2024-002 The City did not have adequate internal controls and did not comply with federal subrecipient monitoring, underwriting and maximum per-unit subsidy requirements. Assistance Listing Number and Title: 14.239, Home Investment Partnerships Program Federal Grantor Name: U.S. Department of Housing and Urban Development (HUD) Federal Award/Contract Number: M23-DC530203, M24-DC530203 Pass-through Entity Name: N/A Pass-through Award/Contract Number: N/A Known Questioned Cost Amount: $0 Prior Year Audit Finding: N/A Background The objectives of the HOME Investment Partnerships (HOME) program include: (1) Expanding the supply of decent and affordable housing, particularly housing for low- and very low-income people (2) Strengthening the abilities of state and local governments to design and implement strategies for achieving adequate supplies of decent, affordable housing (3) Providing financial and technical assistance to participating jurisdictions, including the development of model programs for affordable low-income housing (4) Extending and strengthening partnerships among all levels of government and the private sector, including for-profit and nonprofit organizations, in the production and operation of affordable housing (24 CFR section 92.1) During fiscal year 2024, the City spent $1,663,981 in program funds. The City passed down $1,646,067 to subrecipient organizations to execute these arrangements. Of this amount, the City paid $1,559,449 in program funds to subrecipients for construction of new housing. Federal regulations require recipients to establish, document and maintain effective internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls. Subrecipient Monitoring When the City passes on federal funds to subrecipients, federal regulations require the City to evaluate every subrecipient’s risk of noncompliance with federal requirements to determine the appropriate level of subrecipient monitoring. Subrecipient monitoring requirements include ensuring compliance with program requirements, ensuring the subrecipient receives a federal single audit when required, following up and ensuring the subrecipient takes timely and appropriate action on all audit findings, and issuing a management decision as required. For this award, monitoring for program requirements would include ensuring funds were spent on allowable purposes, verifying subrecipients provided assistance to participants who met program eligibility requirements and performed inspections for Housing Quality Standards (HQS) outlined in 24 CFR sections 574.310(b)(1)-(2). Underwriting Requirements Federal regulations require the City to evaluate each housing project in accordance with guidelines that it adopts to ensure that the combination of federal assistance to the project is not any more than is necessary to provide affordable housing that is financially viable. Before the City commits HOME funds to a project, it must perform this analysis and maintain documentation demonstrating compliance with this federal requirement. Maximum Per-Unit Subsidy Federal regulations require the City to perform an analysis to ensure the per-unit investment amounts of HOME funds being provided for housing projects do not exceed the Federal Housing Administration mortgage limits in Subsection 221(d)(3) of the National Housing Act, including any area-wide high cost exceptions approved by HUD. Before the City commits HOME funds to a project, it must perform this analysis and maintain documentation demonstrating compliance with this federal requirement. Description of Condition The City’s internal controls were ineffective for ensuring compliance with the following: Subrecipient Monitoring The City did not have internal controls in place for ensuring compliance with subrecipient monitoring requirements. Specifically, the City did not have adequate controls for ensuring it completed and documented the required risk assessments. Further, the City did not monitor subrecipients’ activities to provide reasonable assurance that they administered the subaward in compliance with the subaward’s terms and conditions. Additionally, the City did not ensure subrecipients received federal single audits when required and did not review subrecipients’ audits when applicable. Underwriting Requirements The City’s internal controls were ineffective for ensuring it complied with federal underwriting requirements. Specifically, the City was unable to demonstrate it performed the required analysis. Maximum Per-Unit Subsidy The City’s internal controls were ineffective for ensuring it complied with federal maximum per-unit subsidy requirements. Specifically, the City was unable to demonstrate it performed the required analysis. We consider these internal control deficiencies to be material weaknesses that led to material noncompliance. Cause of Condition Subrecipient Monitoring Program staff did not fully understand subrecipient monitoring requirements and became aware of deficiencies with processes in 2024 because of a HUD review of the program. However, the City did not dedicate sufficient time and resources to address the deficiencies identified. Underwriting Requirements Program staff were not aware of all underwriting requirements and while they said they did perform an analysis, they did not know they needed to retain evidence to demonstrate they performed the analysis. Maximum Per-Unit Subsidy Program staff were aware of the requirement to do the maximum per-unit subsidy calculation; however, they said they were not aware they needed to retain documentation that they performed these calculations. Effect of Condition Subrecipient Monitoring The City did not perform required risk assessments for its six subrecipients. Without performing this analysis, the City cannot determine the proper level of monitoring of its subrecipients. The City did not monitor subrecipient activities to provide reasonable assurance the subrecipient administered the subaward in compliance with the subaward’s terms and conditions, including ensuring it provided assistance only to participants who met program eligibility requirements and ensuring it performed inspections for HQS inspections. Additionally, the City did not verify subrecipients received federal single audits when required, ensure subrecipients took corrective actions for any identified deficiencies, nor issue management decisions within six months of audit reports’ issuance for applicable audit findings. Since the City did not monitor its subrecipients, there is no way for it to confirm the subrecipients spent the funds for allowable purposes, provided services to eligible participants, and complied with all program requirements. Underwriting Requirements The City did not retain documentation that it performed underwriting procedures for two applicable projects to ensure it evaluated housing projects in accordance with program requirements. Maximum Per-Unit Subsidy The City did not retain documentation to support that it performed the maximum per-unit subsidy calculations for two applicable projects before it disbursed federal funds. Recommendation We recommend the City strengthen internal controls to ensure compliance with applicable federal requirements, including adequately monitoring subrecipients and performing the required underwriting and maximum per-unit subsidy analyses. In addition, the City should ensure it retains documentation to evidence compliance with federal program requirements. City’s Response The City of Longview acknowledges and understands the State Auditor’s Office finding regarding matters noted in their comprehensive review. We recognize the importance of strong internal controls and documentation to ensure compliance with federal program requirements such as subrecipient monitoring and underwriting and maximum per-unit subsidy requirements. Addressing these issues is a priority. Auditor’s Remarks We thank the City for its cooperation throughout the audit and the steps it is taking to address these concerns. We will review the status of the City’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes subrecipient monitoring and management requirements for pass-through entities. Title 24 CFR Part 92, Uniform Guidance, section 250, requirements for maximum per-unit subsidy amount, underwriting, and subsidy layering. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.