Summary

Matters coming to our attention relating to noncompliance with various guidelines and those relating to significant deficiencies in the design or operation of the internal control for those operations audited are as follows:

The scope of this audit included a determination of the extent to which the internal controls of the Florida Education and Research Foundation, Inc. (FERF), and the Brevard Teaching and Research Laboratories, Inc. (BTRL), promoted and encouraged the achievement of management’s objectives in the areas of compliance, economic and efficient conduct of operations, reliability of financial records and reports, and safeguarding of assets. In making this determination, our audit disclosed that the internal control environment established for these organizations was not conducive to the accomplishment of these objectives. Most significantly, we noted several conditions which limited the assurance that activities and transactions of the organizations, which have been designated as direct-support organizations of Brevard Community College (BCC), were conducted at arms-length and in the best interests of the organizations, BCC, and the State. These conditions included: actions taken in apparent violation of the Sunshine Law; transactions with entities that shared directors or officers; a lack of competitive procedures for the selection of contractors, consultants, and vendors; inadequate documentation of services provided by consultants; duplicate payments for equipment; receipt of contributions and loans from contractors, consultants, and vendors with whom the organizations conducted business; and a lack of a documented basis for management or Board of Directors approval for certain actions. It is apparent from the existence of these material internal control weaknesses and the findings included in this report that the activities of FERF and BTRL have not been subjected to adequate and effective oversight. (See paragraphs 27 through 31.)

Sunshine Law

Our review of the records of FERF disclosed that on 13 occasions actions of the FERF Board of Directors were taken by unanimous consent of the Board members without holding meetings. Such actions included approval of bond resolutions; authorization of the sale of land; appointment of Board members and acceptance of resignation of Board members; amendment of by-laws to increase Board membership; approval of a bank loan for the purchase of a vehicle; and authorization to enter into contracts. Also, BTRL Board meetings prior to November 1995 and FERF Board meetings prior to April 1996 were not noticed. These actions appear to have been in violation of the Sunshine Law. (See paragraphs 32 through 36.)

Policies and Procedures

Our review of the operations of FERF and BTRL disclosed that these entities did not have written policies and procedures for many of their functions, including their accounting and related business functions, for extended periods of time during which many of the actions discussed in this report took place. For example, adequate written policies and procedures were not available to document controls over payroll and personnel expenses, procurement of goods and services, and disbursement activities. (See paragraphs 37 through 40.)

Budgetary Controls

Budgets for BTRL were provided for our review for the 1993-94, 1994-95, 1995-96, and 1996-97 fiscal years; however, no budget amendments were prepared and submitted to the BTRL Board of Directors for any of those fiscal years. Additionally, no comparisons of budgeted revenues and expenses to actual revenues and expenses were submitted to the BTRL Board of Directors.

Total budgeted expenses exceeded the total actual reported expenses for the 1994-95 and 1995-96 fiscal year; however, for the 1993-94 fiscal year, total actual expenses ($910,393) exceeded total budgeted expenses ($747,070) by $163,323. Also, total budgeted revenues substantially exceed total actual revenues for each fiscal year. Because budgeted revenues are a major factor in the estimation of resources that will be available for use in the ensuing fiscal year, overly optimistic estimates of revenues in comparison to actual revenues can and have resulted in shortfalls in available resources. Additionally, the budgets did not include the effects of prior year deficit fund balances. Failure to consider necessary changes in revenue estimates and prior year deficits may have contributed to the deficits reported by the BTRL and the resulting need for funding by the BCC. (See paragraphs 41 through 46.)

Related-Party Transactions

Our audit disclosed numerous contractual relationships and transactions among FERF, BTRL, BCC, and other organizations which shared Board members, officers, or employees with these organizations. These relationships and the sharing of Board members may have resulted in transactions involving FERF and BTRL that were not made at arm’s length and in the best interests of BCC and the State.

These transactions are of even greater concern when considered together with the lack of documentation of competitive vendor selection procedures in the selection of the corporations to provide services and the lack of documentation for the services actually provided. Further, given the nature of these related-party activities and the lack of documentation of actions taken and transactions conducted, there is the potential that results of a review of the activities by the Internal Revenue Service could jeopardize the not-for-profit status of these organizations, or the tax exempt status of debt issues, under the United States Internal Revenue Code and Florida Statutes. (See paragraphs 47 through 53.)

General Disbursements

Our audit disclosed numerous expenditures by FERF and BTRL for which the authorized public purpose contemplated to be served by the expenditures had not been demonstrated in the records or which were not adequately documented as to the application of necessary controls designed to assure that the goods and services were actually received and were acquired at the lowest cost commensurate with quality considerations.

