Tioga County Community Development Block Grant Loan by vpo20543

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									OFFICE   OF THE   NEW YORK STATE COMPTROLLER
            D IVISION OF LOCAL GOVERNMENT SERVICES
                    & ECONOMIC DEVELOPMENT




         Tioga County
  Community Development
    Block Grant Loan
           Report of Examination
                   Period Covered:
             May 24, 1994 - June 1, 2004
                      2005M-61




                  A LAN G. H EVESI
                                TABLE OF CONTENTS




                                                                                 Page

AUTHORITY LETTER                                                                  3


EXECUTIVE SUMMARY                                                                 5


INTRODUCTION                                                                      7
           Background                                                             7
           Objective                                                              9
           Scope and Methodology                                                  9
           Comments of Local Officials and Corrective Action                       9


COMMUNITY DEVELOPMENT BLOCK GRANT LOAN                                           10
           Evaluation of the Loan Application                                    10
           Questionable Use of Loan Proceeds                                     12
           Verification that Loan Proceeds were Properly Disbursed                13
           Loan Monitoring                                                       15
           Selection and Monitoring of the Third Party Administrator             17
           Recommendations                                                       17


APPENDIX    A     Response From Local Officials                                   19
APPENDIX    B     OSC Comments on the Local Officials’ Response                   23
APPENDIX    C     Audit Methodology and Standards                                24
APPENDIX    D     How to Obtain Additional Copies of the Report                  25
APPENDIX    E     Local Regional Office Listing                                   26




                DIVISION OF LOCAL GOVERNMENT SERVICES AND ECONOMIC DEVELOPMENT          11
                                             State of New York
                                Office of the State Comptroller

Division of Local Government Services
and Economic Development

April 2006

Dear County Officials:

One of the Office of the State Comptroller’s top priorities is to identify areas where local governments
can improve their operations and provide guidance and services that will assist local officials in
making those improvements. Further objectives are to develop and promote short-term and long-term
strategies to enable and encourage local government officials to reduce costs, improve service delivery
and to account for and protect their governments’ assets.

The reports issued by this Office are an important component in accomplishing these objectives. These
reports are expected to be a resource and are designed to identify current and emerging fiscally related
problems and provide recommendations for improvement. The following is our report on the Tioga
County Community Development Block Grant Loan.

This audit was conducted pursuant to the State Comptroller’s authority as set forth in Article 5,
Section 1 of the State Constitution and Article 3 of the General Municipal Law. The report contains
opportunities for improvement for consideration by the County.

If we can be of assistance to you or if you have any questions concerning this report, please feel free
to contact the local regional office for your County listed at the back of this report.

Respectfully submitted,


Office of the State Comptroller
Division of Local Government Services
and Economic Development




                DIVISION OF LOCAL GOVERNMENT SERVICES AND ECONOMIC DEVELOPMENT                    33
                                                                  State of New York
                                                     Office of the State Comptroller
                                                       EXECUTIVE SUMMARY

Tioga County (County) is located in the Southern Tier Region of New York State. The County is
governed by nine Legislators, one of whom is chosen as Chair by his or her peers. The County
Legislature (Legislature) appoints a County Manager (the County Manager position was established
by Local Law in 1999), who serves as chief administrative officer and is charged with implementing
the Legislature’s policies. An elected County Treasurer serves as chief fiscal officer. The County has
an Economic Development and Planning Department (EDP), established in 1993, that administers
economic development programs. The County’s local development corporation (LDC) provides low
interest loans to start-up and expanding businesses.

The U.S. Department of Housing and Urban Development (HUD) awarded the County a Small Cities
Community Development Block Grant (CDBG) in May, 1995 and in the two subsequent years. The
County received the grant in three annual awards of $600,000 each. The County loaned out the
entire amount $1.8 million, minus administrative costs, to one company – Howland Brothers Co., Inc
(Howland) – with the condition that Howland comply with HUD-required employment goals. During
late 2001, Howland ceased operations, and 69 jobs were lost.

Scope and Objectives

The objective of our audit was to determine whether County officials adequately ensured that the HUD
requirements for the application, use and repayment of the CDBG loan for the period May 24, 1994 to
June 1, 2004, were complied with. Specifically, we sought to address the following questions:

   •   Did County officials appropriately select and adequately oversee the vendor they hired as the
       loan’s third party administrator?

   •   Did County officials properly manage the CDBG loan to Howland?

