city letter to hud over ori demand

OFFICE OF THE MAYORCITY AND COUNTY OF HONOLULU

530 SOUTH KING STREET, ROOPA 300 * HONOLULU, HAWAII 96813PLIONE: SOB) 768.d141 FAX: 808) 755-4232 • INTERNET: www.honoJu.u.gpv

KIRK CALDWELL

MANAc3a4GDEcToR

, .t GEORGETTE T DtMROFDEPUTY MAkAGING DIRECTOR

Julyl8,20l3 Ongiitt kndVIA HANTDE

4lIvccc4 tv’Mr. Mark A. Chandler. Director R cAIrC_tU. S. Department of Housing and Urban DevelopmentHonolulu Field Office — Region IX tt kr); 2—O k)ll32Bishop Street Suite 14003

4, i,sHonolulu, Hawaii 96813-4918

Dear Mr. Chandler:

Subject: On-Site Program MonitoringCommunity Development Block Grant Programpiil 11-25, 2011 andMay 2013 Follow-up

This responds to your June 3. 2013, letter addressed to Mayor Kirk Caidwell, transmitting theU. S. Department of Housing and Urban Development, Community Planning and Development’s(“RUB”), May 2013 Monitoring Report, which addressed open monitoring findings relating totwo subrecipients of the Community Development Block Grant (“CUEG”) program of the Cityand County of Honolulu (the “City”). The two subrecipients are ORI Anuenue Hale, Inc.(“ORIAB”), and its affiliate, Opportunities and Resources, Inc., formerly known asOpportunities for the Retarded, Inc. (“0111”), and the findings pertain to ORIAH’s AlohaGardens Project (the “Project” or “Aloha Gardens”). The Project consists of two facilities, theWellness Center and Camp Pineapple 808 (“Camp Pineapple”). Mayor Caldwell recusedhimself from this matter and asked that I respond to your letter.

We appreciate this opportunity to respond to HUD’s findings and concerns and your willingnessto consider our responses and proposals. As your June 3, 2013 letter (the “June 3 Letter”)acknowledges, the City has worked with ORIAH for the last two years in an attempt to increaseORIAI-I’s appropriate use of Aloha Gardens to ensure compliance with the CDBG nationalobjective of serving the elderly and developmentally disabled adults. Although we acknowledgeHUD’s position that there continue to be challenges regarding ORL&H’s compliance with HUD’sstandards, we believe that ORIA}I’s mission is commendable and that significant progress hasI Mayor CaIdwell was Managing Director from January 2, 2009. until July 21. 2010, when he becameActing Mayor, and was Acting Mayor until October 11,2010. Our review of the City personnel involvedin the process and decisions with regard to ORI’s loan conversion discussed below has disclosed that theresponsibilities within the Managing Director’s Office were divided between then-Managing DirectorCaidwell and then-Deputy Managing Director Tnrdi Saito; that the ORI loan conversion decision-makingprocess was assigned to DMD Saito; and that former Managing Director Caldwell was not involved in anyaspect of the decision to convert the ORI loan. Mayor Caldwell received a campaign contribution of$500.00 in September 2009 from an individual associated with ORI.

Mr. Mark A. Chandler, DirectorJuly 18, 2013Page2ofl5

been achieved. As examples, approximately 40 acres of land were acquired; a portion of that landwas graded; the infrastructure has been installed; the primary building has been constructed andfurnished; programs that serve the target groups have been established; and, in order to do all ofthis, ORIAI-I has raised several million dollars from sources other than the funds it receivedthrough the City’s CDBG program as well as garnered a large base of community support for itsprograms.

As will be described in more detail below, the City’s proposal for the future of Aloha Gardenscontemplates that the portion of the Project that is most compatible with I{UD’s nationalobjectives criteria remain a CDBG project; the remainder of the Project would be converted to aCity-managed project. The City also proposes reimbursing the CDBG program for funds that areattributable to the portions that will be converted to a City-managed project. However, the City’sproposals set forth in this letter are subject to: (1) the City reaching an acceptable agreement withORLM-l; and (2) securing City Council approval of the settlement in accordance with applicablelaws. The specifics of the City’s proposals are set forth below, along with the City’s responses tospecific findings and concerns raised.

BACKGROUND

ORIAII was founded in 1993 as a Hawaii non-member nonprofit corporation with a primarypurpose of improving the quality of economic and social participation of the elderly, disabledpersons, and persons of lower income. ORI was founded in 1980 as a Hawai’i member nonprofitcorporation with a primary purpose “[tjo promote the general welfare of and provide training forthe retarded persons living in the State of Hawaii.”

In the early 1980’s, ORI, in part with HUD funding obtained through the City, developed aresidential agricultural community in Wahiawa known as Helemano Plantation (“ReleinanoPlantation”) for developmentally disabled adults on the 5-acre site of the old HelemanoElementary School. Later, ORI developed (again in part with HUD funding obtained through theCity) a training center for residents of Helemano Plantation, which was opened also to otherdevelopmentally disabled individuals in the community.

While HUD’s on-site monitoring concerns both ORI and ORIAH and touches upon the HelemanoPlantation project, its primary focus is ORIAH’s Aloha Gardens Project.

In 1994, ORIAII first applied for CDBG funds to develop the expansion of Helemano Plantationto adjacent lands owned by Castle & Cooke. While ORIA.H, at one point, considered acquiringland in Kahuku for the Project, it ultimately acquired approximately 43 acres adjacent toHelemano Plantation (portion of TMK No. 6-4-3:003) front Castle & Cooke Properties, Inc., andDole Food Company, Inc., for the Project. Castle & Cooke donated 10 of those 43 acres andORIAH purchased the remainder using CDBG funds from the City.

The Project was originally conceived as being limited exclusively to the elderly anddevelopmentally disabled. The intent changed to include a focus on economic development,which required job creation in accordance with a set formula based on the total CDBG moniesdisbursed; part of the Project would be devoted to public facilities. Over time, the Projectreverted to the original intent.

The original Subrecipient Agreement between ORIAI1 and the City for CDBG funding for theProject was entered into on February 23, 2001, for $1.5 million to acquire a property near Kahuku

Mr. Mark A. Chandler, DirectorJuly 18, 2013 of 15

and owned by Campbell Estate for a social services facility. Over the next five years, throughApril 18, 2006, the Subrecipient Agreement was amended nine times as the scope of the projectchanged and more funds were allocated. With the final amendment, the total amount of CDBGfunding for the Project rose to $7,924,850.

ORIAH held a ceremonial ground-breaking for Aloha Gardens on November 12, 2002. Sevenyears later, a temporary Certificate of Occupancy for the Wellness Center issued on March 24,2009, and the Center opened later in 2009 or early 2010. The last Project invoice paid withCDBG funds was dated May 2006. The Camp Pineapple structures were constructed from 2006,and the City believes they were completed in2010. According to ORIAH, non-CDBG fundingand material in-kind support were relied upon to complete the Project.

Concerns about whether the Project was adequately meeting a CDBG national objective wereraised by HUD in its May 27, 2011, monitoring letter to then-Mayor Peter Carlisle (the “May2011 Letter”). See attached Exhibit 1 As a result, the City and ORIAH entered into aMemorandum of Understanding dated June 27, 2011 (Exlibit_bit2), which was reviewed andaccepted by HUD, and which was aimed at ORTAH increasing the utilization rates for the Project,both at the Wellness Center and at Camp Pineapple, and the City stepping up its monitoringactivities so as to bring the Project in compliance with its stated national objective. Since thattime, the City has regularly monitored ORIAM and has submitted to 1-JUD quarterly monitoringreports documenting efforts to increase utilization rates. Additional oversight efforts by the Cityis reflected, as an example, in the fact that the City’s Federal Grants Unit in the Department ofBudget and Fiscal Services (“BFS”), expressed its concerns in 2012 to the City’s Department ofPlanning and Permitting (“DPP”) about ORTAH’s request to DPP for a minor modification to aSpecial Use Permit (“SUP”) that would have had the effect of shifting developable landssurrounding the Weilness Center to ORIAH’s adjacent land that is not subject to CDBGrequirements. See attached Exhibit 3.

In the June 3 Letter, HUD restates in Finding 1 concerns originally raised in its May 2011 Letterand that apparently have not been closed by HUD. The June 3 Letter also raises a number of newissues not previously identified by HUD to the City, including in the May 2011 Letter. Forexample, HUD’s Finding 2 raises new questions as to whether contract payments for AlohaGardens included work that did not pertain to CDBG-eligibie activities or projects. HUD’sFinding 3 raises new questions about public services grants to ORIAII that pre-date the City’sfiscal year 2006. 1{UD’s Finding 6 raises for the first time a conflict of interest issue inconnection with the City’s CDBG Loan Conversion program, concerning which the City hasalready taken corrective action in response to earlier monitoring by HUD.

RESPONSES TO BUD’s Fu’wINcs AND CONCERNS

In the June 3 Letter, I{UD allowed the City 45 days to respond to the previous Findings that werenot closed by prior administrations and to the new Findings. The City has devoted significantresources to investigate the facts of the City’s three decades long relationship with ORI and

2 During this period of time, the CDBG grants were identified administratively and made through budgetordinances by the City Council. In 2003, HUD expressed concerns over possible conflicts of interest forCouncil members who were involved in CDBG finding decisions, as is more fully discussed in response toHUD Finding 6. In October 2006, Council adopted a resolution naming Council appointees to a selectioncommittee that would make recommendations to DCS on CDBG awards.


