Top state official says state has addressed tough-sounding HUD audit report

CEDAR RAPIDS - The “hope” is that some 300 Cedar Rapids companies that received $10.35 million in federal forgivable loans through the state Jumpstart Small Business Assistance Program will not need to return money as a result of a federal audit report questioning the program's spending.

“We hope, if not expect, that they are going to bless the Iowa amended plan,” Bret Mills, the new director of the Iowa Department of Economic Development, said late Friday afternoon.

Mills was reacting to a federal audit report by the Inspector General's Office of the Department of Housing and Urban Development, released this week, which states that $10.53 million in disaster payments to Cedar Rapids small businesses were made without required supporting documentation, without appropriate checks for other benefits that might have been paid for the same thing and without proper monitoring from the state of Iowa.

Mills said he was “disappointed” that the HUD audit report said IDED had “misspent” funds when the state agency had been working with the HUD auditors for some weeks over what he called “three words inadvertently” placed in Iowa's own administrative rules related to disaster benefits.

The central problem identified by the HUD auditors is that IDED allowed the city of Cedar Rapids to make HUD grants to small businesses if the businesses had secured approval for a disaster loan from a lender, even though Iowa's own administrative rule required that a business actually obtain the disaster loan before it could qualify for a HUD grant in the program. Securing a disaster loan from an eligible lender, the idea was, serves as a measure of proof that a business will be viable and so is deserving of a HUD grant.

IDED's Mills said IDED identified what he called a wording problem last October, and subsequently changed its rule so a loan approval was sufficient to qualify for the HUD funds. On Feb. 5, an official in HUD's Division of Disaster Recovery & Special Issues approved what it called IDED's “technical modification” of its own rules, Mills said.

However, HUD officials now must review the agency inspector general's report and make a final determination, he said.

“Again, we are cautiously optimistic that this issue has been successfully addressed,” Mills said. “We are working very, very closely with our counterparts at HUD to provide them everything that they are requesting.”

The HUD audit report, dated March 10, focused on 406 grants of HUD Community Development Block Grant funds awarded to Cedar Rapids small businesses through the state of Iowa's Jumpstart Business Assistance Program. The forgivable loans of up to $50,000, which HUD calls grants, were provided to the city of Cedar Rapids, which contracted with the Cedar Rapids Area Chamber of Commerce to oversee the program. Theresa Bornbach, president of Transitions Made Better Inc., ran the program for the Chamber of Commerce.

Of the grants, HUD auditors state that 305 of 406 businesses received Jumpstart funds without having secured the required loan and all 406 did not undergo checks for “duplication of benefits” to make sure they did not receive money from other programs or sources that would disqualify them for a HUD grant.

Of the 406, only 18 files have been pulled for further local review, Mills said.

In addition to the issue of loan approvals versus actual loans, the Inspector General's report also found:

In at least six cases, loan approvals used to qualify for HUD funds were less than certain or not in writing. In one instance, two related entities each received $50,000 HUD grants based on the same loan documentation.

In addition, two businesses that incorporated after the June 2008 flood received grants.

In five instances, HUD grants were provided to businesses based on mortgage documentation, not disaster loan documentation, which is contrary to requirements.

More generally, the Inspector General's report criticized IDED for failing to perform on-site monitoring of the Jumpstart business assistance program, a charge to which the report says IDED has admitted and is taking steps to correct.

Bornbach, the local project administrator, said she has electronically forwarded paperwork related to all 406 HUD grants to the Small Business Administration to see if any businesses have an issue with duplication of benefits. Both she and IDED's Mills doubted any would.

Bornbach - who said she, the city and IDED have been working with the HUD auditors on the issues cited in the report for some time - said the few businesses who inadvertently received more than they should now have returned the money.

Cedar Rapids Mayor Ron Corbett and City Manager Prosser on Friday took the audit in stride.

“It's a big undertaking, a lot of money is coming in,” Corbett said. “So this probably won't be the only audit that comes back with some issues. Some may be minor, some may be a little more intense.

“But in all cases we're going to work with the federal and state government to make sure we're following all the rules.”

Prosser called the findings in the Inspector General's report “glitches” in a “complicated” federal Community Development Block Grant program never designed for disaster relief.

“I'll just warn you, you're going to see more of this stuff,” Prosser said.

He noted that one of the complaints after the Hurricane Katrina disaster in 2005 was the lack of care and oversight in the spending of federal disaster dollars. As a result, the federal government has taken steps to increase oversight.

“You have a real strong desire to make sure there is accountability for how these moneys are going to be spent,” Prosser said. “We've forecast that from the beginning.”

The HUD audit report surfaced in Cedar Rapids in the same week the City Council passed a hold-the-line-on-taxes budget.

During budget discussions leading up to the vote this week, Prosser uncharacteristically pleaded with the budget-cutting City Council majority to, if nothing else, fund up to seven additional positions in the city's Finance Department.

The June 2008 flood and the city's ongoing flood recovery, he said, were sending substantial federal dollars through the city's Finance Department with a staff designed to handle the typical $350-million city budget, not the $700-million one that now confronts the city, Prosser argued.

The council agreed to set aside $400,000 in additional spending for new financial employees.

“We've doubled our financial transactions,” Prosser said. “And the transactions are not only more complex, but they are not-traditional. We don't normally run disaster- and business-recovery programs.”