Wednesday, June 12, 2024

City, county request forensic audit from HCAD

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The Granbury City Council and the Hood County Commissioners Court recently requested that the Hood Central Appraisal District undergo a forensic audit, following concerns brought up by Mayor Jim Jarratt that excess funds were not being returned to the taxing entities.

During a regularly scheduled council meeting May 21, Jarratt explained why he had placed the forensic audit request on the agenda.

"I have no reason to believe that there's anyone that has taken a financial gain,” he explained. “I have no reason to believe that at all. I do believe though, that there are processes and procedures that have probably been inherited, at least two and maybe more … that raise concern.”

Jarratt brought up the fact the HCAD board of directors previously used the same auditor for 24 years, but in 2022, decided to change auditors.

"The auditor that was there 24 years did not identify that excess funds were being withheld from being returned to the entities which is required,” he said. “Again, no one is gaining from this, but the taxpayers are losing from this.”

Jarratt said the reason the HCAD was holding the funds was due to a desire to construct a building — specifically, a home office for the appraisal district.

"When you start spending money, it's the approval of the entities, and there's a resolution process that you go through to request that of the entities — and it never occurred,” he said.

According to Jarratt, a contract was written between HCAD and Cauble Hoskins Architects that involved a $333,000 purchase for the home office, however even after the deal fell through, $132,000 of taxpayer funds was never returned to the entities.

"I have documentation from the appraisal district, and it shows a selling point made to the appraisal district by Government Capital Corporation, and it was not made to the appraisal district; it was made to the HCAD Home Office Corporation, which if you go back and look at the minutes, there's a resolution that has been made by the HCAD to form a home office corporation, naming the directors of the HCAD as directors of the home office corporation, but not responsible to the HCAD,” Jarratt said. “The information documents, the bylaws, they all seem to contradict the tax code.”

Jarratt explained that for 17 months, the dissolution of the home office corporation was an agenda item, but no action was ever taken. On the 18th month, Jarratt said the action taken was “Don’t put ‘dissolution of the home office corporation’ on the agenda anymore.”

"Nothing happened," he said. “I don't know what's out there, but I do sense that these processes and procedures are in contradiction to our tax code, and possibly even some of our laws and regulations. I think there's quite a big reason to have a forensic audit, and it's about processes and procedures, not about personnel. No, I do not think that there's anyone that has benefited from this, but I do believe that the taxpayers have now been taken advantage of through some antiquated processes and procedures that need to be reviewed in depth."

In response to Jarratt, new HCAD Chief Appraiser Jeff Law said that due to the lack of documentation submitted to the Secretary of State, the home office corporation was never established.

"Of course, the board has taken action to rescind any and all decisions regarding establishing that,” Law said. “Hopefully that is an issue that has been kind of put to rest.”

Jarratt responded by saying out of the 170 pages of invoices, meeting minutes and notes from the HCAD, there was nothing in the documents that states that the home office was rescinded.

"We have some responsibility to our taxpayers to make sure that the directors are upholding and adhering to the processes and procedures that act in the best interest of the taxpayer, and I don't feel that that's happening,” he said.

Place 2 Councilmember Eddie Rodriguez — who is also chairman of the HCAD board of directors — then asked Jarratt if he was “making an assumption” that the home office is still active.

"No, it was active for three years,” Jarratt said. “I made an assumption that it has yet to be rescinded.”

“So, you’re saying that it’s still active,” Rodriguez said.

“Is it?” Jarratt asked.

“That’s what I’m asking,” Rodriguez said.

“You’re the president of the board. You tell me,” Jarratt responded. “Have you rescinded it?”

“Yes,” Rodriguez stated.

“When? This year?” Jarratt asked.

“Yes,” Rodriguez said. “I don’t have the minutes exactly in front of me.”

Law then weighed in that it was his understanding that the board approved the articles of incorporation and the bylaws, but the chief appraiser at the time never sent the information back to the attorney to have the next process completed, which included registering it with the Secretary of State. He said the minutes might reflect that there was an intention to establish the office, but it never happened.

Rodriguez also explained what the current board of directors has done to improve transparency, like sending out a quarterly newsletter to the taxing entities, creating a new websit, and forming a new budget.

"We as a board of directors for the Hood Central Appraisal District have been making those changes, and now you're asking all the entities to fork out $100,000 on a forensic audit, that the city is only going to contribute 6%, and then the county and the school district are going to have to front the majority of that,” he said. “The city is 6%, the county is around 28%, and then the school districts around 65%, so you're saying that you want to save taxpayers money, but you want to spend $100,000 of taxpayer money for a forensic audit.”

“The appraisal district has already spent a documented $387,000 on design and construction fees for a building that they have not been authorized to build,” Jarratt said. “We need a forensic audit to determine what was done where and when, and then to set up a process and procedure, so it doesn't happen again."

