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Julyl8,20l3 VIA HANTDE Mr. Mark A. Chandler. Director U. S. Department of Housing and Urban Development Honolulu Field Office Region IX ll32Bishop Street Suite 14003 Honolulu, Hawaii 96813-4918

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Dear Mr. Chandler: Subject: On-Site Program Monitoring Community Development Block Grant Program piil 11-25, 2011 andMay 2013 Follow-up

This responds to your June 3. 2013, letter addressed to Mayor Kirk Caidw ell, transmitting the U. S. Department of Housing and Urban Development, Community Planni ng and Development’s (“RUB”), May 2013 Monitoring Report, which addressed open monitoring findings relating to two subrecipients of the Community Development Block Grant (“CUE G”) program of the City and County of Honolulu (the “City”). The two subrecipients are ORI Anuen ue Hale, Inc. (“ORIAB”), and its affiliate, Opportunities and Resources, Inc., formerly known as Opportunities for the Retarded, Inc. (“0111”), and the findings pertain to ORIAH’s Aloha Gardens Project (the “Project” or “Aloha Gardens”). The Project consis ts of two facilities, the Wellness Center and Camp Pineapple 808 (“Camp Pineapple”). Mayor Caldwell recused himself from this matter and asked that I respond to your letter. We appreciate this opportunity to respond to HUD’s findings and concer ns and your willingness to consider our responses and proposals. As your June 3, 2013 letter (the “June 3 Letter”) acknowledges, the City has worked with ORIAH for the last two years in an attempt to increase ORIAI-I’s appropriate use of Aloha Gardens to ensure compliance with the CDBG national objective of serving the elderly and developmentally disabled adults. Although we acknowledge HUD’s position that there continue to be challenges regarding ORL& H’s compliance with HUD’s standards, we believe that ORIA}I’s mission is commendable and that significant progress has I Mayor CaIdwell was Managing Director from January 2, 2009. until July 21. 2010, when he became Acting Mayor, and was Acting Mayor until October 11,2010. Our review of the City personnel involved in the process and decisions with regard to ORI’s loan conversion discussed below has disclosed that the responsibilities within the Managing Director’s Office were divided betwee n then-Managing Director Caidwell and then-Deputy Managing Director Tnrdi Saito; that the ORI loan conversion decision-making process was assigned to DMD Saito; and that former Managing Director Caldw ell was not involved in any aspect of the decision to convert the ORI loan. Mayor Caldwell received a campa ign contribution of $500.00 in September 2009 from an individual associated with ORI.

Mr. Mark A. Chandler, Director July 18, 2013 Page2ofl5 been achieved. As examples, approximately 40 acres of land were acquired; a portion of that land was graded; the infrastructure has been installed; the primary building has been constru cted and furnished; programs that serve the target groups have been established; and, in order to do all of this, ORIAI-I has raised several million dollars from sources other than the funds it receive d through the City’s CDBG program as well as garnered a large base of community support for its programs. As will be described in more detail below, the City’s proposal for the future of Aloha Gardens contemplates that the portion of the Project that is most compatible with I{UD’s nation al objectives criteria remain a CDBG project; the remainder of the Project would be converted to a City-managed project. The City also proposes reimbursing the CDBG progra m for funds that are attributable to the portions that will be converted to a City-managed project. Howev er, the City’s proposals set forth in this letter are subject to: (1) the City reaching an acceptable agreement with ORLM-l; and (2) securing City Council approval of the settlement in accordance with applicable laws. The specifics of the City’s proposals are set forth below, along with the City’s responses to specific findings and concerns raised.
BACKGROUND ORIAII was founded in 1993 as a Hawaii non-member nonprofit corporation with a primary purpose of improving the quality of economic and social participation of the elderly, disabled persons, and persons of lower income. ORI was founded in 1980 as a Hawai ’i member nonprofit corporation with a primary purpose “[tjo promote the general welfare of and provide training for the retarded persons living in the State of Hawaii.” In the early 1980’s, ORI, in part with HUD funding obtained through the City, developed a residential agricultural community in Wahiawa known as Helemano Planta tion (“Releinano Plantation”) for developmentally disabled adults on the 5-acre site of the old Helemano Elementary School. Later, ORI developed (again in part with HUD funding obtained through the City) a training center for residents of Helemano Plantation, which was opened also to other developmentally disabled individuals in the community.

