An Internal Audit Report on the

An Internal Audit Report on the

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An Internal Audit Report on the Draw Processing and Monitoring Functions of the Community Affairs Division’s Community Services Block Grant and Emergency Shelter Grant Programs Executive Summary The Department of Housing and Community Affairs (Department) should improve the processes used to manage the Community Services Block Grant (CSBG) Program and the Emergency Shelter Grant Program (ESGP) to ensure that subrecipients are accountable for the grant funds they receive from the Department and that these programs are administered efficiently. In program year 2007, The Community Services Block Grant the Department was awarded $30,208,630 for Program and the Emergency Shelter the CSBG and $5,157,329 for the ESGP. Grant Program The Community Services Block Grant (CSBG) Program and the Emergency Shelter Grant The Department has good controls over the way Program (ESGP) are both administered by in which the federal funds are allocated between Community Services, which is a subset of the the Department and its subrecipients. However, Department’s Community Affairs Division. (See the organizational chart in Appendix D.) Both improvements can be made in the use of the CSBG and ESGP are federally funded grant funds for specific activities. CSBG funds programs. designated for the Department’s administrative • CSBG provides funding for local expenses are spent on training and technical subrecipients to develop and administer programs to reduce poverty ...

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An Internal Audit Report on the
Draw Processing and Monitoring Functions of the Community Affairs
Division’s Community Services Block Grant and Emergency Shelter Grant
Programs
Executive Summary

The Department of Housing and Community Affairs (Department) should improve the
processes used to manage the Community Services Block Grant (CSBG) Program and the
Emergency Shelter Grant Program (ESGP) to ensure that subrecipients are accountable
for the grant funds they receive from the Department and that these programs are
administered efficiently. In program year 2007,
The Community Services Block Grant the Department was awarded $30,208,630 for
Program and the Emergency Shelter the CSBG and $5,157,329 for the ESGP.
Grant Program
The Community Services Block Grant (CSBG)
Program and the Emergency Shelter Grant The Department has good controls over the way
Program (ESGP) are both administered by in which the federal funds are allocated between
Community Services, which is a subset of the
the Department and its subrecipients. However, Department’s Community Affairs Division. (See
the organizational chart in Appendix D.) Both improvements can be made in the use of the
CSBG and ESGP are federally funded grant funds for specific activities. CSBG funds
programs.
designated for the Department’s administrative • CSBG provides funding for local
expenses are spent on training and technical subrecipients to develop and administer
programs to reduce poverty, revitalize assistance provided to subrecipients, which is
low-income communities and empower
not allowable under the Texas Administrative low income families to become self
Code that directs how the CSBG funds should sufficient.
• ESGP provides funding for the be spent. In addition, ESGP funds designated
rehabilitation or conversion of for the Department’s administrative expenses buildings for use as emergency shelters
are spent on developing the 5-Year Housing and for the homeless, and to fund homeless
prevention activities. Urban Development Consolidated Plan which
serves as the state’s application for federal (For additional information on these programs,
funds. However, the ESGP grant does not see the text box on page 5 for CSBG or the text
box on page 27 for ESGP. More detailed allow these funds to be spent on this activity.
background information is also available in Both the CSBG and ESGP grants allow up to Appendix B.)
5% of the funds to be used to cover the
Department’s administrative costs. In 2007, the administrative portion of the grants was
$1,510,432 for CSBG and $257,866 for ESGP.

Improvements should also be made to ensure that CSBG administrative funds are spent
on a timely basis. At the end of each program year, there is approximately $1 million in
available grant funds remaining. As of February 2008, the Department was still spending
funds from program year 2006. The guidance on the carryover of administrative funds is
unclear and may require the Department to seek clarification from the U.S. Department
of Health and Human Services.

The Department does a good job of ensuring that the subrecipients receive on-site
monitoring visits as required. However, the processes used to monitor the subrecipients
for both programs should be enhanced to ensure that the subrecipients comply with laws
and program rules and adhere to the Department’s program requirements. There are
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An Internal Audit Report on the
Draw Processing and Monitoring Functions of the Community Affairs
Division’s Community Services Block Grant and Emergency Shelter Grant
Programs
inconsistencies in the processes used to identify and categorize the monitoring results for
both programs. These inconsistencies increase the risk that subrecipients may be not be
held accountable and that problems at the subrecipient level may not be identified in time
for the Department to intervene and provide assistance.