Mayor Pro Tem Steven Vale asked Law if the forensic audit was something he would be amenable to.

Law responded that the idea of this audit relates to actions that took place in the past, as he only joined the HCAD as the appraiser in September 2023.

"Everything that I know about what's happened in the past has come to me via hearsay,” Law said. “I've just heard stories. I've heard what people have said, but I don't think that any wrongdoing has happened, and I don't think that there was anybody who received money that they shouldn't have. I think it would be a pretty expensive venture to go into to try to do this type of audit, not knowing really, what would turn up or what would be discovered.”

City Attorney Jeremy SoRelle then addressed Law and explained that they had previous conversations regarding crediting the taxing entities, as well as a lack of agenda items involving actions that were taken by the previous board of directors — essentially not complying with the Open Meetings Act.

"Number one, I say, thank you for all of the changes that we've discussed. The things that you're doing, I think, are fantastic,” SoRelle said. “But at the end of the day, what that truly is for me is an indication that there was some real trouble in the past that we have a list of changes that goes on and on and on … What the request for the forensic audit is, is to go back and look at all of these issues that you guys are addressing and be able to show all of the taxing units, ‘Here's where the money went in. Here's where it was used. Here are processes that maybe were avoided, or maybe weren't,’ but get to the bottom line of all of this, and then use that to go forward with everything that you're implementing now, for a better HCAD.”

“As our city attorney just mentioned, I think there's some things that may come up (from the audit) that may not be anything eye opening, or that will help with some policies and procedures,” Vale said. “I think we owe the audit to our community; I think we owe it to our taxpayers.”

Law said he appreciated the comments and that he will do whatever the HCAD board of directors tells him to do.

“I think going through an audit will reveal things that maybe need to be changed and will also maybe clear up some things that are not an issue,” Law said. “I think audits can work both ways. They can reveal things that need to be fixed and rebuild perception correctly."

Place 4 Councilmember Gary “Skip” Overdier then asked Rodriguez if the HCAD board will still take action regarding the audit if the council adopted the resolution.

Rodriguez said he would go through legal counsel about the decision and explained that the board of directors is a separate government entity like the city council.

"Whether this gets passed or not passed, it's still up to the Hood Central Appraisal District board of directors to determine what they want to do," Rodriguez said. “It's just like somebody's telling us what to do on city council or telling us how to vote or telling us what we need to do. I can't tell you what the board of directors are going to do."

Place 3 Councilman Bruce Wadley also spoke up and said he’s not suggesting any money went into the wrong hands, but he is curious about where the money went.

"In some of the discussion tonight, all that hasn't really been answered. It's not clear in my mind at all,” he said. “An audit of this nature, it seemed like it would get you back to just a new baseline where you know exactly what happened in the past, and for you (Law), I think that would be really beneficial to know going forward that everything's been squared away, and now let's go forward the way you want to do it.”

Rodriguez then argued how he didn’t believe it was fair to pass a resolution requesting a forensic audit when the other taxing entities have to pay for it — especially if the entities don’t agree that one is needed.

Jarratt said the school district has been active in the establishment of the home office and added he hopes that the district will want to ensure that the taxpayer’s funds are being spent appropriately.

Wadley then made a motion requesting the Hood Central Appraisal District conduct a forensic audit and provide the results to the taxing entities. The motion passed 5:1, with Rodriguez voting against the item.

COUNTY COMMISSIONERS ECHO CONCERNS

The Hood County Commissioners Court also approved a resolution May 28, calling on the HCAD to conduct a forensic audit of the prior five fiscal years, due to a concern that there may be funds that were inappropriately allocated. Jarratt and Rodriguez were also present during the meeting.

Precinct 2 Commissioner Nannette Samuelson explained that last summer, there were a lot of questions surrounding the appraisal district and the funds that were being held in non-compliance with Texas Tax Code 6.0 — which ultimately resulted in a refund back to the taxing entities of more than $2 million.

“It has since been discovered that the prior board of the appraisal district also misappropriated an additional $387,000,” Samuelson said. “This additional expense occurred as the result of the Central Appraisal District forming the Hood Central Appraisal District Home Office Corporation, appointing themselves as directors and seeking to borrow $6.2 million from Government Capital Corporation to build a new building. The $387,000 was then spent on architectural design and construction fees, including fees to appraise and survey the GISD-owned property that was being pursued as a swap for the existing HCAD office building. The HCAD Home Office Corporation formation documents and the bylaws are in direct conflict and contradict the requirements of the Texas Tax code 6.0."

Following an explanation by Jarratt regarding the situation, Rodriguez told the court the reason why the board hired a new auditor is for “better pricing,” and to save the taxpayers money. He also said all the budgets, except for last year, were approved by all of the taxing entities.