While HUD’s on-site monitoring concerns both ORI and ORIAH and touche s upon the Helemano Plantation project, its primary focus is ORIAH’s Aloha Gardens Projec t. In 1994, ORIAII first applied for CDBG funds to develop the expansion of Helemano Plantation to adjacent lands owned by Castle & Cooke. While ORIA.H, at one point, considered acquiring land in Kahuku for the Project, it ultimately acquired approximately 43 acres adjacent to Helemano Plantation (portion of TMK No. 6-4-3:003) front Castle & Cooke Properties, Inc., and Dole Food Company, Inc., for the Project. Castle & Cooke donated 10 of those 43 acres and ORIAH purchased the remainder using CDBG funds from the City. The Project was originally conceived as being limited exclusively to the elderly and developmentally disabled. The intent changed to include a focus on econom ic development, which required job creation in accordance with a set formula based on the total CDBG monies disbursed; part of the Project would be devoted to public facilities. Over time, the Project reverted to the original intent. The original Subrecipient Agreement between ORIAI1 and the City for CDBG funding for the Project was entered into on February 23, 2001, for $1.5 million to acquire a property near Kahuku

Mr. Mark A. Chandler, Director July 18, 2013 Page 3 of 15 and owned by Campbell Estate for a social services facility. Over the next five years, through April 18, 2006, the Subrecipient Agreement was amended nine times as the scope of the project changed and more funds were allocated. With the final amen dment, the total amount of CDBG funding for the Project rose to $7,924,850. Certificate of Occupancy for the Wellness Center issue d on March 24, 2009, and the Center opened later in 2009 or early 2010. The last Project invoice paid with CDBG funds was dated May 2006. The Camp Pineapple struc tures were constructed from 2006, and the City believes they were completed in2010. Acco rding to ORIAH, non-CDBG funding and material in-kind support were relied upon to complete the Project. Concerns about whether the Project was adequately meeting a CDBG national objective were raised by HUD in its May 27, 2011, monitoring letter to then -Mayor Peter Carlisle (the “May 2011 Letter”). See attached Exhibit 1 As a result, the City and ORIAH entered into a Memorandum of Understanding dated June 27, 2011 (Exlib it_bit2), which was reviewed and accepted by HUD, and which was aimed at ORTAH incre asing the utilization rates for the Project, both at the Wellness Center and at Camp Pineapple, and the City stepping up its monitoring activities so as to bring the Project in compliance with its stated national objective. Since that time, the City has regularly monitored ORIAM and has subm itted to 1-JUD quarterly monitoring reports documenting efforts to increase utilization rates. Additional oversight efforts by the City is reflected, as an example, in the fact that the City’s Fede ral Grants Unit in the Department of Budget and Fiscal Services (“BFS”), expressed its concerns in 2012 to the City’s Department of Planning and Permitting (“DPP”) about ORTAH’s requ est to DPP for a minor modification to a Special Use Permit (“SUP”) that would have had the effect of shifting developable lands surrounding the Weilness Center to ORIAH’s adjacent land that is not subject to CDBG requirements. See attached Exhibit 3. In the June 3 Letter, HUD restates in Finding 1 concerns origi nally raised in its May 2011 Letter and that apparently have not been closed by HUD . The June
ORIAH held a ceremonial ground-breaking for Aloh a Gardens on November 12, 2002. Seven years later, a temporary

3 Letter also raises a number of new issues not previously identified by HUD to the City , including in the May 2011 Letter. For example, HUD’s Finding 2 raises new questions as to whet her contract payments for Aloha Gardens included work that did not pertain to CDBG-el igibie activities or projects. HUD’s Finding 3 raises new questions about public services gran ts to ORIAII that pre-date the City’s fiscal year 2006. 1{UD’s Finding 6 raises for the first time a conflict of interest issue in connection with the City’s CDBG Loan Conversion prog ram, concerning which the City has already taken corrective action in response to earlier mon itoring by HUD.

In the June 3 Letter, I{UD allowed the City 45 days to respond to the previous Findings that were not closed by prior administrations and to the new Find ings. The City has devoted significant resources to investigate the facts of the City’s three deca des long relationship with ORI and

During this period of time, the CDBG grants were identified administratively and made through budget ordinances by the City Council. In 2003, HUD expres sed concerns over possible conflicts of interes t for Council members who were involved in CDBG findi ng decisions, as is more fully discussed in response to HUD Finding 6. In October 2006, Council adopted a resolution naming Council appointees to a selection committee that would make recommendations to DCS on CDBG awards.


Mr. Mark A. Chandler, Director July 18, 2013 Page 4 of 15 ORLkH in order to develop meaningful responses to all of the Findings and Conce rns raised. Due to the long history, the changes in administration and the loss of historical knowl edge, we have relied on documents and spotty recollections of available witnesses. ORIAI -I has refused to permit the City to interview its past and present employees and officers and initiall y refused to permit the City to review its files and documents. Accordingly, the City is unable to conclude its internal review prior to HUD’s deadline for this response. Nevertheless, the City submits this response, with a proposed resolution and corrective action plan for HIJD’s consid eration

