The Detroit News (Michigan) - by Darren A. Nichols

The city is managing federal funding so poorly that it's risking future dollars for social service programs intended to help disadvantaged residents, officials examining Detroit's finances say.

State officials found numerous cases of misspending on salaries and other expenditures in the administration of Head Start, Women, Infants and Children nutrition support, home weatherization and other programs, according to the state's preliminary review of the city's finances.

That puts the city in a vulnerable spot as it seeks to convince state officials that it can handle its fiscal crisis without outside intervention. If Gov. Rick Snyder determines the city requires the oversight of an emergency manager, that person could bar the city from administering federal funds and instead give the job to Wayne County or a private company.

One city union leader fears that could mean people who don't understand Detroit could be making the decisions for those who need services the most.

"Once you start disconnecting from your residents, it creates an environment in which residents don't receive the level of service they should," said Greg Murray, vice president of the Senior Accountants, Analysts and Appraisers Association, who has been critical of how Detroit expends funds for more than a year. "They don't know the population they are serving.

Detroit should administer social service programs because it knows the population it serves.

"Contracting would lead to a disconnect (with people) where it ends up with residents not receiving the services. The city can properly manage social services programs."

But a preliminary state review team that analyzed the city's finances last month found evidence to the contrary. Officials sifted through an 80-page KPMG audit from 2010 that cited several areas of concern.

The city administered nearly $325 million in federal and grant funding in 2010. Among the problems cited in the audit:

• About $12.7 million in questionable salary costs under the city's community development block grant program, which provides funding to nonprofits that handle a variety of programming. Health care, home repair and rehabilitation, and homeless programs are among the services provided by the agencies.
• About $1 million in questioned costs — as well as accounting eligibility and fund reconciliation issues — under the WIC program, a nutritional program for women and children.
• About $846,000 in salary and $246,000 in indirect planning costs in the city's home investment initiative, which is designed to address the impact of the foreclosure crisis.

The review, based on 2010 city records, concluded Detroit is suffering from "probable financial distress." The team found the city's long-term debt exceeds $12 billion.

Questionable purchases

Longtime city activist Ken Reed said it's yet another example of the problems plaguing Detroit.

"One of the things I find troubling … is how funding that has come in that were designed to help low-income people wasn't being distributed properly and it was being sent back to the feds," said Reed, 43, who lives on the city's west side.

"All of this stuff has been handled terribly. Combined with the legacy costs and the running deficit, we're in a real mess."

The city's handling of federal funds in multiple departments has been under scrutiny for years, but has come to the forefront in recent months. Among the departments that use federal funds are Health and Wellness Promotion, the Detroit Police Department, Building and Safety Engineering, and Recreation.

Last year, spending was questioned when a warming center did not open until late February because it didn't have funding.

But a few months later, it was discovered the city's Human Services Department spent nearly $182,000 on office furniture Sept. 27, 2010.

The money came from a $1.1million federal contract to Clark & Associates, a nonprofit acting as a fiduciary to provide a food pantry and clothing for low-income residents.

As recently as last week, the City Council was scrutinizing a no-bid contract of up to $24 million for Clark & Associates to administer funds for Head Start, an early-childhood development program for about 7,000 low-income children. The contract remains stalled in a council committee.

Detroit has had other troubles with administering federal funding. A Sept. 29 report by the U.S. Department of Housing and Urban Development revealed the city might have to pay back up to $26 million after failing to adhere to "procurement standards" for HUD demolition contracts and competitive proposals.

The city also failed to follow financial management standards, including certifying employees working solely with the block grant program, according to HUD.

The developments force some city leaders to question whether Detroit has the capability to handle federal funds.

"You need better leadership in the respective departments that are assigned the mission of getting out social services, and people have to be held accountable," said Council President Pro Tem Gary Brown. "Normally the policies that are in place are good to get services out, but we're not making sure the policies are followed. We can't afford to give money back."

Pontiac could be example

Political analyst Eric Foster says the city's practice of plugging budget holes with federal dollars makes it possible state officials could consider turning the duties over to an outside entity.

"A lot of people don't want to hear this, but that's just the logical conclusion people have to come to," said Foster, whose solution is to centralize federal funds and grant dollars into one city department. "If the resources inside the distressed agency (are) not able to manage and report on the monies that are coming in, you have to logically consider transferring management and reporting to another entity."

Developments in Pontiac, which is under the control of an emergency manager, offer a glimpse of what could happen in Detroit. Federal block grant dollars earmarked for Pontiac were set to be transferred to Oakland County control until U.S. Rep. Gary Peters and Oakland County Commissioner Tim Greimel, D-Pontiac, reached a last-minute deal to block the transfer and keep the money under the city's control. Critics feared the deal didn't maximize the dollars Pontiac could have gotten in federal block grant funds.

Emergency Manager Louis Schimmel sought to transfer the funds to Oakland County after the U.S. Department of Housing and Urban Development claimed Pontiac mismanaged $1.4 million in block grant funds.

Greimel, D-Pontiac, said the action illustrates how emergency managers seeking quick fixes do not always have a community's best interests at heart.

"It's a mentality that is based on what's convenient and expedient, instead of what's in the long-term interest of city residents," he said. "That's not surprising when you consider emergency managers are unelected and not accountable."