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What constitutes a conflict of interest?

That’s a question at the heart of federal investigators’ findings about the way the city of Honolulu manages millions of dollars in grants.

Where the U.S. Department of Housing and Urban Development found conflicts of interest, the Honolulu Ethics Commission found none.

Specifically, HUD examined the city’s handling of Community Development Block Grant (CDBG) monies. It identified multiple conflicts related to the handling of CDBG funds, including a city manager who “failed to disclose his/her conflict of interest.” Federal investigators also faulted the city for knowing about that conflict but failing to address it.

HUD’s findings about potential conflicts represent a small section of a report the federal agency recently submitted to the city. Elsewhere in the report, federal investigators detail violations at a nonprofit that could lead to the city returning $7.9 million for misusing funds.

“The City had knowledge of the City Manager’s conflict but could not explain why it has allowed the conflict to exist,” HUD investigators wrote. “The City failed to establish quality controls to prevent the manager’s conflict of interest, despite having knowledge of the conflict.”

The manager described in HUD’s report is Keith Ishida, the administrator of the Honolulu Department of Community Services Community-Based Development Division. The head of the city’s Ethics Commission told Civil Beat that he spent a “long time” examining Ishida’s roles inside and outside the city before concluding he didn’t have a conflict overseeing the division that administers CDBG grants.

“Our advice is always what is lawful, what is unlawful,” Honolulu Ethics Commission Executive Director Chuck Totto told Civil Beat. “We’re always hovering at that line which is the lowest level of ethical conduct. If you go below that, you’re in trouble.”

Despite the difference in opinion between federal investigators and city ethics officials, the administration of Mayor Peter Carlisle is still taking HUD’s findings “very seriously,” said Honolulu Managing Director Doug Chin.

“What we’ve asked Keith to do is we’ve asked him to resign (from his board membership with an outside nonprofit),” Chin told Civil Beat.

Ishida says he is stepping down in June, and that he came to the decision without being asked.

Ishida Says HUD ‘Never Bothered’ To Ask Him

“The report talks about a city manager, and that’s me,” Ishida told Civil Beat. “I will say this much: At no time did HUD discuss this with me. I honestly would have hoped that before they put it to writing, that they would have talked to me about it. They asked that all of us city guys, they asked us to disclose if we had memberships on boards. They never bothered to see me and to thoroughly understand that relationship.”

The relationship Ishida refers to is his role as a director of the board of the , a nonprofit that lends money to developers for affordable housing and consults those applying for CDBG funds.

Ishida says there are “firewalls” built into his role with HCRC that enable him to serve on the nonprofit’s board of directors, a volunteer position. While HUD raised a red flag about Ishida’s role with the city and with HCRC, it also reported that it did not find any preferential treatment or unfair advantages as a result of that potential conflict.

Late last month, at the advice of the Ethics Commission, Ishida said he sent a letter to his employees about his role with HCRC. That letter went out May 27, the same day HUD sent its report to the mayor.

“By this message, I am informing (Community-Based Development Division) staff that should they have to work, interact, or engage with HCRC and HCRC staff, that you treat them as you would any other agency or individual that we normally work with,” Ishida wrote. “When working with HCRC or HCRC staff, you should not feel that you have to provide them with any additional courtesies or attention in any way, treat HCRC as just another member of the community we serve.”

Here’s a screenshot of the complete email, provided by Ishida:

“My participation with HCRC was never kept a secret,” Ishida said. “My staff was well aware of it. When I sent out that memo, no came came to me and said, ‘Phew, thank goodness,’ or anything like that. I think I’ve always conducted myself in a very open way and HCRC functions very separately from the city. They’re pretty much at arm’s length.”

Yet the Honolulu Ethics Commission still saw Ishida’s dual roles as worth examining.

“What we were concerned about is if he is selecting both applicants that would receive a loan on the private side, and he is in charge of the people who review and select applicants on the government side, there could be a conflict of interest,” Totto said. “What he has done and he has maintained, he makes sure that he does not sit on the loan committee for HCRC or approve any of the loans for HCRC.”

Ishida says that while he runs the city division in which CDBG funding decisions are made, he has nothing to do with those decisions.

“The funding decisions for CDBG are not made by anyone in the administration,” Ishida said. “I don’t get involved in making those funding decisions. I supervise a staff that implements the funding decisions. That’s where I get involved, but that’s largely guided by statute and rule. I gotta make sure my guys follow statute and rule. I’m not a funding decision-maker.”

Ishida says that while he disagrees with the federal findings he understands the importance of appearances.

