Audit Report on the Financial and Operating Practices of the New York City Economic Development Corporation and Compliance with Its Master and Maritime Contracts July 1, 2005-June 30, 2008

AUDIT REPORT IN BRIEF

The New York City Economic Development Corporation (EDC) is a local development corporation organized under §1411 of the Not-For-Profit Corporation Law of the State of New York.  EDC’s primary activities consist of rendering a variety of services and administering economic development programs on behalf of the City.  EDC performs its services under two contractual agreements with the City (the Master Contract and the Maritime Contract).  Both agreements are for one-year terms and are subject to annual renewal.

The audit determined whether EDC accurately recorded and reported its revenue and expenses to the City, properly retained revenue payments in accordance with the Master and Maritime contracts and remitted amounts due the City; and complied with other significant provisions of the agreements, such as the submission of the budget and financial plan reports to the City, contract procurement requirements for personal and professional services, and the preparation of monthly and annual reports including reports on the monitoring of job retention and expansion.

Audit Findings and Conclusions

EDC generally accounted for its revenue and expenses and complied with other provisions of the agreements.  However, we found a noticeable lack of transparency in the classification and disclosure of certain revenue transactions to the public that resulted in EDC’s retention of $125.5 million in payments it collected as a conduit on behalf of the City. The amount included payments from the 42nd Street Project (Project), proceeds from the sale of City-owned assets, and inactive public purpose funds that should have been transferred to the City and disclosed accordingly in EDC’s financial reports to the City.

Moreover, we identified some internal control deficiencies during the course of our audit that led to EDC’s lack of review of payments-in-lieu-of-taxes (PILOT), inadequate control over its property disposition process, and incomplete collection of rental income. Other weaknesses in EDC operating practices included problems with the calculation of the energy discount, the recording of the Revolving Loan Fund Program (RLF), and the monitoring of contract administration, job retention and construction requirements, and timekeeping functions.

Audit Recommendations

We make 12 recommendations based on our findings to EDC:

• Remit the retained funds, totaling $125,513,793, to the City:
  • $98,297,350 in payments collected from the Project.
  • $10,682,600 in fund balance as of June 30, 2008, for inactive Public Purpose Fund #22.
  • $16,533,843 in net proceeds from the special sales of City assets.

• Provide for proper classification and enhance the transparency of its revenue amounts due the City.

• Properly monitor the Project as follows:
  • Maintain accurate and complete books and records for the costs incurred and reimbursements received.
  • Ensure that the reconciliations are prepared in accordance with the terms of the agreements and in a timely manner.
  • Verify the accuracy of PILOT payments collected for the Project.

• Use the total funding balance of $10,079,415 as of June 30, 2008, from inactive Public Purpose Funds #12, #13, #18, #28, #30, and #31 in accordance with the terms and provisions of the respective funding and trust agreements.

• Properly administer the sales of real properties as follows:
  • Consistently classify properties that have previously generated revenues as City assets.
  • Return the proceeds of the sales of City assets to the City in a timely manner, unless expressly waived by the Office of Management and Budget.
  • Require prospective buyers of properties to do their due diligence and take into consideration the possible remediation and other additional development costs before the final offer is accepted on property in order to avoid discretionary negotiation of substantial cost deductions subsequent to the procurement process.
  • Discontinue the use of projected cost data of a prospective buyer’s development plan to serve as a basis for the reduction of the appraised value.
  • Adhere to the established fee schedule in charging administrative fees on property sales.

• Recoup the $97,079 in rents and license fees due.  Properly calculate, bill, and collect the rent amounts and other tenant reimbursements in accordance with the terms of each lease agreement.

• Recoup the excessive Energy Cost Savings Program (ECSP) discounts of $461,038 credited to six customer accounts and credit the other six accounts with the total shortfall of $122,110.  In addition, EDC should credit the difference of $262,962 to Con Edison. Use the correct rate to calculate ECSP discounts and ensure that the amount is consistent with Con Edison’s discount.

• Properly record the RLF administered by lenders as loan receivables to ensure accurate tracking of the amount receivable upon the termination of the agreement.

• Recoup contractor workers’ compensation for duplicate payments and unrelated capital project costs.

• Implement policy and guidelines to ensure that all contractor submissions are properly reviewed and approved.

• Ensure its project developers and other entities comply with the employment and construction requirements stipulated in their agreements with EDC, validate the employment data submitted, and schedule timely site inspections to authenticate the completion of constructions.

• Ensure that time-keeping records are properly submitted and authorized.