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Report: Berry's Administration Might Have Broken IRS Rules on ART Payments

Former Mayor Richard Berry's administration appears to have violated federal tax rules in the way it paid for the $135 million ART project, according to a report on the ART project released Thursday by the city's Inspector General's office.

The city had to pay for ART construction out of its own funds because it still hasn't gotten A $75 million grant from the Federal Transit Administration that is was hoping for. To pay for the construction, which is basically complete, the city appears to have used general obligation money that was approved by voters and dedicated to specific projects.

But exactly which capital projects were raided isn't known because Berry's administration commingled capital projects funds into a single account and paid for ART out of that fund, said the report by IG David Harper.

“The City funded the construction of ART in part using funds derived from GO Bonds that taxpayers intended to be used for other projects based on the bond descriptions at the polling booths,” The City’s bond counsel advised that bond funds need to be used for the intended projects within three years per IRS rules.”

In addition, the 73-page report said that Berry's administration threatened the company that is building ART's 20 electric buses if it didn't get the city at least one bus before Berry left office on Nov. 30, 2017. Berry's administration threatened to cancel its $23 million bus contract with the company, BYD, if it didn't deliver the city a bus before Berry left office, the report said.

The bus that BYD did deliver to Berry's administration was built on a chassis for another transit agency and wound up not meeting Albuquerque's specifications, Harper's report said.

And, Harper's report said that BYD and ART's contractor, Bradbury Stamm Construction, might have violated the city's ethics policies by buying meals for city employees working on the ART project.

So far the city has spent $108.1 million on ART. Some of that is from federal grants and city revenue bond money. But if the city doesn't the the FTA grant, it could be more than $90 million in the hole for the project, the report said.

So far, the city has paid Bradbury Stamm $87 million.

Here are the report's main findings:

1. The City funded the construction of ART in part using funds derived from GO Bonds that taxpayers intended to be used for other projects based on the bond descriptions at the polling booths. The City’s bond counsel advised that bond funds need to be used for the intended projects within three years per IRS rules.

2. The City expended possible restricted funds without a federal grant agreement in place. Should the federal government not provide a grant to reimburse the funds used, there will be considerable financial ramifications. The City may not have followed GASB (Government Accounting Standards Board) standards for accountability regarding restricted funds and avoiding “negative cash” flows. The City does not have a contingency plan should the federal government fail to provide the anticipated $75 million.

3. On 30 May 2018, FTA Region 6 advised that federal funding could not be used for the electric buses until a bus completed and passed the Altoona Testing in Pennsylvania and the remaining buses were modified to match the bus that passed testing. On 30 May 2018, the Assistant Maintenance Manager, DTF, advised that a bus was at the Altoona Testing site in Pennsylvania, but testing has not started on the bus. He said the testing is expected to begin within the next week. He said that the testing for diesel buses typically last about 13 months, but testing for the electric bus will probably require additional time due to the need to recharge the batteries. Therefore, it appears that federal funds for the buses will be delayed a minimum of 13 more months for the testing and additional time for the remaining 19 buses to be modified.

4. There were several quality issues that impacted buses and may have contributed to the delay in delivering buses. The City has been engaged with BYD to address the problems and also is considering options to ensure there is proper and fair contractual consideration.

5. Typically, the first item that is provided by a contractor should be the “First Article” that is used by the purchaser to assess and determine if there was compliance with all specifications. This did not occur in the purchase of the BYD buses and in fact, City officials knowingly “accepted” a bus that was manufactured on a platform and to the specifications of a bus intended for the AVTA, with the intent of using the bus for public relations, which included a publicity event involving the former Mayor and other publicly elected leaders and officials. This was not within the contract and may have contributed to the further delay of receiving buses that complied with the contract. As indicated in the report, this was described as a “loan.” However, the BAA Audit report characterizes the bus as the “first production bus in the order, VIN 38022, which was delivered to the City on August 7, 2017.”

6. The Mayor addressed the public shortly after beginning his term regarding several challenges with the buses (including the batteries) and construction from both an ADA and non-conformance perspective; BSC has corrected most of the ADA issues and continues to correct non-compliant situations.

7. The inspection disclosed concerns with the BAA Audit Report in that there are assertions and references to documents that do not exist, to include the “Resident Inspector Report.” This is problematic that there were certifications appended to the Report that affirmed the report existed and that the City had inspectors validating the BAA status.

8. The City’s approach to providing inspections of the assembly process did not appear to be sufficient and lacked continuity. The City did not establish selection criteria based on the complexities of conducting inspections of a new product – electric buses, but rather selected employees who volunteered to travel for a two week period. The City did not provide any formal training and did not develop an inspection checklist specifically for the electric buses. The City did not develop a manual or guide for use by the inspectors during the inspection process.

9. The City awarded several contracts to complete the ART project, with the two most significant contracts being awarded to BYD for the electric buses and BSC for the construction. The City used solicit offerors using an RFP and then selected the contractors using an “Ad Hoc Advisory Committee” (commonly referred to as a selection or evaluation committee). In a “post-TASER” environment (a prior OIG investigation focused on allegations of favoritism and conflicts of interest involving a former police chief for the APD and TASER, the company that provided on-body cameras to APD), it is important to go great lengths to ensure there is not even the appearance of partiality, biases and undue influence in the selection processes. The inspection disclosed that both Ad Hoc Advisory Committees included high level City appointed officials and deputy directors to the appointed officials, rather than including more disinterested, but technically qualified, members, such as professors for the local universities, members from City commissions, and officials from county or state agencies that have similar services.

10. The inspection disclosed concerns regarding ethics and impartiality in the contract administration process. A senior official at BYD purchased at least one meal for almost all inspectors and even twice for one inspector. While the value of the meal from the point of view of the inspector may have been de minimis, the value of funds expended by the BYD official were significantly more in the aggregate and furthermore, blurs the line of avoiding even the appearance of impartiality in the inspection process.

11. In addition to the prior observation, inspection activity revealed that BSC provided meals and other items free of charge to senior level City officials, to include an elected official and appointed official. As before, while any individual meal may have been considered de minimis to the employee, in the aggregate, the cost to BSC was potentially substantial considering the venue. Again, it is important for both City employees and contractor personnel to go to extreme lengths to avoid the appearance of biases, conflicts and partiality. This is especially true given the contract was ongoing at the time and most likely, BSC will compete for future contracts.

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