AT-241-1003
CITY'S LOAN PORTFOLIO AS OF MAY 3091997
LOAN
PROGRAM
PRINCIPAL
BALANCE
OUTSTANDING
PRINCIPAL
BALANCE IN
DEFAULT
PERCENT
IN
DEFAULT
DEFAULT
> 90 DAYS
PERCENT
DEFAULT >
90 DAYS
CDBG - MFR
$15,031,188
$6,738,463
44.8 pement
$4,772,984
31.8 percent
CDBG - SFR
5,274,361
1,791,692
33.8 percent
799,417
15.2 percent
Rental Rehab
5,489,370
979,732
17.9 percent
227,500
4.1 percent
HOME
748,996
110,790
14.8 percent
57,051
7.6 percent
UDAG
585,597
88,189
15.1 percent
50,338
8.6 percent
Scattered Site
368,919
102,281
27.7 percent
20,000
5.4 percent
Section 8
59,696
53,319
89.3 percent
50,670
84.9 percent
Ocher
100,000
50,000
50.0 percent
10,000
10.0 percent
TOTAL
$27,658,117
$9,904,456
35.8 percent
$5,987,960
21.7 pemat
We limited our review to the MFR loan program due to the large outstanding loan portfolio; high
defaults; and high susceptibility to fraud, waste, and abuse. As of May 30, 1997, the MFR loan
portfolio outstanding principal balance was $15,031,188, which rested 54 percent of the City's
outstanding loan portfolio.
Approximately 45 percent of the MFR loan outstanding balances were in default, which was 23 of the
40 MFR loans. The 23 defaulted loans represented 57.5 percent of the City's outstanding MFR loans.
Twenty of the 23 defaulted loans were over 90 days past due. Also, 10 of the 20 loans were over 2
years past due. Approximately $1.1 million of the MFR loan payments, including late fees, wore. past
due. A schedule of the defaulted MFR loans is included as Appendix B. In addition to the defaulted
loans, the City wrote off five MFR loans totaling $2,373,865 as uncollectible during the May 31,
1996, program year.
We judgmentally selected five MFR loans for review. The loans reviewed mchaded two loans the
City wrote off as uncollectible, one in default, and two the City restructured. See Apices C-1
through C-3 for detailed results of the deficient loans reviewed. In addition, we also performed a
limited reviews of foreclosure requests for defaulted SFR loans.
THE CITY'S UNDERWRITING PROCEDURES WERE DEFICIENT
The City's underwriting procedures were deficient. For example, the City did not adequately analyze
borrowers' credit worthiness or require equity investments from borrowers. As a result, the City
made loans to borrowers who were not credit worthy. Therefore, the City increased the risk that
borrowers would not repay loans and the risk of financial losses upon foreclosure. The deficiencies
contributed to the defaulted and uncollectible loans.
98 AT-241-1003
�___ C_ i7 ��l 1, ^_
The City's Housing Division did not adequately analyze credit worthiness when
underwriting NTR loans. For the five loans reviewed, the City did not obtain credit
reports. Analysis of credit worthiness is an essential element of the underwriting process.
Faihue to consider credit worthiness democates the City's lack of sound management
practices.
Because the City did not adequately analyze credit worthiness, Housing inappropriately
made a loan to Liberty City Improvement Corporation. L%erty's principal was also a
principal of two other entities, Ideal Rehabilitation Inc., and DC Two Exponent, Inc., that
previously defaulted on W R loans. Despite the previous defaults, Housing made a
$367,300 NOR loan to Liberty on August 15, 1990. Liberty defaulted on the loan in
February 1991. The details regarding these loans are discussed in Appendices C-1 and
C-2. It is not sound management practice for the City to make loans to borrowers with a
poor credit history or who have previously defaulted on a Federal loan. At a minimum,
the City should analyze credit worthiness by reviewing credit reports for the borrowing
entitles and its principals.
B. The City Did Not Require Equity Investment From Borrower
Housing did not require equity investments by borrowers. Private sector lenders generally
require borrowers to make at least a 10 to 20 percent investment to receive a rehabilitation
loan, but the investment cannot include debt equity (secondary loan proceeds). However,
Housing allowed debt equity for the full equity investment.
Requiring borrowers to make an equity investment would reduce the likelihood of default
because the borrowers risk losing their investments. Because the City did not require
borrower investments, borrowers had less incentive to repay the loans. Thus, the City
increased the risk of loss to the program.
THE CITY'S COLLECTION PROCEDURES WERE INADEQUATE
The City did not have written collection procedures detailing the collection process and assigning
responsibilities for specific tasks. The lack of written procedures caused poor communication and
misundestending of duties between the responsible divisions. Tberefore, the procedures used by the
City were inadequate to properly safeguard its assets. The City's failure to implement adequate
collection procedures contributed to the $9.9 million in defaulted lows and the $2.3 million written
off as uncollectible.
12
98 AT-241-1003
, 7TI ass 97,17-3 -M-
A City Finance Department Accounts Receivable Clerk was responsible for collecting
loan payments, contacting delinquent borrowers, notifying the other responsible
departments when borrowers defaulted on their loans, and determining when a loan was
=collectible. When loans became past due, the Clerk sent various types of 30 and 60 day
delinquency letters to borrowers and made personal contact with borrowers to discuss
repayment. If a loan was not current after 120 days, the Clerk sent a letter t>reateriing
legal action. Although the 120 day letters wed legal action, Finance did not begin
sending the letters for MFR loans to Legal until February 1997 after our review started.
Thus, Legal did not take any legal action pursuant to the letters. The Clerk continued to
send the 120 day delinquency letters to the delinquent borrowers every month until the
past due amounts were paid or the City took other action.
If the Clerk determined a loan to be uncollectible, the Clerk sent a foreclosure request form
to Housing recommending foreclosure. However, loans were often delinquent more than a
year before the Clerk sent a foreclosure request form to Housing. The Clerk did not recall
sending Housing any foreclosure request fours for NOR loans even though some NOR
loans had been delinquent for over 3 years. We were unable to determine the reason the
Clerk seldom sent MFR loan foreclosure request forms to Housing.
Housing was responsible for determining whedw to restructure delinquent NOR loans or
recommend foreclosure. However, Housing did not have access to the City's accounts
receivable system. Therefore, Housing could not readily identify delinquent loans.
Instead, Housing relied on Finance for notification of delinquent loans.
According to the Housing Division Chhiet Finance was responsible for initiating the
foreclosure process by sending a foreclosure request form to Housing. Housing was
responsible for recommending foreclosure and sanding the form to Legal. Evan &wgh
Housing knew many loans were seriously delinquent, Housing relied on Finance to send a
foreclosure request form to initiate the process.
