By J.B. Smith

Tribune-Herald staff writer

Downtown Waco Inc. has received a $70,000 check in restitution for missing money, board president Scott Felton acknowledged Thursday, as city of Waco officials awaited answers to whether the agency misused public funds.

Felton would not say who wrote the check or who might be to blame for the shortfall. He said the nonprofit economic development agency is seeking an outside audit to determine how much money is missing.

Until the audit is complete, the city of Waco and McLennan County are withholding their payments to Downtown Waco Inc. Those payments were budgeted to be $386,138 for the fiscal year starting Oct. 1 — nearly three-quarters of the agency’s budget of $473,825.

Felton acknowledged the missing funds Thursday after the Tribune-Herald received a copy of a Sept. 28 memorandum from Waco City Manager Larry Groth that referred to “a $70,000 restitution check” paid to Downtown Waco.

“That correctly states what it is,” Felton said Thursday.

In the Sept. 28 e-mail to the city council, obtained through the Texas Public Information Act, Groth said he and the council “need to discuss your feelings about continued support with the assumption an audit will find misuse of public funds.”

In an interview, Groth clarified that statement, saying he was presenting the council a “worst-case scenario” and not prejudging the outcome of the audit. He said it’s unclear whether Downtown Waco would owe restitution to the city of Waco if the audit determines a misuse of public funds.

Groth’s e-mail Sept. 28 said that Downtown Waco Inc. remained insolvent even after the $70,000 check. Felton said that on Sept. 29, Downtown Waco paid off its bills after meeting with vendors to whom it owed money.

“There were a few receivables past due several months that we didn’t know about,” he said, adding that the board was surprised to find how much Downtown Waco Inc. owed.

The crisis has shut down the agency’s offices on Washington Avenue this week. Felton said none of the current employees of Downtown Waco are under suspicion, including Toni Herbert, the interim executive director who has helped conduct the internal investigation. A former city councilwoman, she took the reins of the 50-year-old institution in July after the resignation of Margaret Mills, who had been executive director since 1988.

Felton said the board began to ask questions about Downtown Waco’s finances in April or May, but he declined to discuss whether those questions were related to Mills’ departure. Mills could not be reached at her home Thursday. Herbert declined to be interviewed for this story.

In a Sept. 26 e-mail to Felton, Groth listed several demands that Downtown Waco must meet before the city would consider continuing funding:

* A complete audit given to the city for review.

* Verification that no public funds were misappropriated.

* Internal controls to “prevent this from happening again.”

* A new contract between the city and Downtown Waco Inc. with an audit requirement and “more definitive perform- ance measures.”

* Assurances that Downtown Waco Inc. “will be able to sustain and accomplish agreed tasks.”

Meanwhile, the county is also awaiting the results of the audit before releasing its annual contribution of $20,974, County Auditor Steve Moore said.

Felton and other Downtown Waco board members this week held out hope that the agency and its funding agreement with the city and county could be salvaged.

“Most people who have served on nonprofit boards could see how this could happen, under little fault of the board,” Felton said. “If someone is operating outside the direction of the board, many times only that individual would know what they are doing.

“What I’m hoping is that we’ll be considered to continue with the services we provided in the past, with whatever additional requirements may go with that contract. I’m hopeful (the city) doesn’t put individuals in front of an organization from the standpoint of continuation and being effective, but we understand that.”

‘The mission is good’

Tom Kelly, a Baylor University economist who serves on the board, said he hopes Downtown Waco Inc. can survive this crisis.

“I think the mission is good — that’s why I’m here,” he said. “We need some kind of catalyst for downtown development. I think it’s done a good job, if you look back at where we came from.”

Since 1988, the year that Mills took over Downtown Waco Inc., downtown has seen its workforce increase from 7,500 to 17,000, and 90 businesses have relocated to downtown, according to city documents. Appraisal values in the downtown Public Improvement District have tripled, from $41.3 million to $124.9 million. Mills pioneered the district, which uses a special 10-cent property tax levy to provide extra landscaping, police and sanitation service for downtown — funding that is administered by Downtown Waco Inc.

Linda Ethridge, who served as mayor from 2000 to 2004 and as a councilwoman before that, said she always thought Downtown Waco Inc.’s work in promoting downtown and the Brazos River Corridor was “of a superior quality” and there was never a hint of impropriety.

“I was stunned to hear about the difficulties they’re having,” she said. “It was totally out of the blue. I’m very saddened that they’re having difficulties. . . . Downtown Waco’s board appears to be taking strong and appropriate action.”

As the public face of Downtown Waco Inc., Mills has been widely credited for her leadership in downtown’s rebound. In taking the interim position in July, Herbert, a friend of Mills, lauded her as “someone who eats, drinks, breathes and wakes up in the middle of the night thinking of the development of downtown and the river.”

Herbert helped plan a Sept. 26 “block party” on Austin Avenue to honor both Mills’ service and the institution’s 50-year history, according to e-mails obtained from the city. In an Aug. 31 e-mail to other organizers, Herbert suggested focusing more on Downtown Waco Inc.’s history than on Mills herself.

“She isn’t opposed to being recognized for (her) leadership role, but doesn’t want the party to be about her,” Herbert wrote.

The next day, Sept. 1, Herbert e-mailed other organizers saying that the party had been canceled because of an unspecified “major glitch.”

“I’m about as sorry about this as a person can be, especially since we’re well down the road in terms of donations and contributions,” she wrote.

Two weeks later, Herbert was seeking to meet with Groth about whether Downtown Waco Inc. had a future with the city.

“It seems to me that you’ll probably need to get direction from the council before you know what, if anything, Downtown Waco will be authorized to continue working on,” Herbert wrote in a Sept. 15 e-mail to Groth.

She also volunteered to assemble Felton and current and past treasurers to discuss “DTW’s ‘situation’ ” in executive session with the city council.

That “situation” turned out to involve an investigation into financial irregularities serious enough to threaten to derail a venerable downtown institution.

Felton said he hopes it’s not too late to learn from the experience.

“When things like this happen, you get smarter,” he said.

jbsmith@wacotrib.com

757-5752