Federal audit finds no fraud in Cedar Rapids flood buyout program

But city asked to justify money spent on administrators

April 1, 2014 | 2:33 am

City officials here say they are pleased that a federal audit of the city’s wide-ranging, $125 million-plus property buyout program found no fraud, though the audit is requiring the city to prove that $12 million in fees paid or to be paid to the disaster program’s private administrators are reasonable.

City Manager Jeff Pomeranz said Thursday that the “most critical statement” in the 14-page audit report by the U.S. Department of Housing and Urban Development’s Office of Inspector General is the first one under the heading “What We Found.”

“The city generally expended its CDBG (Community Development Block Grant) Disaster Recovery grant funds for property acquisition in accordance with applicable federal regulations,” the audit report’s first sentence states.

“So,” said Pomeranz, “you have a program, well over $100 million, and after all the work by the auditors, that’s their determination. What the community should feel good about is that the federal government is saying we’ve expended the recovery grant funds in accordance with federal regulations.”

The HUD inspector general’s report, though, takes the city to task on a few fronts, most notably for not ensuring that the city obtained “the best value” when it hired private firms to administer the buyout program, which is still continuing.

The HUD report, which was posted on the office’s website on Thursday afternoon, states that a citizen complaint to a HUD “hotline” alleging fraud in the Cedar Rapids buyout program was one of the reasons that the office conducted the audit.

“There is no fraud,” Mayor Ron Corbett emphasized in summing up the report.

The audit also was prompted by the size of the Cedar Rapids buyout program, the report states.

Casey Drew, the city’s finance director, said the federal audit of the buyout program in and of itself is not an indication of problems.

“This is such a large program, they’re going to audit it anyway,” Drew said.

The auditors’ central criticism faults the city for not ensuring the “reasonableness” of the costs paid to two private administrators handling the city’s contracts for portions of the buyout program, a program that is continuing.

Drew said this criticism comes, in part, because the city received just one proposal for the largest of the contracts when the program began in 2009. Other firms, he said, did not want to bid because of the complexity of administering a program that has now seen the buyout of more than 1,300 flood-damaged properties. Nearly 100 other properties closest to the river were bought out in a different program using funds from the Federal Emergency Management Agency.

The audit report recommends that HUD work with the state of Iowa to ensure that the city “justifies” more than $9.3 million in spending and $2.8 million in yet to be spent or reimbursed funds tied to the private contracts to administer the buyout program.

In the primary buyout contract, the report notes that the city sought proposals from 12 firms, though three of the 12 joined forces to submit the only proposal the city received. At that point, the city should have performed an independent cost analysis, the audit report states, to determine the reasonableness of the contract cost.

“We believe that the costs are reasonable, and we will continue to work with HUD on developing the justification for those contracts,” Drew said. “We just need to justify them, and we believe we will be able to.”

At this point, the federal government has not requested that the city return grant money and has not disallowed any of the program spending, Pomeranz and Drew said.

The federal audit report also states that the city did not adequately advertise for program bid proposals, a criticism which Drew said stemmed from the city decision to advertise on its website where it believed it would reach a larger pool of bidders even though the city’s procurement policy at the time stated that the city should advertise in the newspaper. The policy has since been changed, he said.

The audit report also criticizes the city for signing one contract before the City Council voted to approve it, which the council did six days later.

In addition, the audit report states that the city lacked “detailed operational procedures, including checklists,” to ensure it was following federal regulations.

“With any audit, there’s always going to be findings in most instances,” Drew said. “And I’ve always considered those findings to be recommendations about how to improve so you don’t have this happen again. And that’s how we’re treating these.”

Both Pomeranz and Drew pointed out that the city’s buyout program is large and complex, and Drew noted how complicated the administration of it became as the city, state and federal government tried to determine which pieces of an assortment of disaster programs for down payment assistance, interim mortgage assistance, emergency FEMA disaster grants and more would be deducted from buyout payments to avoid a duplications of benefits.

“With all this flood recovery, a lot of this stuff was done on the fly,” Drew said.

Pomeranz said there was no “rule book” to consult as the buyout program evolved.

“That doesn’t mean that the city’s work was perfect,” he said. “There was a tremendous amount of pressure and demands put on the city to administer this program. … The bottom line: After everything this community has gone through, particularly in the year or two after the flood when these programs began their administration, I’m pleased to see that the federal government is stating that the funds were expended in accordance with federal regulations.”

Drew said the HUD Office of Inspector General’s auditors were in and out of City Hal between March 19 and July 25 to conduct the buyout program audit. The review covered a period from October 2009 through February 2012 and involved the review of 12 buyout cases.

The audit report also notes that the auditors conducted an interview with the citizen who complained about the City Hall program via a HUD phone “hotline.” As a result of the interview, the audit report states that auditors also reviewed properties that had been bought out and then donated to two developers as part of a program allowed and approved by the state and federal government and intended to save a small group of the best flood-damaged homes rather than demolish them. More than a dozen developers and builders qualified for the disposition program.

The audit report made no mention of problems with the program or any developer mentioned by the unnamed complainant.

The city acknowledged that HUD’s Office of Inspector General was at City Hall in March to conduct an audit.

At the time, Mayor Corbett and City Council member Justin Shields both said that a committed cadre of City Hall critics spent time calling an assortment of federal and state government agencies to contend that city officials were misusing federal disaster dollars.

“The FBI, the CIA, the national defense people. Anybody with a phone number they’ve turned us in to,” Shields said then.

The audit made public Thursday is a second one from the HUD Office of Inspector General related to Cedar Rapids flood-disaster funding. A report released in March 2010 criticized the lack of documentation in the distribution of $10.35 million in forgivable loans to more than 300 Cedar Rapids businesses in a program administered by a local private company.

HUD and the state of Iowa since have resolved the issue in a process that required the state and city to recapture about $385,000 or 3.7 percent of the $10.35 million in questioned payments, Tina Hoffman, spokeswoman for the Iowa Economic Development Authority, said on Thursday.

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