C. Weaknesses in the Legal Division's Procedures
Legal was responsible for foreclosing on loans. However, Legal did not have adequate
staff assigned or an effective system established to perform timely foreclosures. As a
result, the City never foreclosed on a MFR mortgage. As of March 31, 1997, 10 SFR
loans that were sent to Legal for foreclosure from November 1991 through September
1996 were not foreclosed. Legal had only completed foreclosure on one SFR loan in the
last 2.5 years.
13
98-AT-241-1003
An Assistant City Attorney and a part time legal assistant were assigned to perform
foreclosures for the community development loans. However, the Assistant City Attorney
was also responsible for foreclosures of code enforcement liens as well as other
foreclosures. At the time of our review, in addition to the community development loans,
the Assistant City Attorney had about 900 code enforcement foreclosures in inventory.
The Assistant City Attorney also receives about 200 additional foreclosure cases annually.
According to the Assistant City Attorney, each foreclosure can requires about 20 staff
hours. Therefore, it would take about 18,000 (900 cases x 20 staff hours) staff hours to
complete the 900 cases currently in inventory. This does not consider the additional 200
cases received annually or any community development foreclosure cases.
Generally, when the City received a Notice of Foreclosure Action from other lien holders,
the City had 30 days or less to respond to the foreclosure action. Odx wise, the other lien
holders could obtain a summary judgment and the debt to the City would be extinguished.
However, Legal did not have a system in place to trek correspondence with Housing or
the status of foreclosure cases. The lack of a tracking system seriously interfered with the
City's ability to respond timely to the Notices. Upon receiving a Notice, Legal seat a letter
to Housing requesting advice as to what action to take. Because there was no system to
track correspondence, Legal could not ensure a timely response was received from
Housing. Also, Legal could not ensure timely action would be taken if a response was
received. Legal recognized the weaknesses caused by the lack of a tracking system, and
has commendably begun the development of a tracking system.
OTHER WEAXNESSES EXISTED IN THE CErrS PROCEDURES
The City did not pursue all legal remedies to cure defaults and recover losses. In addition to
foreclosures, the City had other available remedies to safeguard its assets. The remedies included
collecting marts through assignment of rent agreements and pursuing personal guarantees to recover
losses. Also, the City did not take appropriate action to protect its interests upon foreclosure by
superior lien holders.
A. The City Did Not Pursue Collection Through AssiogLag of Rent Agreemen
The City required each MFR borrower to execute an assignment of rent agreement. The
agreements authorized the City to require all property rents be assigned to the City to cure
defaults. However, despite the high defaults, the City never exercised its rights pursuant to
the agreements. As a result, the City increased the risk of loss to the program.
B. The City Did Not Pursue Personal Guarantees To Recover Losses
Since 1986, the City required all MFR borrowers to personally guarantee the loans in order
to decrease the risk of loss. Even though the City wrote off over $2.3 million in program
year ending May 31, 1996, the City did not take action pursuant to the guarantees to
recover the losses. The City has never exercised its rights to recover any losses pursuant to
the guarantees.
14
98-AT-241-1003
Legal explained they had never received a request to pursue collection against personal
guarantees. Thus, Legal took no action. Housing assumed Legal pursued collection
against personal guarantees based on its foreclosure recommendations. This further
illustrates the poor communication and misunderstanding of duties caused by the lack of
written procedures.
C. The City Did Not Protect Its Interest Upon Foreclosure By %W96or Lien Holders
The City did not protect its interest upon foreclosure by superior lien holders. The City
claimed this occurred because it did not have fimdmg authorized to pay off superior
mortgages and because it did not have adequate resources to manage properties acquired
through foreclosure. As a result, the City lost at least $1,571,480 following foreclosure by
superior lien holders.
Generally, the City had 30 days or less to respond to notices of foreclosures from other
lien holders. Otherwise, the other lien holders could obtain a summary judgment and the
debt to the City would be extinguished. In order to avoid the summary judgement, the City
could have satisfied the note to the foreclosing lien holder. However, the City did not have
a funding source established to satisfy the liens. The City recognized the need to establish
a funding source; however, finding was not provided
Also, the City did not have staff assigned to manage multifamily properties. We believe
the City should have anticipated that foreclosures would occur; thus the City should have
pied accordingly.
COhI IISSIONERS' INVOLVEMENT HAMPERED LOAN PROGRAM OPERATIONS
The City established a loan committee responsible fort approval or disapproval of
loan applications, loan agreement restructuring, and lien subordination. In spite of the committee's
reoo�rendations, the City made certain decision regarding MFR loans because of political pressure
by City Commissioners.
We identified three cases where the City Commissioners became involved in decisions regarding
loans. In each of the three cases, the borrowers requested the City to subordinate its liens to increased
superior mortgages. The loan committee disapproved the requests. Against the loan committee's
recommendation, the Commissioners subsequently approved the subordination. As a result of the
Commissioners' actions, the City increased its risk of loss by over $1 million.
The following illustrates an example of the Commissioners' involvement in a NUR loam The City
made a $1,685,283 deferred payment loan to Downtown Investments, Inc., in April 1994 from its
HOME Program funds. Pursuant to the loan terms, the City would forgive a portion of the loan
annually for 10 years. Downtown Investments, Inc., was not required to make any payments on the
loan unless they defaulted on a superior mortgage or failed to comply with the HOME Program
requirements. The City held a third mortgage position.
is
98-AT-241-1003
In a February 16, 1995, memo the City was informed that the second mortgage holder was
foreclosing on the mortgage. On August 18, 1995, Miami Capital Development, Inc., a sub -recipient
that administers the City's economic development loan program, obtained the second mortgage.
In January 1997, after the first mortgage holder began foreclosure, Downtown Investments requested
the City to subordinate its mortgage to a new first mortgage. Downtown Investments planned to
obtain a new first mortgage loan of $950,000. Downtown Investments world use $539,000 of the
loan proceeds to pay off the existing first and second mortgages. Downtown Investments world
receive the remaining $411,000 as a return of equity. If the City agreed to the subordination, the
City's risk would be increased as a result of the $411,000 larger mortgage. Although the defaulted
borrower would receive $411,000 from the refinance, the City would not receive compensation for its
increased risk. The loan committee disapproved the request.
The City's staff determined the appropriate action was for the City to pay off the first mortgage
balance of $209,000 and then foreclose. This would prevent the City's $1,685,283 mortgage from
being extinguished upon foreclosure by the superior lien holder. The second mortgage holder, Miami
Capital Development, agreed to subordinate its lien position to the City.