Under this finding, HUD notes that the purpose of the Wellness Center and Camp Pineapple facilities was to serve elderly and developmentally disabled persons, which are presum ed benefit categories under the CDBG national objectives at 24 CFR 570.208(a)(2). HUB has concluded that there is insufficient documentation or records to demonstrate program compl iance with a national objective as required by 24 CFR 570.208 and 570.506. Additionally , HUB has concluded that the City will not enforce and take action to ensure CDBG progra m compliance with regard to ORTAH’s CDBG assisted projects. HUD’s Corrective Actions: 1. The City is advised to reimburse its CDBG program S7.924.850 with non-federal funds. 2. Until the funds are repaid to the CDBG program the City must record the $7,924 ,850 payable to the CDBG program as an account payable in its accounting records for disallowed program costs.
iBIS draws and cancel the Aloha Gardens activities. The funds shall be noted as a return

3. Upon receipt of the funds into the City’s local CDBG account, the City must revise the

of grant funds and must be promptly reprogrammed for other CDBG-eligible activities. sonse:

The City acknowledges FTIJD’s concerns regarding ORIAI-l’s compliance with CDBG national objectives. The City further acknowledges that HUD’s concerns over this organi zation’s abiliw to run a viable program have been repeated over the years, through three prior City administrations and now to this fourth current administration. The past efforts of prior administrations to impress upon ORLkH the seriousness of noncompliance and the consequences of failure to meet the national objectives have been largely unsuccessful. Accordingly, the City is now faced with putting its entire CDBG program at risk for loss of funding that would benefit other worthy and compliant nonprofit organizations serving low and moder ate income residents. In part to address Finding 1, the City proposes reimbursement of approximately $1.88 million to the CDBG program. A portion of that reimbursement includes fair value for the acquisition of and CDBG-funded improvements to Camp Pineapple, with the intent to remov e Camp Pineapple from the CDBG national objective requirements. The City is committed to workin g with ORIAJ-{ in a focused effort to sustain national objective compliance for the Weilness Center and the
Attorneys for ORIAH permitted the City to briefly inspect some documents and have indicated a willingness to permit further inspection.

Mr. Mark A. Chandler, Director July 18, 2013 Page 5 of 15 remaining Aloha Gardens land acquired with CDBG finds, including improv ed monitoring as outlined in the City’s proposed Corrective Action Plan. The remainder of the reimbursement addresses the eligible cost issues raised in Findings 2,3 and 4. The City acknowledges that documentation from ORL&H for some payme nt requests was unclear. To address HUD’s concerns about potentially ineligible costs in Finding 2, the City estimated a proportionate share of the development and construction costs for reimbursement. The City believes that the estimated share for reimbursement overstates the potent ially ineligible costs but is willing to accept the additional amounts to resolve Finding 2. The cost issues in Findings 3 and 4. and related reimbursement, concerning ORIAH’s separate acquisition of the three acre parcel used for entry to the Project site and for parking (the “Entry Lot”) are addressed in Finding 3. REID FINifiNG 2: ACqUISITION AND CONSTRUCTION PAYMENTS FRTD notes under this Finding that the City authorized $7,924,850 in CDBG payments for the Project. HUD concludes, however, that construction contract payments for the Project included work that did not pertain to CDBG-eligible activities/projects, that ORIAH used CDBG funds to pay for costs not associated with the CDBG-eligible Aloha Gardens Project and that payment requests were not detailed enough to confirm the costs were attributable to the CDBG-eligible Project. HUD finds that these costs should be disallowed. FEUD’s Corrective Action:
Per FEUD, resolution of this Finding is subject to completion of the correct ive action in Finding 1.

City Response: The City does not dispute that a charge for $275 for vegetation control for a private property near Pearl Harbor should be disallowed and reimbursed, and points out that some of the items listed on Table 1 in the June 3 Letter are addressed in other parts of this letter. However, the bulk of the expenses listed are net specific enough to address at this time. The City will address this Finding by implementing the proposal described in the City’s response to Finding I and reimbursing a conservatively proportionate share (overstates the potentially ineligible costs) of total development and construction CDBG-funded expenditures.


In the first sentence describing the “Condition” relating to this Finding, FEUD concludes that the City authorized ORIAH to acquire with CDBG funds what the City’s DPP identified as an “illegal” three-acre parking lot adjacent to OREs Plantation Hale trainin g facility (Helemano Plantation) for mentally-challenged clients. HL D finds that such use of $597,780 in CDBG funds T resulted in an overpayment and ineligible use of CDBG funds. HUD’ s Corrective Action: Per FEUD, resolution of this finding is subject to the corrective action in Finding 1. City Response: There are two parts to this response.

Mr. Mark A. Chandler, Director July 18, 2013 Page 6 of 15 First, the City believes that the document referred to in the first sentence describ ing the Condition is an email dated April 22, 2003. from a staff person at the DPP addressed to other City personnel with the subject line, “Prposed [sicj acquisition of additional lands adjacent to Helemano Plantation for for [sic] ORI’s Aloha Gardens”. See attached Exhibit 4. Tn that email, the DPP staff person says: I recently learned that ORT was planning to acquire about 3+ acres located between Flelemano Plantation and Karn Hwy. for access as require d by condition of the SUP from Castle & Cooke (see attached aerial photo). However, that access area also has parking for Helemano Plantation that may have been established illegally since the City Council Resolutions that covered Helemano Plantation would not have included separate parking on Dole Plantation lands. Apparently, ORT made this arrangement for off-site parking on their own. If the property is acquired for access then it “belongs” under the Aloha Gardens project and should be included in the SUP/variance. However, that would bring it beyond the 15-acre limit and an amendment to the SLP would require Land Use Commission approval. The staff person then goes on to list three options. The approximately 3 acres referenced in the email is the Entry Lot, which serves as the primary access road into the Aloha Gardens site. Wiile there is surface parking on the Entry Lot, such parking was constructed before Aloha Gardens was constructed, as shown in the aerial photograph attached as Exhibit 5, and initially served as the parking area for the Helemano School Site. The supposed “illegality” referred to in the email refers to the possibility that such parking was not approved via the Hawaii Revised Statutes (“fiRS”) chapter 2OlG exemption that permitted the Helemano Plantation to be developed in the agricultural zoning district. Even if the surface parking on the Entry Lot was not a part of the HRS chapter 201G exemption, the City intends to address this Finding through an agreement with ORIAF { that addresses many of the Findings and Concerns and, pursuant to which, ORIAH will undert ake option 2 mentioned in the email, that is, “Modify the recently approved SUP to reconfigure the approved area to incorpoate [sici the access/parking so that there is no net increase. That will require processing another SUP amendment and will take at least 3 months Second, the City proposes to reimburse a portion of the CDBG funds that were used by ORIA}{ to acquire the Entry Lot. The April 14, 2003 Summary Appraisal Report prepared by an independent appraiser appraised the Entry Lot, having approximately 3.1 acres and AG- 1 zoning, at $650,000. Exhibit 6 at 8. The appraiser derived that value using the Direct Market Comparison approach. Id. at 5. For that approach, the appraiser review ed five comparable transactions. Id. at 6. Transactions No. 1-3 were AG-l (agricultural) zoned lots in a Waialua agricultural subdivision. Id. Transaction No. 4 was an AG-2 (agricu ltural) zoned lot in Kahuku with grandfathered commercial structures. Id. Transaction No. 5 was a B-i (commercial) zoned lot in Kunia purchased with plans to construct a shopping center. Id. The appraiser adjusted the values of the comparable transactions based on several factors, includi ng location, access, lot size, and zoning. Id. at 7. For zoning, the appraiser assumed that parking was a principal permitted use of the Entry Lot. Id. As a consequence, for compa rison to the other AG-i lots (Transactions No. 1-3), for which parking was not a principal pennitt ed use, the appraiser

Mr. Mark A. Chandler, Director July 18, 2013 Page 7 of 15 increased the reported value of those transactions by 25% to reflect the assumed superior use available on the Entry Lot. Id. For Transaction No. 4, with its grandfathered commercial use, the appraiser deemed the value comparable and made no adjustments based on zoning. Id. Finally, because Transaction No. 5 was zoned for more general commercial use, the appraiser reduced the reported value of that transaction by 20% to reflect the inferior uses available on the Entry Lot. Id. Assuming that the other adjustments for location, access, and lot size remain unchanged, the difference between the appraised value for permitted uses of an AG-l zoned lot and an AG-I zoned lot with parking as a principal permitted use, is 25% of the value for the traditional AG-I zoned land. Based on the CDBG expenditure of $594,134.67 to acquire the Entry Lot, the difference would be $118,826.94. The City further would note that direct market comparisons between per acre value in the January 2003 appraisal of the 33 acre parcel to the per acre value in the April 2003 summary appraisal of the 3 acre Entry Lot are not linear. As explained by the appraiser, larger undivided parcels are less marketable. Id. at 7 (“Adjustments for size were made based on the concept that larger parcels, all other factors being equal, tend to command lower unit rate values.’). In this instance, the appraiser reduced the reporte d value of lots only 2 acres larger than the 3 acre ORIAH parcel by as much as 13%. Id. The City proposes to reimburse the CDBG program $1 18,826.94—the increase in value resulting from parking as a principal permitted use on the Entry Lot, according to the appraisal—to resolve concerns regarding the principal permitted use of the Entry Lot. This amount is includ ed in the total amount proposed in response to Finding I above. The Entry Lot provides a shared access that will continue to benefit ORT’s residential community of developmentally disabled individuals at Helemano Plantation and ORTAH’s beneficiaries at the Weliness Center, consistent with CDBG requirements.



