Audit Exposes Caldwell’s $175M Slush Fund
by Andrew Walden
There is no honor amongst thieves.
Then-Honolulu Mayor Kirk Caldwell launched his candidacy for Governor in September, 2021 only to withdraw in May, 2022.
After the Rail debacle, FBI raids, and COVID shutdowns, why did Caldwell think he had a chance?
Apparently, for some, COVID wasn’t too bad.
The story is spelled out in the November, 2024, “CARES Act Audit Final Report”, a self-initiated project of the Honolulu City Auditor. The exact phrase “fraud, waste, and abuse” pops up 12 times.
The Audit Report contrasts two Honolulu County funds launched under the umbrella of the CARES Act signed into law by President Donald Trump, March 27, 2020:
…although both the Small Business Relief and Recovery Fund (SBRRF) and Household Hardship Relief Program (HHRF) programs began with an equal initial allocation of $25 million, ultimately the SBRRF program was funded with $175 million, nearly 45 percent of the city’s total CRF allocation (of $387M). In contrast, the HHRF did not receive additional funding beyond the initial allocation. The city’s choice to prioritize small businesses over households ultimately led to the premature closure of the HHRF program, leaving over 2,000 applicants in need of an estimated $9 million in emergency rental assistance….
We found that the city exposed the SBRRF program to fraud and abuse by prioritizing quick distribution of funds over confirming applicant eligibility. Specifically, the city did not follow federal guidance related to self-certification of business need for assistance. As a result, the city increased the risk of applicants possibly having already been funded by other small business federal aid programs, exposing the program to double-dipping. 98 percent of SBRRF grant recipients in our sample also failed to provide all required documentation to verify eligibility, such as owner residency, operation from a physical commercial space, and registration with the Department of Commerce and Consumer Affairs….
Finally, we believe the city engaged in questionable purchases of municipal vehicles using CARES funds. In April 2020, the city committed nearly $4 million for additional paratransit Handi-Van vehicles, despite having an existing purchasing contract in progress and experiencing significantly lower ridership. Also, the Honolulu Police Department purchased 40 All-Terrain Vehicles purportedly to enforce COVID-restrictions. However, by the time of our review, many new vehicles showed low mileage and many older ATVs had been rotated out of use, suggesting that CARES funds were used inappropriately to replace dated or inoperable equipment. (pg 2)
What’s the difference between needy households and alleged small businesses? The businesses are more likely to make campaign contributions.
Any why ‘alleged’ small businesses?
…56 percent did not have DCCA registration verification documents on file…. (pg22)
Our audit revealed that 98 percent of SBRRF grant recipients failed to provide the required documentation to verify essential eligibility criteria, such as owner residency, operation from a physical commercial space, and registration with the Department of Commerce and Consumer Affairs. This failure to enforce lease documentation requirements for eligible businesses led to a lack of assurance that the funds were reaching brick-and-mortar establishments… (pg16)
Triple-dipping:
…the percent of applicants reapplying in Phase 2 and Phase 3 was between 40 to 56 percent for the different credit unions. For one credit union, there were 27 applicants who applied in all three phases and received the maximum amount in each phase, totaling over $1 million combined….
repeat applicants accounted for more than half of the funds distributed in phase 2 and 3 totaling $1.7 million in additional funding to return applicants…. (pg 33)
Caldwell, a banker moonlighting as mayor, funneled the SBRRF slush fund through five local credit unions: Aloha Pacific Federal Credit Union, Hawaii State Federal Credit Union, Hawaiian Financial Federal Credit Union, HawaiiUSA Federal Credit Union, Honolulu Federal Credit Union.
Executive staff of one of the credit unions contracted by the city to process SBRRF grants stated that, “fraud, waste, and abuse was not a concern for the city. The city relied on us to handle everything and we had to really just trust the applicant’s self-certification because there was no database to check whether SBRRF applicants already received PPP. Individual research would’ve caused a tremendous delay in getting funds out, possibly weeks.” (pg 16-17)
Could credit union executives go to jail? East Coast accounting firm PB Mares explains:
One of the more common types of COVID-19 tax credit fraud is double-dipping. Under SBA and CARES Act guidelines, businesses may not utilize the employee retention credit and PPP loan funds simultaneously (however, businesses may continue to claim the sick leave credit while using PPP funds).
Other types of fraud in this area are inflated payroll, U.S. Treasury check deposits into accounts without any payroll or business activity, and U.S. Treasury checks used to fund personal expenses.
Credit unions can be held liable for fraud if a member applies for PPP funds but is discovered to have been taking the employee retention credit at the same time. Additional background checks and document verification should be implemented to identify potential fraud.
Only a few of the guilty are going to prison:
Federal investigators have documented millions of dollars used for ineligible purposes. For example, a defense contractor in Hawai‘i misled lenders about how many employees he had and used subsidiary companies to mask the fact that he had already received $12.8 million in pandemic relief funds, which effectively allowed him to double-dip into the program.
• In our sample review of 258 grantees, 150 grantees who received $2,103,415 in SBRRF funds had already received over $7,425,190 in PPP funds.
• Of these 150 grantees, 44 grantees specifically requested payroll reimbursements totaling $622,431. It is possible that the documentation submitted for SBRRF program was the same documentation used to apply for the PPP loan. We were unable to verify that the data was mutually exclusive.
• We also identified 7 applicants who requested SBRRF funds for payroll reimbursement using payroll dates that were the same dates submitted for a PPP loan.
• Finally, we found 2 applicants that were approved for both a PPP loan and SBRRF grant from the same credit union, further highlighting the ease with which businesses could access multiple sources of funding without adequate verification. (pg 16-17)
While the good times rolled for fake businesses, needy renters left without income by COVID shutdowns got the runaround from Caldwell’s non-profit partners in the HHRF program:
The city’s decision to minimally fund the HHRF program resulted in early program closure, turning away over 2,000 applicants and leaving $9 million in unmet community need. Because the Department of Community Services (DCS) did not prioritize timely processing, the program experienced excessive processing times resulting in unprocessed applications for nearly half of all applicants who applied. We found 51 percent of all applications were left unprocessed and only 41 percent of applicants who applied were funded at least once. The inadequate management of the HHRF program and the city’s decision to prioritize small businesses over individual households not only resulted in prolonged application processing times, but also worsened capacity constraints, ultimately leading to the rejection of thousands of potentially qualified applicants…
While over 10,000 small businesses received grants, only 5,247 households received assistance, despite similar numbers of applications. Additionally, the total average monthly award per HHRF application was only $1,275, which is less than the average monthly rent cost of $1,300 for a one-bedroom apartment in Honolulu. … (pg 43)
On average, HHRF applicants experienced a 51-day wait time to receive an update on their application status, which is a significant difference from the contract’s set requirement of seven business days…. (pg 51)
Caldwell’s non-profit partners were: Aloha United Way, Council for Native Hawaiian Advancement, and Helping Hands Hawaii.
Other cities did a lot better. For instance:
…the City of San Francisco electronically published the total funds spent for their program and listed all recipients number of disbursements and amounts funded, similar to how the federal PPP program reported its performance numbers. The City of San Francisco’s reporting practice ensured program accountability between local and federal government, and lowered the risk for fraud, waste, and abuse. Honolulu did not maintain or report similar data…. (pg 31)
And it still wasn't enough to get Caldwell elected governor.
---30---
SA Editorial: City must improve spending oversight
BACKGROUND: