US Treasury investigation recommended for 1602
Among the three recommendations outlined in a draft report on the federally funded Section 1602 low income housing program is for the grantor, which is the U.S. Treasury Department, to further investigate and review the program, which is administered locally by the Development Bank of American Samoa.
The draft report, revised on July 11, 2012 was prepared by the American Samoa Economic Stimulus and Recovery Office (ASESRO) 1602 Compliance Staff for ASESRO executive director Pat Galeai.
In response to Samoa News stories on the draft report, Galeai said in a press release reported in last Friday’s issue, “We wish to emphasize first of all that a draft report is a draft report for a reason. We also want to make clear that some of the allegations contained in the newspaper report were flagged for removal from the subsequent draft precisely because no substantiation was available.” He did not say which allegations were ‘flagged for removal’.
According to the draft report, obtained by Samoa News, the Compliance staff said it reviews the Low Income Housing Tax Credit (LIHTC) Section 1602 program, which provides federal funds under the American Recovery and Reinvestment Act (ARRA) provision to finance construction or acquisition and rehabilitation of a qualified low-income building or unit.
The draft report is in ‘narrative’ form, and is an ‘ongoing’ report, which includes items the Compliance Staff are still reviewing or questions they are still seeking to answer. It also states that a final report on Section 1602 will be issued in early 2013. This would correspond with the final date of the program — Dec. 31, 2012.
NON-COMPLIANT GRANT USE
Among the cases of non-compliant use of grant funds cited in the draft report is a DBAS board member who used the 1602 funds to renovate her hotel’s eight units and the hotel has a swimming pool, according to the draft report, which also states that its “unclear how this hotel renovation is eligible for 1602 funding for low-income housing,” and whether the swimming pool was renovated with the 1602 funding.
It cites a provision of the ARRA law which in part states: “None of the funds appropriated or otherwise made available in ARRA may be used by any state or local government, or any private entity, for any casino or other gambling establishment, aquarium, zoo, golf course or swimming pool.”
Another 1602 project is completed and occupied by the subgrant recipient/project owner and his family. “The project owner defiantly declared that he had no intention of renting his house — 1602 funded — to any low-income clients,” the draft report says. “He also said that he was thinking of a way to pay back the 1602 funds.”
The draft report further states that other “projects have expensive, decorative features that will be costly to maintain over the program period of 15 to 30 years. Money was spent with little regard to the concept of Best Value.”
It also states that one “bold contractor, tried to bill for 80 hours at $135 per hour for a back hoe — self owned — to dig a septic tank” and ASESRO inspectors estimated that the correct number of hours should have been closer to eight.
“Additionally, workers on site complained that they were never paid. One group of workers told us that they were the fourth group for one of the projects we visited. The first three groups refused to work anymore for lack of payment,” the Compliance staff reported.
During its site visits, ASESRO compliance inspectors found at least two projects that were occupied by other than eligible occupants.
Examples cited by the Compliance staff are: one 4-unit complex is occupied by contract employees of a huge local company; while yet another 4-unit project is occupied by operators of local grocery stores. Additionally, the project owners themselves occupy some projects. “It is hard to believe that a low-income unit would also house two $35-$40,000 vehicles,” it says.
And one local landlord complained that he is losing his tenants to the low-income housing — when the tenants are ineligible for low-income units in the first place.
“Our records show an unaccounted/no record amount of $21,248,333,” the draft report states, adding that of the $30.77 million some $5.49 million was disbursed for material, $3.81 million for labor, $220,823 for developer fee and only $9.53 was approved by ASESRO.
The draft report also states that several 1602 units “are built way out in the boondocks, inaccessible to the public transportation used by the average wage earner, much less a low-income family.”
“The roads are rugged, deep and far — it would require a 4-wheel drive vehicle to get there except on foot,” it says. “The roads to these 1602 projects are inaccessible to public transportation, especially in the Fogagogo, Ili’ili, Tafuna and the Pavaiai areas. The 1602 tenants would have to walk about two miles to the nearest bus stop. The taxi fare would hardly be affordable for a 1602 client.”
INADEQUATE OR UNAUTHENTICATED PAYMENTS
The report also found problems with inadequate or unauthenticated payments, saying that labor cost requests for many projects approved by DBAS “lacks sufficient documents such as payroll records, invoices from service providers, invoices for vendors or other relevant documents.
“It is difficult to track the number of jobs created and/or retained,” it says. It further pointed out that many payments “appear dubious because they are made directly to the project owner or his/her spouse” while other payments are made to an entity that does not provide or furnish the type of items on the invoice.
“Also, numerous payments were made based on ‘estimates’ from vendors or companies owned by the project owners themselves,” it says.
“Some payments were made on pro forma invoices — estimates to a preferred vendor. These payments are then deposited into an account in the name of the project owner for future delivers,” the draft report says and the Compliance Staff raised two questions on this practice:
• What will happen to the deposit balance in the account at the end of the project without any tracking or accountability?
• Who is tracking this to ensure that the deposit account is only charged for 1602 items?
According to the report, the grantee must maintain program, financial and accounting records sufficient to demonstrate that grant funds were used in accordance with the Section 1602 program and its terms and conditions.
“We are convinced that the implementation of the 1602 LIHTC Program was rushed to start with, thus the underlining note is evident of ‘the end justifies the means’ tactics,” it says. “We were lead to believe by the DBAS staff that there were not enough time for thoroughness and diligence.”
“...it is the judgment of our inspectors that many projects will end up unfinished by the deadline. Several project owners are financially unable to finish their incomplete projects on their own,” according to the report.
“Because of the lack of diligence and thoroughness, we also believe that a lot of projects will end up short on the financial side,” it pointed out. “Several project owners will probably be required to finish their projects on their own.”
Based on correspondence from DBAS, only 58% of the projects have been completed and the 56 remaining projects are incomplete, with no 1602 funds remaining, it says and noted that some unfinished projects are at a standstill while owners seek further financing.
• ASESRO staff should continue to monitor and report compliance issues. A final report will be issued in early 2013
• All concerns will be made known to the appropriate authorities
• Further investigation and review by the grantor would seem warranted.