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Auditor: Some EDC transactions at odds with approvals noted in minutes
By Lynn Hotaling
Auditor Mitch Crisp of Dixon Hughes told Jackson County leaders Tuesday (Feb. 8) that his firm's audit had uncovered two Economic Development Commission transactions for which documentation was not available and three instances in which transactions appear inconsistent with approved actions noted in EDC minutes.
Those were the main findings listed in the auditor's written report. Not included in the document were concerns Crisp expressed about possible conflict of interest stemming from the fact that EDC Chairman Tom McClure is also the president of Jackson Development Corp., the property-owning offshoot of the EDC.
"The concern is that the EDC chairman is executing documents in his capacity as president of Jackson Development," Crisp said.
As was the case during a Jan. 25 special meeting to discuss the EDC, the former Tuckaseigee Mills location, now home to QC Apparel, generated the most discussion. That property was purchased in 2001 by Jackson Development, with the EDC holding the second deed of trust.
Crisp termed the Tuckaseigee Mills transaction a "classic example" of a conflict because EDC Chairman McClure executed a document on behalf of Jackson Development.
"Clearly that's a conflict of interest," Crisp said.
The Tuckaseigee Mills acquisition was one of the three instances of transactions not matching EDC minutes, Crisp said.
According to the report, the EDC board approved a loan to Jackson Development on June 10, 2001, specifying that the EDC would hold a first deed of trust. However, the real estate closing file indicates that McClure, in his role as Jackson Development president, executed a July 18 document that instead gave the EDC a second deed of trust.
The report states that McClure told auditors EDC board members approved the transaction as a second mortgage, but minutes for an announced July 15 meeting could not be located.
"This issue is significant due to the greater risk of loss created by taking a second position," the report states. "In the event of foreclosure by the first mortgage holder, the EDC would be required to increase its investment in order to protect its investment."
County attorney Paul Holt said he found that while the first mortgage to Triple S was recorded in July at the same time as the deed to the property, Jackson Development's deed of trust to the EDC was not recorded until about two months after the closing, something both he and Commissioner Eddie Madden, a Cashiers real estate broker, said is irregular. Crisp indicated his firm had discovered the same thing.
According to Holt, that meant that for six or eight weeks the EDC had no security to protect its investment.
"So that property could have been re-sold and all the money lost?" asked Commissioners' Chairman Stacy Buchanan.
Crisp and Holt indicated that was correct.
One recommendation Crisp made to commissioners was that the county and municipal governments that formed the EDC should evaluate the value of the QC property and consider taking action to forestall any threatened foreclosure by the first mortgage holder.
When contacted Tuesday, McClure disagreed with the idea of a conflict of interest in the QC transaction because he did not profit from the deal.
"I don't see it here," he said. "There was no personal gain for me – this is for the benefit of the community. Everything is documented."
As to the discrepancy in the minutes as to whether EDC members agreed to a first or second mortgage, McClure said Triple S refused the second lien and that he briefed EDC members on that during their July meeting.
"There was agreement to the second lien," McClure said. "Otherwise we wouldn't have done it."
McClure said he doesn't think minutes were taken during the July 15 meeting where the second lien was discussed.
With regard to the delay in filing the deed of trust, McClure said he had no explanation other than that's the way the lawyer handled it.
"(Former Sylva attorney) Tom Jones handled that," McClure said. "I thought (the documents) were recorded one behind the other.
Jones, a former county attorney and Board of Elections member, is currently serving a four-year sentence in federal prison on charges of embezzling, bank fraud and money laundering, though he had not yet been charged with any crimes at the time of the QC transaction.
When asked about potential foreclosure on the property by Triple S, McClure said the company had always intended to sell its note and that he has already located a private individual, a "patient" investor, who has agreed to carry the note for two years at 6 percent interest.
Triple S should be out of the picture in a matter of days because he expects the deal with the private investor to be finalized by early next week, McClure said.
"Jackson Development is in the process of dealing with it," McClure said. "It's not like it's being ignored."
At the end of that time Jackson Development should have sufficient cash flow to obtain traditional bank financing and pay off both the loans from the individual and the EDC, McClure said.