"Last year, it was a circumstance where we had $2 million that was in our excess, what you call a fund balance, but they were all obligated ... That's kind of like your savings account,” Rodriguez said.

He also reiterated how the prior board established the Home Office Corporation, but that the documents were never filed, so the entity does not exist.

“What the board of directors did is rescinded all those documents and all those minutes that took place under the Home Office Corporation because it never existed,” Rodriguez said. “I'm not sitting here as a lawyer, and I'm not sitting here as an auditor. I'm just here as the chairman of board trying to give you some explanation of what the board has been trying to do, and I just want to give you some steps that we've been taking, as good faith and within the law.”

Precinct 4 Commissioner Dave Eagle then asked Rodriguez if he had a problem with having a forensic audit conducted. Rodriguez explained that the city had allocated $100,000 for a forensic audit, but that it was the HCAD board of directors' decision if they wanted to take action or not.

"Yes, the board of directors of the Hood Central Appraisal District is a separate entity. But it's funded by all of the taxing entities — one that's already passed a resolution to request that a forensic audit be done,” Samuelson said. “We may vote to or not to. But those are two of the taxing entities that fund the appraisal district. We're responsible for the actions that are taken on our behalf, so I do want to say that, you know, if I were a member of the appraisal board, and the people that are funding me asked me to take some action to ensure that policies and procedures and accounting principles and controls were in place, I might want to listen to them.”

Rodriguez then explained how he’s not opposed to doing the forensic audit, but that his goal is to save the taxpayers money.

"I've read a lot of documents, a lot of emails, a lot of stuff going back and forth where I'm questioning whether there's criminal intent involved,” Eagle said. “I really am … We can find out who said what, when, and determine whether there was an attempt by, not your board, but a prior board, to go around tax code 6.01, and I'm trying to understand why you're resistant to the idea of ‘OK, we did nothing wrong. Come do what you’ve got to do.’ Why don't you come at us like that?”

“Mr. Eagle, I already told you why I'm coming at you like that,” Rodriguez responded. “I mean, y'all have hammered the appraisal district for not saving taxpayers money, and now you're sitting here telling us to spend money, so we're getting some mixed signals from the commissioners court. Do you want us to spend money, or do you want us to save taxpayers' money? Are you willing to spend that type of money for the type of return that you’re going to get?”

“We don't know what the return is,” Samuelson said. “We don't know what the results of the forensic audit (will be). It's not just about the $387,000. We need to be assured as stewards of the taxpayers' money, that the policies, procedures and controls that were lacking back then have been corrected, and that there were no other misdeeds or misappropriations that happened during that time. The way to do that is with the forensic audit.”

Samuelson also pointed out how the HCAD is not allowed by the Texas Tax Code to maintain a fund balance.

"You do not have a rainy day fund. Any funds are to be returned to the taxing entities, and that was the whole point of what we went through last summer,” she said. “There is no fund balance maintained by the appraisal district, so the purpose for doing this forensic audit is to ensure again, I'm going to reiterate, the processes, procedures and controls that were not in place during the time that these things happened and are now in place and have been corrected, so that we can assure the taxpayers that the Hood Central Appraisal District has those processes and procedures in place and is not misallocating or misappropriating funds that they're being taxed for.”

Hood County Judge Ron Massingill then said he doesn’t have any problems with the new board or the chief appraiser, but that he does have some questions about what happened in the past.

"Some of the things that I looked at, it does bother me, and I think we need to look at it,” he said. “I really do. That's saying nothing against you (Rodriguez) or the new board, and nothing against the new chief appraiser. But there were things that were done that I have a problem with. And I don't really agree with you that the taxing entities that make up the (appraisal district) that we all vote to do something on a thing, I don't think that the board of directors can countermand what we want to do. If (they) do, we have a real problem.”

Eagle said he agreed with Massingill and that there have been enough questionable emails and letters from the HCAD to justify a forensic audit.

Rodriguez then reiterated what the current HCAD board of directors has done to better the processes and procedures to try to prevent a similar situation from happening again.

"I want to commend the steps that the board has taken to tighten this stuff up,” Precinct 1 Commissioner Kevin Andrews said. “I think that you guys are absolutely moving in the right direction. I don't want to make any disparaging notion whatsoever towards the good direction, so thank you for that.”

Samuelson then made a motion to approve the resolution to have the HCAD amend the current year’s budget for the purpose of retaining a third-party forensic audit of the prior five fiscal years and deliver said audit to each taxing entity no later than the last day of the calendar year 2024.

Alternatively, the Hood County Commissioners Court calls on the Hood Central Appraisal District to include a line item for a forensic audit in the 2025 budget and complete and deliver said forensic audit to each taxing entity no later than June 1, 2025, and prior to the submission for review of the 2026 Hood Central Appraisal District Budget to each taxing entity.

Following a second from Eagle, the motion passed unanimously.