Oct. 28, 2002 – The response of Gov. Charles W. Turnbull to the draft audit report on the Public Finance Authority prepared by the U.S. Department of Interior's Office of Inspector General is a 21-page document dated Oct. 16, 2002, that is addressed to Arnold van Beverhoudt, regional audit manager.
In it, the governor argues that the draft report is full of "findings which are legally or factually incorrect" and, further, "addresses policy decisions by the PFA that are properly outside the scope" of the Inspector General's Office. It contains "impermissible conjecture and irrelevant opinion," he says, and "must, therefore, be substantially revised before it is issued as a final report."
If this is not done, he said, the result could be "serious consequences for the authority's pending financial transactions."
Turnbull was asked to respond to the draft report in his capacity as chair of the PFA board of directors, a position which he holds by virtue of being governor. Van Beverhoudt has said that he will not comment on the governor's response but that it will be included in the final audit report, as is standard practice with responses requested of the top officials of agencies that have been audited.
Van Beverhoudt had submitted the 30-page draft report to Turnbull on Oct. 1, asking in a cover letter that he respond by Oct. 16 and stating that if a response were not received by that date, the final report would be issued without benefit of the governor's comments.
Last week, the draft report was leaked to the news media, resulting in extensive coverage of its contents, which are highly critical of the PFA.
On Wednesday, Turnbull responded in a press release to media reports concerning comments he had made in a television appearance on Oct. 17. The release said: "Certain news reports in the print and broadcast media suggest that I misled the Virgin Islands public during an interview on Oct. 17 while appearing on TV2 with regard to reading the draft audit report on the Public Finance Authority. Let me again assure the Virgin Islands public that I had not seen the federal inspector general's draft of the audit at the time of the interview."
On Thursday, in another release, the governor took "strong exception to nearly all of the findings" in the draft report, saying its "analysis and conclusions" are "substantiated by neither law nor fact," and also decried the unauthorized release of the report to the news media.
On Friday, Government House released to the media the 21-page response that Turnbull had submitted to Van Beverhoudt, dated Oct. 16.
For a summary of the contents of the draft report, see "Audit faults PFA for management, spending ills".
For details on the governor's statement issued Wednesday, see "Turnbull: PFA audit report unseen as of Oct. 17".
For a report on the governor's press release on Thursday criticizing the report, see "Turnbull lambastes PFA draft audit report".
Following is a summary of the governor's response to the draft report, released to the media on Friday:
Authority issues
Turnbull in his introduction said the draft audit report "has exceeded the scope of the inspector general's authority by impermissibly opining on matters of local public policy that Congress has delegated to the local government." He said:
– The office "has apparently misread or misunderstood the scope of PFA's legal authority and the broad role it plays in assisting the government" in "performing its fiscal duties."
– The draft report "reaches incorrect conclusions" based on its "misunderstanding" of the Internal Revenue Code and/or its "assumption of false, mischaracterized or incomplete facts."
– The draft report "impermissibly ventures beyond its authorized scope by opining on matters of purely local public policy."
– The Inspector General's Office has the authority to audit the authority periodically "for instances of fraud or serious malfeasance and recommend appropriate remedies. The draft report, however, makes no such findings."
The response document is drafted in the form of a legal brief and contains numerous federal court case citations, both footnoted and within the text. Turnbull said case law supports the view that the Office of Inspector General "must afford the government of the Virgin Islands, including the PFA, due deference in its policy decisions with respect to matters of local self-government." He said it "is not within the province" of the inspector general "to second-guess local government policies unless the audit reveals fraud and other serious problems, abuses and deficiencies."
Turnbull charged that the draft report "is unfocused and of indeterminate scope" and is "non-specific as to the period under review," and that many of its findings are "obviated by the facts as they exist today." Also, he said, "the quality of the audit work, particularly with respect to the discussion of the use of bond proceeds and consistency" with federal regulations "is suspect."
He said that to his knowledge, the Office of Inspector General did not consult with the PFA bond counsel or financial advisers but "appears to have relied … on the apparently self-serving memoranda of the authority's now-departed director of finance and administration issued days before the end of his tenure." The reference is to Amadeo Francis, whom Turnbull fired last December. The PFA board voted to bring him back on a transitional basis in February, but he rejected the offered interim contract.
The governor is at pains throughout the response to distinguish between his administration and that of his predecessor, Roy L. Schneider. The audit covers fiscal activity from the mid-1990s, when Schneider was governor, through the end of last year, the third of Turnbull's term.
"While the report does identify instances of apparent delay on the part of previous administrations, any conclusion or inference that the present administration violated the [Internal Revenue Code], participated in impermissible delays or sanctioned purported instances of 'ineffective' use of proceeds is unwarranted and must be withdrawn," the governor said.
Tax-exempt status of bonds
He said statements in the draft report that the PFA allowed bond money to go unused past the date for being tax-exempt, leaving the agency susceptible to as much as $8.8 million in tax penalties, "are demonstrably false," and that the inspector general "has incorrectly applied the federal corporate income tax rate" to arrive at the figure. "Bond counsel has advised that at no time were the referenced bonds subject to loss of tax-exempt status or other tax penalty," he said.
Further, he said, the bonds in question "were advance refunded from proceeds of the 1998 matching fund bonds in May 1998, thus mooting the issue," and at the time, "no issues were raised as to the tax-exempt status of the refunded bonds." He said Francis "first brought the issue to the current board days before the end of his tenure," and that at Turnbull's request, the "PFA's bond counsel investigated this issue in January of 2002," concluding that "the prior bonds would retain their tax-exempt status."
According to the governor, the draft audit report's finding of reprogrammed bond proceeds not used in accordance with the Internal Revenue Code "lacks sufficient detail to render any conclusion a
s to its accuracy" and "is without merit and should be deleted." He said it is the opinion of bond counsel that three cited expenditures in the draft report — $52,000 for voting machines, $41,000 for speakers and $19,000 for the painting of a mural — "could, in fact, be financed with tax-exempt bond proceeds without violating the provisions of the IRC."
(In his response, Turnbull criticized Francis for investing $40 million from the PFA's 1998 Bond Debt Service Reserve Fund in the money market fund of the authority's financial adviser, which at the time was also its investment manager. The Turnbull administration dropped the company as financial adviser, but Francis kept it on as investment manager. "Despite the repeated recommendations of the present financial adviser to consider investment in higher-yielding guaranteed investment contracts, [Francis] refused to consider the recommendation," the governor said, and as a result, "PFA's earning dropped dramatically."
(Kenneth Mapp, Francis's successor, "has accepted the recommendation … to invest the bond proceeds in guaranteed investment contracts … and the authority is now earning more than $1.5 million per year above what was earned in the previous investment regime," Turnbull said.)
School reconstruction issues
Turning to the audit's finding of extensive cost overruns and construction delays in the rebuilding of three St. Thomas schools destroyed by Hurricane Marilyn, Turnbull said the overruns, delays "and innumerable change-order requests" were due in large part to "design and engineering errors" on the part of the construction firm contracted to provide management services for the projects, Heery International. Even so, he said, "there is absolutely no evidence to support your contention that the cost overruns are $17.3 million."
Again distancing his administration from that of Schneider, he suggests that some "cost overruns" may have resulted from the omission of "essential infrastructure components" in the contracting process in "the apparent rush of the prior administration to initiate ground-breaking ceremonies for the projects in advance of the last gubernatorial election." In that election, Schneider lost his bid for re-election to Turnbull.
Further, Turnbull said, "My administration and the current leadership of the PFA have, since the appointment of the new director [Mapp], undertaken to develop an aggressive strategy to assist the authority in getting the projects back on track, while achieving a comprehensive resolution of the various cost overruns, defective/incomplete work and design and construction issues for which Heery may be responsible."
Professional contracts
The governor said the audit's findings that the PFA did not ensure that "costs related to professional service contracts" were within its "primary areas of responsibility" and its recommendation that the authority seek competitive bids for professional contracts "cannot withstand scrutiny and must be withdrawn." The draft report recommended that the PFA follow a policy of previous years of seeking bids, while noting that there is no legal obligation that it do so. Turnbull said the issue is one of "PFA's internal policies" and "outside the scope" of the inspector general.
He said the draft report's description of the authority's primary functions as "raising and managing capital on behalf of the government" is "overly simplistic and incorrect." Among other things, he said, the PFA is empowered by the Legislature "to make contracts, issue guarantees and execute all instruments necessary or convenient in the exercise of its powers" and "to appoint, employ and contract for the services of officers, agents, employees and professional assistants…"
He cited the audit's criticism that some $450,000 was paid to the PFA's financial adviser, First Union Capital Markets, "for work unrelated to the authority's primary areas of responsibility." The response then addresses, item by item:
– Conversations regarding Washington initiatives, including amendments to the Revised Organic Act, federal rum excise tax cover-over rate adjustments, 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 union employees.
– Analysis and discussion of salary proposals for teachers union arbitration.
– Preparation of cost benefit analyses of three retirement plan options.
– Collection of delinquent property taxes.
– Researching the possible privatization of the public transit system and contracting out of administration of the Workers' Compensation program.
– Reimbursement of government personnel for incidental expenses.
All, the governor said, "are directly related to the authority's efforts to aid the government of the Virgin Islands in the performance of its fiscal duties and to raise capital for essential public projects," and thus "fall squarely within PFA's statutory mandate."
He did say that billings by the financial adviser of $6,000 in cellular phone charges "will be reviewed, and any that are not related" to PFA responsibilities "will be billed back to the government."
Turnbull next addressed the audit's criticism of $42,000 paid to its bond counsel, Harris, Beach & Wilcox, for conferences and meetings pertaining to the V.I. Hotel, hospital privatization, a mortgage foreclosure, and government payroll and deficits; review of legislation related to a local communications firm; and related out-of-pocket expenses. Again, he said, all of the items "are, in fact, directly related to the PFA's responsibility."
"Work related to the issuance of the 1999 revenue bonds required review and opinions concerning the deficit, government payroll and potential adverse effects of proposed legislation on the gross receipts revenue stream, including a bill granting further tax exemptions to a communications carrier," he said. The mortgage foreclosure conferences concerned the Kings Alley loan made by the PFA in the prior administration, which was foreclosed, specifically to several proposed structures utilizing tax-exempt vehicles to revitalize the complex. And the V.I. Hotel work involved use of bond vehicles "to rehabilitate a non-productive asset." Work related to privatizing the hospitals "focused on the tax treatment of outstanding bonds."
A questioned trip to Norway by a private individual was by a V.I. Agriculture Department researcher and concerned "an initiative to reintroduce aquaculture to St. Croix," Turnbull said, and "private activity bonds were under consideration as a means to finance such a project." And "assertions that government employees traveled to New York to attend a holiday party are untrue, and were corrected in a letter dated April 30, 2001, a copy of which the prior director received at the time," he said.
Regarding $367,000 paid to Johnston & Associates, the consulting firm of a former U.S. senator, in 1997-98, Turnbull said: "The present administration has no knowledge as to the services provided under this contract." That, in fact, is what the audit found — that the contractor had provided no documentation of the services provided, only time-based billings.
Legal fees
The audit faulted the payment of $1.73 million to the government's Washington, D.C., law firm, Winston & Strawn, for expenses it found should for the most part have been billed to the Office of the Governor, not to the PFA.
"Aside from whether the [inspector general's] 'opinion' is well founded on the merits (which it is not)," Turnbull said, "that '
opinion' concerning how the Office of the Governor and the PFA should exercise their discretion is simply outside the scope" of the inspector general's audit authority. Again, he said, the allegations in this area "are thus without basis and must be deleted."
The draft report faulted the payment of $86,000 to the government's bond counsel, Buchanan Ingersoll, on similar grounds, and the governor similarly responded that the work done fell "well within PFA's statutory authority." Much of it had to do with "private activity bond initiatives aimed at spurring economic development and job retention," Turnbull said.
Collection of loans
The audit concluded that the PFA has been lax in pursuing defaulted loans or obligations. That, Turnbull said, is a mistaken conclusion "based on incomplete information."
– In the case of a loan to Development Consultants Inc. for redevelopment of the Kings Alley complex in Christiansted, "the PFA commenced foreclosure proceedings on Nov. 20, 2000, and received judgment of foreclosure on March 13, 2001." It has since purchased the property and formed a company to operate it on the PFA's behalf "until it is able to sell it to recoup its investments."
– In the case of a $5 million cash collateralized guarantee provided in the form of a certificate of deposit to the developer planning to renovate the Yacht Haven Hotel and Marina on St. Thomas, the loan was paid off last July 15; all that is outstanding is $120,883 in interest still due "as agreed with the lender."
Turnbull concluded his response by stating to van Beverhoudt that he "would be pleased to make available to your office the authority's new director," as well as government financial advisers and counsel "to further supplement the responses made in this letter, to ensure that any findings are supported by fact and law, and to answer any questions you may have."
According to the draft document, delivered to Turnbull on Oct. 1, Mapp was given repeated opportunities to comment on the findings but did not do so. The document states that a preliminary draft was delivered to him 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 initial accounts of the contents of the draft published last Tuesday, Mapp took to the airwaves to denounce the document as "fatally flawed and severely lacking in professional quality."

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