Watchdog report: South Jersey Economic Development District can't pay NextGen contractors

Findings

The South Jersey Economic Development District owes about $495,000 to contractors that completed the infrastructure work at the site of the NextGen Aviation Research and Technology Park. The money is reimbursable to the district under a $2.5 million U.S. Economic Development Agency grant, but the district must first come up with the $495,000.

By JENNIFER BOGDAN, Press of Atlantic City

Posted: Sunday, February 12, 2012 12:05 am
Updated: 9:09 pm, Sat Feb 11, 2012.

The South Jersey Economic Development District, the agency that coordinated building the $7 million infrastructure at the planned NextGen Aviation Research and Technology Park in Egg Harbor Township, is unable to pay an estimated $495,000 to contractors that did the work.

And SJEDD failed to complete timely audits - as required under U.S. Economic Development Administration guidelines - for two years in a row while undertaking its largest project ever. An audit covering March 2009 through March 2010 was finalized just last week.

As a result, Atlantic County withdrew from the district because the district was unable to provide accurate accounting of the project's debt.

Officials at SJEDD now say the the district may not survive if they are unable to recoup $858,000 spent on the NextGen park so far. Project debt totals more than $1.3 million.

SJEDD, the state's only economic development district, was founded in 1979 under the U.S. Economic Development Administration for the purpose of regional economic planning. The district includes Cape May, Cumberland and Salem counties. Atlantic County withdrew last month after 32 years, citing various concerns about the district's operations, including the financial accounting. The SJEDD is funded by $12,000 membership fees paid by the counties, funding provided by the federal EDA, plus other grants and revenue received through administered projects.

Gordon Dahl, executive director of the SJEDD, said the district has been negotiating with the NextGen park's board, which wants SJEDD to turn over the project's land lease that it holds with the Federal Aviation Administration. Dahl and the district's board members say they have no intention of giving up the rights to the lease unless the district is paid the $858,000. The district's board passed a resolution last week agreeing not to accept anything less than that amount for turning over the lease.

"There was no question that the district would recover its money from the land leases so the money could go to the next project, and the next project. (The park's board) came in and said, ‘We're taking over the project. You won't have the land leases, and we're not paying you the capital costs you put into the project that you expected to get back,'" Dahl said.

However, current and former SJEDD board members who were asked about the sublease model, including board Chairman Leonard Desiderio, said they were unaware of that plan - pointing to some degree of miscommunication between them and Dahl. Board members also said that while they approved project expenditures, they were unaware, until recently, that the district was unable to pay it's contractors.

"I knew what was being spent in a general sense, but I was under the impression that the district had the money," said Cape May County Administrator Steve O'Connor, who was a board member until December 2011.

Control of the land

The NextGen park was first announced in October 2005 as a seven-building center that would bring 2,000 high-paying jobs to the area. Building construction, however, has yet to begin. Opportunities for financing the construction were missed under SJEDD's leadership as recently as December 2010, when the district lost a $15 million stimulus bond after it and the park's board failed to secure tenants for the first building.

Bids for construction of the first building have twice expired and were later extended as SJEDD and the park's board were unable to secure a developer needed to finance construction. In January, the low bidder, Hunter Roberts Construction Group, with offices in Philadelphia and Newark, agreed to extend its $9.5 million bid to June 30, 2012, and New Vistas Corp., a Northfield-based real estate and development firm, was announced as a "conditional designated developer" for the project.

However, the announcement is unusual as the park's board, which selected New Vistas, does not have control of the park's land. SJEDD retains the final say over the land through a lease agreement with the FAA. The district will default on the lease if it fails to begin construction of the first building by Dec. 21, 2014.

In January, Dahl and his attorney turned down an offer from the New Jersey Economic Development Administration for a $495,000 bridge loan to pay the contractors, one of whom has not been paid since March 2011.

The bridge loan also would have allowed the district to close out a $2.5 million federal EDA grant. As a condition of accepting the loan, SJEDD would have been required to transfer the lease to the park's board, according to an email written by Dave Nuse, managing director of real estate for the state EDA, that was obtained by The Press of Atlantic City.

"Giving us a $500,000 loan, which we have to pay back, doesn't help the district," Desiderio said. "In hindsight, if we had known what this (NextGen) project was going to be, I think you would have (had) three counties voting not to get involved with it. If we all knew the magnitude, we would have looked for someone else to carry the load. The district can't move forward without its $858,000."

Howard Kyle, chief of staff to Atlantic County Executive Dennis Levinson, said the county has become very involved in attempts to transfer the NextGen lease to the park's board and that it has a vested interest in advancing the project. Kyle said the county believes the district incurred expenses at its own risk, according to a June 2010 memorandum of understanding between SJEDD and the park's board. Atlantic County has contributed $2.5 million taxpayer dollars to the park's $7 million infrastructure installation.

The agreement examined by The Press of Atlantic City states that the parties are responsible for funding their own activities and agree to assume their own risks and liabilities.

