Watchdog Report: HUD says Fresno has wasted millions

The Fresno BeeDecember 22, 2012 

A million bucks -- blown on a project that never got off the ground.

Nearly $200,000 for another project -- wasted, as well.

More than $5 million spent on code enforcement -- no justification for it.

These are just a few of the taxpayer-funded disasters made by the city of Fresno's housing division over the past three years, according to a federal investigation.

The 29-page report from the U.S. Department of Housing and Urban Development describes a richly funded office whose staff had limited grasp of the rules and got little oversight from City Hall's top management.

City officials say things aren't as bad as HUD's triennial report suggests. But, they admit, they're bad enough to spark a major shake-up in how City Hall does housing.

Claudia Cazares has resigned as manager of the Housing and Community Development Division and no longer is with the city.

The housing division now reports to Assistant City Manager Renena Smith instead of downtown revitalization czar Craig Scharton, who has moved to a new job as business development director in City Manager Mark Scott's office.

And just about every housing decision now gets close HUD scrutiny as the feds and City Hall work hand-in-hand to fix things.

Scott said he, as the city's chief operating officer, takes responsibility for the mess. He said the problem was caused in part by the need to prioritize during a financial crisis that cut a wide swath through the city's payroll, including the ranks of top management. He said he and Mayor Ashley Swearengin spent much of their energies over the past 30 months trying to keep the city out of bankruptcy court.

(Mark Scott's response letters to HUD)

But the big problem is an unfocused city housing policy that was allowed to just drift along, catching City Hall's attention here or there but always receding into the background when something seemingly more pressing came up.

"We've had objectives, but we set the objectives so broadly that they didn't really focus anything," said Scott, who doubles as the city's planning director. "We've brought a project in here, we've brought a project in there. But nobody could see what the overall objective of all this is."

Scharton said HUD auditors should have interviewed the HUD executives who routinely visited Fresno to praise the housing division for its good work in places like downtown's Lowell neighborhood.

"People trying to make change were patting us on the back," Scharton said.

City Council members were briefed a few months ago on the HUD report in closed session.

"Mark is overwhelmed -- there's no planning director and he's stretched real thin," said Council Member Lee Brand, the housing division's harshest critic for the past four years. "He doesn't have qualified people who can do the job. They make decisions on rah-rah, not facts and figures. This is the result."

The HUD report is a prime example of government gobbledygook.

Investigators "identified several administrative and program management issues which will be shared with you," Maria Cremer, the San Francisco-based director of HUD's Office of Community Planning and Development, wrote in an Aug. 17 cover letter to Scott.

That apparently is the extent of HUD's outrage -- at least in print.

The report itself, though, suggests a peeved federal agency.

HUD investigators were in Fresno for a week in late May. They dug into the city's handling of three sources of housing money: Community Development Block Grants, the Home Investment Partnership Program (called HOME funds) and the Neighborhood Stabilization Program.

Investigators made 14 findings and listed three concerns. They also identified causes, effects and corrective actions.

The Bastian Court project in downtown gives a good sense of what HUD investigators found.

Bastian Court was to be a five-story apartment complex with about 60 units for low- and moderate-income tenants on the northwest corner of Stanislaus and L streets. It had been in the works since late 2007, when Alan Autry was mayor. A San Francisco-based nonprofit and Cornerstone Church's foundation teamed up as developers.

The developers wanted help to jump-start the $14.7 million project. The City Council in October 2008, a few months before Swearengin took office, agreed to invest $2.1 million of the city's HOME funds -- federal money with federal strings but handled locally.

All the developers had to do was get their own money.

But the housing market at the time was cooling fast, in Fresno as well as nationally. The full effect of the Great Recession was just over the horizon, but a chill was in the air. Bastian Court's developers failed year after year to line up the financing.