Other Findings
The processes used to track and monitor CSBG subrecipients’ expenditures needs
improvement. Some CSBG subrecipients may be receiving more than a 30-day
supply of funding. Program rules and the CSBG contract limit subrecipients to a
30-day supply of operating funds on hand.
Program officers do not obtain sufficient financial information to evaluate the
CSBG subrecipients’ financial status. Program officers review financial
documentation, but generally have not retained all of the documentation needed to
verify assertions about bank account and general ledger fund balances.
Community Services has not defined the criteria used to decide what sanctions to
apply to subrecipients who have significant or repeated monitoring findings, or
who do not comply with the CSBG program requirements.
The performance information submitted by CSBG subrecipients is not verified by
Community Services staff. As a result, three of the Department’s key
performance measures may not be correct. In addition, this information is used to
calculate annual performance awards paid to subrecipients. Since 1995, $2.3
million has been paid to subrecipients in the form of performance awards.
Federal law requires ESGP applicants to certify that they will comply with
specific rules such as obligating the funds within 180 days of the contract start
date. There are some additional certifications required by federal law that need to
be incorporated into the ESGP application process. In addition, there are several
Texas Administrative Code requirements that should be included in the
monitoring instruments for ESGP to ensure that subrecipients are in compliance
with these requirements.
Follow-up work was performed on thirteen prior audit issues related to
Community Services. Of these issues, twelve (92%) were implemented and will
be closed. One issue was not implemented and will be re-opened as a new finding
for both CSBG and ESGP. See Appendix C for a list of these issues and their
status.

Summary of Recommendations
The salaries of the program officers and the trainer should be allocated between
administrative funds and other funds proportional to the amount of time spent on
these activities, or the training and technical assistance duties should be separated
from monitoring and not charged to administration. An alternative solution is for
the Department to seek a Board-approved change to the Texas Administrative
Code to include training and technical assistance as allowable activities.
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An Internal Audit Report on the
Draw Processing and Monitoring Functions of the Community Affairs
Division’s Community Services Block Grant and Emergency Shelter Grant
Programs
The Department should find an alternate fund to which staff can charge the work
performed on the 5 Year Housing and Urban Development Consolidated Plan.
ent should seek guidance from the U.S. Department of Health and
Human Services regarding whether administrative funds should be liquidated
within the two-year period. In addition, the Department should consider whether
it is retaining administrative funds, and if so, consider re-allocating any un-
liquidated funds to subrecipients for use in serving clients.
Community Services management should provide program officers with a guide
for the designation and disposition of common monitoring issues to generate more
consistent reporting of monitoring findings.
Community Services staff should ensure that CSBG subrecipients do not receive
more than a 30-day supply of funds by reviewing the prior month’s advances for
specific line items and comparing them against the actual expenditures reported
by line item.
Program officers should increase the level of review over subrecipients’ financial
information by obtaining and reviewing a copy of the most recent audited annual
financial report and any associated management letters prior to conducting a
monitoring visit. This information should then be compared to the financial
documents reviewed during monitoring. In addition, they should obtain and
review a complete general ledger printout for the month(s) reviewed.
Community Services should define the range of sanctions that can be used for the
various types of monitoring findings or issues of non-compliance.
When reviewing a sample of client files during monitoring visits, program
officers should re-calculate the reported incomes using the supporting
documentation in the client file to confirm that clients who were reported as
transitioned out of poverty really did so, and that only allowable income is
considered.
All certifications required by federal law should be included in the ESGP
application. In addition, all requirements of the Texas Administrative Code
should be included in the monitoring instruments and reviewed during on-site
monitoring visits.

Management’s Summary of Their Responses
Management generally concurs with the recommendations in the Internal Audit Report
and appreciates the ability to use this audit as a strong foundation for divisional
improvements. The existing internal controls, rules in the Texas Administrative Code and
contracts in the Community Services Section need to be strengthened, better enforced and
applied uniformly.

Department management will be working over the next several months to ensure that all
CA programs and subrecipients are fully compliant with federal and state program rules,
and to resolve outstanding issues identified in this report.
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Draw Processing and Monitoring Functions of the Community Affairs
Division’s Community Services Block Grant and Emergency Shelter Grant
Programs
Table of Contents