ORLkH in order to develop meaningful responses to all of the Findings and Concerns raised.Due to the long history, the changes in administration and the loss of historical knowledge, wehave relied on documents and spotty recollections of available witnesses. ORIAI-I has refused topermit the City to interview its past and present employees and officers and initially refused topermit the City to review its files and documents. Accordingly, the City is unable to concludeits internal review prior to HUD’s deadline for this response. Nevertheless, the City submits thisresponse, with a proposed resolution and corrective action plan for HIJD’s consideration

Hun Furni 1: NoN-CoMPLIANcE WITH A ORG NATIONAL OBJECTIVE

Under this finding, HUD notes that the purpose of the Wellness Center and Camp Pineapplefacilities was to serve elderly and developmentally disabled persons, which are presumed benefitcategories under the CDBG national objectives at 24 CFR 570.208(a)(2). HUB has concludedthat there is insufficient documentation or records to demonstrate program compliance with anational objective as required by 24 CFR 570.208 and 570.506. Additionally, HUB hasconcluded that the City will not enforce and take action to ensure CDBG program compliancewith regard to ORTAH’s CDBG assisted projects.

HUD’s Corrective Actions:

1. The City is advised to reimburse its CDBG program S7.924.850 with non-federal funds.

2. Until the funds are repaid to the CDBG program the City must record the $7,924,850payable to the CDBG program as an account payable in its accounting records fordisallowed program costs.

3. Upon receipt of the funds into the City’s local CDBG account, the City must revise theiBIS draws and cancel the Aloha Gardens activities. The funds shall be noted as a returnof grant funds and must be promptly reprogrammed for other CDBG-eligible activities.

sonse:

The City acknowledges FTIJD’s concerns regarding ORIAI-l’s compliance with CDBG nationalobjectives. The City further acknowledges that HUD’s concerns over this organization’s abiliwto run a viable program have been repeated over the years, through three prior Cityadministrations and now to this fourth current administration. The past efforts of prioradministrations to impress upon ORLkH the seriousness of noncompliance and the consequencesof failure to meet the national objectives have been largely unsuccessful. Accordingly, the City isnow faced with putting its entire CDBG program at risk for loss of funding that would benefitother worthy and compliant nonprofit organizations serving low and moderate income residents.

In part to address Finding 1, the City proposes reimbursement of approximately $1.88 million tothe CDBG program. A portion of that reimbursement includes fair value for the acquisition ofand CDBG-funded improvements to Camp Pineapple, with the intent to remove Camp Pineapplefrom the CDBG national objective requirements. The City is committed to working with ORIAJ-{in a focused effort to sustain national objective compliance for the Weilness Center and the

Attorneys for ORIAH permitted the City to briefly inspect some documents and have indicated awillingness to permit further inspection.


remaining Aloha Gardens land acquired with CDBG finds, including improved monitoring asoutlined in the City’s proposed Corrective Action Plan.

The remainder of the reimbursement addresses the eligible cost issues raised in Findings 2,3and 4. The City acknowledges that documentation from ORL&H for some payment requests wasunclear. To address HUD’s concerns about potentially ineligible costs in Finding 2, the Cityestimated a proportionate share of the development and construction costs for reimbursement.The City believes that the estimated share for reimbursement overstates the potentially ineligiblecosts but is willing to accept the additional amounts to resolve Finding 2. The cost issues inFindings 3 and 4. and related reimbursement, concerning ORIAH’s separate acquisition of thethree acre parcel used for entry to the Project site and for parking (the “Entry Lot”) are addressedin Finding 3.

REID FINifiNG 2: ACqUISITION AND CONSTRUCTION PAYMENTS

FRTD notes under this Finding that the City authorized $7,924,850 in CDBG payments for theProject. HUD concludes, however, that construction contract payments for the Project includedwork that did not pertain to CDBG-eligible activities/projects, that ORIAH used CDBG funds topay for costs not associated with the CDBG-eligible Aloha Gardens Project and that paymentrequests were not detailed enough to confirm the costs were attributable to the CDBG-eligibleProject. HUD finds that these costs should be disallowed.

FEUD’s Corrective Action:

Per FEUD, resolution of this Finding is subject to completion of the corrective action in Finding 1.

City Response:

The City does not dispute that a charge for $275 for vegetation control for a private property nearPearl Harbor should be disallowed and reimbursed, and points out that some of the items listed onTable 1 in the June 3 Letter are addressed in other parts of this letter. However, the bulk of theexpenses listed are net specific enough to address at this time. The City will address this Findingby implementing the proposal described in the City’s response to Finding I and reimbursing aconservatively proportionate share (overstates the potentially ineligible costs) of totaldevelopment and construction CDBG-funded expenditures.

fflJD FINDING 3: PROPERTY ACQUISITION — UNPERMITTED PARKING LOT

In the first sentence describing the “Condition” relating to this Finding, FEUD concludes that theCity authorized ORIAH to acquire with CDBG funds what the City’s DPP identified as an“illegal” three-acre parking lot adjacent to OREs Plantation Hale training facility (HelemanoPlantation) for mentally-challenged clients. HLTD finds that such use of $597,780 in CDBG fundsresulted in an overpayment and ineligible use of CDBG funds.HUD’ s Corrective Action:

Per FEUD, resolution of this finding is subject to the corrective action in Finding 1.

City Response:

There are two parts to this response.


First, the City believes that the document referred to in the first sentence describing the Conditionis an email dated April 22, 2003. from a staff person at the DPP addressed to other City personnelwith the subject line, “Prposed [sicj acquisition of additional lands adjacent to HelemanoPlantation for for [sic] ORI’s Aloha Gardens”. See attached Exhibit 4. Tn that email, the DPPstaff person says:

I recently learned that ORT was planning to acquire about 3+ acres locatedbetween Flelemano Plantation and Karn Hwy. for access as required by conditionof the SUP from Castle & Cooke (see attached aerial photo). However, thataccess area also has parking for Helemano Plantation that may have beenestablished illegally since the City Council Resolutions that covered HelemanoPlantation would not have included separate parking on Dole Plantation lands.Apparently, ORT made this arrangement for off-site parking on their own.

If the property is acquired for access then it “belongs” under the Aloha Gardensproject and should be included in the SUP/variance. However, that would bring itbeyond the 15-acre limit and an amendment to the SLP would require Land UseCommission approval.

The staff person then goes on to list three options.

The approximately 3 acres referenced in the email is the Entry Lot, which serves as the primaryaccess road into the Aloha Gardens site. Wiile there is surface parking on the Entry Lot, suchparking was constructed before Aloha Gardens was constructed, as shown in the aerialphotograph attached as Exhibit 5, and initially served as the parking area for the HelemanoSchool Site. The supposed “illegality” referred to in the email refers to the possibility that suchparking was not approved via the Hawaii Revised Statutes (“fiRS”) chapter 2OlG exemption thatpermitted the Helemano Plantation to be developed in the agricultural zoning district.

Even if the surface parking on the Entry Lot was not a part of the HRS chapter 201G exemption,the City intends to address this Finding through an agreement with ORIAF{ that addresses manyof the Findings and Concerns and, pursuant to which, ORIAH will undertake option 2 mentionedin the email, that is, “Modify the recently approved SUP to reconfigure the approved area toincorpoate [sici the access/parking so that there is no net increase. That will require processinganother SUP amendment and will take at least 3 months

Second, the City proposes to reimburse a portion of the CDBG funds that were used by ORIA}{to acquire the Entry Lot. The April 14, 2003 Summary Appraisal Report prepared by anindependent appraiser appraised the Entry Lot, having approximately 3.1 acres and AG- 1 zoning,at $650,000. Exhibit 6 at 8. The appraiser derived that value using the Direct MarketComparison approach. Id. at 5. For that approach, the appraiser reviewed five comparabletransactions. Id. at 6. Transactions No. 1-3 were AG-l (agricultural) zoned lots in a Waialuaagricultural subdivision. Id. Transaction No. 4 was an AG-2 (agricultural) zoned lot in Kahukuwith grandfathered commercial structures. Id. Transaction No. 5 was a B-i (commercial) zonedlot in Kunia purchased with plans to construct a shopping center. Id. The appraiser adjusted thevalues of the comparable transactions based on several factors, including location, access, lotsize, and zoning. Id. at 7. For zoning, the appraiser assumed that parking was a principalpermitted use of the Entry Lot. Id. As a consequence, for comparison to the other AG-i lots(Transactions No. 1-3), for which parking was not a principal pennitted use, the appraiser


increased the reported value of those transactions by 25% to reflect the assumed superior useavailable on the Entry Lot. Id. For Transaction No. 4, with its grandfathered commercial use, theappraiser deemed the value comparable and made no adjustments based on zoning. Id. Finally,because Transaction No. 5 was zoned for more general commercial use, the appraiser reduced thereported value of that transaction by 20% to reflect the inferior uses available on the Entry Lot.Id.

Assuming that the other adjustments for location, access, and lot size remain unchanged, thedifference between the appraised value for permitted uses of an AG-l zoned lot and an AG-Izoned lot with parking as a principal permitted use, is 25% of the value for the traditional AG-Izoned land. Based on the CDBG expenditure of $594,134.67 to acquire the Entry Lot, thedifference would be $118,826.94. The City further would note that direct market comparisonsbetween per acre value in the January 2003 appraisal of the 33 acre parcel to the per acre value inthe April 2003 summary appraisal of the 3 acre Entry Lot are not linear. As explained by theappraiser, larger undivided parcels are less marketable. Id. at 7 (“Adjustments for size were madebased on the concept that larger parcels, all other factors being equal, tend to command lower unitrate values.’). In this instance, the appraiser reduced the reported value of lots only 2 acres largerthan the 3 acre ORIAH parcel by as much as 13%. Id. The City proposes to reimburse theCDBG program $1 18,826.94—the increase in value resulting from parking as a principalpermitted use on the Entry Lot, according to the appraisal—to resolve concerns regarding theprincipal permitted use of the Entry Lot. This amount is included in the total amount proposed inresponse to Finding I above.