City Hall wasted no time spending HOME funds. City officials said more than $400,000 was paid to Cornerstone for the half-acre at Stanislaus and L. Another $176,000 went to raze a building on the property. Nearly $400,000 was spent on lawyers, engineers and architects. All told, the city spent slightly more than $1 million of the $2.1 million earmarked for Bastian Court.

There were two big problems with City Hall's gung-ho attitude.

HUD wanted construction on Bastian Court to begin within a year once City Hall committed the HOME funds. That didn't happen.

And HUD couldn't figure out why City Hall actually spent $1 million of HOME funds on Bastian Court when developers consistently failed to line up their own money.

The city "erred in reimbursing developers for predevelopment costs prior to the (project) obtaining permanent financing," HUD wrote.

As city officials acknowledge, City Hall faced the "chicken or egg" dilemma. The developers perhaps had a better chance of getting their financing if they could say to lenders: Look -- Fresno has a million dollars in the game. Or, City Hall could wait until the bankers jumped first, safeguarding taxpayer money but maybe dooming a worthy project with undue caution.

City housing officials, despite HUD rules, decided taxpayers should bear the risk for putting life into the project.

Assistant City Manager Smith doesn't explain what went wrong at City Hall. She said only: "That's why we're revamping with HUD all of our procedures going forward. HUD is actually developing those procedures for us. That's something very positive that has come out of this."

Bottom line, according to the HUD report: "Repayment is now required."

And not just for Bastian Court. The city did the same thing on a more modest scale for a southeast Fresno project called the Transit Village. The tab for this failed project was $162,000.

The city must repay all of the nearly $1.2 million spent on the Bastian Court and Transit Village projects. The money will be deducted from future HOME fund grants.

That's not all. The city had committed, but not spent, another $4.5 million of HOME funds for these two failed projects. Since the money wasn't spent in time, it's now lost to Fresno unless city officials can convince HUD to give them a second chance.

As HUD wrote, the city's mismanagement "has reduced the amount of affordable housing resources that may have been available to City residents."

The HUD report goes on and on like this -- dry, jargon-filled language that does nothing to obscure a picture of City Hall housing policy in disarray.

More examples:

-- The city committed, but did not spend, more than $900,000 in HOME funds for the proposed Hotel Fresno residential/commercial project. The Southern California developer couldn't find additional financing and the 12-month HUD deadline to spend the money passed.

City housing staff "knew or should have known" the project had little chance of meeting the deadline, HUD investigators wrote.

The Hotel Fresno project was a priority last year for Swearengin's downtown revitalization plans. The administration isn't ruling it out for another round of HOME funds. But for now, Hotel Fresno is in deep hibernation as far as HUD money is concerned.

-- The city spent nearly $5.3 million of Community Development Block Grant funds on code enforcement salaries in 2010 and 2011. Enforcing city codes for livable housing is a good thing, HUD wrote. But, it added, the city did a bad job of itemizing how this money was spent. HUD also said the city would be wise to spend more of the money on programs designed to help low-income homeowners actually fix their houses.

City officials said this desire of HUD's is not expressed in threatening terms. But when the dispenser of HOME funds talks, they add, City Hall listens.

-- HUD couldn't figure out how the city monitors the Neighborhood Stabilization Program, which is designed to re-energize vulnerable neighborhoods by filling foreclosed houses with industrious new homeowners.

"Inadequate staff oversight, lack of adequate written agreements, and lack of adequate policies and procedures have led to confusion over how the City staff run the homeowner assistance program," HUD wrote.

-- In HUD-speak, an investigative team's "concern" is a tactful warning that City Hall is headed toward trouble.

The city got $3.55 million in 2011 from another round of Neighborhood Stabilization Program funds, called NSP3. It came with a string -- spend at least half by March 2013.

When HUD investigators came to town last May, the report stated, "the City of Fresno had expended none of its NSP3 allocation and does not have an approved plan in place" to do so.

The report didn't identify penalties for failure, but city officials got the message. Assistant City Manager Smith told the City Council on Nov. 29 about plans to spend $1.8 million of NSP3 funds.