Chapter 1
Community Services Block Grant Funds Should Be Spent Correctly and
on a Timely Basis................................................................................................ 5
Chapter 2
The Process for Tracking and Monitoring Subrecipients’ Expenditures
Needs Improvement ......................................................................................... 9
Chapter 3
Improvements Can Be Made in the Monitoring Processes for the
Community Services Block Grant Program in Order to Increase
Subrecipient Accountability .......................................................................... 12
Chapter 4
Subrecipient Performance Should Be Verified............................................ 21
Chapter 5
Emergency Shelter Grant Program Funds Should Be Spent Correctly .... 27
Chapter 6
The Process for Monitoring Emergency Shelter Grant Program
Subrecipients Should be Improved to Ensure Timeliness and Compliance
............................................................................................................................ 30
Chapter 7
Improvements are Needed to Ensure that the ESGP Application
Complies with Federal Requirements........................................................... 37
Chapter 8
There are Advantages and Disadvantages in Changing the
Organizational Structure to Separate the Monitoring and Program
Support Functions ………………………………………………………………...40
Appendix A
Objectives, Scope and Methodology.......................................................... 43
Appendix B
Background ...................................................................................................... 46
Appendix C
Status of Prior Audit Issues .............................................................................. 49
Appendix D
Organizational Chart of the Community Affairs Division ........................... 54
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Draw Processing and Monitoring Functions of the Community Affairs
Division’s Community Services Block Grant and Emergency Shelter Grant
Programs
Detailed Results –
Community Services Block Grant Program

Chapter 1
Community Services Block Grant Funds Should Be Spent
Correctly and on a Timely Basis
The Community Services Block Grant Act (CSBG act), which is the federal statute
governing the Community Services Block Grant (CSBG) funds, requires that the funds
allocated to the Department of Housing and Community Affairs (Department) be used as
specified. For example, the CSBG act
The Community Services specifies that 90% of the funding must be
Block Grant Program
allocated to subrecipients who provide
services to clients and that up to 5% can The Community Services Block Grant (CSBG) is a
federal grant administered by the Community be used for the Department’s
Affairs Division of the Department of Housing and administrative costs. The remaining 5% is
Community Affairs (Department.)
reserved for special projects, disaster
The CSBG program has been in place in various relief and other specific functions (see
forms since 1964. (See Appendix B for additional Appendix B, page 46.) The CSBG act
background information.) In program year 2007,
also specifies what activities are allowable $30,208,630 in CSBG funds were awarded to the
Department. or unallowable and the period in which
the funds must be used. Community
CSBG funds are used to assist states and local
Services, which is part of the Community communities, by working through a network of
Affairs Division, administers the CSBG community action agencies and other
neighborhood-based organizations, in the reduction Program in addition to the Emergency
of poverty, the revitalization of low-income
Shelter Grant Program (See Chapter 5 for communities, and the empowerment of low-income
families and individuals in rural and urban areas to more information on the ESGP and
become fully self-sufficient. Appendix D for Community Affairs’

organizational chart.) In program year 2007, the Department distributed
funding to fifty-three subrecipients who provide
programs at the local level. These subrecipients The Department has good controls over
served 481,598 clients. Programs provided by the
the allocation of the required percentage subrecipients include programs to promote self-
of funds between the subrecipients and the sufficiency, secure and retain employment, attain
education, maximize the use of income, obtain and Department’s administrative costs, but
maintain housing, obtain emergency assistance, and
improvements should be made in the to increase participation in the affairs of the
community. In addition, the Department also funds expenditures that are charged to
special projects such as training and technical administrative funds and the timeframe in
assistance, coordinating programs and program
which the funds are used. support.

Currently, funds for administrative costs
are spent on the salaries of the Community Services staff that manage, support and
monitor the CSBG program, as well as other costs such as a portion of operating costs
(office space, telephones and travel expenses), and capital expenditures (furnishings and
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Draw Processing and Monitoring Functions of the Community Affairs
Division’s Community Services Block Grant and Emergency Shelter Grant
Programs
equipment.) These costs are all allowable under the CSBG act. However, the Texas
Administrative Code, which is the set of program rules approved by the Department’s
governing board, does not allow training and technical assistance to be paid for using
administrative funds. The program officers who are responsible for monitoring the
subrecipients also provide technical assistance to the subrecipients. In addition, the
Division has a full time trainer. The program officers and the trainer charge their time to
the grant code designated for CSBG administrative funds, which does not comply with
the Texas Administrative Code requirements.

In addition, the requirements for spending CSBG funds do not make it clear if the
administrative funds must be spent within a two year period as is required for the 90% of
the grant funds that are allocated to the subrecipients. The Department has carried over
administrative funds from year to year, and normally has approximately $1 million in
administrative funds remaining at the end of each program year. In February 2008, the
Department was still spending funds from the program year 2006 grant.

