Oct. 22, 2002 – The first-ever federal audit of the V.I. Public Finance Authority has found that the agency "effectively raised capital through the issuance of bonds" but "did not effectively manage bond proceeds or funds from its own budget."
The draft report states that the PFA:
– Allowed bond proceeds to go unused past the date for remaining tax-exempt, leaving the agency susceptible to as much as $8.8 million in tax penalties.
– Allowed the use of $1.2 million in bond proceeds "for a mental health facility that was never opened."
– Did not adequately plan the construction of three schools prior to issuing contracts, causing the authority to incur cost overruns up to $17.3 million and delaying completion of the schools by as much as 600 days and more.
– Did not ensure that $29.6 million in funds were effectively or appropriately utilized.
– Incurred $2.3 million for work not related to the authority's primary functions of raising and managing capital for public projects. Such expenses involved, among other things, travel and cellular phones for employees of the Office of the Governor and meetings and consultations concerning such matters as the executive branch budget and government employee collective bargaining issues.
According to the draft report, the top executive of the PFA, Kenneth Mapp, was given repeated opportunities to comment on the findings but did not do so.
A copy also was provided to Mapp's predecessor, Amadeo Francis, "because he was in office during the period covered by the audit scope and during the entire period during which the audit was conducted." According to the draft report, Francis "concurred with the proposed recommendations and stated that the report accurately represented conditions" at the PFA during the period covered by the audit.
In fact, the report states that "despite attempts by [Francis] to alert responsible government officials of the instances of non-compliance with tax-related constraints on the use of bond proceeds, his warnings were essentially ignored."
The auditors recommend that the PFA board take the following actions:
– Require that bond proceeds be used in accordance with the time frames and other restrictions set forth in the Internal Revenue Code.
– Require that there be adequate planning before soliciting bids for construction contracts.
– Ensure that the ongoing school construction projects be completed as quickly as possible.
– Discontinue charging the costs of non-PFA services to the authority's operating budget.
– Obtain supporting documents for payments totaling $367,000 made to a contractor; or, failing this, consider asking the Attorney General's Office to initiate legal action for recovery of the money.
– Require that professional service contracts be awarded on the basis of competitive bids.
– Collect $571,000 due on loans to private entities and $706,000 due as reimbursement for expenses paid on behalf of the government of the Virgin Islands.
In a cover letter to Gov. Charles W. Turnbull dated Oct. 1, Arnold Van Beverhoudt, regional audit manager for the Office of Inspector General, set a deadline of Oct. 16 for the administration to respond to the draft report. The protocol is for the government's response to the draft report to be included in the final report. Turnbull reportedly submitted his response on Friday.
According to the draft document, efforts were made between July 10 and Aug. 13 by the Office of Inspector General to meet with Mapp, the authority's director of finance and administration, to discuss the audit findings, but these proved unsuccessful.
The document states that a preliminary draft was delivered to Mapp on July 10, and "after several followup requests," a meeting was scheduled for Aug. 6, when Mapp "stated that he was not prepared to discuss the report and requested an extension." A second meeting was scheduled for Aug. 13, but "shortly prior to the scheduled meeting time," the report states, "we received a fax from the director indicating that he was still not fully prepared to discuss the report. Therefore, we are issuing this formal draft report without benefit of an exit conference."
Following accounts of the contents of the draft published in The Avis and reported on the radio Tuesday, Mapp took to the airwaves in the afternoon to denounce the document as "fatally flawed and severely lacking in professional quality." Speaking on WVWI Radio, he said there was "no factual evidence" for the audit findings concerning school construction overruns, and that what overruns there have been "come nowhere close to $17 million."
He also sought to discredit the input of Francis cited repeatedly in the report. His predecessor, Mapp said, "did not leave the PFA under friendly circumstances … How objective can an audit report be that you take a terminated employee, and use that terminated employee to draft your report?"
And he suggested that Van Beverhoudt was the person who leaked the report to the news media. This prompted a response on air from the regional audit manager terming Mapp's comments "just a smokescreen to deflect attention away" from the substantive findings of the audit. Van Beverhoudt said it was "totally ridiculous to charge that I or any member of my staff leaked the report," and that anyone in his office who did so would risk losing their jobs. Noting that he is just a few years away from retirement, he added, "I'd be very stupid do something like that and jeopardize my benefits."
Francis, reached by telephone at his home in Puerto Rico Tuesday night, said of Mapp, "I think it's very unfortunate of him to characterize my service to the Virgin Islands in that way, but I guess we're all entitled to our own opinions." He confirmed that he, too, had received a copy of the preliminary draft in July for comment, and "I virtually accepted it verbatim."
Noting that he has been "silent on the reason for my leaving, my being left" by Turnbull, who fired him last December, Francis added, "I'm not going to get involved in the campaign … When the report comes out — and I hope it comes out before the election — it will speak for itself."
This was the first federal audit performed on the PFA, although in 1994 the Office of Inspector General issued a report on the bonded debt of the V.I. government and its autonomous agencies.
