California put hundreds of millions of dollars in homeless aid at risk because of its “disorganized” and “chaotic” anti-fraud policies, according to a major federal audit.
The audit released Tuesday looked at the California Department of Housing and Community Development (HCD), which oversees the state’s homeless programs. It gave the California agency its lowest possible ranking, concluding that it lacked adequate policies to prevent, detect and respond to fraud. As a result, the audit found that the state agency failed to adequately protect $319.5 million in federal homeless funding, which was distributed during the COVID-19 pandemic, from the potential for misuse.
The audit did not uncover any new cases of fraud.
“Fraud poses a significant risk to the integrity of federal programs and erodes public trust in government,” said Inspector General Rae Oliver Davis of the U.S. Department of Housing and Urban Development (HUD) in a press release. “Enhancing its robust anti-fraud program will help the California Department of Housing and Community Development ensure that its pandemic grant funds and future homeless assistance funds are protected from fraud,” she added.
With the arrival of the pandemic in 2020, the federal government poured $4 billion into its Emergency Solutions Grant program, which was meant to help people struggling with homelessness. California’s share of that fund was $319.5 million, a 2,505% increase from its typical annual allocation. With that huge influx of money also came an increased risk that bad actors would try to use those funds for nefarious purposes. But California failed to adequately step up its anti-fraud measures, according to the federal housing department.
In response, the state housing department said it will take steps to implement federal recommendations and improve its anti-fraud measures.
“HCD is committed to a systematic and comprehensive approach to risk management, including fraud risk, as an integral part of the formulation and implementation of its strategy,” Director Gustavo Velasquez wrote in a letter to the federal housing department.
In a statement to CalMatters, the state housing agency said work has already begun. “Since the audit, HCD has worked with HUD to address all … audit recommendations to ensure the framework strengthens fraud risk detection and reflects industry-leading standards and best practices,” the agency said in an email.
The audit found that California failed to prioritize fraud prevention in its administration of homeless funds. The state failed to conduct regular fraud risk assessments, develop a plan to quickly identify and address potential fraud and have a process to evaluate the effectiveness of its anti-fraud policies, according to the audit. Those failures go against best practices that the federal housing department expects all recipients of federal homeless funds to follow.
When the state discovered alleged fraud, it failed to respond, the audit found.
In March 2022, the state housing department discovered that a local law enforcement agency was investigating potential fraud and misuse of Emergency Solutions Grant funds. The state agency did not report that allegation through the proper channels because, in part, officials were concerned that doing so could create a publicity risk, according to the audit. The agency finally reported the incident nearly a year and a half later — and only after federal auditors began asking questions, according to the audit.
In assessing the state housing department’s response to potential fraud, the audit found that the department failed to reassess its exposure to suspected fraud, “rework its internal control processes” to address fraud and fail to develop a written policy “to convey senior leadership’s expectations for managing fraud risks.”
“HCD and (the Federal Financial Assistance Division) did not have an anti-fraud strategy to respond to the department’s specific fraud risks,” the audit states.
Neither the feds nor the state housing department provided additional details about the alleged fraud. Because the case was under active investigation, the state housing department refrained from further documentation or public discussion of the case, the agency told CalMatters.
The findings did not surprise Sen. Dave Cortese, a Democrat from Santa Clara County, who recently backed an independent audit of the state’s homeless programs. That audit, which was released last month, found that the state is failing to track what it is spending on homeless people and which programs are working.
The latest federal audit appears to underscore a broader lack of accountability in the homeless sector, he added.
“The main reason it’s frustrating is that these are public sector dollars, these are taxpayer dollars. It’s disrespectful to taxpayers to say, ‘Wow, we really don’t know what happened here with your money,'” Cortese said.
Assemblyman Josh Hoover, a Folsom Republican and co-author of the previous state audit request, agreed.
“Once again, California is failing to meet its goal on homelessness. If we are serious about solving homelessness, we have to start by holding our own bureaucracies accountable,” he said in an emailed statement.
Despite finding multiple loopholes in the California agency’s anti-fraud practices, the feds did not provide any evidence that fraud was actually rampant at the agency. Aside from the March 2022 case, the federal housing department did not mention any specific instances of alleged fraud. But that could come down the road: The feds recently launched a second audit investigating improper payments for emergency solutions grants, which could include fraud. That report is expected to be released sometime next year.
The federal housing department is also auditing the agencies that administered the Emergency Solutions Grants in Honolulu and New York City. Those results have not yet been released.
Fraud allegations have already surfaced in other programs overseen by California’s housing department. Earlier this year, the state agency sued a Los Angeles developer who received $114 million to develop housing for homeless people through the state’s Homekey program.
While most COVID-19 Emergency Solutions Grant funds have been distributed, California’s lack of fraud protections could continue to jeopardize future programs, auditors wrote.
This story was originally published by CalMatters and distributed through a partnership with The Associated Press.