The Entry Lot provides a shared access that will continue to benefit ORT’s residential communityof developmentally disabled individuals at Helemano Plantation and ORTAH’s beneficiaries atthe Weliness Center, consistent with CDBG requirements.

I{TJD FINDING 4: PROPERTY ACQUISITION — COST REASONABLENESS

This Finding concludes that the City authorized a CDBG payment for a parking lot that was not aprincipal permitted use, failed to ensure the properly appraisal was based on permitted uses of thesite (agricultural), and permitted ORIAR to use CDBG funds to pay more than the fair-marketvalue for the acquired property.

MUD’ s Corrective Action:

Per MUD, resolution of this finding is subject to the corrective action in Finding I.

City Response:

The City acknowledges that it appears the surface parking on the Entry Lot was not a properlypermitted principal use at the time that the Entry Lot was purchased by ORIAIT. The Citysubmits however, that the land had been used as a parking lot for many years prior to ORIARspurchase and that the City advised ORIAH that an option to correct the deficiency would be toreconfigure the boundaries of its SUP to include the parking lot. The City also submits that, sincethe purchase of the Entry Lot, the City has properly enforced its zoning requirements whenORIAH has made requests that have raised questions regarding its compliance with MUDrequirements.

Mr. Mark A. Chandler, DirectorJuly 18, 2013Page8ofl5

As stated in the City’s response to Finding 3, the City will reimburse the CDBG programS 118,826 and will address this Finding through an agreement with ORIAIT pursuant to whichORIAH will request modification of the SUP to include the surface parking areas within theEntry Lot.

fflJD FINDING 5: PuBLIC SERVICE COSTS AND EXPENDITURES

HUD finds that, for certain public service subrecipient agreements with ORIAH prior to 2006, theCity’s records fail to demonstrate that payments to ORJAH were direct costs for implementing apublic service activity, resulting in ineligible or questionable CDBG program payments thatinclude, but are not limited to, grant research and management fees.

HUD’s Corrective Action:

HUD proposes that the City reimburse, with non-federal flmds, the CDBG program for S226,680or provide supporting documentation for the eligibility of the CDBG expenditures on the publicservices costs identified by ITUD as ineligible or questionable.

City Response:

The City has reviewed HUD’s listing of questionable and ineligible expenditures set forth in thisFinding.

The City notes that all of the questioned expenditures were under public service subrecipientagreements for years prior to 2007. None of these expenditures were mentioned in HUD’s May2011 Letter. Reimbursement should not be required for “questionable” expenditures undersubrecipient agreements closed out before June 3, 2009, as the four-year record retennon periodhas expired. 24 C.F.R. § 85.42 (as modified by 24 C.F.R. § 570.502(a)(16)). ORIARadministered five CDBG-funded public service grants from 2000 to 2006. The last subrecipientagreement closed no later than January 2007. See attached Exhibit 7. To the extent some recordsfor the grants were available, the review conducted by the Cit has not produced documents thatwould support the conclusion that these “questionable” expenditures were in fact ineligible.

With respect to the automobile expenses identified in HUD Finding 5 as “ineligible,” the City’sresearch indicates that these expenses were for vehicles used to transport ORJAH clients, and notfor ORIAII employee auto expenses. See attached Exhibits 8 and 9. Accordingly, theseexpenditures were CDBG-eligible.

With respect to the “ineligible” items for “Grant Research ($6,000) and “Administration”($20,000), those items are identified as proposed categories of expenditures in SubrecipientAgreement No F76820. The City does not have extensive records for Subrecipient AgreementNo. F76820 because the record retention period expired in 2005. Although ORIAH’s finalexpenditure report does not expressly charge for the ineligible categories, Exhibit 10, the Citywould agree to reimburse $26,000 to the CDBG program.


CUBG FINDING 6: LOAN FoRGwENss

HUD finds that the City made a decision to forgive ORI (an ORIAH affiliate) nearly $1.2million in CDBG loans when City employees, running for elected office, were directly involvedin approving, developing, or recommending the ORI CDBG loan forgiveness while receivingcampaign donations from representatives of or persons closely associated with representatives otORT or ORIAH (collectively referred to as the “0111 Representatives”). HUD finds that thefinancial relationship between ORI I ORIAH and City staff created a CDBG conflict of interestsituation.

HUD’s Corrective Action:

HUD proposes that:

1. The City immediately reinstate the ORI loans and interest due until it issues a publicnotice and complies with the 30-day comment period advising the public of the City’s OH loanforgiveness, including the total amount forgiven (loan and interest) and the situation involving theORlJCity conflict of interest.

2. The City provide NIJD with a copy of the public notice ‘and accounting entries reinstatingthe ORI CDBG loan and interest account payable addressing Corrective Action I above.

3. The City provide a copy of the City’s loan forgiveness policy to its subrecipients thatcurrently have an outstanding CDBG loan with the City and provide HUD with a copy of thesubrecipients’ written receipt of the policy.

Ciw Response:

There are two parts to this response.

