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We audited the City of Modesto’s Community Development Block Grant (CDBG) program.  We selected the City based on a hotline complaint (HC-2017-2082) regarding the City’s rehabilitation program and the U.S. Department of Housing Development’s (HUD) and the HUD Office of Inspector General’s risk assessments.  The objective of the audit was to determine whether the City used CDBG funds in accordance with HUD requirements, focusing on its rehabilitation activities. 

The City did not use CDBG funds in accordance with HUD requirements.  Specifically, it (1) did not follow HUD’s and its own requirements for its rental and homeowner rehabilitation projects, (2) drew CDBG funds in advance, (3) provided false information to HUD, (4) spent HUD funds inefficiently, (5) misclassified some delivery costs, and (6) did not include all recipients in its monitoring plan.  These conditions occurred because of the City’s desire to show HUD that it was close to meeting timeliness requirements, its disregard for HUD’s and its own requirements, its lack of sufficient knowledge and capacity, and the failure of its policies and procedures to ensure that it monitored all of its recipients of CDBG funds.  As a result, the City was unable to support that its use of more than $1.6 million in CDBG funds met HUD requirements, and it improperly used $257,737 for duplicate costs.

We recommend that the Director of HUD’s San Francisco Office of Community Planning and Development require the City to (1) support that its use of more than $1.6 million in CDBG funds met program requirements or repay the program from non-Federal funds, (2) repay the program $257,737 for duplicate costs from non-Federal funds, (3) implement policies and procedures to ensure that CDBG funds are used in accordance with program requirements, (4) provide training to its staff to ensure sufficient knowledge of CDBG program requirements, and (5) implement policies and procedures to ensure that it includes all of its CDBG recipients in its monitoring plan and that it selects objective samples.