"SJEDD rejected the (loan offer from state EDA), insisting on an $858,000 bailout to cover what they called their out-of-pocket expenses. In other words, they were saying if they don't get a bailout, then nobody gets paid and they don't care if the project goes down with them," Kyle said.

"Atlantic County's position is that SJEDD's financial problems are largely the result of unilateral decisions made by the executive director without the full consent of its board. ... If audits were done as required, this would have shown up, and the board might have been able to address this early on."

In October 2011, the county examined SJEDD's finances on the NextGen project and found the $858,000 in unfunded liabilities, or costs incurred during the course of the project that are not subject to reimbursement under other financing agreements. The district had previously been unable to provide an accurate representation of its expenses, county and park officials said.

The $858,000 includes more than $107,000 of interest on a bank loan, nearly $550,000 for architectural firm Environetics Design Inc., and $82,000 for Joe Sheairs, who acted as an SJEDD consultant on the project prior to becoming the park's interim executive director in 2009.

In April 2011, SJEDD sought as much as $1.74 million to turn over control of the project. More than $1 million of the total was accounted for as fees for administering contracts, and obtaining and implementing grants. The district is now focused on the $858,000, Dahl said.

Atlantic County Freeholder Frank Formica was on SJEDD's board for about a year. He says he had serious concerns about the organization. He and Kyle spoke of a meeting that took place Oct. 18, 2010, in which Dahl stated he had the money to pay his contractors and would do so by Dec. 1. When that deadline was not met, Formica said Dahl later admitted at a Dec. 12 meeting that he did not have the money to do so.

Dahl disputes that interpretation, and says he never misrepresented the debts of the project or the district's financial position. Instead, he says, he's always provided the best numbers he's had available on a project with mounting expenses.

"Gordon has promised in front of his board members that he would pay his contractors, and no one has gotten paid. We cannot in good faith be part of an organization that has been less than responsible with the public trust and public funds," Formica said. "It's undeniable that there is no money to pay his encumbered expenses."

Unpaid contractors

According to the district's unaudited calculations, about $495,000 is needed to close out a $2.5 million U.S. Economic Development Agency grant. The district must first pay that sum to its contractors and will be reimbursed later by the EDA with the grant money.

SJEDD took out a $350,000 bank loan to help front some of its expenses, but that line of credit has been exhausted. As of October 2011 - in the most recent figures prepared by Atlantic County's auditor - $107,000 of interest had accumulated on that loan.

Atlantic County Improvement Authority Executive Director John Lamey confirmed that his authority, which acted as a project manager for the infrastructure installation, is owed $64,500. The authority has not received a payment from SJEDD since March 2011 for a bill issued in December 2010. On Feb. 2, the authority issued a letter of default to SJEDD demanding that the district identify the funding source dedicated to pay ACIA when the contract was executed. Payment must be made by Feb. 24 or ACIA will take legal action, the letter states.

ACIA's contract with SJEDD expired Aug. 31. Despite going five months without payment, the authority continued to complete work at the site through October and still makes occasional trips to the site, Lamey said. The agency has not billed for any work since August.

"We've maintained an as-needed presence and done so in recognition of the importance of the project to our region," Lamey said.

Birdsall Services Group, a Sea Girt, Monmouth County-based engineering firm, is owed nearly $140,000. Other contractors owed money reimbursable to the district under the EDA grant include Berlin, Camden County-based Mount Construction; Howell, Monmouth County-based Caruso Excavating, and Egg Harbor City-based Accent Fence. October calculations show the companies were owed $134,000, $56,000 and $85,000 respectively, according to the county's financial report on the project obtained by The Press.

Dahl told The Press that any unpaid invoices were due to insufficient work. In particular, he said, he was unhappy with uneven fencing installation, which caused him to withhold payment to the ACIA. The ACIA, however, said it has not heard any complaints about workmanship since the infrastructure installation was finished in the fall.

"I've spent most of the last year conducting my own inspections on that park because I needed to have the confidence things were getting done right," Dahl said. "That was on my time, not the district's time. I was out there on weekends."

SJEDD also entered into a $172,000 agreement with Atlantic County in December 2010 for road improvements at the intersection of Delilah Road and the NextGen park's access road. The district agreed to use the county's contractor for the improvements and to reimburse the county for its expense, according to the resolution authorizing the agreement and examined by The Press.

When a Sept. 12, 2011, $76,000 invoice was still unpaid by Jan. 3, the county issued a letter of default to the district, threatening to "proceed with all remedies and measures that may be available to secure funding and sanction the SJEDD for breach of contractual obligations."

Dahl issued payment to the district Jan. 18, citing concerns about the quality of the asphalt. County officials said those concerns had never before been addressed, but would be explored. The county has since issued another invoice to SJEDD, requesting a nearly $83,000 payment associated with the same agreement.

How the district works

When SJEDD was first formed in 1979, it was heralded as an ideal way to secure additional funding for the region: A regulation made development districts eligible for an added 10 percent of funding when they applied for federal EDA grants on behalf of member counties.

That regulation, however, was removed from legislation in 2004, according to the federal EDA. There are no other financial incentives to being part of a district. However, without being a member, a county or municipality cannot apply for federal EDA funding unless it has developed a Comprehensive Economic Development Strategy.

