Fraud plagues state stimulus funds

APRIL 8, 2010

By TROY ANDERSON

The board of directors’ retreat at a luxury casino: $8,300. The price tag for their bottled water: $2,300. And let’s not forget their facial tissue: $460.

These are just a few of the $542,478 in disallowed expenditures made by the Economic Opportunity Council of San Francisco, an agency that was slated to receive $159,000 in federal stimulus funds for community weatherization projects, according to California Inspector General Laura Chick.

The state Department of Community Services and Development, which identified the unallowed expenses in a recent audit, has taken action to stop the transfer of federal funds and is now working with the city and county of San Francisco to provide the services instead.

As $85 billion in Federal Recovery Act dollars flow into California to stimulate the economy and create jobs, Chick says officials are only beginning to uncover the misuse of the funds. While the Federal Bureau of Investigation is warning officials to expect that 7 percent to 10 percent of these dollars will be lost to fraud, waste and abuse, Chick says it may take years to track down the “fraudsters.”

“The experts at the FBI and the U.S. Attorney’s Office are convinced that with this much money coming out in such a short amount of time that there are numerous fraudsters out there just waiting to take advantage of this,” says Chick, appointed by Gov. Arnold Schwarzenegger to oversee the spending of the state’s stimulus funds. “I’m going to assume when all is said and done that we are going to find millions – I just hope it’s not billions – in fraud. But we’re probably not going to know the full extent of it until at least two to three years after all the money has been spent and the reports and audits come out.”

In the more than a year since President Obama signed the $787 billion American Recovery and Reinvestment Act into law, government watchdogs have raised concerns about the potential for fraud, waste and inefficiency – especially when so much money is quickly funneled to state and local governments and various contractors.

From the time the act was approved through Feb. 28, the federal Recovery Accountability and Transparency Board has received 2,093 complaints of fraud, waste and abuse. Of these, 55 have been referred to various agencies for possible prosecution, board spokeswoman Cheryl Arvidson says. Details on the cases are confidential until criminal charges are filed.

“It strikes us that the entire program for the stimulus funds is like opening up a bag of cash in the middle of a tornado and hoping some of it ends up where you want it to go,” says Jon Coupal, president of the Howard Jarvis Taxpayers Association. “Look, the federal government is just throwing money at various programs and projects with no idea whether or not it’s going to work.”

In a recent “Stimulus Checkup” report examining how funds have been wasted, mismanaged, or directed toward “silly and shortsighted projects,” U.S. Sens. John McCain, R-Ariz., and Dr. Tom Coburn, R-Okla., found funds targeted for the Napa Valley Wine Train, Shakespeare Festival/LA, Monterey Jazz Festival, beautification of the Sunset Strip and the Hollywood Entertainment Museum.

While some major U.S. cities have still not been fully protected from the possibility of catastrophic flooding, an Alaskan contractor received $54 million in stimulus funds for a Napa County flood control project, some of which were used to relocate tracks used by the Napa Valley Wine Train, according to the report.

Wine Train spokeswoman Melodie Hilton disputes the report, saying the train is not benefiting financially from the project.

“These monies are strictly for a very important flood control project that has been ongoing for almost a decade and was voted in by the citizens of Napa,” Hilton says.

The report also found the University of California, San Diego, will use $233,825 to send five students to Africa to investigate “why Africans vote the way they do” in their elections. Meanwhile, the state has received $60 million in stimulus funds to modernize its decades-old unemployment benefits system. But this is the second time the state has received money for the same modernization program. In 2002, the state received $66 million for the system – a project that was supposed to be finished last year, but “competing priorities and funding limitations extended the time line for the program.”

“Some of the close to $7 billion in projects … create few jobs; benefit private interests over the public good; or make improvements where they are not necessary,” McCain and Coburn wrote in the report. “Some send money to companies facing fraud charges. Others take millions of dollars to do work local officials and experts admit are not needed or will not help. Stimulus money has been, or will be, spent on dinner cruises, golf courses, puppet shows and stimulus road signs. Many Americans will question whether investing $787 billion in these projects are the highest national priorities.”

So far, California has spent about $20 billion of the $85 billion it is slated to receive – the most of any state in the nation.

“This is a very large stream of money and it’s going to take awhile to have this money fully work its way through the system,” says Herb K. Schultz, a senior advisor to the governor and director of the California Recovery Task Force. “I’m not saying the money is not out there. There are a significant amount of dollars out there. But California will be receiving a lot of additional funding, both in terms of tax credits and program funding beyond what we have already received.”

