Lawmakers wanted the state auditor to determine whether there were widespread problems with the state’s affordable housing system. The auditor’s answer is a resounding ‘Yes.’
When the Legislature was discussing comprehensive reform of the state’s scandal-plagued regional housing authorities two years ago, Rep. Jose Campos, a leading skeptic of a State Investment Council report that found widespread misuse of bond money, said he wanted independent audits to determine whether reform was necessary.
“Before we start condemning anybody, let’s get all the information out,” he said at the time. “Let’s not commit a political hack job.”
Several lawmakers sided with Campos, and out of that was born a compromise: Some changes to the housing authority system were approved in 2007, but a bill that would have enacted comprehensive reform was gutted. Instead, the Legislature appropriated money to empower State Auditor Hector Balderas to determine the extent of the problems with the system.
Balderas released his long-awaited audit reports on Wednesday. (You can read them by clicking here.)
The result: Whether it was due to corruption, ineptitude, mismanagement or other factors, the authorities were running amok with public money and there were inadequate controls in place to stop it. Balderas says the audits prove that the authorities had become “a colossal failure to low-income citizens and the state of New Mexico.”
The problems may be even worse than the public knows. The auditor also referred on Wednesday some findings to state and federal prosecutors in a separate report that can’t legally be made public until prosecutors are finished with it.
Balderas, in a news release, cited weak internal controls, a lack of adequate oversight and poor management as primary causes of a scandal that toppled most of the state’s affordable housing system when the Albuquerque-based Region III authority defaulted on $5 million in bonds it owed the state in 2006. Five of seven regional authorities collapsed under the weight of that scandal, though the other two have continued operating without problems.
The audits don’t explicitly attribute any of the problems with the five now-defunct regions to corruption, but that’s not the job of the auditor. Audits are designed to find financial irregularities and other problems. It’s up to prosecutors to decide whether there’s a public corruption case to be made, and Attorney General Gary King is already scheduled to take his criminal case before a grand jury next month.
Serious problems
The $5 million in bond money isn’t all that was misspent. One of the new revelations brought to light by the audit reports is that the Region III authority was actually taking out mortgages on homes it already purchased with bond money to increase cash on hand. On 14 homes, the authority owed both a mortgage and a bond payment, each roughly equal to the value of the home.
That increased the housing authority’s debt beyond the bond money by more than $1.3 million. It was a debt the housing authority system had no way to pay.
Also among the more troubling findings to the state auditor’s office, Balderas said in an interview, was the creation by Region III and then-Executive Director Vincent “Smiley” Gallegos of a separate company, Housing Enterprises, Inc. (HEI), which ostensibly carried out some of the on-the-ground activities of housing authorities around the state. Though HEI and Region III were purported to be separate entities, Gallegos ran both, some people served on both entities’ boards, and taxpayer dollars were moved back and forth between the two entities.
Missing documents
One of the most difficult tasks investigators in the auditor’s office and elsewhere have encountered in trying to determine the scope of the scandal is overcoming the volume of documentation that the housing authorities were legally required to create and preserve that cannot be located.
Was it destroyed or stolen? Or were required records never kept in the first place? That’s a question Balderas said he can’t answer.
“While I can’t speculate as to the cause, I was extremely troubled at the amount of missing documentation that management had a duty to preserve and protect. It was the worst I’ve ever seen in any of the hundreds of audits that we’ve done,” Balderas said.
The missing documentation is referenced frequently throughout the audit reports.
For example, in the audit of the Region I authority, which covered the northwest corner of the state, auditors could locate no records for accounts payable or payroll, and, according to the audit, “a large percentage of the cash disbursement and expenditure documentation was missing.” The audit of the Las Cruces-based Region VII authority found that, in addition to the same documentation missing in Region I, there’s no record that the authority kept an inventory of its property and there are missing minutes of meetings of its governing board of directors.
For the Santa Fe-based Region II authority, so much documentation is missing that auditors can’t even find a record of who served on its board.
The greatest volume of missing documentation was in the Region III authority, which was ground zero for the problems experienced by the system. In that region, the audit states, the auditors’ work was “severely limited” because missing records included documentation of expenditures, personnel files, payroll records, several months of bank statements and minutes of some board meetings.
The findings
Among the more titillating findings in the audits were money spent on a private club membership, alcohol, flowers, a pricey designer briefcase and a trip to Las Vegas, Nev. In addition, according to the Region III audit, Gallegos sought reimbursement from both Region III and HEI for per diem of $114 per day to stay in Santa Fe for 37 days straight during the 2006 legislative session. That double-dipping resulted in him being paid $4,218 from each entity for the same trip.
Beyond those more outrageous findings, however, the audits reveal a system in such disarray that there may not be any way to fully determine the level of abuse, which is why Balderas’ audits frequently decline to state opinions on the authorities’ financial statements. Findings of the Region I audit included timesheets that weren’t authorized, missing documentation for cash receipts, late audit reports and loans from Region III that were not properly authorized. Findings of the Region II audit included improper use of federal funds, multiple documents that used the same check numbers, and lack of documentation of invoices.
Findings in the audit of the Region IV authority that covered the northeast corner of the state included many of the same findings from the Region I and II audits and also a lack of proper authorization for reimbursement of travel expenses. In Region VII, the findings were similar.
As for Region III, the audit notes several eye-popping transactions that have already been revealed publicly: The region sold homes to two of its employees and one HEI board member who may not have qualified for low-income housing. In addition, Gallegos, as director of HEI, made a personal loan of $300,000 to a company he owns to purchase property in Las Cruces. That appears to have been done with bond money and, as such, the loan violated state law.
Many of the findings in the other audits are also reflected in the Region III report.
Reforming the system
The reforms proposed but never approved in 2007 are going to be pushed again this year by Lt. Gov Diane Denish, Sen. Mary Kay Papen and others in a bill that attempts to expand oversight and restructure the system to ensure such misuses of public money don’t happen again. Denish, in reacting to the release of the audits, said in a news release that she is glad Balderas “has finally completed this long-awaited audit,” and pointed out that the bill that funded Balderas’ work in 2007 also began the process of increasing oversight of the housing authorities.
“The new legislation I am pushing this year will strengthen that oversight and build a better structure to get services to the people who need them most,” Denish said. “We will not tolerate corruption, and I will continue to fight to protect New Mexicans.”