I received reports of difficulties viewing the section of the city council work session on the discussion of the HUD audit and have thus re-posted that portion of the meeting on YouTube below. Update: Also posted beneath the videos is a transcript of the HUD audit discussion.
[Videos deleted]
City Manager Jean-Ann McGrane: So the next item is about the audit discussion. Obviously, there was a lot of publicity about this. Councilwoman Dickinson and the mayor had requested that we have an opportunity to put this on the agenda. You may have some questions regarding the audit. Lourdes is here. We will do our best to be able to answer that, if you have some specific questions.
Councilwoman Christine Bello: I just would like to know where, why there was absolutely no accountability regarding these funds throughout those years. I mean, it may have started that way, but over the last few years it wasn’t, it shouldn’t have been allowed to be continued.
JM: I mean, one doesn’t… I’ll go. I mean, obviously, I think there’s a couple of items here. [Indecipherable] Ops, I think that was one of the issues. We have moved forward to go into litigation. We worked extensively with the individuals to try to get them to actually pay that loan. It was anticipated that, well, they would, for a variety of reasons. They had, allegedly had, two buyers. They also had a $250,000.00 that they would lose if they, in fact, didn’t pay that loan off. An incentive, essentially, to pay off by the end of 2007.
So there was ongoing efforts on the part of the city to try to avoid litigation. And to get, get the cooperation on the part of the individual of Dr. Glendening and the Marina Ops Corporation. So there was ongoing efforts to do this. We did not wait to – contrary to what it looked like in the paper - or even in the audit – to move forward with the litigation. We were moving forward with that prior to the auditors even showing up. Just – it’s like everything else – timing is everything.
Councilwoman Marge Bell: Yes it is.
JM: Yes it is, or not, unfortunately. Yes it is, or not.
MB: Why did we not know about the audit?
JM: The audit – we had talked about one component of the audit, the second component of the audit, which was Crystal Lake. The Crystal Lake piece had not – had been not presented to the council because we were waiting for the final report. I think in retrospect, we should have really said, “Look, they’re here, here’s what they’re looking at.” My experience has been in other places that if an auditor comes, what they look, they start out looking at, and at the end of the day, it’s not necessarily the… most instances, that I’ve been experienced with, they really have had very little, bring few recommendations and they’ve been minor. This was a different situation, in terms of the… The bottom line is, you should have been notified up front, as opposed to waiting to the end and when the report came in. That’s, that’s really what…
And that, we’re changing that policy.
MB: Because, you know, it just… it just reeks of the same old pattern. You know, as a member of the Newburgh City Council, for me not to have any knowledge that this is going on is, it’s just… I just, it’s just,
CB: It was just frustrating, to have residents calling us when we weren’t even aware that an audit had taken place.
MB: And then, the whole issue of, we’ve heard of robbing from the rich to give to the poor. We never heard of robbing from the poor to give to the rich!
JM: Well, I think that it’s important, and I think this would be an important discussion to have with the council, because in terms of the deals that were done. Again, nobody here at this table, at least on this side of the table, [Indicates herself and Lourdes Zapata] were a part of those deals. I think in retrospect those were not, those were [indecipherable] criminal deals for the city, in terms of the outcome. I think the problem was that we didn’t get the payback at the time, in a timely manner, that we anticipated. I don’t know, mayor, if you were involved…
Mayor Nick Valentine: I was, I had just gotten on city council when, especially the Marina Ops one, was put into place. And Marina Ops were [indecipherable] following Savoy, which, you know, after the absolute ineptitude, you know, that came out of city government, and all the changes that happened, the checks and balances were all put in place because, you know, technically the legal loan was done, and that [indecipherable].
When it came to Marina Ops, safeguards were put in place. The timeframe for repaying the loan was put in place, and, as the City Manager mentioned earlier, with incentives to pre-pay. Because part of the moneys that we had gotten for this was some grant money that we could not get in any other way, unless we were to do something that would do with waterfront stabilization. So the marina fit in perfectly with what that would be. So using the funds, and borrowing the money, to do the project, did make sense because we were getting it paid back in a timely manner…
MB: But we weren’t!
NV: That’s true! We weren’t. We weren’t. And, and, I have to tell you… it makes no sense to the person who has not paid it back to not pay back [indecipherable]. And they will. And they will pay it back with the interest and the penalties, and et cetera that go through it, but, if you were to look at the way it was structured with the personal guarantees, with the property guarantees, there is more than enough equity there in order for us to get our money back.
MB: We should own it all at this point!
NV: Well, actually -
MB: For, you know, prior to now. We should own everything. Why do we sit there? And act so impotent. I just don’t understand.
