By J.B. Smith

Tribune-Herald staff writer

Since 2000, the city of Waco has insisted on outside audits of the economic development partners it funds, including the Greater Waco Chamber of Commerce, the Cen-Tex Hispanic Chamber of Commerce and the Cen-Tex African-American Chamber of Commerce.

The exception to that rule: Downtown Waco Inc.

City officials can’t explain why a downtown revitalization agency that was to receive $386,138 this year in local tax funds has been allowed to present its own financial reports instead of a third-party audit like the other partners.

Now that privilege is under scrutiny as an investigation probes an alleged misappropriation of funds from Downtown Waco Inc. under the tenure of former executive director Margaret Mills.

City Manager Larry Groth said that the decision to exempt Downtown Waco from audit requirements was made before he joined the city administrative staff and that he was unaware of the exemption before the recent allegations came to light.

He said an audit might have prevented some of the problems that now threaten the future of Downtown Waco Inc.

“Any time you bring in independent eyes, you generally discover any irregularities,” Groth said of audits. He said city officials in 2000 had no reason to suspect foul play at Downtown Waco Inc., which had been contracting with the city since 1988.

“You make decisions based on the facts you have,” he said. “Here’s an organization that had been performing for the city for 12 years.”

Linda Ethridge and Toni Herbert, who were council members in 2000, said they don’t remember a decision to exempt Downtown Waco Inc. from the audit requirements. Herbert is now helping conduct the investigation as the agency’s interim executive director.

Ethridge said she does recall the council wanted to rework contracts with the three chambers to make them more detailed and performance-based.

“The difference I am remembering is that the existing arrangements with Downtown Waco were already performance-based,” she said. “They were providing specific services, where the chambers’ contracts were broad and general.”

Now that police have joined in the investigation of alleged misuse of funds at Downtown Waco Inc., the city and county have declined to renew the contracts that provided nearly three-fourths of the agency’s budget, and Downtown Waco Inc.’s board president says the its survival is in question.

The contracts are essential to the agency’s mission of encouraging development in downtown and the Brazos River corridor, Scott Felton said. But he doesn’t expect those contracts to be renewed for several months, if ever.

“We can’t survive on membership alone,” he said. “We understand where the city’s coming from. They can’t make a commitment to us. We’ve got to figure out whether we want to go into some kind of hibernation . . . I don’t see a lot of short-term positives in the situation that appears to be developing.”

Groth has laid out conditions for Downtown Waco to meet before the city will consider renewing funding. They include new internal controls, a regular outside audit and a determination that no public funds were misspent.

Future uncertain

Asked whether the city will permanently end its relationship with Downtown Waco Inc. if it finds that public funds have been misspent, Groth said that’s a city council decision.

“That really depends on the council’s view of their ability to ensure this doesn’t happen again,” he said. “At some point they have to evaluate the public’s needs. We shouldn’t put public money into something unless there’s a public benefit.”

The alleged irregularities at Downtown Waco Inc., as detailed in records released Friday, include the use of agency checks and debit cards for personal use. In addition, a $3,000 dues check from the Tribune-Herald to Downtown Waco Inc. was deposited into Margaret Mills’ personal account in 2004.

Even after receiving a check for $70,000 on Mills’ behalf late last month, board members are continuing to seek further restitution, Downtown Waco Inc. internal memorandums show.

Mills, who led Downtown Waco Inc. for 18 years and was widely credited with helping resurrect downtown, retired with two weeks’ notice in July. Internal documents show a retirement party planned for her was abruptly canceled in late August amid mounting board questions over the organization’s finances.

Felton said it’s possible the city will try to take on downtown development duties itself or find another economic development partner. He said that Downtown Waco Inc. has a strong board of directors and a solid record of results and that he hopes the city will renew.

But in the short term, Downtown Waco Inc. is struggling to meet the city’s demands, he said. The agency has not yet commissioned the outside audit the city wants. The dilemma, Felton said, is that Downtown Waco Inc. can’t afford the audit’s cost of at least $7,000, especially with no assurance the city and the agency have a future together.

“We don’t want to financially obligate ourselves any further until we see what the future holds,” he said.

Groth said that, in retrospect, the city should have kept a stricter watch over the money it gave to Downtown Waco Inc.

In downtown business circles, predictions about the future of Downtown Waco Inc. were mixed.

“This is a hiccup,” said Jon Spelman, a real estate agent who markets many downtown properties. He predicted Downtown Waco will rebound, just as Baylor University’s basketball program survived the 2003 scandals that cost the head coach his job.

“Did Baylor have a basketball future after (coach) Dave Bliss? Yes, because Baylor and basketball is a good concept,” he said. “Economic development in downtown is a good concept.”

Real estate agent Jim Peevey echoed his optimism.

“The situation with Downtown Waco Inc. is a setback, but we’ll overcome it,” he said. “Downtown has a lot going on now, too much positive stuff for it not to develop as we hope. Private investors are spending money there, and the chamber is building its new headquarters downtown . . .  I’m optimistic. I office downtown. I eat downtown. It’s not dying.”

Businessman Doug Brown, a former Downtown Waco Inc. board member, said he was shocked about the financial scandal, especially given the agency’s success over the years.

“It amazes me what they’ve done with all that happening,” he said. “I’m not sure I understand that. That’s why no one would have been suspicious, because so much progress has been made.”

He said Downtown Waco Inc. might be able to survive even without city funding, but it might take several years to overcome the damage to its reputation.

Tom Chase, chairman of Insurors of Texas, 225 S. Fifth St., said the trouble at Downtown Waco Inc. is a “terrible setback,” but the agency has a good track record.

“I’ve been a supporter of what Downtown Waco Inc. has been able to accomplish,” Chase said. “It’s sure resilient enough. Either it will survive, or a new group will come together to take up the work.”

In the meantime, the Greater Waco Chamber of Commerce is working hard to keep momentum going for downtown redevelopment, President Jim Vaughan said.

“I believe there is in this community — I know there is at the chamber — a strong commitment to downtown,” he said. “Witness our investment in downtown and our involvement in the bigger development down there.”

He was referring to the chamber’s decision to build a $2.5 million headquarters for the Greater Waco Chamber of Commerce at South Third Street and Austin Avenue, as well as the $50 million proposed development by Stonehenge Development of Houston.

“What happens to Downtown Waco Inc. is up to them to decide,” he said. “We have been and will continue to be an advocate for downtown and provide leadership for downtown.”

Staff writer Mike Copeland contributed to this story.

jbsmith@wacotrib.com

757-5752