[Audit Report "Virgin Islands Public Finance Authority, Government of the Virgin Islands"]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 2003-I-0002

Title: Audit Report "Virgin Islands Public Finance Authority, Government
       of the Virgin Islands"

  
Date:  October 31, 2002

**********DISCLAIMER********** 
This file contains an ASCII representation of an OIG report. No attempt has been made to display graphic images or illustrations. Some tables may be included, but may not resemble those in the printed version. A printed copy of this report may be obtained by referring to the PDF file or by calling the Office of Inspector General, Division of Acquisition and Management Operations at (202) 219-3841. 
******************************

Honorable Governor Charles W. Turnbull	Honorable Almando "Rocky" Liburd
Chairman, Board of Directors		Senate President
Public Finance Authority		Legislature of the Virgin Islands
No. 21 Kongens Gade		Post Office Box 477	
Charlotte Amalie, Virgin Islands 00802		Charlotte Amalie, Virgin Islands 00804

Subject:  Audit Report "Virgin Islands Public Finance Authority, Government of the Virgin Islands" (No. 2003-I-0002)

Dear Governor Turnbull and Senator Liburd:

	This report presents the results of our audit of the Virgin Islands Public Finance Authority.  

	Section 5(a) of the Inspector General Act (5 U.S.C. app.3) required the Office of Inspector General to list this report in its semiannual report to the U.S. Congress.  In addition, the Office of Inspector General provides audit reports to the Congress.

	Please provide a response to this report by December 6, 2002.  The response should provide the information requested in Appendix 5 and should be addressed to our Caribbean Regional Office, Federal Building - Room 207, Charlotte Amalie, Virgin Islands 00802.

	If you have any questions concerning this report, please call me at (202) 208-5745 or Mr. Arnold E. Van Beverhoudt, Jr., Regional Audit Manager, at (340) 774_8300.

							Sincerely,

							

							
							Earl E. Devaney
							Inspector General

cc:   Director of Finance and Administration, Public Finance Authority



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EXECUTIVE SUMMARY


The Public Finance
Authority Did Not
Effectively Manage
Bond Proceeds and
Funds from Its
Operating Budget

The Virgin Islands Public Finance Authority's main responsibility is raising and managing capital for public projects.  While we found the Authority effectively raised capital through the issuance of bonds, it did not effectively manage bond proceeds or funds from its own budget.

The Authority allowed bond proceeds to go unused past the date for remaining tax-exempt, leaving the bond holders susceptible to as much as $8.8 million in tax penalties.  In addition, the Authority allowed the use of bond proceeds totaling $1.2 million for a mental health facility that was never opened.

The Authority also failed to adequately plan the construction of three schools prior to issuing contracts, causing the Authority to incur cost overruns up to $17.3 million and delaying completion of the schools by more than 600 days.

In addition, the Authority paid for expenses that were not related to functions in its jurisdiction, such as travel and cellular phone expenses for employees of the Office of the Governor and meetings and consultations concerning such general government functions as the executive branch budget and government employee collective bargaining issues.  In fact, the Authority incurred a total of $2.3 million for work items not related to its primary functions.

Additionally, the Authority had not enforced the collection of interest and credit enhancement fees totaling $571,000 related to loans to private entities, and did not pursue reimbursement of about $706,000 incurred on behalf of the Government of the Virgin Islands.

In total, the Virgin Islands Public Finance Authority did not ensure that funds totaling $29.6 million were effectively or appropriately used.

Recommendations
and Response from
the Public Finance
Authority

We made eight recommendations to the Authority's Board of Directors to:

!	Require that bond proceeds be used in accordance with the timeframes and other restrictions contained in the Internal Revenue Code.
!	Require that adequate planning be performed before soliciting bids for construction contracts, and ensure that ongoing school construction projects are completed as quickly as possible.

!	Discontinue the practice of charging the cost of non_Authority services to the Authority's operating budget.

!	Obtain supporting documents for payments totaling $367,000 made to one contractor.

!	Require that professional service contracts be awarded on the basis of competitive requests for proposals.

!	Collect $571,000 due on loans to private entities and an additional $706,000 due as reimbursement for expenses paid on behalf of the Government of the Virgin Islands.

The Governor's October 16, 2002 response to the draft report disagreed with most of the issues discussed in the report and questioned the authority of the Office of Inspector General to express opinions on matters of local policy.  However, our office is completely versed in both the legislative history of the Government of the Virgin Islands and our own audit authority.  We have been challenged in Federal court in the past, and in every case, the courts have upheld our authority.  Additionally,  because the response did not address our eight recommendations, they are considered unresolved.

We added a new recommendation calling the Legislature of the Virgin Islands to amend the legislation that created the Public Finance Authority providing for a greater level of legislative scrutiny and public disclosure of day_to_day operations.  This recommendation is also considered unresolved.  



CONTENTS


EXECUTIVE
SUMMARY

	  1

INTRODUCTION

Background 	  5
Objective and Scope 	  5
Prior Audit Coverage 	  6


RESULTS OF AUDIT	

Overview 	  7
Bond Proceeds	  7
School Construction Contracts	10
Professional Service Contracts	12
Loans and Loan Guarantees	22


RECOMMENDATIONS

	26

APPENDICES

1.	Bond Projects Reviewed	36
2.	Monetary Impact 	37
3.	Prior Audit Report	38
4.	Response to Draft Report	39
5.	Status of Recommendations	60



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INTRODUCTION

	
BACKGROUND	

The Virgin Islands Public Finance Authority (the Authority) is a public corporation established by Act No. 5365, the Government Capital Improvement Act of 1988 (29 V.I.C. Chapter 15).

The Authority was created to aid the Government of the Virgin Islands in performing its fiscal duties and to raise and manage capital for public projects.  Legislation vests the Authority with the power to borrow money and issue bonds, lend bond proceeds or other money to Governmental agencies and private entities, and invest its own funds as well as the Government's.

The Authority is governed by a 5_member Board of Directors. The Governor of the Virgin Islands serves as Chairman; the Commissioner of Finance serves as the Executive Director; the Director of the Office of Management and Budget serves as the Secretary; and two private sector members are appointed by the Governor, with the advice and consent of the Legislature.  In addition, the Board of Directors appoints a Director of Finance and Administration, who is responsible for day_to_day administration and operation.  Even though the Authority is part of the Virgin Islands government, it is still considered a separate entity and should not be sharing funds with other Virgin Islands government offices.  Generally accepted government accounting standards require that financial integrity be preserved.  

The Authority's annual budget is derived from a combination of interest earned on bonds and Matching Fund (rum tax) revenues.  Its annual budget for fiscal year 2000 was $1.9 million, and the annual budget for fiscal year 2001 was $2 million.


OBJECTIVE AND
SCOPE
The Office of Inspector General initiated this audit as part of the fiscal year 2001 Audit Work Plan.

The objective of the audit was to determine whether the Authority effectively (1) raised capital for essential public projects, (2) ensured that bond proceeds were used for intended purposes, (3) issued contracts and payments for bond issuance costs and expenses, and (4) issued and managed loans and loan guarantees.

