Finding 1156346 (2024-004)

2024-004 The City did not have adequate internal controls for ensuring compliance with earmarking requirements. Assistance Listing Number and Title: 14.231 – Emergency Solutions Grant Program Federal Grantor Name: U.S. Department of Housing and Urban Development Federal Award/Contract Number: E-23-MC-53-0005 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 City spent $7,864,346 in Emergency Solutions Grant (ESG) Program funds in 2024. The ESG Program provides grants to states, metropolitan cities, urban counties and territories for (1) rehabilitating or converting buildings to use them as emergency homeless shelters, (2) paying certain expenses related to operating emergency shelters, (3) providing essential services related to emergency shelters and street outreach to homeless people, and (4) preventing homeless and providing rapid re-housing assistance. Federal regulations require recipients to establish, document and maintain internal controls that ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition For ESG, the total amount of the City’s fiscal year grant that may be used for street outreach and emergency shelter activities cannot exceed the greater of: (1) 60% of the City's fiscal year grant; or (2) the amount of fiscal year (FY) 2010 ESG program funds committed for homeless assistance activities. For the 2023 ESG award (E-23-MC-53-0005), the greater of the two options was FY 2010 ESG program funds or $502,628. Although the City had a process to review invoices for emergency shelter costs related to the earmark, its internal controls were not adequate to ensure it did not spend more than the allowable amount. We consider this deficiency in internal controls to be a significant deficiency. Cause of Condition Initially, the Human Services Department (HSD) created a budget for emergency shelter costs that was less than the earmark limit. However, HSD staff did not review actual costs charged against the budget. Effect of Condition Our audit found the City exceeded its earmark limitation by $17,524 in emergency shelter costs, which is unallowable. Recommendation We recommend that the City monitor and track all costs related to earmarks to ensure compliance with grant requirements. We further recommend the City consult with the grantor to determine whether it needs to repay the costs charged over the earmarking limit. City’s Response The Department acknowledges this finding. The overage occurred following a period of prolonged vacancy in the contract specialist position and while newly assigned staff were still receiving training. To address this issue, the Department has hired a permanent Federal Grants Management Unit (FGMU) Manager to provide consistent leadership and supervision. The contract specialist receives structured management oversight and ongoing training to strengthen capacity for accurate budget monitoring. In July 2025, the FGMU updated its ESG policies and procedures to incorporate improved controls for earmarking. In addition, the Department has instituted regular training sessions for all staff responsible for federal grant management to reinforce compliance with earmarking and other federal requirements. These corrective actions are designed to strengthen internal controls, provide clearer oversight, and ensure that future expenditures remain within established budget and earmarking limits. Auditor’s Remarks We appreciate the City’s commitment to resolving this finding and thank the City for its cooperation and assistance during the audit. We will review the corrective action taken during the next regular 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. 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. Title 24 CFR Part 576, Emergency Solutions Grants Program, section 100 General provisions and expenditure limits, describes the requirements for auditees on the limits on the amount of the grant that may be used for street outreach and emergency shelter activities.