However, the City Commissioners did not agree. At a July 10, 1997, meeting the Commissioners
approved Downtown Investments request for the City to subordinate its mortgage to the larger
refinanced mortgage. The Commissioners, however, did require Downtown Inver to use the
remaining $411,000 to rehabilitate another property owned by them However, the City did not have
an mterest in the other property. Thus, the City would not receive a benefit for its increased risk.
We do not believe the Commissioners acted in the City's best interest by approving the subordination.
The property was vahred at about $2 million. Thus, the City could have sold the property for a price
sufficient to recover the HOME funds. Thus, we believe foreclosure was a more appropriate option
Om subordination of the lies Also, by December 22, 1996, Downtown Investments had defaulted
on both the first mortgage and the second mortgage assumed by Miami Capital Development.
The balances were $209,000 and $330,000, respectively. Since Downtown Inver defaulted on
the previous mortgages, we are concerned Downtown Investments will be unable to make payments
on a $411,000 greater mortgage. In addition, we are concerned that the Commissioners elected to
increase the City's risk of loss to a borrower who had previously defaulted twice on its mortgage
loans.
We identified two other cases in which the City Commissioners may not have acted in the City's best
interest. In both cases, the Commissioners acted against the loan committee's recommendations.
One case involves the refinancing and subordination of loans to Ideal Rehab, Incorporated and
Liberty City Investments Corporation? The other case involves the sale of a property owned by
Indian River Investments Management Company. The details regarding these loans are discussed in
Appendices C-1 and C-3, respectively.
Separate loans were originally made to Ideal and Liberty. The loans were subsequently restructured into a
single loan.
16
98 AT-241-1003
AUDITEE COMMENTS
The City generally agreed with the Finding. The City is seeking City Commission approval to
impose a voluntary moratorium on the CDBG and HOME funded MFR loan programs. This would
afford the City an opportunity to work with HUD in addressing the wealmesses and deficiencies cited
in the audit. The City plans to aggressively pursue collection and legal actions against all delinquent
loan accounts under the NOR Programs.
OIG EVALUATION
We commend the City for recognizing the weaknesses and its taking actions to resolve the
deficiencies. We believe the City recognizes that substantial improvements in the loan programs
must be made.
RECOMMENDATIONS
We recommend you require the City to:
2A. Repay the CDBG Program $686,270 for amounts written off as uncollectible for the DC Two
EMment, Inc. loan
2B. Repay the CDBG Program $368,077 representing past due ifltare t and late fees forgiven for
the Ideal Rehab, Inc. and Liberty City Improveanent Corporation loans.
2C. Collect all loan payments over 90 days past due, within 90 days, either through repayment
from the borrowers, assignment of rents, foreclosure, or personal guarantees. As of May
30,1997, about $ 1,500,000 of the loan payments were pest due. The City should consider
establishing a task force or other committees to aggressively pursue collections.
2D. Implement controls and procedwes to ensure proper administration of its loan progmins and
proper safeguarding of its assets. At a minimum the controls and procedures shoWd inchWe:
• ObWning and analyzing credit reports for the borrowing entity and its principals;
• Requiring disapproval of loans to entities and individuals who have a
lack of credit worthiness;
• Requiring a minimum equity investment of 10 percent fiom borrowers;
• Written procedures delineating the roles and responsibilities of the various
departments in carrying out the loan collection process;
17
98 AT-241-1003
Despite the review appraiser's comments, on January 30, 1996, the City authorized a
disbursement of $725,000 to purchase the site. Liberty Housing Associates purchased the site on
February 15, 1996.
INDEPENDENT CONSULTANT DETERMINED THE PROJECT WAS NOT VIABLE
The City hired an independent consultant to analyze the project development. In an October 31,
1996, report the consultant concluded that the development was not a viable project. The
consultant stated the developer should provide sufficient funding to complete the overall
development, as well as provide sufficient evidence of available subsidized end loan financing
for individual buyers. The consultant further stated cost savings could be accomplished in the
construction process by reducing the per square footage costs and reducing and/or redesigning
the homes to make them affordable for prospective home buyers. Therefore, the cost savings
would make the overall development a more viable and attractive project.
EWPLEMENTATION OF THE HOUSING DEVELOPMENT
The housing project, Northwestern Estates (formerly Knight Manor), was implemented to
increase the supply of affordable housing for low and very low income families and individuals.
The City allocated the funding for land acquisition and assisting in financing the development
of 134 affordable homes. The project is located in the Model City Community Development
target area of Miami, Florida.
The Urban League of Greater Miami, Inc., a State of Florida not -for -profit corporation, sponsors
the project. The Urban League is also the Community Housing Development Organization
approved by the City to conduct HOME activities within the Model City target area. Liberty
Housing Associates is the project developer.
THE HOMES EXCEEDED AFFORDABILITY LEMM
According to the Community Housing Development Organization Agreement, the project was
intended to increase the supply of affordable housing for low and very low income families and
individuals. However, the sale prices exceeded affordability and income limits were insufficient
for eligible families to qualify.
Title 24 CFR 92.254, sets forth requirements for housing to qualify as affordable. It states if a
participating jurisdiction intends to use HOME funds for homebuyer assistance, the participating
jurisdiction may use the Single Family Mortgage Limits under Section 203(b) of the National
Housing Act or it may determine 95 percent of the median area purchase price for single family
housing in the jurisdiction.
20
98 AT-241-1003
The single family mortgage limit under Section 203(b) of the Act for Dade County was
$112,350. Since the Model City neighborhood where the project is located is an economically
depressed area of Dade County, the mortgage limits were not representative of the area market.
Therefore, the prudent method to determine affordability for the project was to use 95 percent of
the median purchase price for the immediate area of the project and similar adjacent areas. Per
Title 24 CFR 92.254, to determine the median purchase price at least 3 months of sales data
were required since sales were less than 250 per month.
We determined the median area purchase price was $60,000. Thus, to qualify as affordable the
purchase prices cannot exceed $57,000 ($60,000 x 95 percent). As shown in the following table,
the estimated prices of the homes ranged from $53,000 to $91,400. Therefore, only 14 of the
134 homes qualified as affordable.
PLANNED UNIT MIX AND SALES PRICES
Model A
8
Single family
$91,400
$731,200
Model B
8
Single family
$91,400
$731,200
Model C
8
Single family
$91,400
$731,200
Model A(T)
14
Two story townhouses
$53,000 to $55,000
$756,000
Model B(T)
96
Two story townhouses
$74,500 to $76,000
$7,224,000
TOTAL
134
$10,173.600
In addition, low and very low income families will not qualify for the homes without subsidies.
The following tables illustrate the required income and cash investment for home purchases, as well
as the income limits and family size for Dade County.
