Honolulu officials continue to negotiate with the U.S. Department of Housing and Urban Development over how much money the city owes the federal agency for mismanaging grant funds that were given to a Central Oahu nonprofit.

HUD just lowered their demand to $3 million.

For years the city and HUD have been fighting over Community Development Block Grant money that was supposed to go toward serving the elderly and developmentally disabled at ORI Anuenue Hale in Wahiawa.

But problems, including allegations of kickbacks, political favoritism and lax city oversight, have plagued the deal, resulting in the city and ORI falling out of compliance with HUD’s grant rules.

In June, HUD told the city it would have to pay back the nearly $8 million in block grant money it had given to ORI. The city countered with an offer to pay back only $1.88 million along with a commitment to bring ORI back into compliance with federal grant rules.

In a Sept. 27 letter that was released Thursday, HUD offered its response, telling city officials that the federal agency would be willing to accept about $3 million.

HUD also clarified to the city that if Honolulu is unable to bring ORI into compliance then it will be on the hook for the remaining balance, which is about $5 million.

“After reviewing the City’s response and proposals, HUD first would like to acknowledge the City’s efforts to address the complicated issues identified in the June, 3, 2013 report,” wrote Mark Chandler, the director of community planning and development in HUD’s Honolulu Field Office.

“The city’s proposals indicate the potential to resolve all findings and concerns. However, at this time HUD cannot accept all the City’s proposals.”

Chandler’s Sept. 27 letter goes point-by-point through the various concerns the federal agency has had with Honolulu over its management of the grant funds that went to ORI. It also summarizes the city’s responses to those concerns with a discussion about whether Honolulu’s actions have been good enough.

In many cases the HUD noted the city is heading in the right direction by updating its record-keeping systems and reorganizing its departments to provide better oversight of its grant program.

But there are still some problem areas, particularly when it comes to how the city deals with conflicts of interest.

Serious allegations were uncovered during HUD’s years-long investigation of ORI, including those of possible kickbacks between the non-profit group and a contractor, not to mention the use of campaign contributions to get political favors from city employees

The city told the U.S. Attorneys Office about the kickback scenario and performed its own internal investigation into the possible conflicts of interest related to political contributions and a $1.2 million loan-forgiveness deal for ORI.

That investigation found that none of the city officials who received money from ORI had a conflict because they didn’t receive a direct benefit.

HUD’s letter also notes that the city argued that the First Amendment protects the rights of individuals to make political contributions.

But Chandler said this doesn’t go far enough when it comes to satisfying HUD”s rules for conflicts of interest, and he disagreed with the argument that there is no conflict if an individual doesn’t receive a direct benefit.

Chandler also made clear that HUD doesn’t believe that ORI violated any rules in this regard.

“ORI and its representatives did nothing wrong contributing funds to the City employee’s political campaign,” Chandler said. “The finding is and has been solely against the City and its failure to comply with the program conflict of interest regulation.”

Chandler added that the city’s failure to comply with the conflict-of-interest policy has been “an on-going problem” and that the city needs to fix it.

Honolulu spokesman Jesse Broder Van Dyke said the city has no comment on HUD’s response due to the possibility of future legal action.

Among the politicians who received money from ORI representatives are former Mayor Mufi Hannemann, current Mayor Kirk Caldwell and Honolulu City Council Chair Ernie Martin.

ORI and its attorneys have refuted any wrongdoing, saying HUD is overreaching.

Read Chandler’s letter here:

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