OARC, as the group is known, also tried to pay its own salaries from a $1 million grant approved for equipment and construction projects under a minority business development program, the examiners' report says. And it spent nearly $1 million more on three Ogontz Avenue properties that were later valued at $640,000.
The confidential 28-page report, submitted to state officials in January 2012 by a Pittsburgh accounting firm and obtained by The Inquirer, adds detail to a behind-the-scenes battle between the Corbett administration and a pair of politically connected nonprofits that for years received tens of millions of dollars to shore up city neighborhoods.
Officials from the state Department of Community and Economic Development have since frozen funding to OARC and the second group, the Urban Affairs Coalition, but have declined to release details of the investigations.
Last summer, the state demanded OARC return $2.7 million, including grant money for two of its signature projects, the redevelopment of Ogontz Plaza and West Oak Lane Plaza, records show. The department also denied or rescinded nearly $2 million more in grants, including some after they had been approved.
It's unclear what sparked the probes, and if the findings reflect broader flaws in the way state grants are awarded and spent, or just egregious exceptions.
In a lawsuit it filed in January against the Corbett administration, OARC maintains it sought and managed grants the same way for years, following practices approved by the same department that has since slashed its funding. It has asked a federal judge to order the state to honor the grant contracts.
But officials from the nonprofits say they can't discuss the allegations because the state hasn't given them its findings.
"It's outrageous that you got a document and we don't have it," S. David Fineman, a lawyer for OARC, told The Inquirer. "It's only indicative of people dealing in bad faith."
The report on OARC spending parallels one compiled last spring by inspectors who reviewed Urban Affairs Coalition grants. Those findings, reported in November by The Inquirer, said UAC mismanaged at least $1.5 million in grants, including using state money to pay a Philadelphia pastor and his aide, at Dwight Evans' direction, for work investigators could not verify.
Ties to Evans
The nonprofits are separate but closely aligned. Sharmain Matlock-Turner, the president of UAC, has served as OARC's board chairwoman. Her signature has appeared on its contracts with OARC president Jack Kitchen's.
Both groups have strong ties to Evans, the Democratic Party heavyweight who for years was their key legislative patron in Harrisburg. He isn't mentioned in the report about OARC, the nonprofit he launched three decades ago, and said last week he would not discuss the report or dispute. "I only know what I read in the papers," he said. "I don't know anything else."
During the decade before he lost his post in 2010 as the ranking Democrat on the influential House Appropriations Committee - a span when another Philadelphia Democrat, Ed Rendell, occupied the governor's seat - OARC and UAC together collected $52 million, more than any groups statewide, in the "walking around money" (WAM) that legislators plugged into the budget for pet projects without public discussion or scrutiny.
Gov. Corbett, a Republican who promised to rein in unchecked state spending, ended WAMs after taking office in 2011. That year, the economic development department also began scrutinizing grants to OARC and UAC.
'Fair and impartial'
Corbett's inspector general, Kenya Mann Faulkner, whose office is charged with rooting out government waste and fraud, hired outside accounting firms to review the grants. A spokesman for her office declined to discuss the probes but issued a statement that said the office reviews every complaint it gets, strives for "fair and impartial" investigations, and "does not target or single out any agency, vendor or grant recipient."
Faulkner's office has no authority to prosecute but can refer cases to law enforcement agencies. It's unclear if that has occurred.
Fineman, the OARC lawyer, said he had been assured "that OARC and its employees are not the target of any [other] investigation."
In November 2011, a team from the Pittsburgh-based accounting firm Schneider Downs arrived at OARC's Haines Street offices to begin a "forensic investigation" of its records and expenses, their report says. They stayed five weeks.
The 11 grants they were asked to review represented a fraction of the money managed by OARC. Its tax returns show more than $40 million in public support just between 2006 and 2010.
Still, the inspectors cited recurring problems: funds that were misspent or miscategorized under the terms of the contracts, hundreds of thousands of dollars paid as no-bid "consulting fees," expenses that OARC couldn't verify or explain, and grant budgets rewritten and money spent before the state approved any changes.
When state officials asked Kitchen why OARC paid itself $433,000 from a $3 million grant allocated for the Philadelphia Center for Arts and Technology, he said OARC used the cash to hire a construction manager for the project and as reimbursement for "technical support," the report said. The contract doesn't explain what the support was.
According to the report, Kitchen told officials such fees "are typically reinvested to support the overall mission of the organization."
The inspectors called his statement "a tacit admission" that funds were routinely misspent. They also noted that records suggest the construction manager's salary was already paid through another grant.