"I'm glad you're in charge, Renena," Brand said.

Fixing 29 pages of trouble is a tall order for any city hall.

Scott said he and his staff are doing what they can while asking HUD to soften some of the proposed remedies. Scott said he initially feared the city would have to repay the $1.2 million for the Bastian Court and Transit Village mistakes from a budget already millions in the hole.

He said HUD has agreed to take the money out of future HOME grants.

City officials are trying to give HUD what it wants, be it reformed policies or better-trained staff or simply more paperwork.

For example, HUD investigators clearly were unhappy with how the city spent the CDBG millions on code enforcement. Prove the money wasn't wasted, HUD said, or send us $5.3 million.

City officials are busy gathering the written proof.

Asked if a chastened City Hall is changing the way it handles housing, Smith said with a rueful laugh: "You betcha."

Some City Hall observers say the housing challenge for City Hall runs deeper than the HUD woes.

There is a lot of taxpayer money in Fresno public housing. There are lots of players in the taxpayer-funded housing industry. It's unclear whether they're working together to maximize taxpayer investment.

Doug Vagim, a member of the Fresno Oversight Board that oversees the former Fresno Redevelopment Agency, said the housing division is only one source of City Hall influence on local public housing policy.

Vagim said the recent state-mandated demise of redevelopment agencies means a new City Hall entity called the Housing Successor Agency controls $18 million of former RDA housing money. The state Department of Finance, which is the Oversight Board's ultimate superior, is looking into whether City Hall even deserves the money, let alone whether it's being spent wisely and correctly, Vagim said.

City housing officials "are under the edict to spend money as fast as possible," Vagim said. "The checks and balances are out of control."

Then there is the Fresno Housing Authority, a quasi-government agency whose governing board is appointed by the mayor. Its charge is broader than City Hall's housing division. Rental assistance, for example, is among its tasks. But the Housing Authority also is a catalyst for quality shelter, such as its role in building the Renaissance at Santa Clara housing project for the homeless.

Housing Authority executive director Preston Prince said in recent years "there has been a lot of movement in aligning the priorities" between his agency, the city housing division and the former RDA. But, he adds, he doubts if the Housing Authority and the other two ever become more than friendly but distinctly separate allies.

His suggestion for the City Council and Swearengin administration: Hammer out a coherent housing policy -- then get the talent to produce results.

There's the rub, Scott said.

As HUD's report makes clear, federal housing programs are complex and labor-intensive. Smith, though, also oversees the budget division, perhaps the city's most important office in these days of budget gaps.

She's not alone. Assistant City Manager Bruce Rudd is the interim parks director. Scott's duties include overseeing the planning department. Beth Brown hadn't settled in as the city's new emergency director when Scott told her to negotiate a new deal with the Central California SPCA for animal control.

That's just the tip of the iceberg. City Hall is still looking for a new finance director, a new human resources director and a new airports director. Ken Hamm is expected to leave as chief of FAX next summer.

The housing division mess is another sign of the leadership challenge at a City Hall that has endured $100 million of budget cuts and a 25% payroll reduction over the last four years.

"I don't have a deep bench," Scott said of his top managers. "We're trying, but it's critically important that I have people capable of doing these jobs. And we don't have any money."

HUD's issues with City Hall

Some of the many:

-- Spent $1 million on downtown Fresno housing project that never got built

-- Spent $162,000 on southeast Fresno housing project -- ditto

-- Not enough paperwork to justify $5.3 million spent on code enforcement

-- Not enough spent on home repairs for the needy

-- Missed deadline to spend about $900,000 on Hotel Fresno

-- Hard to figure out who monitors the Neighborhood Stabilization Program

-- About $3.5 million for neighborhood stabilization sitting idle in the bank

The reporter can be reached at (559) 441-6272 or ghostetter@fresnobee.com.

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