This Finding concludes that the City authorized a CDBG payme nt for a parking lot that was not a principal permitted use, failed to ensure the properly appraisal was based on permitted uses of the site (agricultural), and permitted ORIAR to use CDBG funds to pay more than the fair-market value for the acquired property. MUD’ s Corrective Action: Per MUD, resolution of this finding is subject to the corrective action in Finding I.
City Response:

The City acknowledges that it appears the surface parking on the Entry Lot was not a properly permitted principal use at the time that the Entry Lot was purc hased by ORIAIT. The City submits however, that the land had been used as a parking lot for many years prior to ORIARs purchase and that the City advised ORIAH that an option to correct the deficiency would be to reconfigure the boundaries of its SUP to include the parking lot. The City also submits that, since the purchase of the Entry Lot, the City has properly enforced its zoning requirements when ORIAH has made requests that have raised questions rega rding its compliance with MUD requirements.

Mr. Mark A. Chandler, Director July 18, 2013 Page8ofl5 As stated in the City’s response to Finding 3, the City will reimburse the CDBG progra m S 118,826 and will address this Finding through an agreement with ORIAIT pursuant to which ORIAH will request modification of the SUP to include the surface parking areas within the Entry Lot. fflJD FINDING 5: PuBLIC SERVICE COSTS AND EXPENDITURES HUD finds that, for certain public service subrecipient agreements with ORIAH prior to 2006, the City’s records fail to demonstrate that payments to ORJAH were direct costs for implementing a public service activity, resulting in ineligible or questionable CDBG program payme nts that include, but are not limited to, grant research and management fees. HUD’s Corrective Action: HUD proposes that the City reimburse, with non-federal flmds, the CDBG progra m for S226,680 or provide supporting documentation for the eligibility of the CDBG expenditures on the public services costs identified by ITUD as ineligible or questionable. City Response: The City has reviewed HUD’s listing of questionable and ineligible expenditures set forth in this Finding. The City notes that all of the questioned expenditures were under public service subrecipient agreements for years prior to 2007. None of these expenditures were mentioned in HUD’s May 2011 Letter. Reimbursement should not be required for “questionable” expend itures under subrecipient agreements closed out before June 3, 2009, as the four-year record retennon period has expired. 24 C.F.R. § 85.42 (as modified by 24 C.F.R. 570.502(a)(16 )). ORIAR § administered five CDBG-funded public service grants from 2000 to 2006. The last subrecipient agreement closed no later than January 2007. See attached Exhibit 7. To the extent some records for the grants were available, the review conducted by the Cit has not produc ed documents that would support the conclusion that these “questionable” expenditures were in fact ineligible. With respect to the automobile expenses identified in HUD Finding 5 as “ineligible,” the City’s research indicates that these expenses were for vehicles used to transport ORJAH clients, and not for ORIAII employee auto expenses. See attached Exhibits 8 and 9. Accord ingly, these expenditures were CDBG-eligible. With respect to the “ineligible” items for “Grant Research ($6,000) and “Admi nistration” ($20,000), those items are identified as proposed categories of expend itures in Subrecipient Agreement No F76820. The City does not have extensive records for Subrecipient Agreement No. F76820 because the record retention period expired in 2005. Althou gh ORIAH’s final expenditure report does not expressly charge for the ineligible categories, Exhibit 10, the City would agree to reimburse $26,000 to the CDBG program.

Mr. Mark A. Chandler, Director July 18, 2013 Page 9 of 15 CUBG FINDING 6: LOAN FoRGwENss HUD finds that the City made a decision to forgive ORI (an ORIAH affiliate) nearly $1.2 million in CDBG loans when City employees, running for elected office, were directl y involved in approving, developing, or recommending the ORI CDBG loan forgiveness while receiving campaign donations from representatives of or persons closely associated with representatives ot ORT or ORIAH (collectively referred to as the “0111 Representatives”). HUD finds that the financial relationship between ORI I ORIAH and City staff created a CDBG conflict of interest situation. HUD’s Corrective Action: HUD proposes that: The City immediately reinstate the ORI loans and interest due until it 1. issues a public notice and complies with the 30-day comment period advising the public of the City’s OH loan forgiveness, including the total amount forgiven (loan and interest) and the situation involving the ORlJCity conflict of interest. The City provide NIJD with a copy of the public notice ‘and accounting 2. entries reinstating the ORI CDBG loan and interest account payable addressing Corrective Action I above. 3. The City provide a copy of the City’s loan forgiveness policy to its subrec ipients that currently have an outstanding CDBG loan with the City and provide HUD with a copy of the subrecipients’ written receipt of the policy. Ciw Response: There are two parts to this response. 1. The OH Loan Conversion. The City aclaaowledges that, until 2010, it was City policy to deny requests to convert HUD-funded loans to grants. In 2009, however, the.City’s Department of Community Services (“UCS”) and the BFS began a dialog ue concerning a change in City policy to permit loan conversion for CDBG and HOME loans that supported special needs housing or public facility projects. Although the December 20, 2009, memor andum from BFS cited in the June 3 Letter (Exhibit 11) raises concerns about loan conversion and specifically references OH; the November 13, 2009, memorandum from DCS (Exhib it 12) does not mention OWl and includes a list of 17 loans potentially eligible for conversion. The DCS response to BFS on March 16, 2010 (Exhibit 13), explained that DCS had reviewed the eligibl e loans and selected ORI as a “pilot project;” DCS emphasized that the policy change only concem ed a limited subset of HUD-funded borrowers that typically relied on government subsides for operations and were not self-supporting. Although the City interviewed individuals involved in the ORI loan conversion process and reviewed relevant documents, no withess or document explains why the City selected OH as the pilot project for loan conversion or why a loan conversion policy was not written and publicly disseminated for comments before conversion of ORI’s loans. While a technical distinction, the City notes that the loan was not ‘forgiven”; rather, the loan was convened to a grant. As far as we can determine, based on our review of the documents and the witiess interviews, the individuals involved in the ORI loan conversion decision-making process (from the fall of 2009 throug


