A federal audit released today criticizes California for putting hundreds of millions in homelessness funding at risk due to its “disorganized” and “chaotic” anti-fraud policies.

The audit evaluated the Department of Housing and Community Development, which manages the state's homelessness programs, and assigned it the lowest possible ranking. It found that the agency lacked sufficient policies to prevent, detect, and respond to fraud. Consequently, the audit revealed that the state agency failed to adequately protect $319.5 million in federal homelessness funds distributed during the COVID-19 pandemic from potential misuse.

The audit did not identify any new instances of fraud.

“Fraud represents a serious threat to the integrity of federal programs and undermines public trust in government,” said Inspector General Rae Oliver Davis of the U.S. Department of Housing and Urban Development in a news release. “Strengthening its anti-fraud program will help the California Department of Housing and Community Development protect its pandemic grant funds and future homelessness assistance funds from fraud.”

In response to the COVID-19 pandemic in 2020, the federal government allocated $4 billion to its Emergency Solutions Grant program to assist those struggling with homelessness. California received $319.5 million from this fund—a 2,505% increase from its usual annual allocation. This substantial influx of funds also heightened the risk of misuse, but the state failed to adequately enhance its anti-fraud measures, according to the federal housing department.

In reply, the California Department of Housing and Community Development stated it will adopt the federal recommendations and improve its anti-fraud efforts.

“HCD is committed to a systematic and comprehensive approach to managing risks, including fraud risk, as a core part of its strategy formulation and implementation,” Director Gustavo Velasquez wrote in a letter to the federal housing department.

In a statement to CalMatters, the state housing agency indicated that corrective measures are already underway. “Since the audit, HCD has been working with HUD to address all recommendations, aiming to enhance fraud risk detection and adopt leading industry standards and best practices,” the agency said in an email.

The audit found that California did not sufficiently prioritize fraud prevention in managing homelessness funds. Specifically, the state failed to conduct regular fraud risk assessments, develop a plan for promptly identifying and addressing potential fraud, or establish a process to evaluate the effectiveness of its anti-fraud measures. These deficiencies are contrary to the best practices expected by the federal housing department for all recipients of federal homelessness funding.