October 20, 2011At the request of the Guilford County Audit Committee, Eddie Burke, an auditor with Cherry, Bekaert & Holland, looked into a 2008 deal that Guilford County Manager Brenda Jones Fox – who was at that time the county's finance director – made with Wachovia bank for Guilford County to finance the purchase of the BB&T building at 201 W. Market St. in downtown Greensboro.
Burke's report to the Audit Committee answered one question, but also created some new questions.
On Thursday, May 19, the Guilford County Audit Committee charged Burke with examining the county's dealings with Wachovia after details of the deal were made public in The Rhinoceros Times. The county's Audit Committee asked Burke, the county's contracted auditor, to look into the actions Fox took when she conducted the bid process to select a bank to make a $5.1 million loan to the county to buy and renovate the BB&T building.
On Thursday, Oct. 6, the Audit Committee met to hear that report. The question Burke answered was one that had been answered months ago: Namely, whether or not Fox violated NC General Statutes 143-129.1, which state how a formal bid process must be conducted. Burke said Fox did not violate GS 143-129.1 because – even though she initiated what looked, from all appearances, to be a formal bid process – the state laws that would normally apply to a bid process didn't apply, since no formal bid process was required in the first place.
Burke said that a county securing financing on a building purchase is considered to be seeking a service contract, and, therefore, Burke said, GS 143-129.1 didn't apply. He said that, since Fox wasn't required to conduct the bid process to obtain the loan for the county, Fox didn't violate those statutes when she allowed Wachovia to raise its price from its initial bid after the bidding was closed.
That is the same conclusion that NC Institute of Government expert Frayda Bluestein stated in The Rhinoceros Times in May, shortly after the controversial deal came to light.
At the meeting, Burke did not address other questions that arose from the 2008 deal, such as whether or not Fox broke the law by giving emoluments – giving away taxpayer money without a benefit in return. It is illegal to use a county position to bestow favors at taxpayer expense – all county money spent must, by law, be in exchange for some good, service or benefit to the county.
In this case, Fox allowed Wachovia to raise the bid to a point where Wachovia made more money on the deal but was still below the next lowest bidder. Fox didn't allow the two other banks that bid on the loan package to change their bids, nor did she inform the other banks that she had allowed Wachovia to alter its bid.
Commissioners Kay Cashion, Paul Gibson and chairman of the Audit Committee Commissioner John Parks – were at the Oct. 6 meeting in the manager's conference room of the Old Guilford County Court House, as were Burke, Fox, Guilford County Internal Audit Director Martha Rogers and Finance Director Reid Baker.
Burke's firm has been under contract with Guilford County to conduct the county's annual audit since 2003.
At the Audit Committee meeting, Burke prefaced his comments by saying he had not spoken with Fox.
"I have not discussed this at all with the county manager," Burke said.
He said that was done intentionally so he could come back and report that fact to the committee.
Burke also said he didn't discuss the matter with Guilford County Attorney Mark Payne or with the county's other legal staff. However, he said, he had spoken with Guilford County finance officials.
"It did cost the county more," Burke said of Fox allowing Wachovia to raise its bid rate.
He said that, according to his calculations, the cost to Guilford County of allowing Wachovia to raise its rate was closer to $175,000 than to the $200,000 that had been reported in The Rhinoceros Times.
Burke began by summarizing the events that took place. He didn't go into a great deal of detail, but instead laid out the basics of what happened four years ago.
In 2007, the Guilford County Board of Commissioners agreed to purchase the BB&T building – largely to relocate the county's Register of Deeds office. On Friday, Dec. 14, 2007, the Guilford County Finance Department, then headed by Fox, sent out a request for proposals (RFP) to nine banks asking those banks to submit interest rate bids on the $5.1 million loan. The deadline was 5 p.m., Friday, Dec. 28, 2007.
