U.S. Department of Housing and Urban Development

Community Planning and Development

Special Attention of: Notice CPD-98-3

All CPD Division Directors Issued: March 25, 1998

All State CDBG Grantees

All State Coordinators Expires: March 25, 1999

Cross References:

Subject: Procedures for Closing State Community Development Block Grant
(CDBG) Program Grants

I. Purpose

This Notice provides policy guidance and procedural

instructions for HUD Field Offices and State staff on how to

close out grants awarded to States under the State Community

Development Block Grant Program. This Notice replaces Notice

CPD-86-12, entitled \"Procedures for Closing State CDBG Program

Grants,\" published on November 3, 1986.

II\. Applicability

State CDBG Program grants are authorized under Title I of

the Housing and Community Development Act of 1974, as amended.

The Department\'s implementing regulations for administering these

grants are found in 24 CFR Parts 91 and 570 (Subpart I). HUD and

State staff must make the necessary reviews and audits to ensure

that statutory and regulatory requirements governing CDBG grants

have been satisfied prior to closing a State CDBG allocation.

III\. General Criteria for Closing State CDBG Grants

A grant to a State may be closed when the State and Field

Office staff determine that all of the following conditions have

been met:

A. The State has disbursed to recipient units of general local

government all CDBG funds included in the Final Statement/

Consolidated Plan for the fiscal year grant to be closed

out under the agreement, except for funds remaining for

state administrative expenses and audit;

CGBS: Distribution: W-3-1

B. Recipients have completed all activities and expended funds

received and the State has made the required reviews and audits

to determine whether recipients have satisfied the performance

criteria in Section 104(e)(2) of the Act. Section 104(e)(2)

reviews and audits must document that the State: distributed its

CDBG funds in a timely manner; adhered to its method of

distribution in the State\'s Final Statement or Consolidated Plan;

carried out its certifications required by Title I for

administration of State CDBG funds and complied with Title I and

other program requirements in administering its State CDBG

allocation, including appropriate reviews to ensure that all CDBG

activities funded are eligible and meet a national objective; and

C. The audit(s) of the State covers all funds in the allocation

to be closed and there are no open outstanding monitoring and

audit findings; or, where costs have been incurred since the most

recent audit(s), the State is willing to enter into a written

agreement with HUD, which will require the State to submit to HUD

the amount of any costs which are disallowed by subsequent audits

or HUD Field Office reviews.

IV\. Documents and Reviews to assist in Determining Compliance

with Program Requirements

When HUD determines that the State has met the criteria

stated in Section III, steps may be taken to close out the grant.

Generally, the necessary reviews to ensure compliance occur prior

to the closing of the grant. However, it may be necessary in some

instances to conduct a further in-house and/or on-site review

prior to closing to verify those financial transactions that

recently occurred or those transactions where the full amount

will not be known until the date of closing.

In conducting the in-house review, the following documents

may be used as resources: Final Statement (State CDBG allocation

prior to FY 1995 will have a Final Statement); Consolidated Plan

(Consolidated Plan for all grant allocations, beginning in FY

1995 and later, except for those states that received an

exemption from submitting a Consolidated Plan in FY 1995); Grants

Management System (GMS); approval letter; grant contract; annual

Performance and Evaluation Reports (PERs); Integrated

Disbursement and Information System (IDIS); audit reports;

monitoring letters and reports; and any other documents pertinent

to the grant agreement.

A. Final Statement/Consolidated Plan

Until FY 1995, the Final Statement was the key document

submitted by States to HUD Field Offices to describe their

objectives and projected use of CDBG funds for a program year.

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For a State, this document contains a description of the method

by which the State distributes its CDBG funds to units of general

local government. The Final Statement has now been replaced by

the Consolidated Plan. Generally, the Consolidated Plan may

cover a period of up to five years. However, the Consolidated

Plan contains a one-year action plan (and certifications), which

details how the appropriation for the fiscal year will be

distributed to units of general local government.

