We completed an audit of the City of Newburgh, New York's (City) administration of its Section 108 Loan Guarantee program. The objectives of our audit were to determine whether the City ensured that (1) Section 108 loans and related activities were administered in compliance with CDBG program objectives and (2) subsequent CDBG funds used for Section 108 loan repayments were necessary, reasonable, and in accordance with all applicable contracts, agreements, and federal regulations.

The audit disclosed that contrary to the loan agreement and regulations, the City failed to ensure that all Section 108 Loan Guarantee funds and related project costs pertaining to the Front Street Marina redevelopment project were proper, necessary, and fully supported. Specifically, the City (1) failed to enforce loan agreement provisions and adequately pursue loan collateral to satisfy the debt, (2) did not ensure that all funding sources were supported and documented, (3) unnecessarily used CDBG funds to repay the loan and deprived its activity from receiving program income, and (4) overpaid the developer for duplicate costs. Consequently, the City's CDBG program was deprived of funds that could have been used for other activities, and Economic Development Initiative (EDI) funds were improperly expended.

In addition, the City did not achieve the primary objective of job creation for the industrial park project, loan proceeds remained unused in a bank account for more than seven years, possible collateral or program income for loan repayment was not pursued, and the City did not ensure that the industrial site was feasible for commercial development and job creation. As a result, the failure of the industrial park project had and will continue to have a large negative impact on the City's CDBG program, as CDBG funds were used to repay the Section 108 debt and additional CDBG funds were scheduled to retire the debt. Thus, the CDBG program will be hindered from effectively using future CDBG funds to provide maximum benefit to low- and moderate-income residents.

We recommend that HUD instruct the City to (1) enforce the loan provisions on the marina redevelopment project within 90 days or reimburse the CDBG program from nonfederal funds the $449,817 used for debt repayment, (2) take appropriate actions against the marina developer and ensure that nonfederal funds are used to repay the remaining $1.3 million in future loan obligations, (3) reimburse the EDI program from nonfederal funds the $144,341 paid for ineligible duplicate costs, (4) establish a plan for the industrial park site within 90 days or reimburse the CDBG program from nonfederal funds the approximate $1.8 million used for debt repayment, and (5) reprogram the approximate $1.7 million in CDBG funds currently scheduled to be used for future repayments of the industrial park project loan.