In the absence of supporting documentation to demonstrate the legal authority, public purpose, and demonstrable benefit provided to BCC and the State of Florida, the FERF and BTRL Boards of Directors could not be assured as to their propriety. (See paragraphs 56 through 63.)

Duplicate Payments

In audit report No. 12356, paragraphs 36 through 44, we noted that effective controls were not exercised over the equipment purchases made under the arrangements among BCC, BTRL, and Indian River Region Environmental Institute (IRREI). Specifically we noted: (1) the contract between BCC and BTRL had not been approved by the BCC’s Board of Trustees and the contract was general in nature and did not specify the manner in which services would be provided; (2) there was nothing of record authorizing any delegation of purchasing authority to BTRL or IRREI or specifying the procedures to be followed by those organizations; (3) there was no indication that any of the items were purchased pursuant to bids or combined for bid purposes; and (4) the purchases were not adequately supported by BCC purchase orders, receiving reports, and invoices. Our audit of BTRL disclosed that $66,258.16 of purchases billed to BCC by IRREI and paid by BCC during the period from January 1992 to December 1992 were also billed to BCC by BTRL and paid by BCC during the period from July 1992 to February 1993.

On November 17, 1997, the BCC Vice-President for Business Affairs filed a claim with the Florida Community College Risk Management Consortium indicating that " Brevard Community College has been hit with a series of duplicate payments which resulted in the college losing $66,953.33." (See paragraphs 64 through 70.)

High Efficiency Chiller Purchase

A BCC internal audit report dated June 30, 1997, questioned the purchase of a high efficiency chiller for the BTRL clean room facility using Florida Department of Community Affairs’ grant funds. The information provided in the internal audit report indicated that actions were taken to represent falsely that grant terms had been met in the acquisition of the chiller. (See paragraphs 71 through 73.)

Contributions from Vendors and Consultants

Our audit disclosed that numerous contributions (totaling approximately $75,900) and loans (totaling $5,400) were received by FERF from consultants and vendors doing business with FERF or BTRL. The loans and contributions were made directly to FERF by the consultants and vendors and recorded in the accounting records of FERF.

The receipt of contributions and loans from consultants and vendors doing business with an organization or a related organization raises a question regarding the propriety of the transactions between the organization and the consultants and vendors. While it is generally not possible on postaudit to determine the existence of any relationship between the business transactions and the loans or contributions, such contributions and loans, together with the cited lack of competitive vendor or consultant selection procedures and lack of adequate documentation of goods or services provided, could indicate a circumvention of the controls normally associated with the conduct of business by arm’s length transactions between independent parties. (See paragraphs 74 through 76.)

Motor Vehicles

Our review disclosed that FERF obtained at its cost a vehicle that was used by the former President of FERF. There was nothing of record to indicate that FERF considered and documented the basis for determining: (1) the need to acquire the vehicle; (2) the type of vehicle that would best serve FERF’s needs as compared to the costs; and (3) the manner of acquiring the vehicle at the least cost to FERF. We also noted that the vehicle subsequently was sold to the former President of FERF without consideration of whether the vehicle could have been sold at a higher price by open bid or other competitive procedure. (See paragraphs 77 through 83.)

Travel Expenditures

Our examination of travel expense reimbursements disclosed questionable travel reimbursements totaling $1,611.50 to the former FERF President. These reimbursements were included in payments to the former FERF President totaling $2,424.00 for 10 trips, primarily to Tallahassee, during the period from December 1994 through June 1995. Nine of the reimbursements were made from BTRL accounts and one was made from a BCC account. Since the vehicle used by the former FERF President was leased by FERF at that time, it appears to be inappropriate for BTRL to pay the mileage expenses for travel by the former President. (See paragraphs 84 through 87.)

Bonded Debt

On October 1, 1994, the City of Palm Bay issued Lease Revenue Bonds (Series 1994A) in the amount of $8,955,000 and Taxable Lease Revenue Bonds (Series 1994B) in the amount of $140,000 and loaned the proceeds to the Florida Education and Research Foundation, Inc. (FERF), to finance the acquisition of 44 acres of land by FERF and the development and construction of a 35,000 square foot building. On April 1, 1995, the City issued Lease Revenue Refunding Bonds (Series 1995A) in the amount of $9,360,000. The proceeds of this issue were used to refund the Series 1994A bonds at par of $8,995,000, pay a three percent redemption premium of $268,650, pay $100,000 into the interest fund, and pay $36,350 into the expense fund to cover certain costs of issuance. The result of these debt issues is that debt of $9.5 million ($140,000 and $9,360,000) was incurred and must be repaid in order to generate only $6.27 million for land and facilities acquisition.