Audit Results

County officials seriously mismanaged the CDBG loan to Howland. From the beginning of the loan
process (evaluation of the loan application and selection of a third party administrator) to the ultimate
failure and default of the loan, County officials were negligent in their oversight responsibilities.
County officials’ lack of attention to administering the loan led to the loss of funding for future
economic development projects. At the time of our audit, the County lost at least $1.1 million of the
$1.8 million loaned.



                DIVISION OF LOCAL GOVERNMENT SERVICES AND ECONOMIC DEVELOPMENT                      55
County officials did not effectively evaluate Howland’s loan application, and failed to ensure that
the company would be able to repay the loan. The County also did not evaluate Howland’s financial
condition. If they reviewed the Company’s financial statements at all they would have seen that the
Company’s financial position was rapidly deteriorating.

County officials neglected to take basic steps to protect the County’s interest. For example they
initially attached liens to equipment purchased with the loan proceeds but allowed those liens to lapse.
As a result, the County lost its security over $1.1 million in public funds. As a second example of
County negligence, County officials allowed the company to purchase two buildings that the seller did
not own (at the time the Tioga County IDA had title due to a “Payment in Lieu of Taxes” agreement)
for a price based on the seller’s own appraisal. County officials were unaware that Howland never
obtained title to these properties. The appraised value of the properties was significantly inflated. The
original appraised value was $950,000 and the value three years later was $570,000.

Finally, County officials did not adequately monitor and enforce compliance with the loan’s repayment
terms. Specifically, they did not take action when the company violated the loan terms. In 2001, even
though the company began defaulting, County officials failed to notify Howland of this fact until
three months after the first non-payment. Howland paid less interest than what was owed in the early
portion of the repayment period. Loan repayment invoices that Thoma prepared for Howland under-
billed the interest due by approximately $13,200. County officials were unable to locate in their files
any documentation proving they reviewed or approved these invoices.

Comments of Local Officials

The results of our audit and recommendations have been discussed with County officials and their
comments, which appear in Appendix A, have been considered in preparing this report. County officials
generally agreed with our recommendations and indicated they planned to initiate corrective action.




   6        OFFICE OF THE NEW YORK STATE COMPTROLLER
                                   Introduction

Background                Tioga County (County) is located in a rural portion of New York
                          State’s Southern Tier region and has a population of 51,784 residents,
                          according to the 2000 Census. The County is governed by nine
                          Legislators, one of whom is chosen as Chair by his or her peers.
                          The County Legislature (Legislature) appoints a County Manager,
                          who serves as chief administrative officer and is charged with
                          implementing the Legislature’s policies. Prior to establishment of the
                          County Manager position in 1999, the Chairman of the Legislature
                          performed a number of executive and administrative functions. An
                          elected County Treasurer serves as chief fiscal officer. The County
                          has an Economic Development and Planning Department (EDP) that
                          administers economic development programs, including this CDBG
                          loan as well as grants. The County established the EDP in 1993 to
                          foster badly-needed business and job growth. The County’s local
                          development corporation (LDC) provides low interest loans to start-
                          up and expanding businesses.

                          In 1996 and 2000 County officials loaned a local company, Howland
                          Brothers Co., Inc. (Howland), Federal Community Development
                          Block Grant (CDBG) moneys for a business expansion project in
                          the Town of Berkshire. At the time of the loan Howland produced
                          dimension lumber and furniture. Precision Woodcrafters of Indiana,
                          Inc. (Precision) and McGraw Box Company, Inc., (McGraw) both
                          regularly purchased products from Howland. In addition to being a
                          customer, McGraw later became a lender of money to Howland. The
                          application documentation stated that McGraw had been a Howland
                          customer for over two generations. McGraw and Precision were
                          owned by the same individual.

                          The project began in 1994 when EDP officials approached Howland
                          management to discuss purported company plans to move operations
                          from Berkshire, to the State of Indiana. The move was to occur
                          in coordination with Precision, which was already located in
                          Indiana. County officials claimed they not only dissuaded Howland
                          from leaving, but convinced Precision to relocate from Indiana to
                          Berkshire.




             DIVISION OF LOCAL GOVERNMENT SERVICES AND ECONOMIC DEVELOPMENT                77
                      County officials applied for the CDBG from the U.S. Department
                      of Housing and Urban Development (HUD) in February 1995
                      and the two subsequent years. The grant total was $1.8 million
                      sent to the County in three $600,000 annual awards. The County
                      loaned the total amount of the grant, minus approximately $50,000
                      in administrative costs, to Howland. The County would use the
                      repayment of the loan to establish a revolving loan fund to assist
                      other businesses in the County.

