Rio Nuevo audit “res ipsa loquitur”

Res ipsa loquitur, Latin for “the thing speaks for itself.”

The second, in a series of forensic audits for the Rio NuevoDistrict projects, was released to the public immediately upon completion. The District’s Board discussed the audit, and its release upon completion, at their Tuesday meeting.

The first audit, which addressed the Depot Plaza Block spending, was released in March. Click here for article.

The primary purpose of the Rio Nuevo District was to collect funds to build an arena and hotel with the idea that the business community would once again gravitate downtown and there would be a revitalization of the area. An exciting and vibrant hub was envisioned that showcased the best in public/private partnerships.

The hotel and arena were never built.

At the District Board’s meeting, Board member Jeff Hill told the public that “the debt service on the bonds which we are going to discuss today is $12.3 million a year. Clearly we don’t have the money to pay the bond, let alone and start contracting for some other items.”

When asked about the forensic audit released this week, acting Chairman Albert Moore said, “The residents of Tucson have certain expectations of the Rio Nuevo Board. One is to move forward with the downtown projects. The other is to remain diligent in accounting for the moneys that were previously spent”. Mr. Moore went on to say, “There is no reason why the Board can not do both. The residents of Tucson deserve a downtown that they can be proud of, and voted for just that. They also deserve to know the truth about where the money for our vibrant downtown has been spent. The Audit speaks for itself”.

Audit highlights:

Barrio Viejo – Auditors determined that the Barrio Viejo neighborhood is not within the boundaries of the Rio Nuevo Multipurpose Facilities District. Total expenditures on the Barrio Viejo project were $225,960.58. It is unclear how this project was a direct benefit to the District. Therefore, all of those expenditures have been considered questioned costs. Auditors were also unable to find supporting documentation for $12,483.19 of the expenditures incurred.

Barrio Sin Nombre – Auditors determined that the neighborhood is not within the boundaries of the District, yet $131,845.78 of District funds were used for architectural design fees. Auditors were unable to locate supporting documentation for $14,042.68 of these expenditures. It is unclear how this project was a direct benefit to the Multipurpose Facility and, therefore, all of the expenditures are considered questioned as District expenses.

Auditors found that the District expended $20,422 in connection with a contract between the City and a developer for which the City and District had no financial participation agreement.

University of Arizona Science Center – Auditors were unable to locate support for expenditures of $7,233,630.20. Of that amount, $7,143,179 paid to the University of Arizona (“U of A”) has been questioned as we were unable to locate an executed amended intergovernmental agreement between the City, the University, and the District.

The U of A charged the District for expenses that were unallowable on other projects based on City of Tucson procurement guidelines including personnel costs, purchase of computers, phone service, food, professional memberships, subscriptions and conferences, and professional ads to hire the Development Director position. Due to the lack of support, auditors were unable to determine the total amount of expenses that were unallowable, but the memo identified $186,415 of such costs.

Gadsden Development – Auditors found that the District expended $20,422 in connection with a contract between the City and a developer for which the City and District had no financial participation agreement.

Total expenditures on the Gadsden Development project (JA03) were $20,422. Although the Gadsden Development is within the District boundaries, a financial participation agreement between the City of Tucson and the District was not located to justify the District’s payment of the fees associated with the sale of property in which the City of Tucson benefited from.

Mission Site/Origins Park – Total expenditures for this project listed in the City of Tucson’s Flow of Funds are $18,233,716.69. The City provided supporting documentation for only $2,417,382.44. As such, auditors were unable to determine the validity of $15,816,334.25 in expenditures due to the lack of support.

Utilizing the data that auditors did obtain, they were able to identify $1,191,419.15 of questioned costs. Of these questioned costs, $365,422.90 is due to preconstruction costs included in the Construction Manager at Risk payment applications being charged to the District twice on the flow of funds report. Due to the limited documentation, auditors were unable to determine if the preconstruction costs were paid twice by the City of Tucson.

Mission Gardens – Supporting documents were not provided for $1,802,667.40 of expenditures related to this project. Only $250,268.38 of expenditures had supporting documentation. An Intergovernmental Agreement between Pima County, the City of Tucson and the District (“IGA”) which was recorded November 14, 2001 provided the City access to Pima County property in order to design and construct improvements in accordance with the Mission Gardens and Mission San Agustin del Tucson Cultural Heritage Park Master Plan. The construction of the Mission Gardens portion was to be completed within 5 years of the effective date of the IGA (November 14, 2006) or the IGA would be void and the City’s license to enter and occupy the Pima County property would be revoked (Exhibit K). According to the City of Tucson’s Flow of Funds, expenditures on the Mission Gardens project did not begin until the fiscal year ending June 30, 2009, totaling $2,052,935.78.