B. Performance and Evaluation Report (PER)

The Performance and Evaluation Report (PER) is the document

used by States to report to HUD on their accomplishments under

the State CDBG Program. This report contains information on

recipients and activities funded and proposed and actual

accomplishments under the grant agreement. A State submits a

separate PER for each allocation that is still open.

The Consolidated Plan established the single submission and

reporting requirements for four of HUD\'s programs: CDBG, ESG,

HOME, and HOPWA. States will soon be able to use the Integrated

Disbursement and Information System to provide HUD with a wealth

of statistical information on their progress under these grants.

The standard forms used for reporting performance (the PER for

the State CDBG Program) will eventually no longer be needed for

reporting on progress. However, until the States are in IDIS

production mode, there is still a need for manual reporting on

recipients funded and their accomplishments under the State CDBG

Program. The Department\'s memorandum of December 5, 1996,

entitled \"Interim Performance Reporting for 1996 Consolidated

Plan Program Year\" provides instructions to States and other

grantees on performance reporting for the consolidated program.

Until the IDIS is fully operational for State grantees, States

may continue to use the PER to satisfy statutory and other

reporting requirements under the Consolidated Plan for the State

CDBG Program. Updated reporting guidance for States will be

issued in the near future.

C. Grants Management System

The Grants Management System brings together core activities

for CPD, including consultation with grantees, timely processing

of grant awards, oversight of grantee compliance with regulatory

and statutory requirements, and evaluation of grantees, under one

technical system. The GMS data base contains a wealth of

information on grantees\' short and long-term goals and

objectives, best practices implemented, monitoring findings and

evaluations, and accomplishments under the grant agreement.

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D. Audit Reports

The audit reports are critical for determining whether the

State has met financial management requirements. The Single

Audit Act prohibits HUD from requiring a State to obtain an audit

covering only the CDBG Program. (HUD still has the authority to

conduct or contract with an independent public accountant to

audit a State\'s program. However, HUD must pay for the audit and

it cannot duplicate any previous audit work on the State.)

In cases where the previous audit(s) fails to cover all

grant funds under the agreement, the grant may still be closed,

provided the State is willing to enter into a written agreement

to remit to HUD any costs disallowed by a subsequent audit and

sustained by HUD. This procedure is expected to be used in those

cases where both the State and HUD want to proceed with the

close-out before the next periodic single audit will be done

covering the remaining grant funds not already audited.

The 1996 amendments to the Single Audit Act made significant

changes to the audit requirements for States and local

governments. A revised office of Management and Budget (OMB)

Circular,
[A-133](http://www.hud.gov/utilities/intercept.cfm?http://www.whitehouse.gov/OMB/circulars/a133/a133.html),
was published in the Federal Register on June

30, 1997. In early FY 1998, HUD will issue revised regulations

at 24 CFR Parts 84 and 85 to implement the new OMB Circular A-133

requirements. This new rule will replace the existing 24 CFR

Part 44 regulations.

E. The Integrated Disbursement and Information System (IDIS)

The Integrated Disbursement and Information System (ISIS) is

an integrated financial and programmatic information system

designed to provide up-to-date information for HUD and grantees

on recipients and activities funded and disbursement of grant

funds for these activities. The IDIS will eventually contain all

of the information now currently collected in various individual

program performance reports such as the State Performance and

Evaluation Reports. HUD staff will be able to use the IDIS to

obtain reports on activities funded in a specific program year

and funds expended for these activities.

A feature of IDIS is the first in first out (FIFO) drawdown

process. Drawdown requests will automatically be paid for out of

the oldest available allocation. The Line of Credit Control

(LOCC) System will operate in the same manner for States.

Entitlement communities have always operated in this manner.

However, States were required to draw down their funds by grant

allocation year. The FIFO process in IDIS and LOCCS will now

automatically draw down funds from States\' oldest allocation

first. States need not wait until they \"go live\" on IDIS to

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begin using the FIFO drawdown process; they may do so now.

States may wish to close out older year grants from HUD in order

to simplify the conversion to IDIS.

