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We audited the U. S. Department of Housing and Urban Development (HUD) Community Development Block Grant (CDBG), Supplemental II Disaster Recovery program funds, administered by the Texas Department of Housing and Community Affairs (TDHCA). Specifically, we wanted to determine whether TDHCA monitored its program management firm (the Firm) to ensure compliance with Federal and State regulations and to ensure costs reimbursed for the Housing Assistance Program (HAP) and the Sabine Pass Restoration Program (SPRP) were adequately supported. This is the fourth audit of the Disaster Recovery funds awarded to the State of Texas, and it was conducted as part of the Office of Inspector General's (OIG) commitment to HUD to implement oversight of Disaster Recovery funds to prevent fraud, waste, and abuse.

TDHCA's monitoring activities provided assurance that the Firm generally complied with Federal and State regulations. Further, TDHCA's reviews and monitoring generally ensured that program costs submitted for reimbursement by the Firm were adequately supported. However in a minor instance of noncompliance, TDHCA allowed the Firm to budget and receive reimbursement for a $71,691 mark-up for "Admin Fees on Subcontractors" calculated using a "cost plus a percentage of cost method" that is not allowed under CDBG rules. TDHCA had originally questioned the costs but subsequently allowed them because contractor staff provided support that made the expenditures seem plausible to TDHCA.

We recommend that HUD's Deputy Assistance Secretary for Grant Programs require TDHCA to recover from the Firm all "Admin Fees on Subcontractors" costs, reimburse its HUD Disaster Recovery program accounts for those costs, and continue to monitor and review program disbursements for the ineligible cost plus a percentage of cost payments.