To accomplish the audit objective, we interviewed Authority officials and reviewed applicable laws, rules, and regulations; 
files related to professional service and construction contracts; bond issuance statements; loan and loan guarantee documents; interest earning statements; and minutes of Board meetings.  The scope of audit included transactions that occurred during fiscal years 1997 to 2002 and other periods as deemed appropriate.

Our audit was conducted in accordance with the "Government Auditing Standards," issued by the Comptroller General of the United States.  Accordingly, we included such test of records and other auditing procedures that were considered necessary under the circumstances.

As part of our audit, we evaluated the Authority's internal controls and we identified weaknesses in the use of bond proceeds, the issuance of construction and professional service contracts, and the collection of amounts owed to the Authority.  These weaknesses are discussed in the Results of Audit section.  The recommendations, if implemented, should improve these areas.



PRIOR AUDIT
COVERAGE

The Office of Inspector General has not issued any prior reports on the Virgin Islands Public Finance Authority.  However, in 1994 we issued a report on the bonded debt of the Government of the Virgin Islands and its autonomous agencies (see Appendix 3).



RESULTS OF AUDIT

	
OVERVIEW

While the Public Finance Authority effectively raised capital on behalf of the Government of the Virgin Islands (VI), it did not:

!	Use bond proceeds in a timely and efficient manner. 
!	Adequately plan for the construction of three public schools prior to the issuance of contracts.

!	Ensure that costs related to professional service contracts were within the Authority's primary areas of responsibility.

!	Enforce the collection of outstanding loans.


BOND PROCEEDS

In April 1998, the Legislature of the Virgin Islands passed Act No. 6226 to reprogram unused bond proceeds totaling $27.6 million for various capital improvement projects.

The Internal Revenue Code of 1986 (IRC) requires that any proceeds earned on bonds must be reprogrammed within a 3_year period in order to retain their tax_exempt status.  Failure to comply could result in the assessment of income taxes on interest earned retroactive to the date the bonds were issued.

Bond Proceeds of
$27.6 Million Remained
Unused for 8 1/2 Years

Despite these requirements, the Authority allowed bond proceeds totaling $27.6 million to remain unused for 8 1/2 years before being reprogrammed for capital improvement projects, which left the bonds susceptible to as much as $8.8 million in tax penalties.

The unused proceeds came from the following bond issues:

!	$7.7 million from the $29.2_million Highway Revenue Bonds (Transportation Trust Fund) Series 1989 remained unused for 8 1/2 years.
!	$3.5 million from the $28.8_million Special Tax Bonds (General Obligation Matching Fund/Hugo Insurance Claims Fund Program) Series 1991 remained unused for 7 years.

!	$16.4 million from the $215.1_million Revenue Refunding Bonds (Virgin Islands General Obligation/Matching Fund Loan Notes) Series 1992A remained unused for 6 years. 

$7.3 Million of
Reprogrammed Bond
Proceeds Remained Unused

Although  the Legislature eventually reprogrammed the $27.6 million, as of September 2001, $7.3 million (of the $27.6 million) remained unused.  Based on our review of 16 projects (see Appendix 1), we determined that the agencies responsible for the projects had not made the effort to use all of the funds or, in some cases, did not intend to use the funds.

The Authority's Director of Finance and Administration understood that significant tax penalties could be assessed against interest earned on bond proceeds.  He stated in his December 27, 2001 annual report to the Governor that "the Authority is in gross violation of the terms of the [Bond] Indentures and the IRS regulations stipulating that funds borrowed as long ago as 1989 have still not been used for the purposes for which they were borrowed."

Reprogrammed Bond
Proceeds Not
Used Effectively

While the Legislature did reprogram the $27.6 million of bond proceeds, the agencies responsible for the projects did not use all of the money effectively.  The Legislature reprogrammed $1.1 million for the Department of Health to make final payment on the purchase of the former Michelle Motel to be used as a long_term mental health facility on St. Thomas.

The Legislature also reprogrammed an additional $1.2 million for the Department of Health to repair and renovate the Michelle Motel.  Of this amount, $100,000 was used for architectural plans for the proposed renovation.

However, after the building was purchased and money was spent for architectural plans, the Commissioner of Health notified the Authority that the Michelle Motel building was unsuitable as a mental health facility.  The Commissioner requested that the remaining balance of $1.1 million be reprogrammed to construct a new mental health care facility adjacent to the existing Eldra Schulterbrandt Mental Health Facility in Anna's Retreat, St. Thomas.  As a result, in March 2000, the remaining $1.1 million was again reprogrammed to construct a new facility.

Therefore, both the $1.1 million (final payment on the purchase the Michelle Motel) and the $100,000 (architectural drawings to renovate the motel) were wasted.

Bond Proceeds Not Used In
Accordance with Internal
Revenue Code


In addition to finding that reprogrammed funds were not used effectively, we also found reprogrammed funds were not used in accordance with the IRC.  The Legislature reprogrammed approximately $2 million for capital improvements at the Legislature's facilities on St. Thomas, St. Croix, and St. John.  Of that amount, $750,000 was spent inappropriately. 

The Director of Finance and Administration in three instances voiced his concerns that improper payments were being made from the bond funds.  However, he reluctantly approved legislative expenditures totaling over $608,000, but noted that "only about 7.5% of these moneys are utilized for what might properly be deemed capital expenditures."

The IRC, as amended, (Subsection 263, Paragraph 13,709.01) states that amounts paid or incurred "to restore, add to the value of, or substantially prolong the useful life of property" are considered to be capital expenditures.  However, amounts paid or incurred "for incidental repairs and maintenance of property" are not capital expenditures.

Regardless, the Authority approved reimbursement for items such as the purchase of voting machines ($52,000); speakers ($41,000); and the painting of a mural ($19,000).

Summary

Despite the attempts by the Director of Finance and Administration to alert responsible Government officials of the instances of non_compliance with tax-related constraints on the use of bond proceeds, his warnings were essentially ignored.  We believe that in order for the Authority to preserve the tax_exempt status of the bonds, it should develop and implement policies and procedures that require that bond proceeds be used within the time frames required by the IRC, and only for approved purposes.  Such procedures would have to be strictly enforced by the Governor, in his capacity as Chairman of the Authority's Board of Directors, in order to be effective.



SCHOOL
CONSTRUCTION
CONTRACTS

The Authority's lack of proper planning for the construction of three schools prior to issuing contracts caused cost overruns and completion delays.

In 1998, bonds (Series 1998E) totaling $541.8 million were issued by the Authority for capital improvement projects and other public purposes in the Virgin Islands.  Of the $541.8 million, $40.2 million was earmarked for school construction on St. Thomas as follows: 

!	$9.2 million for Peace Corps Elementary School. 
!	$10.5 million for Herbert E. Lockhart Elementary School.

!	$20.5 million for Bertha C. Boschulte Middle School.  

However, because of inadequate planning prior to the issuance of construction contracts, cost overruns are estimated to be as much as $17.3 million, and completion of one of the schools has been delayed by more than 600 days.


Three St. Thomas Schools
Had Cost Overruns
Totaling $17.3 Million

We reviewed the three original and two supplemental contracts for school construction and found:

!	The Peace Corps School had cost overruns totaling $3.1 million, with the potential for additional overruns of more than $408,000 for work performed under two pending change orders.

