SANTA FE, N.M. — Despite an independent audit of the city of Santa Fe’s 2008 parks and trails bond that showed approximately $2 million of the $30.3 million bond was improperly used for maintenance, payroll and operations instead of long-lasting projects, state Auditor Tim Keller says the examination into the city’s handling of the bond produced something positive.
“The investment Santa Fe made in this audit will help other municipalities across the state, especially that legal opinion,” Keller said at the conclusion of Wednesday’s city Audit Committee meeting, the first public airing of the audit released last Friday. He was referring to a legal opinion on use of bond proceeds from Santa Fe’s Rodey law firm that was attached to the long-awaited audit.
“Santa Fe did a good turn for other cities and towns,” said Keller.
The $150,000 the city invested in the audit performed by Atkinson & Co. Ltd. came after another $50,000 had been spent on a more cursory review by a different firm last spring. That initial report cited numerous problems, including a lack of policies and procedures, inadequate internal controls and missing records, that caught the attention of the Office of the State Auditor.
The “good turn” Santa Fe did was to provide a legal guideline for types of expenditures that are allowable from the proceeds of a capital improvement bond. Three conclusions were reached: 1) the city can in fact use internal labor to construct city projects; 2) changes can be made to projects after voter approval as long the changes are consistent with the intent of the bond issue; and 3) expenditures must be for capital projects and not for working capital, maintenance or operating expenses.
Item number 3 is where Santa Fe went wrong. The city couldn’t show that $2 million in spending went for lasting capital improvements like construction.
“We certainly see that one of the most common audit challenges is the notion of dedicated revenues and what you can do with it,” Keller said in an interview after the meeting. “In many cases, the question becomes how much flexibility do you have with it?”
Into the weeds
One question summed up much of the controversy over Santa Fe’s bond spending: Does pulling a weed constitute a park improvement?
When voters approved the parks bond in 2008, they agreed to provide tax-supported funding of bonds “to improve parks, trails and open spaces for recreational purposes.”
However, the city used $4.2 million of the bond to pay the salaries of employees, some of whom performed maintenance work, and to fund operating costs at Marty Sanchez Links de Santa Fe Golf Course.
City officials had decided to use in-house labor for parks projects from the 2008 bond – instead of hiring contractors on a per-project basis, as in the past – to help avoid layoffs during the recession.
At Wednesday’s meeting, Martin Mathisen, audit director at Atkinson & Co. Ltd, which performed the independent audit for Keller’s office, said that, for at least two years, $67,000 went into the operations at the golf course.
When the question of whether bond money could be used to pay city workers came up at a City Council Finance Committee in 2011, then-City Attorney Geno Zamora said that was fine as long as the city employees were performing work consistent with the intent of the bond.
And he said that making an “improvement” could be interrupted liberally. “If you are pulling a weed, you are improving,” he said, according to the minutes of the Sept. 6, 2011, meeting.
According to the audit report, a follow-up memo by then-Assistant City Attorney Judith Amer did not analyze the word “improve,” but “seems to have taken on a different perspective” than Zamora’s and provided “cautious advice.” Amer’s memo said that determining whether workers should be paid from bond funds should be made on a “case by case” basis.
The new legal opinion that came with the state audit, provided by the Rodey, Dickason, Sloan, Akin & Robb firm, states that “we have found no authority under State law, or federal tax or accounting guidance … to conclude that providing maintenance unrelated to capital development is a permissible expense and are concerned that the advice of the City Attorney was either misconstrued or inartfully presented.”
In the same paragraph, the firm concedes that it’s possible that Zamora’s interpretation was based on the idea that pulling the weed was necessary to clear room to for an “asset,” such as laying sod.
At Wednesday’s meeting, Mathisen said there was a “disconnect” between city attorneys Zamora and Amer, and private lawyer Duane Brown, who served as bond counsel for the city. The audit report says “retired city management,” during the audit examination, agreed with the staff attorneys that they had in fact conferred with private bond counsel concerning payroll issues. Brown, however, said he did not recall such conversations.
If those discussions did take place, they were verbal and nothing was ever put in writing. “A documented inquiry and response may have prevented internal payroll expenditures for non-capital items,” the audit report states.
Now, Santa Fe and other cities in New Mexico have something in writing and can use the Rodey’s firms opinion as guidance. Keller wasn’t the only one at Wednesday’s meeting happy to have it down in black and white.
Teresita Garcia, the city’s assistant finance director, said the opinion helps define “where the fine line is” when it comes to determining an appropriate expense for capital improvement bond issues.
