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After 37 years and $700 million, the federal government for the first time wants money back from the City of Buffalo for mismanagement of anti-poverty programs.

A federal inspector general has recommended the city repay nearly $500,000 in anti-poverty funds and justify or return up to $24 million more.

The audit conducted by the inspector general of the U.S. Department of Housing and Urban Development found the city continues to do a poor job of managing some pots of community development block grant funds. It also confirms some key findings of a 2009 investigation by The Buffalo News that found extensive mismanagement of economic development funds by the city.

The city fails to follow the rules or adequately document spending, sometimes using federal aid to cover expenses that should be paid out of the city's general operating budget.

The audit also found Buffalo sometimes slow to spend millions of dollars in anti-poverty aid despite its ranking as the nation's third poorest city.

Mayor Byron W. Brown's office disputes many of the findings and refused an interview request. But other elected officials said time had come for decisive action to end mismanagement of the block grant program, which last year provided the city with about $17 million.

South Council Member Michael P. Kearns called the audit findings "shocking and embarrassing" and said the city comptroller's office already should have begun tracking block grant spending.

Kearns also questioned the effectiveness of the Buffalo Urban Renewal Agency, headed by the mayor and controlled by his appointees. The audit said the agency has failed for years to adequately monitor tens of millions of dollars in economic development funds.

"Maybe we need to roll [renewal agency] back under the city," Kearns said. "This report brings us to a final conclusion we have to do things differently."

The audit faulted the city's use of community development block grant funds on three fronts, starting with its management of money earmarked to promote economic development.

The inspector general found$4.7 million in such federal aid has gone unspent since 2008 as the city scaled back, then suspended business loans and other programs aimed at helping small businesses and creating jobs. Few jobs were created, and half the loans fell into delinquency.

The HUD audit also found the city failed to keep a close enough eye on millions more in economic development funds managed by the Buffalo Economic Renaissance Corp., the agency's primary economic development entity.

The agency, furthermore, engaged in questionable spending, including the use of block grant money to pay severance to agency employees dismissed when the city phased out BERC.

The HUD audit concluded the city's economic development efforts "achieved minimal progress" and that the shortcomings are the result of a "lack of monitoring and oversight."

The inspector general found other problems, as well.

In an effort to spend block grant funds that had languished in accounts, the city used federal aid to pay for street and sidewalk repairs that were not permissible under federal regulations, the audit said. In three instances, the audit said the city reimbursed itself for work that was not performed.

The inspector general recommended the city reimburse HUD $162,923 and provide documentation to justify $2 million or return that money, as well.

In another major finding, the inspector general said the city failed to follow regulations in spending federal aid to board up vacant buildings. Such spending is permissible only if the buildings subsequently are demolished, but the houses and other structures remain standing.

In essence, the audit found the city used block grant funds for wages and material that should have been covered by its regular operating budget.

The inspector general recommended the city repay HUD $304,506 and provide documentation to justify the spending of another $716,622 or return that money, too.

The HUD report also recommended the city stop spending block grant funds for its "clean and seal" program and public infrastructure improvements until it has a better handle on the federal regulations and has established better financial controls.

>Continuing problems

In a statement, the Brown administration said last week it "strongly disagrees" with the findings and recommendations in the audit report.

The city "believes that many of the conclusions in this audit are subjective, in other instances not supported by the facts, and that in other instances documentation and comments provided were ignored," according to the statement.

In a written response to HUD on March 10, the Brown administration argued that spending to improve streets and seal vacant buildings satisfied federal regulations.

It also disputed some, but not all of the audit findings on its handling of economic development funds and said the inspector general failed to take into account the Brown administration's decision to close the Buffalo Economic Renaissance Corp. and shift its responsibilities elsewhere. But that reorganization effort, announced 15 months ago, still hasn't been completed.

Bad federal reviews of the city's management of block grant spending are nothing new.

As Kearns, the Council member said, "another year, another finding."

