Rio Nuevo Board releases Depot Plaza audit: over $4 mil in questioned costs

The Rio Nuevo District Board held a public meeting and press conference today regarding the forensic audit of Depot Plaza Block spending. The audit was performed by Regier, Carr, and Monroe, LLC, commissioned by the new Rio Nuevo District Board. Early in the day, the City had tried to stop the release of the audit, saying that it would sour mediation.

“Based on the results of this for forensic examination, we find that there is sufficient evidence to support the conclusion that approximately $2,319,366.04 of District expenditures should be considered to be questioned costs. In addition, $2,223,530.20 of expenditures lacked evidence of District authorization and approval. The findings result in a total of $4,542,896.24 of questioned costs,” according to the audit. The audit defined “questioned cost” as a cost not “supported by adequate documentation, a cost that is unnecessary or unreasonable, or a cost that is in violation of the law, regulation or contract.”

The audit found all three types of “questioned costs.”

The audit was prompted by information resulting from a performance and financial analysis of the District performed by Crowe Horwath, LLP in October 2010.

According to a statement released by the new Board, the audit results are disappointing, but not as disappointing as those that will follow. Audits are being performed of several projects entered into by the old city-controlled Rio Nuevo Board.

Board Chair Jodi Bain began the meeting by stating earlier in the day, the situation had “turned ugly” due to attempts to stop the release of the audit by the City. She stated that for the record that Board did not commission the audit to be punitive or do harm to the City of Tucson, but rather “we got to get a baseline here.” She said that despite being called cockroaches and other things by critics, the Board was acting on behalf off the taxpayers, and not trying to harm anyone, “remember, we are volunteers.”

In keeping with the City’s plan of action to attack anyone perceived to be an enemy, City of Tucson Finance Director Kelly Gottschalk, attempted to impugn the auditors by telling the reporters, “You need to understand, these guys are hired guns. This is not an independent audit.” However, the auditors are licensed CPAs who must meet certain professional standards.

Gottschalk told reporters “I don’t know what they looked at,” in reference to the auditors. However, according to the auditors, Gottschalk herself assured the auditors in an email that “she had provided all documentation on the Depot projects contained in the project files.”

Audit findings:

Finding A:

Just as the history of the Depot Projects is difficult to follow, the District’s authorization and approval of funding of the Depot projects is murky. We found that there were three instances of the District approving funding for the depot Projects.

Finding B:

We found that the District was charged for $61,938.14 for services related to the MLK Apartments. The MLK Apartments were a project of the City of Tucson and the District had authorized no funds thereto.

Finding C:

We found that the District was erroneously charged $82,962.00 for preconstruction services.

Finding D:

We found that $75,223.00 of construction costs were not supported or approved by the District.

Finding E:

The revised contract with TestMarcx, dated 22, 2008, states that it is for the LEED certification requirements for the MLK Apartments. The contract was not executed by the City or the District. The City of Tucson Partial Delivery and Receiving Reports dated February 26, 2008 and March 13, 2009 were authorized as signed by Greg Shelko.

Finding G:

Per the City of Tucson Flow of Funds detail of Depot Garage and Depot plaza projects, it was noted that $91,429.04 of Nelsen Partners, Inc. fees which related to the Depot Plaza Project were incorrectly charged against the Depot Garage Project.

Finding H:

No supporting documentation was provided by the City for the City of Tucson Consultant’s request for Payment numbers 15 and 21 in the amount of $1,169,515 and $723,150, respectively. As such, these payments have been considered questioned costs.

Finding I:

Transactions were described as “Transfer” in the City’s Flow of Funds for the Depot Garage project in the amount of $394,116.76 Specific support was not located in the amount of these items identified as “Transfers.” We were also unable to trace supported expenditures totaling $3,000,645.81 into the City Flow of Funds. We believe these expenditures are included in the “Transfer” amount; therefore, they are included as a reduction to the questioned costs. The net unsupported costs related to the “Transfers” amount are $93,470.95.

Finding J:

We found expenditures identified as “Finance Department in the City f Tucson Flow of Funds totaling $114,987.50 charged to the Depot projects. Of the expenditures, a total of $48,976.93 was specifically identified as labor charges. The remaining $66,010.57 may also be labor charges, but are no clearly identified as such in the Flow of Funds. Charging the City salary or payroll expenses to the District is in violation of Arizona Revised Statutes.