!	The Lockhart School had cost overruns totaling $1.9 million, with the potential for additional overruns of more than $535,000 for closeout costs that are pending settlement.

!	According to Authority estimates, the Boschulte School could have cost overruns of about $8.7 million by the time the school is completed.  

The cost overruns listed above, in addition to funds for school designs and program management services, resulted in cost overruns for the three school projects totaling about $17.3 million.  

Several factors contributed to the cost overruns, including:

!	Inadequate planning and budgeting. 

!	Negotiation of contracts without complete architectural drawings and specifications.

!	Lack of guaranteed maximum price provisions.  

The contracts for all three schools were negotiated at prices lower than the Authority's original construction estimates.  The Authority did not include removal of existing modular classrooms, paving of access roads and parking lots, or the installation of air conditioning at the schools.  The original contract for the Boschulte School did not even include the construction of a gymnasium or additional classrooms that were added later. 

Both bidding and construction started prior to the completion of the official architectural plans, leaving contractors unable to anticipate all required construction work.  Therefore, they submitted proposals in amounts well below actual costs.  Subsequently, supplemental agreements were negotiated and change orders were approved to include all the missing work, which resulted in substantial cost overruns.

We contacted the Assistant Commissioner of Property and Procurement regarding the awarding of contracts that lacked guaranteed maximum price provisions and complete architectural drawings and specifications.  

She explained that Property and Procurement was involved in the competitive selection of contractors and that the actual negotiation and execution of the contracts was handled by the Authority.  However, she stated that she had never been involved in construction contracts that were executed without complete drawings and specifications.

Because of the cost overruns, the Authority had to allocate additional funds to complete the schools.  For example:

!	In February 2000, $2.2 million from interest earned on bond proceeds was approved for additional work at the three schools to remove the modular classrooms and prepare roads and parking lots.  At the same time, additional funds were provided to cover the cost overruns at the Peace Corps School, not to exceed $2.5 million, and at the Lockhart School, not to exceed $1.5 million. 

!	In January 2001, $7.7 million from interest earned on bond proceeds was approved for Boschulte School to provide partial funding for the supplemental contract and management oversight.

Completion of the Schools
Was Delayed by More
Than 600 Days

Due to the inadequacies of the original contracts, completion of the Peace Corps and Lockhart Schools were delayed 376 and 331 calendar days, respectively.  Authority officials expected the Boschulte School to be completed by July 2002, or 607 days after the original target date.  However, as of August 2002, the school was not yet complete.  In a September 2000 letter to the Governor, the Director of Finance and Administration expressed his concern with the delays, especially at the Boschulte School.

Summary

We believe that the Authority should develop and implement policies and procedures that require adequate planning be performed prior to soliciting bids.  This should include ensuring that architectural plans and specifications are completed, all required tasks are defined and included in the proposed scope of work, and realistic cost estimates are developed.



PROFESSIONAL
SERVICE CONTRACTS


We also assessed professional service contracts that provided legal or financial management services to the Authority.

We found that contractors were paid from the Authority's operating budget for work items not related to the Authority's primary functions.  We also found that the Authority did not follow the past practice of competitively awarding professional service contracts and, in at least six instances, noncompetitively awarded contracts that had a total value of about $8.2 million.  Two of the six contractors were selected on the basis of "pro ono" work they had previously performed for Government officials.
Contractors Were Paid
About $2.3 Million for 
Work Items Not Related
to the Primary Functions 
of the Authority

The Authority paid four professional service contractors at least $2.3 million for work items that were not related to its primary functions (which pertain to raising and managing capital on behalf of the Government of the Virgin Islands).  Details on these unrelated contract costs follow:

Financial Management Services Contract

The Authority executed a 4_year contract with First Union Capital Markets in January 1999 for financial management services.  The Authority paid the contractor a total of $1.7 million through October 2001.

In addition, we estimated that $450,000 of the $1.7 million was paid for work unrelated to the Authority's primary areas of responsibility.  For example:

!	Conversations regarding Washington initiatives including, but not limited to, Organic Act revisions, cover over tax rate adjustments, obtaining Federal grant monies, and forgiveness of FEMA loans.

!	Discussion of Government of the Virgin Islands 2001 and 2002 budget preparations.
!	Preparing analysis of the cost of implementing step increases for union employees.  

!	Analysis and discussion of salary proposals for teachers' union arbitration.

!	Preparing cost benefit analyses of three alternative retirement incentive plans.

!	Collection of delinquent real property taxes.

!	Researching the possibility of privatizing the Virgin Islands Transportation System (VITRAN) and outsourcing the administration of the workman's compensation program.

Additionally, we found that the Authority was charged for out_of_pocket expenses of about $7,900 incurred by First Union Capital Markets on behalf of Office of the Governor employees, who:

!	traveled to New York for rating agency presentations and incurred costs of $1,400 for lodging and car services.

!	incurred cellular phone charges totaling $6,000 over a 6_month period.

!	incurred overnight expenses in New York for lodging and car services of $500.

Bond Counsel Services Contract

The Authority executed a 3_year contract with Harris, Beach, and Wilcox in January 1999 for bond counsel services.  The Authority paid the contractor a total of $950,000 through December 2001.

Although most of the services provided by the company were for Authority_related issues, there were instances where services, totaling $42,000, were for matters that were not related to the Authority's primary areas of responsibility.  For example, payments were made for services related to:

!	Conferences with a private citizen (who was not an employee of the Authority or the Government) regarding the Virgin Island Hotel and various other issues.
!	Review of legislation related to a local communications firm.

!	Conferences regarding the Government payroll and deficits.

!	Conferences regarding hospital privatization.

!	Meetings regarding a mortgage foreclosure.

Additionally we found that the Authority was charged for out_of_pocket expenses totaling $4,787 that were related to private individuals who were not employees of the Authority, the Government, or the company, as follows:

!	The Authority paid expenses totaling $1,738 on behalf of a private individual who traveled to Norway.

!	The Authority was billed for expenses totaling $3,049 for business meals, entertainment, and air fare for another private individual.  In this instance, the Authority's Director of Finance and Administration questioned the invoice and payment was later denied by the Governor's Fiscal Advisor, which supports our position that these types of expenditures should not be paid from the Authority's operating account.

Legal and Governmental Relations Services Contract

In January 1999, the Government and the Authority entered into a contract with the law firm Winston and Strawn for legal and government relations services.  The Authority paid the contractor a total of $2.3 million through August 2001, with $1.8 million of that amount being paid from the Authority's operating budget.

The law firm submitted its invoices to the Office of the Governor, which then forwarded them to the Authority for payment.  The invoices were itemized by attorney hours spent in various categories, such as general (including budget and legislative issues), economic, FEMA, trade, taxes, solid waste, the environment, and rum taxes.  

Based on our review of the work descriptions under each of these categories, we determined that, with the exception of services provided on rum tax issues, the services provided by the law firm were mostly related to the Office of the Governor rather than to the Authority.

We estimated that only $70,000 of the $1.8 million paid from the Authority's operating budget was related to the Authority.  The remaining $1.73 million related to the functions of the Office of the Governor and, in our opinion, should have been paid from that Office's budget. For example, payments were made for services related to:

!	Meetings with various cabinet members regarding executive branch business and Federal Emergency Management Agency related issues.
!	Meetings with the Virgin Islands Delegate regarding outstanding debts to the Bureau of Prisons and the Government of the Virgin Islands/Department of the Interior Memorandum of Understanding.

!	Review of the Office of Management and Budget's statistical analysis of the Federal budget.

Concerning the appropriateness of payments to the law firm from the Authority's budget, in the Authority's annual report dated December 27, 2001, the Director of Finance and Administration stated that the law firm's charges "will undermine the solvency of the [the Authority's] resources" and that in previous administrations, services provided by Washington lobbying entities were paid for by the Office of the Governor, "where they rightfully belong."

Bond Counsel Services Contract

In May 2000, the Authority entered into a contract with Buchanan Ingersoll Professional Corporation (Buchanan Ingersoll) for bond counsel services.  The Authority paid the contractor a total of $250,000 through November 2001.  

Our review of invoices submitted by Buchanan Ingersoll disclosed that charges, totaling $86,000, were for work that was unrelated to the Authority.  For example, payments were made for work related to:

!	Telephone conferences with Office of the Governor employees regarding Government employee stipends, teachers' salaries, and budget issues.

!	Conferences with Office of the Governor employees regarding a park proposal.

!	Meetings with the Governor and Office of the Governor employees regarding 2001 budget, agenda, and strategy meetings.

!	Meetings regarding HOVENSA Refinery memorandum of understanding.

!	Meetings regarding Government bankruptcy issues.

!	Review of Attorney General's office problems.

!	Meetings with Office of the Governor employees regarding proposed St. Croix investors.

The Director of Finance and Administration raised questions regarding the relevance of these charges to the Authority's functions.  

!	In an October 31, 2000 letter transmitting some of the bond counsel's invoices to the Governor's Office, the Director stated that the Authority "does not have a contractual relationship with Buchanan Ingersoll.  I am therefore forwarding these items to you for your disposition."  Nonetheless, the Authority paid all of the invoices, and the Director was instructed to take up his concerns with the Governor's legal counsel.  

!	In a February 6, 2001 memorandum responding to an inquiry from the Director, the bond counsel stated that "all work was done at the request of [the Governor's Special Assistant] or his subordinates."  

!	In an October 3, 2001 memorandum, the Director forwarded to the Governor's Special Assistant an invoice from Buchanan Ingersoll in the amount of $25,597 for legal services through August 31, 2001 and stated, "A review of the charges revealed that the vast majority were incurred with you.  It would therefore be appreciated if you would review the statement and, by your signature, attest to its correctness."  The Governor's Special Assistant subsequently approved the invoices for payment.

This correspondence supports our position that the Authority paid for unrelated charges.

In addition to the Authority paying for services under the Office of the Governor's jurisdiction, we also found the Authority paying out_of_pocket expenses - including travel, meals, and other expenses not related to its operations - for Office of the Governor employees and a private citizen totaling about $10,000.  Some examples include:

!	Airfare of $2,460 for an Office of the Governor employee to attend a New York holiday party and meetings regarding "various new transactions."

!	Airfare of $442 for another Office of the Governor employee to travel to a New York holiday party.

!	Airfare of $2,028 for an Office of the Governor employee to travel to Washington, D.C.

!	Airfare of $1,715 for a private citizen to attend meetings held in New York regarding the status of the Virgin Islands.

!	Local transportation of $107 for a private citizen.

Summary

These expenses incurred by the Authority were for purposes not related to its primary functions and should have been paid from the budget of the Office of the Governor.

Documentation Was Not
Available to Support
Work Performed by a
Contractor Who Was
Paid $367,000

The Authority also paid for expenses that were not adequately documented.

In February 1997, the Authority entered into a contract with Johnston and Associates for consultation services.  Documentation was not available to support $367,000 paid to the contractor.  In accordance with the contract, the contractor, who was a former United States Senator, was to:

!	Solicit international investors, particularly from China and other Asian countries, to the Virgin Islands.
!	Provide advice and consultation for the development of transshipment ports on the island of St. Croix.

!	Assist with the development of Public Finance Authority economic strategies beneficial to the Virgin Islands.

Invoices submitted for payment did not detail what work was performed, but only stated the time periods for which services were being billed.  

Concerned about the manner in which the invoices were being submitted, the Director of Finance and Administration wrote to the then_Governor's legal counsel on May 21, 1997, stating that the Authority "cannot attest to the professional services rendered" by the contractor.  Therefore, authorizations for payment under this contract were made by the then_Governor.

Further, the contract specifically stated that "all documents, books, records, instructional materials, programs, printouts and memoranda of every description derived there from and pertaining to this contract shall become the property of the PFA [Public Finance Authority] and shall be turned over to it at the termination of this contract."  However, we were unable to locate any reports or documentation of any work performed by the contractor.

In this regard, the February 1, 1999 meeting of the Authority's Board of Directors included a discussion by the Governor, the Governor's Fiscal Advisor, and the Director of Finance and Administration concerning the lack of documentation evidencing the work performed by the contractor.  The Director of Finance and Administration stated that all decisions concerning the contract were handled by the then_Governor and concluded that "We [the Authority] don't have anything in our files that would show anything of any value being done.  That doesn't mean nothing was done.  I'm just saying that we don't have anything."

Because documentation was not available for any work produced by the contractor, we consider the entire $367,000 paid under this contract to be unsupported costs.

Professional Service
Contracts of at Least
$8.2 Million Were Awarded
Noncompetitively

Although the Authority was not required to follow the competitive procurement procedures outlined in the Virgin Islands Code (Title 31 V.I.C. Chapter 23) for executive branch agencies of the Government, through 1998 it was standard practice for the Authority to award contracts competitively.  Despite this, the professional service contracts identified above, and another contract (for bond underwriters),  collectively worth almost $8.2 million were awarded noncompetitively.

Financial Advisers and Bond Counsel

Contracts for financial advisers and bond counsel were noncompetitively awarded and executed on January 5 and January 4, 1999, respectively.  The financial advisers were paid a total of $1.7 million through October 2001, and the bond counsel was paid a total of $950,000 through December 2001.  At a meeting of the Authority's Board of Directors held on February 1, 1999 (almost one month after the contracts had already been executed), the selection of the two contractors was discussed and approved retroactively. According to the minutes of the Board of Directors meeting, the contractors were selected primarily because they had performed "pro bono" work for the Governor during the time of his transition into office.

Resolutions to approve contracts with First Union Capital Markets as financial advisers and Harris, Beach and Wilcox as bond counsel were read into the record and, after some additional discussion, were passed unanimously by the members of the Board of Directors.

Bond Underwriters

Other professional service contractors which received a non_competitive awards were Pain Webber, Inc.; Morgan Stanley and Co.; and Roosevelt and Cross, Inc.   On June 4, 1999, the Authority's Director of Finance and Administration wrote to the Special Assistant to the Governor expressing concern over the selection of these contractors as underwriters for the 1999 Series A Revenue Bonds.  The Director's memorandum clearly shows that the Authority's past practice had been to use competitive procurement procedures to the maximum extent possible, but that current practice was to use noncompetitive selection of contractors.  In the memorandum, the Director stated:

     I have received [a First Union representative's] memo of June 4th in which she advises that you have authorized sidestepping the RFP [Request for Proposal] process in the selection of the Senior Managing Underwriters for the anticipated working capital financing.
                                 Whereas the Authority is not mandated to utilize an RFP in procuring professional and technical services, it has nevertheless been deemed a highly desirable procedure and more often than not has been utilized by the Authority.  

