The non-profit Chicago Better Housing Association, headed by a onetime Obama campaign volunteer, was supposed to turn a blighted city-owned land parcel into a botanical garden but the garden was never built, the Chicago Sun-Times reported.
Illinois Attorney General Lisa Madigan -- a Democrat who supports Obama's presidential bid -- began last week investigating "whether this charitable organization properly used its charitable assets, including the state funds it received," Madigan Deputy Chief of Staff Cara Smith told the Sun-Times.
Obama's actions in awarding the money, which occurred when he was a state senator, are not a focus of the investigation, Smith said.
State records show $65,000 of the grant money went to the wife of Obama 2000 congressional campaign volunteer Kenny B. Smith, who heads the housing association, the newspaper said.
Records also show Smith wrote another $20,000 in grant-related checks to a construction company his wife, Karen Smith, created five months after work on the garden was supposed to have begun, the newspaper said.
Neither Smith nor his wife is accused of wrongdoing. Smith and his lawyer didn't return Sun-Times calls seeking comment.
An Obama spokesman said the senator's Washington staff would monitor Madigan's probe to ensure "the taxpayer funds allocated for the construction of the garden are recuperated from CBHA if the agencies determine that the funds were not properly spent."