Audit spurs deeper look into city funds, Department of Neighborhoods

Changes made to prevent repeat errors, official says

Dan Hiskey, left, was appointed by Mayor Mike Bell to study a 2010 audit of the city's federal grant funds.

The Blade/Darrell Ellis
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Dan Hiskey, left, was appointed by Mayor Mike Bell to study a 2010 audit of the city's federal grant funds.

It's been just over a week since Toledo Mayor Mike Bell launched an official investigation into alleged illegal activity at the city's Department of Neighborhoods, but concerns about the department appear to have hit the city's radar long before the latest probe was announced.

In August, Mr. Bell hired former city auditor Dan Hiskey as "special projects" manager. His charge: to look at findings from a 2010 audit of the city's federal grants. The audit highlighted procedural problems and, out of two small samples of city expenditures, found more than $300,000 in questioned use of federal funds. These included the purchase of a plane ticket to China, personnel costs not supported by documentation, and spending on what appears to be an address that does not exist.

City officials maintain there is no link between the current investigation and the concerns raised in the audit, which was completed in August. They attributed the auditor's concerns primarily to disruptions from a change in accounting software early in 2010. Understaffing as well as a lack of knowledge among some employees about federal record-keeping laws also were factors, they said.

Mr. Hiskey assured steps have been taken to address the problems raised in the audit. He said he is confident that most of the problems will not be repeated.

"Absolutely. You have to justify these questioned costs. I'm sure we can justify them," he said. "As an auditor, I take these real seriously."

Nevertheless, Mr. Hiskey could not explain what many of the questioned costs were.

The audit of the city's use of federal funding was conducted externally by Cincinnati-based firm Clark Schaefer Hackett. It is part of an annual citywide audit required by the state. The findings on the neighborhoods department stem from the entity's use of $20.9 million in grants provided by the U.S. Department of Housing and Urban Development. These funds, called Community Development Block Grants, are for use on projects that combat slum and blight, principally for the benefit of low and moderate-income people.

Key findings

Two findings raised the most concern for city officials.

The first came from a sampling of $871,756 in program expenditures, about 5 percent of the city's total $17 million CDBG spending in that category. Of that sample about a third, or $298,241, in questioned expenditures were not supported with documentation, the audit found.

Most of those questioned expenditures -- $221,158 -- came from internal charges to the CDBG fund made by various departments and divisions within the city. Mr. Hiskey said these could be charges for items such as gas, car maintenance, computer repairs, supplies, and personnel time related to work done on neighborhoods department programs.

Auditors flagged those costs because they appeared in the city's financial software but were not accompanied by supporting documents such as receipts and invoices. That documentation should exist, Mr. Hiskey said, but was not available to auditors at the time of the review because it is kept by individual departments and not by the city's finance office, as in the past. He attributed this to a change in accounting software in early 2010 that digitized the internal billing process, removing the need to send paper invoices and receipts to the finance department.

To address the problem, Mr. Hiskey asked Finance Director Patrick McLean in an October memo to track down that documentation. As of Friday, Mr. Hiskey could not say how much progress, if any, had been made in that effort.

Mr. McLean did not return calls for comment Saturday.

However, Councilman Adam Martinez, who chairs the neighborhoods committee, said he was surprised to learn of the problems with internal charge backs. He said the new software system, called SAP, is capable of storing digital copies of receipts and invoices.

Mr. Martinez said he has been asking city finance officials to establish proper internal charge-back procedures, particularly for the division of Streets, Bridges and Harbor, since the summer and has yet to see evidence of improvements.

"To me it seems very routine," Mr. Martinez said. "I'm not sure what the holdup is."

A vacant lot sits between 1001 Indiana Ave. and 1049 Indiana. An address of '1009 Indiana,' where a city official speculates work might have been done, doesn't exist.

Other expenses

Four other groups of expenses also raised questions for the auditors:

$1,246 for Delta air travel to China.

$15,099 for "dumping."

$59,052 for "labor and materials."

$1,784 for a line item listed simply as "1009 Indiana."