                                 I note that we seem to be embarking on a trajectory contrary to this criteria.  We did not use the RFP procedure in soliciting and selecting bond counsel; we did not use the RFP process in soliciting and selecting financial advisors; and now we are not using the RFP process in soliciting and selecting the underwriters and have delegated said selection to the sole discretion of the financial advisors.  

                                 Despite the arguments set forth by [the First Union representative], I do not believe this is a healthy course to follow and trust that it shall not characterize our future procurement efforts.

Despite these concerns and the large amounts of money associated with the underwriting of each bond issue, the Authority still discontinued its prior practice of competitively selecting underwriters.  Therefore, there was no assurance that the best underwriter rates were selected and paid by the Authority for the $2.6 million in discounts awarded for the bonds issued in 1999.

Consultation Services

A contract for specific consultation services was awarded noncompetitively to Johnston and Associates and executed on February 10, 1997.  The contractor was paid a total of about $367,000 through January 1999.

Legal Counsel

A contract for legal and governmental relations services was awarded noncompetitively to the law firm Winston and Strawn and executed on January 15, 1999.  The law firm was paid a total of about $2.3 million through August 2001.

Bond Counsel

A contract for bond counsel services was awarded noncompetitively to Buchanan Ingersoll Professional Corporation and executed on May 2, 2000.  The firm was paid a total of about $250,000 through November 2001.

Summary

For the six contracts discussed above, we found no evidence in the Authority's files to suggest that any other firms had even been considered.  Although the Authority was not required to use competitive procurement procedures, that process was the usual practice in prior administrations and was abandoned.

We believe that prudent business practice and the Authority's fiduciary responsibility to the people of the Virgin Islands dictate that reasonable efforts be made to obtain the most beneficial prices, terms, and conditions for contractual services.



LOANS AND LOAN
GUARANTEES

The final area in which we found the Authority failing to operate effectively was in its enforcement and collection of outstanding loans.  

The Virgin Islands Code (29 V.I.C. ï¿½ 919(M)) gives the Authority the power to lend bond proceeds to private enterprises in the Virgin Islands.  The Authority had four outstanding loans at the time of our review.  We found that the Authority did not enforce the reimbursement of two loans issued to private entities.  As a result, the Authority did not collect interest payments and credit enhancement fees totaling $571,000 and was not reimbursed for $706,000 incurred on behalf of the Government.

The Authority Did Not 
Collect Interest Payments
and Credit Enhancement
Fees Totaling $571,000

On August 28, 2000, a loan guarantee agreement was executed between the Authority and three private companies (Long Bay Partners; Bay Harbor Holdings, Inc.; and Land Holdings Ltd.) to redevelop the former Yacht Haven Hotel and Marina.  According to the terms of the agreement, in order to commence development activities, the developer (PRM Realty Group) entered into a $13 million financing arrangement with a lending institution (MMBC Debt Holdings) in which the Authority agreed to provide a limited guarantee cash deposit of $5 million.  

As additional consideration to the Authority, the companies entered into an agreement with the lender, which provided the Authority a guaranteed rate of return on its deposit of 10 percent per annum, less any interest paid to the Authority by the lending institution from the money market account in which the Authority's $5 million cash deposit was held.  The difference was to be paid quarterly by the developer, beginning three months from the date of the loan agreement.  The loan agreement also required that the companies pay the Authority an annual credit enhancement fee of 1.5 percent per annum beginning on the date of the loan agreement until the Authority was repaid the total deposit. 

According to the terms of the loan agreement, each of the companies' quarterly interest payments to the Authority should have amounted to $125,000.  But as of November 30, 2001, five quarterly payments, totaling $625,000, were due.  Because, on March 1, 2002, the Authority received a payment of $129,000 representing 6 months of interest earned on the money market account into which the collateral was deposited, the net amount of interest owed by the companies was $496,000.  However, the Authority made no efforts to collect this amount.

In addition, it appears that the Authority was due additional interest amounts (above the $129,00 actually received) from the money market account.  However, we were unable to determine the money market account's rate of return in order to estimate the amount of interest due.  Based on a December 5, 2001 memorandum for the record from the Director of Finance and Administration, it appears that the Director was also unsuccessful in obtaining information on the money market account.  In the memorandum, the Director stated that the steps the Authority needed to take in order to secure payment were:

!	Obtain documents in evidence of the investment in the money market account.

!	Determine the amount of monthly or quarterly earnings on the money market account.

!	Determine the amount that was due to the Authority for the 16 months that had transpired since the date of investment in the money market account.

!	Secure payment from the companies of the differential due to the Authority (interest due on collateral minus interest earned on the money market account).

As a result of our inquiries, on December 6, 2001 the Authority's legal counsel wrote to the lending institution requesting immediate payment of interest earned on the money market account.  On December 13, 2001, the Director of Finance and Administration also wrote a letter to the companies informing them of the net amount of $496,000 that was due from them and requesting payment.

Summary

Payment of $75,000 representing the credit enhancement fee (1.5 percent) due for 2000 was paid to the Authority.  However, the Authority had not received the $75,000 credit enhancement fee due for 2001.  Therefore, the total amount due to the Authority, as of December 31, 2001, was $571,000 ($496,000 in quarterly interest payments and $75,000 credit enhancement fees).

Costs of $706,000 Incurred
on Behalf of the Government
Were Not Reimbursed

The Authority also incurred expenses on behalf of the Government totaling $706,000 that had yet to be reimbursed.

On September 28, 1989, the Public Finance Authority issued $76.9 million in revenue bonds (Virgin Islands General Obligation/Matching Fund Loan Note Series 1989B).  According to the bond offering statement, a portion of the proceeds from the bonds was to be deposited into a Revolving Loan Fund to be used to make advances to the Government and loans to agencies, instrumentalities, commissions, authorities, and political subdivisions of the Virgin Islands for the purpose of financing projects approved by the Legislature or otherwise authorized by law.

On February 3, 1998, a professional service contract was executed between the Authority, on behalf of the Office of the Governor, and the accounting firm Price Waterhouse to render services pertaining to the feasibility and advisability of a sale or transfer of an equity interest in the Water and Power Authority (WAPA).

Through July 1998, the Authority had paid the accounting firm $515,000 from the Revolving Loan Fund  and a companion Revolving Loan Recycled Payment Fund.  With these payments, the Revolving Loan Fund was completely depleted and the Revolving Loan Recycled Fund was left with a balance of only $2,500.  Therefore, funds were no longer available for the Authority to make additional loans or advances to other entities.

After the Revolving Loan Fund was depleted, the Board of Directors, in December 1998, approved the payment of an additional $191,000 for financial advisory services by the accounting firm.  The payment was made from the Authority's operating budget.  The Board of Directors approved two more payments to the contractor, in December 1999 in the amount of $176,000 and in March 2000 in the amount of $177,000.  Both of these payments were also made from the Authority's operating budget.  Therefore, in total, the Authority had paid $1,059,000 for the feasibility study on the sale of WAPA.