1. The OH Loan Conversion. The City aclaaowledges that, until 2010, it was Citypolicy to deny requests to convert HUD-funded loans to grants. In 2009, however, the.City’sDepartment of Community Services (“UCS”) and the BFS began a dialogue concerning a changein City policy to permit loan conversion for CDBG and HOME loans that supported special needshousing or public facility projects. Although the December 20, 2009, memorandum from BFScited in the June 3 Letter (Exhibit 11) raises concerns about loan conversion and specificallyreferences OH; the November 13, 2009, memorandum from DCS (Exhibit 12) does not mentionOWl and includes a list of 17 loans potentially eligible for conversion. The DCS response to BFSon March 16, 2010 (Exhibit 13), explained that DCS had reviewed the eligible loans and selectedORI as a “pilot project;” DCS emphasized that the policy change only concemed a limited subsetof HUD-funded borrowers that typically relied on government subsides for operations and werenot self-supporting. Although the City interviewed individuals involved in the ORI loanconversion process and reviewed relevant documents, no withess or document explains why theCity selected OH as the pilot project for loan conversion or why a loan conversion policy wasnot written and publicly disseminated for comments before conversion of ORI’s loans.

4 While a technical distinction, the City notes that the loan was not ‘forgiven”; rather, the loan wasconvened to a grant.As far as we can determine, based on our review of the documents and the witiess interviews, theindividuals involved in the ORI loan conversion decision-making process (from the fall of 2009 through


As detailed in the City’s prior monitoring response dated May 7, 2012, the City’s LoanConversion Policy was previously the subject of public notice and comment. The Citynevertheless commits to taking the corrective actions outlined above for HUD Finding 6.

2. Campaign Contributions. Finding 6 also alleges a CDBG conflict of interestsituation arising from the receipt of campaign donations from ORI Representatives by Cityemployees who were running for elected office and were involved in approving, developing, orrecommending the OM CDBG loan conversion. In reviewing this matter, we do not agree that aCDBG conflict of interest exists in the absence of evidence that an individual received a directbenefit, such as would exist where the government official who participates in the decisionmaking relating to a subrecipient’s CDBG-funded project is also an employee or officer of thesubrecipient. Our review of the facts did not support a CDBG conflict of interest in this situation.

Our research disclosed many City officials and employees who received campaign contributionsover the years from ORI Representatives. A copy of our cursory research is attached for yourinformation as ExhibiLi4. While this list indicates that ORI Representatives contributed over$100,000 over the past 16 years to political campaigns, and while some may infer an attempt tounlawfully influence the political process, we have found no evidence of a quid pro quorelationship nor any direct benefit resulting from the loan conversions inuring to City officialswho participated in the decision that would constimte a conflict of interest.

If you are aware of any evidence of benefits received by any City employee or official other thancampaign contributions, we would appreciate receiving that evidence so that we may review it todetermine if there was a conflict requiring any action.

We note that federal and state laws protect the First Amendment rights of individuals to makepolitical contributions. While Congress may limit, regulate or condition the use of federal fundsthat it appropriates, the federal government is much more circumscribed in its efforts to restrictprivate, nongovernmental grantees or contractors, or persons affiliated with them, from usingtheir own private or non-federal resources to engage in political advocacy or to make campaigncontributions in state or local election contests. Serious First Amendment concerns are implicatedwhen the government places restrictions on private persons in the area of political advocacy, andthe courts have been careful and deferential to the rights of private parties in terms of theirfreedoms of association and expression. We have asked our Ethics Commission to investigatewhether any conflict of interest under the City’s ethics laws existed for those who receivedcampaign contributions and were involved in the decision making of the loan conversion.

The City notes that HLTD has previously raised conflict of interest issues in connection with theadministration of the CDBG program and approval of grants. Most notably, by letter datedNovember 25, 2003, addressed to Council Chair Donovan Dela Cruz (Exhibit 15), you advisedthe Chair of the possible occurrence of a conflipt of interest involving the Councilmembers duringthe City budget process for CDBG-assisted activities. You advised of the importance ofCouncilmembers’ understanding of the HIJD program regulations as the Council makes the finalfunding decisions for use of H1JD Community Planning and Development program monies,citing to 24 CFR 570.611. You concluded that, at a minimum, Councilmembers who receive

June 2010) were: (1) Mayor Hanneman, who indicated his general agreement with the decision; (2) TrudiSaito, then-Deputy Managing Director (“DM11’); (3) BFS Director Rix Maurer; (4) DCS Director DebbieMorikawa; (5) Ernie Martin (OSP Executive Director); and 6) Keith Ishida. a DCS division chief.


payment or who are members or an organization’s governing body should refrain from offeringfor consideration or voting on a funding measure for that organization.

Thereafter, on July 14, 2004, the City Council adopted Resolution 04-189. CDI, which urges theMayor to establish a review panel to make recommendations on CDBG funding of projects fornonprofits. The Resolution proposed a review panel consisting of 7 members, 3 appointed by theCouncil, 3 appointed by the Mayor, and the 7th member nominated by the Mayor and confirmedby the Council; members serve for 4-year terms and no member is to serve more than twoconsecutive terms.