INCOME AND CASH INVESTMENT REQUIREMENTS
(1) PURCHASE PRICE
$54,000
$75,250
$91,400
(2) DOWNPAYMENT
2,200
3,262
4,070
(3) MORTGAGE AMOUNT (1) - (2) = (3)
51,800
71,988
87,330
(4) PRINCIPAL & INTEREST @ 8 PERCENT
380
528
641
(5) TAXES & INSURANCE
128
169
200
(6) PITI (4) + (5) = (6)
508
697
841
(7) MINIMUM INCOME TO MEET
31 PERCENT REQUIREMENT
19,647
26,970
32,555
(8) MAXIMUM FIXED EXPENSES TO MEET
43 PERCENT REQUIREMENT
704
9661
1,167
(9) MAXIMUM EXPENSES WITHOUT PITI
196
269
326
(10) N11N MUM CASH INVESTMENT
(1) x 7 PERCENT = (10)
3,780
5,268
6,398
21
98 AT-241-1003
LOW AND VERY LOW INCOME LIMITS FOR DADE COUNTY
FAMILY SIZE
LOW
VERY LOW
1
24,900
15,600
2
28,500
17,800
3
32,050
20,000
4
35,600
22,250
5
38,450
24,050
6
41,300
25,800
7
44,150
27,600
8
47,0001
29,350
As shown in the above tables, because of the minimum income needed to meet the 31 percet
requirement, the income limits for very low one and two person families were inadequate to qualify
for mortgages on any of the homes. Also, only very low income families with seven and eight
members would qualify for the $75,250 averaged priced homes. No very low itwome families
qualified for the $91,400 homes. The only families qualified for the $91,400 homes were low
income families with four or more persons.
Since the project is located in an economically depressed area, the median income data for Dade
County was not truly representative of the neighborhood incomes. Therefore, we obtained
household income information in the immediate area of the project and similar adjacent areas.
HOUSEHOLD INCOMES W IIM THE
ZIP CODE AREA OF THE PROTECT
$36,000 b
$49.90
13%
$50,000 or
more
12%
$20.01
$30
24%
1-u 411-
10,000
30%
As shown in the above chart, incomes were less than $20,000 for 51 percent of the households in
the immediate area. Therefore, it would be difficult to locate enough qualified buyers to
purchase the homes.
22
98 AT-241-1003
The Federal Register Final Rule Part 92.503 (ax 1), published September 16, 1996, requires program
income be deposited in the City's HOME Investment Trust Fund unless the City permits the
subrecipient to retain the program income for other HOME projects pursuant to a written agreement.
The Community Housing Development Organization Agreement requires the project sponsor to
obtain written approval if program income is used. No written approval was granted The City's
Housing Division notified the developers on several occasions that the funds must be returned to the
City. However, the developer did not return the funds.
CITY DID NOT RECORD PROPERTY DEED
The City did not record the property deed as agreed. The City and Liberty Housing Associates
executed a Covenant on February 15, 1996. According to the Covenant, the City agreed to make
disbursements of HOME funds for construction on the condition that construction improvements
commenced on or within 12 months from the date of the Covenant. In the event construction did
not start by the commencement date, the property would be conveyed to the City by warranty
deed. Liberty Housing Associates executed the deed in favor of the City and authorized the City
to record the deed in the Public Records if construction did not commence by the
commencement date. Commencement of construction would be evidenced by recordation in the
Public Records of Dade County of a Notice of Commencement. As of August 12, 1997, (18
months from the covenant date) construction had not commenced and the City held the deed but
did not execute its right to record the deed.
CITY SPENT OVER $1.9 MMUON ON THE PROJECT
The City agreed to fund $4.75 million of the estimated $15 million total development costs. The
funding would be disbursed in two phases of $2,375,000. Phase I finding would be used
primarily for land acquisition, tenant relocation, and demolition/clearing. Phase II included
finding for site work, construction of a model center, and construction of pre -sold units. The
City was not obligated to disburse fiords for phase II until the project sponsor had pre -sold two-
thirds of the units. Also, the City was not obligated to disburse any fiinds for construction unless
the City had received evidence of sufficient financing to complete construction and ensured the
project was affordable for low and very low income families. Although the City spent
$1,925,814 of HOME fiords for phase I activities, the developer did not pre -sell or construct any
units, provide evidence of sufficient financing, or ensure the project was affordable.
AUMEE COM [ENTS
The City generally agreed with the finding. The City is taking steps to ensure compliance with
requirements. The City informed the developer to repay the $144,538.
24
9&AT-241-1003
OIG EVALUATION
We commend the City for its efforts to ensure compliance with requirements. However, the City
must ensure that no additional funding, except necessary finding for relocation and security, be
provided until the developer is in compliance with requirements.
RECOMMENDATIONS
We recommend you require the City to:
3A. Demonstrate how the Northwestern Estates housing project can be made affordable to
low and very low income families by obtaining sufficient subsidies, reconfiguring the
project, or otherwise reducing the costs.
3B. Provide evidence the developer has obtained sufficient financing to complete project
development.
3C. Reimburse $144,538 of program income to its HOME Investment Trust Fund.
3D. Discontinue finding the project, except for necessary costs such as relocation and
security until the City complies with recommendations 3A, 3B, and 3C.
3E. Take other appropriate action, as needed, to protect the Secretary's interest and the
integrity of the HOME Program, including terminating the project.
25
98-AT-241-1003
Internal Controls
In planning and performing our audit, we considered the internal controls of the management of.
the City of Miami to determine our auditing procedures and not to provide ass mme on internal
controls. Internal control is the process by which an entity obtains reasonable assurance as to
achievement of specified objectives. Internal control consists of interrelated components,
including integrity, ethical values, competence, and the control environment which includes
establishing objectives, risk assessment, information systems, control procedures,
communication, managing change, and monitoring.
We determined the following internal control categories were relevant to our audit objectives:
• Management philosophy and operating style.
• Accounting for and maintaining control over program receipts and disbursements.
• Assuring expenditures for administering the programs were eligible.
• Management monitoring methods.
• Reporting program results.
• Assuring proper underwriting, servicing, and collection of loans.
• Assuring housing activities will provide affordable housing to eligible recipients.
We assessed these controls. To the extent possible, we obtained an understanding of the City's
procedures and HUD requirements, assessed control risk, and performed various substantive
tests of the controls.
A significant weakness exists if internal control does not give reasonable assurance that goals
and objectives are met; that resource use is consistent with laws, regulations and policies; that
resources are safeguarded against waste, loss, and misuse; and that reliable data are obtained,
maintained, and fairly disclosed in reports. Based on our review, significant wealmesses existed
in the internal controls we tested as discussed in the findings.
