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Feds say Iowa misspent $10.5M in flood aid

March 14, 2010

DES MOINES - Federal auditors say Iowa officials misspent more than $10.5 million in federal grants for flood-damaged Cedar Rapids businesses.

The audit, written by the inspector general's office of the U.S. Department of Housing and Urban Development, said 305 forgivable loans were improperly awarded to Cedar Rapids businesses through the Jumpstart Iowa Small Business Assistance Program.

The audit faults the state's Department of Economic Development for oversight problems, particularly for failure to ensure that the businesses receiving grants complied with a key eligibility standard established for the program.

The audit's criticism of the disaster funds program marks the second time in recent months that the Department of Economic Development has come under scrutiny. Department Director Mike Tramontina resigned in September after irregularities were found in the Iowa Film Office, which administered state tax credits to filmmakers.

In the Jumpstart case, HUD auditors said state and Cedar Rapids officials who administered the program failed to verify that grant recipients didn't receive duplicate benefits though any other disaster assistance programs, insurance or other source.

State officials said they disagreed with the finding that $10.5 million had been misspent, but agreed that a review of possible duplication of benefits was necessary. That review is under way through the Small Business Administration, Bret Mills, Iowa's director for economic development, told federal officials.

Kay Snyder, communications director for the economic development department, expressed confusion Thursday about the audit, which was made public Wednesday. She said she hadn't read the audit in detail.

''We believe there was a technical wording problem and that our modification was accepted to HUD. We are awaiting word to make sure that is true,'' she said. ''We will, however, continue to work with HUD officials to resolve these problems.''

Cedar Rapids officials administered the program through the local chamber of commerce.

City Manager Jim Prosser told The Associated Press Friday that the question is about whether proper documentation was in order.

''The state had worked with HUD to determine what appropriate documentation was and now the auditor apparently doesn't like it,'' he told the AP. ''There is no major issue that I can see related to that. We followed the requirements of the state and I'm confident it will be cleared up in pretty short order.''

According to the audit, economic development department officials acknowledged that they had failed to perform on-site monitoring of the Jumpstart program and cited staffing problems.

''(The state) had two staff members that handled business programs, but one of them left and was replaced by someone who was transferred from another unit to assist,'' the audit said. ''Because the department did not monitor the program, it was not aware of the problems in the administration of the program.''

State officials set up the Jumpstart business program in September 2008 to help flood-damaged businesses resume operations as quickly as possible.

The program was unveiled at a time when municipal leaders across the state were complaining that relief money was slow to reach their communities.

''The people in Katrina had money within weeks,'' then-Cedar Rapids Mayor Kay Halloran said at the time. ''It's been months for us.''

When he announced the program, Gov. Chet Culver called it ''the most efficient way of providing immediate relief to Iowans at this time.''

In a statement released Friday afternoon, Culver says the state worked with federal officials to streamline the process and get funds to Iowans who suffered from the 2008 floods.

He says the Jumpstart program has been an ''innovative model for delivering disaster aid'' to residents and businesses and helped move communities closer to recovery.

''The governor and lt. governor are confident the program has served its purpose and confident this issue will be resolved quickly,'' the statement read.

The program provided a maximum $50,000 loan, with forgiveness of the loan if the business reopened within 12 months of the award date.

Overall, the federal housing agency has provided the state with $799 million in disaster funding, including $282 million through the Community Development Block Grant program.

The audit also revealed:

-Of the loans improperly awarded, 292 went to businesses that failed to provide documentation showing they had obtained disaster loans from eligible lenders - a requirement for the Jumpstart grant money. Those loans accounted for $10.1 million of the amount federal officials say was misspent.

-Cedar Rapids officials obtained only oral confirmation of a disaster loan rather than written confirmation. In addition, auditors found two applications for $50,000 from ''two related entities'' using the same loan document to secure $100,000.

-Two businesses received grants even though they were incorporated after the floods of 2008. State law and HUD regulations limited the grant money solely to companies that sustained flood-related damage or losses.

-Four borrowers ''participating in the same business'' each received $12,500 grants by using a mortgage approval document for $200,000. In addition, another applicant received a $50,000 grant by producing loan documents for the purchase of a building.

State officials acknowledged in their response that rules governing the grant program initially had an existing loan requirement. However they told federal officials that was inadvertent.

In a letter to federal inspectors dated Feb. 5, Mills, the state economic development director, said an emergency rule change had been made to allow loan approval as opposed to actual loan execution to be sufficient to obtain the loans.

Federal auditors disagreed: ''The intent of the program was to ensure viable businesses obtained grant amounts. Loan approval by a bank does not necessarily mean that a loan has been fully underwritten or that all due diligence has been performed. The department files did not contain evidence that these loans were properly underwritten.''



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