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The U.S. Department of Housing and Urban Development's (HUD) Office of Inspector General audited the State of Michigan’s (State) Neighborhood Stabilization Program (Program) administered by the Michigan State Housing Development Authority (Authority). The audit was part of the activities in our fiscal year 2010 annual audit plan. We selected the State based upon our designation of the Program as high risk and a citizen’s complaint to our office. Our objectives were to determine whether the State (1) complied with Federal requirements in its award, obligation, and use of Program funds under the Housing and Economic Recovery Act of 2008 (Act); (2) ensured that a subgrantee complied with the U.S. Department of Housing and Urban Development’s (HUD) regulations when procuring architectural services for its Program-funded rehabilitation projects under the Act; and (3) complied with Federal requirements in its reporting of Program accomplishments under the Act and the American Recovery and Reinvestment Act of 2009 (Recovery Act).

The State did not comply with Federal requirements in its award, obligation, and use of Program funds under the Act, ensure that a subgrantee complied with HUD’s regulations when procuring architectural services for its Program-funded rehabilitation projects under the Act; and comply with Federal requirements in its reporting of Program accomplishments under the Act and Recovery Act. It (1) lacked sufficient documentation to support its award of Program funds under the Act for a project, (2) reported Program obligations under the Act in HUD’s Disaster Recovery Grant Reporting (Reporting) system that did not qualify as obligations, (3) inappropriately disbursed Program funds under the Act for Program obligations that did not qualify as obligations, (4) did not maintain sufficient documentation to support the use of Program funds under the Act for administrative expenses, (5) did not ensure that a subgrantee complied with HUD’s regulations when procuring architectural services for its Program-funded rehabilitation projects under the Act, (6) did not comply with Federal requirements by posting the State’s quarterly performance reports for the Program under the Act for the first through third quarters of 2010 on its official Web site more than 30 days after the end of each quarter, and (7) did not maintain sufficient documentation to support the number of jobs it reported as created or retained from the use of Program funds under the Recovery Act for the first and second quarters of 2010.

As a result, (1) HUD lacked assurance that the Authority awarded $1 million in Program funds under the Act for eligible project costs, (2) the Authority inappropriately reported Program obligations of more than $719,000 under the Act in HUD’s Reporting system and disbursed Program funds for more than $531,000 in Program obligations that did not qualify as obligations, (3) HUD lacked assurance that the Authority used nearly $87,000 in Program funds under the Act for eligible Program administrative costs, (4) HUD and the Authority lack assurance that nearly $68,000 in Program funds under the Act was used efficiently and effectively, (5) the public did not have timely access to the State’s quarterly performance reports for the Program under the Act, and (6) HUD and the public lacked assurance that the Authority accurately reported the number of jobs that the use of Program funds under the Recovery Act created or retained.

We recommend that the Director of HUD’s Detroit Office of Community Planning and Development require the State to (1) provide sufficient documentation to support that the fair market value of the properties was $1 million and that the Authority’s award of $1 million in Program funds under the Act for the purchase of the properties was reasonable or cancel the Authority’s award and award the $1 million in Program funds to an eligible project(s), (2) reimburse HUD from non-Federal funds for the more than $531,000 in Program funds under the Act inappropriately disbursed for Program obligations that did not qualify as obligations, (3) deobligate in HUD’s Reporting system the more than $719,000 in Program funds under the Act that did not qualify as Program obligations, (4) provide sufficient supporting documentation or reimburse its Program from non-Federal funds, as appropriate, for the nearly $87,000 in Program funds under the Act used for unsupported administrative costs, (5) perform a formal cost or price analysis to determine whether the nearly $68,000 in Program funds under the Act was reasonable for the architectural services provided for a subgrantee’s rehabilitation projects, (6) and implement adequate procedures and controls to address the findings cited in this audit report.

We also recommend that the Director of HUD’s Detroit Office of Community Planning and Development recapture the more than $188,000 in Program funds under the Act, which the Authority obligated that did not qualify as Program obligations but the Authority did not disburse, and reallocate the funds in accordance with 42 U.S.C. (United States Code) 5306(c)(4).