                      The loan arrangement was governed in part by Federal regulations,
                      which dictated certain loan terms including funding-use restrictions
                      and employment goals. The County’s grant application claimed
                      that 75 percent of Howland’s 69 employees were classified as low
                      to moderate income, meeting one grant requirement. The grant
                      also required that Howland create 51 new jobs with no less than 51
                      percent of those jobs be held by, or made available to, people with
                      low to moderate incomes.

                      Before the County disbursed the loan proceeds, County and
                      Howland representatives signed agreements and related documents
                      at meetings referred to as loan closings, which bound them to
                      specific terms and conditions. The entire loan transaction consisted
                      of County officials paying out the proceeds in three installments
                      of approximately $600,000 each. Two installments closed on the
                      same day, December 4, 1996, while the third closed almost four
                      years later, August 3, 2000. Howland used the first and a portion of
                      the second – about $800,000 in total – to purchase equipment and
                      inventory and to construct a new building (30N). They used the
                      balance of the second installment and the entire third installment,
                      about $950,000, to purchase two additional buildings (18N and
                      18S) from Precision.

                      In late 2001, Howland ceased operations and defaulted on the balance
                      of the loan. Sixty-nine company employees lost their jobs. The
                      County is due to receive the companies’ assets, mostly consisting
                      of real property, the value of which County officials estimate to
                      be approximately $700,000. HUD officials informed us that HUD
                      could have directed the County to pay back the full grant amount of
                      $1.8 million if they concluded that County officials did not fulfill
                      their responsibilities and comply with grant restrictions. Although
                      the HUD investigation was closed in May 2005, the fact that HUD
                      officials considered requiring the grant to be repaid highlights the
                      significance of the issues raised in this report.




8   OFFICE OF THE NEW YORK STATE COMPTROLLER
Objective                  The objective of our audit was to determine whether County officials
                           adequately assured that requirements for the application, use and
                           repayment of the CDBG loan were complied with. Specifically, we
                           sought to address the following questions:

                               •   Did County officials appropriately select and adequately
                                   oversee the vendor they selected as the loan’s administrator?

                               •   Did County officials properly manage the CDBG loan to
                                   Howland?

Scope and                  During this audit we examined the process and circumstances
Methodology                surrounding the County’s lending of CDBG moneys to Howland. Our
                           audit period covered May 24, 1994 to June 1, 2004.

                           County officials involved with the loan transactions from its inception
                           are no longer employed by the County, therefore making it difficult
                           to ascertain all the circumstances surrounding the complex nature of
                           the loan transactions that began more than 10 years ago. We relied on
                           available documentation and inquiry of current officials for pertinent
                           information.

                           We conducted our audit in accordance with Generally Accepted
                           Government Auditing Standards. More information on such standards
                           and the methodology used in performing this audit are included in
                           Appendix C of this report.

Comments of                The results of our audit and recommendations have been discussed
Local Officials and         with County officials and their comments, which appear in Appendix
Corrective Action          A, have been considered in preparing this report. County officials
                           generally agreed with our recommendations and indicated they
                           planned to initiate corrective action.

                           The Legislature has the responsibility to initiate corrective action.
                           Pursuant to Section 35 of the General Municipal Law, Legislators
                           should prepare a plan of action that addresses the recommendations
                           in this report and forward the plan to our office within 90 days. For
                           guidance in preparing their plan of action, County officials may refer
                           to applicable sections in the publication issued by the Office of the
                           State Comptroller entitled Local Government Management Guide.
                           We encourage the Legislature to make this plan available for public
                           review in the Clerk of the Legislature’s office.




              DIVISION OF LOCAL GOVERNMENT SERVICES AND ECONOMIC DEVELOPMENT                99
             Community Development Block Grant Loan

                           Sound management practices require the Legislature to have
                           procedures in place to monitor CDBG loan activity. Written policies
                           and procedures also help to ensure that loan recipients meet the
                           terms and conditions of loan agreements to help minimize risks that
                           loan proceeds would not be repaid. County officials had no such
                           procedures in place to monitor a loan to an obviously risky company
                           which discontinued operations resulting in the loss of 69 jobs and
                           approximately $1.1 million.

                           County officials did not ensure that Howland complied with CDBG
                           loan requirements through proper monitoring and assessment of the
                           company’s financial viability. This was apparent even with the initial
                           selection of the third party administrator to oversee this loan and
                           related transactions. As a result, the County lost approximately $1.1
                           million, having on hand only $700,000 in assets which it received from
                           Howland after the company collapsed. The County’s lien on other
                           assets which the company purchased with loan proceeds, however,
                           lapsed, leaving a large portion of the County’s loan unsecured. In
                           the end, not only did County officials lose an economic development
                           resource they could have used for its revolving loan fund to develop
                           other businesses, but they may have disqualified themselves from
                           receiving future HUD moneys.

                           In addition, there were very questionable transactions that the County
                           allowed that created a public suspicion of wrongdoing. For example
                           Howland paid far more than market value for buildings it purchased
                           shortly before going out of business.

Evaluation of the Loan     County officials should adequately evaluate CDGB loan applications
Application                to ensure that loan proceeds are used to benefit County residents, in
                           accordance with HUD requirements. We found substantial weaknesses
                           in County officials’ evaluation of Howland’s loan application. The
                           County approved the loan despite indications that Howland was not a
                           financially strong operation, exhibiting many signs that it was heading
                           for collapse.

                           Financial Assessment: Could the Company Repay the Loan? –
                           Effective management practices by a lender require some level of
                           assurance that loan moneys will be repaid. Therefore, a thorough
                           assessment of the borrower’s financial health and credit worthiness




  10       OFFICE OF THE NEW YORK STATE COMPTROLLER
             should be an integral part of any lending process. However, County
             officials did not analyze Howland’s financial condition prior to
             submitting the HUD grant application for this loan. In addition,
             Howland had no business plan that County officials could have used
             to gauge Howland’s ability to repay the loan. County officials had
             plenty of time to understand that the company was financially weak
             prior to the initial release of the loan proceeds. The County applied
             for the moneys in February 1995, but Howland did not receive the
             first payment until December 1996, giving County officials nearly
             two years to analyze the company’s financial health. Howland
             continued to receive loan proceeds until 2000, shortly before going
             out of business.

             According to our analysis of Howland’s financial statements, prepared
             (these statements were not audited but only reviewed) by independent
             auditors, company net sales had fallen nearly 22 percent from 1994
             to 1996 when the first two loan closings occurred. (We could not
             locate these statements for 1995.) Net sales continued to drop each
             year through 1999 (the date of the third loan closing) by more than 56
             percent from their 1994 levels. Howland operations showed a net loss
             of nearly $1 million from 1993 to 1999, with only one year showing
             a profit of $32,000 in 1994. During the same period, current year-end
             liabilities (obligations potentially due within one year of statement
             date) climbed from about $450,000 to more than $2.3 million. Cash
             on hand at year-end during that period ranged from $3,500 to $45,000.
             Despite clear indications that Howland was financially weak, County
             officials did not reassess the project’s feasibility.

             Criteria Assessment: Did the Company Meet HUD requirements? -
             All HUD grants contain requirements and restrictions over the use
             of the moneys awarded. HUD requires that County officials use due
             diligence in their decisions and maintain documentation consistent
             with County representations. HUD officials rely on County
             representations to make grant-related decisions. As a rule, HUD
             will rescind a grant and reject future applications if recipients do not
             comply with grant criteria. The County’s initial CDBG application
             claimed that 75 percent of Howland’s employees were low-to-
             moderate-income wage earners. Given that HUD required at least 51
             percent of the employees to be in this income range, it would seem
             the company had met this threshold. However, there is no evidence
             that County officials verified this figure and instead appeared to just
             repeat information provided by the company. County officials should
             have used due diligence and verified that all information included
             in the CDBG grant application was true, accurate and complete to
             ensure they complied with HUD requirements.



DIVISION OF LOCAL GOVERNMENT SERVICES AND ECONOMIC DEVELOPMENT                  11
                                                                               11
Questionable Use of Loan    County officials chose Thoma Development Consultants (Thoma),
Proceeds                    a Cortland-based consulting firm that specializes in administering
                            government grants, to oversee certain aspects of the Howland
                            project including compliance with HUD requirements. In addition,
                            Thoma prepared the applications for the second and third awards of
                            the CDBG loan.

                            County officials authorized payments to Howland based on the
                            company submitting acceptable cost documentation that met grant
                            requirements. Thoma prepared Howland’s payment requests, based
                            on Thoma’s review of Howland’s documentation. Howland was to
                            use the money for construction, inventory, equipment, improvements
                            and building acquisition. The loan closing documents securitized
                            some of Howland’s assets for the County by a mortgage. In addition,
                            the County filed a lien with the County Clerk on equipment Howland
                            purchased with loan proceeds.

                            Effective business practices dictate that when moneys are loaned
                            to purchase an asset, not only should the purchase price reflect
                            the asset’s value but the asset’s title should pass to the purchaser.
                            Following the closing of the third $600,000 installment, the County
                            disbursed this sum together with a $350,000 portion of the second
                            installment to Howland so the company could purchase two
                            buildings that Precision allegedly owned, since at the time the Tioga
                            County IDA (IDA) had title due to a Payment in Lieu of Taxes
                            (PILOT) agreement. The County released these moneys despite the
                            following circumstances:

                               •   The buildings’ value was based on an estimate made by an
                                   appraiser that Precision itself hired. County officials did
                                   not obtain an independent appraisal to verify the validity of
                                   Precision’s appraisal. Therefore, County officials did not
                                   know the true value of the buildings at the time of sale.

                                   Three years later, as a result of a HUD audit of the transaction
                                   and appraisal, the same appraiser valued the buildings at
                                   one-third of the original appraised value ($330,000). It is
                                   unclear who actually owned the property at the time of
                                   second appraisal. Subsequent County appraisals estimated
                                   the value of the buildings at about 60 percent of the original
                                   appraised value, or $570,000.




 12       OFFICE OF THE NEW YORK STATE COMPTROLLER
                              •   At the time of the sale Precision did not hold title to the
                                  buildings. Rather, according to deed records in the County
                                  Clerk’s Office, the Tioga County Industrial Development
                                  Agency held title under the provisions of a previous financial
                                  agreement that gave Precision a real property tax exemption,
                                  and then the IDA leased the property back to Precision.

                          To summarize, County officials loaned money to Howland to purchase
                          two buildings from a “seller” who did not even own them, for a price
                          that was significantly higher than their worth. This incident took
                          place shortly before Howland filed for bankruptcy, preventing the
                          County from recouping its loans

                          Securing the Loan – County officials were by law allowed to protect
                          their interest in the assets Howland purchased with the loan proceeds,
                          especially because this loan was made to a financially risky company.
                          They should have maintained an accurate listing of the assets that
                          included a description, location, value, and identification (e.g., serial
                          numbers). County officials failed to secure their financial interests in
                          the following manner:

                              •   Neither County officials nor Thoma maintained a list of assets
                                  that Howland acquired until 2000.

                              •   On December 4, 1996, County officials secured a lien on
                                  equipment Howland purchased. However, they did not renew
                                  this lien when it expired five years later, thus losing their
                                  security interest in the equipment. McGraw subsequently
                                  placed liens on the equipment and then took title to, and
                                  possession of, it. Other assets such as the building 30N were
                                  securitized by the County via the security agreement and
                                  mortgage.

                          The County should have ensured that all Howland assets purchased
                          with loan proceeds were securitized to their fullest extent. This
                          failure to do so resulted in approximately $1.1 million in losses to
                          the County.

Verification that Loan     County disbursements should be adequately supported by documents
Proceeds Were Properly    detailing the purposes for which they are made. Disbursements such
Disbursed                 as Federal grant loan proceeds, which have restrictions attached
                          to them, should also be supported by documentation that proves
                          adherence to such restrictions. They should comply with all legal
                          restrictions. County CDBG disbursements to Howland were not only
                          unsupported but they violated HUD requirements and County law.



             DIVISION OF LOCAL GOVERNMENT SERVICES AND ECONOMIC DEVELOPMENT                  13
                                                                                            13
                       Inadequate Support – County policy requires supporting
                       documentation for all County disbursements to demonstrate that
                       they were made for a legitimate County purpose. In the case of the
                       CDBG grant loan, the County was also required to comply with
                       HUD guidelines on payments the County made in this endeavor.
                       The County failed on both counts.

                       According to its contract with Thoma, the County should not
                       have made any payments to this consultant without documentary
                       evidence that Thoma was doing its job as specified by contract.
                       Also, according to the closing document restrictions, Howland was
                       to purchase only those items allowed by contract and provide the
                       County information proving that the purchases were within the
                       bounds of the loan restrictions. The County was then to disburse
                       moneys to Howland based on that supporting evidence.

                       We found no documentary evidence that justified and supported
                       County disbursements to Thoma or Howland. The County issued
                       more than $1.7 million in loan proceeds to Howland and more
                       than $23,000 in consultant fees to Thoma. These payments were
                       not processed through the County’s normal claims auditing process
                       prior to payment. When County legislators inquired about the loan’s
                       status several years after the project had started, EDP staff members
                       told them that payments totaling more than $1.6 million were not
                       fully supported. Discrepancies included the following: vendor
                       invoices which could not be located; no documentary evidence that
                       Howland sought County permission prior to making purchases; and
                       claims with only copies of checks attached.

                       These questionable transactions took place along with dubious
                       equipment purchases that Howland made from both Precision
                       and McGraw totaling over $1 million, including the previously
                       discussed real estate transaction. The equipment included, for
                       example, industrial power saws and conveyors; transformers and
                       other electrical distribution equipment and office furniture totaling
                       $87,500. County documents indicate these companies were major
                       customers, not vendors, of Howland. We could find no evidence
                       proving that Howland ever received some of the equipment it was
                       supposed to have purchased.

