Local towns paying heavily for Bergen County loan program meant to save time, money

BY STEPHANIE AKIN AND CHRISTOPHER SCHNAARS – The Record

A Bergen County loan program touted as a quick and easy way for local governments to pay for big-ticket items has instead plunged some of them into long-term debt.

The five-year-old Municipal Banc was supposed to let cash-strapped towns bypass conventional borrowing methods and get county-backed loans for emergency services and public works projects. The program promised 24-hour loan approval with no red tape, backed by the county’s AAA credit rating.

Behind the news

Fees and contributions

Consultant fees paid by the Bergen County Improvement Authority since 2004, along with those consultants’ campaign contributions during the same period.

Sources: Bergen County Improvement Authority, N.J. Election Law Enforcement Commission

How it works

• Bergen County, which has a AAA credit rating, guarantees as much as $8 million yearly for municipalities and school boards, and since 2009, sewerage authorities and municipal and county utilities authorities.
• The Bergen County Improvement Authority provides application forms to borrowers, who do not have to pay their own attorneys and financial advisers for the service. Borrowers that complete the one-page application are approved in as little as 24 hours. The 1.75 percent application fee is folded into the loan.
• Once the application is approved, TD Bank deposits the entire loan in an account. The borrower starts paying interest on the loan and the fee immediately, regardless of whether the money has been spent.
• The borrower submits vouchers to the bank for reimbursement as it spends the money, and the bank deducts the money from the account.

How we did it

This article was complied from months of research, during which reporters analyzed hundreds of documents associated with the 78 loans issued through the Bergen County Improvement Authority Municipal Banc from 2004 through 2008. The reporters examined loan payment schedules and hundreds of vouchers provided in response to Open Public Records Act requests to the BCIA and towns that used the program.

Reporters also conducted dozens of interviews with town and county government officials, financial professionals and critics of
the program.

Most towns and school districts that used the program borrowed only what they needed and spent the money quickly. Many praised the program for its convenience and low fees.

But some towns took out loans for items as inexpensive as rope and firefighter boots, borrowed money long before they intended to make purchases and paid interest on money they never spent. In some cases, their applications were approved even though they provided little information about how the money would be used.

From 2004 to 2008, Rutherford, Fair Lawn and Hackensack let a total of more than $1.6 million in loans sit idly in Commerce Bank accounts while taxpayers paid more than $200,000 in interest and fees. Fair Lawn, for example, waited four years to buy a $130,000 generator.

“That’s like saying, ‘I’m going to buy a house, I’m going to pay a mortgage and interest on the house, but I’m not going to move in for three or four years,’” said Joseph Tedeschi, a Fair Lawn councilman.

TD Bank took over the program after it bought Commerce in March 2008.

Five consultants that donated more than $450,000 to Bergen County Democrats from 2004 to the end of 2008 were paid at least $1.8 million for professional services by the Bergen County Improvement Authority — the agency that oversees the Municipal Banc — including more than $180,000 for services tied to the loans.

Those consultants included Dennis Oury, the former counsel for the BCIA and the Bergen County Democratic Organization. Oury, who pleaded guilty to federal corruption charges in September, collected more than $1.1 million from the BCIA during that period. Oury resigned from the BCIA in early September 2008 after federal officials accused him of fraud.

The program auditor, Ferraioli, Wielkotz, Cerullo & Cuva, also was the auditor in three of the towns that were the heaviest users of the program: Fair Lawn, Hackensack and Rutherford.

“This is basically a funding scheme for the accountants, for Commerce and for the lawyers that are backing the [Bergen County Democratic Organization],” said Rutherford Mayor John Hipp, a critic of the $4.6 million that Rutherford borrowed under his Democratic predecessor, Bernadette McPherson. “It’s not against the law to do this. The question is whether it’s fiscally responsible.”

BCIA Chairman Ronald O’Malley said the fees collected through the program are put into the BCIA budget, and much of the money is then spent on projects that benefit county residents, such as improvements at Bergen County Regional Medical Center and Overpeck Park.

“I didn’t know that these goofballs were signing notes and then not submitting vouchers for eight or nine months at a time without doing a different note,” he said. “I don’t know what would possess anybody to do that.”

Many problems

O’Malley said that, when used properly, the Municipal Banc allows towns to borrow money cheaply. But a Record analysis of dozens of loans and hundreds of purchases found a litany of problems. Among the findings:

• Commerce overcharged Ruth er ford more than $715,000 when the borough closed six loans in 2007. The borough paid the full sum without question, only discovering the overpayment when questioned about it by The Record two years later.

After the borough’s auditor and attorney began a formal review of the accounts, the bank responded by informing the borough that the money was available, but did not acknowledge the overcharge. The bank issued a series of checks for the full sum on Monday. Borough officials are still investigating why the money was sitting there for so long with no communication from the bank.