Bond proceeds unused for years
The audit found that bond proceeds of $27.6 million remained unused for up to 8½ years, although the Internal Revenue Code requires that any such proceeds be reprogrammed within three years in order to retain tax-exempt status. In April 1998, the Legislature approved reprogramming of money for various capital improvement projects comprising bond proceeds of:
– $7.7 million from $29.2 million in Highway Revenue Bonds (Transportation Trust Fund) Series 1989, unused for 8½ years.
– $3.5 million from $28.8 million in Special Tax Bonds (General Obligation Matching Fund/Hugo Insurance Claims Fund Program) Series 1991, unused for 7 years.
– $16.4 million from $215.1 million in Revenue Refunding Bonds (V.I. Government General Obligation/Matching Fund Loan Notes) Series 1992A, unused for 6 years.
As of September 2001, the draft audit report states, $7.3 million of the $27.6 million remained unused. After reviewing 16 public projects, "we determined that the agencies responsible for the projects had not made the effort to use all of the funds or, in some cases, did not intend to use the funds," the report states.
It notes that Francis stated in his Dec. 27, 2001, annual report to the governor that the PFA was "in gross violation of the terms" of the bond indentures and the IRS regulations.
The report states that the Legislature (in 1999) reprogrammed $1.1 million for final payment on th
e purchase of the Michelle Motel for use a long-term mental health care facility, and another $1.2 million to renovate the structure. However, after the government bought the building and paid $100,000 for architectural plans, the commissioner of Health told the PFA that it was not suitable for the intended use. The $1.1 million and the $100,000 "were wasted," the report states.
(This should not be confused with the case of a mental health facility on St. Croix in which the government is accused of having misspent some $870,700 on a project that was pursued outside of standard procedures and ultimately scrapped, in what the Office of Inspector General called "a case study on the inefficiencies and waste of public funds." See "$1 million squandered on clinic that never was".)
Of about $2 million in bond proceeds appropriated for capital improvements, the audit found, some $750,000 was spent inappropriately. Francis "voiced his concerns that improper payments were being made from the bond funds," the report says, but "reluctantly approved legislative expenditures totaling over $608,000" while noting that "only about 7.5 percent of these monies are utilized for what might properly be deemed capital expenses."
According to the Internal Revenue Code, money paid for "incidental repairs and maintenance of property" is not a capital expenditure. Nor, the report says, were PFA payments of $52,000 for voting machines, $41,000 for speakers and $19,000 for the painting of a mural.
School rebuilding overruns and delays
The PFA issued $541.8 million in Series 1998E bonds, of which $40.2 million was earmarked for the reconstruction of three schools demolished by Hurricane Marilyn — $9.2 million for Peace Corps Elementary, $10.5 million for Lockhart Elementary and $20.5 million for Bertha C. Boschulte Middle School. According to the audit:
– Peace Corps had cost overruns of $3.1 million with the potential for more than $408,000 more for work performed under two pending change orders, and completion was delayed 376 days.
– Lockhart had cost overruns of $1.9 million with the potential for $535,000 more, and completion was delayed 331 days.
– BCB could have cost overruns of $8.7 million by the time the school is completed, and completion had been delayed 607 days as of July — or some 900 days to date.
Bidding and construction work began before architectural plans were completed, the audit found, and while the contracts let were below estimate, they did not include such work as removal of existing modular classrooms, installation of air conditioning, paving of access roads and parking lots and, in the case of BCB, construction of a gymnasium and additional classrooms. Also, the audit found, contracts lacked guaranteed maximum price provisions.
Inappropriate spending for services
In the area of professional service contracts, the audit found that in at least six instances, the PFA awarded contracts on a non-competitive basis for a total amount of $8.2 million. The draft report says the government paid:
– First Union Capital Markets $1.7 million from January 1999 through October 2001; according to the report, $450,000 was inappropriately spent, including for Organic Act revisions, obtaining federal grants and forgiveness of Federal Emergency Management Agency loans, discussion of V.I. government Fiscal Year 2001 and 2002 budget preparations, analysis of the cost of implementing step increases for unionized workers, analysis of salary proposals for teachers, analyses of retirement plans, collection of delinquent property taxes, and researching possible privatization of the V.I. public transit system and contracting out of the administration of the Workers' Compensation program.
– Harris, Beach and Wilcox $950,000 for bond counsel services between January 1999 and December 2001; the audit found that $42,000 was inappropriately spent, including for conferences with a private individual regarding the V.I. Hotel, "review of legislation related to a local communications firm," conferences regarding government payroll and deficits, conferences regarding hospital privatization and meetings regarding a mortgage foreclosure.
– Winston and Strawn $2.3 million, $1.8 million of it from the PFA's operating budget, for legal and government relations services from January 1999 through August 2001. The audit determined that $70,000 of the $1.8 million paid was for work related to the PFA, mainly in the area of rum tax issues, and the rest "related to functions of the Office of the Governor" — dealing with matters involving FEMA, debt to the Bureau of Prisons, and the memorandum of understanding between the government and the U.S. Interior Department — that should have been paid from that office's budget.
