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In an attempt to avoid repaying the federal government $7.9 million, Honolulu Mayor Peter Carlisle signed off on a letter outlining corrective action the city will take to comply with U.S. Department of Housing and Urban Development rules.

Carlisle transmitted a 13-page plan to HUD on Monday, the deadline day for responding to an investigation that found the city may have turned a blind eye to a nonprofit’s misuse of millions of dollars in federal Community Development Block Grants. The investigation came as part of HUD’s routine monitoring of the city’s grant use.

“We take the findings seriously and recognize that improvements are necessary to strengthen City administrative procedures,” Carlisle wrote.

The city agreed to better monitor recipients of federal housing grants, review its ethics requirements and report back to HUD regularly. The federal agency’s regional spokeswoman, Gene Gibson, told Civil Beat that HUD is pleased with the city’s response so far.

“It is an interim response,” Gibson wrote in an email. “We look forward to the final work plan that will lay out the specific steps taken to ensure compliance.”

The nonprofit at the center of the federal probe, ORI Anuenue Hale, Inc., insists it has not violated any rules, but agreed to enter into a “memorandum of understanding” with the city to meet HUD standards. ORI has repeatedly turned down Civil Beat’s requests for an interview.

“While (ORI) believes it is, and always has been, fully in compliance with HUD regulations, the City and (ORI) both acknowledge that in order to avoid repayment by the City in excess of $7,924,850… the parties must make certain changes.”

HUD found multiple violations at ORI, a Wahiawa-based complex with services for people with disabilities and the elderly. Investigators reported that ORI:

• Overstated how many clients use its Wellness Center
• Allowed its Camp Pineapple 808 cabins to be rented out for purposes not allowed under federal rules
• Refused to cooperate with federal investigators, and withheld documents requested
• Used grant money intended to pay for senior activities to cover salary costs of workers

Federal investigators said the city turned its back on monitoring ORI. Their investigation came six months after Honolulu forgave $1.2 million in old loans to the nonprofit, converting the money into a grant so that ORI wouldn’t have to pay it back. HUD’s regional spokeswoman told Civil Beat that investigators did not know about the loan forgiveness at the time of the monitoring.

“It is not an entirely unusual practice,” HUD’s Gibson wrote in an email to Civil Beat. “The City should have in place a prescribed process/policy when ‘forgiving’ the loans to insure transparency and full disclosure in the process.  Additionally, the City should then identify information about the ‘forgiven’ loan in its annual report.”

Much of what the city is now promising to do involves more closely tracking and clearly reporting how federal money is spent. City officials agreed to make quarterly visits to ORI, and said they will submit to HUD a report about each visit. The city also said it will add more resources to monitor CDBG-funded projects after they’re completed.

The increased monitoring will include closer reviews of financial records, and “greater scrutiny” of facility rentals.

Under the city’s plan to bring ORI into compliance, its executives must develop plans to get more people to use the wellness center and converting Camp Pineapple 808 into group homes for the elderly or disabled. ORI must submit a detailed plan to the city by July 15, 2011.

ORI also agreed to submit detailed financial records — balance sheets, rent rolls, cash-flow statements, profit and loss statements and more — to city officials in conjunction with the city’s quarterly monitoring.

In the meantime, the city has halted payments to ORI until it can prove it is eligible by HUD standards. A plan outlining how ORI proposes to meet funding criteria is due on July 15.

Shortly after the investigation, the city paid back $66,861 that HUD says ORI misused. ORI might have to reimburse the city, but the decision is up to HUD.

The city is also reviewing conflict of interest guidelines to be sure they meet federal standards, promising to complete any changes to city rules by August 1. Honolulu agreed to require mandatory ethics training for “all members of the CDBG selection committee,” which HUD found had multiple conflicts of interest.

Management and staff responsible for CDBG funds will be required to sign an annual disclosure form on conflicts of interest, certifying compliance with city rules.

HUD’s Gibson said she believes the city can successfully take steps to avoid repaying $7.9 million.

“We truly are rooting for the City,” Gibson wrote in an email to Civil Beat earlier this month. “Having said that, HUD must be a good steward of the American tax dollar. If ORI’s project, under the auspices of the City, is not in program compliance, then the money must be returned to HUD.”

Read the full June 27 memo from the city to HUD: