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Draft comptroller’s audits identify questionable uses of LDCs in Ramapo and Monroe County

September 22, 2011

The use of LDCs for municipal financing and economic development initiatives has received increasing criticism over the past few years, and two draft audits released by the state comptroller this summer provide more evidence that additional oversight is needed to prevent waste and corruption.

One of the audits involves the Town of Ramapo and its very questionable use of an LDC to finance a minor league baseball stadium. As the draft audit explains:

Town officials have inappropriately mingled the activities of the Town and the Ramapo Local Development Corporation (RLDC) in the construction of a minor league baseball stadium…. These actions allowed Town officials to circumvent laws the Town is required to abide by for the approval and construction of such projects, and [have] resulted in the Town paying over $35.4 million in improvement costs and being liable for at least $25 million in bonds issued for debt on property that the Town no longer owns. In addition, there is little likelihood that the project will generate sufficient revenue to help the Town pay for this outstanding liability.

The Town will pay approximately $27.5 million in principal and interest payments on these bonds over the next five years. This is significantly more than the approximately $7 million a feasibility consultant projected the baseball stadium would generate in net revenues available for debt service during the same time frame. The Town does not have a written agreement with the RLDC outlining how the RLDC will reimburse the Town for the principal and interest on these bonds. Supposedly the RLDC is relying on revenues that will be generated from the sale of affordable housing units to reimburse the Town. However, the RLDC obtained loans of approximately $29.9 million that were also guaranteed by the Town to build these units. These loans must be repaid before any revenues generated from the sale of the units can be made available to reimburse the Town for payments related to the $25 million bonds. As a result, it is unlikely that the RLDC will be able to reimburse the Town for the full principal and interest payments made on the $25 million bonds.

We found that the [Town] Board has not exercised effective oversight of the Town. Board members told us that they received no financial reports; such as detailed project cost reports for Town projects (including the baseball stadium), budget versus actual reports, and generally did not receive or review contracts. Additionally, Board members told us that they did not know how much the baseball stadium would cost the taxpayers or how it would be paid for.

An article in the Journal News notes that the town’s use of five-year bonds to circumvent the public vote was approved by a state judge, but “stadium foes called it the ‘fait accompli’ defense, because [the court] noted that ‘the (project) is largely built, the trees are already cut down, and a good deal of money has already been spent.'”

Town officials, however, see the stadium deal very differently. Christopher St. Lawrence, the Town Supervisor and RLDC chair, stated that “While there has been spirited debate among our residents about the pros and cons of building the beautiful new facility, the project has been lawfully constructed and funded. The Ramapo Local Development Corporation is on course to meet its debt service obligations appropriately guaranteed by the town, and the entire facility will be owned by the Town once the debt service is satisfied.” St. Lawrence has also argued that criticism against the RLDC is misplaced, and it would be more productive to seek reforms of the “archaic, nonsensical regulations such as the Wicks Law that burden taxpayers” and that encourage the use of questionable LDC financing techniques in the first place.

The other draft audit focuses on the Upstate Telecommunications Corporation, which was created in 2004 by Monroe County to provide financing and support services for the county’s information technology needs. Although not as serious as the alleged improprieties in Ramapo, the audit found various problems with the county’s $99 million contract with the LDC, specifically stating that:

  • County officials had no legitimate evidence to state that the UTC contract would save $5 million when the [County] Legislature made its decision to approve the UTC contract
  • the County sold $2.5 million in County-owned IT assets to UTC; the County then leased these same assets back from UTC, which will result in County taxpayers paying more for equipment that they already owned
  • the County paid UTC $8 million more than UTC expended to provide IT systems and services to the County from February 2005 through December 2009.

Additionally, the audit explains that:

The County’s request for proposals (RFP) process it used to select a vendor for the County’s IT needs was just a perfunctory one. Potential vendors were not informed of the existence of the LDC or the intent to use the LDC as a conduit for the contract as part of the RFP. Consequently, only one vendor, one with significant connections to current and former County officials, provided a proposal that included the use of the LDC.

Furthermore, County officials were unable to demonstrate how the establishment and use of the LDC to perform a County function would lessen the burdens of government: County payments are paying for the LDC’s debt, and the County is now paying principal and interest costs on computers it previously owned. As a result, County taxpayers are likely overpaying for IT services, and will continue to do so over the life of this more than $99 million contract.

We also found that County officials have failed to properly manage the UTC contract. The contract lacks a schedule for IT refreshes (the periodic replacement of equipment) that are supposed to occur over the life of the contract, which could result in the County’s paying for refreshes it does not receive. Further, over the first five years of this contract, the CIO had no evidence to show that he verified that the contract deliverables were of acceptable quality, or that UTC satisfactorily met the terms and conditions of the contract. As a result, the County is at high risk of paying for goods and services that were not provided or that did not conform to contract terms.

The draft audit includes six recommendations:

  1. County officials should adhere to the requirements of [the General Municipal Law] and County policy when procuring goods and services to help ensure goods and services are procured in the most prudent and economical manner, that goods and services of desired quality are being acquired at the lowest possible price or in the case of procurements that are exempt from bidding requirements, upon the most favorable terms and conditions, and that the procurement is not influenced by favoritism, extravagance, fraud or corruption.
  2. When an RFP process is authorized, County officials should thoroughly review and analyze all proposals using formal evaluation/rating criteria and document their recommendation prior to awarding contracts.
  3. County officials should ensure that assets are no longer useful prior to their disposal and that they are getting an appropriate value for the assets on disposal.
  4. The County Controller should only authorize payments for sufficiently itemized and supported vouchers or invoices for goods received and services rendered after a proper audit of the claim. The County Controller should also analyze UTC’s total annual expenses and compare that amount to the contract payment to monitor the value of the goods and services received from UTC.
  5. County officials should properly negotiate future contracts and ensure that contracts contain clear contract language that thoroughly details all parties’ rights and responsibilities and schedules that set timeframes for contract deliverables. Material changes to contracts should be supported by contract addendums that have been properly authorized.
  6. The CIO and County officials should monitor the services performance of the existing UTC contract.

A report from the Rochester Democrat and Chronicle notes that Monroe County officials have vehemently denied the audit’s criticisms, claiming that the audit relied on “false assertions, inaccurate and misconceived assumptions, and erroneous statements….” In a letter sent to the comptroller in response to the audit, the county claimed that the UTC contract has been appropriately managed and that it has actually saved taxpayers $13 million. The County’s CIO also emphasized that the audit didn’t find any evidence of unlawful or criminal activity.

If the audit is accurate, however, it could raise concerns for a public safety LDC that Monroe County set up based on the UTC model. That LDC, known as Monroe Security and Safety Systems, or M3S, has a 20 year, $224 million contract to improve public safety communications equipment in the county. According to the Democrat and Chronicle, “while the workings of the LDCs are not identical, the draft comptroller’s audit of UTC has echoes of how the public safety LDC operates.”

In an editorial, the newspaper has taken the position that “there’s an unmistakable air of clubbiness surrounding the agreement that should raise public concerns,” even if the issue of criminal conduct has yet to be resolved. “The situation underscores why the state Legislature must strengthen oversight of local development corporations…. Under existing law, non-profit LDCs are given broad authority to act on behalf of local government, and they can’t be audited by the state comptroller. Tighter oversight might have averted findings in a draft state audit limited solely to Upstate Telecommunications Corp.’s relationship with Monroe.”

Comptroller DiNapoli, another article notes, “is pushing legislation to strengthen his office’s oversight of LDCs, though it has so far only been introduced in the Assembly…. In addition, DiNapoli has proposed prohibiting local governments from leaning too heavily on a provision of the law governing LDCs that describes them as ‘lessening the burdens of government and acting in the public interest.’ The clause, which is used routinely in Monroe County and elsewhere, is ‘overly broad,’ DiNapoli argues.”

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