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September 13, 2002
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Audits
confirm horrendous financial mess at Red Lake
By Bill Lawrence
A little more than four years ago former Red Lake tribal
chairman Bobby Whitefeather was swept into office by a 42-vote majority
on a
“great leap forward” economic development platform. Cornerstones
of the great leap forward were a modular home
manufacturing plant, a door and window plant, a bottled water operation
and a
hotel/water park expansion at the River Road Casino in Thief River
Falls (TRF).
In an article in the Bemidji Pioneer on July 17,
1998, one week before the tribal election, Whitefeather is quoted as
saying
that “The tribal council often heard ideas, but they later fizzled
without
follow-through. Now the tribal council
has a plan of action and a timetable to implement these projects.” “Now we have a methodology,” he said.
At the most recent regular
monthly meeting of the Red Lake tribal council on Tuesday, September
10,
auditor Ron Romero of RSM McGladrey, Inc. made a slide presentation of
the
status of the forensic audit, to date, of the River Road casino
expansion. Romero explained to the council
and tribal
members in attendance that he was still waiting for documents from some
of the
financers and others involved with the project before he could finalize
all the
numbers. He said that he hoped to be
able to get those documents in the near future. He
also said that everyone had been cooperative with him in doing
the audit. He said he wasn’t in a
position to comment on whether he had come across any fraud, waste or
abuse
yet.
Romero’s presentation and the handout made available to
tribal members confirmed the fact that River Road hotel/water park
casino
development was overspent by nearly $12 million. The
amount authorized by council resolution was $26,507,000 and
the amount spent was $38,295,000. Romero
told the Council that “what really hurt the
band was that over
$8.5 million of the $12 million overspent came out of tribal operating
capital. Right out of funds that should
have been available to run tribal programs.” Romero
explained that the breakdown on the amount
spent was as follows:
water park $7,344,000; hotel $22,279,000; TRF casino expansion
$8,672,000. In addition, Romero estimated
that interest
on the development was about $10,000,000. Chairman
“Butch” Brun told Romero that he calculated
the numbers and he
came up with interest costs of more like $20,000,000.
Romero responded that his estimate was very
conservative and the
final figure could very well be close to the chairman’s $20,000,000
estimate.
Romero discussed management concepts for developments like
the River Road hotel/water part project and said he found deficiencies
in all
major areas including: a lack of strong business knowledge of the
principals
involved; a lack of business plans; a lack of policies and procedures;
a lack
of internal controls; a lack of good communication; a lack of
accountability,
and a lack of reporting and progress management.
Romero said the location of the hotel/water park expansion
and the inadequacy of the feasibility study were some of the main
causes of the
financial problems with the project. He
said lack of patronage at the hotel/water park, high overhead and debt
would be
a continuing problem for the Council at River Road.
In response to questions about “what went wrong at River
Road?” Romero responded that because of not having the management
concepts in
place, as he discussed earlier, the tribal council (led by Dan King)
spent
money they didn’t have on other projects such as gaming equipment at
Warroad,
purchase of the Churne property, the Warroad casino expansion, and
purchase of
the Super 8 motel in Warroad.
Romero also indicated that the auditors would also be taking
a look at the quality of workmanship in the developments.
Romero indicated that there still is a lot
of work for the auditors to do, and did not give a time line for
completion of
the forensic audits. Red Lake tribal
treasurer Darrell Seki told Press/ON that the committee that is
assisting him with working with the forensic auditors are happy with
RSM
McGladrey’s work so far. He indicated
that the auditors have been paid $12,000 for their work to date.
Auditors from the CPA firm of Brady, Martz & Associates
of Grand Forks, ND reported on audits they had completed for the fiscal
year
2001 operations of Red Lake Industries (modular homes) and Red Lake
Custom
Doors II. Because of the inadequacy of
inventory records at both operations the auditors were unable to form
an
opinion regarding amounts in inventory. Regarding
the Red Lake industries, the auditors
found and reported in
note 6:
“Note 6:
Going concern: As shown in the
accompanying financial statements, the Company incurred a net loss of
$1,333,141 during the fifteen month period ended December 31, 2001 and
incurred
a net loss of $768,813 during the year ended September 30, 2000. These losses from operations in prior
periods have resulted in accumulated deficits of $3,287,389 as of
December 31,
2001. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. The Company’s sales volume is dependent upon
government contracts through the Red Lake Housing Authority. Fixed overhead costs will require continued
cash flow support from the Red Lake Band of Chippewa Indians. The financial statements do not include any
adjustments that might be necessary if the Company is unable to
continue as a
going concern.”
In
addition, Red Lake Industries has a $500,000 note due at 6½ %
interest at a
local bank, and it is unlikely that they will have the revenues to
cover the
debt when it must be paid by January 31st. Due to the financial situation of the Red Lake
industries, the
tribe will probably be required to assume responsibility for that note.
According
to the audit report, Red Lake Custom Doors II had a net loss of
$114,743 for
fiscal year 2001. The operation was
shut down last fall and is currently not in operation.
In
addition, the Red Lake bottled water plant was discontinued last fall,
and it,
also, is not operating. The bottled
water plant could never work out manufacturing and water-quality
problems at
the Redby site. Red Lake
tribal business manager, Randy Redpath, who was hired about four months
ago,
presented financial information on the general and special revenue
funds as of
December 31, 2001.
With the changeover
from the fiscal year which ended last September 30th,
to a
calendar
year beginning January 1, 2002, these numbers reflect fifteen months of
operation during the last fiscal year, which started October 1, 2000
and ended
December 31, 2001. Due to the
changeover from a 15-month fiscal year to a 12-month calendar year, the
numbers
do not offer any comparison between the two period, and they also did
not
contain the amounts budgeted for the fifteen-month period.
According to the figures in the general and
special revenue fund, total revenue for the fifteen-month fiscal year
was
$57,045,847 and total expenditures were $62,480,617, leaving a deficit
of
$5,434,770. In order to deal with the
deficit, during fiscal year 2001 the Whitefeather council withdrew
$7,924,083
from trust funds, leaving a net balance $2,698,976 in operating funds
for the
year. Of concern
is the fact that federal program awards for the 15-month period were
$28,348,242, and expenditures for the same fifteen-month period totaled
$35,779,343. This does not necessarily
mean that there weren’t adequate funds, but it may mean that financial
reports
were not prepared to the meet the requirements of having funds released
for the
federal government for the programs.
From review of the records, it looks like money was
handled very poorly
by previous administration during that period. It
appears now that the new administration is making
every attempt to
find out exactly what the financial situation of the tribe is. Manager Randy Redpath, in response to a
question, said that the full audits will be available on September 30th,
and that as far as he can tell, this is the first time that the tribal
accounting staff has been able to develop their own financial
statements in
preparation for the audits. Whitefeather’s
“great leap forward” that carried him into office in 1998, along with
recalled
former treasurer Dan King and council members Fabian “Nickel” Cook,
Delores
Lasley, and Harlan Beaulieu, resulted in going from the very limited
indebtedness
of the tribe four years ago, to a debt now estimated to be in excess of
$60
million. In doing this, the former
tribal council has impacted money that should have gone to tribal
programs and
hasn’t. The financial impact is still
being audited, and won’t fully be known for a few more months.
We are just
learning the full impact of Whitefeather’s financial naivety and his
“great
flop forward,” and the full scope of his inept planning, which is
inevitably
going to affect people on the reservation for many years. |
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