U.S. Wants City to Repay $12 Million in Loans : Grants: Housing and Urban Development department says funds were used inappropriately. L.A. says it did nothing wrong and that the agency’s demand would hurt the poor.

Citing an “inappropriate” use of federal block grant funds, the U.S. government is demanding that the city of Los Angeles pay back more than $12 million in community development loans it already has made to local projects.

City officials, including Mayor Tom Bradley, are outraged, saying the demand by the U.S. Department of Housing and Urban Development is not only unfair but also jeopardizes continuing financing for the troubled $100-million Baldwin Hills Crenshaw Plaza shopping center, redevelopment projects in Hollywood and the Wholesale Produce Market downtown.

The controversy focuses on the city’s practice of withdrawing federal community development block grant funds that were already earmarked for specific local projects and lying idle in federal bank accounts. Because it is often many months before the federal money is actually needed to finance the project for which it was granted, the city and county have been using it to make interim “float loans” to developers or other city agencies.

Although Los Angeles technically gets to keep the money, HUD is demanding that the city return it to federal accounts until it is actually needed for specifically approved projects.

City officials said HUD’s demand for repayment of the loans will send them scrambling for funds they don’t have.

In addition, they contend, HUD’s action would hamstring the city’s efforts to nurture other economic development projects already planned and set a precedent that would kill similar efforts to help the poor by cities and counties around the nation.

The same federal audit that criticized the city also found $18.6 million in what it said were inappropriate loans by Los Angeles County, but county officials were able to resolve their differences several weeks ago by meeting with HUD officials in San Francisco and Washington. The county already has agreed to change some of its loan practices and will end up repaying the federal government just $17,000, said Bobbette Glover, assistant executive director of the county’s Community Development Commission.

City officials are hoping for a similar resolution. Calling the issue a matter of “great urgency,” Bradley dispatched an Aug. 8 letter to HUD Secretary Jack Kemp defending the loans, in which he contended that HUD officials knew all along what the city was doing.

“These are projects critical to the disadvantaged of our city,” Bradley wrote. “I simply cannot accept this decision without discussing its ramifications with you personally.” The mayor asked Kemp to immediately “take the necessary steps to reverse this action.”

City officials plan to meet Sept. 19 with regional HUD officials in San Francisco. But so far, Kemp has not responded, and other HUD officials are refusing to back down.

Of particular concern to auditors is the fact that the city and county both set up special “revolving fund” bank accounts of their own so they could withdraw the money out of federal accounts and make money from it--by lending it out at interest and by collecting interest from the bank on the deposits. By 1990, the separate city and county accounts had grown to more than $64 million in cash and outstanding loans, including $15 million in earned interest.

In its audit, HUD said “serious problems” in the loan program have cost the federal government more than $3 million since 1988 in interest lost through the city’s practice of withdrawing the loan money early. And auditors said financial practices made it impossible to determine if the federal money was being used for its intended purpose--namely, fostering economic development by eliminating urban blight and expanding job opportunities for poor people.

HUD auditors blamed not only the city and county for disregarding regulations but said HUD’s own Los Angeles field office did not adequately monitor the loan activities for more than two years.

Miguel P. Barrios Jr., the HUD regional inspector general for audits, said Friday that the $12.4 million in city loans were “inappropriate and questionable” because they were made through the revolving fund, without HUD’s knowledge and without public input.

The city, Barrios said, “had buried the projects we questioned in the revolving fund and did not let anyone see what the money was being used for. . . . They used an improper technique and were abusing the system.”

HUD procedures, in fact, allow for some leeway in the use of block grant funds to temporarily finance legitimate development projects. But auditors determined that the city “has not complied and does not intend to comply with these procedures.”

Two of the loans--$8.6 million to the Los Angeles Community Redevelopment Agency for the Baldwin Hills Crenshaw Mall and $438,000 for the produce mart--appeared to be in keeping with HUD’s stated goals, Barrios said.

But in at least two other cases, he said, the city made loans or grants to projects that should not have received HUD money, Barrios said.

In one case, the city loaned the CRA $2 million to help plan and operate its massive Hollywood redevelopment project at a time when it was facing citizen opposition and was tied up in the courts. In the other, it gave the CRA a $1.3-million grant for general planning uses.

Parker C. Anderson, general manager of the city’s Community Development Department, defended the loans made by his agency, saying the revolving fund was an innovative and effective use of money that wasn’t being used, and that all of the projects were legitimate.

“These projects were eligible, appropriate and extremely beneficial to the poor citizens of this city,” Anderson said.

In his letter to Kemp, Bradley also contended that HUD’s effort to keep the block grant funds in federal accounts was tantamount to trying to balance the federal budget “on the back of poor people.”

Anderson said city officials have spent several months contesting the audit. As a result, he said, HUD has dropped most of its original demands and is no longer asking that the city and county repay the $3 million in lost interest and financing costs.

City officials have agreed to close out the revolving fund and restore to federal accounts at least $21 million, Anderson said.

Because the HUD action could affect cities and counties nationwide, two national associations representing cities and counties in Washington plan to meet soon with top HUD officials to discuss the controversy.

So far, the controversy has hit the city of Los Angeles the hardest and already has caused problems with the financing of the new headquarters for the Gay & Lesbian Community Services Center.

In the case of the shopping mall, city officials say they are afraid that they may be asked to cover the $8.6-million loan they used to buy the land for the project.

Asked Friday how the city would keep loans from defaulting, CRA Operations Director Donald Spivack said: “We don’t know. At the moment, we don’t have that money.”