In an August 24, 2000 memorandum to the Governor, the Director of Finance and Administration stated that, "both payments [$176,000 in December 1999 and $177,000 in April 2000] were made out of the Authority's operating budget for the Fiscal Year 2000 with the understanding that the Authority would be reimbursed for all sums that had been advanced for this purpose. . . . [I]n light of the above, the Authority is hereby requesting reimbursement from the Government of the Virgin Islands for the sum of $353,000."

At a meeting held on August 20, 2001, the Authority's Board of Directors agreed to accept payment of $275,000 and a credit for $85,000 from the Government of the Virgin Islands as full payment of the $353,000.  However, the remaining $191,000 was never reimbursed to the Authority's operating budget.  

Summary

Added to the $515,000 expended from the Revolving Loan Funds, the Authority should seek reimbursement from the Government for a total of $706,000.



RECOMMENDATIONS


TO THE VIRGIN
ISLANDS PUBLIC
FINANCE AUTHORITY

We recommend that the Board of Directors of the Virgin Islands Public Finance Authority:

1.	Develop and implement policies and procedures to require that bond proceeds be used within the timeframes required by the Internal Revenue Code and only for approved purposes in order to preserve the tax-exempt status of the bonds.  This should include the issuance of a directive by the Governor to require the timely and appropriate use of bond proceeds by the receiving agencies.

2.	Develop and implement policies and procedures to require that adequate planning be performed prior to soliciting bids for construction contracts.  This should include ensuring that architectural plans and specifications are completed, all required tasks are defined and included in the proposed scope of construction work, and realistic cost estimates are developed prior to issuance of solicitations for bids.

3.	Take immediate action to expedite the completion of the Bertha C. Boschulte Middle School.  This should include replacing the current contractor if unexplained or unreasonable delays continue to occur.

4.	Discontinue the practice of charging against the Authority's operating budget any contract costs for services and out_of_pocket expenses that are not related to the Authority's primary areas of responsibility as defined in the Virgin Islands Code (29 V.I.C. Chapter 15).  Instead, the Authority should request that any such unrelated contract costs be funded through the operating budget of the Office of the Governor.  If necessary, this should include requesting that the Legislature appropriate funds to the Office of the Governor to cover such non_Authority contract costs.

5.	Officially contact the former United States Senator who was contracted by the Authority in February 1997 to again attempt to obtain any available documentation to support the services performed under the contract and for which the former Senator was paid $367,000.  If no supporting documentation can be obtained, consider requesting the Attorney General's Office to initiate legal action for recovery of the $367,000.

6.	Develop and implement policies and procedures to require that professional service contracts be awarded on the basis of competitive requests for proposals unless valid reasons for noncompetitive procurement can be documented.

7.	Develop and implement policies and procedures to require that collection action be taken on loans and other amounts owed to the Authority from projects financed with Authority funds.  This should include taking action to collect the outstanding interest payments and fees of $571,000 related to redevelopment of a former hotel and marina.

8.	Request funding from the Government of the Virgin Islands to reimburse the Revolving Loan Fund for the $515,000 and the Authority's operating budget for the $191,000 expended on behalf of the Government for a feasibility study on the sale of the Water and Power Authority.



TO THE LEGISLATURE
OF THE VIRGIN
ISLANDS

We also recommend that the Legislature of the Virgin Islands:

9.	Consider amending the legislation that created the Public Finance Authority to provide for a greater level of legislative scrutiny and public disclosure of day_to_day operations than currently exists.

PUBLIC FINANCE
AUTHORITY'S
RESPONSE

The October 16, 2002 response (Appendix 4) from the Governor of the Virgin Islands, in his capacity as Chairman of the Authority's Board of Directors, disagreed with most of the issues discussed in the report and questioned the authority of the Office of Inspector General to express opinions on matters of local policy.  Because the response did not address the report's recommendations, Recommendations 1 through 8 are considered unresolved (see Appendix 5).

Recommendation 9, addressed to the Legislature of the Virgin Islands, is a new recommendation and is also considered unresolved (see Appendix 5).

OFFICE OF INSPECTOR GENERAL REPLY


A summary of specific comments made in the Governor's response and our replies are contained in the following paragraphs.

Office of Inspector General's Audit Authority

	Governor's Response.  The response states that the Office of Inspector General (OIG) overstepped its audit authority by expressing opinions related to matters of local policy.  The response then provides lengthy discussions of the legislative history of the Government of the Virgin Islands and the audit authority of the OIG and its predecessor organization (the Office of U.S. Government Comptroller).  The response concludes that "it is not within the province of the OIG to second-guess local government policies unless the audit reveals 'fraud and other serious problems, abuses, and deficiencies,'" implying that through our audits we attempt to set policy or interfere with the Government's policymaking authority.

	Office of Inspector General Reply.  First, we are completely versed in the legislative history of the Government of the Virgin Islands and the audit authority of the OIG in the Virgin Islands (and the other insular areas).  That audit authority has been challenged in the Federal courts on three occasions, with regard to audits of the Territorial Court of the Virgin Islands (1986), the administration of income taxes in Guam (1990), and the administration of income taxes in the Northern Mariana Islands (1992).  In all three cases, the courts upheld the broadest interpretation of OIG's audit authority, with the Virgin Islands case being unsuccessfully appealed by the Territorial Court all the way to the U.S. Supreme Court.  Additionally, the Insular Areas Act of 1982 (P.L. 97_357) gives the OIG a greater level of audit authority over the insular areas than does the Inspector General Act of 1978 as amended (P.L. 95_452) and is not limited by the Inspector General Act. 

Further, we believe that it is perfectly within the scope of our audit authority to review and comment on issues related to the use of Government of the Virgin Islands resources.  We do not set policy or interfere in Government policymaking but merely make recommendations for new or revised policies where we have concluded Government resources are not being adequately safeguarded (that is, where internal controls are lacking or ineffective).  It is completely within the Government's prerogative to either accept or reject our recommendations, and, in fact, many of our recommendations are rejected or simply ignored.

Therefore, we disagree with the argument that this audit report interferes in any way with the policymaking discretion of the Governor or the Board of Directors of the Public Finance Authority.  We stand by our overall opinion that the Authority's current policies (or lack thereof) in certain areas have put Government resources at risk.

	Finally, we agree that the report did not identify any instances of fraud.  Finding of fraud is a matter for the U.S. Attorney.  As such, we have provided a copy of this report to our investigative office for it's review and possible referral to the office of the U.S. Attorney.

Scope and Quality of the Audit

	Governor's Response.  The response states that the audit report is "unfocused and of indeterminate scope, undermining its accuracy and potential usefulness."  The response also questions the quality of the audit work, particularly with respect to the "complex issues" related to municipal bonds and finance discussed in the report, and states that "the OIG appears to have relied, without further investigation or due diligence, on the apparently self-serving memoranda of the Authority's now_departed Director of Finance and Administration."

