At yesterday’s meeting of the Rio Nuevo District Board, board members Alberto Moore and Jeff Hill revealed the truth about the history and financial status of the failed project. The two well respected gentlemen, who have served the community faithfully, laid out in great detail, the City of Tucson’s corruption and the squandering of about $230 million over ten years. Below, is a transcript of both men’s statements:
Mr. Chairman, all I know is what I read in the paper, and since it is the Arizona Daily Star, that can be pretty grim. But I want to make one point today that I think is easily understood. It shows the situation and what Rio Nuevo is, particularity for those who think it is an unending fund of money to spend on building facades and Lord knows what else. The debt service on the bonds which we are going to discuss today is $12.3 million a year. That is just debt service that doesn’t count any expenditures to run the district. The TIFF funds, which out of bond proceeds, is the only money this Board receives. In fiscal year 2009 was $8.9 million, in fiscal year 2010 it was $12.9 million. Annualized for this fiscal year, ending on June 30 its $9.8 million. As you can see, the history of the TIFF money, the only year that has ever reached just the debt retirement , it has not reached the operating budget was the last fiscal year. Therefore, every year, unless the TIFF money increases, we are going to be dipping out of some pile of money the City has. They have not turned over all of the funds they have to the Board and they are ensuring that these bonds are paid. Clearly we don’t have the money to pay the bond, let alone and start contracting for some other items.
This is an abbreviated version of the historic recap that was promised to Governor Brewer by the Board. It is my belief that what has occurred with Rio Nuevo is a microcosm of what is happening across the country.
In response to recent developments concerning the Rio Nuevo District Board, I think it is appropriate to make some additional comments. Because, as a result of these developments only two of the original reconstituted Rio Nuevo Board members remain.
As we will see, this is no accident. In fact, it is the result of a relentless effort of powerful special interests to keep the truth from the public.
The reconstituted Rio Nuevo Multipurpose Facilities District Board was the result of the State of Arizona stepping in after ten years of mismanagement of the District by the City of Tucson. In March of 2010, the Governor and Legislature tasked the new board to do the following:
1. Perform a Performance Audit of the financial records of the Rio Nuevo District since its inception – in order to determine where almost a quarter of a billion dollars, that the city had identified as under the umbrella of Rio Nuevo, was spent.
2. To review and investigate the proposed business venture of a convention hotel and a new convention center project. One of the driving goals behind this effort was to protect and save the Gem Show.
3. To baseline the District and determine:
• What the District owned (or was supposed to own).
• The cash position (restricted and unrestricted).
• What the District owed; and
• How much money, if any, was available to use after debt service is paid.
In the process of fulfilling its mandate to “follow the money,” the reconstituted Board had to untangle a web of contradictions, missing documents, deceit, and endless accounting dead ends. All accounting, finance and other matters of Rio Nuevo were done by the City folks.
A year before the new board was seated, “ it was publicly known and acknowledged by the City of Tucson that the City of Tucson’s finances were a mess, were unclear, and concealed a number of transactions.” Funds were obviously misplaced.
Because of poor bookkeeping and recordkeeping by the City and the City’s continued demand for funds that were in fact not owed to it, the reconstituted Board requested three Forensic Examinations – including
• the Depot Plaza Block Projects
• the West Side Projects and
• the Garfield Traub/Turner/Sundt Hotel, Garage, Convention Center Project.
It is important to remember that for over ten years the City Council had appointed the Rio Nuevo Board. The City’s Finance Director, Kelly Gottschalk, acted as the District’s Treasurer and the Assistant City Manager, Richard Miranda, served as the District’s Executive Director.
The simple truth was that under the management of the City of Tucson, there had been almost a quarter of a billion dollars they claim spent by the Rio Nuevo District and there is little to show for it.
Not only did the State of Arizona want to know where the money had gone, the public deserved to know where the quarter of a billion dollars went. In October 2010 we received an audit of the finances and the public demanded we have a Forensic examination of the audit executed.
