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We conducted a review of the City of Dunkirk, NY (City), pertaining to its Community Development Block Grant (CDBG) funds received under the American Recovery and Reinvestment Act of 2009 (Recovery Act). We selected this auditee based on a congressional interest inquiry received by the Recovery Act Transparency and Accountability Board and forwarded to the U.S. Department of Housing and Urban Development’s (HUD) Office of Inspector General (OIG) in September 2010. The inquiry pertained to a concern that CDBG funds received under the Recovery Act (CDBG-R) may have been used to support an activity prohibited by Section 1604 of the Recovery Act. The primary objective of our review was to evaluate the validity of the congressional concern that the City used CDBG-R funds for an activity prohibited by the Recovery Act.

The City’s water park Recovery Act project was an activity prohibited under Section 1604 of the Recovery Act. Federal funding expended to date of $134,654 was, therefore, ineligible for inclusion under CDBG-R. Accordingly, the remaining $18,866 of the total $153,520 in CDBG-R grant funding to the City should be reprogrammed to another eligible activity. The ineligible costs occurred because City officials were either not aware of or misinterpreted the restrictions on the use of CDBG-R funds and did not have adequate controls to ensure that CDBG-R costs incurred were for eligible activities and supported by adequate documentation.

We recommend that the Director of HUD’s Buffalo Community Planning and Development Division instruct City officials to reimburse the CDBG-R program line of credit the $134,654 expended on ineligible Recovery Act costs from non-Federal funds, reprogram the remaining $18,866 in CDBG-R funding to other eligible activities and do not allow City officials to use Recovery Act funds to support the water park project, submit a plan to use the $153,520 in funds for a project that is eligible under the Recovery Act and provide guidance on the allowable activities for CDBG-R funds and direct City officials to establish controls to ensure that all CDBG-R costs are only incurred for eligible activities that are supported by appropriate documentation.