This format for a review panel was not implemented by the City and an agreed upon format for areview committee was apparently not established until the City Council adoption ofResolution 06-316, FD 1, on October 25, 2006, to select members for the CDBG and HOMEproject selection committee for the fiscal year 2007-2008 CDBG and HOME projects. ThisResolution identifies the Council’s three appointees to the committee and recommends a fourthindividual to serve as the jointly selected member of the committee. This Resolution directed thata copy of the Resolution be transmitted to you; we trust you received a copy in good order. TheMayor identifies three members for the committee and agrees upon the joint member, thusestablishing a 7-member selection committee. This is the format currently in place andmost-recently effected with the adoption of Resolution 13-7, CD1, appointing the Council’s thieemembers and recommending a fourth member for CDBG and HOME projects for the fiscal year2013-2014, and providing also that a copy of the Resolution be transmitted to you. Again, wetrust you received a copy in good order.

1TTID CONCERN 1: FAILURE TO FoLLow U ON POSSIBLE PROGRAM VIOLATIONS

Under this Concern, HUD concludes that the City failed to meet its obligation to administer itsthe ORLA}I grant in accordance with Subpart J, Grant Administration [24 CFR 570.500 series),and Subpart K, Other Federal Requirements [24 CFR 570600 series], and related provisions,citing as examples that:

During the period 2004 through 2011 the City failed to address a possible violation ofthe anti-kickback {provisions]of the CDBG program, arising from a September 22, 2004letter from ORI documenting that it had negotiated a $90,000 payment from thecontractor in exchange for a $5.3 million CDBG.

• The City failed to enforce against ORIAH certain Special Use Permit (SUP)limitations relating to a parking lot parcel acquired for the Aloha Gardens Project andfailed to follow a DPP recommendation that the parking lot be eliminated.

• Tn 2004 and 2007, the City reviewed ORIAI4 but failed to identify any noncomplianceissues.

HUD Corrective Action:

ThJD proposes that:

I. The City ensure proper authorities are reviewing the possible kickback situation.

2. The City train current City officials, staff, and management, including but not

Mr. Mark A. Chandler. DirectorJuly 18, 2013 of 15

limited to, individuals that have and had a direct role in the oversight of the ON AlohaGardens project on the Copeland “Anti-Kickback” Act 18 Usc 874.

3. The City establish a system that will ensure subrecipient compliance with HLTDprogram requirements, as measured through a decrease in non-compliance HUD programfindings for the City and its subrecipients.

Ciw Responses:

Athough HUD poses this matter as a “Concern” rather than a “Finding,” we have spentconsiderable time investigating the history of the City’s relationship with ORLAH and its relatedorganizations. The evidence of political contributions to City officials as well as state and federalcandidates or elected officials is clear. We have found evidence of inquiries by City Councilmembers on behalf of ORIAIT, but such inquiries on behalf of constituents are routine actions byCouncil members — and on its face, completely proper. There is anecdotal evidence indicatingthat ON Representatives have the ear of and support from elected officials. Our internal reviewshowed management inconsistencies, which could promote an environment where externalinfluence could be exerted. some of this can be explained by the history of the creation of DCS.Other explanations are attributed to the budget cuts and restrictions that forced more work onfewer staff.

However, two facts contribute to the oversight challenges of the Project:

First, the Project was managed by the DC5 Office of Special Projects (“OSP”), and not by theCommunity Based Development Division (“CBDD”). CBDD has more expertise in managingconstruction projects and a process for documenting work progress and is typically responsiblefor the CDBG-funded construction projects.

Second, after construction was completed on the Project, there was a breakdown between DCSand BFS with regard to which department and person(s) were responsible for monitoringcompliance with the CDBG national objectives post-construction. Part of the explanation of thisbreakdown is the fact that, while construction may have been completed for the Weilness Centerin 2009, the Federal Grants Unit of BFS did not take over post-development CDBG compliancemonitoring until 2011.

Regardless of the reasons, we have chosen to make a fresh start by reorganizing DCS so that thereis one unit responsible for grants rather than two, as in the past. In addition, we havestrengthened our interagency protocols to hold both DCS and BFS jointly responsible for certainaspects of program management. These organizational changes provide both check and balancein project management as well as coverage when staffing changes affect monitoringresponsibilities.

1. Regarding the first Conective Action, the City notes, as HUT) has noted, that the City didtake action in 2012 by refen-ing the alleged kickback situation to the attention of the office of theUnited States Attorney (“USAO”), after the matter was brought to the City’s attention byHUD.USAO has confinned receipt of the September 22, 2004, letter. Most recently, as a resultof the City’s present internal review, on July 16, 2013, the City provided to the USAO a copy of aSeptember 21, 2004, letter from ORIAH to its contractor relating to the matter. This letter wasprovided to the City by counsel for ORIAH. Copies of both letters are attached as Exhibits 16and 17.


