Nine months ago, the president of a nationally known collection agency was asked to recall how Municipal Collections Inc. won a contract from the city of Houston to help track down some $60 million in delinquent traffic-ticket fines.
"This thing," he offered, shaking his head in disgust, "stunk right from the beginning."
Now it's taxpayers who are caught downwind of a deal that, according to an audit released this week by City Controller George Greanias, has cost the city close to $1.5 million in lost revenue.
The controller's audit reports that, with the "knowledge and cooperation" of Larry Miller, director of Municipal Courts Administration -- the city department that oversees the ticket collection contract -- Municipal Collections has been paid $672,000 more than it has actually earned as one of two contractors hired to track down and collect on delinquent traffic tickets.
In addition, auditors found that in the two years since Municipal Collections was awarded its contract, city employees have performed roughly $300,000 worth of work for the company -- one of a number of "major contract deviations" allowed by Miller.
The audit of Municipal Collections' contract was initiated by Greanias last November following a story in the Houston Press that raised questions about how Municipal Collections beat out apparently more qualified competitors. Earlier this year, findings flowing from that audit revealed that Bayou City Enterprises, a minority subcontractor working for Municipal Collections, was acting as a "pass through" company, being paid $480,000 for work that was then handed off to, and actually performed by, yet another firm.
After a three-month political standoff, Mayor Bob Lanier removed Bayou City from the city's ticket collection contract. But despite Greanias' urging, the administration has made no effort to seek reimbursement from Bayou City. Similarly, it appears likely there will be no attempt to recoup some $729,000 that the controller believes Municipal Collections should refund to the city.
In another bit of political dejà vu, the city's Legal Department has reprised the role it played in the Bayou City imbroglio by leading the challenge to the controller's latest report. Instead of expressing an interest in checking out what Greanias' audit seems to have uncovered, City Attorney Gene Locke sent the controller a four-page memo that, while agreeing that certain amendments to the ticket collection contract were in order, argued that the city had a legal right to little, if any, reimbursement.
Moreover, the Municipal Courts Administration's director, Larry Miller, has cited the Legal Department's "interpretation" in his response to Greanias' audit, which he says is "in error."
On Monday, during his release of the audit, the controller responded to the Legal Department's memo wryly. "I expect I'll have hair," the smooth-pated Greanias said, "before the Legal Department accepts any audit findings from my office."
The findings in the city controller's study of Municipal Collections' relationship with the city argue that, since being awarded the contract to collect "new warrant" cases (traffic tickets that are less than 210 days delinquent), Municipal Collections has been the happy beneficiary of the city's willingness to ignore -- if not outright manipulate -- the terms of its own contract. For example, the audit discovered that:
* Municipal Collections was assigned tickets before they were actually delinquent. The importance of this is that Municipal Collections was due 28 percent of each ticket assigned to the company that was then paid off. By assigning the company tickets before the 30-day grace period on them had elapsed, the likelihood of the company enjoying a windfall from people who intended to pay their tickets, but were waiting for the last legal minute to do so, was increased. According to the audit, Municipal Collections earned $110,000 in fees for collecting on parking tickets assigned to them before the grace period had elapsed.
* Another $134,000 was paid to Municipal Collections even though the traffic violators involved had squared their debts with the city before collection efforts began. That happened because Municipal Collections incorrectly recorded the "date of first notice" -- the day collection efforts officially begin and the company becomes eligible for a fee. Auditors determined that the actual "date of first notice," which was supposed to be when dunning notices were first mailed, was usually several days later than recorded.
* The audit also suggested that the city is permitting Municipal Collections to collect on tickets that are more than 210-days delinquent, even though Municipal Collections' contract states that such tickets are to be passed along to another contractor. But in some instances, Municipal Collections was allowed to keep tickets for an additional two weeks in order to collect them and earn a fee.
* City employees in the Municipal Courts mailroom were doing work Municipal Collections had agreed to perform under the contract. Auditors estimated the city spent $300,000 processing mail payments that Municipal Collections should have handled.
The collector's audit also shed more light on the curious relationship between Municipal Collections and Bayou City Enterprises, the minority subcontractor that was banished from the collection deal in March for being a "pass through."
The controller's audit revealed that Municipal Collections was tapping a portion of the 19 percent minority set-aside that Bayou City was receiving. Before Greanias stopped payments to Bayou City in December, the subcontractor had paid Municipal Collections a total of $207,000.
Those payments were made, the controller says, "strictly to improve [Municipal Collections'] bottom line." And like all the discrepancies identified in the audit, the Municipal Collections/Bayou City arrangement was never approved by City Council.
"Given the findings in the audit," Greanias said at his Monday press conference, "there are some serious questions raised about why this contractor was allowed to forgo so many of the critical elements of the contract, elements that were part of the way we determine what share of the fees they would collect."
More intriguing is a question that Greanias' auditors did not address, but which has hovered over Municipal Collections' deal with the city since it was finalized in May 1993: how, exactly, did Municipal Collections, a company that had no experience, no clients and no prior record of existence, wangle its way into a lucrative contract over several nationally known collection firms?
In many ways, the answer to that question foreshadowed the irregularities identified by Greanias' audit.