V. Expediting Close-Out of State CDBG Grants

In some situations, switching to a FIFO drawdown process now

may allow States to drawdown and expend small amounts remaining

in older year grants. These older grants may then be closed out

rather than transferred into IDIS. The fact that LOCCS has

\"zeroed out\" a given year\'s funds does not, by itself, mean that

a given year\'s grant to a State may now be closed out; all

activities funded from that year\'s allocation must also be

completed. This can be problematic where a few slow-moving

activities funded out of a year\'s allocation remain uncompleted

by State grant recipients.

A State may delete activities from one year\'s funding

allocation and add the same activities to a subsequent year\'s

grant. This ability can be used to hasten the completion of

activities funded out of a given year\'s allocation. The

unexpended portion of an open grant to a community can be

terminated, and a like amount of funds could be awarded to the

community from a more recent year\'s allocation. The now

unobligated remaining funds from the old allocation can then be

used to make a new award to another community.

How this can work is illustrated by the following

hypothetical example. Town A received a \$330,000 grant from the

State\'s 1991 allocation. The project is moving very slowly, and

to date, only \$180,000 has been expended; the remaining funds are

for an activity which has not yet begun because of a lawsuit.

Town B has submitted an application for a \$150,000 grant in the

1997 funding competition; the activities proposed for funding are

likely to be completed quickly, and rate well enough to be

funded. The State could amend Town A\'s grant contract,

terminating the \$150,000 worth of remaining 1991 funds and in its

place awarding them \$150,000 worth of 1997 funds. The State

could then award Town B a grant for \$150,000 from its 1991

allocation instead of its 1997 allocation. Once Town B completes

its 1991-funded activities, the State can proceed to close out

its 1991 grant from HUD.

Several factors must be considered in applying this

approach. The State may need to authorize the reimbursement of

pre-grant agreement costs for Town A, to the extent that Town A

already has placed CDBG funds under contract at the local level

prior to the award of the 1997 funds. The State must also ensure

that Town A\'s activities are consistent with the State\'s 1997

Consolidated Plan method of distribution, and that Town B\'s

activities are consistent with the State\'s 1991 method of

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distribution. Finally, the State must be satisfied that Town B

will complete its activities more quickly than Town A will;

otherwise, nothing is gained.

This approach cannot be applied to activities for which funds

have already been drawn down and expended. A partially or fully-

completed activity cannot retroactively be given the identity of

some previous allocation. If Town C received a 1994 grant, but

has already completed its activities and expended all its grant

funds, the State could not retroactively \"switch\" Town C\'s grant

to the 1991 allocation in order to give Town A \$150,000 from the

State\'s 1994 allocation.

States may not move funds from one year\'s allocation to

another. Further, States must account for funds by allocation

year for national objectives and other program requirements on a

program year basis. For instance, a FY 1995 grant to a local

government will be reported as part of the FY 1995 allocation

even though funds from FY 1990 or 1993 may be used to pay for

drawdown requests for that grant. Further, States must ensure

that their financial accounting systems account for grants and

activities on a program year basis and there is a linkage between

their systems and IDIS.

VI\. Rule Governing Obligation/Expenditure of CDBG Funds

The National Defense Authorization Act for Fiscal Year 1991

(P.L.101-510) established rules governing the availability of

appropriations for obligation and expenditure. This legislation

mandates that all CDBG funds must be appropriated and obligated

within a certain time period. On September 30th of the fiscal

year after the period of availability for obligation of a fixed

appropriation account ends, the account shall be closed and any

remaining balances (whether obligated or unobligated) in the

account shall be canceled and thereafter shall not be available

for obligation or expenditure for any purpose. CDBG funds

remaining in the grantee\'s account after this time period will be

deobligated by HUD. The appropriation period for CDBG funds is

three fiscal years, the year the funds are actually appropriated

plus two additional years. Grantees now have a total of 8 years

to obligate and expend CDBG funds, counting the appropriation

period of-three years and the additional five years for

expenditure of funds mandated by this legislation.

