The federal audit criticizing the city’s use of Community Development Block Grant (CDBG) funding sets off multiple alarm bells that signal the crucial need for reforms in the way such funds are spent and overseen.
At issue, according to investigators for the U.S. Department of Housing and Urban Development, are $15.9 million in expenditures it finds questionable; repayment could be required. The money includes funds used for the acquisition of the Hibiscus Hill apartment complex in Waipahu and the Kaneohe Elderly Apartments, projects intended to boost the city’s inventory of affordable rentals.
What HUD officials raise goes beyond mere technicalities: They raise administrative shortcomings that result in inefficiencies and waste.
The city addressed the complaints in a lengthy response that mitigated some of the critique. For example, HUD’s position in its Aug. 26 report is that the city failed to support its property acquisitions as necessary.
That seems easy to remedy. In a city this far short of affordable rentals, and in a market as tilted toward condominium conversion as Oahu’s, the city makes a credible defense for the acquisition of properties.
But in the end, the projects have not yet yielded the apartment units that are sorely needed in an efficient and timely manner. That is a real problem that must be fixed through a streamlining of the way the grants are administered.
The CDBG gramt program, now in its fifth decade, enables governments to apply federal funding to a range of specific local needs. The report criticized the city for “a decentralized grant administration process (that) created dysfunction, inefficiency and wasted grant funds.”
Among the strongest recommendations in the audit was the proposal that CDBG administration be consolidated into a single department. That makes more sense than the status quo, in which projects bounce between two offices — Community Services, and Budget and Fiscal Services — handling different facets.
Here are a few of the bullet points from the audit:
>> Among the more serious demerits, HUD noted concerns about procurement procedures. In one case, the city allowed one of its grantees, Hunt Companies Inc., to give a contract to one of its affiliates.
“The city did not have adequate policies and procedures in place to ensure that a potential conflict of interest did not affect the integrity of the procurement process,” the report said.
The audit cited another instance in which the city arbitrarily amended two requests for bids to expedite the process in order to meet its deadlines for spending the federal funds.
>> The city used a “subjective” and hurried alternative selection process in finding the company to handle the $21 million purchase of Hibiscus Hill, a newly formed entity called A‘ohe Pukana La Housing LLC.
>> Insufficient funds for the rehabilitation of the 80 units were set aside — $1 million — and implementation bogged down. Only $146,626 was spent, and only eight of the units were renovated.
>> The $21 million purchase price was $4.27 million above the property’s recently appraised value.
>> The Kaneohe project was subject to financing requirements that would keep affordability requirements in place until 2028, which made the acquisition by the city less than urgent.
In a 57-page response, Nelson Koyanagi Jr. and Gary Nakata, respectively the budget/fiscal services director and the community services director, said it was not required for the lapse of affordability terms to be imminent in order for the Kaneohe purchase to meet requirements.
City officials also said the appraiser concurred with them that the drive to secure the Hibiscus property in a hot market was a rational basis for paying more than $4 million above appraisal.
That’s not persuasive, given that the high demand in Honolulu’s real estate market already should be built into the appraised value.
The city also countered the conflict charge by asserting that the connection between the two Hunt entities happened after the contract award. But the federal authorities are right that having procedures in place to safeguard against such conflicts is essential.
Officials acknowledged that it was under deadline pressure in its selection processes, but defended them as thorough.
“Attention to timeliness should not impugn the legitimacy or validity of the city’s selection process, the selected projects, or the city’s motives,” Koyanagi and Nakata wrote in the response.
That kind of defensive posture should give way to what’s really needed now: a course correction. The City Council should conduct its own review of the audit and insist that the administration reorganize the way its housing grants are handled.
There’s too much work to be done in overcoming Oahu’s affordable housing shortage to allow for this kind of sloppiness. A single agency managing complex federal grant requirements would be better positioned to provide the clear procedures and accountability that’s needed.