Municipal Collections Inc. was conceived by private investigators Peary Perry and Clyde Wilson and former Municipal Courts judge William E. Wells in November 1992, the same month the city sent out what are known as RFPs -- requests for proposal -- for a contract to collect overdue traffic tickets.
Wilson, who later bowed out of Municipal Collections, has identified himself as the source of a Channel 13 story on an insurance scam that damaged the mayoral bid of Lanier's 1991 runoff opponent, Sylvester Turner; Perry, still the company's president, has done security work in the past at banks and apartment buildings owned by Lanier. He also worked on the mayor's 1991 campaign, and lawyers for Turner, who is suing Channel 13, have suggested that Perry was the real source for the insurance scam story.
When asked at his Monday press conference if the circumstances of Perry's relationship with Lanier had allowed Municipal Collections to take advantage of the city, Greanias replied, "I hope not."
"To the degree the city's interests were not protected," Greanias added, "you need to look to the person who was in charge of administering the contract."
That would be Larry Miller, and when one considers his relationship with Municipal Collections, the ties that bind become more tribal than political.
The 58-year-old Miller worked in one capacity or another at Municipal Courts for 27 years before Lanier appointed him director in 1992. Miller became well acquainted with William Wells, an original principal with Municipal Collections, between 1981 and 1988, when Wells was a Municipal Court judge.
Wells reportedly relinquished his share of Municipal Collections after it was disclosed by the Press that he was convicted of embezzlement and theft of an elderly woman's Social Security checks. But before he left the company, the former judge gave Miller's sister-in-law, Verna Fletcher, a job with Municipal Collections. In March, Miller told the Press that Fletcher's hiring "didn't look too good," but that he couldn't do much about it.
Miller could, however, have passed up the opportunity to hire her husband, Ken Fletcher. But he didn't: Ken Fletcher makes $33,000 as an assistant manager in Municipal Courts' warrants division. That office records bonds posted by violators, among them people with outstanding traffic tickets. Posting a bond is supposed to halt any traffic ticket collection process. But one of Greanias' findings suggests that Municipal Collections was paid fees for tickets on which violators had already posted bonds.
That's not the only Miller connection that appears to have worked out well for Municipal Collections. At the very beginning, amendments made by Miller to the city's RFP were helpful to Municipal Collections' efforts to secure the ticket collection contract. Miller made late changes to the RFP that allowed Municipal Collections to skirt requirements that it have five years of experience and that it produce CPA-certified statements attesting to its financial stability.
In April 1993, Council approved Miller's recommendation of Municipal Collections for the contract. Miller, who referred all questions about the controller's audit to the city's Legal Department, has denied that the RFP amendments helped Municipal Collections get the contract. And in his response to the controller, he says that contrary to the audit findings, he has "aggressively managed" the Municipal Collections contract.
Maybe so, but to what end?
Two audit findings in particular suggest that Municipal Collections was even less qualified to do its job than it appeared when the company was awarded the contract -- and that Miller was as willing to take it upon himself to amend the contract as he had been to amend the request for proposal.
Auditors found that, despite being required to do so by the contract, Municipal Collections failed to purchase $1.1 million in performance and payment bonds when it began working for the city; evidence suggests the brand-new company couldn't afford them. Though Municipal Collections did ultimately purchase its bonds, it did so on June 12, 1995 -- two years and almost $3 million in fees after it started collecting tickets for the city.
Miller has admitted that the bond requirement was not enforced and says that the "appropriate personnel have been reprimanded." But in response to other audit findings, he says nothing in the contract prevented him from doing what he did.
He also appears to have interpreted the contract the way he wanted. For instance, Miller says he made a "management decision" to allow his department to carry out the mail-payment processing duties for Municipal Collections. The contract, according to Miller, permitted either the city or the contractor to process mail payments, and the Legal Department backs him up on that. However, the contract language could hardly be more explicit: "The Contractor will receive and process mail payments ...."
Greanias says such deviations from the original contract have allowed Municipal Collections to increase its income at taxpayers' expense.
"I don't see anything in management's responses that says, 'You're wrong,'" the controller says of Miller's and the Legal Department's responses to his office's audit. "They've got a lot of reasons for why it's no big deal. We don't agree with that. We think it is a big deal when a contractor makes one set of promises and we agree to pay them a certain amount based on those promises and subsequently the contractor says ... 'I'm going to do it differently.'"
But don't expect the Lanier administration to share Greanias' outrage. Lanier stubbornly rejected Greanias' opinion that Bayou City was being illegally paid. And though the mayor finally pulled the company off the ticket collection contract, he's made no effort to get the city reimbursed the nearly half-million dollars Greanias says it's owed.
If he wants money back from Municipal Collections, Greanias can do what he did with Bayou City and begin withholding the city's payments to the firm. But word has already come down from the Legal Department that such a move would be legally unwise.
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"Administratively, he could do it," says Susan Taylor, an assistant city attorney." We think he should not. We feel like we'd be at risk of a lawsuit."
Interestingly enough, Greanias' audit may prove damaging in another lawsuit pending against the city.
In April, West Capital Financial Services, which had a separate contract to collect "old warrant" cases more than 210 days delinquent, sued the city for $2.5 million. The reason? The company claims Larry Miller gave Municipal Collections preferential treatment.
West Capital officials say that, in light of Greanias' audit, they expect to increase the damages they will seek from the city.