The Inquirer shared some details from the report with Kitchen. In an e-mail Wednesday, he said he would not address specific assertions but said: "We were never asked to explain these issues and had no knowledge of what the report contained."
The investigators also looked at a $1.5 million grant OARC got in 2007 to cover its salaries and marketing plus expenses for the West Oak Lane Jazz Festival. The event, a symbol of the community's resurgence, disbanded last year.
OARC, the report said, doled out $121,000 in no-bid contracts for festival services such as catering and sound engineering, ignoring regulations that require competitive bidding for contracts of more than $10,000.
The organization also lacked records to prove an additional $119,000 in expenses, including $67,000 it said it spent on media and $20,000 for limousines. The nonprofit also got $187,000 to spend on artists and $80,000 on security without identifying where the funds would go.
"In many of the contracts, OARC's approved budget did not clearly stipulate precisely how the grant funds were to be used," the investigators' report concluded, warning that it could open the door for grant recipients "to spend funds frivolously."
That grant was one of three used between 2006 and 2008 to pay for "Wine Down Wednesdays" at a restaurant a few doors down from Evans' office, inspectors said.
In 2006 and 2007, when the restaurant operated as the Ogontz Grill, OARC paid $42,000 for radio ads and a disc jockey to work at the weekly event, the report said. That money came from a $1 million grant approved for "consultants to produce a series of arts and culture events over the next two years at a variety of locations throughout Northwest Philadelphia to showcase the annual festivals," records show.
In 2007, OARC brokered the relaunch of the restaurant under a new owner, chef Sadiki Travick. Between October 2007 and January 2008, OARC reported spending $51,000 more on Wine Down Wednesdays, with grant funds allocated for real estate, salaries, and marketing, the report states. From a third grant, OARC claimed an additional $18,000 in Wine Down Wednesday costs just for April 2008.
In an interview with The Inquirer, Travick said the weekly promotion was a bust, largely because the restaurant did not have a liquor license for much of his tenure. Patrons were encouraged to bring their own bottle, but rarely more than a handful showed up, he said.
The inspectors cited records suggesting OARC spent money on the promotion into the spring of 2008, but Travick said the restaurant stopped hosting Wine Down Wednesdays in November 2007.
"While I was there, it never happened again," he said.
Despite state regulations that bar grant recipients from funding projects in which they have an interest, OARC bought out Travick's stake in the restaurant in 2008. (He later sued OARC for breach of contract and fraud, but a judge dismissed most of his claims.)
OARC renamed the restaurant Relish - its name today - and sold its share a year later. The investigators also reviewed OARC's purchase in 2009 of another local restaurant, North by Northwest, but did not find state money misused in that deal.
But inspectors did rap OARC for being unable to verify hundreds of thousands of dollars in claimed expenses. For instance, they cited $70,000 in expenses in 2006 and 2007 logged in OARC's books simply as "cash."
According to the report, the nonprofit also asked in 2011 to shift $1 million that had been allocated for construction vehicles and equipment under a minority business development program grant to cover OARC's operating expenses, including $586,000 in salaries. The economic development office never approved the request, but OARC spent the funds anyway, the report says. Last summer, the state demanded that OARC repay $988,000 from that grant.
In its lawsuit, OARC claims a department official verbally approved the spending shift "so long as the items . . . were not being funded by another contract." It also maintained that reallocating money as it did was a long-approved practice between the state and grant recipients, in part because the department took "an excessive amount of time" to approve budget changes.
The inspectors also questioned OARC's decision to buy four Ogontz Avenue properties in late 2006 and early 2007 without getting appraisals. Three were later appraised for much less than their purchase price.
The starkest example cited by inspectors was a lot and building OARC bought in November 2006 for $375,000, almost double what the property had sold for six years earlier. OARC then transferred the parcel to a subsidiary, Main Development Group, and took out a $425,000 mortgage on it.
An appraisal three years later - after a stretch when the housing market tumbled - valued the site worth $180,000, less than half its purchase price. OARC sold it in 2011 for $213,000, about 43 percent below its purchase price.
In the end, the team of inspectors said they could not be sure they had a full picture of the nonprofit's books. OARC's initial response to their record request was "incomplete and disorganized," and hampered their fieldwork, they said.
Fineman, the OARC lawyer, said the agency bent over backward to respond to the investigators. "All our books and records and everything have been examined," he said. "There isn't anything that hasn't been examined."
Contact John P. Martin
at 215-925-2649, at email@example.com or @JPMartinInky on Twitter.