Goliad's $1 million mess (Multimedia Investigation)
Sept. 7, 2013 at 4:07 a.m.
Updated Sept. 10, 2013 at 4:10 a.m.
In the name of economic development, the Goliad City Council loaned $31,128 to Lionel Garcia to purchase washers and dryers in 2009.
The self-serve laundromat did not create new jobs.
Moreover, Garcia stopped making payments on his loan in June 2011 - one month after he was elected to Goliad City Council.
In the next two years, he made only two payments to the city.
The city did not call his loan into default until June - two years after he defaulted and two months after the Advocate launched an investigation into the city's economic development program.
Other related stories:The businesses:Who received the loans?Editorial:Goliad's $1M mess
Garcia's loan is one of 13 loans or grants issued since 2008, totaling about $550,000 in loans and grants the city of Goliad has mismanaged.
An extensive Victoria Advocate investigation reveals a program started to promote economic development has instead been riddled with poor record-keeping, questionable loan practices, missing documents and virtually no accountability.
The Advocate's investigation learned:
• Since 2008, the development board has collected $525,624 in sales tax. It spent more than $1 million during those same five years, but the city does not accurately record the money.
• Few on the board received economic development training. No one kept accurate records. No one accepts responsibility.
• Three City Council members had loans while on the council. All three defaulted.
Two of the loan recipients went out of business, three development projects are still only empty lots, and six have defaulted on their loans.
"It is all enmeshed. It is all entwined. It is all as sick as you can possibly imagine. And it has to stop," said Linda Powell, a Goliad resident who has been working to hold her city officials accountable.
But even though she and her husband, Roney Powell, have been raising the concern for more than a year, Goliad officials have not acted to correct the problems.
Instead, the officials point in a circle for the management of economic development efforts:
• The economic development board said the City Council has final responsibility.
• City Council members said staff is accountable.
• City staff said they do what the City Council and the board asks.
• Officials at the state comptroller's office said their department is not responsible for the money.
WHERE HAS THE MONEY GONE?
Goliad created a Municipal Development District in 2008. Previously, the town used a form of an economic development agency more commonly in place across Texas.
The city started with a little more than $780,000 in the economic development fund and began collecting a half-cent sales tax starting in September 2008, according to records from the Texas comptroller's office. The board collected $525,624 in sales tax from the creation of the district in 2008 through August 2013.
The development district board spent more than $1 million in the same time period, according to Advocate calculations from meeting minutes and what financial records were available.
The money, however, is difficult to track.
An annual report detailing all expenditures made by the board is required to be submitted to the City Council at the end of every fiscal year, according to the rules and regulations of the board.
When these reports were requested by the Advocate, city officials said the records did not exist.
In addition, about half of the monthly financial reports for the board are missing or were never created.
Larry Zermeno, Goliad city administrator, said he realized in the summer of 2012 that the financial records were incorrect.
"That was the only number I had to pull off the general ledger, so I went with it," Zermeno said about the incorrect fund balances on monthly reports received by the Advocate.
It took two years to balance the funds, said Zermeno, who was an auditor for the San Antonio Water System for 20 years.
Advocate calculations using meeting minutes and monthly financial reports show the development district's available fund balance to be between $314,000 and $436,000.
The city's records showed the fund balance was $870,000 at the end of July.
When asked if this was how much money was in the development district's bank account, Zermeno said the money was kept in "various" accounts, and he could not provide that number.
He could not provide an itemized account of the money.
The development district is audited, along with the overall city budget, by Roloff, Hnatek & Co., of Victoria, Zermeno said. But no itemized explanation of the district's spending can be found in the audits.
Roloff, Hnatek & Co. refused to comment for the article, citing client privilege.
However, in a letter issued to the Goliad City Council after the 2012 annual audit, the auditors identified "significant deficiencies" and "material weaknesses," such as City Council members having outstanding loans and voting on board matters.
The Goliad City Council took no action on the audit during the meeting, other than to accept the results, when it was presented in July.
WHO IS RESPONSIBLE?
Authorized under the Texas Local Government Code, the development district has few restrictions and no state oversight.
And that is the way it should be, said Goliad City Council member Buddy Zavesky, former mayor of Goliad.
Zavesky, who was on the City Council in 2007, said having less oversight was the main reason for the switch.
"Honestly, I think there should be less state regulation in everything. When it comes down to it, you know how to run your city or your county, and there are a lot of state regulations that hamstring people," Zavesky said.
Under the local government code, the local municipality has complete control of the district.
In Goliad's case, that local government is the City Council.