The 1995A bond issue dated April 1, 1995, in the amount of $9,360,000 (to refund the $8,955,000 issue) was rated by Moody’s Investors Service as "Baa" or medium investment grade bonds and carried interest rates ranging from 6.1 to 7.0 percent. According to Moody’s Investors Service, the basis for the rating was a resolution passed by the BCC Board of Trustees on January 23, 1995, which stated:

"The Board of Trustees hereby covenants to use its best efforts, in its sole judgement, to provide for the Lease Payments in each annual proposed budget within the restricted fund category. . . ."

Based on our review of the Moody’s Daily Recap dated March 24, 1995, and the more detailed Credit Report dated March 27, 1995, it is apparent that the bond rating of "Baa" was based, at least in part, on the BCC resolution.

In our audit report No. 13000, paragraph 49, on BCC, dated May 28, 1997, we noted that substantial payments were made by BCC to BTRL and we questioned whether it was the intent of the Legislature to authorize colleges to routinely pay significant operating costs of a college’s direct-support organization without reimbursement.

In October 1997, Moody’s Investors Service lowered its rating on the 1995A bonds to a "Ba" rating. According to Moody’s Investors Service, bonds which are rated "Ba" are said to have speculative elements and their future cannot be considered as well assured. (See paragraphs 88 through 96.)

Bond Issuance and Other Related Costs

The amount of bond proceeds expended for direct project costs or deposited for payment on the bonds represents only 80 percent of the total amounts disbursed as a result of the bond issues (64 percent for the bond project, $6,270,498.19, and 16 percent deposited to debt service and interest funds, $1,570,008.51), while the issuance and other costs on the bond issue was 20 percent, which is excessive. In light of the significant costs incurred to issue this debt, it is not evident on what basis the determination was made that this debt financing was in the best economic interest of the public, BCC, and BTRL. (See paragraphs 98 through 101.)

Unauthorized Use of Bond Funds

The bond indentures for the bond issues included provisions specifying the proper uses of the bond proceeds and interest earned thereon. These uses, as set forth in Article 5 of the Bond Indenture included interest on the bonds, prepaid lease payments, redemption of the refunded bonds, issuance costs, and project costs. The amounts paid from the proceeds and interest for these bond issues included several amounts totaling $251,613.61 for which documentation was not available to demonstrate that they were related to the purposes for which the bonds were issued and included in the project budget. (See paragraphs 102 through 107.)

Selection of Underwriters, Construction Manager, and Other Service Providers

The underwriter for the bond issues was paid $900,214.27 for fees, expenses, an underwriter’s discount, and a redemption premium and $372,067.82 for accrued interest earned on the bond proceeds while the bonds were held by the underwriter. The architect and the construction manager for the construction of the Brevard Laboratories facility were paid $319,914.83 and $2,347,104.15, respectively, from the proceeds of the bond issues. Additionally, a total of $1,980,167.24 was paid to various vendors or contractors for materials and labor related to completion of the project facilities. In addition to the underwriter, architect, and construction manager, our review of the payments made from the bond proceeds and related interest earnings disclosed payments totaling $733,330.72 to several professionals, including attorneys, financial advisors, and a development consultant, for services rendered in connection with the bond issues.

Our review of bond-related FERF documents provided for our examination disclosed no indications of the use of competitive selection procedures for securing the services of the underwriter, the architect, the construction manager, and the other professionals. Our review of FERF records did not disclose the basis used by FERF in deciding that noncompetitive negotiated sales were appropriate for the issues and that competitive selection of the architect, construction manager, and other consultants were unnecessary. Additionally, the Vice-President for Business Affairs, at our request, obtained from the construction manager documentation of quotes received by the construction manager for various materials and labor related to construction of the project facilities. However, records were not available to evidence that this documentation had been reviewed by BCC or BTRL personnel and that appropriate bid procedures had been applied in the selection of the vendors and contractors who were paid for materials and labor.

Competitive selection procedures are generally used to provide objective assurance that the best services and interest rates are obtained at the lowest possible cost and to demonstrate that selection procedures are free of self-interest and personal or political influences. Furthermore, competitive practices reduce the opportunity for fraud and abuse, and are fair to competing finance professionals. The lack of competitive selection procedures, in combination with a lack of contracts and inadequate documentation of services provided, provides very little assurance in this regard. (See paragraphs 108 through 111.)