26
9&AT-241-1003
Follow- Up on Prior Audits
An Office of Inspector General audit (report number %-AT-251-1002, dated October 18, 1993)
of the City's Emergency Shelter Grant Program contained one finding. The finding disclosed
the City did not properly manage its Emergency Shelter Grant Program. Specifically, the City
did not execute a written agreement for services, did not monitor expenditures, and did not
timely submit required reports to HUD. The finding was resolved.
The last financial audit report completed by Deloitte & Touche for the fiscal year ended
September 30, 1995, contained one finding pertaining to the CDBG Program. The Ending did
not relate to an issue in our report. The finding was not resolved.
27
98-A T-241 -1003
Issues Needing Further Study
and Consideration
During our review, other matters regarding the City's special economic development loan
program came to our attention that require correction or improvement. Miami Capital
Development, Inc. administers the City's special economic development loan program.
LOAN DEFAULT RATE WAS EXCESSIVE
Based on Miami Capital Development's April 30, 1997, Loan Portfolio Status Report,
approximately 33 percent of the outstanding principal balance of loans was in default. The
defaulted loans represented about 32 percent of the outstanding loans. At November 30, 1996,
about 21 percent of the outstanding balance was in default which represented 23 percent of the
loans. Thus, the default percentages have increased rather significantly over a 5 month period
We believe the increased defaults indicate a wealmess in Miami Capital Development's
procedures.
PROGRAM INCOME MAY NOT HAVE BEEN PROPERLY DISBURSED
Miami Capital Development, Inc. administered a revolving loan fiord used to provide economic
development loans. In addition to receiving fimdmg from the City to provide the loans, Miami
Capital Development also received program income in the form of loan repayments. The loan
repayments were required to be deposited into the revolving loan fiord for use in malting new
loans.
According to Title 24 CFR. 570.504 (c) and (bX2Xi), any program income should be disbursed
from the revolving loan fiord before additional cash withdrawals are made from the U.S.
Treasury for the same activity. We believe the City did not require Miami Capital Development
to substantially disburse program income prior to malting additional withdrawals.
At April 30, 1997, Miami Capital Development reported a balance of $723,657 in the revolving
loan fund. This included about $389,000 of program income received from November 30, 1996,
to April 30, 1997, from loan principal payments. During the same period, Miami Capital
Development made only four new loans which totaled $86,000. Even though Miami Capital
Development had a large balance in the revolving loan fund and made only $86,000 of loans in
5 months, the City allocated Miami Capital Development an additional $560,000 for the
revolving loan fund for the period July 1, 1996, to June 30, 1997. The City also provided Miami
Capital Development $250,000 for administrative expenses for the period.
28
98 AT-241-1003
Although Miami Capital Development needs to maintain funds in the revolving loan fund to
provide loans, given the low loan activity, we do not believe a substantial balance is needed in
the revolving loan fund. Miami Capital Development should substantially use the revolving
fiords to pay administrative expenses prior to the City withdrawing funds to pay those expenses.
Alternatively, unless the new loan activity increases, the City should reduce the amount of
fimdmg to the revolving loan fiord.
Further, the City did not require Miami Capital Development to remit interest earned on the
revolving loan fund. Title 24 CFR 570.500(b), requires the revolving loan fiord cash balance to
be held in an interest bearing account. Any interest paid on the fiends is considered interest
earned on grant advances and must be remitted to HUD at least annually.
According to the City, interest earned on the revolving loan fiord was used to pay Miami Capital
Development's administrative expenses and to make new loans. The City was not aware the
interest should be remitted to HUD. Thus, the City did not require Miami Capital Development
to remit the fiords. Given the large cash balance in the revolving loan fimd, the interest income
may be significant.
INSUFFICIENT PUBLIC BENEFIT RECEIVED
Miami Capital Development made loans which do not appear to provide sufficient public
benefit According to Title 24 CFR 570.209(b), if the amount of CDBG assistance for an
individual activity exceeds $50,000 for each permanent job created or retained, the public
benefit received is insufficient. Therefore, the activity may under no circumstances be assisted
with CDBG fiords. Miami Capital Development made at least two loans which did not provide
sufficient public benefit.
On March 31, 1995, Miami Capital Development loaned $401,479 to 1830 Ent. Teatro Marti.
As a result of the loan, only four jobs were crested or retained Thus, the average cost for each
job was $100,370. In addition, on October 30, 1996, Miami Capital Development loaned
$200,000 to Valparaiso United The loan resulted in the creation or retention of two jobs. Thus,
the average cost for each job was $100,000.
29
Appendices
98 AT-241-1003
Appendix A
SCHEDULE OF INELIGIBLE AND
UNSUPPORTED EXPENDITURES
>n�IWA"�
IA
$2,133,797
1B
$ 484,999
1C
2,518,210
1D
551,600
2A
686,270
2B
368,077
2C
1,500,000
3C
144,538
Totals
53.183.884
$5.203.607
` Ineligible amounts obviously violate law, HUD or local agency policies or regulations.
5 Unsupported amounts do not obviously violate law, contract, policy or regulation but warrant being contested
for various reasons such as the lack of satisfactory documentation to support eligibility and HUD approval.
30
98-AT-241-1003
Appendix B
SCHEDULE OF DEFAULTED MULTIFAMILY
REHABILITATION LOANS
BORROWER
DATE OF
DEFAULT
PRINCIPAL
BALANCE
0 - 30
DAYS
30 - 60
DAYS
60 - 90
DAYS
90+ DAYS
TOTAL
PAST DUE
Urban League of
Greater Miami
11/01/96
S 308,244
S 2,416
$ 2,416
$ 2,416
$ 9,108
$ 16,356
Indian River MgmL
12/01/93
740,788
7,640
7,640
7,640
290,322
313,242
Winwood Nine Inc.
06/01/93
147,415
946
946.
9"
41,787
44626
O.T.12Inc.
04/01/93
216,507
1,379
1,379
1,379
63,542
67,679
O.T.15Inc.
06/01/93
234,247
1,500
1,500
1,500
66,225
70,025
White, Patrick
12/01/92
143,018
1,107
1,107
1,107
56,058
59,379
Douglaa, ilillot+edt
OW01196
SZ584
917
817
817
6,518
81969
Dawson, Floyd
unknown
43,390
903
903.
903
555
3,264
Sisto, Omar &
Donna
11/01/96
11,268
245
245
245
518
1,253
Bawmvlii, Corp
07/01/94
181,033
2,013
2,013
2,013
62,487
68,526
Dales, Inc.
02/01/95
398,295
2,818
2,818
2,818
70,447
78,901
Gemini Investment
& Mgmt.
