Nonprofit that runs Sacramento, CA homeless programs pays $3M settlement in fraud suit

A nonprofit that has received millions in taxpayer funds to run homeless programs across California — including nearly $20 million from the city of Sacramento — is paying $3 million to settle a state lawsuit that alleged fraud.

Step Up in October signed the settlement agreement to repay the state $3 million that was supposed to fund new housing in Salinas, but instead went to the nonprofit’s coffers. The payout addresses part of a civil fraud suit filed in January 2024 by Attorney General Rob Bonta on behalf of the California Housing and Community Development Department. It alleged Santa Monica-based Step Up on Second and other entities accepted state money intended to build homeless housing that was never constructed.

Step Up, founded in 1984, is a major nonprofit provider of homeless housing and mental health services in the state, with 656 employees and an annual revenue last year of $72 million.

The $3 million settlement has raised new questions about Step Up’s financial management of homeless funding in Sacramento — where it is one of the top three recipients for city homelessness funding — coming shortly after an audit found city taxpayer funds that were misappropriated or unaccounted for in the nonprofit’s running of the troubled motel shelter program.

According to public records, Sacramento has paid the nonprofit roughly $19.6 million in the last five years, including a $2.9 million loan from 2022 to construct new affordable housing in south Sacramento that has not been built.

In an email to The Sacramento Bee, Tod Lipka, Step Up’s president and CEO, blamed the fraud suit on Step Up’s partner, Shangri-La Industries, which had planned to build the homeless housing. Shangri-La is also named as a defendant in the state’s suit, which is still active, and has since filed for bankruptcy.

“Along with numerous other private and public entities, Step Up was a victim of Shangri-La’s fraudulent conduct related to Project Homekey,” Lipka said in an email. “As part of Step Up’s settlement with HCD, Step Up did not admit any liability, wrongdoing, or fault.”

The suit involved a Step Up and Shangri-La contract stemming from Project Homekey, a program launched by Gov. Gavin Newsom in 2020 that allowed developers to receive state funding to convert motels into apartments for homeless and low-income residents. Shangri-La received $114 million from that program to develop motels in San Bernardino, Ventura and Monterey counties.

A bankruptcy filing for Shangri-La, reported by the Los Angeles Times, said that $2.7 million that was supposed to convert a Salinas motel actually went to Step Up’s coffers because the nonprofit needed an infusion of cash and had asked the developer to buy out its interest.

The settlement that Step Up did agree to pay is “significant,” for a nonprofit of its size and scope, said Joan Harrington, an expert in nonprofit governance at Santa Clara University’s Markkula Center for Applied Ethics.

“$3 million is a significant charge and a significant resolution that merits attention,” Harrington said.

When the state filed the suit in 2024, Sacramento City Council Member Lisa Kaplan asked city staff to re-evaluate whether it should keep contracting with Step Up. After learning of the settlement last week, Kaplan said she has more questions, including whether the city is exposed to liability.

“Oh wow,” Kaplan said of the settlement. “That adds to more questions I need to ask and get answers to.”

Higher salaries than Sacramento nonprofits

In June 2022, a federally-required count showed Sacramento’s homeless population had surpassed San Francisco.

The revelation, combined with then-mayor Darrell Steinberg’s strong focus on the crisis, caused the city to pump more taxpayer money into the issue.

At the time the count was released, the city had paid Step Up about $3.5 million for various homeless services. In 2023, when it came time to find a new contractor for the motel shelter program, a lifeline for homeless families, Step Up was the only one that applied.

Hiring Step Up to run the motels increased the city’s reliance on the nonprofit, which again increased when the city hired Step Up for services for the new shelter, which opened last week. Since 2021, only two other nonprofits — First Step Communities and Hope Cooperative, both based in Sacramento — have received more city of Sacramento money to address homelessness than Step Up.

The city is currently paying Step Up $2.8 million through Dec. 31 to run the motel shelters, provide case management at the new River District shelter and conduct street outreach.

According to the latest tax filings, Step Up’s executives are paid more than their Sacramento-based counterparts.

According to the tax form for the fiscal year that ended in June 2025, Lipka earned a base salary of $424,000. Six other executives earned salaries between $196,220 to $314,485.

By contrast, no executive for either First Step Communities or Hope Cooperative earned more than $215,055, according to the most recent available tax forms for those nonprofits.

“It is deeply troubling to see leaders of publicly funded homeless service organizations earning salaries of this magnitude while so many unhoused people continue to cycle back onto the streets,” Crystal Sanchez of the Sacramento Homeless Union said of Step Up’s salaries. “Sacramento appears to have developed a homelessness industrial complex in which nonprofit organizations and their leadership are increasingly rewarded for managing the crisis rather than solving it.”

Lipka defended Step Up’s salaries, noting that the nonprofit placed 987 Californians in permanent housing last year, including 304 who were formerly homeless in Sacramento. He said salaries are set by looking at other comparable organizations.

“Step Up is a comprehensive services agency providing full scope mental health services, homeless services and is also a developer of permanent supportive housing projects,” Lipka said. “It is uncommon to see such comprehensive services under one agency.”

Jennifer Singer, a city spokesperson, said the city’s contracts with Step Up have included clauses that no more than 10 to 11% of the city funds can be used on indirect costs such as administrative salaries.

“The City of Sacramento works diligently to ensure accountability with all its contractors through a variety of oversight measures including internal controls, required reporting, performances metrics and structured payments,” Singer said in an email.

Sacramento paid for furniture in LA

The city has previously found issues with Step Up’s financial management.

In 2025, a city audit found several issues with how the company spent funds, including charging the city $6,756 that went to furnish new apartments for homeless people in Southern California. Auditors found Step Up spent an additional $52,000 without records to verify the money was spent appropriately, or that it was even used for participants of the Sacramento program.

The nonprofit repaid the city a total of $15,870, Lipka said

“Subsequent to the audit we have worked closely with the City and identified the backup documentation in our records that will ensure that, in future audits, expenditures can be directly tied to clients in the program,” Lipka said. “In an abundance of caution, Step Up refunded $15,870 of the $52,000 to the City where our documentation was not to our satisfaction. We are confident that, moving forward, our documentation will meet the City’s requirements.”

The city is satisfied with the changes Step Up has made since the audit, Singer said.

The city signed a new contract with Step Up in January, about six months after the audit was released.

“The audit of the City Motel Program clearly states the limited scope of the furniture error and how it was resolved as well as how the recommendations from the City Auditor are being addressed and implemented,” Singer said.

Lipka defended the success of the motel program, pointing out that the audit found 32% of guests exited the motel program to a “positive” location, which is higher than the average outcome for shelters across the state, as well as other Sacramento shelters.

However, the audit found the nonprofit was not tracking required data for many of the guests to track accurately how many actually got housed.

The nonprofit’s main job with the motel shelter guests was to try to help them find and apply for permanent housing. But some guests told auditors they did not get invited to a meeting with a case manager for months. City staff told auditors they observed Step Up had “a severe resource constraint in service provider staff.”

Lipka said case managers were available.

“We feel that all participants had consistent and ongoing contact with our staff,” he said. “Step Up case managers were (at the motels) every day from 8-4:30pm.”

Harrington said that the settlement and audit together suggest “management issues.”

“If they’re getting negative feedback from their grantors, both the city and the state, you’d expect an improvement,” Harrington said. “They need to strengthen their internal financial controls ... I would expect dramatic changes.”

Kaplan said she is worried the city may also be exposing itself to litigation, followed by costly settlements, if it continues to hire Step Up.

”(We need) accountability measures,” Kaplan said. “So the city of Sacramento doesn’t find itself in the same situation.”