Arizona Revised Statute 48-4204(C) states “A district established pursuant to section 48-4202, subsection B may not use monies distributed pursuant to 48-5031 for the salaries or compensation of any employee of the municipality in which the district is located.” Additionally, Senate Bill 1004 that provided changes to Title 48 states the changed are retroactive to June 30, 2009. The Flow of Funds reflects that the City of Tucson charged the Depot Garage Project and Depot Plaza Project $48,564.93 and $412,000, respectively, for labor charges of the personnel of the City Finance Department or other City employees for the year ended June 30, 2010. Based on the Arizona Revised statutes, these salary charges are considered questioned costs.

Finding K:

We were unable to identify several transactions in the Flow of Funds. The description provided in the Flow of Funds was sufficient to determine the nature of the expenditures, and we did not identify any supporting documentation for these amounts. These items, totaling $21,278.40, are considered questioned costs and are identified in Exhibit L as “Unidentified Expenditures.”

The Board released the following statement:

Today is the beginning of the end of an era. An era that began in 1999 with great expectations and optimism. We anticipate, as a result of the dogged determination and dedication of the reconstituted District Board, that as the forensic audits are released, the community will be offered a sense of closure, transparency and confidence for the future.

When the Board and its oversight provisions were reformed by the Arizona Legislature in 2009, the new 2010 Board knew the task would not be easy. As priorities were put together, one stood out. If we accomplished nothing else, we had to give the taxpayers an honest accounting of key areas of their spent monies. It was a common goal that many of us often shared and focused on at virtually every meeting.

It is our hope that this first forensic audit examination presented today, and those audits to be presented, will offer a sense of closure to Tucsonans regarding their many questions and a reminder that with proper oversight, a more vibrant District corridor can yet be realized.

The Depot Plaza Block forensic audit presented today is the first in a series. It was triggered upon legal advice because the City continued to demand an additional $1,500,000.00 from what little remains from the Rio Nuevo monies. Preliminary review indicates that it will be the least disappointing of the forensic examinations.

While we share other City leader’s desire to create an even more vibrant Tucson core, as servants to the public, none of us has the right to dismiss the past failures to accommodate potential progress. It has been insisted that the District proceed with funding past projects for which, until now, we did not know if money continued to be actually owed. Outlay of funds not due would have only perpetuated the past methods, whether it was intended or not.

We would like to recognize a number of people, including the many citizens who urged us to find out where the money was spent and to rebuild the vision of many downtown projects had seemingly vanished. The Southern Arizona legislative delegation and the Governor’s office, who at every step of the way said only one thing: Do what is right. Each member of the board, past and present, who have stood behind the efforts of rooting out truth and transparency; often while taking vicious personal attacks. They all have a deep dedication to this City and the community. The many City employees who have helped the District and the investigating agencies. Their focus was always to ensure everything be transparent, records made public, with a belief that city residents had a right to know.

Despite the past failures of past Rio Nuevo efforts, many great things have happened downtown. The remarkable people of Tucson have built a foundation of small businesses which represent our City’s full heritage. There is much upon which to build. We are a part of this future and look forward to working with the many aspects of the community.

Today’s news focuses on the regrettable mistakes and possible malfeasance. With the assistance of the examinations, the innocent will be exonerated and the guilty will be held accountable.

The new era of this District begins with confidence, hope and anticipation of great things to come. Our hope is based on our confidence that the actions of this District Board demonstrate we make hard decisions (which are not popular) to preserve the little remaining funds entrusted to the District so that many of the promises which remain viable may now be fulfilled.

Future audits are expected to reveal that in one instance alone, the city agreed to pay for a design of a new hotel, which had been created and mostly finished without a design and build agreement in place and accepted by the City for Rio Nuevo. The developer, Garfield Traub and the builder, Turner/Sundt, billed the City for the hotel design which was based on Sheraton Hotel chain specifications, without an agreement with the hotel chain. As a result, without that agreement, the city would have been stuck with a hotel that would not meet the requirements of any other chains with whom the City might negotiate.

If Sheraton did not accept the agreement, the City would have an almost impossible time selling the hotel to any other prospective partners without extensive costs to reconfigure.

Tucson City Councilman Steve Kozachik, released a statement today questioning the need for the audit. He essentially said that everyone knows that mistakes were made and that people should move on. One taxpayer responded, “It isn’t his money to forgive and forget.”

The following is a listing of all city of Tucson representatives that signed documents contained in the documentation provided by the City of Tucson:

Greg Shelko
Kelly Gottschalk
Mike Hein
Richard Miranda
Christina Thompson
Fran LaSala
Jennifer Gillespie
Joe Comella
Joyce Garland
Kathleen Bender
Lee Barr
Silvia Amparano
Stacie Bird
Vincent Hunt
Virginia Monyak
William O’Malley