However, Jay Harvey, who has been mayor since the board was started in 2008, said he does not recall reading the local government code that governs the development district or receiving training.
"I don't know who wrote the rules ..." Harvey said, "the state?"
Harvey, a part-time mayor who works another full-time job, said it is difficult for officials in small cities to operate without help from staff members.
"A lot of that stuff falls on the staff and the city administration. The city administrator runs the day-to-day workings of the city. It is one of those deals where you depend on your administrator, your staff and your city attorney to keep you in the right parameters of the program," Harvey said.
City Administrator Zermeno, however, said the duty of holding the loans accountable falls on the Municipal Development District board, which initially approves fund expenditures, and the City Council, which has final approval on all transactions. He said staff is responsible for carrying out board decisions.
The development district board members are all unpaid volunteers who meet once a month.
From retired school teachers to construction workers, the board members received little to no training on economic development.
The city staff, therefore, has the responsibility of vetting applications for funding and keeping up with the money, said Hernan Jaso, Municipal Development District president from February 2012 through May.
For example, a $32,000 low-interest and partially forgivable loan was approved in March for a welding company to come to Goliad. Even though the $32,000 was given to the company in March, it has yet to build a business.
Zermeno asked for the city's money back in June but was denied. The city has not entered into litigation.
When asked how the development board approved a loan application before making sure the business owners had enough funding to open, Jaso replied:
"You take for granted that it had been completed. So when we got the application for ANS Welding - boom. It is a final thing."
Many of the city's loan contracts could be up for legal dispute, according to contract litigation attorney Jim Cole, of Victoria. Many of the contracts are either unsigned by one or both parties, the terms are not specific, or the contract is riddled with basic flaws, such as listing a maturity date before the loan was taken out.
When asked why the loans were not signed, Zermeno shrugged, admitting that they probably should have been.
He said he did not know why they were not signed.
Terry Baiamonte, city attorney for Goliad who wrote the contracts, said she was not in charge of making sure the documents were signed.
She did say, however, that loan documents should be signed to prevent argument of the conditions of the loan.
The state comptroller's office, which requires reports for the hundreds of other economic development corporations across the state, does not require any reporting from Municipal Development Districts.
In fact, the comptroller's office does not have a right to interfere with or investigate Municipal Development Districts, said R.J. DeSilva, spokesman for the comptroller's office, in an email.
IS THE CITY ACTING ETHICALLY?
In 2012, a retired school teacher and Goliad native decided to volunteer for the Goliad Municipal Development District.
Liz Holsey did not receive any training when she was appointed to the board. But she quickly discovered basic blunders that could be costing the city hundreds of thousands of dollars.
Looking at loan payments, for example, Holsey found two loans were in serious default - Garcia's loan for the laundromat and two loans taken out in 2008 and 2009 by Vicki Rubio to open a video store.
Both Garcia and Rubio were council members when Holsey was appointed to the board. Garcia and Rubio were elected in May 2011.
"I know I'm not the best bookkeeper in the world, but when you start looking, and you see that they haven't paid, you don't have to be a genius - you just start counting," said Holsey, who ran for City Council in May because she felt the board was almost powerless to correct mistakes.
The board voted to call the loans into default in September 2012 - more than a year after they had defaulted.
City staff members did not send out letters, however, until June 4, eight months later, because they did not know how much money was owed on each loan, Zermeno said. The Advocate began investigating the district in April.
Garcia, who is still a Goliad City Council member, refused to comment.
Rubio and Garcia both voted in new municipal development directors - of whom the City Council can vote to remove from the board without cause, according to the local government code.
Baiamonte, the city attorney, said allowing council members with defaulted loans to vote on board membership was not a legal conflict of interest, even though board members call loans into default and renegotiate defaulted loans.
"I see what the concern is, but unless there is a very specific conflict of interest, it is up to the individuals on the council to decide if they have a conflict," Baiamonte said.
Rubio said she trusted the city attorney's decision that it was not a conflict of interest and said her defaulted loans did not affect her votes.
Ed Carter, elected to the City Council in 2010, disagreed with Baiamonte.
"Garcia paid on time every month until he was elected to City Council. He hasn't made very many payments since - so that is where I am coming from," Carter said.
Carter said he did not receive training on economic development before voting on economic development proposals, though he said city staff was always helpful.
Carter said the development district was "just a monster out there that I don't know a lot about."
Richard Tinney, who received a loan to open Panache on the Square restaurant in 2009, was a sitting City Council member when his loan was approved. He did not vote on the loan and said he did not vote on new board members or any board regulations after his loan was approved.
Tinney eventually defaulted on his loan, though he was not on the council at the time.