                       Questionable Purposes – In the case of real property, it is in the
                       interest of a building’s owner to also hold title to the land on which
                       the buildings sits. This helps the building’s owner avoid expensive
                       and difficult disputes over real property taxation, injury liability,




14   OFFICE OF THE NEW YORK STATE COMPTROLLER
                          and rights-of-way. Howland used some of the loan proceeds to
                          construct a building (identified as 30N) on two parcels of land that
                          Precision owned. There was no documentation that County officials
                          had considered the problems this action could have caused.

                          HUD Provisions Violated – HUD officials informed us that funds
                          they provided the County in the past have always carried restrictions,
                          including employment for the benefit of low to moderate income
                          people. Unless and until the County returns the grant moneys to
                          HUD, the restrictions continue in force. Howland made one principal
                          loan repayment to the County in the amount of $50,000. Contrary to
                          HUD restrictions and without HUD approval, County officials then
                          turned these moneys over to the LDC. The County designated this
                          money as a local match to a U.S. Department of Agriculture (USDA)
                          Intermediary Relending Program grant. Officials at HUD informed
                          the County that its payment to the LDC required HUD’s approval as
                          it constituted a new activity. HUD officials also indicated that the
                          HUD-required sub-recipient agreement between the County and the
                          LDC for the USDA program did not address all HUD requirements.
                          HUD officials informed us that HUD could have directed the County
                          to pay back the full grant amount of $1.8 million if they concluded
                          that County officials did not fulfill their responsibilities and comply
                          with grant restrictions. Although the HUD investigation was closed
                          in May 2005, the fact that HUD officials considered requiring the
                          grant to be repaid highlights the significance of the issues raised in
                          this report.

Loan Monitoring           The County’s loan agreement with Howland required the company
                          to periodically report employment and financial information to the
                          County, and make timely loan repayments. County officials were also
                          responsible for enforcing the loan terms including repayment time
                          frames and amounts. As the following issues demonstrate, County
                          officials failed to meet their obligations as outlined in the loan closing
                          documents:

                              •   Howland did not provide quarterly employment reports
                                  to the County EDP and the County did not enforce this
                                  requirement.

                              •   County officials routinely did not levy penalties against
                                  Howland after it violated loan requirements including:

                                     o   The company’s failure to prove it consistently met
                                         HUD requirements that at least 51 percent of new
                                         hires have low to moderate incomes.




             DIVISION OF LOCAL GOVERNMENT SERVICES AND ECONOMIC DEVELOPMENT                   15
                                                                                             15
                                  o   Twenty-seven among 54 of Howland’s interest
                                      payments to the County were late. Late payments
                                      are subject to a two percent penalty, but County
                                      officials never applied the penalty.

                          •   In 2001, Howland began defaulting on the loan. County
                              officials were responsible for notifying the company
                              that it was in default and subject to penalty. The default
                              notification was not sent until three months after the initial
                              default occurred. County officials forgave without penalty
                              Howland’s failure to make timely principal payments in
                              accordance with the 1995 and 1996 closing documents,
                              claiming that the company was negotiating with the County
                              and HUD. However, we found no documentation supporting
                              the County’s decision to delay the transmittal of delinquent
                              notices.

                          •   Howland paid less interest than was due in the early part
                              of the loan repayment period; loan repayment invoices
                              that Thoma prepared actually called for an underpayment
                              of $13,200 in interest. County officials could not provide
                              us with any evidence that they reviewed or approved these
                              invoices. County officials did not prepare amortization
                              loan repayment schedules that would have clearly identified
                              when amounts were due.

                       The loan closing documents were the basis for all three installments
                       of the loan transaction. Sound management practices would help
                       to ensure that such documents are free of error, clearly state the
                       meaning and intent of all provisions, and contain consistent
                       information throughout. County officials did not carefully prepare
                       the loan closing documents, and as a result documentation for the
                       third loan installment contained several inconsistencies, including
                       the following:

                          •   Although the loan agreement stated that Howland owed the
                              County $1,699,800, that same agreement stated that as a
                              result of this loan, the County was placing liens on company
                              assets for only $1,531,704. County officials blamed this
                              discrepancy on a typographical error on documents hastily
                              assembled for the closing.

                          •   Documents indicated that loan repayments from Howland
                              were due in 1999 and 2000 but the third/final closing did not
                              occur until August 3, 2000.