Lease-Purchase Agreement

BTRL is responsible for accumulating resources to meet the debt service requirements on the bonds issued for the Brevard Teaching and Research Laboratories project by the terms of its Lease-Purchase Agreement with FERF. However, as evidenced by the deficit fund balances accumulated by BTRL and the support provided to BTRL by BCC, it is apparent that adequate consideration was not given to the ability of BTRL to accumulate resources adequate to meet the debt service requirements. The primary source of revenues of BTRL is laboratory user fees.

While BTRL, under the terms of the Lease-Purchase Agreement, initially leased 44 acres from FERF, and therefore was responsible for funding the entire debt service for the bond issue, BTRL was utilizing only a 3.7 acre parcel of land on which the laboratory facility was constructed. As a result of the sale or other disposition, the land under lease to BTRL has been reduced; however, BTRL is still paying for debt service on 32.28 acres of land which is well in excess of the value of goods received and utilized. Because of the excessive acreage included in the Lease-Purchase Agreement, as well as the excessive load on the debt issue, BTRL is responsible for making lease payments in amounts that significantly exceed the value of the assets being utilized. (See paragraphs 112 through 114.)

BCC provided support totaling $3,065,042 to BTRL through June 30, 1997, to supplement BTRL’s other revenues and pay the costs of operations of the laboratories and the debt service. Our review of the records of FERF and BTRL and the official bond documents disclosed no feasibility studies or market surveys conducted to assess the ability of BTRL to generate sufficient revenues from user fees or other sources to provide for the cost of operations and debt service requirements.

In view of the levels of revenues generated by BTRL and the levels of support provided to BTRL by BCC, it appears that the bonds were issued and the Lease-Purchase Agreement entered into without adequate consideration as to the ability of BTRL to fund the debt service. (See paragraphs 115 through 118.)

Land Transactions

Our audit disclosed that FERF executed several real estate transactions without obtaining real estate appraisals. Additionally, minutes of FERF Board meetings did not clearly evidence the Board’s consideration of the reasons for these transactions and how these actions were expected to benefit BCC and its missions.

Good business practices dictate that real estate appraisals should be obtained prior to any decision to sell, purchase, or exchange real estate; however, we have not been provided with any appraisals of the bond land. The establishment of a minimum sales price of $43,260 per acre (including redemption premium) for the bond land presumed that the land could be sold for that amount. The proceeds of such sales are to be paid into the Land Sale Redemption account to reduce the debt owed by BTRL which, under the terms of its Lease-Purchase Agreement with FERF, is responsible for the debt service on all of the lands. To enable BTRL to meet its obligation, it is important that this land be sold and the debt reduced accordingly. However, the only releases of the bond land to date were made through the purchase/exchange of 9.92 acres between Parrish Medical Center and BCC and the 1.8 acres released for the Clean Room.

Our review of the real estate market around the Palm Bay campus indicated that the real estate market, which peaked in 1992 or 1993, is well below the $43,260 per acre required minimum purchase price. In purchasing the property, FERF may have relied on some appraisals obtained by BCC for property purchased by BCC in the same area; however, it is apparent that the value of the remaining bond land is currently less than the required minimum price of $43,260, making disposition of the property at that price very difficult. (See paragraphs 119 through 126.)

Use of College Facilities

As direct-support organizations of BCC, FERF and BTRL are authorized to use BCC facilities. However, examination of the activities of FERF and BTRL disclosed several other corporations that listed the same address on corporate filings, but had not been designated as direct-support organizations.

One of these organizations, the Indian River Region Environmental Institute, Inc. (IRREI), had entered into an agreement with BCC to provide certain services to BCC. This agreement provided for IRREI to utilize BCC facilities. Because no value was placed on the services to be provided or the use of BCC facilities, we were precluded from determining whether the BCC was providing use of facilities on a commensurate basis with the services provided by IRREI. No such contracts with the other organizations were provided for our review. While the scope of our audit did not include the activities, if any, of the remaining organizations, we did note that the officers and directors of several of these organizations were also officers and directors of FERF and BTRL and that some of these organizations had contractual relationships with BCC. In the absence of direct-support organization designations for these corporations, we are unaware of any authority for their use of BCC facilities. (See paragraphs 127 through 129.)

The written responses to the audit findings and recommendations included in audit report No. 13170 are presented as Exhibit F.