Chapter 1-A
The Texas Administrative Code Does Not Allow Expenditures for Technical
Assistance to be Charged Against Administrative Funds
Community Services has program officers that monitor the subrecipients. These program
officers conduct on-site monitoring visits as well as provide technical assistance to the
subrecipients. In addition, the Division also has a trainer that provides assistance and
training to subrecipients. The program officers’ and the trainer’s salaries are all charged
to the 5% of the grant set aside for administrative costs. However, the Texas
Administrative Code (10 TAC Part 1, Chapter 5 A, 5.6(d)) states:

“Five percent (5%) of the Department's annual CSBG allocation is used
to cover state administrative costs including salary and benefits for state
CSBG staff, indirect costs, a portion of operating costs (space, telephone,
staff travel, etc.), and capital expenditures (furnishings, equipment, etc.).”

Technical assistance and training are not included in the allowable activities under
this rule.

Recommendation
The salaries of the program officers and the trainer should be allocated between the
CSBG administrative funds and other funds proportional to the amount of time spent on
training and technical assistance, or the training and technical assistance duties should be
separated from the monitoring function and not charged to administration. An alternative
solution is for the Department to seek a Board-approved change to the Texas
Administrative Code to include training and technical assistance as allowable activities.



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Draw Processing and Monitoring Functions of the Community Affairs
Division’s Community Services Block Grant and Emergency Shelter Grant
Programs
Management Response
Management acknowledges the need to separate staff time for training and technical
assistance from monitoring and other administrative activities to provide better oversight
of these separate processes. Management will work with the Financial Administration
Division to ensure that time for training and technical assistance activities are accounted
for separately and fully.

The Department believed that the cost of salaries for staff that provided training and
technical assistance was an appropriate and eligible use of the CSBG administrative
funds and the U. S. Department of Health and Human Services concurs with this
interpretation. Staff will propose a change to the section of the rule in the Texas
Administrative Code that references allowable activities for use of CSBG administrative
funds, to specify that staff time spent providing training and technical assistance are
included as allowable activities and recommend that the total administrative costs
including training and technical assistance be limited to not more than five percent of the
annual grant allocation.

Implementation Date: TDHCA Board Meeting June 26, 2008 (proposed rule change)
TDHCA Board Meeting July 21, 2008 (possible adoption)

Staff Responsible: CA Director, Financial Administration Director and CS Manager


Chapter 1-B
The Department Should Seek Guidance on the Requirements for the Timely
Expenditure of Administrative Funds
The Department’s Financial Administration Division does a good job of ensuring that the
5% limit on administrative funds is not exceeded; however, these funds are not expended
on a timely basis. After the Department receives an award letter for the CSBG grant, they
calculate the 5% that can be used for administrative purposes under the grant rules and
these funds are tracked separately in order to ensure that the Department does not exceed
the 5% limit. In program year 2007, the Department’s 5% limit for administrative funds
was $1,510,432.
As of February 2008, the Department is still using administrative funds received for
program year 2006 and has not yet expended any administrative funds for program year
2007. The CSBG act, Sec. 675(C)(a)(2) states that, "Funds distributed to eligible
entities...shall be available during that fiscal year and the succeeding fiscal year."
However, administrative funds retained by the state are dealt with in a separate provision,
(SEC. 675(C)(b)(2)), that does not have a similar 2-year obligation limit. The 2007
Notice of Grant Award Letter implies that the 2-year limit also applies to the
Department's administrative portion of the grant. It states that, “If the grantee is on an
accrual accounting system, services must be provided on or before September 30, 2008
and liquidated on or before December 29, 2008.” An analysis of the CSBG administrative
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Draw Processing and Monitoring Functions of the Community Affairs
Division’s Community Services Block Grant and Emergency Shelter Grant
Programs
funds shows that there is approximately $1 million left over at the end of each program
year. (see Figure 1)
Administrative Funds Remaining at the End of the
Program Year
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
2004 2005 2006
Program Year

Figure 1

Recommendation
The Department should seek guidance from the U.S. Department of Health and Human
Services regarding whether administrative funds should be liquidated within the two-year
period. In addition, the Department should consider whether it is retaining administrative
funds, and if so, consider re-allocating any un-liquidated funds to subrecipients for use in
serving clients.

Management Response
The Department will seek guidance from the U.S. Department of Health and Human
Services to determine if the two-year time limit applies to State CSBG administrative
funds and to confirm if any of the unspent administrative funds can be allocated for
activities other than administrative costs, such as services for clients. Based on the
guidance received from USHHS, the CA Director will work with the Executive Director
and the Financial Administration Director to develop a plan to expend the unspent funds.