His $19,588 loan lists furniture, cookware and a 1999 Chevrolet Tahoe as the collateral. The business closed in 2010 because it was not making enough money, Tinney said.
WHAT ECONOMIC RESULTS ARE THERE?
A $58,000 loan for a funeral home came before the City Council in 2010.
Buddy Zavesky, a council member at the time, was expected to be employed by the funeral home. The loan passed, although Zavesky did not vote on the loan.
Roney Powell, who was on the council, said he fought the passage of the loan.
"Funeral homes aren't something that a Municipal Development District - it is not something that should be financed. It doesn't create jobs. The only job it created was Buddy's. But it passed - everything passed," he said.
The funeral home has produced three jobs since 2010, including current council member Buddy Zavesky’s.
Adrian Fulton, owner of the funeral home, currently employs two people, not including Zavesky.
Fulton did pay off the loan without incident.
Zermeno said he does not remember ever checking employment records for businesses, even those that were required to employ staff to receive grant money.
For example, Angels RV Park in Goliad, which took out a total of $66,320 in two separate loans, had $20,660 forgiven. The city lost the document with Angels' performance requirements and approved the company for the forgiveness.
Angels RV Park was one of three businesses that did not default.
Though economic development is hard to gauge, the system riddled with errors hardly seems to have achieved its goal - creating jobs and generating sales tax revenue.
Of the 13 loans or grants that were issued:
• Three of the projects are still empty lots with no business yet created.
• Six of 10 loans have defaulted, with two businesses closing.
• The city does not know how many new jobs were created because it does not track that number even though it is a requirement for many loans.
"We are not bankers. We are not repo men," Mayor Harvey said. "Does there need to be a balance? Yeah, there does, definitely. But on the other hand, you try to work with them as best you can. ... We are there for economic development."
WHAT IS GOLIAD DOING?
At a City Council meeting in July, Councilman Lionel Garcia leaned back in his chair with a slight smile as he watched the drama unfold.
The topic under scrutiny was loans in default - his and one to former City Council member Vicki Rubio.
Sitting in the audience, Rubio pleaded with council members to lower her payments and grant an extension on her defaulted loan, which they agreed to do.
Her collateral was not called in, she was not charged late fees, and the 33 missed payments were not reported to a credit agency.
Garcia's name was not brought up.
He did not withdraw himself as a City Council member during the discussions on defaulted loans. Garcia did not address the council or his constituents about why he made only two payments on his loan in two years.
In fact, the residents would not know Garcia refused to work with city staff in repaying his loan.
They would not know his loan was given in 2009 despite having a lower credit score than required by the board and despite having little collateral.
The public would not know the city has little recourse to get any money back at all if Garcia chooses not to pay.
Residents would not know these things because no one said a word about it - not Garcia, not the City Council and not staff.
Though the notice of default on his loan was issued three months ago, no action has been taken on his loan.
Harvey, the mayor, said he was pleased with how the program is running.
"You don't want to stop doing it because a few have not paid their loans. It is still a good program. It is still something that can be used for economic development," Harvey said.
Goliad County District Attorney Michael Sheppard said his office would investigate the issue, but he said he doubted criminal charges would be filed.
"In lending crimes, there is an element of intent - intent to defraud, intent to steal, that kind of thing," Sheppard said. "So just making a bad loan or not being able to repay a loan is not criminal. It would require something more than that."
IS THERE A SOLUTION?
Sylvia Carrillo, Aransas Pass city manager, sits with the Texas Local Government Code in front of her.
The page is flipped open to Local Government Code 377, which regulates Municipal Development Districts.
The pages are highlighted, tabbed and crinkled, but she can quote the code without looking at it.
"These are public projects. They are financed with public funds, so they should have public good. That is the whole idea," Carrillo said.
Carrillo said she sees a higher level of expectation in the code than Goliad does.
The development district is required to be audited, so it is reviewed separately from the city and paid for by the district.
It is a check and balance, she said.
Aransas Pass never issued loans to private businesses.
"These are all public monies, and it is absolutely scary for me to think that taxpayer money would be used to grant a loan that wouldn't be granted on the private market," Carrillo said. "There is a place for that, but I'm not sure public taxpayer money is the place."
Instead, the city opted to sell bonds and create a civic center and an aquatic recreation park - both of which bring tourists to the city, Carrillo said.
They don't need more state regulation, Carrillo said, because all the rules are in the code.
All they have to do is follow the rules, she said.
Part two of this series examines the rules of the Municipal Development Districts and whether the lack of regulation presents a statewide problem. The next installment will publish Sept. 15.