Feds say New Jersey may have to pay back $43 million in Superstorm Sandy aid

The troubled rollout three years ago of a Hurricane Sandy rebuilding aid program continues to dog Gov. Chris Christie, with auditors and two Democratic congressman calling for the state to reimburse the federal government for potentially millions of dollars in spending that was inadequately documented or did not follow federal regulations.

An audit released by the U.S. Department of Housing and Urban Development says the state failed to properly oversee Hammerman and Gainer, Inc. (HGI), the company it hired to distribute federal aid, and calls for New Jersey to either justify $43 million in outlays or reimburse HUD using state funds.

Congressmen Bill Pascrell and Frank Pallone, who had called for an audit in 2014 after the state canceled HGI’s contract, sent Christie a letter urging him to address HUD’s findings.

“We fought hard to ensure that New Jersey got its fair share of federal disaster recovery dollars after Sandy, which is why it is disappointing that the state did not do all it could have to ensure these funds were spent in compliance with federal requirements,” they wrote. “The New Jerseyans who struggled to recover from the devastation of Hurricane Sandy deserved better.”

The audit by HUD’s inspector general focuses on the program’s record-keeping and cost problems, alluding only briefly to the impact on homeowners trying to obtain financial help. In late 2014, a year and a half after the storm, thousands were still waiting for long-term rebuilding aid and a poll found widespread dissatisfaction among storm victims, who cited poor communication and responsiveness when they tried to apply for funds. Many had horror stories of delays, lost paperwork, and bureaucratic red tape.

“Performance issues with the contractor affected the state’s implementation of three disaster programs, which resulted in delays of assistance to recipients and may have resulted in unnecessary labor costs for idle contractors,” the audit says.

In a written response to the audit, the attorney general’s office argues that the documentation was sufficient and that the state followed federal rules. It notes that after reviewing HGI’s invoices, the state contested some charges, entered into arbitration, and ultimately reached a settlement that paid the company only $43.5 million rather than the $57 million requested.

“We’re confident the state maintained adequate documentation to support all the funds disbursed, and also took steps to safeguard Community Development Block Grant Disaster Recovery funds after the contract with HGI terminated,” a spokesman for the attorney general said in an email.

The state had awarded HGI a $68 million contract in May 2013 to administer the Homeowner Rehabilitation, Reconstruction, Elevation and Mitigation Program, or RREM, and two other housing programs. The contract was terminated without public notice in December 2013 and the state Department of Community Affairs took over HGI’s responsibilities.

The state argues that RREM has been largely successful, with 4,230 homes rebuilt and $1.2 billion in grants disbursed or obligated. But with 7,657 total grant agreements signed, that means that, four years after the storm, more than 3,400 families are still not back in their homes.

The state and HGI were heavily criticized after the program’s high rate of wrongly denying aid applications was revealed in 2014. DCA data the Fair Share Housing Center obtained through an Open Public Records Act request showed that 74 percent of people who appealed an RREM determination, as well as 77 percent of those who appealed denial for smaller Resettlement grants, won their appeals and became eligible for assistance. The DCA blamed many of the denials on inaccurate damage assessments by the Federal Emergency Management Agency, and said a subsequent review resulted in grant awards for eligible applicants.

But the auditors found numerous problems with oversight of HGI. For example, they said the company and the state did not accurately and completely record how much of the spending was meeting HUD’s “national objectives,” such as assisting low- and moderate-income residents and addressing urgent health and welfare needs. In its response, the state argues that HGI’s method of categorizing which expenditures met which objective was “roughly equivalent” to DCA’s method, which HUD has previously approved.

The state didn’t commission an independent cost estimate before receiving contractor bids, as required, and didn’t analyze the “reasonableness and necessity of charges before disbursing funds,” the audit said. The auditors note that even though the state canceled HGI’s contract after less than nine months, the company invoiced for $4.5 million more in labor costs than it had originally proposed for the full 3-year contract period.

The state also erroneously paid HGI $129,000 for costs incurred before the contract was executed, the audit said. The state didn’t issue purchase authorizations for $2.4 million in expenses — including $258 for plants — and some leases were incomplete or more expensive than allowed by regulation, according to the auditors. Some program employees were paid for work hours that didn’t appear on their timesheets. Travel money went to pay prohibited expenses, like cleaning supplies and train ticket upgrades, and computer equipment inventories were inaccurate or incomplete, the audit found.