The legislation was enacted in FY 1991, and therefore

impacted funds dating as far back as 1989 which were available

through the 1991 fiscal year. However, supplemental legislation

(P.L. 102-27) was enacted on April 10, 1991, which exempted

certain funds. This Administrative procedure stated that

\'Community development grants\' and \'Urban development action

grants\' for prior fiscal years shall be exempt, effective as of

March 5, 1991, from the application of provisions of section

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1405(b)(4) and (b)(6) of P.L.101-510 (104 Stat.1670) and Section

1552 of title 31,USC, and shall remain available until expended for

the purposes for which originally obligated. only those funds which

were obligated as of March 5, 1991, are exempt. All other CDBG funds,

including 1989, 1990, and 1991 funds that were not obligated by March

5, 1991, as well as all 1992 and later funds remaining in the grantee\'s

account after this time; are subject to cancellation, pursuant to

P.L. 101-510.

VII\. Financial Review

Field Office and State staff should be able to verify the

following with regard to the State\'s financial records:

A. Administrative Costs

No more than two percent of the total grant allocation and

program income earned was used for eligible State administrative

expenses and the State has met the required match provision for

these funds. In calculating the two percent eligible for

administrative expenses, States may include two percent of

program income returned by units of general local government to

the State after August 21, 1985, and two percent of program

income received by units of general local government after

February 11, 1991. For Fiscal Year 1984 and subsequent grants,

States may use an additional \$100,000 of the grant which need not

be matched. Administrative costs greater than \$100,000 must be

matched on a dollar for dollar basis. The match may include any

direct or indirect administrative costs the State pays for with

State funds to carry out its responsibilities under the Act. In

addition, the general administration expenses incurred by the

State and its recipients should not exceed the overall twenty

percent limitation.

The financial status report section of the existing PER,

which is now a part of the Consolidated Plan Report, contains a

line for reporting the total amount of the grant budgeted for

administration. The actual amount used by the State for

administration should be reported on the final performance report

for the allocation. The IDIS system will allow a State to set

aside its-administrative funds in a subgrant to itself.

Technical assistance funds not awarded directly to recipient

units of general local government but used by the State to

provide such technical assistance can also be shown in the same

manner.

B. Program Income

The State must have a system in place to effectively account

for and manage all program income earned as a result of grant

supported activities. This includes program income returned

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from units of general local government to the State, as well as

program income retained by units of general local government.

1\. Program Income Returned to State

The financial status information in Part I of a State\'s PER

contains a line item on total program income distributed within

the program year. This amount does not include program income on

hand at the State level which was not awarded to a recipient. It

also does not contain any program income included in a state\'s

revolving fund account. Program income in a revolving fund

account is returned to the revolving fund account to continue the

revolving fund specifically identified activities.

2\. Program Income at Local Level

Program income received and retained by the unit of general

local government before close-out of the grant is treated as

additional CDBG funds and is subject to the requirements of the

Act. A State can require its recipients to return all program

income received back to the State. Program income retained at

the local level must be tracked and used in accordance with

program requirements. Program income amounts of less than

\$25,000 during a single year is considered miscellaneous revenue

and program requirements do not apply. Program income amounts

that exceeds \$25,000 in a single program year must be tracked by

the local government and State to ensure that Title I and other

requirements are satisfied. Units of general local government

must use any program income funds on hand prior to requesting

funds from the State. The only exception to this requirement is

in the case of revolving fund accounts.

3\. Program Income Prior to FY 1993 vs. Program Income in FY

1993 and Beyond

In tracking and reporting the use of program income, it is

important that States separately account for program income that

was generated from grants the State received prior to FY 1993 and

those grants received in FY 1993 and later. The applicability of

CDBG program income requirements is different depending on the

fiscal year of the State\'s allocation from which the program

income was-generated. For allocations prior to FY 1993, Title I

and other program requirements apply to program income collected

during the life of the grant. At close-out, Title I and other

program requirements apply only if:

\(a\) The unit of general local government has another

ongoing CDBG grant;

\(b\) The program income is being used to continue the

activity that generated the program income; or

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\(c\) The State has imposed additional requirements governing

the use of program income.