Mr. Hiskey said he could only guess what most of those expenditures were. He did not know whom the flight to China was for but suggested it could have been for former Deputy Mayor Dean Monske. Mr. Monske and the mayor traveled to Asia with a delegation of private business people in September, 2010, to woo Chinese investors to Toledo.

In an Oct. 14 memo to the directors of the city's finance and neighborhoods departments, Mr. Hiskey described the trip as "not allowed." In an interview Friday, he said the cost of the flight has been reimbursed using general fund money.

The special projects manager also said he was uncertain as to what the dumping or labor and material costs were related. He speculated the "1009 Indiana" item was likely for work on a home or lot at that location. However, no such address exists, according to the Lucas County Auditor's Web site. A Blade reporter visited the site and confirmed there was no home or building with that address.

In the same October memo, Mr. Hiskey asked neighborhoods Director Kattie Bond to find the documentation to support the last three items. He said he did not know how much progress had been made.

Ms. Bond and two other senior neighborhoods officials were placed on administrative leave Friday pending the outcome of the city's investigation, which is centered on allegations of bid rigging, favoritism, and poor oversight in the department. Ms. Bond did not return calls from the Blade requesting comment Friday.

It was clear from an email that Mr. Hiskey sent to Ms. Bond in September, however, that the questioned costs weighed heavily on his mind.

"I just don't know how a HUD audit like this is dealt with by them frankly as I've never seen on[e] like this, nor have you of course," Mr. Hiskey wrote. "Again, procedurally and process-wise, I think we are solid, BUT, now we have to deal with the money!"

In a hand-written note at the bottom of the email, Mr. Hiskey wrote what remains a haunting question for the city: "What dollar amount could HUD say we owe them? (Worse case scenerio)."

Mr. Hiskey said Friday there are no plans to probe outside the expenses questioned in the auditor's sample. However, if that sample is representative of all the expenditures, there could be as much as $5.8 million in questionable costs.

"If an auditor wants to do more of a sample they will keep going," Mr. Hiskey said. "Apparently, this was enough for them to see that most was related to internal service charges."

Payroll costs

The second audit finding of questioned expenditures relates to $8,034 in payroll costs. According to Mr. Hiskey, this finding centers on the city's four-member Department of Economic Development, which also taps into CDBG money.

When employees perform work funded by CDBG grants, they are required to document that labor on time sheets or activity reports to prove it is eligible for federal money. But in some cases during 2010 that did not happen.

"The City's procedures for charging payroll to the grant do not appear to be adequate," auditors wrote. "First, one employee's time was charged to the grant when it should have been charged to the General Fund. Second, differences were noted in time charged to the grant per review of actual time spent according to time sheets. Finally, certain employees were charging a percentage of their time to the grant as opposed to actual time spent on the grant as supported by personnel activity reports or periodic time studies."

Again, the auditor looked at a sample of payroll expenditures -- $69,503 -- less than 2 percent out of a total of $4 million. If that sample is representative, there could be as much as $457,000 in payroll expenditures not adequately supported by documentation.

In his October memo, Mr. Hiskey attributed the issue to one of two employees working during 2010 in the development department.

"This could be [former Deputy Mayor Dean] Monske or [Economic Development Director Brad] Peebles, but I'm not certain," he wrote.

On Friday, Mr. Hiskey said he was still not certain who was responsible for the missing time sheets. Mr. Monske no longer works for the city. Mr Hiskey said Mr. Peebles has time sheets for 2011 but that he had not spoken with the development director about his 2010 time sheets.

"I have not talked to him about 2010," Mr. Hiskey said. "I didn't get into 2010 yet."

Mr. Martinez said he sees no excuse for the time sheet problem.

"The administration knows they are paid through Community [Development] Block Grant funding and they need to document their time appropriately," Mr. Martinez said. "Regardless of position, everybody has to make sure they're in federal compliance."

Procedural issues

Other findings in the 2010 audit focused on procedural problems, most of which Mr. Hiskey said were easy to fix.

A finding that the city submitted its comprehensive annual performance and evaluation report, or CAPER, late will be remedied next year by getting it in on time, he said.