Mr. Mark A. Chandler, Director July 18, 2013 Page 10 of 15 As detailed in the City’s prior monitoring response dated May 7, 2012, the City’s Loan Conversion Policy was previously the subject of public notice and comment. The City nevertheless commits to taking the corrective actions outlined above for HUD Finding 6. 2. Campaign Contributions. Finding 6 also alleges a CDBG conflict of interest situation arising from the receipt of campaign donations from ORI Repres entatives by City employees who were running for elected office and were involved in approv ing, developing, or recommending the OM CDBG loan conversion. In reviewing this matter , we do not agree that a CDBG conflict of interest exists in the absence of evidence that an individ ual received a direct benefit, such as would exist where the government official who participates in the decision making relating to a subrecipient’s CDBG-funded project is also an emplo yee or officer of the subrecipient. Our review of the facts did not support a CDBG conflic t of interest in this situation.
Our research disclosed many City officials and employees who receive d campaign contributions over the years from ORI Representatives. A copy of our cursory research is attached for your information as ExhibiLi4. While this list indicates that ORI Representativ es contributed over $100,000 over the past 16 years to political campaigns, and while some may infer an attempt to unlawfully influence the political process, we have found no evidence of a quid pro quo relationship nor any direct benefit resulting from the loan conversions inuring to City officials who participated in the decision that would constimte a conflict of interes t.

If you are aware of any evidence of benefits received by any City employee or official other than campaign contributions, we would appreciate receiving that evidence so that we may review it to determine if there was a conflict requiring any action. We note that federal and state laws protect the First Amendment rights of individuals to make political contributions. While Congress may limit, regulate or condit ion the use of federal funds that it appropriates, the federal government is much more circumscribed in its efforts to restrict private, nongovernmental grantees or contractors, or persons affiliat with ed them, from using their own private or non-federal resources to engage in political advocacy or to make campaign contributions in state or local election contests. Serious First Amend ment concerns are implicated when the government places restrictions on private persons in the area of political advocacy, and the courts have been careful and deferential to the rights of private parties in terms of their freedoms of association and expression. We have asked our Ethics Comm ission to investigate whether any conflict of interest under the City’s ethics laws existed for those who received campaign contributions and were involved in the decision making of the loan conversion. The City notes that HLTD has previously raised conflict of interest issues in connection with the administration of the CDBG program and approval of grants. Most notably, by letter dated November 25, 2003, addressed to Council Chair Donovan Dela Cruz (Exhibit 15), you advised the Chair of the possible occurrence of a conflipt of interest involving the Councilmembers during the City budget process for CDBG-assisted activities. You advised of the importance of Councilmembers’ understanding of the HIJD program regulations as the Council makes the final funding decisions for use of H1JD Community Planning and Develo pment program monies, citing to 24 CFR 570.611. You concluded that, at a minimum, Counc ilmembers who receive the decision; (2) Trudi Saito, then-Deputy Managing Director (“DM11’); (3) BFS Directo r Rix Maurer; (4) DCS Director Debbie Morikawa; (5) Ernie Martin (OSP Executive Director); and 6) Keith Ishida. a DCS division chief. June 2010) were: (1) Mayor Hanneman, who indicated his general agreem ent with