The federal EDA's Philadelphia Regional Office oversees SJEDD. The district is a nonprofit corporation but under its classification is not required to file Form 990s.

Its current development strategy is outlined in a nearly 90-page document available to the public on the district's website that includes employment statistics and development strategies in various sectors such as tourism, aviation, health care, and renewable energy.

SJEDD helped secure and administer a $1.5 million federal grant for the New Jersey Motorsports Park in Millville, a $2 million federal grant for the Rutgers Food Innovation Center in Bridgeton, and a $1.2 million federal grant for Atlantic Cape Community College's Allied Health Technical Institute.

Dahl has been the district's executive director since 1987. He earns $120,000 annually. The district's staff is composed of Dahl, senior planning officer Diana Schiavo and administrative assistant Deborah Dalton. Their salaries are funded through the district's revenues, which come from membership fees paid by counties, federal EDA funding and grants.

Development districts are required to submit audits to the federal EDA only if specifically requested or if the district has spent at least $500,000 of federal funds within a given year. According to those federal guidelines, the district was required to submit an audit, also known as a Circular A-133 under federal regulations, for the past two years; SJEDD has not done so. SJEDD drew down more than $1 million of a federal grant for the park between December 2010 and August 2011.

The federal EDA, recently discovering the oversight, has requested the A-133, but is not penalizing the district.

"Not having an audit done in two years falls on the responsibility of the entire board. Quite honestly, I don't know how that wasn't caught, and it's not excusable," said Cape May County Administrator Steve O'Connor, who was a board member for eight years. O'Connor stepped down in December 2010.

Ocean City-based Ford-Scott and Associates auditor John Sabella said SJEDD did not present materials for the 2009-10 audit until February 2011, 11 months after the end of the district's fiscal year. At that point, Sabella suggested completing a two-year audit, which was later approved by board resolution.

"I would assume that everything would be running the way it ran every other year," Desiderio said when asked why the lapse was allowed to occur. "Being on this board is not a day-to-day, right-on-top-of-it micromanagement of this little district. Up until this NextGen project, everything was smooth, and there was never anything to question, or look at, or wonder, or think about."

Every three years, districts also undergo federal EDA performance evaluations. SJEDD's last occurred in 2010. At that time, no problems were found, according to the EDA.

Dahl has since promised that both years' audits would be complete by Jan. 31. However, that deadline was not met. A copy of the 2009-10 audit approved by SJEDD's board last week has not yet been made available to The Press. A draft of the 2010-11 audit has not yet been completed, and next month the 2011-12 audit should commence. The district's fiscal year ends in March.

Meanwhile, Ford-Scott and Associates found "significant deficiencies" in the district's accounting practices, even in its 2008-09 audit. In an April 30, 2010, letter to the district's management and board, it said certain preferable internal controls did not exist and may not be feasible due to the (small) size of the district's staff.

"This situation dictates that the Board of Directors remains involved in the financial affairs of the district to provide oversight and independent review functions," the letter read.

The audit also questioned why Dahl was using his SJEDD-issued vehicle to commute to and from work.

"Commuting from the director's home to the district office is not considered business use. The value of this business use should be included in the director's wages or be reimbursed to the district by the director," the letter read.

Concerns about Dahl's use of the company car had been brought to the board's attention previously. Former SJEDD attorney and project manager Judith Arnold, who left the district in November 2009, questioned Dahl's use of the company car among other practices involving Dahl's decision-making in a letter to the board.

In June 2009, SJEDD's board appointed Mount Laurel-based attorney Beth Lincow Cole to investigate the allegations. She returned a "confidential investigation summary report" to district leaders a month later finding that no wrongdoing took place, according to the report examined by The Press.

Five months later, Arnold wrote to the U.S. Attorney's Office and state attorney general questioning the same practices. In the letter obtained by The Press, she also questioned the district's accounting practices. Representatives for the U.S. Attorney's Office and the state attorney general said they could not confirm nor deny investigations.

Moving forward

Aside from the financing struggles, the SJEDD's board members question the strength of the district without Atlantic County.

"I question whether the district is sustainable without Atlantic County. If it can move on, its mission will be severely weakened. It really needs the partnership of all four counties to remain a strong, viable organization," O'Connor said.

Federal EDA officials said any projects presented to the EDA will still be evaluated on their own merit and the remaining counties will not necessarily be hurt, though population estimates for the district and per capita income will fluctuate.

Cumberland County Freeholder William Whelan, who has been a board member for about a year, said the remaining three counties are hoping the financial difficulties can be resolved so that Atlantic County can again become a part of the district.

Asked about the financial position of the district, Whelan said he couldn't speak to that until both of the past-due audits have been completed.

"I'd rather have an answer based in fact than in a gut feeling in my stomach. At this point, I need more information." Whelan said. "As a board member, you have an understanding to a certain extent. We're there to make policy decisions, not manage budgets. My gut tells me the district may have overstepped its means."

Source:  http://www.pressofatlanticcity.com