“I wanted to thank The Record for bringing it to my attention,” Hipp said. “It’s very important that we uncovered these funds. These are public funds, and they shouldn’t be put away somewhere — I don’t want to say secreted or hidden — but left out there unexpended.”

• Some towns borrowed more than they needed and left the extra money in the accounts for years. Fair Lawn, Hackensack and Rutherford, for example, paid more than $200,000 in unnecessary interest and fees. In one case, Hackensack City Manager Stephen Lo Iacono said he did not know about $500,000 the city borrowed in 2004 but didn’t spend.

The money was still sitting in a non-interest-bearing account when Record reporters questioned Lo Iacono about it in September 2008. The city waited four additional months to try to close the account, asking the bank for reimbursement for purchases it had made as far back as 1999, according to documents Lo Iacono provided to The Record. By then, the city had paid nearly $60,000 in interest and fees. Lo Iacono recently said he could not immediately provide documentation that would show the accounts actually had been closed.

• Loan applications are supposed to list what borrowers plan to buy. In some cases, however, towns bought items that weren’t on their applications. In Fair Lawn, former Borough Manager Tom Metzler used money left over from a 2005 loan to buy a $25,000 car for his use, bypassing Borough Council approval and prompting an internal investigation that resulted in official reprimands for Metzler and Chief Financial Officer Barry Eccleston, who approved the purchase. Metzler’s use of BCIA accounts resurfaced in council proceedings to fire him before he resigned in November 2008.
• Some towns left blank pages in their applications where they were supposed to describe what they planned to buy. Commerce Bank approved the loans anyway. Fair Lawn submitted blank pages signed by former Mayor David Ganz — who, as a county freeholder, helped to develop the Municipal Banc program — and Joanne Kwasniewski, the borough manager at the time and now the acting manager. Borough officials who have been critical of the program say the blank applications have made it almost impossible to determine where the money was supposed to be spent.

“It’s like putting a puzzle together,” Councilwoman Jeanne Baratta said. “But you can’t find the pieces.”

• After it approved a loan, Commerce Bank held on to the money — and charged interest on it — until the borrower submitted a voucher. In some cases, this included money the bank held as long as four years.

By the end of 2008, the bank had collected more than $1.1 million in interest.

• Most towns that used the program had strong ties to the BCDO. The mayors of Fair Lawn, Rutherford and Demarest also were Bergen County freeholders when their towns borrowed money, and the mayor of New Milford was the head of the county Parks Department.

TD Bank, which agreed to respond only to written questions submitted through a spokeswoman, said the borrowers benefit from the program’s simple application process, fixed-rate pricing and minimal closing costs.

The spokeswoman, Rebecca Acevedo, brushed aside questions about towns paying interest for years on unspent balances, saying the towns dictate how the program works and when they want to pay for their projects.

She also declined to explain why specific documents were left blank in lease applications, saying that the bank “requires certain documents” when it approves a lease, and that those documents are reviewed by the BCIA and the state Local Finance Board, an agency that oversees municipal spending. Other documents, she said, are intentionally left blank at closing.

Marketing campaign

The BCIA — a county agency with the authority to issue debt — aggressively marketed the Municipal Banc program through glossy brochures and press releases, encouraging towns and school districts to take out loans for everything from police cars to fax machines.

Officials stressed that municipalities could avoid down payments typical with other types of borrowing — meaning they would have more money for other spending.

The agency also made a promise that sounded as tantalizing as a come-on for a credit-card: loan approvals within 24 hours, immediate access to a credit line and low-interest loans without the paperwork and long waits associated with taking out a bond, the most common way for municipalities to borrow money.

In his 2005 state-of-the-county address, County Executive Dennis McNerney called the BCIA program “one-stop shopping for capital purchases” — the type of big-ticket items, such as fire trucks and snowplows, that municipalities usually buy on credit.

The agency is no stranger to heavy marketing. It has sent its representatives to town meetings — including at least one in Fair Lawn that wasn’t open to the public — to encourage borrowing through its programs.

After McNerney and BCIA representatives appeared at a Glen Rock Borough Council meeting in August 2008, the Bergen County Republican Organization called for a federal investigation of the agency for what it called strong-arm tactics and fees paid to companies that support the Democratic Party.

Critics say the BCIA operates beyond voter oversight and allows municipalities to get deeper into debt while it puts money into the pockets of big campaign donors.

“The last thing I want is government officials that have instant access to money,” said former Bogota Mayor Steve Lonegan, who lost a bid for the Republican spot on the gubernatorial ticket in the June primary. “I want it to be as hard as it can be for them to get that money.”

