Fed Says Funds Misspent, May Cost State Millions

Having awarded $799 million to Iowa for recovery from the 2008 natural disasters, the federal government performed a routine audit on the use of some of those funds. Specifically, they reviewed the State’s Jumpstart Business Assistance program and the roughly $14.9 million that program spent in Cedar Rapids.

The audit notes that “the Iowa Department of Economic Development (DED) was tasked with administering the disaster recovery activities of the State.” In regards to the Jumpstart program, it was to offer forgivable loans to businesses who reopened their doors within 12 months. The maximum loan was 25% of a disaster loan from an eligible lender, up to $50,000. DED contracted with the City of Cedar Rapids to administer the Jumpstart program. The City ended up subcontracting with the chamber of commerce for administration of the program.

The audit from the Inspector General’s office made two conclusions. First, the State provided disaster assistance fund to businesses without supporting their eligibility for funding. Second, the State failed to check for duplicate benefits before awarding disaster assistance funds.

On the first finding, the audit concludes that the State failed to show proper eligibility for funding from 305 out of the 406 businesses receiving assistance. Both State law and the approved action plan from the Department of Housing and Urban Development (HUD) require that to be eligible for the forgivable loan, a business must have received a disaster loan and submit executed loan documents.

The audit found that the City only obtained verbal confirmation of an eligible loan in one instance. In others, they only documented loan authorizations, not actual loans. In another instances, the City failed to obtain any documentation at all. The audit found two “related entities” who used the same loan document to receive two $50,000 grants.

Remember these loans are for businesses who sustained damage from the 2008 floods. This is why it is so egregious that the audit found two businesses receiving funds even though they were incorporated months after the floods

Additionally, the audit found examples of grants that exceeded 25% of the loans secured by the businesses. In one instance, the business was granted $40,000 and only documented a loan of $40,000. Some businesses secured grants by producing only mortgage documents, which the audit concludes is outside the parameters of the program.

The audit notes that DED failed to provide on-site monitoring of the administration of the program. Concluding that DED “erroneously interpreted” Iowa law and the HUD-approved action plan. The audit finds no ambiguity in the requirements, however it found that DED advised the City “that it did not require executed loan documents.” That fact, shows that the improper administration of these funds traces directly back to DED.

The Inspector General asks that DED provide documentation to support over $10.5 million in Jumpstart funds awarded to businesses or reimburse that money using non-federal sources.

On the second finding, the audit concludes that the State failed to check for duplicate benefits before awarding disaster assistance funds. That may come as a surprise to a large number of individual homeowners who have been disappointed to see their buyouts significantly reduced because of a duplication of benefits. It appears homeowners are being held to a different standard than businesses.

It appears homeowners are being held to a different standard than businesses.

The audit finds that the State failed to check for a duplication of benefits for all 406 Jumpstart recipients due to a belief there was a low risk of duplication of benefits to occur with these businesses. However, federal law is very clear that a verification is required.

The audit concludes that DED incorrectly assumed a low risk of duplication of benefits. Specifically, there was a high likelihood that SBA loans could be secured for the same purposes as Jumpstart assistance. The audit states that DED should have been seeking verification by checking with SBA and other lending institutions..

Additionally, the audit notes that federal law clearly requires the State to consider insurance proceeds and State disaster assistance as a duplication of benefits. DED failed to consider these two sources while awarding Jumpstart assistance.

The Inspector General recommends that the federal government require the State to perform a duplication of benefits check on all 406 business who received funds to ensure compliance with federal law and ultimately to repay any funds found to be duplicated.

In a letter to the Inspector General, the director of DED, Brett Mills, disputes that $10.5 million was misspent. He contends that the whole thing will be cleared up because DED is now attempting to make changes to the Iowa Administrative Code that would no longer require that a loan be “executed.” In the letter, Mills does concede that a duplication of benefits review is necessary and he reports that process is currently underway through the SBA.