Federal Agency says WEDC just a “third party contractor”…block grant program in shambles

This afternoon, Federal officials have weighed in on the Walker Administration’s mishandling of a critical federal block grant program. Badger Democracy has learned from US Department of Housing and Urban Development (HUD)officials that the DOA response to HUD’s highly critical report is currently under review by the federal agency(link to August 16, 2012 HUD letter to DOA). HUD expects to have a written response in 30-45 days.

According to HUD, DOA “…lacks the administrative and management capacity to properly oversee the (CDBG) activities of WEDC.”

Meanwhile, the federal agency is making clear their position that the Wisconsin Economic Development Corporation (WEDC) is merely a “third-party contractor” in the eyes of the Federal Government.

In addition, serious questions remain as to whether DOA is functionally capable of administering and overseeing WEDC, required under the pending (and still under review) agreement with the federal agency. Hanging in the balance are millions of dollars in Community Development Block Grant (CDBG) money, a critical program to local governments.

The entire fiasco raises the question exactly how WEDC is making government “more efficient” than the previous Department of Commerce (DOC)? Even if the agreement between DOA and HUD is approved, DOA will be required to have full oversight of WEDC for the administration of federal grant programs. So much for eliminating the middle man and streamlining government.

Also of significant concern is the failure to re-allocate a total of $43 million in local revolving loan funds (RLF) which have been repaid from previous projects. In its criticism of the state administration of the program, HUD officials stated:

In 2010 and 2011, local revolving funds could have contributed over $7,000,000 to economic development projects benefitting residents of their counties. Instead, the State of Wisconsin funded the projects using CDBG grant funds.

State officials interviewed by HUD officials gave the reason for this practice in their report (pg 18 of the linked document):

The State of Wisconsin has different loan terms than local RLFs that are more favorable to companies such as lower interest rates and forgivable loans. 

The HUD report provides increasing evidence that Scott Walker’s signature “state agency” has nothing to do with “streamlining government.” Rather, it has everything to do with being a conduit for public money into private corporate capital.

On May 21-24, and again on May 30, 2012, HUD officials were on-site at DOA and WEDC to conduct monitoring of the CDBG program administration. HUD’s monitoring objectives were to determine whether the state has been administering the block grant program in compliance with Federal Law, and if the state has a financial management system in place to “adequately safeguard the funds.”  Some key report findings after financial audits and staff interviews:

1. The state fails to follow its own program guidelines. In one case, a  loan for Kapco corporation in Polk County was approved with a per job benefit of $20,000; in spite of a state plan maximum of $10,000. The loan to Kapco was eventually forgiven, in spite of written state policy that “loans are only forgivable under extraordinary circumstances.” Since 1/1/11, eleven of twenty loans under this plan were forgiven. As part of interview comment, WEDC staff told HUD officials:

Certain jobs were considered more valuable to the state, so limits were exceeded, projects received forgivable loans.

The HUD report was scathing, saying the process had no documentation where there should be a “transparent and defensible process.”

2. Underwriting – Two CDBG awards received no underwriting, bringing into question a wide range of accountability issues. Gilman Corp in Grafton was “skipped to accommodate the business timeline” according to interviewed state staff. Morgan Aircraft in Sheboygan County was claimed to have been performed by WEDC, but as of the report date, no underwriting had been submitted to HUD.

3. Administration and financial management – From 7/1/11 – 3/7/12, WEDC awarded $9,634,470 in CDBG funds that were unauthorized – as it was not recognized as a state agency and oversight by DOA had not been approved by HUD.

The severity of this utter fiasco cannot be overstated. According to the report, “DOA lacks the administrative and management capacity to properly oversee the activities of WEDC.”

As of today, the federal government considers WEDC a “third-party contractor” with the state. Whether DOA will meet the federal oversight guidelines remains to be seen. Meanwhile, the block grant program remains in limbo, and Scott Walker’s signature “agency” is nothing more than a conduit to public funds for private corporations. WEDC as a non-state entity has less accountability, and DOA has yet to demonstrate the ability to monitor its own programs adequately.

The Joint Legislative Audit Committee should launch an immediate audit into the entire program, as it is displaying a tremendous lack of transparency and accountability. Where is the $43 million in repaid revolving fund loans?

This fiasco has been ongoing since HUD’s first letter to DOA in February 2011. Did Paul Jadin’s exit have anything to do with the current state of affairs?

If WEDC cannot meet a basic federal standard as a state agency, was the point of replacing the DOC merely to get away from public accountability? How has this streamlined government?

This story will be updated as it evolves. Previous Badger Democracy articles on this topic can be found here, here, and here.

Repeated attempts at comment from DOA have not been returned.

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