Representatives of three of the five consulting companies that worked for the loan program — Ferraioli, the Gibbons law firm and Acacia Financial Group — said their contracts had nothing to do with patronage. Municipal Advisory Partners no longer exists, and Oury did not return a request for comment.

In an interview, McNerney said critics accuse the county of funneling contracts to politically connected consultants, a practice called pay-to-play, every time it comes up with an innovative program.

“If the tired old cynics want to continue to use pay-to-play, go ahead and let them,” he said.

The Municipal Banc program is just one tool the county provides to municipalities and school districts to help them pool their resources and save money, he said. Similar programs exist nationwide, including programs in Morris, Somerset and Mercer counties in New Jersey.

Nearly one of every five municipalities and school boards in Bergen County had taken out BCIA loans by the end of 2008. Scores of those loans were used almost immediately after they were approved, giving the borrowers the advertised benefits of the program.

But critics said the program doesn’t save municipalities the money it claims to.

The BCIA charges a 1.75 percent fee on every loan. Bond fees generally would be higher — but all towns issue bonds for projects that can’t be financed through the BCIA program, such as road work and sewer improvements. Because towns have to pay those bond fees anyway, critics said, they can lump in extra loans at almost no additional cost and get a competitive interest rate.

Towns also can minimize the interest they pay on bonds through short-term loans they use on incremental expenses until they have accumulated the entire debt approved for a bond, spending the money only as they need it.

In Dumont, for example, the council approved a $500,000 Municipal Banc loan for a fire engine in 2007, but then opted to issue bonds because its auditor found bonds would be cheaper, Borough Administrator John Perkins said.

“If bonding is a cheaper way to go, then that’s the way to do it,” he said.

‘A shopping spree’

Critics also said the program encourages reckless spending, because it does not require the same voter oversight as bonds, which generally have to be approved in detail at public meetings. Officials then have to produce documents showing how much they are borrowing and why.

“It’s a shopping spree,” Hipp said.

Such spending can make elected officials look good while they’re in office, critics said, but it can create mountains of debt to be paid off by taxpayers.

“The temptation is I get to please everybody,” Hipp said. “And by the time the problem arises, I’m up and out [of office]. I’m a senator. I’m a president.”

Under McPherson, who was also a county freeholder and a strong supporter of the program, Rutherford borrowed $4.6 million through the Municipal Banc, acquiring so much debt that in 2007 it appealed to the Local Finance Board for special permission to refinance its BCIA loans.

McPherson did not return numerous requests to comment for this article.

In testimony before the board, Rutherford officials said they had been relying on a windfall from the scandal-ridden EnCap redevelopment project in the Meadowlands to pay off the debt.

When the EnCap project went bankrupt, the borough was left with rising property taxes and no way to pay off its loans.

The BCIA is not responsible for Rutherford’s poor financial planning, O’Malley said.

“They’re not in trouble because we lent them that money,” he said. “They’re in trouble because they lost all that money that was budgeted for EnCap. These transactions are not what got them in trouble.”

Fair Lawn also was led at the time by a mayor who was a county freeholder — David Ganz. Along with Rutherford, it borrowed one-third of all the money loaned through the program.

Meeting minutes show that Ganz and Allan Caan, a councilman and Ganz’s freeholder aide, suggested taking out Municipal Banc loans for everything from library books to lawn mowers. In 2004, when the borough paid for much of its capital budget with $1.1 million in BCIA loans, Ganz spoke extensively about how much money the borough was saving by using the program because it could borrow money without paying anything down.

Ganz said in an interview that the program allowed Fair Lawn to provide better services to its taxpayers, and that several officials — from the borough’s chief financial officer to the Local Finance Board — reviewed the loans.

He dismissed suggestions of political pressure to use the program.

“It was something that was made available to every municipality in the county of Bergen, all on the same terms,” he said. “I had no personal interest in it at all.”

Both Ganz and McPherson were voted out of their mayoral offices in landslide defeats amid allegations of fiscal irresponsibility. Officials in both towns have since vowed to stop doing business with the BCIA, citing concerns about high costs and political patronage. Ganz and McPherson are still freeholders.

Ed Cortright, Rutherford’s chief financial officer, said the program got the borough in trouble because of a feature that politicians had considered one of its biggest strengths. As promised, he said, the money is available quickly — so quickly that interest started snowballing long before the purchases could be approved.

“In hindsight, maybe it wasn’t the best choice,” he said.

E-mail: akin@northjersey.com

Loans

Nearly one of every five municipalities and school boards in Bergen County had taken out BCIA Municipal Banc loans by the end of 2008. Here’s a look at how much each of them borrowed and paid in fees and interest in that period.

Note: Interest was not calculated for loans issued after July 1, 2008.
Source: Bergen County Improvement Authority