Feds Say City Lacked ‘Adequate Oversight’ over Taxpayer-Funded Loan Program

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Thursday, July 19, 2012

Dan McGowan, GoLocalProv News Editor

Providence did not “exercise adequate oversight” over a taxpayer-backed loan fund that has had an “approximately 60 percent” default rate, according to a new 19-page report obtained by GoLocalProv.

The report, issued by the U.S. Department of Housing and Urban Development (HUD), analyzed ten years of the Providence Economic Development Partnership’s (PEDP) finances and found that the program had little oversight over funding recipients, failed to meet requirements for financial management standards and displayed questionable use of federal funds.

In addition, the report questions whether certain organizations were even eligible to receive federal dollars and suggests the PEDP’s procedures for writing off bad loans were inadequate. The agency also did not provide proper transparency and disclosure to citizens, HUD found.

Last fall, GoLocalProv first reported that a quarter of all loans issued by the PEDP were at least 90 days past due, leaving the city with little hope of collecting on the more than $3.3 million it was owed. At the time, PEDP lawyer Joshua Teverow said the agency was focusing its collection efforts on 11 companies that combined to owe over $1.3 million.

Last month, seven of those loans were among the 29 that were written off by the PEDP, leaving the city stuck with a $2 million tab.

17 Loans Didn’t Create Any Jobs

When interviewed last October, both Teverow and former PEDP executive director Thomas Deller consistently stressed that the point of the PEDP, which is funded mostly through the federal Community Development Block Grant (CDBG) program, was to be a last resort loan provider for businesses that could not obtain financing elsewhere.

Even then, loans still had to be approved by the PEDP’s 15-member board of directors, which is chaired by the Mayor. For the majority of the ten years HUD looked at, the chairman was former Mayor and now Congressman David Cicilline.

“Therefore everyone who gets a loan from us has either been rejected by two banks or has been offered a loan that is not sufficient to do the project,” Deller said at the time. “As a result our loans are very risky. “

“It’s no guts, no glory,” Teverow said. “The nature of economic development is that you’re supposed to take a chance.”

But because the loans come from CDBG funds, HUD requires recipients to prove that “low and moderate” income people are being hired. Records show that between July 2001 and June 2011, the PEDP dished out $14.8 million in loans, 52 of which were “provided on the basis of job creation or retention.” For every $35,000 in funding, those loans were supposed to create at least one full-time job.

“Seventeen of 52 loans which provided $2,990,000.00 in CDBG funds did not create or retain any jobs for low and moderate income people,” the report states. “Of the files reviewed, documentation of job creation or retention were either lacking or missing. As a result, these loans were used to benefit businesses without demonstrating that they also provided the intended benefits to low and moderate income people.”

The report also questions several instances where loan recipients may have not actually been eligible to receive federal dollars. In one case, the city loaned $400,000 to the nonprofit Black Repertory Theater for “working capital and staff salaries.” HUD claims the company should not have received those funds and has raised questions about 11 additional nonprofits that received a combined $3.2 million in loans.

“PEDP did not maintain adequate supporting documentation to demonstrate activities funded with CDBG were eligible or met a national objective,” the report states.

Loan Write-offs/Questionable Spending

Before the PEDP voted to write off 29 loans last month, HUD was also raising questions about whether the agency was properly underwriting loans that it likely had no chance of ever recouping any money from.

“We found no written policies and procedures governing underwriting, loan collection, loan modifications and or write off policies,” the report states.

In the report, HUD singles out Danal Inc., which carried a principal balance of $66,240 and was over 4,500 days past due. The report states that over ten years, PEDP collected a net amount of $543 from the company, but it also incurred $7,903 in legal fees. The loan was still in the PEDP’s active portfolio until it was among those written off last month.

“The city has spent an unreasonable amount of legal fees in pursuit of these collections with very little to show for its effort,” the report states.

In addition to questions over the loans awarded to businesses, the report also raises questions about internal spending within the PEDP. HUD staffers reviewed administrative charges from July 2005 to June 2011 and in some cases, expenditures were “never reported to HUD as required.”

The report found that over $552,000 needs to be reclassified as “administration or planning” expenses and that another $1.5 million in costs were questionable. HUD is requiring the PEDP to provide supporting documentation to show a basis for the city’s determination of eligibility.

Making Progress

While the city did not wish to comment for this story, the HUD report paints a rosier picture of the agency today than at any time during Cicilline’s tenure as Mayor and chairman of the board.

The report found that the PEDP still needs to provide more oversight over loans, establish clear financial management policies and comply with federal requirements.

“In general, we found that city staff has made progress in strengthening the financial management systems for PEDP,” the report states.

This afternoon, board members will meet to vote on two new loans for companies: $120,000 for the Fed-Rick Veal Company and $100,000 for Snakes & Dust, LLC.

 

Dan McGowan can be reached at dmcgowan@golocalprov.com.

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