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$40 million of Richland County penny tax money may have been misspent, lawmaker says

A South Carolina representative says he's seen a preliminary audit report which raises serious problems with the program.

COLUMBIA, S.C. — Almost $40 million--which came from everyone that ever bought anything or ever lived in Richland County in the last six years--may have been misspent, according to a state lawmaker who's seen an early version of an audit into the penny tax program. 

"The county may be on the hook for more than $40 million of misapplied taxes," said State Rep. Kirkman Finlay, who represents part of Richland County.

Finlay made the comment after seeing a preliminary South Carolina Department of Revenue audit report of the Richland County Penny Tax program.

"It’s a big number," he said. "As I understand it, the point being the County proper may have to repay $40 million of money that has been expended by the penny. Because, money expended by the penny project was inappropriate. In other words, money has been expended from the penny for items that the penny is not able to do." 

The penny tax was approved seven years ago in 2012 and was meant to raise money to improve roads, transportation, the COMET bus system, and infrastructure in Richland County. But for years concerns about how some of that money is being spent have dogged the program.

RELATED: Council vote latest in string of Richland Co. penny tax controversies

In 2015, the South Carolina Department of Revenue, which is in charge of collecting the penny tax money and giving it to the county to spend, told the county it wasn't using all of that money properly. Specifically, the state agency found some penny tax money was being used for two outside public relations firms and by the county's small local business enterprise program for software and legal services that weren't transportation related.

RELATED: Richland County Council freezes future payments to Penny Tax program

The case even went to the South Carolina Supreme Court. 

Since then, the SCDOR has been going back and taking a look at expenditures from May 2013 to May 2018.

"If you pay for $40 million of inappropriate items, that would be my definition of a slush fund," Finlay said. "Slush funds are normally used to pay for things that are either inappropriate or you don’t want people to see."

RELATED: Lawmaker files complaint against firm auditing Richland County penny tax program

News19 has learned that preliminary audit report was released to some county leaders at an October 2019 meeting, according to SCDOR. But, the SCDOR report has not been made public, and so far County leadership isn’t talking.

When reached on Monday, County Council Chairman Paul Livingston and Vice Chair Dalhi Myers declined to confirm or deny the preliminary report’s findings.

“Per our attorney, I’m not getting into it,” Livingston told WLTX over the phone.

“I have no comments at this time,” he added.

Vice Chair Myers criticized the publication of preliminary information, saying it’s the same reason preliminary reports are not subject to FOIA requests.

“I think it is unwise of all of us to be running around discussing a preliminary finding, so for that reason I have no comment,” Myers said over the phone.

Myers continued, saying she works with facts, not preliminary reports and once again called having the discussion, “Unwise.”

The South Carolina Department of Revenue said they had no comment.

Even Representative Finlay said he was only able to look at a copy.

"The taxpayers can’t see how their money’s spent and there is no urgency in explaining guys we have a problem, what’s our plan?" Finlay asked.

"We are trying to understand where will the state be drawn in, if at all. Number two as a representative; I’m sitting here going I can’t even get numbers about this?” Finlay added, expressing concern about the potential for the state to have to send millions to Richland County.

WLTX has made numerous attempts to get the preliminary audit report and PDT financial documents through multiple FOIA requests, all have been unsuccessful.

"It is crazy to me that a local representative who’s simply trying to understand the problem has been told ‘yeah it may be a $40 or 50-million problem but give us some more time and maybe we’ll figure it out.’ We need to figure this out now. We need to understand what the liability is, understand what the repercussions are, and begin planning for it," Finlay said.

A former county administrator said in 2018 he had serious concerns about the county’s spending. Specifically, he questioned the hiring and contract of the Program Development Team (PDT), a third party that was brought in to manage the penny tax revenue. The county's contract with the PDT ended November 3rd.

At this time there is no way for the public to verify where the funds went or what is in question, since neither the PDT documents nor preliminary audit report have been released. 

"Everybody needs to start paying attention sooner rather than later," Finlay said. "My guess is by this point that number of 40 could have grown to 55 or 60 [million], who knows? But every day that goes on we are putting Richland County taxpayers further on the hook for money."

When did Richland County learn of the report?

During an hours long meeting on Wednesday, October 16th, the South Carolina Department of Revenue met with a delegation of Richland County Council about the county's Penny Tax program, according to council members whom did and did not attend.

SCDOR did not deny the preliminary report was given or discussed during that October 16th meeting when it replied to WLTX’s open records request.

Council members would not comment on the SCDOR October 16 meeting, but called a special called council meeting for October 22 to discuss the ongoing litigation with SCDOR. They did not address what was discussed in a nearly two hour executive session during that October 22 meeting.

Former County administrator raised serious concerns about the penny tax

In writings, now former Richland County administrator Gerald Seals expressed serious concerns about the County’s penny tax spending dating back to April 2018.

In a deposition concerning a lawsuit over his firing and settlement, Seals said he found more than a million spent improperly.

