Audit recommends Modesto pay back as much as $1.9 million in federal housing money

Stanislaus County Affordable Housing Corp. property at 901 California Avenue in Modesto, Calif., Thursday, July 5, 2018.
Stanislaus County Affordable Housing Corp. property at 901 California Avenue in Modesto, Calif., Thursday, July 5, 2018.

An audit is faulting Modesto for how it spent federal housing money and recommends the city repay the U.S. Department of Housing and Urban Development nearly $258,000 and explain how it spent an additional $1.69 million or repay that money as well.

HUD's Office of Inspector General released the audit Thursday of Modesto's community development block grant program. HUD provides the city with about $1.8 million annually in CDBG money, which the city spends to help low- and moderate-income residents and neighborhoods and for such other purposes as eliminating blight.

The audit was for the 2015-16 and 2016-17 budget years and found, among other things, that the city "did not follow HUD's and its own requirements for its rental and homeowner rehabilitation projects, ... provided false information to HUD, (and) spent HUD funds inefficiently."

"These conditions occurred because of the City's desire to show HUD that it was close to meeting timeliness requirements (for spending money), its disregard for HUD's and its own requirements, its lack of sufficient knowledge and capacity, and the failure of its policies and procedures to ensure that it monitored all of its recipients of CDBD funds," according to the audit.

The audit was based on a hotline complaint and HUD's and HUD OIG's risk assessments of Modesto.

City officials said the audit makes recommendations, and HUD will make the final decision on how much money Modesto must repay. The payment, which cannot come from the federal money Modesto receives, would come from the city's general fund.

Jessica Narayan — the city's acting community development manager — said it should take about a year to resolve the issues raised in the audit with HUD, and the city already has started talking with HUD.

"Consistent with OIG recommendations, HUD will go through its audit resolution process to determine if the city can substantiate its use of the HUD funds in question or if all or some of those expenditures will need to be repaid," wrote Ed Cabrera, a spokesman in HUD's San Francisco office, in an email.

City officials added Modesto has been working diligently on fixing the issues raised in the audit, which they attributed to, among other things, a restructuring of the city's HUD program, high turnover and vacancies among HUD program staff, and problems with the city's purchasing division.

Modesto went through several embarrassing months starting last fall when it began to reveal breakdowns in its purchasing practices, which led to the city buying about $16 million more in goods and services than what been authorized over a number of years.

In his June 7 letter to the Office of Inspector General in response to the audit, interim City Manager Joe Lopez wrote: "There are now newly developed process flows, new policies and procedures, and training that will continue on an ongoing basis. The City has done much in the past few months to gain higher performance standards."

Some of the audit's major findings include:

Modesto failed to support that the $993,880 it spent on four projects to rehabilitate multifamily rental properties met HUD requirements. Two of the projects involved housing owned by Stanislaus County Housing Authority, and the other two are owned by the Stanislaus County Affordable Housing Corp.

For instance, the audit states Modesto did not do its own independent cost estimates to determine whether the costs were reasonable and relied on the Housing Authority and STANCO for that. The audit states the two STANCO projects — which provide transitional housing — did not meet the national objective provided by the city, though it could qualify under another HUD objective.

The audit said Modesto put "HUD funds at risk" because it did not have written agreements for the four projects and made payments before the work was completed, which violates HUD requirements and city policy.

HUD in February 2017 notified Modesto and other jurisdictions that receive CDBG funding that it would start including another funding source in its calculations of when CDBG money had to be spent, according to Narayan, the city's acting community development manager.

She said that meant Modesto had roughly $900,000 more that it needed to spend by April.

"I think we wanted to show there was a huge need for these funds in the community, and we had shelf-ready projects," said Narayan about why she believes the city went forward with the projects. She was not overseeing the the city's HUD program at the time.

Housing Authority and STANCO officials said Modesto contacted them about using the money on their projects, and their agencies followed their own and HUD guidelines in carrying out their projects.

"The city approached the Housing Authority and said, 'We've got some money to spend and are facing a deadline to do so,' " Housing Authority Deputy Director Jim Kruse said.

STANCO Executive Director Steve Madison provided a similar account.

The audit also criticized Modesto for not following HUD's and its own requirements when it spent $173,508 on 10 homeowner rehabilitation projects.

The city was required to bid these projects for eight days but failed to do so, including putting four projects out to bid for one day. The audit noted the city awarded a $13,064 job to a contractor who failed to attend the mandatory walk through for the project.

The city also failed to get a sufficient number of bids.

Lopez wrote in his letter that the city is developing "steps that will ensure that all procurements are conducted in a manner that promotes full and open competition and avoids arbitrary actions in the procurement process."

The city also drew $592,266 from two different HUD funding sources for the same project costs. The city tried to fix this, but the audit noted it still had $257,737 left. Naryan said Modesto did not pay the same bills twice and is waiting for clarification from HUD to spend the $257,737 on other expenses.

The audit also found Modesto spent too much on administrative costs during the 2015-16 budget year for its housing rehabilitation program. "The City spent $186,480 on actual homeowner rehabilitation costs and $323,563 on delivery (administration) costs. "