Thursday, Sept. 11, 2008 | A wide-ranging audit examining the Southeastern Economic Development Corp. released Wednesday found that the redevelopment authority’s hidden system of bonuses and extra compensation rises “to the level of fraud.”
The audit painted the picture of a public agency where top officials consistently resorted to creative and clandestine means to boost their own pay and perks, including giving themselves pay increases that had been rejected by the city of San Diego, withholding information from key officials and spending an unauthorized $156,000 on the agency’s 25th anniversary celebration.
The hidden bonus system uncovered by an voiceofsandiego.org investigation in July stood front-and-center in the audit’s findings. The hundreds of thousands of dollars in bonuses and extra compensation paid out annually at SEDC were funded by salary savings created by vacant positions, the audit found, unbeknownst to the City Council or SEDC board.
“These omissions have circumvented the specific governance structures and other requirements in place, which in turn, provided substantial and direct financial benefit to SEDC employees that rose to the level of fraud,” the audit from Macias Consulting Group, Inc. states.
Outdated city and agency policies leave much of SEDC’s power in the hands of one person, President Carolyn Y. Smith, who unilaterally ran nearly all aspects of the agency, including coordinating projects; negotiating with developers; managing all communications with the public, the board and city officials; and hiring consultants, according to the audit.
The board terminated Smith’s employment in July in the wake of the bonus scandal, although she plans to remain in charge of the agency until October and was given a $100,350 severance package. The mayor and City Council have since replaced four of the nine board members and the nomination of a fifth new trustee is pending.
The audit, commissioned last year by City Councilman Tony Young, provides further details about the troubled agency’s inner workings and punctuates Smith’s rapid fall from grace after nearly a decade and a half at SEDC’s helm.
Following the audit’s release, Mayor Jerry Sanders said he had asked District Attorney Bonnie Dumanis to investigate and she told him she was looking into the matter. Sanders said he’d also asked Smith to leave SEDC immediately. Two SEDC board members have said they’ve been questioned by the FBI.
“Instead of serving the public, those running SEDC have been just as intent on serving themselves,” Sanders said. The mayor, a former police chief, also cautioned out that an auditor’s definition of fraud is different from the criminal definition.
In a written response to a draft audit, Smith took issue with many of the report’s findings and maintained that the bonuses and extra compensation payments were indeed included in the budget. She accused the auditors of altering the final version of the audit to suit the city’s wishes.
“The failure of this document to include information that SEDC staff has provided, coupled with the apparent 180 degree change in position from the original (and previous) audits prepared by Macias Consulting Group and its affiliates creates an impression that this ‘expanded’ audit was created primarily to satisfy those who commissioned the report, and is not a fair and impartial analysis of SEDC’s performance,” Smith’s letter states.
The audit shows that, after the city denied Smith’s request for salary increases for fiscal year 2006-07, she chose to give herself, her executive assistant and finance director raises anyway without notifying the board or the City Council.
“Although the salary adjustments were already denied by the City, the SEDC President authorized her own increase of $7,000 and the increases of $5,000 for the Director of Finance (Dante Dayacap) and $2,248 for the Executive Assistant (Kimberly King),” the audit states.
The auditors also took issue with SEDC’s 25th anniversary celebration in August 2006.
The auditors traced $156,680 in expenditures back to the event. The report states that Smith told auditors that she’d received board approval for the expenditures, however, auditors searched four years of board records and found “no evidence of its discussion or approval.”
The audit says Dayacap, upon Smith’s request transferred $30,000 from various SEDC accounts into the “postage and promotions/special events” account to help pay for the party.
In a rebuttal letter, Smith said the celebration included two community events, a book documenting SEDC’s accomplishments and post cards.
Last year, the agency spent $20,787 on food for employees, an expenditure the auditors called “inappropriate for an organization like SEDC, which is primarily funded with public monies.”
The audit also identified at least two potential conflicts in SEDC business.
The audit labeled as a “questionable” expenditure $3,000 the agency spent at the Catfish Club, a community discussion forum. The Catfish Club was founded by the Rev. George Walker Smith, father of ousted SEDC President Carolyn Y. Smith.
“The SEDC President has a direct family relationship to the Club founder that appears to be a conflict of interest,” the report states.
It also says that the agency’s office lease constitutes a conflict of interest because the agency is renting the building from a developer that has contracted with SEDC on development projects.
SEDC paid an arm of Pacific Development Partners $174,917 in rent last fiscal year. PDP has been at the center of a troubled development project at Valencia Business Park, a joint project between PDP and SEDC.
SEDC and Smith have been sued for breach of contract and fraud, respectively, over that development by a local couple that says it was duped into giving up its claim on the land so that PDP could take control of the project.
City Attorney Mike Aguirre has since declared PDP’s agreement with SEDC null and void, opining that former SEDC Chairman Artie M. “Chip” Owen’s business ties to the company violated the state’s conflict of interest law because, while Owen has sat on the board, PDP has been awarded a development agreement by SEDC.
In her written response to Macias, Smith said SEDC pays market rent on the office and that the auditors failed to explain why this is a conflict of interest.
The audit says that Dayacap, the finance director, was responsible for deciding how much in bonuses and extra compensation to pay to himself and all SEDC employees, including Smith.
For the five years reviewed by the auditors, Smith received $228,068 in bonuses and extra compensation, excluding money she received for vacation or sick leave buyouts and car allowances, the audit states. Dayacap received $183,000 in such payments, it states.