NV: Well, I’m… Right now it’s in legal, with outside counsel. So I think, I want to be very, very careful to say exactly where we are in those court proceedings. What I will tell you that… from a personal standpoint, because again, you know, when, when this was done, I was in favor of it. Because of the economic benefit, and also, because of the payback. Because of how it would be paid back. And, I have not sat back, and said, “let’s just see if this happens.” The city manager, and Lourdes, and even before Lourdes, Mr. McKenna, the number of phone calls were numerous, and the enquiry with outside counsel happened as quickly as it could happen after you’d crossed into the possibility of…
[Indecipherable]
NV: Why are you not… [indecipherable] They’re not going to get away with it. It’s, it’s… there isn’t like, you’re trying to find where the money is. It’s there. But finding the money and getting the money are two different things, councilwoman. That’s where we are right now. And anything else, I would not want to discuss, or, unless [indecipherable]
LZ: The deadline for him to be able to take advantage of the incentive is December 31, 2008.
JM and NV: 2007.
LZ: As recently as December… September of 2007, he had been assuring us that he had a buyer for the marina. [Indecipherable]… We called the prospective buyer to make sure that they had a binder. They confirmed that. There was a lot of discussion between September and December… [indecipherable]… we would get assurances… finally,… January of 2008, and said, by January of 2008 we need more money. The full [indecipherable] amount. When that payment did not come, we [indecipherable] to pursue legal action… [indecipherable]. So there was, in that entire year of 2007, there was a lot of communication back and forth. [Indecipherable] A lot of correspondence going back and forth. Both to pursue him, and also to establish the legal foundation for pursuing a legal matter as we did before.
MB: I think that we should have owned that Marina.
NV: We might.
MB: And, and operate them.
NV: We might.
MB: I think that it’s so much time.
NV: At the end of the day, we might. I’m serious.
MB: As far as I’m concerned, we should have had it a long time ago.
Councilwoman Regina Angelo: I think the most disturbing issue around this, is the fact that we have a coalition group involved, continually fighting for better housing. And then we read this report… [indecipherable]
JM: Well, I think it’s important though, to make the point that the city is obligated to pay the loan back. One way or another, if the person who gets the loan doesn’t pay it back. Under CDBG, under HUD requirements, we are required to pay it back. So legally, Lourdes, you can clarify this, I think, for myself and council, paying back a loan, a [indecipherable] loan, is an authorized expenditure for under – yes, it is. Yeah, it is. Maybe you can speak to that. Because I think there’s confusion. It looks like we just took money out of CDBG, and paid this loan back, and – and the fact is, that is authorized. It’s a policy decision as to make it whether or not it should be done, Remember, we have paid [indecipherable] We didn’t pay out of CDBG. We’re going to have to pay out of the general fund. But – go ahead.
NV: But – but, recouping of the money, goes back into CDBG.
LZ: Yes. It all, once the money
NV: That’s right.
LZ: – gets recouped, it comes back to CDBG.
NV: And that money will all be collected and all go back to CDBG.
[Murmuring]
NV: Well, let’s use as an example, we make the money for Savoy, we basically did, [indecipherable] we got all the money, interest, and penalties, and then some, and we still got an extra check over and above. So the fact of whether or not we get it, we will go get it, but I think the policy of the city to not give up till we collect on, on any loan that we give out. Now, whether or not you say the loan should have been done in the first place, you know, 20/20 hindsight is great. If you look at the paperwork of this particular loan at that particular time, you’d say this is a no-brainer. This makes sense. The person is here, the person owns property, the person is developing a piece of property within the City of Newburgh, he lives within twenty miles of here, with plenty of personal equity, that is all accounted for, that is all on there. Personal assets are there. You cannot just go to the front door and get a check. You have to go through the courts. But all of the money, all of the money will be recouped, and that money will go back to CDBG.
It is very easy for a newspaper to say, “you took the money from the poor,” and then go to the next sentence. Very easy.
MB: We read, we all have read the HUD report.
NV: I read it.
MB: And, you know, I don’t think that the newspaper was that different from what the report said. And I have a real serious concern about the findings of this report and how it could impact our ability in the future to get CDBG funds.
NV: And I could…
MB: We could be sanctioned.
NV: But… Okay, now let me finish. Well… I have, I have an answer to that, and also, I’ll bring up another particular HUD report that I found completely incorrect. And we’ve continued to fight it to this day. We answered all of the points in the HUD report that they say are their truisms and where we are in trying to do to recoup the money from the Marina Ops. But we had the exact same similar report come in from – a HUD report – having to do with KNEC. And we have fought them every step along the way because they have been wrong on every single one of their findings. And I sat on the KNEC board for eight years, and there was not one misspent dime. And they did it, as a political agenda, we see it in the report, and we have fought them and at this point we have not given them one dime. And I would fight to the limit not to give them one dime back because we spent that money correctly. This money will be recouped from the loans that were made.
LZ: I’m sorry, but I did want to answer this question about the use of the CDBG entitlement dollars to make payments. [Indecipherable]
Audience: Lourdes, could you speak into the microphone please?
