We completed a review of the City of Phoenix’s (City) Neighborhood Stabilization Program (NSP) grants NSP1 and NSP2. We performed the review because it supports the U.S. Department of Housing and Urban Development (HUD), Office of Inspector General’s strategic plan to contribute to the oversight objectives of the American Recovery and Reinvestment Act of 2009 and the City received a $60 million grant as one of 56 NSP2 grantees. Our objective was to determine whether the City administered its NSP2 grant in accordance with HUD requirements. Additionally, we reviewed the Park Lee Apartments rehabilitation activity for compliance with NSP1 and NSP2 requirements.

The City did not administer its NSP1 and NSP2 grants in accordance with HUD rules and regulations. Specifically, the City’s rehabilitation contract administration was not adequate and did not comply with the NSP2 grant agreement, resulting in an insufficient contract scope of work, inadequate oversight and verification of contract work and expenditures, insufficient maintenance of procurement documentation, inappropriate contract modifications, installation of substandard air conditioning units, and noncompliance with the grant’s Buy American requirements. Additionally, the City inappropriately charged the NSP1 and NSP2 grants for actual losses that could have been covered by insurance, unsupported Park Lee Apartments additional payments, and salaries and wages that did not comply with Federal cost principles.

We recommend that the Director of HUD’s San Francisco Office of Community Planning and Development require the City to (1) stop incurring costs for NSP-funded multifamily rehabilitation projects until HUD determines whether the City has the capacity to carry out these activities in compliance with HUD rules and regulations; (2) support or repay from non-Federal funds expenditures totaling $6.16 million identified in this report; (3) reimburse HUD $140,121 from non-Federal funds for ineligible actual loss charges related to the theft and vandalism of air conditioners; (4) reimburse the City’s NSP2 grant from non-Federal funds $299,901 for substandard equipment, $31,270 for equipment that did not meet the grant’s Buy American provisions, and $60,051 for ineligible actual loss charges related to the theft and vandalism of air conditioners; (5) develop and implement policies and procedures to ensure that HUD-funded projects and construction contracts are managed according to HUD rules and regulations, are adequately monitored, and grant charges comply with Federal cost eligibility requirements.

In addition, we recommend that HUD’s Associate General Counsel for Program Enforcement determine legal sufficiency and if legally sufficient, pursue civil remedies against the City, its principals, its contractor, or all of the above for incorrectly certifying to the integrity of the data or that due diligence was exercised during the approval of rehabilitation payments.