Implementation Date: September 2008

Staff Responsible: Executive Director, CA Director and Financial Administration
Director



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Draw Processing and Monitoring Functions of the Community Affairs
Division’s Community Services Block Grant and Emergency Shelter Grant
Programs
Chapter 2
The Process for Tracking and Monitoring Subrecipients’
Expenditures Needs Improvement
The CSBG subrecipients sign an annual contract with the Department and submit a
Community Action Plan (CAP Plan) that describes the programs and services they will
offer as well as the performance targets they are trying to meet. (For more information
on performance targets, see Chapter 4.) The subrecipients also develop and submit an
operating budget for the program year. However, Community Services does not compare
the subrecipients’ budget to their actual expenditures. The automated contract system
used to track the subrecipient’s monthly expenditure reports does not contain budget
information, nor does it calculate the percent of budget expended. This makes it harder
for the contract specialist who reviews the subrecipients’ monthly expenditures to
determine how the subrecipients are spending the funds allocated to them and to ine if the amounts of the subrecipients’ funding requests are reasonable.

The CSBG program rules stipulate that the subrecipients have on hand no more than a
30-day supply of funds. The automated contract system is used to track the projected
expenditures for the next month, the prior month’s expenditures and cumulative
expenditures. The contract system uses this information to calculate cash on hand.
However, from our review of a sample of seven expenditure reports, and a sample of five
monitoring files that contain information on subrecipient’s bank accounts, it appears that
some subrecipients may be receiving or retaining more than a 30-day supply of funds.

Chapter 2-A
The Contract System Should Track Budget Information for Subrecipients
The budgets that subrecipients submit at the beginning of the program year are not
included in the automated contract system used to track the subrecipients’ expenditure
reports. In addition, the percentage of actual funds expended is not calculated and
compared to the budget. This causes a problem because once a budget is approved,
subrecipients can spend money from any budgeted line item as long as they do not
exceed the total amount they were awarded. As a result, there is less accountability for
the accuracy of budget projections and for actual expenditures compared to budgeted
amounts. In addition, the “other” category of expenses includes direct services and many
other types of expenses that should be further separated into line items. The purpose of
comparing budgeted amounts to actual expenditures is to help program staff assess the
ongoing status of the subrecipient contracts, not to identify unallowable expenditures.
The Community Affairs Division’s Comprehensive Energy Assistance Program utilizes
an expenditure report that includes budget information.

Recommendations
• Budgets should be entered into the contract system at the budget line item level in
order to ensure that subrecipients are not exceeding their approved budget
amounts for any of the budgeted line items.
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Draw Processing and Monitoring Functions of the Community Affairs
Division’s Community Services Block Grant and Emergency Shelter Grant
Programs
• The percentage of actual funds expended should be calculated in the contract
system and compared to the budgeted amount for each line item.
• Line items should be created to address the most common expenditures now
included in the “other” category.

Management Response
Management agrees that the existing system and processes used to monitor CSBG
expenditures needs to be altered to address these recommendations. It is important to
note that the Department has limited ability to disapprove CSBG expenditures or deny
requests to modify the CSBG budget if the activities are defined as allowable in the
CSBG Act.

Staff will expand the existing monitoring instrument to address this concern and provide
training and technical assistance to subrecipients regarding budget preparation for those
subrecipients that repeatedly change the CSBG budget.

Implementation Date: October 1, 2008

Staff Responsible: CS Manager and CS Project Managers


Chapter 2-B
Community Services Staff Should Ensure Subrecipients Do Not Receive
More Than a 30-day Supply of Funds
The expenditure reports in the contract system track projected expenditures for the next
month, the prior month’s expenditures and the cumulative expenditures of each
subrecipient. The contract system uses this information to calculate the subrecipients’
cash on hand. However, from our review of a sample of seven expenditure reports and
five monitoring files which contain information on subrecipients’ bank accounts, it
appears that some subrecipients are receiving or retaining more than a 30-day supply of
funds. The State of Texas Plan and Consolidated Application and the CSBG contract
limit subrecipients to a 30-day supply of cash on hand. The contract specialist is
responsible for reviewing the monthly expenditure reports and alerting the program
officers if a subrecipient appears to have requested more than a 30-day supply of cash.
However, as long as the funds requested do not exceed 1/12 of the total annual allocation,
funding requests are approved. As a result, subrecipients may be able to maintain higher
balances of cash on hand. This increases the risk that the excess cash could be converted
to non-CSBG uses.

Recommendations
• During the monthly review of expenditure reports, Community Services staff
should review the prior month’s advances for specific line items and compare
them against the actual expenditures reported by line item to ensure that the most
recent funding request is reasonable.
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