Dayacap also approved all of Smith’s buyouts for vacation and sick leave, which amounted to $65,431 over the five years. Dayacap admitted to the auditors that he had no authority to do so, and the auditors concluded that he shouldn’t have been approving such payments.
“At no point should management have junior personnel approve a request for reimbursement, because it places the employees in a precarious position in that they are less likely to deny the request for fear of retribution,” the report states.
The audit states that, at the minimum, compensation matters should’ve been approved by the board chairman.
The audit also makes a point about Smith’s claim that she has not taken a day off for sick leave or vacation because she enjoys her position. “A risk factor for fraud in any organization is present when key employees work for many years without taking time off,” the audit states.
The July voiceofsandiego.org investigation showed that Smith, Dayacap and other SEDC officials were annually each receiving five-figure bonuses unbeknownst to the SEDC board or City Council, which serves as SEDC’s ultimate overseer.
The payments weren’t detailed in the budgets and were vaguely titled “acknowledgement” and “cost of living.” For example, between fiscal years 2003-2004 and 2006-2007, SEDC’s top four officials collectively received about $256,000 through the various bonus and extra compensation programs.
More than $250,000 of that estimated total was shared by Smith and Dayacap.
The audit found that the cost of living increase was given twice a year, something it called “an uncommon practice.” In fiscal year 2005-06, SEDC employees received a cost of living increase of 8.46 percent, while city of San Diego employees received no increase.
SEDC is an agency of the city, but is structured separately as a nonprofit agency with its own board. Most of its major decisions still must be approved by the City Council.
Pay data obtained by the auditors shows how the bonus system ratcheted up in recent years. For example, all the extra compensation given out in fiscal year 2003-04 was in the form of cost of living increases or what’s known as “holiday” pay. That year, Smith received a total of $14,620 and Dayacap $10,140.
The next year, employees got a new brand of payments labeled “year end acknowledgement.” Smith and Dayacap, who always received the highest bonuses and extra pay, each received $3,100 in that category in addition to the other extra pay.
That year end acknowledgement increased dramatically over the next two years, with the two top officials getting $16,800 each in fiscal year 2005-06. The next year, Smith got $52,500 in year end acknowledgement pay alone while Dayacap received $44,300.
In fiscal year 2007-08, the two received no year end acknowledgement payments. Instead, they received nearly the same amount in what was labeled “incentive” pay — $52,500 for Smith and $44,200 for Dayacap.
The total amount Smith and Dayacap received grew from $14,620 and $10,140 a year, respectively, in 2003-04 to $78,808 and $63,400 four years later.
Auditors say that only one of the several bonus and extra compensation packages at SEDC is listed in the employee handbook, the merit pay policy. It stipulates that employees not be given increases if they are performing at a low level.
“SEDC staff reported that the performance evaluations had no impact on the supplemental compensation received by the employees,” the report states.
In addition, Smith’s contract requires an annual performance evaluation. However, Owen told auditors that he hadn’t prepared one.
The audit also found that:
- “SEDC doesn’t justify and document its selection of consultants, which may contribute to an appearance of impropriety about the consultant selection process.” The agency, however, isn’t required to do so, including when it gives sole-source, no-bid contracts.
SEDC has been criticized for awarding contracts to Angela Harris, who also was the recipient of an SEDC-sponsored affordable home, and Herman Collins, who helps Smith’s father run the Catfish Club.
Smith is required to disclose when she enters into contracts that are less than $50,000 to the board, but she doesn’t do so, the auditors state. Additionally, she said she rarely uses the authority to enter into those contracts, though the auditors report that such contracts account for a majority of consulting services at SEDC.
- The SEDC board had more than one-third of its meetings cancelled during the audit period “because of the lack of a quorum or from a decision by the SEDC president that the meetings were unnecessary given the absence of matters needing board action.”
The report found that SEDC fails to follow accepted practices by not including community feedback into its formal staff reports to the board.
“The SEDC Board of Directors could not provide effective oversight because SEDC (staff) reduced the Board’s ability to do so because there was insufficient transparency of information and of SEDC internal operations to fully and adequately inform key officials at all levels,” the report states. “No matter how well-designed and operated, controls cannot provide absolute assurance that all SEDC objectives are met when critical data is systematically omitted.”
Three board members told auditors that Owen, the former board chairman, didn’t encourage communication and transparency.
The report didn’t just look at the pay program, but also looked at the agency’s management practices and its overall performance.
It also includes a list of 33 recommendations, including:
- Redrawing SEDC’s governance structure to either greatly limit the president’s authority, merge SEDC with CCDC or the city’s Redevelopment Agency, or completely wrap SEDC into the city bureaucracy. Young strongly stated that he wants SEDC to continue in its current nonprofit structure.
- Filling a number of important managerial roles that have been left vacant and therefore further consolidated control under the president.
- Ending all bonuses and extra compensation except merit pay, which is described under current policies.
Although the audit was requested by Young in May 2007, it didn’t begin until January. SEDC originally hired consulting firm Keyser Marston to perform the audit on a $43,000 contract.
However, city officials refused to accept that audit, as Keyser Marston was already one of SEDC’s key consultants on its everyday business.
City officials requested that the auditors look into the bonus program in July following the publication of voiceofsandiego.org‘s investigation.
Please contact Andrew Donohue or Will Carless directly at andrew.donohue@voiceofsandiego.org or will.carless@voiceofsandiego.org with your thoughts, ideas, personal stories or tips. Or set the tone of the debate with a letter to the editor.