	Office of Inspector General Reply.  Through oversight, an explicit statement of the period covered in the scope of the audit was omitted from the draft report.  (This has now been added.)  However, this omission did not undermine the "focus," "accuracy," or "usefulness" of the report.  Throughout the body of the report, specific dates of contracts, correspondence, and transactions are clearly stated for the benefit of the report's readers.  The audit covered a time period (fiscal years 1997 to 2002) that overlapped the final two years of the prior gubernatorial administration and most of the four years of the current administration.  The prior administration was in office from January 1995 to December 1998, and the current administration has been in office since January 1999.  

With regard to the memoranda from the former Director of Finance and Administration, we cited certain passages in the report because they supported conclusions that we had independently reached as a result of our detailed reviews of bond indenture documents, pertinent legislative or regulatory sources, and the Authority's extensive transaction files.  The memoranda cited in the report also show that the former Director was concerned about certain things that took place at the Authority and had taken the step of informing the two Governors under which he served of those concerns.

The fieldwork phase of the audit took place over a period of about 6 months and the auditors worked at the Authority's offices on an almost daily basis, reviewing documents and discussing with Authority officials various concerns disclosed by their review of the documents.  Therefore, we fully exercised due diligence during the audit.

Untimely Use of Bond Proceeds

	Governor's Response.  The response states that certain statements in the report regarding the potential tax effect of the untimely use of bond proceeds "are demonstrably false and evidence of lack of understanding of the highly specialized and complex provisions of the IRC [Internal Revenue Code] and the Treasury Regulations governing tax_exempt municipal bonds."  The response also contains extensive discussion and footnotes concerning the various tax implications, including a criticism of the $8.8 million estimate cited in the report for the potential amount of tax penalties.

	Office of Inspector General Reply.  While we concede that the audit team members were not "experts" in the complex tax issues involved, they collectively had sufficient background knowledge in the areas of tax and finance and enough auditing experience to analyze the issues related to the untimely use of bond proceeds, discuss these issues with appropriate Authority and other Government officials, and arrive at reasonable conclusions.  For example, we were fully aware (as pointed out in footnote 3 of the response) that any tax penalty would be applied against bondholders (not the Authority) and the interest paid on the bonds (not interest earned by the Authority).  The $8.8 million estimate provided in the report was meant to be a conservative estimate of the potential tax penalty, the actual amount of which would not be known until and unless the Internal Revenue Service chose to impose such a penalty.  By jeopardizing the tax_exempt status of existing bonds, the tax_exempt status of future bond issues is also jeopardized.  Consequently, we have referred this matter to the Internal Revenue Service for their consideration.

However, of even more importance than any "potential" tax penalty is the actual negative impact for the Virgin Islands community of Government agencies not making effective and timely use of bond proceeds made available for critically_needed public projects, such as a long_term mental health facility, a tourism training center, and various flood control projects (see Appendix 1).

Inappropriate Use of Bond Proceeds

	Governor's Response.  The response criticizes the fact that the report does not specifically identify the bond series from which the questioned expenditures were made and does not itemize all of the expenditures that comprise the questioned $750,000.  The response also states that "it is the opinion of bond counsel that the specific items referenced in the Draft Audit Report (voting machines ($52,000), speakers ($41,000), and painting of mural ($19,000)) could, in fact, be financed with tax exempt bond proceeds without violating the provisions of the IRC."

Office of Inspector General Reply.  While we chose not to itemize all of the questioned expenditures in the report, that information is available in our audit workpapers and can be made available to the Authority upon request.  

With regard to the specific items that are listed in the report, we stand by our opinion that these items do not qualify as "capital expenditures" under the definition contained in the Internal Revenue Code.  Whether any tax penalties should be applied because of this type of expenditure is at the discretion of the Internal Revenue Service.

Cost of School Construction Projects

	Governor's Response.  The response states that the firm which provided project management oversight of the construction of three public schools was hired by the prior administration. The response also questions the $17.3 million cost overrun amount cited in the report.

	Office of Inspector General Reply.  As highlighted in the report, the Authority's records clearly showed that the construction of the three schools was not properly planned.  As a result, essential elements, such as architectural drawings, construction management services, removal of temporary classrooms, and paving of parking lots and driveways, were omitted from the original contracts.  

The estimated total cost overrun of $17.3 million cited in the report includes the actual cost overrun amounts (in excess of the original contract prices) related to the Lockhart and Peace Corps Schools and the Authority's own estimate of the potential final cost overrun amount (in excess of the original contract price) for the Boschulte School.  If these projects had been properly planned and all essential scope of work elements had been included in the original contracts, the Authority most likely would have been able to establish contract terms that would have allowed the schools to be constructed at a lower total cost and with fewer construction delays.

Costs Related to Professional Service Contracts

	Governor's Response.  The response states that our conclusion that some of the costs related to professional service contracts were more properly applicable to functions of the Office of the Governor is "based on a fundamental misunderstanding of the broad scope of the PFA's [Public Finance Authority] statutory authority, incomplete knowledge of the facts, and faulty analysis."  The response then presents a lengthy discussion of the authority given to the Public Finance Authority in its enabling legislation and an itemized discussion of the costs that we questioned.

With regard to $367,000 of unsupported costs related to a consulting contract under the prior administration, the response simply states that "the present administration has no knowledge as to the services provided under this contract."

	Office of Inspector General Reply.  We are fully aware of the specific authority and responsibility given to the Authority by the Virgin Islands Code.  We thoroughly researched and analyzed this legislation before commencing the audit.  However, all of the elements contained in the legislation can be summarized as being related to "raising and managing capital on behalf of the Government of the Virgin Islands" (as stated in the report in the interest of brevity).

Our position is that, based on our review of documents (contractor invoices) contained in the Authority's files, it appears that the costs in question were not directly related to the Authority's primary function of raising and managing capital on behalf of the Government.  Most of those costs appear to be for services related to matters that are part of the general functions of government.  By including these type of costs under the budget of the Public Finance Authority rather than under the budget of the Office of the Governor, they were hidden from scrutiny by the Legislature in its oversight capacity over the Government's operating budget.

This is an important issue because, since its creation, the Public Finance Authority has been one of the least understood and most secretive entities within the Government.  With the exception of annual audited financial statements and occasional requests for approval of the issuance of bonds, its day_to_day operations have generally been excluded from public disclosure and legislative scrutiny.  To the extent that costs which would otherwise be paid from the budget of the Office of the Governor are shifted to the budget of the Authority, they too are excluded from public disclosure and legislative scrutiny.  Because we feel so strongly about this issue, we have added a recommendation that the Legislature of the Virgin Islands consider amending the legislation that created the Public Finance Authority to provide for a greater level of legislative scrutiny and public disclosure of the Authority's operations than currently exists.

Concerning the $367,000 paid to a consulting firm by the prior administration without documentation of services rendered, we believe that the current administration has a fiduciary responsibility to make a good-faith attempt to obtain appropriate supporting documentation from the contractor and, if unsuccessful, to further attempt to obtain reimbursement of the unsupported amount, including legal action if necessary.

