Penny Tax Program nearly $90M in hole
By RON AIKEN
Six days after former Richland County CFO Daniel Driggers resigned abruptly following questions about accounting practices, County Administrator Gerald Seals initiated an independent audit.
Almost six months later, the results of that audit have only just come to light, and the story it tells of impropriety and allegations of possible corruption, fraud and malfeasance make it clear why the County has kept it from the public view.
Chief among the audit’s findings is that Richland County CFO Daniel Driggers improperly overdrew the County’s General Fund by $35 million to cover cost overruns on multiple Penny Tax projects and waited weeks to address the issue.
Besides audit findings, Quorum also obtained other key records and internal emails to and from Seals, County Treasurer David Adams and Driggers.
The audit, performed by Richmond, Va.-based accounting firm Cherry Bekaert and for which the County has paid $48,000, was requested by Seals on April 17 and was tasked to assist in “assessing and correcting” County financial records for FY 2016-17.
Besides discovering that Driggers overdrew the County’s General Fund by $35 million to fund Penny Tax projects, the audit also flagged for review 12 “possible areas of malfeasance, fraud or corruption,” including:
- Resignation of Chief Financial Officer. The audit concluded that Driggers’ resignation “subsequent to an administrative inquiry into the status of the County’s budget” was “atypical.” It also alleges that “upon his resignation, (Driggers) directed finance department staff to engage in the retrieval of confidential financial data and began a ‘data sweep’ of his assigned laptop and cell phone.”
- No Budget on Bond Closing Costs. The audit alleges that County’s system to track bond closing cost payments “did not allow for the proper accounting ” of those costs through what appeared to auditors to be an “intentional” decision.
- Improper Distribution of Bond Closing Costs. The distribution of bond closing costs to the County’s former financial advisor (Mike Gallagher of Compass Municipal Advisors) and current bond counsel (McNair Law Firm’s Frannie Heizer) was not consistent with the standard vendor payment process, the audit said. The audit found the money was instead distributed through a “direct wire method; thereby ‘camouflaging’ the amount paid to each respective party.’
- Construction Vendor Fraud. The audit flagged six construction vendors for the County to examine over “concerns regarding malfeasance, fraud or corruption”: The Richland program development team (PDT), Brownstone Construction Group, Chao & Associates; Corley Construction, Carolina Demolition and M.B. Kahn.
In an Aug. 8 email to County Council and staff, Seals wrote that the audit’s findings “are disturbing, unsettling and alarming” and opened “Richland County and County Council to serious financial liabilities.”
Additionally, Driggers’ improper bookkeeping, the audit found, also resulted in “inaccurate and misleading” figures for the Transportation Penny Fund balance in January, overstating the actual balance by $78 million, and his payment of Penny Tax projects from the General Fund resulted in a loss to taxpayers of at least $82,000 in earned interest.
A bigger problem — one the audit did not cover — looms even larger over the County’s financial position.
A review by Quorum of more than 90 pages of Penny Tax project and financial data found that as of Sept. 1, the Penny Tax’s current obligations are $86 million more than the program has on-hand, and with no new bonds to draw from County Council faces either a showdown with the County administrator over new bonds, a possible shutdown of projects currently underway or, perhaps, both.
Just how a publicly funded program expected to generate more than a billion dollars over its 22-year lifetime finds itself in such dire financial and legal straits after just five years requires frank answers to tough questions, and while those responsible have been reluctant to talk, the recently completed audit — complete with with multiple vendors suspected of fraud, bills being paid from improper accounts and shadowy financial practices auditors described as ‘intentional,’ — speaks volumes.
“WE’RE IN TROUBLE”
Why Driggers used General Fund revenue to pay Penny Tax bills was not discussed in the audit, and attempts by Quorum to reach Driggers since his departure from Richland County on April 11 have been unsuccessful. In a Sept. 20 memorandum, Seals said that bond proceeds and Penny Tax funds were available to cover the costs “but were not used since the expenditures were coded to an account with no cash available.”
The overdraft issue is first raised internally in an email from Adams to Driggers dated Jan. 19.
“Over the last six months five capital project accounts have been overdrawn by more than $31 Million,” Adams wrote. “Currently, this is a liability to the General Fund. These negative balances need to be addressed immediately.”
“There are other negative funds associated with the Transportation Penny. Balances in Budget Code 1231 on the General Ledger are inaccurate and misleading.”
“Please notify our office when the necessary corrections have been made.”
Driggers responded later that day by thanking Adams for the email, saying he was “not sure about the specifics or the impact on the general fund” but that he would have a staff member “pull the information and review with me and (make the) necessary adjustments.”