11/01/94
129,030
1,214
1,214
1,214
30,009
33,650
C bibascar Corp I
07/01/94
180,328
1,645
1,645
1,645
51,054
55,998
Gemini Investrnent
& Mgmt.
03/01/95
148,369
1,138
1,138
1,139
26,667
30,082
Gemini Investment
& Mgmt.
05/01/96
2,414
146
146
146
1,459
1,897
Sisto,Omar &
Donna
12/01/95
352,116
3,088
3,088
3,088
45,253
54,518
Overtown
Development Group
unknown
1,056,322
3,987
3,987
United States
Aviation
06/01/95
516,514
'2,580
2,580
2,580
52,102
59,843
2369,Inc.
01/01/96
288,267
2,253
2,253
2,253
29,549
36,308
Vives, Manuel &
Margarita
06/01/96
391,322
2,004
2,004
2,004
16,157
22,169
EZ 352 NW 11 St.
03/01/96
257,833
1,283
1,283
1,293
14,163
18,013
Hillary Ventures,
Inc.
unknown
350,733
1,730
1,730
Vilac, Inc.
unknown
558,425
2,760
2,760
2,760
8,281
TOTAL PAST DUE
PRINCIPAL &
INTEREST
6,739,462
45,612
39,895
39,995
933,980
1,059,392
LATE FEE @ 4
percent
1,824
I,S%
1,596
37,359
42,375
TOTAL PAST DUE
$6,738,462
$47.436
$41,491
$41,491
S971,339
$1,101,757
31
98 AT-241-1003
Appendix C-1
IDEAL REHAB, INC., AND LIBERTY CITY
UA PROVEMENT CORPORATION
On February 6, 1987, the City made a $560,000 NOR loan to Ideal Rehab, Inc., to rehabilitate 58
units. Ideal defoulted on the loan in June 1990. As of July 1995, Ideal was $200,135 past due on the
loan payments.
On August 15, 1990, the City made a $367,300 MFR loan to Lberty City Improvement Cosporation
to rehabilitate 18 units. Lberty deb ulted on the loan in February 1991. As of July 1995, Liberty was
$ 173,943 past due on its loan payments.
A principal of both Ideal and Liberty was also the president of DC Two Exponent, Inc., which also
defiulted on a MFR loan. In fact, when the City made the loan to Liberty, both the Ideal and DC
loans were in default
In July 1991, Housing exercised its option to accelerate the entire balance of $375,104 due on the
Eberly loan. The City informed Lberty that the loam must be paid in fidl by August 15, 1991, or the
City would exercise its various rights and remedies against the borrower. Although Many still did
not repay the loan, the City did not exercise its rights and remedies to cure the default
In September 1993, Housing recommended foreclosure on both the Ideal and Liberty loans.
However, no foreclosures occurred. On October 26, 1993, the City again accelerated the Liberty
mortgage note and requested payment of the remaining principal balance. Again, Liberty did not
make the payment and the City did not exercise its rights and remedies to cure the defiwlt
In January 1994, Housing denied Ideal's and Liberty's request to restructure their loan tams.
Housing denied the request because the properties were fiilly occupied. Thus, the properties should
have generated sufficient rent revenue to make the loan payments.
On July 27, 1994, the first mortgage holder Sled for foreclosure on both Ideal and Liberty. However,
prior to the completion of the foreclosure, the City entered into negotiations with Ideal and Lberty.
Apparently, the foreclosure was not completed.
32
98-AT-241-1003
In April 1996, Housing restructured the loan terms and combined both loans into a single loan. The
restructured agreement required the owner to make two $100,000 payments to reduce pest due
amounts. The first $100,000 payment was due by April 30, 1996.E The second payment was due on
May 1, 1997. The agreement also reduced the monthly payments from $6,205 to $800 for six years.
At the end of the six years, if all terms and conditions of the agreement were met, the City would re-
negotiate the terms of the agreement Further, the City agreed to forgive $368,077 of past due
Me: and late fees and forgave all fixture interest payments.
Around Febniwy 1997, Ideal and Liberty requested the City to subonlinate its lien to a refinanced
first mortgage of $700,000. The existing first mortgages on the properties at the time were about
$470,000. Thus, the City's second mortgage would be behind a $230,000 larger first mortgage. In
addition to paying off the first mortgage, the loan proceeds would be used to pay delinquent water
bills of $105,000 to the Miami -Dade Water and Sewer Authority and to make the second $100,000
payment ;due under the restructured agreement of 1996. The City's loan committee disapproved the
subordination request on March 24, 1997, because of the borrower's poor payment history, inchiding
the DC Two loan, and the inadequate compensation offered to the City.
A City Commissioner attended the March 24, 1997, loan committee meeting. At the meeting, the
loan committee discussed the payment history of the DC Two, Ideal, and Liberty loans. The loan
committee also discussed the City's losses on the DC Two loan. Despite the Commissioner's
knowledge of the payment histories and the loan committee's recommeadatioq the Commissioner
recommended approval of the refinancing to the full City Commission The City Commissioners
approved the refinancing on May 7, 1997.
The City's CDBG Multifamily Rehabilitation Program policies provide guidance for the City's
subordination to refinanced senior mortgages. If the refinanced senior mortgage is more than the
existing senior mortgage, the City should consider subordinating its lien only if the new loan, in
addition to all outstanding loans secured by the property, do not exceed 80 percent of the market
value of the property. The refinanced senior mortgage for Ideal and Liberty was more than the
existing senior mortgages. Thus, the total secured debt could not exceed 80 percent of the property
values, according to the City's policies. However, after the refinance the secured debts for the two
properties were 94 percent of the property values. Thus, the City Commissioners violated the City's
policies by approving the subordination.
The properties had a combined net income of $100,425 from October 31, 1995, to September 30,
1996. According to an August 26, 1996, appraisal, the properties had an estimated fair market value
of $1,663,000. As of April 16, 1997, the property's mortgage debts were about $1,334,660,
including $864,660 owed to the City. Since the property values exceeded the debts, the City may
have been We to foreclose on its mortgage and sell the properties for a price sufficient to recover at
least a portion of the $864,660. The City could have pursued personal guarantees to recover any
losses resulting from the foreclosure. Alternatively, the City could have assigned the projects' rents
to recover the past due amounts.
6 The agreement required a payment of $52,302 on another City loan owed by a related company. The
remaining $47,698 was to be applied to City loans to Ideal.
33
98-AT-241-1003
Instead, the Commissioners were willing to reinstate the April 1996 restructured loan agreement
upon payment of the second $100,000. In return the City subordinated its loan to a $230,000
larger mortgage and forgave $368,077 of past due interest and late fees plus all future interest. It
appears the only beneficiaries of the refinanoe were Miami -Dade Water and Sewer Authority and the
property owner.