Noncompetitive Professional Service Contracts

	Governor's Response.  The response states that "OIG's criticism concerns a question of PFA's internal policies, not a question of the Authority's adherence to law and regulation.  It is well within PFA's authority to retain professionals based on their experience and expertise as opposed to their billing 'rates.'"  The response also states that the retention of three of the contractors "in the first days of the present administration came at a time when the Government of the Virgin Islands was in serious fiscal distress. . . .  Under these circumstances, it would have been highly imprudent, if not irresponsible, to delay the selection and retention of financial and legal experts by undergoing a time-consuming competitive bidding process."

	Office of Inspector General Reply.  We acknowledge that there is no legal requirement that the Authority use competitive procurement procedures when contracting for professional services.  This is clearly stated in the report.  However, we believe that the Authority has a fiduciary responsibility to the people of the Virgin Islands and, accordingly, should make every possible effort to use competitive procurement to ensure that the best qualified contractors are retained.

There is clear evidence, as contained in the minutes of the February 1, 1999 meeting of the Authority's Board of Directors, that the selection of the Authority's bond counsel and financial advisers was based on the fact that these firms had performed "pro bono" work for the Governor during the period of his transition into office.  In fact, the contracts with these two firms were executed, respectively, on January 4 and 5, 1999 and presented to the Board of Directors for pro forma approval at the Board meeting held February 1, 1999.  In order to have executed the contracts on January 4 and 5, 1999, the incoming administration would likely have already selected the firms, arrived at contract terms, and drafted the contracts prior to having been sworn into office.

Additionally, the response ignores the difference between procurement methodologies that involve a formal "invitation for bids" and a less formal "request for proposals."  The "invitation for bids" process is used primarily for construction contracts and contracts for the purchase of specific goods, where the quality of the final product is clearly established and price is the primary differentiation between potential contractors.  The "request for proposal" process is used for professional service contracts, where the quality of service or the expertise of the potential contractors is more important.  This is the competitive procurement process that we believe the Authority should consider using for future professional service contracts.

Collection of Outstanding Loans

	Governor's Response.  The response discusses the circumstances behind the Authority's foreclosure on the Kings Alley Hotel and Arcade, and also states that the loan and outstanding interest on the Yacht Haven Hotel and Marina were paid off in July 2002.  The response further states that the $706,000 owed by the Government of the Virgin Islands to the Authority "are debts owed by the Government to itself."

	Office of Inspector General's Reply.  We did not take issue with or discuss the Kings Alley Hotel and Arcade in the report.  With regard to the repayment of the loan and interest on the Yacht Haven Hotel and Marina, we request that appropriate supporting documentation be provided so that we can close out this portion of the recommendation.  The payment of these amounts apparently took place after the completion of our audit fieldwork.

With regard to the $706,000 that the Government owes to the Authority, to simply say that these "are debts owed by the Government to itself" implies a misunderstanding of the nature of governmental accounting, where each "fund" is a separate accounting entity whose financial integrity must be preserved in accordance with generally accepted governmental accounting standards.  The majority of the funds that are owed to the Authority are related to revolving funds used by the Authority to make loans or advances to other entities for various public purposes.  These revolving funds were depleted when the Authority incurred expenses on behalf of the Government.  Therefore, the  revolving funds are no longer available for future loans or advances.



APPENDIX 1 - BOND PROJECTS REVIEWED


STATUS OF 
REPROGRAMMED
BOND FUNDS AS
OF SEPTEMBER 2001

						Amount 	Amount 	Amount 
                    Agency and Project                    	Available	   Used    	  Unused  

Legislature of the Virgin Islands:
	Capital Improvements (1989 Bonds)	$600,000	$599,853	$147
	Capital Improvements (1991 Bonds)	400,000	400,000	0
	Capital Improvements (1992 Bonds)	1,000,000	996,952	3,048

Department of Health:
	Long Term Health Facility (1992 Bonds)	1,230,000	0	*           1,230,000
	Michelle Motel Final Payment (1992 Bonds)	1,090,000	1,086,667	$3,333

Department of Housing, Parks and Recreation:
	T. Martin, B.Felix, P.Cruz Repairs (1989 Bonds)	150,000	139,077	10,923
	Passenger Van Purchase (1991 Bonds)	50,000	0	50,000
	Adventure Hill Housing Repairs (1992 Bonds)	393,000	282,233	110,767
	Anna's Hope Housing Repairs (1992 Bonds)	100,000	99,150	850
	L.B. Johnson Housing Repairs (1992 Bonds)	200,000	183,661	16,339

Department of Tourism:
	Tourism Training Center (1992 Bonds)	500,000	0	500,000

Department of Public Works:
	Mon Bijou Rights of Way (1992 Bonds)	1,200,000	614,385	585,615
	Nadir Bridge Flood Control (1992 Bonds)	1,305,000	0	1,305,000
	Mon Bijou Floor Control (1992 Bonds)	800,000	0	800,000
	Blue Lightning Project (1992 Bonds)	200,000	0	200,000
	Turpentine Run Flood Control (1992 Bonds)	     230,000	     102,000	     128,000

	Totals			$9,448,000	$4,503,978	$4,944,022






__________
* Although the Public Finance Authority's records showed that none of these funds had been used as of September
   2001, we determined that $100,000 had been used to pay for architectural plans for the long term health facility.


APPENDIX 2 -  MONETARY IMPACT


FUNDING AREAS

Bond Proceeds:
    Unused Reprogrammed Bond Proceeds
    Ineffective Use of Bond Proceeds
    Inappropriate Use of Bond Proceeds

School Construction Contracts:
    Construction Cost Overruns

Professional Service Contracts:
    Non-Authority Related Expenses
    Undocumented Contract Services

Loans and Loan Guarantees:
    Uncollected Interest Payments and Fees
    Unreimbursed Non-Authority Costs

    Totals

Funds To Be Put	Unsupported	   Unrealized
  To Better Use*	      Costs*    	   Revenues*


     $7,300,000
       1,200,000
          750,000


     17,300,000
 

       2,330,687 
					  $367,000

								   $571,000
          706,000		                    	               

   $29,586,687		  $367,000	   $571,000



















__________
* Amounts represent local funds.



APPENDIX 3 -  PRIOR AUDIT REPORT	


OFFICE OF INSPECTOR
GENERAL REPORT

The April 1994 special report "Bonded Debt of the Government of the Virgin Islands and its Autonomous Agencies" (No. 94_I_513) stated that, as of March 31, 1993, pledged revenue sources of the Government should be sufficient to meet the debt service requirements of the bonds that were outstanding at that time.  However, the issuance of additional bonds could strain the ability of the Government's Internal Revenue Matching Fund, the Water and Power Authority's water system, and the Port Authority's Aviation Division to meet future debt service requirements.  The report did not contain any recommendations.




APPENDIX 5 - STATUS OF RECOMMENDATIONS


Finding/Recommendation
            Reference              

1 to 8







9






          Status         

Unresolved.







Unresolved.






                       Action Required                       

Consider the recommendations and provide a response that states concurrence or nonconcurrence with each recommendation.  If concurrence is stated, provide a corrective action plan that includes the target date and title of the official responsible for implementation of each recommendation.

Consider the recommendation and provide a response that states concurrence or nonconcurrence with the recommendation.  If concurrence is stated, provide a corrective action plan that includes the target date and title of the official responsible for implementation of the recommendation.