16   OFFICE OF THE NEW YORK STATE COMPTROLLER
                           In addition, some repayment due dates were not clearly identified, and
                           officials said they could not locate a formal amortization schedule in
                           their files. These inconsistencies and missing information underscore
                           a careless and unprofessional approach among County officials and
                           Thoma representatives toward this project that put County interests at
                           risk.

Selection and Monitoring   When County officials require third-party expertise to fulfill a County-
of the Third Party         related function, the County may contract with a private consultant to
Administrator              provide this service. In that light, County officials should seek competition
                           for this service to ensure the highest quality of expertise is provided
                           at a reasonable cost. Once engaged, the consultant’s work should be
                           monitored to ensure that contractual requirements and expectations are
                           met.

                           The Legislature chose Thoma to oversee and monitor the Howland
                           loan. Thoma developed a Request for Proposals (RFP) document for
                           prospective vendors who would administer the loan. Thoma developed
                           a list that contained the names of four potential firms, and provided
                           this list to County officials. Thoma included itself on this list, creating
                           an appearance of a conflict of interest. County officials subsequently
                           selected Thoma to administer the loan, and paid the firm over $23,000
                           to administer the loan program. Despite paying over this sum, County
                           officials never monitored Thoma’s activities to ensure this firm was
                           meeting its contractual obligations. If County officials had taken more
                           care before choosing Thoma and monitored Thoma’s activities, they
                           may not have been faced with the loss of $1.8 million in Federal grant
                           moneys. Thoma failed to make sure that the grant money loaned to
                           Howland was secured by liens on Howland’s property, which left the
                           loans partially unsecured resulting in a loss of economic development
                           funds for the County.

Recommendations            1. County officials should establish and maintain a set of grant or loan
                              program monitoring procedures to help ensure compliance with
                              program requirements.

                           2. The Legislature should review County purchasing policies and
                              procedures to verify that consultants are independently selected.
                              Also, County officials should monitor the services that consultants
                              provided.

                           3. The Legislature should develop policies and procedures for evaluating
                              loan applicants. These policies should include provisions for:
                              assessing the need for the loan, assessing the financial health of the




              DIVISION OF LOCAL GOVERNMENT SERVICES AND ECONOMIC DEVELOPMENT                      17
                                                                                                 17
                          applicant, and determining the requirements and/or restrictions
                          imposed by external parties such as HUD. They should also
                          ensure that these policies and procedures are strictly followed.

                       4. The Legislature should devise a system to monitor the borrower’s
                          compliance with loan requirements, ensuring that the County’s
                          interests are protected through asset securitization.




18   OFFICE OF THE NEW YORK STATE COMPTROLLER
                                          APPENDIX A

                        RESPONSE FROM LOCAL OFFICIALS

The local officials’ response to this audit can be found on the following pages.




                DIVISION OF LOCAL GOVERNMENT SERVICES AND ECONOMIC DEVELOPMENT     19
                                                                                  19
                                         APPENDIX B

          OSC COMMENTS ON THE LOCAL OFFICIALS’ RESPONSE

Note 1:

We agree with County officials’ suggested changes listed in the Exhibit A attachment and have modified
our report accordingly.

Note 2:

The County officials’ response letter also included a thirteen page attachment, Exhibit B, which was
a copy of a newly-entered into agreement with a local development corporation to administer the
County’s CDBG program. Because of the volume of the attachment and the fact that it merely supports
information already in the response letter, we have not included Exhibit B in this report.




                DIVISION OF LOCAL GOVERNMENT SERVICES AND ECONOMIC DEVELOPMENT                 23
                                                                                              23
                                          APPENDIX C

                     AUDIT METHODOLOGY AND STANDARDS

Our audit included the following procedures that were necessary in order to obtain valid audit evidence
concerning our stated objectives:

   •   We interviewed County officers to obtain information about the CDBG loan including
       application for, use and repayment of funds.

   •   We inquired into what internal controls and procedures were in place to monitor the CDBG
       loan, and we looked for evidence of those controls in existing documentation.

   •   We reviewed loan closing and related County documents pertaining to our audit objectives.

   •   We made inquiry and requested various documents from officials of the County Industrial
       Development Agency and Local Development Corporation.

   •   We made inquiry to HUD officials and reviewed their monitoring letter of the County.

   •   We reviewed accounting records, vouchers, and reports pertaining to our audit objectives.

   •   We scanned the minutes of County Board of Legislators proceedings.

   •   We consulted with our Division of Legal Services on the application and interpretation of
       various laws and Opinions of the State Comptroller.

