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iAUDIT! - Last Tuesday, November 19, L.A. County’s Auditor-Controller released its audit of LAHSA’s financial practices. Its 16 findings are nothing short of damning. Among a host of other problems, the Auditor found:
LAHSA has almost no control over the cash it advances providers. For example, Finding Two shows more than half the advances were outstanding from previous years, even though LAHSA's standard contract language says recipients must repay advances by the end of the fiscal year. In addition, because of poor contract management practices, some of the contracts expired before the advances were repaid, meaning the providers no longer have a contractual obligation to repay them.
Four findings, (3, 8, 9, and 10), cover inadequate contract practices and include signing contracts after procuring services, losing track of existing contracts, no confirmation services were provided and a lack of contract monitoring to ensure providers are meeting contract requirements.
Finding Five cited misuse of restricted-use funds. Because of LAHSA's poor cash management practices (see below) LAHSA uses funds from one source to pay contractors who should be paid from a different source; then they hope they get money to reimburse the improperly charged fund. This is basically a huge shell game, with LAHSA trying to stay one step ahead of funding agency auditors who'd want to know where their money went.
Findings 6 and 11 relate to payments and cash flow issues. LAHSA can't pay its bills on time, most likely because of its byzantine, yet ineffective, approval process. And it also has chronic problems submitting reimbursement claims to funding agencies. Because it bills its funding agencies late, its running into problems maintaining the proper balances in its restricted funds, which is why it "borrows" money from other funds to pay vendors; it’s a vicious circle; LAHSA bills its funding agencies late, which causes cash shortages in some restricted funds, so its forced to delay payments to vendors and improperly charge other funds (see Finding Five above) until it gets the cash it would have had if it submitted its billings on time.
Findings 12 through 16 relate to its internal audit function. Frankly, I was surprised LAHSA has an internal audit unit because of its poor financial practices. While some findings are technical, they show Internal Audit isn't doing its job because it lacks independence and clear audit plans. If Internal Audit did raise concerns, its lack of independence means they can be shut down with no further action. In a way, this is unsurprising since management in general seems to be inadequate.
In summary, LAHSA has more than 1,200 contracts, but in some cases it doesn't know who it’s contracting with, is paying vendors with whom it has no contract, and can't track payments nor tie them to performance. It’s moving money around in violation of government accounting and financial standards. Because it doesn't have accurate contract data, fraud would be very easy; an AP clerk could have a friend or relative get a business license (very easy to do online), and then issue a payment to the bogus vendor, and LAHSA wouldn't know it because they don't know what contracts they have. The clerk could also collude with a past vendor and make a payment since LAHSA is paying for services with no contracts and on expired contracts.
What makes these findings even more shocking is that this is not the first time these issues have appeared in an audit. In 2018 and 2020, the County Auditor reported on LAHSA’s poor contract and procurement practices. Despite promises for improvement from LAHSA’s management, and lots of bluster from the Board of Supervisors, nothing changed.
How did LAHSA respond to the audit? By using three strategies: deflection, denial, and whining. Management leaned heavily on "Yeah, our finances suck, but look at all the wonderful things Dr. Adams Kellum has done". For example, in its response to Finding Six on cash flow issues, LAHSA management said Dr. Adams Kellum is implementing or has implemented financial reforms. That may be true, but there’s no reason more efficient payment practices should not have been in place before, and no organization should rely on one person to see that proper financial practices are implemented.
The Auditor noted LAHSA’s management tried to have several findings deleted or reduced in importance. In its response to Finding 7 on inadequate records for working capital advances, LAHSA claimed the findings didn’t meet the audit’s materiality threshold since the amounts were only about 1.4 percent of Measure H’s working capital. However, the Auditor only used a sample of cash advance records, so the problem could be much larger.
In addition to deflection and denial, LAHSA turned to whining as a defense. Management cited staffing shortages in key areas that make it difficult to track payments and contracts. It blamed funding agencies and vendors for its habit of signing contracts after the fact. However, the Auditor citied specific cases directly related to LAHSA’s inefficient processes, such as one contract that wasn’t created until 41 days after funding was approved. Typically, a public agency will issue a contract within a day or two of board or council approval, sometimes pending submission of routine documentation like insurance forms.
LAHSA has about 900 employees. As the auditor pointed out more than once, it is essentially a “pass through” agency, meaning it collects funds for homelessness programs and then issues those funds to service providers through contracts. Paying for services is its core function, and yet it seems unable to execute even the most basic financial practices.
We can also speculate on the audit’s timing—two weeks after the election and approval of Measure A, which will pour more money into homelessness agencies’ coffers. It would be a serious breach of ethics for the County Auditor to delay the report for political reasons, with significant risks to the program’s certifications. However, no audit can be released without a management response, and LAHSA is notoriously slow to respond to any external request for information—that is one of the reasons Judge Carter ordered the November 21 hearing on why the County and LAHSA are not responding to the auditors’ requests for data. It is possible, though almost impossible to prove, LAHSA’s leadership delayed its response until after the election.
So far, reactions from the City and County have been superficially--and surprisingly-- aggressive. The City is dealing with its own failure to spend almost half ifs $1 billion homelessness budget, so its in no position to criticize others for sloppy financial practices. Likewise, the County of Los Angeles has a history of chronically underspending its homelessness funding. One of the more interesting comments came from Lindsey Horvath, Chair of the Board of Supervisors and Chair of LAHSA’s Commission. After a recent hearing in federal court regarding LAHSA’s inability to provide meaningful performance data, Horvath tried to defend the Authority, proclaiming “LAHSA is us,” which is literally and figuratively true, since it’s a joint powers authority created by the City and County. Now she seems to be changing her tune. In response to the County audit, she’s now calling for consideration of creating a new agency within County government to manage homelessness. She offered no details and didn’t say what she thinks LAHSA’s role, if any, would be in this new scenario, but when the head of your agency is openly questioning the need for its existence, you should know you’re in trouble. Given the universally poor performance of County homelessness programs, its hard to imagine how a County-run agency would be any better.
On November 22, Councilmember Rodriguez introduced a similar resolution for the City to sever ties with LAHSA and have the City provide services directly to the unhoused. While this may have some emotional impact, we should remember a couple of things 1) The City, on a piecemeal basis, is already providing services to the homeless. Many Council Districts have contracts with CIRCLE team providers for direct outreach, mainly because LAHSA does such a poor job coordinating those the services, and the County refuses to do more than the bare minimum to provide support; and 2) Judge Carter ordered an audit of the City's programs because they are plagued by many of the same problems LAHSA has: money paid with no accountability for performance, lack of performance measures, and lose contract management. There's no reason to think the City will suddenly do a better job than its been doing. Chris LeGras superbly dissects the City’s and County’s failures here.
As if the financial shell games and lack of contract control weren’t bad enough, at a November 21 hearing revealed, the auditors provided details on how providers received more than $50 million in advance payments, yet have paid only about $2 million back. Some of the outstanding amounts stretch back more than five years. And don’t forget the City Controller told the court the City typically pays 25 to 30 percent of LAHSA’s project costs as advances, so its not just LAHSA money that’s being wasted.
While shocking, the County’s audit shouldn’t be a total surprise. The court-appointed auditors described LAHSA’s financial and billing system as “untangling spaghetti” and are still trying to get basic performance data from LAHSA, the County, and the City. As one observer told me, there are so many leaks in the system, it would be much easier to map the few effective systems and programs.
Where do we go from here? Can the County or City do better without LAHSA? Based on what we already know, the answer is an emphatic no. A whole new approach, from the ground up, needs to be created. In a future column, I’ll share what I learned from the Sough Bay Cities’ Council of Governments, the consortium that is moving its member cities to functionally zero homelessness.
In the meantime, stand by for the court-appointed auditors’ report in February, and for the theatrical infighting among the City, County, and LAHSA, as more details emerge.
(Tim Campbell is a resident of Westchester who spent a career in the public service and managed a municipal performance audit program. He focuses on outcomes instead of process.)