“If this conflict of interest thing comes up once, it’s going to come up again,” Ishida said. “I cannot risk shedding a negative light on those institutions. I just feel too much aloha for them. The city has been really, really good to me. HCRC can function without Keith Ishida. For me, it was really a decision based on my values and my desire to protect two institutions I really care about.”

HUD Finds Conflicts With Selection-Committee Members

In addition to Ishida’s role in Honolulu’s CDBG acquisition, federal investigators found other potential conflicts in the city’s handling of CDBG grants. They reported that the majority of members on a seven-person committee tasked with recommending CDBG grantees disclosed conflicts.

“Four selection committee members disclosed conflict of interest in an organization applying for CDBG funds or had involvement in the planning, development, or funding of a project or organization applying for CDBG funds,” HUD wrote. “Two of the four selection committee members did not recuse themselves and ranked the projects and organizations with which there appeared to be a conflict.”

HUD says the city violated CDBG conflict-of-interest provisions and “advised the members that they could vote on the projects in question.”

Gwen Yamamoto-Lau is president of HCRC, the nonprofit where Ishida is leaving his board leadership position. He recommended Yamamoto-Lau to be a member of the CDBG selection panel, a position to which Carlisle appointed her in December.

Yamamoto-Lau paints a different picture than HUD of how the selection committee handled potential conflicts.

“During the selection committee, while I did not have any conflicts, other selection-committee members did,” Yamamoto-Lau said. “Everyone was very forthright in informing the committee. It might not have even been a real conflict. Those committee members who had real or perceived conflicts did not vote on that particular applicant’s application.”

She also pointed out that HCRC has its own strict conflict-of-interest guidelines.

“My organization, the CDBG selection-committee, the county when they run it, they have conflicts top of mind,” Yamamoto-Lau said. “We are and they are cognizant, they are mindful and they are aware of it.”

Ishida says he sat in on those meetings, and says he served as a “resource” for panelists deciding which programs to green-light for CDBG funds. He did not vote or make recommendations related to voting, he said.

Others on the committee included A.J. Halagao, Gayle Pingree, Betty Lou Larsen, Hanalei Aipoalani, Amy Hirano and Albi Mateo.

Pingree is a vice present of First Hawaiian Bank and a member of the city’s planning commission. Larsen was director of housing programs for Catholic Charities Hawaii. (Read about his appointments of Yamamoto-Lau, Larsen and Pingree.)

Mateo is general manager of the Royal Kunia Community Association. Aipoalani has worked as a consultant in corporate and community grant-writing, and ran unsuccessfully for Congress in 2006. Hirano is president of Pacific Management Consultants, which has provided legislative lobbying for private-sector and government clients, including the city. (Read the detailing the City Council’s appointment of Hirano, Aipoalani and Mateo to the selection committee.)

Sam Moku, director of the Community Services Department, said the committee was already in place when he took office. He referred Civil Beat to his predecessor, Ernie Martin, who is now a City Council member.

Martin has refused repeated requests for interviews, and an aide told Civil Beat it would be inappropriate for him to comment on any matters pertaining to his former role, now that he is in a different branch of city government.

Feds Order Immediate Corrective Action

Federal investigators are ordering immediate corrective action by the city. HUD says the city has until June 27 to:

• Update its process for screening, selecting and administering CDBG projects to ensure compliance with federal conflict-of-interest requirements
• Provide mandatory ethics training for the city staff, management and selection-committee members charged with reviewing and awarding CDBG grants
• Prohibit city management, staff or selection-committee members from acting on CDBG activities with which they have a conflict of interest
• Require Ishida to seek ethics advice and recuse himself from oversight of any project or organization with which he has a conflict (Ishida says he is resigning from his role with HCRC at the end of the month)

The HUD report comes at a time when federal money is tight, and fewer CDBG funds are up for grabs. Even before HUD’s investigation, city officials said they were worried about how much Honolulu would be able to secure.

“We truly are rooting for the City,” said Gene Gibson, a spokeswoman for HUD. “Having said that, HUD must be a good steward of the American tax dollar.”

Ishida maintains that it makes sense for people with ties to development and housing to make decisions about who should receive CDBG money.

“The CDBG (grants) go to projects that are more human-services oriented, and we all have ties,” Ishida said. “You want people who actually have ties to human services. If there was a conflict they would just recuse themselves from voting.”

Yamamoto-Lau says she is surprised by HUD’s scrutiny, which she says may ultimately have a chilling effect on people trying to improve affordable housing availability on Oahu.

“This becomes uncomfortable in that board members or potential board members or volunteers for a one-time committee have to be concerned about bad press or whatever, and it might discourage people from volunteering,” Yamamoto-Lau told Civil Beat. “That wouldn’t be good for any organization.”