January 21, 2001 – A federal audit paints a grim picture of the V.I. Housing Finance Authority as a politically influenced, patronage-tinged organization where employees were granted special privileges and financial accounting was sloppy at best and deceptive at worst.
The HFA was established in 1981 to help low- and moderate-income residents buy their own homes. The idea was that it would raise funds, through issuing bonds, and use the money to subsidize moderate-income home construction. But the authority's success has been limited by mismanagement, according to an audit by the U.S. Interior Department's Office of Inspector General.
Among the findings:
– A Democratic-controlled Legislature mandated questionable payments to two contractors that cost the authority nearly $2 million.
– Construction contracts valued at $14.7 million were awarded without bid — or, in at least one case, by ignoring the low bidder
– The authority gave interest-free loans to numerous employees, and until the audit was looming, little was done to get any of the money paid back.
– An executive director gave her daughter her own "priority" status to enter the program and apparently failed to make a formal review of her eligibility.
– An employee was allowed to live in a rental property owned by the authority and rack up a bill of $10,690 in back rent due.
– A board member was paid $7,500 as an advance for legal work in an apparent conflict of interest. Although she was forced to resign from the board more than two years ago and never performed the legal work, the HFA has yet to get the money back.
– A sampling of applications from 50 housing program participants showed that only 40 of them met eligibility requirements. Six were clearly ineligible; three had supplied insufficient information to make a determination; and for one the file couldn't be located.
– The HFA has lost the effective use of $33.7 million in bond proceeds because it lacks the cash to cut roads and make other basic infrastructure improvements that would allow for future moderate income developments.
In fact, according to the audit, the HFA is in debt to the V.I. government for about $3 million in payroll costs, to the Government Employees Retirement System for about $25,000 in employee contributions, and to the Water and Power Authority for $257,000 in electric and potable water bills.
The late Earle B. Ottley, a political power broker for decades, was the first executive director of the authority, moving to the position shortly after retiring from a long stint in the Legislature. Although the authority was created in 1981, it did not begin operating until 1984.
His former assistant, Marjorie Magras Caraballo, succeeded him. She gave her tenure as executive director as 1989 and 1990. She was followed by Jose George, who went to the post after serving as the territory's budget director. More recently Claude Richards Jr. was acting director, and now Clifford Graham has the title interim executive director.
The audit findings range over the course of the authority's existence, and it is not always clear under whose watch a particular problem occurred. As is customary, the auditors do not use names in their reports. In a written response to the audit, Ira Hobson, current chair of the HFA board, said several deficiencies cited in the report were corrected more than 10 years ago.
George could not be reached for comment Monday.
Executive gives daughter 'priority status'
Caraballo said, "I'd prefer not to comment" in general. But she defended her action in giving her own "priority status" number to her daughter, an action that allowed her daughter to jump to the front of the line of residents waiting for help from the program and purchase land from the authority.
Caraballo said that when she first applied for housing assistance in 1974 — before the HFA was established — she included her daughter's name on the application. Her daughter was a baby at the time. In 1987, Caraballo said, she bought property on her own, outside the program, and so no longer had any use for her HFA application. When she took over as executive director of the authority, she said, she thought her daughter should be allowed to use the old application since "her name was on it."
According to the audit report, the case file contained no information on the daughter's income, savings or credit history — factors weighed to make eligibility determinations. Besides that, one of the checks she used for the down payment on the property bounced and wasn't replaced until a year later when the purchase was paid off.
Other examples of special treatment
The audit also found these instances of favoritism:
– In 1999, an employee was granted a $20,000 interest-free loan from a self-help program, although that program had been discontinued eight years before and the employee had two other loans that were delinquent at the time.
– In June 1995, an employee received an interest-free $250 loan. He didn't repay it, but continued to take loans from the authority. When he resigned in December 1999, he owed the authority a total of $4,885 on four loans. He did later pay them off.
– In 1995, an employee received a "cash advance" then made no payments before getting a second "cash advance" for medical and funeral expenses in 1997.
– In December 1994, the authority purchased a computer for an employee who signed a promissory note to repay the authority for it. That interest-free loan was repaid, but two subsequent loans totaling $8,000, one in 1994 and the other in 1996, had not been repaid by June 2000. That's when the then-executive director wrote the employee: "The Authority is due to be audited and we are still facing the possibility of being merged with the other Housing agencies. Your experience as a Fiscal Officer should suggest to you that financial matters such as this need to be cleared from our books as soon as possible, before we are cited for fiscal irresponsibility."
– An employee was allowed to purchase a model home at a special rate. It was questionable, according to the auditors, why the home was even constructed in the first place, since it was at a site where the authority was selling only lots, not homes. Although the lots were going for $15,000 each, the employee put down only $500 for the lot.
The employee also received $52,000 in assistance from a federally funded, HFA administered homes program — $42,000 as a grant and $10,000 as a loan at an interest rate of 1 percent. An internal memo indicates authority personnel realized the arrangement was not appropriate.
The director of the federal programs said he told the HFA executive director that "the best way to avoid the situation where someone would be able to draw comparison between the lot price charged to her [the employee] versus [the price] charged to the others is to structure her deal as a package. In other words, give one price, which would include the land and the house; this way, no one on the outside would really know how much is apportioned to land versus house."
Beefed-up building code blamed for cost overruns
The auditors were especially critical that the Legislature intervened and mandated payments to the contractors for the Water Bay project on St. Thomas and the Work and Rest project on St. Croix. In both instances, the contracts were entered into before Hurricane Hugo hit in 1989. The contractors claimed cost overruns due to tougher building codes post-hurricane but did not document specific increases.
Although the authority board and staff objected to paying the cost overruns, the Legislature passed bills appropriating the money to the HFA specifically for the payments.
In the Water Bay project, the Legislature passed two such appropriations, first in September 1996 (followed by an override of the governor's veto) and then again, along with money for the Work and Rest contractor,
in December 2000. Prior to the vote on the 2000 appropriations, the executive director of HFA wrote to senators telling them that "neither (of the contractors) has any legitimate or legal claim against the VIHFA at this time."
The audit report notes that a senator who pushed for passage of the 1996 appropriation to the Water Bay contractor and also for an override of a veto by Gov. Roy Schneider went to work as an attorney for the company a few months later after being defeated for re-election.
The former senator and current Democratic Party state chair, Arturo Watlington Jr., is quoted in The Avis newspaper saying, "It wasn't the first time this has been done, and it won't be the last … Auditors don't tell the Legislature what to do." He also defended the payment to the contractor, Webster Construction, saying the contractor later prevailed in a court suit over the money.
The auditors, however, concluded that "without legislative involvement, the authority and the contractors in the two cases … might have been able to settle outstanding claims for lower amounts, to the advantage of the authority and potential low-income homeowners in the Virgin Islands."