“The conditions described above occurred because the state did not have adequate controls in place to administer its contract and monitor contract performance. Further, it was not fully aware of applicable federal procurement and cost principle requirements,” the auditors wrote.

The state disagrees with all of the findings. Its attorneys argue that in some cases the HUD auditors were misreading federal regulations; for example, they say the payment of precontract costs is permitted. They also argue that the state was required to follow its own contracting rules, not federal regulations. Thus the state was not required to obtain an independent cost estimate before hiring HGI, the lawyers say.

On a number of issues, the state appears to both acknowledge and dispute the audit findings. Rather than purchase authorizations, a state contract manager used “task orders” that served the same purpose, the lawyers say in the audit response. Some of HGI’s leases did indeed exceed authorized amounts but others were significantly lower, resulting in an overall savings to the state, they say.

Of 20 employee timesheets reported missing, the state has located 13, worth $55,000, and “will locate the remaining 7 timesheets…(and) ensure that all timesheets are available for HUD review,” the audit response says. Some office expenses were incurred by an HGI employee while traveling, and so were categorized as travel expenses; they will be re-categorized appropriately, but should not be considered questionable, the state lawyers contend.

But much of the state’s response relies on a larger narrative that describes HGI as initially successful in launching urgently needed disaster recovery programs, only to run into performance problems that the Department of Community Affairs did its best to remedy.

“By July 2013, less than three months after contract execution, deficiencies with HGI’s performance became readily apparent,” the state lawyers write. The company’s eGrants software platform for aid applications didn’t work correctly, the state says, and DCA found “unacceptably high error rates in applicant eligibility/ineligibility determinations.”

“Contrary to [the auditors’] assertion, the state took exhaustive efforts to review the accuracy, reasonableness and necessity of all payments to HGI. HGI’s performance…lagged in several key areas…. HGI’s documentary support for certain expenses was also lacking,” the response says.

DCA officials met regularly with HGI managers to try to fix the problems, and docked the company for a number of expenses, including $9.5 million for eGrants’ flaws and $11 million to replace the system, the state says. DCA also spent more than a year reconciling HGI’s poorly organized, incomplete and unsupported invoices, which included double-billed expenses and excessive billed hours. The agency reviewed and adjusted the pay rates for 1,200 HGI employees, saving another $10.7 million, the state says.

Once the matter entered arbitration, the attorney general’s office had to consider that DCA’s decision to cut pay rates and dock HGI for deficient work could result in the arbitrator agreeing with the company’s demand for an additional $21.7 million payment, the lawyers write. Litigation costs were also a concern. The two sides ultimately settled for $7.6 million, bringing total payments to HGI to $43.5 million. A clawback provision in the settlement requires the company to pay back any amounts that HUD determines were not allowed.

For its part, HGI has in the past blamed the Department of Community Affairs for aid disbursement problems. In a 2014 letter, an attorney for the company said the DCA constantly changed program requirements; didn’t issue the RREM program policy until October 2013 and then continued to change it; and gave HGI new tasks that weren’t in the contract, without additional compensation. The attorney, Robert Mintz, denied that eGrants was a failure, saying the DCA required the company to make major changes to the system with extremely tight deadlines.

As HGI had warned, one major change “caused inevitable errors and inconsistencies that could only be corrected through a detailed and labor-intensive manual review,” Mintz wrote. “Any fair and independent review of HGI’s performance under the SSHIP contract will conclude that HGI acted honestly and responsibly at all times in providing the services required…and as directed by DCA,” he wrote.

The auditors recommend that HUD direct New Jersey to repay the $129,000 in charges incurred before the contract was executed. Additionally, they say the state should repay HUD any part of the $43 million spent on costs that don’t have documentation showing they met “national objectives,” or were “fair and reasonable,” or otherwise satisfied regulations.

They also want the state to demonstrate that its inventory and equipment records for items purchased under the HGI contract are up to date, and to implement better policies and procedures for disaster fund disbursement and contract enforcement.

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