– Buchanan Ingersoll Professional Corp. $250,000 for bond counsel services between May 2000 and November 2001; the audit found that $86,000 was for work unrelated to the PFA, addressing such things as government employee stipends, teacher salaries, budget issues, a memorandum of understanding with Hovensa, government bankruptcy issues, problems in the Attorney General's Office and prospective investors on St. Croix.
– Johnston and Associates $367,000 for consultation services from February 1997 through January 1999 relating to the soliciting of Asian investors, the development of transshipment ports on St. Croix and the development of PFA economic strategies to benefit the territory. No documentation was provided for the work done, the report states; invoices submitted "only stated the time periods for which services were being billed." The contractor was a former U.S. senator, the report states, and when Francis objected to the lack of documentation, "authorizations for payment under this contract were made by the then-governor," Roy L. Schneider.
The draft report also questions a smattering of "small stuff" expenditures — such as airfare of $2,460 for an Office of the Governor employee "to attend a New York holiday party and meetings regarding 'various new transactions,'" $6,000 in cell phone charges submitted by Union Capital Markets over six months, and $1,738 "on behalf of a private individual who traveled to Norway."
Non-competitive award of contracts
Through 1998, "it was standard practice for the authority to award contracts competitively," the report states. But over the audit period, contracts totaling almost $8.2 million were awarded non-competitively, including those for financial advisers and bond counsel executed in January 2001 and approved by the PFA board retroactively a month later.
Francis noted in a memorandum to a Government House official that the PFA is not required to go through the competitive procurement process, but this "has been deemed a highly desirable procedure." He added regarding the non-competitive awarding of contracts, "I do not believe this is a healthy course to follow."
Loans unenforced and uncollected
The PFA has the authority to lend bond proceeds to private enterprises and did so in four cases over the audit period. It did not enforce the reimbursement of two such loans and failed to collect interest and credit enhancement fees totaling $571,000 "and was not reimbursed for $706,000 incurred on behalf of the government," the draft report states.
– In August 2000, the authority entered into a loan guarantee agreement with three companies to redevelop the old Yacht Haven Hotel and Marina. The developer, PRM Realty Group, entered into a $13 million financing arrangement with a lending institution with the PFA providing a limited guarantee cash deposit of $5 million. The developer agreed to pay interest quarterly to the authority according to a formula that guaranteed the PFA overall earnings of 10 percent including interest from the money-market a
ccount in which the $5 million was held.
As of March 2002, the report states, the developer owed the PFA $496,000 in interest but the authority had made no effort to collect it. More money may have been due from the money-market account, but the auditors were unable to obtain information needed to verify this. The authority also did not receive a $75,000 credit enhancement fee for 2001, bringing the total amount owed as of last Dec. 31 to $571,000.
– In February 1998, the PFA entered into a contract with PriceWaterhouse on behalf of the Office of the Governor for services pertaining to the possible sale of the Water and Power Authority. By July 1998, the authority had paid the accounting firm $515,000 out of designated loan funds from a 1989 bond issue.
The PFA board eventually authorized payment of $545,000 more, out of the authority's operating budget, then in August 2001 agreed to accept payment of $275,000 and a credit of $85,000 from the government, leaving the initial $515,000 plus another $191,000 still owed. Therefore, the draft audit report states, "the authority should seek reimbursement from the government for a total of $706,000."
Who makes up the PFA
The PFA was created as part of the Government Capital Improvement Act of 1988 as an autonomous instrumentality. The authority is mandated to assist the government in raising capital for essential public projects through bond issuance, investments and loans.
The PFA is governed by a five-member board consisting of the sitting governor as chair, the commissioner of Finance, the director of the Office of Management and Budget, and two private-sector representatives (required to be knowledgeable about "municipal" finance) who are appointed by governor and confirmed by the Legislature. The board consists at present of Gov. Turnbull, Bernice Turnbull, Ira Mills, St. Thomas accountant Roy D. Jackson and St. Croix businessman Paul Arnold.
Francis, an economist, served as the authority's director of administration and finance from January 1995 until last Dec. 31. He was fired in early December by Gov. Turnbull, who gave no reason for terminating his contract. Informed sources said at the time that the termination was not cordial and had to with Francis's refusal to approve a large payment to a government vendor.
On Jan. 30, the Legislature voted to award Francis the V.I. Medal of Honor and on Feb. 28, the PFA board voted to bring Francis back as a "transitory adviser" to what was then expected to be two persons who would assume his duties, as the board had decided to hire separate directors of finance and of administration.
Francis, however, never signed the offered contract, and on March 22, Gov. Turnbull announced that he had approved the contracting of former senator and lieutenant governor Kenneth Mapp to hold both positions, as Francis had done. Neither Jackson nor Arnold were at the board meeting where the hiring was approved.
Mapp's appointment had been widely rumored, although it was expected that he would get only one of the two jobs. In November 2001, he announced his candidacy for governor in the November 2002 election; although he is a Republican, he was expected to run as an independent. On Feb. 9, he announced that he had dropped out of the race. He gave no indication of whom he would support for the November election.
The draft audit report notes that the recommended changes in policies and procedures to bring the territory into conformity with federal regulations "would have to be strictly enforced by the governor, in his capacity as chairman of the authority's board of directors, in order to be effective."
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