Bank’s Woes Could Cost L.A. Millions

The city of Los Angeles could be forced to repay millions of dollars to the federal government because the Los Angeles Community Development Bank failed to meet performance goals, city officials said.

The bank, overseen by the city, was funded by the federal Department of Housing and Urban Development to revitalize impoverished neighborhoods. In return for funding, the bank was required to create jobs for residents in target neighborhoods.

But the bank has fallen short on those requirements, in part because of a $35-million program to channel venture capital to technology start-ups in hopes of a fast payoff in the stock market. The technology companies are situated outside the core zone the bank aims to serve and have hired only a handful of local residents.

Preliminary findings of an audit by HUD’s Office of Inspector General have raised the possibility that the city will have to repay HUD out of its general fund, according to officials who have been briefed on the findings.

Councilman Eric Garcetti, who chairs the City Council’s Committee on Economic Development and Employment, said the city is challenging HUD’s preliminary conclusions.

“The question has come up whether there are disallowed costs for which the city would be on the hook, [but] that question is still up in the air,” he said. “The city has maintained that the [inspector general’s] original formula for disallowed costs is too stringent. I think they understand the argument that we made and gave us some hopeful signs.”

Garcetti declined to discuss the amount in question, but other sources with knowledge of the audit said it was in the millions of dollars.

The findings by auditors for the independent watchdog agency were contained in a confidential early draft shared with representatives of the bank and the city and county of Los Angeles last month. Bank and local government officials have questioned the auditors’ calculations of the disallowed costs, and the auditors have agreed to review those concerns.

“We had issues regarding the methodologies they used and conclusions they reached,” said Corde Carrillo, director of economic development for the county’s Community Development Commission. Though the bulk of the bank’s money has been spent in the city--which controls the bank’s purse strings and guarantees its funding--10 loans have been made in unincorporated county territory.

The disputed issues center on how job creation figures are counted and when the requirements must be met, Carrillo said. Bank officials have asked borrowers to create the jobs within two years but say HUD regulations don’t specify any time limit.

Also at issue is whether job creation is still required if loans sour and companies are shuttered. The bank has been plagued by early loans that went bad, including one that ultimately totaled $24 million.

Much of the bank’s $430 million in funding is guaranteed by the city’s future federal community development block grants, which the city could lose if the bank cannot repay its obligations. The audit, which was due to be released by March 31 but has been delayed, raises the prospect that losses would have to be covered by the city’s already thin general fund, which is used to pay for such things as police, parks and libraries.

“In tough budget times we need to use the general fund for core services ... so any time that we have unexpected costs, it severely impacts the quality of life for the residents of L.A.,” Garcetti said. “All parties involved are working very hard to make sure there’s responsibility where there needs to be, while at the same time innocents aren’t caught in the cross-fire of [federal] regulations.”

Last Tuesday the City Council voted to reject the bank’s annual business plan, which is required to maintain its funding, triggering a 60-day negotiation period to determine the institution’s future. A staff report to the council noted that if HUD finds the bank’s use of funds to have been ineligible, “the city may have to reimburse costs with nonfederal funds.”

HUD’s Office of Inspector General declined to comment on the audit before it is made final.

Though the bank’s board is appointed by public officials, the bank is quasi-private and was designed to operate at arm’s length from the city. The bank was created in the wake of the 1992 riots to boost the economy in poorer neighborhoods.

According to the most recent bank and city reports, by last summer the bank had channeled only 11% of the jobs it created to the people it was designed to serve, rather than the required 51%.

City Administrative Officer William T. Fujioka declined to comment on the general-fund issue, citing sensitive negotiations.

“We’re still working out the details, both with the bank and with the [inspector general],” he said. “This next 60 days are real critical.”