Neighborhood Stabilization 2 Program Response*

The City approved ineligible and unsupported costs during rehabilitation that resulted in the overpayment of $56,130 of NSP expenditures

One NSP2 developer and a City Council member violated the conflict of interest requirements in an NSP2 property purchase transaction. The amount of this violation was $62,500.

The City approved ineligible real estate commissions, in the amount of $51,936. The audit report also notes that the audit "determined that the following internal controls were relevant to our audit objective: policies and procedures implemented to reasonably ensure that program activities • comply with applicable laws and regulations. policies and procedures implemented to reasonably ensure that program funds are used for eligible activities." In closing, it is important to note that based on our sampling of files and transactions the three findings called out in the OIG audit report were the only material violations found during our audit. I hope this letter helps to clarify the scope of the OIG audit and the information reviewed by our audit staff. Sincerely, the delloupe David A. Montoya Inspector General MODESTO CITY COUNCIL <b>RESOLUTION NO. 2012-374</b> RESOLUTION ACCEPTING THE RESPONSE TO THE STANISLAUS CIVIL GRAND JURY REPORTS 12-03C AND 12-04C WHEREAS, in August 2011 the Modesto City Council requested the Stanislaus Civil Grand Jury to review the Neighborhood Stabilization Program 2 (NSP2), and WHEREAS, the Civil Grand Jury decided to review the program, and WHEREAS, on June 28, 2012 the Stanislaus County Civil Grand Jury issued reports 12-03C and 12-04C focusing on the overall management of NSP2, and WHEREAS, one of the requirements of the Grand Jury report is a written response from the jurisdiction regarding the 'Findings'. NOW, THEREFORE, BE IT RESOLVED by the Council of the City of Modesto that it hereby accepts the response to the Stanislaus County Civil Grand Jury Reports 12- 03C and 12-04C and authorizes the City Manager or his designee to submit the response. 2012-374 1 09/11/2012/PRN/JHannon/Item 12 The foregoing resolution was introduced at a regular meeting of the Council of the City of Modesto held on the 11th day of September, 2012, by Councilmember Cogdill, who moved its adoption, which motion being duly seconded by Councilmember Burnside, was upon roll call carried and the resolution adopted by the following vote: Councilmembers: Burnside, Cogdill, Geer, Gunderson, Lopez, AYES: Mayor Marsh Councilmembers: None NOES: Councilmembers: ABSENT: Muratore ATTEST: (SEAL) APPROVED AS TO FORM: By: A WOOD, City Attorney 2 09/11/2012/PRN/JHannon/Item 12 2012-374

Tenant Eligibility at SCAP: Conflict of Interest and Public Perception of Favoritism The City of Modesto partially agrees with this finding As became plainly evident after investigation by numerous agencies including the City, the practices employed by Stanislaus Community Assistance Project when selecting and screening tenants were against City-established program regulations and resulted in several significant conflicts of interest and ineligible occupants of the NSP properties owned by SCAP. As has been previously noted, the City of Modesto took several actions in regards to these and other SCAP practices. First, the City froze all funding to SCAP while investigating and trying to gain access to files and records that SCAP kept on their premises. The time spent on this endeavor was lengthy due to the lack of cooperation by some of the staff at SCAP. Additionally, the City worked cooperatively with the auditors from the Housing and Urban Development (HUD) Office of the Inspector General (OIG) in its' review of all SCAP files, specifically, those related to SCAP's spending and property rehabilitation costs. Significantly, these projects and the cost reasonableness of the projects did not receive a finding in the final OIG Audit Report - which essentially means that OIG did not find a flaw in the City's oversight of SCAP's property acquisition and rehabilitation costs. With regard to SCAPS improper tenant screening and placement, once the City had the entire picture regarding SCAP's activity in this regard, the City took specific action to remove any existing conflict of interest situations from the SCAP-owned housing stock, as well required SCAP to outsource their tenant screening and processing of tenant income eligibility to a private property management company. At present, the City Council has frozen any future funding allocations to SCAP from the City's HUD allocations. The referenced handbook entitled Homebuyer Program: Policies and Procedures is specific to NSP2 projects designated for re-sale/home ownership and does not outline requirements for tenant eligibility, nor does it apply to the Special Needs Program which SCAP was operating under. However, the City of Modesto provided extensive guidance and direction to SCAP staff regarding income certification methods and tenant certifications. Although in hindsight of course we are able to speculate on additional steps that staff could have taken to provide more oversight on this tenant screening process, and in fact this experience with SCAP's abuses has resulted in the implementation of more stringent oversight. However, at the time these actions took place, we believe that staff was vigilant with respect to the existing guidelines and provided extensive direction to SCAP regarding this issue. City Staff had been engaging SCAP (specifically Mr. Gibbs) for months regarding which method to implement when certifying a tenant. The City staff went as far as requesting HUD's assistance in determining which tenant screening protocol was correct, and HUD confirmed that the Part V form required by the City was the correct documentation by virtue of it being a City mandated requirement that is set forth in each property regulating agreement (as referenced above in the City's response to finding #2.) Finding # 5: Cost of Acquisition and Rehabilitation of Properties The City of Modesto agrees with this finding The City of Modesto would like to ensure that the Civil Grand Jury, as well as citizens of Modesto understand that the six month audit completed by the Housing and Urban Development (HUD) Office of the Inspector General (OIG), requested by the City, did indeed address the reasonableness of the property acquisition and rehabilitation costs and issued no findings on these matters. To illustrate this point, we are attaching a letter from the Inspector General of HUD which clearly makes this point (see attachment 1) Accordingly, the City agrees that that the OIG HUD audit did not address the screening and approval of prospective buyers or tenants of the NSP2 housing units.

Councilmember Acting Alone The City of Modesto understands the Grand Jury's opinion on this matter. The Grand Jury's recommendations in this regard properly fall within the purview of the City Council for future determination as to whether any follow up action is necessary.

Councilmember Conflict of Interest The City of Modesto considers this matter resolved and would refer the Grand Jury to the OIG Audit Report as to its findings in this regard.