Modesto's city staff and council members insufficiently managed the way $33 million in federal housing funds were spent, Stanislaus County’s Civil Grand Jury concluded Monday after a year-long investigation.
In a six-page report released Monday, grand jurors said the council showed "insufficient interest" and "did not exercise sufficient oversight" of the Neighborhood Stabilization Program.
Millions of NSP dollars were funneled to for-profit and nonprofit developers, including an agency called the Stanislaus Community Assistance Project, which was supposed to use the money to provide housing for people with special needs.
The grand jury determined that Modesto's city staff "did not adequately foresee or address issues with respect to the purchase of properties, identification and qualification of potential buyers and tenants, and purported overall objective of the program — neighborhood improvement and property value stabilization."
The report found: "The handling of tenant eligibility at the SCAP program was inappropriate, egregious, and showed favoritism to family members and staff."
While there were policies and procedures for determining tenant eligibility, grand jurors concluded, "City staff were not vigilant with respect to these guidelines and were lax in their monitoring of this element of the program by SCAP."
Oversight of how those federal funds were being spent was delegated to a subcommittee, the report discovered.
"There was little reporting back until problems began to become public and inquiries initiated by The Modesto Bee," grand jurors concluded.
The Bee began running stories in May 2011 about questionable spending of government funds by SCAP. By December, the couple that ran that nonprofit — Denise and Joe Gibbs — had been fired, most members of SCAP's governing board had resigned and the FBI had seized all of the agency's files. The agency had placed family members or staff in eight dwellings.
But rather than praising the whistle-blower who tipped off The Bee about problems at SCAP, the grand jury criticized him.
"The councilmember who was first informed about potential SCAP problems did not appropriately brief, and express his findings and concerns, to the mayor and fellow councilmembers before contacting The Modesto Bee," the report states.
Councilman Dave Lopez brought his concerns to The Bee during spring 2011 after he said he unsuccessfully tried to get the city's staff to take action against SCAP.
Councilman Joe Muratore also was blasted by the grand jury. It recounted how he initially accepted a substantial commission for the sale of an apartment complex, which was bought with federal funds.
Although Muratore later returned $62,500, grand jurors found that he "was on some level deceitful and dissembling in not fully disclosing relevant business affiliations and associates."
Changes made to program
The city received the report June 22 and has 45 days to respond to the grand jury's findings and its seven recommendations.
City Manager Greg Nyhoff released a statement Monday noting that the city asked for the grand jury investigation in August, when it also asked the Department of Housing and Urban Development's Office of Inspector General for an expanded review.
Nyhoff's statement said the city since has made changes to the program, such as requiring the City Council to review all housing purchases and renovation budgets, placing a $165,000-per-home limit on repair costs, requiring a bid process for construction and placing a 5 percent limit on real estate commissions.
Mayor Garrad Marsh said he mostly agreed with the findings. "We didn't have strong enough controls originally and we have taken steps to put those controls in place," he said.
Marsh said the new policy requiring council review will air the remaining NSP projects in public and should prevent problems from recurring.
Lopez said he does not regret taking his concerns to The Bee. He said he first went to Nyhoff with his questions about SCAP and how it was spending program funds, giving him two weeks to provide answers. Lopez said he didn't get any.
"I needed to go to The Bee because the people needed to know," the councilman said. "If I had to do it over again, I would do the same thing. It was corruption and that is something I won't stand for."
The grand jury recommended that quarterly, or even monthly, performance and financial reports on the program be submitted to the city manager and council; that elected officials follow protocol in reporting problems that come to light to the mayor and city staff; and that staff meet regularly with developers in the program to review their processes for screening tenants or potential buyers.
Muratore, in a letter to The Bee, disputed the grand jury's account of city staff discovering his conflict of interest. According to the report, the councilman was a partner in a firm that had an undisclosed business relationship with Trinity Ventures, a company co-owned by Ryan Swehla and Scott Monday that renovated housing with program funds.
Muratore and Swehla are partners in Benchmark Commercial Real Estate Services. On certain disclosures filed with the city, the partnership was listed under Sentinel Rock Realty Trust.
"My co-ownership of a business with Ryan Swehla was specifically disclosed prior to my being on the City Council and was well known by the City Council and staff," Muratore wrote.
"Regardless of this, I did mishandle the real estate commission disclosure. I believed at the time the commission was collected that it was allowable because it was not paid from city funds but by the seller, I had recused myself from NSP related votes, and I was not on the committee that selected recipients and made funding decisions."
SCAP since has changed the makeup of its board and management team, and recast itself as Community Impact Central Valley.
Tom Shanks, who became chief executive officer in March, said the grand jury report is about the actions of the previous managers.
"The grand jury is confirming what we know: that SCAP was a role model for nonprofits who think ethics is an add-on or optional," Shanks stated. "We are now Community Impact Central Valley, and ethics is integrated into everything we do every day. We put clients and this community first."
Here's a summary of the Stanislaus County civil grand jury's findings regarding how the city of Modesto spent $33 million in federal Neighborhood Stabilization Program funds:
Modesto's City Council "did not exercise sufficient oversight" in setting goals or managing how the program was run or monitored.
"Insufficient interest was expressed by the mayor, City Council and the city manager" regarding the program.
One of the city's committees "delegated complete approval authority" to a subcommittee. "There was little reporting back until problems began to become public and inquiries initiated by The Modesto Bee."
"Some properties were overly rehabilitated in relation to the condition of the neighborhood. A cap should be placed on rehabilitation costs, so that the taxpayer gets a reasonable return on investment."
The way the Stanislaus Community Assistant Project handled tenant eligibility for government-renovated housing "was inappropriate, egregious, and showed favoritism to family members and staff."
Despite detailed policies for determining tenant eligibility, "city staff were not vigilant with respect to these guidelines and were lax in their monitoring of this element of the program by SCAP."
The nearly $2.5 million in taxpayer funds used by SCAP to buy and renovate 30 small one-bedroom apartments on Coolidge Avenue was "within reasonable cost parameters."
Councilman Dave Lopez "who was first informed about potential SCAP problems did not appropriately brief, and express his findings and concerns, to the mayor and fellow councilmembers before contacting The Modesto Bee."
Councilman Joe Muratore "who at first accepted a substantial sales commission — only later recusing himself and returning the commission — was on some level deceitful and dissembling in not fully disclosing relevant business affiliations and associates."