We conducted our audit in accordance with Generally Accepted Government Auditing Standards. Such
standards require that we plan and conduct our audit to adequately assess those municipal operations
within our audit scope. Further, those standards require that we understand the municipality’s
management controls and those laws, rules and regulations that are relevant to the municipality’s
operations included in our scope. An audit includes examining, on a test basis, evidence supporting
transactions recorded in accounting and operating records and applying such other auditing procedures,
as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis
for the findings, conclusions and recommendations contained in this report.




  24        OFFICE OF THE NEW YORK STATE COMPTROLLER
                                           APPENDIX D

           HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT


To obtain copies of this report, write or visit our web page:




                                Office of the State Comptroller
                                Public Information Office
                                110 State Street, 15th Floor
                                Albany, New York 12236
                                (518) 474-4015
                                http://www.osc.state.ny.us/localgov/




                DIVISION OF LOCAL GOVERNMENT SERVICES AND ECONOMIC DEVELOPMENT    25
                                                                                 25
                                                    APPENDIX E
                         OFFICE OF THE STATE COMPTROLLER
                      DIVISION OF LOCAL GOVERNMENT SERVICES
                            AND ECONOMIC DEVELOPMENT
                                            Mark P. Pattison, Deputy Comptroller
                                           Steven J. Hancox, Assistant Comptroller
                                            John Clarkson, Assistant Comptroller

                                      LOCAL REGIONAL OFFICE LISTING
BUFFALO REGIONAL OFFICE                                      GLENS FALLS REGIONAL OFFICE
Robert Meller, Chief Examiner                                Karl Smoczynski, Chief Examiner
Office of the State Comptroller                               Office of the State Comptroller
295 Main Street, Room 1050                                   One Broad Street Plaza
Buffalo, New York 14203-2510                                 Glens Falls, New York 12801-4396
(716) 847-3647 Fax (716) 847-3643                            (518) 793-0057 Fax (518) 793-5797
Email: Muni-Buffalo@osc.state.ny.us                          Email: Muni-GlensFalls@osc.state.ny.us

Serving: Allegany, Cattaraugus, Chautauqua, Erie,            Serving: Clinton, Essex, Franklin, Fulton, Hamilton,
Genesee, Niagara, Orleans, Wyoming counties                  Montgomery, Rensselaer, Saratoga, Warren, Washington
                                                             counties

ROCHESTER REGIONAL OFFICE                                    ALBANY REGIONAL OFFICE
Edward V. Grant, Jr., Chief Examiner                         Christopher J. Ellis, Chief Examiner
Office of the State Comptroller                               Office of the State Comptroller
The Powers Building                                          22 Computer Drive West
16 West Main Street – Suite 522                              Albany, New York 12205-1695
Rochester, New York 14614-1608                               (518) 438-0093 Fax (518) 438-0367
(585) 454-2460 Fax (585) 454-3545                            Email: Muni-Albany@osc.state.ny.us
Email: Muni-Rochester@osc.state.ny.us
                                                             Serving: Albany, Columbia, Dutchess, Greene, Orange,
Serving: Cayuga, Chemung, Livingston, Monroe,                Putnam, Rockland, Schenectady, Ulster, Westchester
Ontario, Schuyler, Seneca, Steuben, Wayne, Yates             counties
counties

SYRACUSE REGIONAL OFFICE                                     HAUPPAUGE REGIONAL OFFICE
Debora Wagner, Chief Examiner                                Richard J. Rennard, Chief Examiner
Office of the State Comptroller                               Office of the State Comptroller
State Office Building, Room 409                               NYS Office Building, Room 3A10
333 E. Washington Street                                     Veterans Memorial Highway
Syracuse, New York 13202-1428                                Hauppauge, New York 11788-5533
(315) 428-4192 Fax (315) 426-2119                            (631) 952-6534 Fax (631) 952-6530
Email: Muni-Syracuse@osc.state.ny.us                         Email: Muni-Hauppauge@osc.state.ny.us

Serving: Herkimer, Jefferson, Lewis, Madison,                Serving: Nassau, Suffolk counties
Oneida, Onondaga, Oswego, St. Lawrence counties

BINGHAMTON REGIONAL OFFICE
Patrick Carbone, Chief Examiner
Office of the State Comptroller
State Office Building, Room 1702
44 Hawley Street
Binghamton, New York 13901-4417
(607) 721-8306 Fax (607) 721-8313
Email: Muni-Binghamton@osc.state.ny.us

Serving: Broome, Chenango, Cortland, Delaware,
Otsego, Schoharie, Sullivan, Tioga, Tompkins
counties



  26            OFFICE OF THE NEW YORK STATE COMPTROLLER

								
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