"There's no reason for the commissioners to be involved," McClure said. "The EDC money invested in that building didn't all come from the county."
The EDC's member towns contribute as well, and the town of Sylva has put in a "sizeable amount," McClure said.
Almost no discussion surrounded the other two instances listed in the audit report.
The first was that EDC board members on Nov. 25, 2002, approved paying a financial consultant for QC Apparel at a cost of $25,000 for six months. Actual payments from December through March totaled $33,000. Approval of the additional $8,000 could not be found in EDC minutes, Crisp said.
The third discrepancy was with a $10,000 payment on June 26, 2001, to Western Carolina University's Office of Regional Affairs for secretarial support. While the payment was within budgetary amounts allocated for secretarial services, it was not clear whether the EDC board had approved that arrangement.
McClure, who is the director of WCU's Office of Regional Affairs, said there was no contract, but that the amount had been budgeted.
"It was approved in the budget and invoiced," he said.
Those secretarial services were needed before county officials and the EDC agreed that the county would provide an employee to perform such tasks for the EDC, McClure said.
With regard to EDC disbursements, Crisp reported that it appears that the EDC follows a policy requiring two signatures on every check, though there was one check with a single signature and two disbursements without supporting documentation.
When asked by The Herald if the audit had shown any evidence of misconduct, Crisp replied "We've reported everything we've found. What happened is clearly documented, but approval was not consistent with what actually took place."
Crisp's firm also conducted an audit of the county's revolving loan fund and its six outstanding loans. Findings concerning those did not change and were not discussed Tuesday. That information was reported in the Jan. 27 edition of The Sylva Herald.
The final item the auditors examined was budgeted payments Jackson County made to the EDC from July 1999 through June 30, 2003. All expenditures from the county's finance office agreed with EDC bank deposits, Crisp said.
Crisp's report includes a number of recommendations concerning the EDC, the first of which that "sponsoring governments" should direct their representatives to bring the EDC into compliance with EDC bylaws, which require an annual audit.
Those governments should also direct the EDC to provide periodic financial reports, Crisp said. In addition, EDC appointees should be urged to evaluate that body's internal controls to see whether adequate controls can be established given the limited staff and board time. The auditor said consideration should be given to returning financial management to a sponsoring government for inclusion in an existing system.
Other recommendations included in the auditor's report:
– To acquire fidelity bond coverage for any person with access to or responsibility over EDC assets.
– To document approval in EDC minutes for all significant transactions and to permanently store minutes in a secure location.
– To develop and abide by a conflict of interest policy for EDC board members and officers.
– To clarify job assignments of county employees to eliminate their involvement with Jackson Development Corp.
Jackson Development was discussed during the meeting, during which commissioners questioned Crisp as to the role of the non-profit corporation.
"Jackson Development was formed to hold title to property. Why can't the county hold title?" asked Buchanan.
"It can," said Crisp. "The difference is the means of financing property. It's much more difficult for the government to arrange financing."
"But they can," said Buchanan.
"Yes," said Crisp.
"Property is more difficult to sell, too," said Commissioner Eddie Madden.
"That's the flexibility of a private holding company," said Crisp.
When Madden said that governments' transactions were equipped with more safeguards to protect the interests of the taxpayers, Crisp said that it's not clear that taxpayers have an interest in Jackson Development.
Buchanan then asked if the county had an indirect interest.
Crisp said that appeared to be the case in that the property originally transferred to Jackson Development (the former Buster Brown plant) was owned by the county and the town of Sylva, and that there was clearly a subsidized loan (QC) from the EDC to Jackson Development.
McClure said several weeks ago that EDC-controlled dollars are not county money, and that the only money given to Jackson Development came from EDC funds. The town of Sylva was paid for its interest in the former Buster Brown plant.
"This whole thing was blown out of proportion," McClure said. "It could have been handled differently. The commissioners could have sat down with the EDC board and talked about it."
The EDC chairman was referring to commissioners' surprise Jan. 12 decision to remove him from all appointed county positions, suspend participation in the EDC, begin an audit of the EDC and county revolving loan fund and dispatched deputies to McClure's WCU office to take possession of EDC records.
"There was no crisis," McClure said. "They could have picked up the phone and called."
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