In August 2024, we issued an audit report on the California Department of Housing and Community Development’s (HCD) fraud risk management practices, finding that HCD was not adequately prepared to prevent, detect, and respond to fraud due to the lack of focus it placed on fraud risks and establishing a robust fraud risk management framework for the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act funding for the Emergency Solutions Grant (ESG) program to prevent, detect, and respond to fraud (2024-LA-1001, issued August 2, 2024). Building on that work, we audited HCD’s ESG CARES Act program to determine whether improper payments existed.
HCD made improper payments in its ESG CARES Act program because it did not consistently follow HUD’s requirements. Specifically, HCD and its subrecipients did not, (1) determine whether 318 landlord incentives for holding fees, signing bonuses, and additional security deposits totaling $1.02 million were eligible, reasonable, and necessary; (2) properly draw risk mitigation expenses, which resulted in an overpayment of $6,549 to landlords and, therefore, called into question the remaining $185,731 of risk mitigation expenses as unsupported; and (3) properly determine the reasonableness of payments to a contractor that provided kitchen services totaling $96,561. We determined that these conditions occurred because HCD and its subrecipients believed their practices were in line with the flexibility HUD allowed for landlord incentives under the ESG CARES Act, and because these entities did not have policies and procedures for determining the types of landlord incentives that should be used and when to negotiate them. In addition, both HCD’s Emergency Solutions Grants Financial Management and Monitoring Policies and Procedures were silent on subrecipients’ monitoring responsibilities over sub-subrecipients and contractors. These results reduced the number of participants that could have been served by the program intended to reduce or mitigate homelessness and impacted on HCD’s ability to maintain program and payment integrity of the ESG CARES Act program. Although the ESG CARES Act program has concluded, HCD could make some of the same types of improper payments in the annual ESG program and other HUD-funded program it operates, since these programs allow expenses for similar activities.
We made recommendations in this report to address the control deficiencies identified within the ESG CARES Act program, as well as ensure the risk of the deficiencies occurring within the annual ESG program is mitigated. Specifically, we recommend that the Director of HUD’s San Francisco Office of Community Planning and Development instruct HCD to (1) repay HUD from non-federal funds for the ineligible landlord holding fees of $964,952 drawn from ESG CARES Act funds, (2) determine whether the $58,878 drawn for 18 signing bonuses from ESG CARES Act funds were reasonable under the program participant’s particular circumstances, and not more than necessary to house the program participants, or repay HUD from non-federal funds, (3) repay HUD from non-federal funds for the risk mitigation overpayments of $6,549 drawn from ESG CARES Act funds, (4) determine if the remaining risk mitigation expenses of $185,731 drawn from ESG CARES Act funds were reasonable and necessary in accordance with program requirements, or repay HUD from non-federal funds, (5) support the cost reasonableness of $96,561 drawn from ESG CARES Act funds for the kitchen services contractor, or repay HUD from non-federal funds, and (6) develop and implement additional written procedures and internal controls for the ESG program to ensure that it and its subrecipients do not charge holding fees, risk mitigation expenses, and that adequate ESG contracts are properly executed and maintained.
