Elected officials and city staff in Dallas colluded over a decade to break federal housing and civil rights laws and promote and worsen racial segregation across the city, the U.S. Department of Housing and Urban Development (HUD) has found, dealing City Hall a scathing, and potentially costly, blow after a four-year investigation into the city's housing practices.

The charge sounds flat when they say it: "The Department concludes that (Dallas) is in noncompliance with Title VI of the 1964 Civil Rights Act," HUD wrote in a "letter of findings" dated November 22, 2013.

But the charge is monumental. The HUD accusation is that Dallas city staff have colluded with elected officials to achieve the same kind of government-sponsored racial segregation that was supposed to have been wiped away by the 1990 Walker Consent Decree at the end of a long, bitter federal court battle.

Even the short-term implications are daunting. If Dallas can't or won't quickly come up with a settlement acceptable to HUD, the repercussions could include immediate loss of major federal funding and serious exposure to litigation. The city could lose $100 million in federal aid it counts on to fund its current five-year program dealing with housing, homelessness, public services, public improvements and economic development. It faces fraud charges and damages of at least $250 million in "false claims" litigation for misspending federal money over the last 10 years.

But the larger and longer range implication has to do with what this finding will say to the rest of the country -- that this is a city that deliberately defrauds the government and flouts the law in order to confine people in neighborhoods separated by racial boundaries.

The four-year investigation was inspired by the claims of a real estate developer, Curtis Lockey, who told HUD the city had inflicted $74 million in actual damages on him by killing his development deal in a downtown tower. His claim, now specifically cited and supported by the HUD findings, was that the city killed his 2009 deal to re-do the tower at 1600 Pacific as part of a conspiracy to keep poor people, minorities and disabled people out of downtown.

Since Lockey and an associate, Craig MacKenzie, turned rogue four years ago and began accusing the city of corrupt practices, city officials have painted them as crackpots who are angry and vindictive over a deal gone sour. But the HUD report paints them as whistle-blowers, canaries in a much bigger and deeper coal mine of wrongdoing that would never have been unearthed but for their decision to go public.

Lockey and MacKenzie, now supported by HUD, accuse the city of conspiring to kill their 1600 Pacific project in order to stop it from being available to poor renters who receive federal rent subsidies. The HUD letter quotes the city's director of economic development, Karl Zavitkovsky, as saying the city didn't want any Section 8 voucher recipients in the building at all.

The problem with that position is that it flies in the face of federal law requiring projects that use HUD money to make at least 51 percent of their units affordable. The same laws require cities that receive HUD money to affirmatively bring about desegregation and to sign an annual certification swearing they are doing so.

Dallas officials have been signing that certification on a regular basis for decades while promoting policies and even deed restrictions that flout the law, according to the HUD investigation, a behavior that falls under the doctrine of "false claims" in federal law. In some instances false claims can be treated as criminal matters.

In their lawsuit, Lockey and MacKenzie accuse city staff of conspiring to rescind support already given them for $102 million in federal Housing and Economic Recovery Act (HERA) bonds. Those bonds would have guaranteed the economic viability of their project, but with a proviso: Use of the bonds would have required that the project be accessible to Section 8 voucher holders, a requirement that would have superseded all other policies and restrictions.

Not only did Lockey and McKenzie lose their HERA bonds when the city pulled the rug from under them, but the city of Dallas, in an action I can't find reported anywhere in the media at the time, soon after voluntarily forfeited all of the HERA bond money it had coming, a total of $150 million that would have gone to support affordable housing.

The HUD letter pays close attention to this chapter. The obvious question is why Dallas would first accept, then voluntarily spurn, $150 million in federal support for a need that city official had conceded was urgent: affordable workforce housing downtown. The HUD letter doesn't spell it out, but it puts the bones on the table for a reader to assemble: First Dallas wants the money. Then Dallas finds out the money is a portal to bring Section 8 housing into downtown. Then Dallas gives the money back.

In the HUD letter, the city is quoted as arguing that all of its decisions about Lockey and MacKenzie were based on what it believed was the shaky quality of their finances. HUD dismisses that argument, saying its investigators found that the city endorsed deals at least as speculative or worse by other developers within a protected ring favored by City Hall. It names Hamilton Properties and Prescott Realty as two whose finances should have barred them from doing business with the city if Lockey and MacKenzie's finances were truly a bar.

The much more important issue for the city is what the Lockey and MacKanzie complaint says about the city itself, and the authority with which the complaint says it. For example, in preparing their complaint to HUD, Lockey and MacKenzie hired the Washington law firm of Relman, Dane and Colfax, attorneys for the plaintiffs in a similar successful complaint against Westchester County, New York, and in a $1.7 billion settlement of similar claims against the state of Texas over expenditure of relief funds for Hurricane Ike in 2008.

Relman Dane, in turn, hired Andrew Beveridge, a professor at Queens College, New York, one of the nation's top experts on statistical studies of racial segregation and the impact of public policies on segregation.

Beveridge's report on Dallas is a big story in and of itself, one I will get back to later this week. He found that while segregation was decreasing in Dallas over several prior decades, it increased in Dallas during the 10-year period when Lockey and MacKenzie were duking it out with City Hall over racial steering.

Until now, city staff has been able to blow all of this off and keep the City Council quiet by painting Lockey and MacKenzie as irritating gadflies. The staff's new challenge will be to persuade the council that the U.S. Department of Housing and Urban Development is also an irritating gadfly.

The next gadfly may be the U.S. Department of Justice, if it decides to join Lockey and MacKenzie in their false claims suit against the city -- a decision that seems possible given the nature of the accusations against Dallas in the HUD letter.

HUD Letter of Findings of Non-Compliance