Mr. Mark A. Chandler, Director July 18, 2013 Page 11 of 15 payment or who are members or an organization’s governing body should refrain from offering for consideration or voting on a funding measure for that organization. Thereafter, on July 14, 2004, the City Council adopted Resolution 04-189 . CDI, which urges the Mayor to establish a review panel to make recommendations on CDBG funding of projects for nonprofits. The Resolution proposed a review panel consisting of 7 memb ers, 3 appointed by the th Council, 3 appointed by the Mayor, and the 7 member nominated by the Mayor and confirmed by the Council; members serve for 4-year terms and no member is to serve more than two consecutive terms. This format for a review panel was not implemented by the City and an agreed upon format for a review committee was apparently not established until the City Counc il adoption of Resolution 06-316, FD 1, on October 25, 2006, to select members for the CDBG and HOME project selection committee for the fiscal year 2007-2008 CDBG and HOME projects. This Resolution identifies the Council’s three appointees to the committee and recommends a fourth individual to serve as the jointly selected member of the committee. This Resolution directed that a copy of the Resolution be transmitted to you; we trust you received a copy in good order. The Mayor identifies three members for the committee and agrees upon the joint member, thus establishing a 7-member selection committee. This is the format curren tly in place and most-recently effected with the adoption of Resolution 13-7, CD1, appoin ting the Council’s thiee members and recommending a fourth member for CDBG and HOME projects for the fiscal year 2013-2014, and providing also that a copy of the Resolution be transm itted to you. Again, we trust you received a copy in good order.

Under this Concern, HUD concludes that the City failed to meet its obliga tion to administer its the ORLA}I grant in accordance with Subpart J, Grant Administration [24 CFR 570.500 series), and Subpart K, Other Federal Requirements [24 CFR 570600 series] , and related provisions, citing as examples that: During the period 2004 through 2011 the City failed to addres s a possible violation of the anti-kickback {provisions]of the CDBG program, arising from a September 22, 2004 letter from ORI documenting that it had negotiated a $90,000 payme nt from the contractor in exchange for a $5.3 million CDBG. • The City failed to enforce against ORIAH certain Special Use Permit (SUP) limitations relating to a parking lot parcel acquired for the Aloha Gardens Project and failed to follow a DPP recommendation that the parking lot be eliminated. • Tn 2004 and 2007, the City reviewed ORIAI4 but failed to identif y any noncompliance issues. HUD Corrective Action: ThJD proposes that: I. 2. The City ensure proper authorities are reviewing the possible kickback situation. The City train current City officials, staff, and management, including but not

Mr. Mark A. Chandler. Director July 18, 2013 Page 12 of 15 limited to, individuals that have and had a direct role in the oversight of the ON Aloha Gardens project on the Copeland “Anti-Kickback” Act 18 Usc 874. 3. The City establish a system that will ensure subrecipient compliance with HLTD program requirements, as measured through a decrease in non-compliance HUD program findings for the City and its subrecipients.
Ciw Responses:

Athough HUD poses this matter as a “Concern” rather than a “Finding,” we have spent considerable time investigating the history of the City’s relationship with ORLAH and its related organizations. The evidence of political contributions to City officia ls as well as state and federal candidates or elected officials is clear. We have found evidence of inquiri es by City Council members on behalf of ORIAIT, but such inquiries on behalf of constituents are routine actions by Council members and on its face, completely proper. There is anecdotal eviden ce indicating that ON Representatives have the ear of and support from elected officials. Our internal review showed management inconsistencies, which could promote an environment where external influence could be exerted. some of this can be explained by the history of the creation of DCS. Other explanations are attributed to the budget cuts and restrictions that forced more work on fewer staff.

However, two facts contribute to the oversight challenges of the Project: First, the Project was managed by the DC5 Office of Special Projects (“OSP ”), and not by the Community Based Development Division (“CBDD”). CBDD has more expertise in managing construction projects and a process for documenting work progress and is typically responsible for the CDBG-funded construction projects. Second, after construction was completed on the Project, there was a breakd own between DCS and BFS with regard to which department and person(s) were responsible for monitoring compliance with the CDBG national objectives post-construction. Part of the explanation of this breakdown is the fact that, while construction may have been completed for the Weilness Center in 2009, the Federal Grants Unit of BFS did not take over post-development CDBG compliance monitoring until 2011. Regardless of the reasons, we have chosen to make a fresh start by reorga nizing DCS so that there is one unit responsible for grants rather than two, as in the past. In additio n, we have strengthened our interagency protocols to hold both DCS and BFS jointly responsible for certain aspects of program management. These organizational changes provid e both check and balance in project management as well as coverage when staffing changes affect monitoring responsibilities. 1. Regarding the first Conective Action, the City notes, as HUT) has noted, that the City did take action in 2012 by refen-ing the alleged kickback situation to the attentio n of the office of the United States Attorney (“USAO”), after the matter was brought to the City’s attention by HUD.USAO has confinned receipt of the September 22, 2004, letter. Most recently, as a result of the City’s present internal review, on July 16, 2013, the City provid ed to the USAO a copy of a September 21, 2004, letter from ORIAH to its contractor relating to the matter. This letter was provided to the City by counsel for ORIAH. Copies of both letters are attached as Exhibits 16 and 17.