Mercado Avenue – Auditors were unable to locate supporting documents for $5,065,817.34 of expenditures for the Mercado Avenue projects.

There were two invoices referenced to “149 S. Grande Ave”. Based on an address search, this is a residence adjacent to the round-a-bout at Cushing Street and Mission. The description on the invoices indicated “drill out front bolt add hasp” in the amount of $159.43 and “Asbestos survey” in the amount of $4,283.00. The total of the two invoices amount to $4,442.43. These expenditures have been considered questioned costs.

The District entered into a Financial Participation Agreement with the City of Tucson and Rio Development for the Menlo Park Subdivision dated May 9, 2006. Approval by the City is contained in the City of Tucson Mayor and Council Resolution No. 20334 and the District approved the Financial Participation Agreement on April 20, 2006. Per the Agreement, the District’s financial participation was not to exceed $4 million. Based on the Flow of Funds, the District was charged $5,523,863.22 for this project resulting in $1,523,863.22 in excess of the approved amount.

FORENSIC EXAMINATION REPORT, FINDINGS AND OBSERVATIONS FOR WESTSIDE PROJECTS

The 2010 reconstituted Rio Nuevo Multipurpose Facilities District (“District”) engaged

Regier Carr & Monroe, LLP, CPAs (“RCM” or “we”) to conduct a forensic examination of the West of Interstate 10 Projects (“Westside Projects”) as specifically described below. We have conducted a forensic examination concerning the possible misuse of funds of the District. This examination was prompted by information resulting from a performance and financial analysis of the District performed by Crowe Horwath, LLP in October 2010.

Procedures Performed

On September 9, 2011, special legal counsel to the District, Rusing Lopez & Lizardi, P.L.L.C., requested all supporting documentation from the City of Tucson (“City”) for numerous City projects related to Rio Nuevo. The request (Exhibit A) included the following City project numbers deemed to be related to the West Side Projects: JA01 (Plaza del Centro), JA03 (Gadsden Development), JA05 (Barrio Viejo), JA06 (Barrio Sin Nombre), J004 (Mission Site/Origins Park), J007 (Science Center & Historical Museums), J013 (Mercado Avenue), J021 (Arizona History Museum), J030 (Mission Landfill), J031 (Origins Infrastructure) J050 (Mission Gardens), J051 (Mission Complex Drainage Swale) and any other related projects. In response to this request, Ms. Kelly Gottschalk (“Gottschalk”), Chief Financial Officer/Assistant City Manager to the City provided extensive electronic PDF files for the Westside Projects and their expenditures. The PDF files were provided electronically by e-mail and Gottschalk stated that she had provided all documentation on the Westside Projects contained in the project files (Exhibit B). The PDF files included a total of 3,447 pages. The City Finance Department was responsible for all accounting and disbursements related to the Rio Nuevo Multipurpose Facilities District funds throughout the duration of the Westside Projects, including maintenance of supporting documentation for expenditures. After the documents had been reviewed, it was determined that there were significant documents related to these projects that were not received from the City of Tucson. Therefore an additional request for documentation was made by Rusing Lopez & Lizardi, P.L.L.C. on April 24, 2012 (Exhibit C). To our knowledge, no additional documentation has been received from the City of Tucson by Rusing Lopez & Lizardi, P.L.L.C. in response to that request.

This forensic examination was conducted in accordance with lawful forensic techniques, which included the examination of supporting documentation of expenditures which were provided by the City. We also obtained and utilized relevant information from the City’s and the District’s public websites. Wells Fargo Bank provided documents related to the 2008 Revenue Bonds, which we also used in our examination. We examined the documentation in order to determine if the District had authorized the expenditures, whether the expenditures were adequately supported, whether they related to the Westside Projects, and to determine if there were any indications of misused or misallocated funds and/or fraudulent activity. For the purposes of this examination, all documents received by the City or obtained through websites and other sources are collectively referred to as the “documentation”.

The initial phase of the examination included review of the City provided documents, including contracts. Contracts were reviewed to identify the parties to the contracts, the authorizing agents and the significant terms. The City documents were also reviewed to identify amendments to the contracts. We then examined payment applications for proper authorization, underlying supporting documentation for the expenditures, and appropriateness in relation to the contracts. We reviewed publicly available District Board meeting minutes for motions and resolutions in order to identify District Board approvals related to the Westside Projects.

Expenditures were summarized and compared to actual District approvals and the approved Guaranteed Maximum Price (“GMP”) of contracts, if applicable. Finally, we traced the expenditures from the payment application details into the “Inception to Date Flow of Funds Expenditures FY00 through October 31, 2011” (“Flow of Funds”) prepared by and obtained from the City’s public website for the Rio Nuevo Multipurpose Facilities District (http://cms3.tucsonaz.gov/rionuevo) (Exhibit D).

There were significant gaps in the information provided by the City. The missing documentation limited our ability to test the support of many of the expenditures incurred.

Summary of Questioned Costs

Based upon the procedures performed, we identified $33,849,702.77 of questioned costs. This amount is comprised of $1,547,564.07 of questioned costs based upon our analysis of documents and $32,302,138.70 of questioned costs resulting from expenditures for which no supporting documents were located. In the absence of supporting documentation, these costs should be questioned costs. However, if the City had made the support available, it may have resulted in different findings in this report.

For the purpose of this report, a “questioned cost” is defined as a cost not supported by adequate documentation, a cost that is unnecessary or unreasonable, or a cost that is a violation of a law, regulation or contract.

Westside Projects Background

The Westside Projects consist of approximately twelve projects spanning a period of seven years. These projects include:

• Plaza del Centro (JA01) – The Plaza Centro project is located at Broadway and Toole, not west of Interstate 10. Mayor and Council adopted Resolution 21313 on June 9, 2009 approving and authorizing a development agreement between the City of Tucson and OT Kino, LLC for development of the Plaza Centro project on two City owned parcels on either side of Toole between Broadway and 4th/Congress. The agreement requires the City of Tucson to design and construct a public parking garage on the property as a precondition to the developer purchasing the land and starting his mixed-use, high density, pedestrian oriented development. The City garage will be integrated into the overall development, meeting public parking needs in the area, including those of the Plaza Centro development.

• Gadsden Development (JA03) – Planned development includes 125 room boutique hotel, 400 residential units and additional development to include office space, market, restaurant, and other commercial uses. The Gadsden Development is located on 14 acres immediately southwest of Congress Street and the Santa Cruz River.

• Arizona History Museum (J021) – Design and develop a building program, site plans, and cost estimates for a new Arizona History Museum to be operated by the Arizona Historical Society.

• Barrio Sin Nombre (JA06) – Design and construct a concept plan for improvements to the neighborhood (Barrio Sin Nombre, later renamed to Barrio San Augustin) including new curbs, sidewalks, utilities, storm drains, paving, landscape and street lighting.

• Barrio Viejo (JA05) – Design and construct a concept plan for improvements to the neighborhood (Barrio Viejo) including new curbs, sidewalks, utilities, storm drains, paving, landscape and street lighting.

• Mission Site/Origins Park (J004) – Phase I of the Tucson Origins Heritage Park includes west side infrastructure, some landfill remediation, and construction of the Tucson Presidio element of the park. The Heritage Park also includes the Mission Gardens. Together the elements of the Tucson Origins Heritage Park are to provide residents and visitors a fascinating educational experience and exposure to Tucson’s 4,000 years of habitation. The Mission Site/Origins Park project is located west of Interstate 10 and South of Congress Street.

• U of A Science Center & Historical Museum (J007) – The University of Arizona Science Center was intended to include fourteen major components dramatically positioned along a bridge that spans Interstate 10 and the Santa Cruz River. The District Resolution 2004-001 approved an Intergovernment Agreement between the District, City of Tucson, and Arizona Board of Regents acting on behalf of the University of Arizona authorizing $20 million of District support.

• Mercado Avenue (J013) – Public infrastructure improvements for a mixed-use, pedestrian-friendly, sustainable new neighborhood. The District entered into a Financial Participation Agreement with the City of Tucson on April 20, 2006 which was executed by Ruben Suarez, Chair of the District Board. The District’s financial participation was not to exceed $4 million.

• Mission Landfill (J030) – The Mission landfill is located near the Mission Road and Starr Pass Boulevard intersection. This landfill was used for the disposal of Class II trash which includes construction/demolition debris and green waste. The project was for remediation of the landfill.

• Mission Gardens (J050) – Phased reconstruction of the Spanish Colonial walled garden that was part of the historic San Augustin Mission. The Mission Gardens are located near the eastern base of A-Mountain at the corner of Mission Road and Mission Lane.

The total expenditures for these projects, as reported by the City of Tucson in the most recent Inception-to-Date Flow of Funds, are $38,552,031.94 (Exhibit D).

Findings

Shown below are our findings and observations, based on the examination of documents provided by the City of Tucson, Wells Fargo Bank and other publicly available documents. A summary of questioned costs and expenditures lacking support can be found at Exhibit E.

A. Expenditures on Projects Outside the Boundaries of the District

We found that the District expended $357,806.36 on projects that were not located within the boundaries of the District.

Arizona Revised Statute 48-4201 defines “multipurpose facility” as “a primary component that is located in the district on the multipurpose facility site” and “secondary components that are located in the district and that the board determines are necessary or beneficial to the primary component”. ARS 48-4204 adds that the “district may acquire land and construct, finance, furnish, maintain, improve, operate, market and promote the use of multipurpose facilities and other structures, utilities, roads, parking areas or buildings necessary for full use of the multipurpose facilities and do all things necessary or convenient to accomplish those purposes.” In the Mayor & Council Memorandum dated October 17, 2006, and a letter from the District’s legal counsel dated October 13, 2006, it was the opinion of the City Attorney and District’s attorney that the District could expend funds on projects outside the District boundaries and the District Board should “expressly determine that the expenditure is necessary to support the full use of facilities within the District” (Exhibit F). Expenditures were made on the following projects that are partially or completely outside the boundaries of the District. Evidence of the Board expressly determining that the expenditures were necessary was not found.

i. Barrio Viejo (JA05) – Total expenditures on the Barrio Viejo project were $225,960.58. The Barrio Viejo neighborhood is not within the boundaries of the Rio Nuevo Multipurpose Facilities District. It is unclear how this project was a direct benefit to the District. Therefore, all of those expenditures have been considered questioned costs.

We were also unable to find supporting documentation for $12,483.19 of the expenditures incurred.

ii. Barrio Sin Nombre (JA06) – This neighborhood is not within the boundaries of the District, yet $131,845.78 of District funds were used for architectural design fees. We were unable to locate supporting documentation for $14,042.68 of these expenditures. It is unclear how this project was a direct benefit to the Multipurpose Facility and, therefore, all of the expenditures are considered questioned as District expenses.

B. Gadsden Development (JA03)

We found that the District expended $20,422 in connection with a contract between the City and a developer for which the City and District had no financial participation agreement.

The Development and Real Estate Purchase Agreement between the City of Tucson and The Gadsden Company was executed on August 6, 2008. It does not appear that the District is a party to this agreement, yet the District paid the appraisal fees ($7,500) associated with this sale of property as well as fees related to the Letter of Map Revision – Fill (LOMR-F) to remove a portion of the property from the FEMA Flood Plain Map. Total expenditures on the Gadsden Development project (JA03) were $20,422. Although the Gadsden Development is within the District boundaries, a financial participation agreement between the City of Tucson and the District was not located to justify the District’s payment of the fees associated with the sale of property in which the City of Tucson benefited from. As such, the total expenditures of $20,422 related to the Gadsden Development Project are considered questioned costs (Exhibits G and H).

C. University of Arizona Science Center (J007)

We were unable to locate support for expenditures of $7,233,630.20. Of that amount, $7,143,179 paid to the University of Arizona (“U of A”) has been questioned as we were unable to locate an executed amended intergovernmental agreement between the City, the University, and the District.

We were able to locate the Intergovernmental Agreement (“IGA”) dated August 2004, which included $20 million of District support for the construction of the Science Center. The IGA further states that the District shall pay these funds to the U of A at the time the U of A issues debt for the construction of the Science Center (Exhibit Q). Although we were able to locate the City Resolution 20750 approving an amended and restated IGA in 2007, we were unable to find a District Resolution approving the amended and restated IGA. Also, upon review of the District’s minutes for August of 2007, approval of the amended and restated IGA was on the agenda, but the meeting was cancelled due to a lack of quorum. At the next meeting held by the District on July 30, 2008, a motion passed to approve signing the amended IGA. No District resolution or signed IGA was located. With no evidence of an executed Amended and Restated IGA between the District, City, and U of A, all expenditures to the U of A for the Science Center are considered questioned costs. Of the $7,706,235 in the Flow of Funds for the Science Center project, approximately $7,143,179 was paid to the U of A.