The first of three Forensic examinations was delivered on March 13, 2012. It concerned the Depot Plaza Block Projects and indicated that over $2 million dollars was spent without the approval of the Rio Nuevo Board. The report concluded that over $4.5 million dollars of the project’s costs were questionable.
More importantly, the two additional Forensic studies were due to arrive shortly. One of them would presumably explain how $47 million dollars was spent on the West Side in a hole-in-the-ground on a lot in Tucson’s First Ward. This forensic audit was to be released at the June 18, 2012 planned Retreat that Jodi Bain, Rick Grinnell, Jeff Hill and I were putting together with the Board. The taxpayers must demand that these two audits be made public.
The evidence that the reconstituted Board was uncovering was leading to the conclusion that “for over a dozen years, the City of Tucson used the taxpayer-funded Rio Nuevo District as its personal piggy bank – for everything from funding the pet projects of current and former City Council members to covering embarrassing budget shortfalls.” To some it seemed the City of Tucson was “looting the taxpayers assets.”
It appears because of a concerted effort to avoid accountability for what happened to the money that only two of the original members of the reconstituted Rio Nuevo Board remain.
Allan Willenbrock was the first casualty of the reconstituted Board. He was appointed by the Governor and had an extensive background in finance and bonding experience as a broker for Morgan Stanley. Allan was extremely valuable to the Board because some members had never been exposed to the size or intricacies of what faced them.
Willenbrock analyzed the budget for the hotel proposed as part of the new hotel – convention center. Not only did he determine the hotel was way over budget, but at a cost of $320,000 per room it could never meet the economic returns that would have been required for the development. In addition to the excessive expense per room, the number of rooms were out of proportion to what the market would support.
The consequence was that our attorney Keri Silvyn from the firm of Lewis and Roca and board member Mark Irvin, who I believe was and is a mole for the City, went to Allan Willenbrock and suggested he could have a serious conflict of interest because his company might be the bond dealer in any future hotel development. As a result, Willenbrock stepped down in the summer of 2010.
Allan Willenbrock was very important to the board because he understood the numbers and understood what the numbers meant. Silvyn and Irvin removed an important asset from the board.
The irony is that board member Irvin had many meetings with the City of Tucson about the Rio Nuevo mission and its players without authorization.
Indeed, Irvin’s business relationship with the construction giant joint venture for the hotel of Turner/Sundt could well have prevented him from sitting on the reconstituted Board since Turner/Sundt was the selected contractor team on this Rio Nuevo project – and Sundt Construction on many other Rio Nuevo projects. It also appears Irvin constantly placed himself in a position to negotiate for Rio Nuevo, between the City and Garfield Traub, and Turner/Sundt.
Two members of the Board who contributed greatly to our efforts departed unexpectedly. Jonathan Paton left to run for Congress in Arizona Congressional District 1 and Carlotta Flores removed herself from the Board for family and health reasons.
Two dedicated members of the reconstituted Board were former Chairperson Jodi Bain and former Board member and past 2011 Treasurer Rick Grinnell. Like all members of the Board they were volunteers that served the public selflessly, working for countless hours without compensation. They were committed to determine where the quarter of a billion dollars of taxpayers’ money had gone – but there were also those that wanted to “move ahead” by ignoring the past and going back to the “good old boy’s club.”
It is now clear that a decision had been reached that Jodi Bain and Rick Grinnell must be removed from the Board by the special interests. Several major events were coming together that spelled trouble for those invested in preventing full disclosure about the City of Tucson mismanagement of Rio Nuevo. It was the Perfect Storm.
These events were:
1. Response to Motion to Summary Judgment filed by Rio Nuevo District’s within the last 2 weeks.
2. The West Side Project Forensic audit exam, due to be released on June 18, 2012. (This is the second in a series of three in progress)
3. Elections for new Rio Nuevo executive officers to take place June 2012. The new Board now has this scheduled to take place today.
4. The planned 2008 Bond study session. This session was to determine if there is any remaining money from the Bonds. The City is afraid of the Rio Nuevo Board restating their 2011 Financial Audit as a result of new information from the forensic audit. This is why the City is rushing their new friendly board through Mark Irvin to obligate and spend, spend, spend what is supposed remaining money!
5. Declining TIF money collection that covers the Rio Nuevo District’s debt service. Debt service is covered by the TIF revenue. Debt service exceeds $8,000,000 and will significantly increase in the next two years. The payback schedule for the December 2008 bond issuance by the City in the name of Rio Nuevo increases over time. The TIF collection efforts were to be discussed at the June 18, 2012 Retreat as well. If Rio Nuevo is unable to cover its debt service, the State of Arizona taxpayers get stuck with the bill.
The result was that Arizona Senate President Steve Pierce, who inherited the appointments of both Jodi Bain and Rick Grinnell to the District Board in 2010, was summoned to Tucson. Senator Pierce who has ambitions to be Arizona’s next governor, proved that backroom politics, cover-ups and business as usual trumps process and transparency.
It is reported that Senator Pierce met with Tucson businessman Jim Click, Tucson Mayor Jonathan Rothschild, Rio Nuevo Board member Mark Irwin, General Ron Shoopman, Michael Varney, President of the Tucson Chamber of Commerce, and Fletcher McCusker. When the dust had settled, Senator Pierce had agreed to remove both Bain and Grinnell from the Rio Nuevo Board and replace them with Fletcher McCusker, Chairman and CEO of Providence Service Corporation and local developer Christopher Sheafe.
Perhaps Senator Pierce didn’t know that Sheafe had previously been the Chairman of the Rio Nuevo Board for eight years. Eight years when many of the difficulties and spending irregularities occurred that the reconstituted Board had been attempting to untangle. And then again, maybe Senator Pierce didn’t care.
The word on the street is that Senator Pierce left the meeting with funds added to his gubernatorial war chest and another generous amount promised to a pro-Pierce PAC. There is also word on the street that Speaker Tobin received valuable consideration for his cooperation.
It is also enlightening that the Arizona Daily Star received the removal letters for Board members Bain and Grinnell before they did.
In a stunning display of “Don’t bore me with facts,” Senator Pierce stated that he had made repeated trips to Tucson to speak to concerned citizens, but he never contacted Bain, Grinnell or the Board to hear their version of what was occurring. Of course, the exception was Board member Mark Irvin who again proved he is essentially a puppet for the City Council Administration.
Not only was Senator Pierce not interested in listening to the Board, it appeared he only had passing interest in his new appointees. In an interview he was asked who his new appointees to the Board were, and he was hard pressed to recall Christopher Sheafe’s name.
And that is where we are today. There are calls to move forward. There are complaints of the expenditures made by the reconstituted Board for legal fees of $1,000,000 dollars over 2.5 years in an attempt to find out where a quarter of a billion dollars went. In fact, the City spent over $300,000 in Fiscal Year 2010 before the reconstituted Board was sat!
And let’s be clear – the reconstituted Board never had a budget or a staff. It was compelled to go outside for legal resources because the City would not investigate itself.
So, lets look at what has gone wrong and where some of that money went.
Blurring the Lines
The fundamental flaw that doomed Rio Nuevo from the beginning was that the State gave the City of Tucson the authority to operate the District. The problem was made worse because the City of Tucson had a shaky accounting and recordkeeping system to begin with.
Because the Rio Nuevo District was so closely tied to the City of Tucson, the City often failed to treat it as the separate, independent body that it was and is. As will be illustrated, many of the problems and lawsuits today are a result of that blurring of the lines that occurred between the two entities.
Projects and Follies
The Depot Plaza Block Projects are an example of the overreach by the City and lack of recognition of the District’s independence. For example, the District was charged $61,938.13 for services related to the new MLK apartments.
The apartments were a federally funded project through HUD and the District had not authorized any Rio Nuevo funds for them, which raises the question – if the City charged Rio Nuevo for these services, did they also charge the federal government for them?
Another payment in the original Contractor Management at Risk Contract erroneously charged the District over $116,000 for preconstruction fees; again because of the erroneous inclusion of the new MLK apartment fees.
In another example, the City contracted with Rio Nuevo that the City could not allocate parking spaces and fees derived from them in the garage without the consent of Rio Nuevo.
In the summer of 2010 while the City was offering the Depot Parking garage, without strings to Rio Nuevo, another transaction was taking place.
The City executed a settlement agreement with investor/developer Scott Stiteler. The City granted his group dozens of parking spaces in the Depot Parking Garage, at under market value for years, to settle a City breach to Stitlers group under an unrelated Development Agreement. The City used Rio Nuevo assets illegally as a settlement tool without approval. And we found out about it by accident!
Stiteler, who was instrumental in improving the east end of Congress Street’s historical character, ran into a District Board member. In casual conversation he mentioned his deal with the City regarding Depot parking spaces – it soon became apparent the city had made the deals on the same day with each of them.
The West Side Projects
Although the Forensic Audit Examinations of select ‘Westside’ Projects totaling some $39 million dollars has not been yet been received, there are troubling questions that need to be answered. Namely, the $39-72 million dollars of Rio Nuevo funds that are simply unaccounted for and allegedly spent on the west side.
The losers are the citizens of Ward One – this project has been lying dormant since 1965. The councilpersons that have represented Ward One have only given “lip service” to their constituents’ need for real development and the resulting economic opportunities.
The reconstituted Rio Nuevo Board has repeatedly requested from the City, records for the expenditures of these millions of dollars and, as of to date, has received no explanation.
There is an area in Ward One that used to be a dump and perhaps some of the funds were used to rehabilitate it so it could have been used for a project. The many projects in this area may be expensive, but there is little to nothing built for at least $39 million spent. This is ridiculous.
Perhaps, the City of Tucson’s recordkeeping was so poor that they simply lost the money. However, only the Forensic Audit Examination the District ordered can answer these questions. To my knowledge this audit is 98% complete and should be out asap without interruption or changes. With the major changes in the Board the truth may never be known.
Who Owns What?
There has been an ongoing disagreement about what assets are owned by the District and those owned by the City of Tucson. Often the District has a financial stake in a piece of property and therefore a partial claim to that property or the right to be reimbursed if the city sells that parcel. Other times the contracts clearly state the District is to own the property and the City refuses to honor this.
An example is the eight-acre parcel of land just east of I-10 that was to be used for the planned 12,000 + seat Arena Project through 2007-ish. The project fell through after the Rio Nuevo District had invested approximately $1.5 million dollars in the property for acquisition, planning, planning and planning. Despite this, the city has moved ahead in an attempt to sell the parcel without regard to the consequences it may have on downtown development and refused to give it back to Rio Nuevo.
One of the major thrusts of downtown development was to construct a hotel and convention center exhibition facility to keep the Gem Show in Tucson. The eight-acre Arena Parcel is a critical component of any future plan to realize the development of a hotel and convention center. It is clear that if a hotel and convention center is built, this parcel will be needed for parking for the Gem Show.
However, Schwabe of Peach Properties, the City designated buyer for the property has suggested he will use it – at least in part – to develop low-income housing.
There is no ambiguity to the District’s ownership of roughly ½ of what is the Tucson Convention Center, nor the lease agreement the City of Tucson has to maintain the District-owned parts of it.
When Rio Nuevo took ownership of their portion of the TCC, it also took ownership of various adjacent land properties.
Despite clear legal title to one of these parcels, the City of Tucson had Greg Shelko transfer it to the City without authorization of payment and built Fire Station #1 on it – a $44 million dollar structure built on Rio Nuevo property without the approval of the District.
This demonstrates how the City of Tucson ignored the independence of the District when it met the City’s or developers’ needs. Perhaps the most blatant example is when the financial crisis overtook the City in 2008.
By October 2008, the City of Tucson’s budget deficit was soaring. As the debt crisis grew, the City dipped into Rio Nuevo funds for a reported $6.8 million. But Tucson’s City Manager at the time, Mike Hein, declared another “$31 million was needed.”
So, how did the City solve its budget deficit? Records show the “City of Tucson restated its financials and reclassified approximately $29 million dollars of District assets (land, properties, etc.) and claimed that they now belonged to the City of Tucson – Without approval by the District!
And even now the numbers don’t add up – this is what has been our dilemma.
Bonds and TIF Money
In November and December 2008 the then Tucson staff member Greg Shelko, who was project manager for Rio Nuevo, approached the old Rio Nuevo Board with some 300+ pages of bond documents and pushed that the bond papers must be approved “today.” The meeting was less than 1 hour on this issue.
The old Rio Nuevo Board responded by approving the issuance by the District of $80 million dollars in bonds and naming specific projects totaling about $65 million. $6.8 million of the amount was for an alleged loan the district received from the City from years before.
The trustee for the account was Wells Fargo and the funds were to be released to the City (which managed Rio Nuevo) only for designated projects.
In the same manner, TIF money collected by the District was to be received by and held by Wells Fargo and any excess over debt service was to be released to the City of Tucson.
However, it appears that the Bond Fund Proceeds released by Wells Fargo to the City of Tucson in January 2009 in reality went into the City of Tucson general fund and not into a separate and SEGREGATED project account as required. Although the City maintains no wrongdoing this has, at the very least, the appearance of the comingling of funds.
Clearly, these are not the only examples of mismanagement of Rio Nuevo by the City of Tucson. There are other issues, such as the Fox and Rialto Theaters, the Presidio, and the TCC East Entrance construction, which is not only shoddy but of questionable value. The latter was a $4+ million dollar expenditure built in anticipation of a new hotel and convention center that was to be doomed by its bloated and untenable cost.
In the aftermath of a ten-year+ spending spree and precious little to show for it, the City of Tucson and the reconstituted Rio Nuevo Board were left to pick up the pieces.
The result was more conflict. There are three lawsuits pending and a failed mediation effort.
There is one lawsuit where the District is the defendant and Garfield/Traub is the plaintiff. Jonathan Paton and Jodi Bain are being personally sued for defamation as a part of this lawsuit for a million dollars each. It is reported this lawsuit is close to being completely dismissed.
If this is a form of intimidation or retribution for Bain or Paton it is inappropriate behavior. What the community should know is that both Paton and Bain should have an ongoing right to discuss any of these matters with attorneys for Rio Nuevo without Board approval, because they are named in the suit along with the District.
There are two other lawsuits where the City is the defendant and the District is the plaintiff. One of these concerns a property title issue, and the other monetary questions.
Part of the mediation negotiations attempted to set terms regarding who owned what and who had financial interest in what.
There was a charge presented in the Sunday Arizona Daily Star that the Rio Nuevo Board wanted, in essence, to take money from the City to compensate the District for misdirected or misplaced funds.
Mayor Rothschild is quoted as saying, “That’s basically like taking, over time, $180 million out of the city coffers.”
In fact, the legislature was approached with a plan to extend development credits to new projects so the taxpayer of the city and district would be made whole. No new money would be required for this.
In real terms this was a credit system being set up and the credits would have provided a bookkeeping strategy that helps to stimulate development in an area without affecting the taxpayer adversely. Nonetheless, it was negatively received and apparently was the excuse the City claims it needed to walk away from the mediation process.
What really brought the negotiations to an end was not Rio Nuevo demanding some imagined “reparations of taxpayers money” that had been misappropriated or misplaced by the City, but a single phrase.
Every time negotiations were close to succeeding, the City wanted language included in the settlement that held the City and its employees be held blameless for any of its present or past actions.
Since the extent of possible malfeasance and negligence by the City or some of its employees is still to be determined, it was a condition that was not acceptable to the Board. The City then walked away from the table.
As the Board pushed for accountability and clarification of who owns what, the City continued to drag its feet. To be charitable, the City might not be guilty of obstructionism. It may be their Finance
Department is run so inefficiently and incompetently they simple don’t have any idea where the quarter of a billion dollars of Rio Nuevo money went. In fact, as far as the accounting folks can tell….there never was a quarter of a billion dollars to spend!
In March of 2010, the reconstituted Rio Nuevo Board was optimistic that, with the cooperation of the City of Tucson, it could sort out the financial tangled-web that ten+ years of poor management had created. The Board was soon to find its optimism misplaced.
If the financial quagmire the reconstituted Board confronted had simply been the result of poor management the solutions would have been straightforward. The City could have admitted they did a poor job of accounting and managing Rio Nuevo, cooperated in finding the missing funds and pledged to help the new Board move ahead.
But this was not the case. Presumed incompetence by the City was leading toward intimidation of others in order to ensure the reconstituted Board fails in its mission.
Bain had tires slashed and threatening voicemail messages. Wells Fargo told a board member they did not want to interrupt their good relationship with the City and then the Rio Nuevo accounts were put under “legal review” for months. They still refuse to answer some questions and we never received the banker boxes of documents we were told to expect in January 2012.
Further, powerful political forces were gathered to ensure more compliant individuals served as Board members. In truth, the demand that the Board needs to move forward and forget the past is a clarion call to those who wish to cover up and repeat the past.
It is important to remember a lesson of history. Ignoring and denying past transgressions and wrongdoing, only encourages and guarantees the commission of new misdeeds.
Today I stand in the wreckage of what was the reconstituted Board, which had been selected to find a quarter of a billion dollars of missing taxpayers’ money.
Despite the spoken words, the agenda for the current Board shows the path that will be taken. And I am afraid it is a path where the truth will be the first victim.
Nonetheless, I would make the following recommendations to the Governor, the legislature and anyone who will listen – which presumably exclude Senator Pierce.
1. First, I recommend that every contract that the Rio Nuevo District is a part of be read, studied and reviewed by the University of Arizona College of Law. This would be a tremendous learning tool for students- demonstrating how the real world operates while bringing transparency to the process and teaching them how NOT to advocate for a client.
2. Identify the character and type of person that should be on the Board. These should be professional people that are familiar with the law, contracts, construction and real estate. They should be persons of good character.
3. I do not believe it is possible to depend on a board of volunteers to oversee such a large program.
4. It is important to ensure that persons involved with the Board do not have genuine conflicts of interests; especially where they can make money off them.
5. It is also my belief, it is necessary to review all TIF programs statewide because I don’t think this Board’s experience is unique.
6. Finally, for the sake of transparency, I would request the members of the reconstituted Board that served from 2010 to present have the opportunity to speak with the Governor, Speaker of the House and the President of the Senate in order to make both a written and oral report to them regarding the duties and functions of Rio Nuevo. In addition they should present the findings and obstacles the reconstituted Board uncovered.
As one grows older it becomes easier to speak your mind. Because of the collective talent that made up the reconstituted Rio Nuevo Board, we were able to realize some of the major pitfalls with this entire concept – including the misrepresentations that were made either by the City or some of the contractors or parties that had personal interests in draining funds from projects.
This was a cesspool started by the City and the puppeteer and the magician was Michael Rankin, the City Attorney. He created and approved all contracts for the City between Rio Nuevo and the City and others. And the sewage was a lot of department heads and previous boards of Rio Nuevo.
Unfortunately, the new Board coming together and the new Mayor are now tainted with this sewage. And Speaker Tobin of the House and President Pierce of the Senate have allowed themselves to be sucked into this sewer. And the Arizona Daily Star is the toilet paper for all of them.
In 2010 I stood here, confident that the reconstituted Rio Nuevo Board would fulfill its mandate. I was optimistic that people such as Senator Pierce and Representative Tobin would back us. I expected cooperation and good faith from the City of Tucson.
In the end I was disappointed with many.
But to the members of the reconstituted Board that worked so hard for a better outcome, it was a privilege to serve with you. Those of us who have fallen and been vilified for standing firm against the rolling tides should be commended.
I must also extend my appreciation to Governor Brewer for her steadfast support.
With that said, I wish us all luck.