Reports dating to the era of Mayor James D. Griffin have cited chronic problems with the city's management of block grant funds. The latest, two years ago, found 19 serious problems.

The scope of the most recent audit, triggered by a call to a HUD complaint line in July 2009, is narrower. But unlike the critical report of two years ago, when problems were resolved to HUD's satisfaction in February 2010, the new audit calls for fiscal sanctions.

The city would lose block grant funds for the first time if HUD's regional office in Buffalo acts on the inspector general's recommendations. In 2003 and 2006, the only similar losses of federal funds, HUD demanded the return of $1.8 million of a $10 million grant to build affordable housing.

"It's very troubling to potentially have to pay back that much of the block grant money," said Delaware Council Member Michael LoCurto, chairman of the Community Development Committee.

The city also faces losing $2.8 million in block grant money as a result of the federal budget deal recently cut between President Obama and Congress.

Localities get wide latitude in how to spend block grant money to improve the lot of low- and moderate-income residents, remove slums and blight, and finance general public improvements, ranging from community centers to sidewalks.

An investigation published in The News in 2004 found the city had frittered away much of its block grant money through parochial politics and bureaucratic ineptitude.

More than half the spending went to "soft costs" that include covering bad loans, paying city salaries and subsidizing an overblown network of neighborhood agencies, The News found. Relatively little went to brick-and-mortar projects, and what was spent to revitalize downtown and neighborhoods was haphazard, with money sometimes going to risky and futile projects.

The mayor and Common Council failed to make major reforms in the program in recent years, and problems have persisted. Two years ago, a HUD monitoring report found continued shortcomings that included too much spending on bureaucrats, questionable financing for upscale housing developments and sloppy fiscal management of several programs.

While those problems have been resolved, this latest audit shows serious problems remain, especially in economic development.

>Troubled agency

The now-defunct Buffalo Economic Renaissance Corp. was the ultimate recipient for federal aid to provide economic opportunities for the city's low- and moderate-income residents. The agency was criticized over the years for making risky loans and generating relatively few jobs, and its poor performance was detailed in a series of investigations by The News in 2009.

First came One Sunset, a Delaware Avenue restaurant and bar financed largely with public funds that was owned by former basketball star Leonard Stokes and managed in part by Michelle Barron, a vice president of the city development agency who helped Stokes obtain city loans and grants.

One Sunset closed in December 2008 after operating just one year. Its $235,000 in bad debts included $160,000 owed the city and Erie County Industrial Development Agency.

The fiasco triggered an investigation of then-Elliott Council Member Brian C. Davis, who eventually pleaded guilty to falsifying election finance disclosure reports and resigned. It also raised politically damaging questions about Brown's relationship with Stokes and his possible role in directing city money to One Sunset.

The News then reported that the development entity's grants program was skewed toward Brown's old Council district, which received more money than the rest of the city combined and that barbershops were the among the biggest recipients.

The News also reported lending to small businesses had dwindled under Brown, that a third of loans made since he took office were delinquent, and the agency could document the creation of only 99 to 112 jobs over the previous four years.

The HUD audit confirmed the problems with delinquent loans and job creation.

The development corporation's job creation goal was 120 for 2008 and 2009, but only 46 jobs were added as a result of its lending program.

The audit attributed that to the agency's making only 15 loans over those two years. Half of the entity's active loans, moreover, were delinquent, and most borrowers failed to provide required employment figures.

Corporation officials "did not adequately oversee the activities they funded," the audit said.

The audit also faulted the city, through the Buffalo Urban Renewal Agency, for not sufficiently monitoring the corporation's finances. In fact, "comprehensive programmatic monitoring of [corporation] had not been performed by the city since March 2004," the audit said.

"As a result, [the city] could not provide assurance that more than $20.1 million in transactions was properly accounted for," the audit said.

The inspector general recommended the city document those transactions and reimburse the federal government for ineligible spending. The audit suggests the problem primarily involves inadequate record keeping, rather than ineligible spending that could result in a loss of funds.

e-mail: jheaney@buffnews.com