“Also, there was about $1.3 million that the County paid that we could not justify the payment that would have went to the PDT group,” Seals said, according to a transcript of the deposition.

The Program Development Team (PDT) managed the penny tax from November 2014 to November 3, 2019.

In an April 14, 2018 letter to the county council, Seals highlighted more issues, including the potential for several millions of misspent dollars.

“The County Attorney and the County Administrator informed the Council that several levels of cost overruns potentially imperiled the integrity of the program and that reimbursement should be sought and the program should be reconfigured to achieve concurrent accountability and compliance with the approved referendum,” Seals wrote.

“Now, the County’s General Fund will be charged millions of tax dollars to reimburse cost overruns and questionable expenditures in the Transportation Tax Fund that could have been avoided,” Seals continued.

Seals also criticized the County’s $50 million contract with the PDT.

“Last week’s filing of the Judge Cooper ruling seems almost certainly renders the PDT contract void. Specifically, costs not based on the County’s procurement ordinance competitive bidding requirement are ineligible cost to be applied against the Penny Sales Tax,” Seals wrote.

It’s unclear if the SCDOR report, which Finlay says determined $41 million in misspending, calls into question the contract cost between Richland County and the PDT.

County, Department of Revenue have battled for years over the penny tax

In 2015, the revenue department tried to stop the money raised from the penny tax from going directly to the county, after it found some of the money wasn't being used for transportation projects. Eventually, the case headed to the South Carolina Supreme Court.

In 2018, the high court ruled the Department of Revenue had the authority to rule the County improperly spent more than one million dollars. The court said the revenue department had the right to tell the county how it should spend the money, but also ruled SCDOR couldn't withhold funding from the program. The county then promised to make changes to how the money was spent that would be in line with the court's ruling.

New questions raised, second audit prepared

But that decision didn't end questions about how the money was being spent. Seals, the former Richland County Administrator who was fired by the council last year, claimed in a July 2019 deposition that money was still being misused.

Meanwhile, the county paid for its own independent audit of the program management team performed by Cherry Bekaert LLP that was said to be completed in 2017. The audit is separate from the one conducted by the SCDOR.

The audit has not been released to the public. Richland County Councilman Joe Walker said in a July 2019 letter he was forced to sign a non-disclosure agreement to review summary documents concerning that audit. Since then, Bekaert LLP has been urged by Walker and the county to release the documents, or provide information on how it reached its audit conclusions.

On Tuesday, in a reply to this story, Cherry Bekaert emailed WLTX.

"We never requested a non-disclosure (NDA). We asked for a signed consent that they will treat the audit work papers with the appropriate care. There are bank account numbers and other sensitive and security data points that are not subject to Freedom of Information laws. This consent is a standard request that all CPA firms would be required to observe," wrote August Keller with Cherry Bekaert.

Walker has maintained repeatedly, including in his original letter sent to Cherry Bekaert and the state Attorney General, "I request all findings, including those born to council under cover of a non-disclosure agreement."

In the same email from Keller, Cherry Bekaert maintains the audit is public.

"This is not accurate as audit HAS been released and is on their website at the following location," Keller wrote, including a link to the County's website.

One of the PDT's senior principals, Rick Ott, told WLTX the same thing in an October interview.

There is a document listed under "PDT Audit Reports," and has the title "FY 2017 Audit." The document is 13-pages.

It states, "We have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements referred to in the first paragraph."

Rep. Finlay filed a complaint with the state’s Labor, Licensing and Regulation Department about his frustration with Cherry Bekaert’s refusal to release the audit.

It's unclear why Walker and Finlay have both alleged the online report is not the document they're looking for during their public appeals and complaints.

The council has also ordered the PDT to send more than a million documents to the county detailing penny tax expenditures, finances, and other relevant history.

In late September, the County announced it planned to release all of those documents publicly after a formal review and any necessary redactions. But so far, after numerous WLTX requests, the County has not released any of the documents nor indicated specifically when they will begin to be released.

In late September, Richland County administrator Leonardo Brown wrote a letter to Cherry Bekaert asking the company to specify which documents now in the County's possession, of the more than one million, were the basis for its audit findings.

Full version of state audit nears completion 

On October 3 of this year, WLTX confirmed the Department of Revenue was almost done with its more complete audit of the program stretching from May 2013 to May 2018.

“The purpose of this audit is to ensure all expenditures are in compliance with South Carolina law,” a DOR public information officer wrote in the same email on October 3.

In the meantime, Richland County regained management of the Penny Tax Program after the contract with the Program Development Team (PDT) ended on November 3.

The team, which managed the penny tax for five years, has said repeatedly any decisions to spend taxpayer funds were approved by the County.

RELATED: Team managing Richland County Penny Tax hits back at recent County decisions, criticism

On October 1, Council voted to freeze all future management payments to the PDT through the end of the contract as questions over the audit, finances, and other concerns persisted.

At the time, Council members Dalhi Myers and Chakisse Newton said the freeze was important to protect the County’s options before the contract ends.

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