Because of the City of Miami's financial difficulties, an Oversight Board established by the State of
Florida oversees the City's financial operations. On July 7, 1997, the Oversight Board denied the
City's subordination of the Ideal and Liberty mortgages. The Oversight Board stM4 in part, it
appears the City of Miami has been extremely lenient with the mortgagors. Payments on the
outstanding City mortgage of $836,000 were reduced from $6,204 to $800 per month with no
intereest. At the current rate, it would require 87 years to repay the loam Additionally, the Oversight
Board concluded that no consideration was offered to the City of Miami in return for its increased
risk.
We agree with the Oversight Board's decision. We believe the City should foreclose on the
mortgages and sell the properties. The City should pursue collection against personal gum for
any resulting losses inc umxL Also, we do not believe the City took appropriate action to safeguard its
assets by forgiving tare past due interest and late fees and all firture interest.
34
98-AT-241-1003
Appendix C-2
DC TWO EXPONENT, INC.
On April 24, 1986, the City loaned $750,000 to DC Two Exponent, Inc., to rehabilitate 66 units.
Verde Capital Corporation provided $550,400 of additional financing to complete the rehabilitation
Verde held a mortgage position behind the City's mortgage.
On the day the loan closed, the president of DC Two resigned and the president of Verde acquired 49
percent ownership of DC Two. Within two years of the loan closing, all of DC Two's principals had
resigned and the president of Verde became the president of DC Two.
In June 1987, DC Two obtained a $550,000 loan from First American Bank and Trust. DC Two
used the $550,000 in part to pay off an existing first mortgage of about $270,000. DC Two paid the
remaining $280,000 to Verde to reduce its mortgage. DC Two did not pay any of the proceeds to the
City. The City subordinated its mortgage to First American Bank and Trust, thus allowing First
American Bank and Trust to became the first mortgage holder. Thus, the City increased its risk by
waning a second mortgage behind a higher first mortgage. Also, since the president of DC Two
was also the president of Verde, he benefited from the First American Bank and Trust loan.
In October 1989, the City allowed DC Two to discontinue its monthly mortgage payments for one
year (July 1,1989 to June 30, 1990). The City allowed the discontinued payments to provide finding
to hire police officers in order to reduce vacancies. However, when the agreement expired in June
1990, DC Two failed to resume making the monthly loan payments.
Alm DC Two defaulted on the loan payments in July 1990, the City did not file a foreclosure
suit until December 18, 1992. However, DC Two also defaulted on the First American Bank and
Trust/First Union loan.' First Union began foreclosure on its mortgage in about September 1992.
First Union received a final foreclosure judgment on December 17, 1992, the day before the City
filed its foreclosure suit. Thus, the City's lien was extinguished.
In addition to failing to foreclose, the City also failed to protect its interest at the foreclosure sale. On
August 31, 1992, the property appraised for $1,572,000. The property's mortgage debts were about
$1,422,358, including $686,270 owed to the City. Since the property value exceeded the debts, the
City may have been able to purchase the property at the foreclosure sale and resale it for a price
sufficient to recover at least a portion of the $686,270.
7 Apparently, First Union National Bank of Florida subsequently acquired the mortgage from First American
Bank And Trust.
35
9&AT-241-1003
Subsequendy, the City wrote off the SM,270 as an uneollectible account. The City did not attempt
to recover the loss puma t to personal guarantm signed by principals of DC Two.
Because the City failed to foreclose, failed to protect its lien upon fomclosm by First American Bank
and Trust, and failed to recover losses prnsum t to personal guarantees, ft CDBG prog= lost
$W,270. We do not believe the City took adequate action to safeguard its assets.
36
98-AT-241-1003
The City's loan committee disapproved Seatra's assumption of the Indian River loan. However, the
City Commissioners subsequently approved the agreement. Many of the teems of the
Commissioners' approval are unclear. Thus, we were unable to analyze the iransacxion to deteamite
if it was in tie City's best interest. However, based on the prior payment history of the Sentra
principal, the transaction appears to be very risky.
Also, as a part of the purchase, Sent ra planned to aswune Indian River's Housing Assistance Payment
contract with the City. Indian River originally obtained the Housing Assistance Payment eoaaw in
accordance with HUD's Moderate Ahab litation Program. In accordance with program
requirements, the Housing Assistance Payment rents are based, in part, on the property's operating
The agreement approved by the Coonmissioaers allowed Sentra to reduce de mondily payments on
the MFR loan from $7,640 to $4,500. Since the Housing Assistance Payment rents are based on the
operating expenses, the Housing Amistaoce Payment comi rac t dxxdd be reduced to re8/ec t the lower
payments.
39
98AT-241-10M
Appendix D
AUDITEE COMMENTS
P.O. Baas 33070e
1bIIAW RDRMA 33233-07M
(305) 416.1025
FAX (305) 400-3043
March 9, 1998
Ms. Sonya D. Lucas
Assistant Inspector General for Audit
Southeast/Caribbean
Richard B. Russell Federal Building
7 5 Spring Street, SW Room 3 10
Atlanta, GA 30303-3388
Dear Ms. Lucas:
Please consider this correspondence as a follow up to our telephone conference call on
Friday, March 6, 1998, whereby the City of Miami concurred with the issues stated in the
draft audit findings of the Office of the Inspector General for the Audit dated
November 21, 1997. Specifically, this correspondence saves to respond to finding No. 2
and No. 3, and to reiterate corrective actions which the City of Miami plans to
undertake immediately in the coming months. Finding No. 1 is being addressed under
separate cover.
In our telephone conversation, both parties agreed to the solutions pi+oposed below and
the Chys administration welcomes any additional assistance related to the findings.
In reference to findings No. 2, within the next thirty (30) days, the City Administration
plans to secure City Commission approval to impose a voluntary moratorium relative to
the administration of the City's CDBG and HOME Program funded Multi -Family
Rehabilitation Loan Programs. This action would afford the City an opportunity to work
closely with the Coral Gables HUD Regional Office, in addressing the weaknesses and
deficiencies cited in the audit relative to the City's loan underwriting and collection
procedures.