Three banks responded with bids – RBC Centura, BB&T and Wachovia. Part of the BB&T building was to be used by private businesses and part by Guilford County. Therefore the county requested two rates in its RFP – one for the tax-free part of the loan and the other for the taxable portion.
In the bid process, Wachovia offered a tax-free loan rate of 4 percent and a taxable rate of 4.63 percent.
On Jan. 3, 2008, five days after the deadline, Wachovia was allowed to raise its rates on the loan by half a percentage point on the taxable part and slightly more than half a percentage on the non-taxable portion of the loan. Those higher rates are the rates Fox presented to the commissioners in early 2008, and the rates Wachovia ultimately got on the loan when the commissioners later voted to approve the deal.
The interest rate on 10-year Treasury bills was 4.11 percent on Dec. 28, 2007, and on Jan. 3, when Wachovia got the higher rates, the rate on 10-year Treasury bills had fallen to 3.91 percent.
Because Wachovia was allowed to raise its bid on the $5.1 million 10-year loan, it cost the county at least $175,000 more than it would have if the loan had been made at the rate Wachovia originally bid. The amount it cost the county is even greater if one takes into account that interest rates continued to drop before the county actually entered into the agreement with a vote of the commissioners later that year.
Based on emails and sources close to the process, it is evident that Fox made the move over the objections of then Guilford County Attorney Sharron Kurtz.
On Jan. 3, Fox sent Wachovia's "revised" rate to Guilford County Cash and Debt Manager Clay Hicks, in an email with a three-word message: "For your action."
Hicks replied to Fox, also in an email. (The capital letters in the email belong to Hicks.)
"I don't have amortization schedules to make a definitive ruling," Hicks wrote, "but based on a simple mathematical calculation blending the taxable and tax-exempt rates based on a 1/3-2/3 ratio, it looks like Wachovia is still the low bidder. HOWEVER – our RFP did not make any provision for Mulligans or 'Do-over's' because someone screwed up in the bid. I don't know whether Wachovia's language allowing for rate change gives them a legal out in this process and trumps our language in the RFP that states that quote should be firm through the anticipated close in late February or early March. I am not a legal expert in this area but I think we are wading into a minefield if we allow this change without consulting someone else for a ruling."
At the Oct. 6 Audit Committee meeting, Burke stated several times that he took his charge from the committee to be a narrow one: He said it was his understanding that the Audit Committee had asked him to determine if Fox had violated GS-143-129.1.
Just as Bluestein had stated months ago in The Rhinoceros Times, Burke said Fox could not have violated GS 143 because it does not pertain to service contracts.
"That statute did not apply," Burke said.
"I'm not a lawyer," he cautioned, "but I didn't see that 143 applied."
At the meeting, Burke said the reason Wachovia was allowed to "renegotiate" the rate upward after the bid process was because Wachovia had stated, when it made its bid, that its rate was subject to change, whereas, Burke said, the other two banks had not.
"The other two rates were firm," Burke said at the committee meeting.
In response to concerns that Fox may have informed Wachovia of the other two bids, Burke said he had spoken with Hicks.
"I talked with Clay and he did not have any knowledge that Wachovia was made aware of the other rates," he said.
At the meeting, Gibson asked, "Why would the other two banks bidding on the loan make their bid firm, when Wachovia did not?"
"I can't answer that," Burke said. "I don't know."
n response to a public records request from The Rhinoceros Times earlier this year, the county provided The Rhino with many of the relevant emails and documents and paperwork pertaining to the deal, and BB&T's proposal to the county states, immediately after BB&T offered its rates, "Also BB&T shall entertain a lower rate if current market rates decline," which clearly seems to indicate that the BB&T bid was not firm.
(The Rhinoceros Times has requested a copy of the proposal from Centura Bank as well, but the county has not yet provided that document.)
When Burke was asked, after the meeting, how he arrived at the conclusion that the proposed interest rates from the other banks were firm, he said that he made that assertion based largely on the fact that Wachovia included a detailed passage in its proposal that made it very clear that its rates might change. He added that all of these matters were subject to legal interpretation and he said that this type of question got into "procedural matters" rather than what he was asked by the committee to look into – whether GS-143 had been violated.
