CivilBeat.com reported HUGE grant mistakes that forced the U.S. Department of Housing and Urban Development (HUD) to request the City of Honolulu to repay nearly $8 Million in Federal Community Development Block Grant funds that were sent to a non-profit organization that serves the elderly.
The multi-year investigation revealed numerous grant mistakes with managing federal funds including:
- Mismanagement of Federal awards
- Conflicts of Interest
- Possible Kickbacks
(Do you know the 7 signs of waste, fraud, and abuse?)
In a scathing 15 page report, HUD questioned the level of sub-recipient monitoring and failure of oversight provided by the grantee.
9 Grant Mistakes to Avoid
Let’s look at nine major findings of the reports with what happened and how you can avoid making similar grant mistakes in the future.
Grant Mistakes: Mismanagement of Federal funds
Good intentions will not get you far when it comes to managing Federal funds.
Grant recipients must ensure that awards are spent on allowable costs and activities or risk expensive grant mistakes and related cost disallowance.
1) Unallowable Spending Likely
The grantee authorized the funds to be spent developing facilities including a Wellness Center and cabins but didn’t strongly monitor how or where the monies were actually spent.
- The lack of monitoring increased the chances of unallowable expenditures including duplicate and inappropriate payments.
2) Federal Funds Spent to Violate Laws
Funds were spent developing a parking lot which was considered illegal under the city’s laws.
- The cost principles state that it is improper to spend Federal funds for things which are prohibited by Federal, state or local laws.
3) Ineligible Spending is Always Unallowable
The city paid the non-profit for costs that were ineligible under the Block Grant requirements.
- As stated in the Cost Principles regulations, Federal funds can’t be used for unallowable costs.
4) Ongoing Monitoring is Not Optional
The city didn’t review the proposed budget submitted by the non-profit organization.
- Award recipients must demonstrate that they have ongoing monitoring procedures in place to test the effectiveness of existing processes and procedures.
5) Allowable Costs Always Need Adequate Documentation
The city lost or withheld supporting documentation for many of the expenditures.
- Costs must be adequately documented to be allowable spending for the federal grant.
- Award recipients must demonstrate effective controls and accountability for all federal spending.
Grant Mistakes: Conflicts of Interest
Conflicts of interest mean decisions are not made based on what’s best for the program or project, but instead decisions are based on “What’s in it for ME!”
This is another area of expensive grant mistakes.
6) Overpaid for Property
The city paid eight times more than the fair-market-value for some of the property and ignoring their own land-use regulations which resulted in an inflated valuation.
- Grantees must have procurement policies and procedures to support “free and open” competition to the “maximum extent practical.”
- A cost-price analysis must be completed for purchases in excess of the small purchase threshold.
7) Give and Take
The city loaned federal funds to the nonprofit organization and then later “forgave” the loans.
During the time of the loan forgiveness, campaign contributions were made by the nonprofit organization to city representatives who voted on the loan forgiveness.
- Grantees must be alert to conflicts of interest. This means the grantee needs to establish a procedure for identifying and communicating potential conflicts of interest in the use of Federal funds.
Grant Mistakes: Possible Kickbacks
Kickbacks are a reputation destroying grant mistake for organizations. Here are ways the city failed its grant management.
8) Pay to Play
A $90,000 payment was made to the non-profit by a contractor in exchange for being awarded a $3.5 million contract paid for by Federal funds.
- Anti-kickback regulations apply to all contracts paid for with Federal funds which make it illegal to accept kickbacks on Federal projects.
9) Ignoring Violations Doesn’t Make Them Go Away
In addition, the city didn’t take action for over 7 years after being notified by the nonprofit organization of the possible kickback situation.
- The grantee is responsible for monitoring sub-recipients Don’t make a similar grant mistake; ensure your sub-recipients are compliant with contract provisions and take action when they are not.
What are you doing to make sure your federal funding is safe from similar grant mistakes?
Take action to keep your grant management compliant with the Federal regulations before you have an unpleasant multi-million dollar surprise!
Ready to Improve Your Grant Management?
How about you?
Would you like to be a better grant manager?
We have another grant management training seminar coming soon.
Click here to get all the details!
Hope to see you there!
Lucy Morgan CPA, MBA
CEO, Compliance Warrior
Author of “Decoding Grant Management-The Ultimate Success Guide to the Federal Grant Regulations in 2 CFR Part 200” The 2nd Edition is now available on Amazon in Paperback and Kindle versions.