2. Regarding the second Corrective Action, the email reflecting the advice of DPP and theCity’s response are referred to in detail in the City’s response to Finding 3.

3. Regarding the third Corrective Action, the City’s proposal to take steps to strengthenoverall CDBG program compliance by subrecipients is set forth in more detail in the proposedCorrective Action Plan attached to this letter as Exhibit 18. The City believes that the actionsproposed will enhance the City’s ability to identify compliance with CDBG-requirements bysubrecipients and to promptly address any concerns.

HUD CONCERN 2: RECORDS MISSING AND WITHHELD

During follow up monitoring in the last two years, WJD has found that the City was initiallyunable to produce the entire Aloha Gardens Project files and that, when produced, the recordswere incomplete. In addition, HUT) states that the City withheld certain documents from itclaiming “attorney-client privilege.” HUT) states that the City’s claim of attorney-client privilegeconflicts with CDBG program regulations.

HUT) Corrective Action:

HUT) proposes that:

I. The City notify all subrecipients in writing of the subrecipients’ obligation to provideHUT) access to their records and failure to do so is a violation of program regulations that couldresult in disallowance of the subrecipients HUD funds.

2. The City provide HUD with a listing of the subrecipients notified and copies of thenotices provided to the subrecipients.

3. The City establish a centralized records system for documenting all grants managementactivity. Until the City establishes a centralized records system, the City needs to maintain alldocuments generated for a HUT) Annual Action Plan Activity (CDBG, HOME, HOPWA andESG), regardless of the City division creating the document, within the department responsiblefor developing and submitting the City’s Annual Action Plan (currently Budget and FiscalServices).

City Response:

The City acknowledges that it initially was unable to locate all DCS project files requested byHull The City notes that the request was made orally to an acting DCS Division Head andafforded the City only a few hours in which to locate files requested by BUD and to review thosefiles so that the originals could be delivered to HUD’s offices. The City continued its search forfiles afler HUD’s initial request and supplemented its response as files were located and becameavailable for review.

The City notes that only three documents and two email streams were withheld pursuant to theattorney-client privilege. Copies of privilege logs that describe those documents and emailstreams were previously provided to HUD are attached hereto as Exhibits 19 and 20. Apart fromthis limited number of attorney-client privileged documents, the City produced or made availablefor production its DCS project files for review and copying by HUD. At the request of the HlJTJ


Director, the City’s BFS Director set aside for HUD’s review certain BFS files; however. HUDhas not asked to review such files.

Regarding RUD’s expressed concern as it relates to the City’s assertion of attorney-clientprivilege with respect to the limited number of docurnents, the City must respectfully disagreewith HUD’s position, which we interpret as being that the attorney-client privilege does not existin the context of CDBG monitoring by HUD. In our view, the attorney-client privilege is abedrock principle of the American legal system, regardless of whether asserted in the CDBGmonitoring context.

While the City believes that it is important to assert the privilege when applicable andappropriate, we note that efforts were made by DCS to accommodate HUD’s desire for access toprivileged documents by (1) stating that a general waiver of the attorney-client privilege was notintended by the effort, and (2) authorizing the City’s Department of the Corporation Counsel toproduce the privileged documents upon HUD’s agreement that the production would be for thelimited purpose of HLTD’s monitoring and that such production would not constitute such ageneral waiver of the privilege. This offer was made twice to the HUD Director in 2012, but theCity has not received any response. The City hereby renews that offer.

Having said all this, the City agrees to undertake the above Corrective Actions in connection withthis Concern. The City’s proposed efforts regarding establishment of a centralized records systemare set forth in more detail in the proposed Corrective Action Plan.

CONCLUDING REMARKS

The City would like to express its appreciation for the time and effort made by HUD in ensuringthat its grantees are aware of and implement the requirements of the CDBG program. We believeHIJD’s letters, and the City’s responses, reflect our mutual desire to serve in the best interests ofthe people of the City and County of Honolulu.

After the submission of this letter, the City intends to confer immediately with ORIAH and itscounsel to seek its agreement on corrective actions for certain Findings. We look forward toworking further with you on the matters mentioned in this letter.

Should you have any questions or require additional information, please contact CorporationCounsel Donna Y. L. Leong.

Aloha,

EMBER LEE SHINNManathng Director

Attachments

cc

Department of Budget and Fiscal Services, Attn.: Director Nelson Koyanagi


Department of Community Services, Attn.: Director Pam Witty-OaklandDepartment of Corporation Counsel, Attn.: Corporation Counsel Donna V. L. LeongMark Bennett, Esq., Counsel for ORI Anuenue Hale, Inc.

city letter to hud over ori demand

Documents

managing director caldwell

mayor caldwell recusedhimself

managing directors office

mayor kirk caidwell

thenmanaging directorcaidwell

director tnrdi saito

camp pineapple

open monitoring findings