Wednesday, July 30, 2008 | For months, federal auditors have been camped out at City Hall poring through documents in an attempt to establish whether tens of millions of dollars in federal grants were actually spent on the purpose they were destined for: removing blight from San Diego’s poorest neighborhoods.

Auditors from the Office of the Inspector General of the Department of Housing and Urban Development have recently honed in on 35 loans made by the city to redevelopment projects under the federal Community Development Block Grant program, a fund set up in the 1970s to provide grants for low- and moderate-income communities around the country.

The auditors want to know whether the money was really spent on projects that are eligible under guidelines laid out for the CDBG program. The city has admitted that it did not properly document more than $10 million in CDBG loans it made between 1999 and 2006, and the City Attorney’s Office has estimated that in total the city made CDBG loans worth between $150 million and $200 million that were not documented correctly.

Joan Hobbs, regional inspector general with HUD in Los Angeles who is overseeing the audit, said she can’t comment on San Diego’s issues until her inspectors have finished their investigation. But Hobbs said that generally, if a city’s officials can’t prove that their CDBG money was spent on eligible projects, the city can ultimately be forced to pay back the money to the federal government.

Jay Goldstone, the city’s chief operating officer, said the audit is just one of the elements of San Diego’s CDBG program that are being investigated by HUD. He said the problems the auditors are looking at predate the administration of Mayor Jerry Sanders.

“There were a lot of sloppy procedures in this city prior to us arriving, to the extent that we’re still discovering some of them,” Goldstone said.

Every year, San Diego is awarded a chunk of HUD funding via the CDBG program. The money, which is supposed to be spent on alleviating blight and benefiting low- and moderate-income residents by building projects like affordable housing developments in needy communities, is awarded to thousands of cities and counties around the country.

In San Diego, much of the CDBG money is given to either the city’s Redevelopment Agency, the Southeastern Economic Development Corp. or the Centre City Development Corp., agencies which are tasked with alleviating blight in the city. Each year, the agencies apply to the City Council for funding and the council allocates CDBG money for eligible projects.

But, rather than simply doling out the money in grants, for many years San Diego instead loaned the money to the redevelopment agencies. The agencies then paid back the loans to the city as they received tax increment income from their respective redevelopment areas.

What has caught the eye of federal auditors is that, for many years, after the initial CDBG loans were paid back to the city, the city then immediately re-loaned the money straight back to the redevelopment agencies.

Under CDBG rules, any money used to pay back CDBG loans must, in turn, again be recycled and spent on CDBG-eligible projects. So, when the redevelopment agencies repaid the CDBG loans and the city issued them new loans, the new loans should have only been spent on CDBG-eligible programs and should have been spent according to the CDBG guidelines.

The federal auditors want to know how the city ensured that happened.

As of June 11, the city didn’t have an answer.

That day, in a letter to the auditors, Scott Kessler, a city official who works on the CDBG program, admitted that much of the documentation requested by the auditors simply does not exist. The auditors had asked the city to provide the initial applications for the CDBG loans and the CDBG monitoring reports for the loans. The city couldn’t find them.

Goldstone confirmed that little of the necessary documentation appears to exist. He said for several years — he’s not sure how long — city officials did not properly document the loans and re-loans and therefore cannot prove to the auditors that the loans were spent on eligible projects.

Without the paperwork, the federal auditors have been left trying to confirm that the CDBG loans were actually spent on eligible projects, or whether the loaning and re-loaning of the money allowed the city to bypass restrictions on how to spend the federal money.

Brian Sullivan, a spokesman for HUD in Washington, D.C., said any scheme that is used by a city to skirt CDBG would be troublesome for the federal government.

“If that’s the case, then that’s a problem,” Sullivan said.

City Attorney Mike Aguirre, who has himself been investigating the city’s CDBG program, said the loaning and re-loaning of the CDBG funds could also violate state law, which prohibits governments from transferring redevelopment funds from one project to another or from one redevelopment agency to another.

“The auditors are attempting to establish whether the loaning and re-loaning of the CDBG money effectively washed the funds so that they could be used by the redevelopment agencies on whatever projects they wished, regardless of the federal guidelines,” Aguirre said.

“I hope that’s not the case,” he said.

Aguirre said his office is currently interviewing past and former city officials who worked on the administration of the CDBG funds. He said everyone in the city is working hard to meet the needs of the federal auditors.

Hobbs said the audit is likely to be completed before year’s end. Earlier this year, city officials pledged to reorganize San Diego’s CDBG program after auditors revealed several other flaws in the city’s process for administering the grants.

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