Butkovitz Finds Commerce Department Failed to Properly Monitor $135 Million Cultural Commercial Corr

Audit Date: November 13, 2012
Controller: Alan Butkovitz

Executive Summary

For Immediate Release:
November 13, 2012

Contact: Harvey Rice

Butkovitz Finds Commerce Department Failed to Properly Monitor $135 Million Cultural Commercial Corridor’s Program

Review of the Cultural and Commercial Corridors Program

PHILADELPHIA – City Controller Alan Butkovitz today released the Review of the Cultural and Commercial Corridors Program that found the Commerce Department failed to provide adequate oversight over the $135.5 million taxpayer-funded program.

“Although these funds had the laudable goal of increasing citizen exposure to the arts and business communities, it is highly questionable as to whether taxpayer funds were spent in the most economical and effective manner possible,” said Butkovitz. “Funding agreements with award recipients did not contain requirements to properly safeguard the public funds.”

In one instance, The Merchants Fund (TMF), a non-profit organization with one employee, received $1 million in grants and provided funding to 18 retail locations for renovations to coffee shops, restaurants and retail stores. These 18 received an average of $42,000 without any criteria to evaluate the effectiveness of each project’s outcome.

“We question the soundness of Commerce’s decision to use a small organization having only one employee to administer $1 million in grant funds,” said Butkovitz. “It’s even more troubling that Commerce did not maintain adequate records of site visits while the renovations were ongoing.”

In fact, for one award recipient, the Village at 63rd Street, which operated a coffee shop, was no longer in business and the property has since been sold. A restaurant, the Gold Standard Café, was found to have owed thousands in state and federal taxes prior to receiving $50,000.

Further, we questioned the openness and competitiveness of the award and bidding process for the $1 million disbursed under this program. TMF used a private e-mail list and only sent notifications to 170 organizations and agencies on that list.

“Limiting the application process to a select group of people not only increases the potential for fraud, waste, or abuse, it deprived entities that may have been more deserving of an opportunity to apply,” said Butkovitz.

Another aspect of the Commercial Corridors Program was an $8.5 million low interest loan program administered by another non-profit, The Reinvestment Fund (TRF). Under this program, 13 projects received loans ranging from $100,000 to $1,000,000 to assist in the acquisition and development of activities along the city’s commercial corridors. As the loans were repaid, TRF would use the proceeds and interest to create an on-going fund to finance future development projects.

Two recipients, who received a total of $1.5 million ($500,000 to Progress Trust and $1,000,000 to Broadnu Enterprises) or almost 20% of the $8.5 million allocated to this program, obtained loans that were later forgiven. TRF decided that both for-profit businesses would be burdened by too much debt or not be able to meet the debt service requirements. The loans were gifted to make the projects financially viable.

“With Progress Trust having no investment in their project and Broadnu Enterprises having less than four percent, it was obvious that these projects would carry a high debt burden,” Butkovitz said.

Butkovitz also stated “By forgiving nearly 20 percent of the funding, TRF was limiting the pool to assist future projects. In contrast the $1 million loaned to Philabundance enabled it to triple their refrigerated storage capacity and increase services to the hungry and needy in the community, while at the same time repaying its loan”.

Other findings included:
▪ Commerce did not properly scrutinize the documentation supporting the expenditures of bond funds
▪ Vendor invoices submitted for payment provided insufficient detail to determine whether the expenditure was appropriate for the project.
▪ Commerce did not require that city bidding procedures be followed for 30 streetscape projects.
▪ Sub-recipients were not required to document and retain bids for awarded projects.

“Taxpayers will be paying for the projects through debt service payments over a 25 year period and better oversight and monitoring was needed to ensure that public funds were properly safeguarded,” said Butkovitz. “We hope that when the city issues bonds in the future it will put such safeguards in place.”

The Cultural and Commercial Corridors Program was created to improve and enhance the city’s cultural and commercial corridors for the benefits of city residents. To achieve this goal, the city provided capital funding through a $135.5 million bond issued in 2006 by the Philadelphia Authority for Industrial Development (PAID). Interest rates on the bonds ranged from 4.00 to 5.17 percent. The Commerce Department was responsible for the oversight of the Program.