39
98 AT-241-1003
March 12, 1998
Ms. Sonya D. Lucas
Assistant District Inspector General
for Audit, Southeast/Caribbean
U.S. Department of Housing and Urban Development
District Office of the Inspector General
Richard B. Russell Federal Building
75 Spring Street S.W. Room 330
Atlanta, GA 30303-3388
Dear Ms. Lucas:
The attached schedule is submitted in response to HLYD s request for an explanation of the retro-active
adjustment which the City recorded in Fiscal Year 1991
Our records reflect that in 1991, the City performed a review of indirect coats charged to the CDBG
program for Program Years 1986 thru 1991 inclusive. The resulting determination was that the amounts
charged to the grant program for Program Years 1986 thru 1991 was grossly understated and an adjustment
was subsequently prepared to recover indirect costa totaling $2,066,379
In conformity with the guidelines of OMB-A-87, the City had prepared Cost Allocation Plans for the years
1986 and 1990, however there were no plans prepared for the years 1987,1989, dc1989. Based on the
consistency of the data captured in the plans for 1986 and 1990 it was determined that an average of the
two years' charges should be applied to each of the analyzed years for which the indirect coats were
understated. These amounts are supported by the Cost Allocation Plans for the years 1986 sad 1990, and
justifiably represented the basis for allocating these costs.
Based on this average it was determined that the total of $605,916 should have been recovered from
the CDBG program as indirect costs for each of the five years (1996J7-1990191) which were analyzed. The
adjustment, which was recorded in Fiscal Year 1991; therefore, represents the difference between indirect
oasts which were previously ram, and the revised calculation of $605,916 as per the 1991 analysis.
(Refer to line item "RE MO -ACTIVE ADJUSTMENT" on attached schedule entitled - "ANALYSIS -
CDBG INDIRECT COSTS').
The attached schedule further illustrates that the twenty percent (20%) cap allowable for administrative
expenses was not exceeded in any of the referenced years as a result of processing this recovery
adjustment. This is clearly indicated an the attached schedule of Indirect costs. (Refer to the line item
"AVAILABLE UNDER 20% CAP AFTER ADJUSTMENT" on attached schedule).
41
98-A T-241 -1003
Page 2 of 2
March 12, 1998
Ms. Sonya D. Lucas
Assistant District Inspector General
for Audit, Southeast/Caribbean
U.S. Department of Housing and Urban Development
As a result of the finding in the draft audit report related to the issue of Cost Allocation Plans to support
indirect costs for the years 1995, 1996 and 1997, City staff met with 14UD Regional Office Administrators
in Coral Gables. We proposal and obtained approval to prepare the Cost Allocation Plan for the FY ended
September 30, 1997, which is due March 31, 1998. Based upon the timely submission of the 1"7 Cost
Allocation Plan and pending the approval by HUD of the Indirect Cost Rate Proposal, there -in contained,
City staff requested that HUD consider allowing us to use that Indirect Cost Rate Proposal retroactively,
for FTs 1995 and 1996. Furthermore, the Finance and Community Development departments will work
together with David M. Griffith and Associates, Ltd. (DMGA) to ensure that each City department
responsible for providing support services prepares accurate nand timely documentation comistant with the
provisions of OMB A-87.
The City of Miami, for at least the last ten (10) years, has contracted the services of DMGA to annually
prepare a Cost Allocation Plan, according to OMB Circular A-87. DMGA is one of the largest, if not the
largest, company speciali=g in the preparation of Cost Allocation Plans for government entities in the
State of Florida.
Sincerely,
Lourdes Reyes„
Comptroller
L R.KE/Is
Attachments: (1)
c: Angelo Castillo, Director, HUD Regional Office
Christina M. Cuervo, Assistant City Manager
Michael G. Lavin, Assistant Director of Finance
Kenneth Edwards, Grants Financial Manager
Linda Kelly Kearson, Assistant City Attorney
Gwendolyn Warren, Director - Department of Community Development
Jeff Hepburn, Assistant Director of Community Development
Jose Cm*A Acting Assistant Director - Department of Community Development
Frank Castenada, Federal and State Liaison
Jose Romano, Staff Auditor Principal
42
r
06
m
ANALYSIS - CDOG INDIRECT COSTS
1986 to 1991
19�
1fNgf
1f8U811
1!H/!0
11f011/
196111 TO 1991
i
Ii0sl000
8
11.910,000
8 11.291,000
S 11.742.000
S 11.061.000
8 87,f0S,000
OIVINTAVWUIO
1.800.000
1.800.004
1,1109.7st
3,160,864
2.279.061
10,396,403
PROGRAM INCOME
A 14,902,554
S 12.7M.0f1
8 •• 3111.803
TOTAL
,•
13 �Q6.000
8
13,440,000
6 13.291.762
ADMINISTRATIVE CAP (20%)
8
2.641,000
•
2.688,000
S 2.611,897
8 ZMAI1
8 2.671,214
8 13,072,262
INOIREOT COSTS RECORDED W"'I
OTNERAOMINISTMTIVECOSTS R�COItOED fAOfH
• 476.723
1.0f0.391
8
2ff,660
1.872,440
6
2.030.88•
6 271,161
_ 1,613,73•_
• -
1.646.011
8 1.040.140
9,314,301
TOTALADMINISTMETIVCOSTSU30A1
8
2.169,120
8
2.172,30
8 Z,036,08•
8 2.144.692
6 1,8/8,139
• 10,393,047
RETRO,AACTMADJUSTMENT
121,103
3014"
903,916
334.78f
091,486
2006.379
TOTAL ADMINISTRATIVE COSTS VW ADJUSTMENT
S
2.208,312
S
2.478.364
S 2.64I.604
S 2-479.661
8 2.640.04
8 13.429.424
PERCENTAGE UTILIZED
17.1%
16.4%
19.9%
16.6%
AVA LAELE UNDER 20% CAP AFTER ADJUSTMENT
i
394,687
t
9.090
S .0SS33
i 800•N0
f 130.620
8S 1.242.856
S 1.242.856
TOTAL AVALABLE UNDER 20% ADMINISTRATIVE CAP 55209
199M INDIRECT COSTS BASED ON 1990 PLAN S 1.795.545
AVAILABLE BALANCE INCLUDING 1f92 ALLOCATION
ADJUSTING ENTRIES TO RECOUP INDIRECT COSTS i 1,215,382
215.82
S 2.066.379
TOTALADJUSTMENTS
RE -STATED AS PER BAL ANCE3 IN RPT-9 AS OF 21211198
8 476,871 S
299.860 S - S
271,157 8
99,569 S
1.149.477
INDIRECT COSTS RECORDED 2128196
1.680,250
1,872,448 2.036.588
1,885,112
1.699.975
9,376,373
OTHER ADMINISTRATIVE COSTS RECORDED 2128f98
S 2.038.588 S
2.156.269 $
1,999.56/ 6
10.625.850
TOTAL ADMINISTRATIVE COSTS212WS
8 2,159.121 8
2.172.306
iSA%
14.6%
15.0%
15.4%
PERCENTAGE UTILIZED
18.1%
16.2%
rn
10