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Monday, Jan. 5, 2009 | The city of San Diego’s chief operating officer, Jay Goldstone, said the city won’t challenge the findings of a potentially damaging federal audit released Monday, but he did take issue with a key conclusion and said the city could negotiate the audit’s recommended punishments.

The audit found nearly $13 million in questionable spending of urban revitalization grants from 2000 to 2007. It calls for the immediate repayment of $1.8 million to the U.S. Department of Housing and Urban Development and for the city to justify the expenditure of another $11 million, which could ultimately have to be returned.

The audit also alleges that the city lent the money to its redevelopment agencies in order to create the debt for them to exist under state law but didn’t seek loan payments. In order to collect the extra tax funds that can be captured by creating a redevelopment area, the government agency overseeing it must carry debt.

Goldstone said that with the exception of the $1.8 million finding the rest of funds appear to have been spent properly and that the problems highlighted by HUD were largely “paperwork” issues.

“I don’t think we’re going to challenge the findings because we don’t have supporting documentation but we will sit down with HUD to begin discussions with them over how to resolve these findings which may or may not involve” the $1.8 million figure, he said.

Still, the possibility of having to fork over fines for alleged misdeeds especially smarts for a city struggling to scrounge up $200,000 a year to maintain fire pits at the beach or ensure that skateboarders at city skate parks wear helmets. The audit also adds another layer of criticism to the arrangements between the city and its nonprofit redevelopment agencies, which were the subject of scandal last summer.

As a whole, the audit said the city failed to properly administer federal funds in the 35 projects it evaluated over the seven-year timeframe. The city’s failure to properly document its redevelopment agencies’ use of the money made it impossible to verify whether the money had been spent as it was intended.

HUD’s Community Development Block Grants are supposed to be used to build viable urban neighborhoods and specifically aid economic opportunities for low- and moderate-income residents.

However, the city’s administration of the money allowed its redevelopment agencies “to spend CDBG funds at will, while not following HUD requirements.”

For example, projects overseen by the city’s Southeastern Economic Development Corp. used $144,993 for acquisition needs when the money was to be spent on planning and another $67,002 on administration costs, which isn’t allowed.

In total, HUD questions all of SEDC’s $5.1 million in spending in what’s know as the Central Imperial redevelopment area, saying that CDBG funds must be used on primarily residential neighborhoods. The neighborhood, HUD asserts, is only 32 percent residential.

Brian Trotier, the SEDC’s interim president, said the city was challenging that assertion and believed Central Imperial to be majority residential.

The audit’s author, Joan S. Hobbs, was unavailable for comment. A message at her office said she was out until Jan. 12 and her replacement couldn’t be reached as of deadline.

The audit alleges that the city gave the grants to its redevelopment agencies as a loan and rarely collected on the loans as a way to allow the agency to build up enough debt to allow the redevelopment areas exist.

“As a result, the City recorded a large amount of continually increasing debt owed to the CDBG program that might not be returned, while receiving a substantial monetary benefit not subject to CDBG requirements,” the audit states.

Goldstone said city staff took issue with that characterization. He said the city planned on collecting the debt, and its interest, at the end of the redevelopment agencies’ lives. SEDC and its sister agency, the Centre City Development Corp., both had enough debt to exist already, Goldstone said.

“It wasn’t like we knew they wouldn’t be paid back,” he said.

The city will petition HUD to allow it to continue with the postponed repayment of debt, Goldstone said. It will also work to demonstrate that it has already made reforms in the CDBG process under Mayor Jerry Sanders, such as suspending the lending program, putting floors on the amount of funds individual organizations can get from the city in CDBG funds and enacting better internal controls.

“There is $13 million at risk but we will have discussions with HUD. They have discretion (regarding how much money to seek from the city),” Goldstone said. “A lot will hinge on their understanding of the things we’ve put into place.”

Please contact Andrew Donohue directly at andrew.donohue@voiceofsandiego.org with your thoughts, ideas, personal stories or tips. Or set the tone of the debate with a letter to the editor.

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