Beginning with FY 1993 funding allocations and thereafter,

any locally-held must always be used in accordance with Title I

and other program requirements. Such program income will have to

be tracked and reported to States as long as the program income

exists.

VIII\. Preparation of Financial Status Report

The State should be asked to complete a Financial Status

Report. This report should be sent to HUD\'s Community Planning

and Development Division within 30 days after the State has

satisfied the criteria for close-out of its grant. All of the

conditions set forth in Paragraph III of this notice must be

satisfied prior to preparation of Financial Status Report. CPD

must be able to verify that:

HUD has completed the necessary reviews to ensure that the

State has fully satisfied Title I and other requirements

governing the grant agreement; and

The audit reports on hand cover all funds under the grant

agreement or the State is closing subject to a later audit.

States were previously instructed to use the Financial

Status Report (Form 269) contained in 24 CFR Part 85 for their

financial status reports (see Attachment I for a copy of Form

269). States were advised that completion of line items 10

columns \"a\" through \"f\" was not necessary for their submissions.

States were required to complete only line item 10 \"a\" through

\"m\" of column \"g\" which provides financial data on the total

obligations, expenditures, and program income related to the

grant.

States may continue to use Form 269 for financial reporting.

However, because States are not required to follow 24 CFR Part

85, HUD cannot mandate that States use this form. Section

570.489(d)(2) allows States to use fiscal and administrative

requirements applicable to the use of its own funds, adopt new

fiscal and administrative requirements, or apply the provisions

in 24 CFR Part 85. Therefore, a State may submit its own

financial status report as long as the report contains the

following:

There is a block on the form for signature by the certifying

official that the report is accurate;

HUD is able to determine that the total grant allocation is

consistent with the grant agreement amount;

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Program income is accounted for;

The total amount expended is shown;

The State has estimated an amount for any third party claims

remaining under the grant agreement; and

The total amount of any grant funds to be canceled is shown.

A. Review by Field Office

Upon receipt of the financial report, the CPD Field Office

should review it for accuracy and consistency with other

available information, including grant disbursement records,

audit reports, and LOCCS. The State\'s financial report should

indicate any amount of unused grant funds to be canceled. In the

case of States using the Financial Status Report Form, the amount

shown on line 10 \"m\" of column \"g\" of the form represents the

amount of the unused grant to be canceled.

B. Preparation of Letter to be Attached to Financial Status

Report

Because the Financial Status Report and/or state financial

report may not contain a grant computation balance section and

appropriate space for the HUD official to certify HUD\'s approval

of the grantee\'s Financial Status Report, the Letter in

Attachment II of this Notice has been designed to meet this need.

The Certifying HUD Official should either be the Director of CPD

or his designee. The Letter should be attached to the financial

report to be forwarded to the Director, Accounting Division,

Office of Comptroller for certification. A copy of the financial

report, with the letter attached, must also be returned to the

grantee to indicate HUD\'s approval of the grantee\'s financial

report.

XIII\. Recordkeeping Responsibilities

Section 570.490 of the State CDBG regulations describes the

recordkeeping requirements governing this grant program.

Generally, records at the State and local level, including

supporting documentation, shall be retained for three years from

close-out of the grant to the State, unless there are other

statutory/regulatory provisions requiring a longer retention

period. Field Offices should maintain all records concerning the

termination and/or grant close-out in accordance with the

disposition instructions contained in HUD Handbook 2225.6,

Records Disposition Management: HUD Records Schedules.

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IX\. How to Obtain Additional Information

States should contact their respective Field Offices for

further advice and guidance in closing State CDBG grants. Field

Offices may contact the State and Small Cities Division, Office

of Block Grant Assistance, Community Planning and Development,

for further advice and guidance on closing State CDBG grants.

[Attachments](http://www.hud.gov/utilities/intercept.cfm?/offices/cpd/lawsregs/notices/1998/98-3att.pdf)

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