A month later, Adams had heard nothing back from Driggers and reached out again via email.
“Daniel, We are currently showing more than $30 million restricted for capital project expenditures in our concentration account,” Adams wrote. “It is costing significant amounts in our investment income to the general fund until this is fixed.”
Driggers stopped by the Treasurer’s office on Feb. 22 and told staff member Stacey Hamm that “his staff was working on fixing the problems and that since Transportation bonds were not going to be issued any time soon, that we would be on a pay-as-we-go basis for now.”
Less than two months later, Driggers was gone, leaving questions regarding his departure and logic unknown.
What is known, however, is that almost across the board, Penny Tax project costs and estimates have been skyrocketing well beyond what the 2012 referendum budgeted and, Council members say, beyond the tax’s ability to pay for them since concerns in the financial sector over the County’s ongoing legal problems with the Department of Revenue and others has meant that no new bonds have been issued since an initial $50 million anticipation bond was issued back in 2013. The referendum called for the issuance of up to $400 million in bonds.
Concerns over cost estimates for Penny Tax projects and how to pay for them intensified over the summer of 2017 as first Driggers, then Transportation Director Rob Perry, the County’s designated manager of the Penny Tax program who had been with the County since 2013, resigned in a span of three weeks. At a June 6 Transportation Ad Hoc Committee with Council members Jim Manning, Bill Malinowski, Paul Livingston and Yvonne McBride present, Heizer provided an answer told the group why no new bonds had been or were about to be issued.
“Immediately after the commencement of the legal dispute between the County and the Department of Revenue, the market was very concerned about the existence of the dispute,” Heizer said. “Therefore, the cash (collected so far) was used to repay the outstanding $50 million and no further debt has been issued.”
As of Aug. 31, the Penny Tax has collected $238 million since May 2013 for a total of $288 million including the initial bond. Its expenses as of Aug. 31 are listed as $251 million, for a relative reserve of approximately $37 million.
A review of more than 90 pages of information by Quorum on the financial status of Penny Tax projects, however, shows a gap of $123 million between 2012 cost projections and current estimates in road widenings alone, meaning on paper, at least, the penny tax is $86 million short.
North Main Street Widening: Referendum $36.4M, current estimate $59.2M. Difference: $22.8M.
Bluff Road Widening: Referendum $16.7M, current estimate $38.2M. Difference: $21.5M.
Shop Road Widening: Referendum $33.1M, current estimate $46M. Difference: $12.9M.
Atlas Road Widening: Referendum: $17.6M, current estimate $39.7M. Difference: $22.1M.
Pineview Road Widening: Referendum $18.2M, current estimate $41.2M. Difference: $23M.
Blythewood Road Widening: Referendum $8M, current estimate $11.3M. Difference: $3.3M.
Broad River Road Widening: Referendum $29M, current estimate $39M. Difference: $10M.
Spears Creek Church Road Widening: Referendum $26.6, current estimate $34M. Difference: $7.4M.
When Manning asked Acting County Transportation Director Tony Edwards in June about the huge increase in costs between what was projected and now, Edwards offered a candid response.
“The majority of 2012 estimates were under the projected cost estimates for today,” Edwards said. “It is going to be an issue.”
“I feel like it already is an issue,” Manning responded.
“It is an issue,” Edwards said.
Responding to both Edwards and Manning, Seals agreed and suggested a performance review of the PDT — two of whose members, M.B. Kahn and Brownstone Construction, would be flagged just three months later by the Cherry Bekaert audit for potential malfeasance or fraud.
“Part of the business is to project (future costs), but the reality is that when you project now we’re in trouble in terms of being able to meet the expectations of the program as enumerated,” Seals said.
Seals’ answer — and staff’s inability to account for how those costs would be paid in the absence of new bonds — frustrated Manning.
“(We need) to find out what in God’s name is going on with Richland County and the Penny,” Manning said. “If I went out to a community meeting tonight and tried to explain to them, (if they asked) ‘Do you and your colleagues (have) a handle on this penny?,’ I would have to look at them and say, ‘I’m ashamed to tell you I don’t think me or any one else knows what in the world is going on or where it’s at.”
Where it is, at least according to the Cherry Bekaert audit, is in trouble.
Where it’s going, at least for now, is anyone’s guess.
Reach Aiken at (803) 200-8809. Email him at firstname.lastname@example.org. Follow him on Twitter @RonAiken and @QuorumColumbia and like Quorum on Facebook.