The U.S. Department of Housing and Urban Development has found the city's housing department incapable of managing its Community Development Block Grant program and has threatened to place sanctions on the city that could jeopardize the $21 million program.
In a lengthy report sent to the city's Department of Housing and Community Development last month, HUD especially criticized the city for funneling federal money to the private Council for Equal Business Opportunities without confirming that the funds are being spent to eliminate urban blight or to create permanent jobs for disadvantaged people.
HUD found that more than $500,000 in federal money was lent to a member of CEBO's board of directors for construction loans.
Federal reviewers also found some of the money went to businesses in Prince George's County and the Eastern Shore, and not in Baltimore as federal regulations require.
HUD warned that the city's failure to oversee outside organizations such as CEBO "may lead to other abuses or even fraud."
Federal officials ordered the city to stop funding CEBO with block grant money. CEBO received $617,000 in federal funds last year.
HUD estimated that CEBO had misused about $2 million, and it asked the city to repay the money so that it can be put to use on proper block grant programs in the city.
Maxine S. Saunders, manager of the Baltimore HUD office, wrote to city housing commissioner Robert W. Hearn that the city's block grant program "is in substantial non-compliance" with federal regulations and said the city has a "lack of qualified staff."
During an interview, Hearn called the HUD report "a lot of technical, procedural and documentation issues."
Of HUD's characterization of his agency's inability to run the program, Hearn said "that's almost a part of the standard litany. That's not the case at all."
He refused to discuss any specific issues in the report, including the CEBO loans.
"I don't want to say anything about any specific reporting in there because it is fairly detailed and we have to do a thorough review," Hearn said, adding that the city intends to examine the report and answer HUD's charges.
In addition to the problems with CEBO, HUD criticized the city in numerous instances for failing to document how block grant money helped the disadvantaged.
Saunders warned that the city's failure to take remedial action will force her office to recommend that HUD place sanctions on the city. Sanctions could mean a reduction in the amount of block grant money the city receives from HUD.
The 19-year-old federal program, which gave the city $21 million this year, provides the city government and various non-profit organizations with money to build city parks, to build and renovate houses, to alter buildings for the handicapped, and to pay for many other projects and services that create a decent living environment for people of low and moderate incomes.
Since Mayor Kurt L. Schmoke appointed Hearn as housing commissioner in late 1987, several experienced housing officials who handled block grant money have left the city.
Nevertheless, the HUD report indicates that some of the city's most serious problems with the federal program predate the Schmoke administration.
HUD notes in its report that the federal government questioned the city housing department in 1987 on its failure to oversee the hundreds of thousands of dollars the city gave to CEBO.
Although city officials promised to closely monitor CEBO, HUD officials found almost no supervision has taken place.
Michael A. Gaines Sr., executive director of CEBO, said that any "technical deficiencies" in documenting the use of federal block grant money are being corrected.
He said his non-profit organization, which has existed for 22 years, has used the money to create jobs in "construction, manufacturing and retail" and to help unemployed people start businesses.
Last week, he said he had not had a chance to read the report and could not comment on the specific criticisms of CEBO.
HUD's reviewers found that a member of CEBO's board of directors, Clarence Gross, received 26 loans -- totaling more than $600,000 -- from CEBO, some of which financed a project in Prince George's County.
HUD's officials noted in their report that they did not know if Gross, president of Springdale Construction, was on the board of directors when he obtained the loans.
"If he was a member of the Board at the time any of those loans was approved, his presence on the board constituted a conflict of interest," the report said.
Samuel T. Daniels, who retired as CEBO's executive director in June last year, said Gross was on the board but that the "board did not consider it a conflict of interest."
"They decided they needed the input of black professionals and those persons would not be denied the services [of CEBO]," Daniels said.
Daniels said Gross did not participate in the board's decision to give him loans.
Gross said he received some of the loans before he joined the board and some afterward.