“I have never seen a legal opinion on bond funds. This clarifies the issue,” she told the audit committee. “Now we have a legal opinion and it’s very clear. Department heads say, ‘Now I understand why you say no.’ It’s a very positive tool for us.”
Another issue of significant importance discussed Wednesday was whether the inappropriate use of funds could jeopardize the city bonds’ tax-exempt status.
Bond-holders, those who purchase tax-exempt municipal bonds as an investment to earn interest income, don’t have to pay taxes on their earnings as the city pays the bonds off.
Cities can’t get the exemption if they’re issuing bonds – essentially borrowing money – just to add to operating revenue instead of for lasting capital projects, which in parks bond could include playgrounds, paving, new trees, trails, fountains, restrooms or a whole new park.
Though apparently unlikely, a worst-case scenario at this point – since Santa Fe couldn’t disprove for auditors that it used a chunk of the 2008 bond funding for maintenance and operations, not capital improvements – could be that the bonds lose their tax-exempt status and investors would have to pay taxes on their earnings over the past eight years, creating liability problems for the city.
Mayor Javier Gonzales addressed the issue when the city released statements in response to the audit last Friday.
“As to the remaining question of tax-exempt status, this is a serious issue that is a top priority for our staff and the Auditor’s office,” he said. “I’ve asked that a review of the unallowable costs be undertaken and, if necessary, corrective action be taken to safeguard the city. Based on preliminary conversations with our senior staff, we believe that will be achieved.”
There was some talk during Wednesday’s Audit Committee meeting about trying to correct the problem.
While state law prohibits the use of bond proceeds for non-capital items, federal bond law does grant exceptions for certain non-capital expenses, like interest on the bonds and cost of issuance, of up to 5 percent of total proceeds from tax-exempt bonds. The more than $2 million in uncapitalized expenses determined in the audit represents about 7 percent of the $30.3 million bond’s total.
There is some hope that, with $800,000 still unspent from the bond proceeds, Santa Fe can find a way to comply with the federal requirement by getting to a final spending total with allowable non-capital spending below 5 percent and keep the bonds tax free. “Since the bond isn’t done, they can go back. Santa Fe is lucky,” Keller told a reporter as he left Wednesday’s meeting.
But the Rodey opinion adds, “Based on our limited review of the City’s financial condition, it is unclear whether any of the exceptions are likely to apply in this case.”
Weaknesses and deficiencies
Mayor Gonzales’ statement last week said that, among the positives in the audit, was that “not a single dollar is unaccounted for or missing.”
While it appears true that all the spending was in some way “accounted for” and that the audit apparently found that the dollars went to pay somebody or buy something, the audit also makes clear that it couldn’t determine how some of the labor that the bond proceeds paid for was used. What sometimes is “unaccounted for or missing” is where and for what purpose work was performed.
One of the “material weaknesses” found in the audit was in the area of time-keeping for wages paid. More than half the 99 payroll transactions tested on employee time sheets don’t indicate what work was done, “so there is no way to determine if approved project work or other (non-capital) activities were performed,” according to the report. Also, the time sheets did not reflect all costs of construction activities, nor did they provide details for where and when the activities were performed, the audit states.
Some of the audit’s blanks spaces on payroll involved: for several parks, payroll or administrative costs continued to be charged well after construction was concluded; at Monica Roybal Park, more than $21,000 for payroll was charged “for no apparent activity”; for a whole year for the Arroyo Chamiso trail, there was $60,800 in administrative work charged, but no payroll for actual construction or improvement; $131,000 in administrative costs for a St. Francis Drive pedestrian crossing was charged before any construction work began; and, at the Cross of the Martyrs, $70,800 went for work that “was not identified.”
There is also a hint of nepotism in one audit finding regarding procurement. Without naming names, the report refers to “procurements with a certain vendor” involving 15 projects in which many purchase orders were executed after the goods had already been received. There was just one instance of the vendor’s price exceeding other quotes or bids, the audit states. During one fiscal year, the same vendor was awarded jobs without a competitive sealed bid process when such bidding was required.
Also, a possible conflict-of-interest situation with the vendor arose when an unnamed city employee was promoted and became part of the decision-making process, according to the report.
At the end of Wednesday’s discussion, Anna Hansen, who served on the city’s Parks and Open Spaces Advisory Commission while the bond was being implemented, asked one of the questions the public will surely want answered.
“How do we make sure this doesn’t happen again?” she asked.
“That’s up to the city,” Mathisen said.