LZ: Is that better?
Audience: Yes.
LZ: If the city doesn’t make the payment, HUD will automatically take it from our credit line. It’s not an option to not make the payment, and in fact, if HUD has to go in and take it, rather than the city making a voluntary payment, then that becomes a problem from HUD’s perspective and it’s a matter of advice. Ideally, for the Marina Ops portion we would have been getting payments from the developer and [indecipherable] and that would have been the source of the payment for the Marina Ops portion of it. For the Crystal Lake portion, other than the general funds, it is is a section 108 that’s entitlement money, sorry, CDBG entitlement money, that would then be used to make the payment. The fact that the city used CDBG entitlement dollars to make the payment is an allowable expense. And I understand the frustration in whether the city should be making that payment instead of or on the behalf of the developer. And I can totally understand the frustration of, that’s not how it should have been. Unfortunately, the circumstances that we found ourselves in, once, that we were not getting [indecipherable] in, that did not excuse us from making payments to HUD.
What we’ve done since then, however, is that the Crystal Lake [indecipherable], the portion that was unused, we are now [indecipherable]. We create the section 108 account, so now we’re using those dollars to pay back that portion of the CDBG Section 108 loan. So you see, if you look at the 2008 budget, the payment of $230,000.00, in the 2009 budget, it’s $140,000.00. [Indecipherable]
I’m not making excuses for that. We are trying to rectify and deal with the situation that we have in our hands.
MB: So we didn’t know that the money shouldn’t have been sitting in the account?
LZ: We had intended on looking at other development opportunities. It’s now at this point, it’s making a decision whether we want to continue to use the CDBG entitlement money to [indecipherable] the loan, or we have the money sitting there. It was clear to us at that point that it just doesn’t make sense to continue to do that. So we’re making payments now through the 108 loan account. But again, I’m dealing with [indecipherable] things now, I’m trying -
NV: The first one that we… Crystal Lake was before I was on. That’s… And that was done, again, the history of it has a bearing on why we did it in the first place. The original intent was that there wasn’t funding to move forward on economic development… project… in a most critical part of our city where development could happen, which was Crystal Lake, one of the [indecipherable] “That’s one that could really produce economic development, it could produce the jobs,” and that’s part of what you’re supposed to be doing. The problem was that the only way to structure it was through the CDBG because there wasn’t any other funding instruments that were available and that was done at that time that way.
Would you do it today? We’d probably get different funding streams to do it today. But this was quite a while ago. [indecipherable]
JM: Councilwoman Bello.
CB: Yes. I have a question. If someone didn’t pay their mortgage, certainly after three payments, a bank would start foreclosure proceedings. Why is it that this was allowed to linger for so many years before we took the action? The legal action.
LZ: Well, I can’t speak to what happened before I started working on this, and I, when I looked back in the files, and looked back at the records and the time of year, I believe [indecipherable] 2007. And from that point until today, there were very aggressive steps and [indecipherable]. The city manager, her staff, and the comptroller of the time, who was not our current comptroller, saying, what’s going on, we need to pursue this. And the direction from the city manager at the time was to be aggressive as we possibly can to pursuing, and that’s the course that we took. I can’t speak to what happened prior to that time.
CB: Well, who is ultimately responsible for turning a blind eye to this person’s failure to repay this loan? And whoever it was, why weren’t they terminated on discovery of this immediately?
JM: That’s something we can talk about in terms of personnel. I will be more than willing to discuss that. Because there were actually a variety of issues and individuals this touches.
MB: And why wasn’t the council informed about the audit?
JM: The council wasn’t informed about the audit because actually, initially the city manager wasn’t informed about the audit. When I found out about the audit, my intent at the time was to notify the council when the final report came in. Clearly that’s, that’s a mistake. What I’ve learned from other situations is that when an auditor comes in the door, you should know about it. Rather than waiting for the final conclusion. Even if it may be nothing, maybe it’s important that the council be notified. And I think that, clearly I’ve learned from this. There was some… miscommunication within city government and city hall, that delayed your getting the report. And I’d be glad to talk about that, too, under personnel.
MB: And why wasn’t the council informed? I hear you saying that you probably should have told us, but you didn’t tell me why we were not informed. I still don’t know why we were not informed. Was it to hide in some way?
JM: Absolutely not.
MB: But why?
JM: As I indicated to you, my experience with audits has been, in the past, that an auditor will come in, and they’ll do an evaluation, and then the final report is what gets submitted to the overseeing body. I think that clearly that’s a way of doing business that should be changed. I mean, as soon as somebody walks in the door, and I discussed this in another situation with you, as soon as they walk in the door, here they are, [indecipherable], let’s give them an ongoing update. As far as the final report is concerned, they were some very serious miscommunication, and within city hall, it was not an effort to – clearly – not an effort to keep this information from the council at all. And, again, I’d be glad to discuss that under personnel.
