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The U.S. Department of Housing and Urban Development’s (HUD) Office of Inspector General audited the State of Illinois’ (State) Neighborhood Stabilization Program (Program). The audit was part of the activities in our fiscal year 2010 annual audit plan. We selected the State based upon citizens’ complaints to our office. Our objectives were to determine whether the State (1) had the capacity to effectively and efficiently administer its Program and obligate Program funds before the required 18-month obligation deadline, (2) awarded Program funds for eligible projects, and (3) used Program funds for eligible administrative costs.

The State needs to improve its capacity to effectively and efficiently administer its Program. Although the Illinois Housing Development Authority (Authority), the current administrator of the State’s Program, had sufficient staffing levels and extensive experience with HUD programs, it is at risk of not meeting the required 18-month obligation deadline for Program funds. Further, the Illinois Department of Human Services (Department), the former administrator of the State’s Program, allocated more than $4.8 million in Program funds for a project that did not comply with HUD’s and Federal requirements for maintaining sufficient documentation to support the use of nearly $8,000 in Program funds for administrative expenses. As a result, a significant portion of the State’s nearly $20.9 million in unobligated Program funds is at risk of being recaptured by HUD and not being used to stabilize neighborhoods and stem the decline in value of neighboring homes in the State, and HUD lacked assurance that the State used nearly $8,000 in Program funds for eligible Program administrative costs.

We informed the Authority’s executive director and the Director of HUD’s Chicago Office of Community Planning and Development of a minor deficiency through a memorandum, dated August 4, 2010.

We recommend that the Director of HUD’s Chicago Office of Community Planning and Development require the State to (1) implement adequate procedures and controls to ensure that it obligates its Program funds for eligible projects before September 4, 2010; (2) implement the Authority’s Program reallocation award plan (plan) for the more than $4.8 million in Program funds available after the Authority rescinded one of the Department’s allocations for a project; (3) provide sufficient supporting documentation or reimburse its Program from non-Federal funds, as appropriate, for the nearly $8,000 in Program funds used for unsupported administrative costs; and (4) implement adequate procedures and controls to address the finding cited in this report.