The Rhinoceros Times also pointed out to Burke that the county, in its RFP, had stated that bids should be firm. The county's bid request sent out to all three banks, as well as to other banks that didn't return bids, states: "We anticipate closing on the property in late February or early March 2008; your quote should be firm through that time period."
When it was suggested to Burke that, if any bids were actually firm, it was because that was what the county had asked for, he said that the county used the language "should be firm" rather than "must be firm" and that, he said, left room for ambiguity. Burke acknowledged that the statement "your quote should be firm" could be read as indicating that the county wanted firm quotes.
"I see your point," Burke said.
When Burke was asked after the meeting about his explanation as to why Fox would allow Wachovia to raise its rates when interest rates had fallen from the time Wachovia submitted its bid to the time Fox allowed Wachovia to change its bid, he said that was not something he had looked at.
"I didn't look at interest rates," Burke said.
When The Rhino Times asked Fox after the meeting why, given the fact that interest rates had come down after the bid process, and before the county awarded Wachovia the loan, she didn't call the other two banks to see if they would now offer bids that were better than Wachovia's new elevated rate, Fox responded: "Well, you have to quit sometime."
Bluestein said this week that there would have been nothing in the law preventing Fox from calling the other two banks and seeing what rates they could offer at that time. Bluestein said that since GS-143 did not apply, the rules of a formal bid process did not have to be followed and Fox could have called the other banks and asked for new quotes.
Rates kept falling and the county wasn't locked in to any deal until the commissioners voted on the loan later that year. Fox could have also sought lower rates as rates continued to fall.
When Fox was asked about her "negotiations" – which allowed Wachovia to increase the rate it charged at a time when interest rates were falling – Fox said there are several factors that go into making the decision of which bank to use and what rate to accept.
Fox said both at the Audit Committee meeting and afterward, when asked, that there were other factors besides rates. When Fox was asked after the meeting what considerations she was talking about, Fox said, "Prepayment options."
In addition to listing the proposed interest rates, the bid sheets obtained by The Rhinoceros Times also list other terms and conditions of the proposed loans. On the bid sheet, under the Wachovia proposal, it states, "Prepayment not allowed."
This week The Rhinoceros Times asked Fox several questions in two emails including the following. (The first question assumes for the sake of argument that the other two banks were firm.)
"Since Wachovia was not 'firm' but the others were firm, does that mean, if one of the other banks had won, then you would NOT have gone back to them and said 'What is it now?' because you already had a firm quote from them? Is that right, that Wachovia gets the right to renegotiate because it put that language in the bid?"
Fox was also asked: "If this is the practice, then are the other banks just not smart enough to put the clause in?"
In addition she was asked: "Also, wouldn't a rational bidder always just come back with a bid like 00000.1 to be assured they were the lowest, and then, after they had won the bid process, see what interest rates were at that time and convey the real offer they want to make to the county. They could say, well, now it is 3.9 percent or whatever?"
Another question asked in the emails was: "You said tonight that the interest rate was only one consideration and you mentioned that prepayment conditions were something else considered. I'm looking at the bid sheet and, in the bids offered by RBC and BB&T, it says those two banks do not have any problem with prepayment. Wachovia, however, has 'Prepayment not allowed.' So I was wondering how that could be better for the county. Or were other conditions even more important and, if so, what were those considerations (other than interest rates) that made it beneficial for us to go with Wachovia?"
To those questions, Fox replied: "In response to your two e-mails regarding installment financing, Eddie Burke, partner with Cherry, Bekaert Holland, L.L.P. independent auditors, in the audit committee meeting on October 6, 2011, explained the installment purchase financing transaction for the purchase of the BB&T building by the County, based on the facts and circumstances that existed at the time. My decisions and recommendations were based on these facts and circumstances."