Mr. Mark A. Chandler, Director July 18, 2013 Page 13 of 15 2. Regarding the second Corrective Action, the email reflecting the advice of DPP and the City’s response are referred to in detail in the City’s response to Finding 3. 3. Regarding the third Corrective Action, the City’s proposal to take steps to strengthen overall CDBG program compliance by subrecipients is set forth in more detail in the proposed Corrective Action Plan attached to this letter as Exhibit 18. The City believe s that the actions proposed will enhance the City’s ability to identify compliance with CDBG -requirements by subrecipients and to promptly address any concerns.
HUD CONCERN 2: RECORDS MISSING AND WITHHELD During follow up monitoring in the last two years, WJD has found that the City was initially unable to produce the entire Aloha Gardens Project files and that, when produced, the records were incomplete. In addition, HUT) states that the City withheld certain documents from it claiming “attorney-client privilege.” HUT) states that the City’s claim of attorney-client privilege

conflicts with CDBG program regulations. HUT) Corrective Action: HUT) proposes that:

I. The City notify all subrecipients in writing of the subrecipients’ obliga tion to provide HUT) access to their records and failure to do so is a violation of program regulations that could result in disallowance of the subrecipients HUD funds. 2. The City provide HUD with a listing of the subrecipients notified and copies of the notices provided to the subrecipients. 3. The City establish a centralized records system for documenting all grants management activity. Until the City establishes a centralized records system, the City needs to maintain all documents generated for a HUT) Annual Action Plan Activity (CDBG , HOME, HOPWA and ESG), regardless of the City division creating the document, within the departm ent responsible for developing and submitting the City’s Annual Action Plan (currently Budget and Fiscal Services). City Response: The City acknowledges that it initially was unable to locate all DCS project files requested by Hull The City notes that the request was made orally to an acting DCS Division Head and afforded the City only a few hours in which to locate files requested by BUD and to review those files so that the originals could be delivered to HUD’s offices. The City continued its search for files afler HUD’s initial request and supplemented its response as files were located and became available for review. The City notes that only three documents and two email streams were withheld pursuant to the attorney-client privilege. Copies of privilege logs that describe those documents and email streams were previously provided to HUD are attached hereto as Exhibi ts 19 and 20. Apart from this limited number of attorney-client privileged documents, the City produced or made available for production its DCS project files for review and copying by HUD. At the request of the HlJTJ

Mr. Mark A. Chandler, Director July 18, 2013 Page 14 of 15 Director, the City’s BFS Director set aside for HUD’s review certain BFS files; howev er. HUD has not asked to review such files. Regarding RUD’s expressed concern as it relates to the City’s assertion of attorney-clien t privilege with respect to the limited number of docurnents, the City must respectfully disagre e with HUD’s position, which we interpret as being that the attorney-client privilege does not exist in the context of CDBG monitoring by HUD. In our view, the attorney-client privilege is a bedrock principle of the American legal system, regardless of whether asserted in the CDBG monitoring context. While the City believes that it is important to assert the privilege when applicable and appropriate, we note that efforts were made by DCS to accommodate HUD’s desire for access to privileged documents by (1) stating that a general waiver of the attorney-client privile ge was not intended by the effort, and (2) authorizing the City’s Department of the Corporation Couns el to produce the privileged documents upon HUD’s agreement that the production would be for the limited purpose of HLTD’s monitoring and that such production would not constitute such a general waiver of the privilege. This offer was made twice to the HUD Director in 2012, but the City has not received any response. The City hereby renews that offer. Having said all this, the City agrees to undertake the above Corrective Actions in connec tion with this Concern. The City’s proposed efforts regarding establishment of a centralized record s system are set forth in more detail in the proposed Corrective Action Plan.

The City would like to express its appreciation for the time and effort made by HUD in ensuring that its grantees are aware of and implement the requirements of the CDBG program. We believe HIJD’s letters, and the City’s responses, reflect our mutual desire to serve in the best interests of the people of the City and County of Honolulu. After the submission of this letter, the City intends to confer immediately with ORIAH and its counsel to seek its agreement on corrective actions for certain Findings. We look forwar d to working further with you on the matters mentioned in this letter. Should you have any questions or require additional information, please contac t Corporation Counsel Donna Y. L. Leong. Aloha,

EMBER LEE SHINN Manathng Director Attachments cc Department of Budget and Fiscal Services, Attn.: Director Nelson Koyanagi

Mr. Mark A. Chandler, Director July 18, 2013 Page 15 of 15
Department of Community Services, Attn.: Director Pam Witty-Oaklan d Department of Corporation Counsel, Attn.: Corporation Counsel Donna V. L. Leong Mark Bennett, Esq., Counsel for ORI Anuenue Hale, Inc.

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