Since President Obama signed the bill on Feb. 17, 2009, the California Governor’s Recovery Task Force estimates the act has created, saved or funded about 150,000 jobs.

Most economists say the act is doing what it was designed to do – stimulating the economy and mitigating job losses.

“The overwhelming consensus is the Recovery Act has benefited the economy,” says Craig Jennings, director of federal fiscal policy at OMB Watch, a Washington, D.C.-based nonprofit organization that tracks federal spending.

The White House’s Council of Economic Advisers estimates the act has saved or created 2 million jobs. Shortly before the act was approved, the nation was losing about 700,000 jobs a month. In the last two years, 7 million people have joined the ranks of the unemployed. In recent months, however, the country has gained a modest number of jobs, including 165,000 in March.

“We can safely say that we’re avoided the depression many feared,” President Obama said in his recent annual economic report to Congress. “Our economy is growing again, and the growth over the last three months was the strongest in six years.”

Despite this positive assessment, the largest economic stimulus program since the New Deal has encountered a slew of problems, including reports that some state agencies failed to provide proper cash management and sub-recipient monitoring and abide by federal reporting guidelines.

Numerous cases of inflated and underreported job tallies have surfaced and government watchdogs have raised concerns about large corporations obtaining tens of millions of dollars despite previous environmental violations and allegations of fraud.

Furthermore, critics say most of the “saved” jobs were public-sector positions.

Chick agrees, saying much of the money has been used to prevent layoffs of teachers, correctional officers and other government workers.

“Now the money is starting to go out to the private sector …, but it’s very difficult to find shovel-ready projects that can quickly create private-sector jobs,” Chick says. “The (criticism) is accurate, but I disagree it’s going to stay that way. The intent is to create new jobs in the private sector and I believe we’ll be successful. It’s just taking a little bit longer than everyone wanted.”

A variety of government audits have found other problems. A recent report by the U.S. Government Accountability Office noted California had awarded $66 million to 35 local service providers for weatherization activities, but as of Feb. 25 only 849 homes had been weatherized, less than 2 percent of the 43,000 homes expected to be weatherized. The state auditor claims delays in weatherizing homes could jeopardize the state Department of Community Services and Development’s ability to meet U.S. Department of Energy’s performance milestones and, thus, its ability to timely access the remaining $93 million in weatherization funds.

“Its intent to use existing monitoring procedures for the Recovery Act Block Grant could result in a large number of subrecipients receiving no on-site monitoring until well after the Recovery Act funds are spent – increasing the risk that these funds could be misused,” state Auditor Elaine M. Howle says.

In a report regarding the Tulare County Workforce Investment Board, Chick’s office found “very sloppy business and accounting practices” resulted in $1 million that was misdirected from summer youth programs to pay for rent, equipment and utilities – overhead that only should have cost $60,000.

“This was done in spite of the fact that the WIB was basically a pass through to the sub-contractors who were providing the actual services to the community,” Chick says. “These precious dollars were intended to be spent providing training to at risk youth who need to improve their workforce readiness skills.”

Elected officials have complained that while states have been awarded large sums of money, very little has actually made its way into the coffers of local governments, requiring them to borrow money while awaiting reimbursement.

During a recent U.S. House Committee on Oversight and Government Reform hearing in Los Angeles, Mayor Antonio Villaraigosa said the funds the city has received often aren’t helping create jobs. He cited $7.5 million in broadband expansion funding Los Angeles received – more than any other city in the country.

“While this funding will allow us to bridge the digital divide by creating 4,000 workstations in public libraries, recreation and community centers, it only creates one new job,” Villaraigosa said. “Other grants for equipment, such as the $8 million for the purchase of 16 clean fuel burning buses, will help improve the environment, but don’t create a single job.”

Meanwhile, Dennis Yee, the new interim director of the Economic Opportunity Council of San Francisco, says the agency doesn’t dispute that the board of director’s trip to the Cache Creek Casino was not “handled very well by our agency.” Since he was named the interim director in December, a new board chair has been named and other board members have been replaced, Yee says.

“However, a lot of the money they’re talking about is a misunderstanding on how we do inter-fund transfers,” Yee says. “We are working with the (CSD) to come to an actual figure of what they consider disallowed expenses. I think it will be a fraction of the ($542,478).”