In addition, we examined a City of Tucson memorandum dated October 21, 2008 from Stacie Bird (finance manager) to Mike Hein (City Manager) which indicated that the U of A charged the District for expenses that were unallowable on other projects based on City of Tucson procurement guidelines (Exhibit I). Based on the memo, these included personnel costs, purchase of computers, phone service, food, professional memberships, subscriptions and conferences, and professional ads to hire the Development Director position. Due to the lack of support, we were unable to determine the total amount of expenses that were unallowable, but the memo identified $186,415 of such costs.

D. Mission Site/Origins Park (J004)

Total expenditures for this project listed in the City of Tucson’s Flow of Funds are $18,233,716.69. The City provided supporting documentation for only $2,417,382.44. As such, we were unable to determine the validity of $15,816,334.25 in expenditures due to the lack of support.

Utilizing the data that we did obtain, we were able to identify $1,191,419.15 of questioned costs. Of these questioned costs, $365,422.90 is due to preconstruction costs included in the Construction Manager at Risk payment applications being charged to the District twice on the flow of funds report. Due to the limited documentation, we were unable to determine if the preconstruction costs were paid twice by the City of Tucson.

We noted approximately $817,960 in fees were paid to Desert Archaeology. We were not able to locate a contract between Desert Archaeology and the District, as such all expenses for Desert Archaeology have been included in questioned costs.

The remaining $8,036.25 of questioned costs for this project relate to fees paid to TextMarcx. Although we were able to locate a proposal, it was not signed by a District or City representative and no Notice to Proceed was located (Exhibit J). Also included in the payments to TestMarcx (sic) were $1,901.25 of expenses for a project unrelated to the District.

E. Mission Gardens (J050)

Supporting documents were not provided for $1,802,667.40 of expenditures related to this project.

An Intergovernmental Agreement between Pima County, the City of Tucson and the District (“IGA”) which was recorded November 14, 2001 provided the City access to Pima County property in order to design and construct improvements in accordance with the Mission Gardens and Mission San Agustin del Tucson Cultural Heritage Park Master Plan. The construction of the Mission Gardens portion was to be completed within 5 years of the effective date of the IGA (November 14, 2006) or the IGA would be void and the City’s license to enter and occupy the Pima County property would be revoked (Exhibit K). According to the City of Tucson’s Flow of Funds, expenditures on the Mission Gardens project did not begin until the fiscal year ending June 30, 2009, totaling $2,052,935.78. We were unable to locate evidence of an extension to the IGA. Only $250,268.38 of expenditures had supporting documentation, as such $1,802,667.40 is deemed questioned costs due to the lack of support.

F. Mercado Avenue (J013)

We were unable to locate supporting documents for $5,065,817.34 of expenditures for the Mercado Avenue projects.

G. Wells Fargo Bank Documents

The District’s attorneys, on behalf of the District, sent three letters requesting account information from Wells Fargo Bank (Exhibit L). Included in these requests, were requests for all documentation relating to the District’s Bonds and Certificates of Participation. In response to this request, Wells Fargo Bank furnished a PDF document consisting of 354 pages (2002 COPs 5 pages, 2005 Bonds 12 pages, 2008 Bonds 71 pages, 2009 COPs 266 pages). Our forensic examination included review of the documents relating to the 2008 Bonds because they were issued to pay for several of the Westside Projects (among other projects). The following are observations based on the examination of the Wells Fargo documents:

The Wells Fargo Bank documents included “Requisition for Payment From Rio Nuevo Account” documents in which Wells Fargo Bank was provided a copy by the City of Tucson pursuant to the Disbursement Agency Agreement (Exhibit O) included in the 2008 Bond documents. There were 12 of these requisitions sequentially numbered 1 to 13. No requisition numbered “10” was included. It appears a 10th requisition was made based on the total dollars changing from requisitions 9 to 11. The total of the disbursement requests, in which were available for review, was $49,271,772.29 (Exhibit P).

The 2008 Bond Transcript included a breakdown of how the bond proceeds would be used. Based on the documents provided by Wells Fargo, RCM prepared a comparison of the intended uses and actual uses of the 2008 bond funds (Exhibit P).

We have identified items “ii” and “iii” above as potential issues regarding the use of the bond proceeds; however, we are not qualified to determine the District’s compliance with bond rules and regulations. Legal counsel will need to review these matters.

To view the audit click here.

Related articles:

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

Moore and Hill reveal the truth about Rio Nuevo (transcript)