Auditors also did not receive proof that prevailing wages were paid for federally funded construction work. Mr. Hiskey said that was because that paperwork was housed with the affirmative-action office, not the neighborhoods department.

And auditors found that neighborhoods employees were not logging required inspections of rehabbed properties. Four new employees were hired this year to make sure employees don't fall behind in logging their inspection reports, Mr. Hiskey said.

Those issues and others have been addressed in the city's corrective action plan, which has been provided to HUD along with the audit.

HUD's response

Laura Feldman, a spokesman for HUD's regional Chicago office, said Friday that while the city has submitted the audit, federal authorities have not yet reviewed it. But in general, she said HUD works with the grantees to resolve any audit findings.

The audit is also considered in the agency's annual risk-analysis process, which may result in additional monitoring visits. If an issue is discovered that the field office cannot resolve, it may be referred to the inspector general's office, she said.

"Bottom line: We will work with the grantee to resolve any findings," Ms. Feldman said. "If sufficient documentation cannot be presented, it is possible funds could be asked to be returned."

The mayor's office maintains there is no link between the concerns raised in the audit and the current investigation of the neighborhoods department. However, the audit paints a picture of a department where regulations are not always followed and where expenditures can be difficult to track, even by the trained eye of an auditor.

New controversy

This apparent lack of oversight is echoed in the controversy now rocking the neighborhoods department.

The city's investigation into possible wrongdoing grew out of a Nov. 22 article in which The Blade detailed allegations of wrongdoing by city employees and poor supervision in the neighborhoods department, which awards millions of dollars annually in federal money, including block grants.

One allegation came from local contractor Craig Gordy, who participated in a roofing program funded with block grant money. Mr. Gordy, of Continental Construction, told The Blade that city rehab specialist Toni Thomas steered him to use a subcontractor with a lengthy criminal record and then instructed him not to list the subcontractor on city paperwork.

The Blade also found sealed bid documents were sometimes opened outside the view of city employees and were filled out after the bid openings.

A day after The Blade published the story, Ms. Thomas left a voice mail for Mr. Gordy telling him to recant the statements he had made to the newspaper. In the voice mail, Ms. Thomas said the department director. Ms. Bond, had told her to make the call.

The audio recordings prompted the city to open an internal investigation into the matter and place Ms. Thomas on paid administrative leave Dec. 2. She was joined Friday by Ms. Bond and two other top department officials: Housing Commissioner Mike Badik and Housing Manager Jodie Prude.

HUD is now assisting the city with its investigation and has visited the neighborhoods department twice in the past week, city spokesman Jen Sorgenfrei indicated.

The Blade also reported in September that a company owned by Mayor Bell's niece, Shayla Bell, had been awarded nearly $1 million in federal grants and loans to buy foreclosed homes, hire a general contractor to rehab, and sell them. The mayor has said Ms. Bell earned that work with no assistance from him.

Council reaction

City councilmen, who conducted a recent hearing with administration officials to press for an investigation of the neighborhoods department, said they are pleased with the actions taken so far, which include several changes to the neighborhoods department's bidding procedures. Those aware of the 2010 audit findings said they hoped the issues raised would be fully resolved so as not to jeopardize future HUD funding.

"Obviously when there are findings identified, the administration needs to respond in a timely manner and to the best of my knowledge that's what happened," said Councilman George Sarantou, chairman of the finance committee. "We need to make sure we are following the law with this money because this money is very critical to the City of Toledo."

Mr. Martinez said he is willing to consider that some of the audit findings can be traced back to the previous administration and may be coming to light now as a result of the SAP system, which he explained is more transparent. However, he said the Bell administration must be held accountable for the problems with the internal charge backs, the time sheets, and the Delta airfare charge.

Councilman D. Michael Collins, who learned of the audit's details Friday, said he expects further revelations to emerge soon.

"In the course of any investigation where there's substance, it's characteristic of peeling an onion," Mr. Collins stated. "The further you go, the more that comes out. I'm not surprised."

Contact Tony Cook at: acook@theblade.com or 419-724-6065.