Wailuku Main Street Association may have violated county grant agreements and federal tax requirements and failed to follow its bylaws and did not keep close tabs on its executive director, who should be fired, according to a report from the state attorney general's office.
A scathing 11-page report from the state Attorney General's Tax & Charities Division, released Tuesday, details the division's several month inquiry into the operations and governance of the nonprofit that has received more than $2.2 million from the county since 2002, the vast majority of its funding.
The report cited nepotism in hiring, lobbying in violation of its grant contract, conflicts of interest, little evidence of program services and a "terribly confused" structure of governance.
Wailuku Main Street Association, tasked with promotion, preservation and restoration of culture history and architecture of Wailuku, faced an investigation by the state attorney general's office, after former board members publicly said that longtime Executive Director Jocelyn Perreira had refused to provide them with key documents and information about the organization's operations and finances.
"WMSA has failed to comply with its governing documents and policies in numerous respects, and WMSA appears terribly confused about its corporate structure," according to the preliminary findings detailed in the report.
"It appears that the directors have violated their statutory duties of care in numerous respects, including but not limited to delegating (or largely abandoning) governance of the organization to the executive director, and not exercising proper oversight of the executive director," according to the report.
Perreira and board attorney Kevin Jenkins both referred comment on the report to WMSA Board Chairman Thomas Cannon on Tuesday.
In an email responding to the report by Supervising Deputy Attorney General Hugh R. Jones, Cannon said that the board has not had an opportunity to thoroughly review and discuss the report.
However, an "initial review is in nearly complete disagreement with its analysis and conclusions," he said.
Cannon called Jones' information and conclusions "erroneous," adding that the board already has taken remedial measures proposed by Jones.
"What is clear from this report is that there is no missing money, no malfeasance, no misappropriated funds, and our history shows consistently clean yearly audits from no less than five notable auditing firms, including an A-133 Management Audit that helped the organization set the direction and safeguards for financial accountability," Cannon said.
Although Cannon said WMSA will respond to the report "point by point in the future," he said Jones was biased and relied only on questioning of a disgruntled former employee and disgruntled former board members.
Cannon alleged that Jones is in possession of WMSA property not included in a subpoena but used in his "interrogation of our executive director." Cannon said that the property Jones has was allegedly stolen from WMSA's office. Cannon did not say what the alleged stolen property is.
For his part, Jones said in the report that his findings are "preliminary" because as of the date of the letter, WMSA had refused to produce additional information requested by the attorney general.
The state's report lists recommended "remedial measures" for the board to "re-assert control over the proper and effective governance, operations and program services of WMSA as a tax-exempt charitable organization."
Those measures include: removing Perreira and recruiting a qualified successor through an open competitive procurement process, reviewing and revamping some of its bylaws, not engaging in proxy voting and developing board policies in 12 different areas within 90 days.
The board also must engage in bona fide strategic planning and adopt a strategic plan within 12 months.
All policies will need to be reviewed and approved in advance by the state attorney general's office. The letter does not say what will happen if WMSA does not comply. A call to the state attorney general's office on Tuesday afternoon was not returned.
Cannon said that the call to remove Perreira is a "moot point" because the board has been forced to temporarily lay off Perreira, which will be effective soon, due to a lack of sufficient funds. He cited a breach of contract by a primary WMSA client, who has not paid the organization for work performed, as the reason for the temporary layoff.
Cannon added that other office staff also recently have been temporarily laid off because of a lack of funding.
Cannon defended Perreira, calling criticism of her the "most egregious" part of the attorney general's report. He called Perreira "an outstanding WMSA employee for 26-plus years." He noted the numerous accolades, her experience and consistently outstanding evaluations.
"It is highly unlikely that we could find a qualified successor to our ED (executive director.)," he said.
For her part, the attorney general's report says that Perreira "repeatedly testified that any dysfunction, violation of policy or other oversight was the responsibility of the directors and officers of WMSA not hers."
Besides the inquiry from the state, Wailuku Main Street also faced pressure from the county Planning Department this year, which sought a more detailed accounting of how the organization was spending the county grant money.
Copies of the report from the state attorney general's office, dated Thursday, were sent to Jenkins and to the county Planning Department, because Maui County is "virtually WMSA's sole-funder" and "the matters discussed in this letter are relevant" in determining compliance with past county grant agreements, the report said.
According to the report, WMSA receives about 95 percent of its funding from the county.
In the county's 2013 fiscal budget, WMSA was not funded; its $243,000 allocation was set aside for small town-planning.
Mayor Alan Arakawa, who made the request to set the money aside, has said that the move was not for or against WMSA but was done as a precaution while the state investigated the organization. The County Council followed Arakawa's request during its budget deliberations.
County spokesman Rod Antone reiterated Tuesday that the administration wanted to "keep the money safe while we are awaiting the AG's report, and we have."
In response to questions from The Maui News about whether the county would accept future grant proposals from WMSA and whether the county would take action against WMSA if violations were found, Antone said those matters were being handled by county attorneys Tuesday. He did not elaborate.
The report does outline at least two cases where violations may have occurred with the county grant contract.
The county agreement calls for the "grantee" to have a "governing board whose members have no material conflict of interest." The report said the board failed to adopt a meaningful conflicts policy, which puts WMSA "in significant risk of violation of county grant restrictions."
The report also said the board needs to adopt a conflict policy because "WMSA's external auditor's spouse is apparently an architect and has done volunteer work for WMSA, and one or more of the directors are also licensed architects or engineers or have clients or employers (that) may have projects subject to WMSA review."
The report added that the county's grant agreements also prohibit using county funds for lobbying. WMSA frequently testifies before the Maui County Council in support of or against specific legislation, and WMSA staff spends time preparing written testimony, the report said.
WMSA also meets with council members and staff.
"Such activities constitute 'direct lobbying' '' under applicable Treasury regulations, the report said.
The report also noted that the organization's IRS Form 990 for 2010 states that WMSA does not engage in lobbying.
Other preliminary findings include:
* The board failed to comply with its own bylaws in many instances and engaged in nonpermitted proxy voting at board meetings.
* The board failed to formally adopt fundamental policies to protect the organization from risks and threats despite informing the IRS it had done so, putting the organization's tax-exempt status at risk.
* The organization's 2009 and 2010 IRS Form 990 appears to have inaccuracies.
* The organization has engaged in prohibited political intervention by making an illegal contribution.
* WMSA's liquid assets (last publicly reported at $256,000) are not invested but remain deposited in a noninterest-bearing bank account in excess of FDIC insurance limits, contrary to professional advice.
In response to the misuse of proxies issue, Cannon said in his email that the only votes that were affected by the misuse of proxies were the votes in favor of Jones' "witnesses" - the disgruntled ex-board members - becoming WMSA officers.
The state report also says that WMSA has shown little evidence of actual program services in the last two years. No organization staff has any design or architectural expertise or degrees. WMSA has not contracted for any such expertise despite that a core function of WMSA is to formally review construction and development projects, the report said.
Arakawa and the planning department have questioned the WMSA's program services and have asked several times for more information. That information has been withheld by WMSA citing confidentiality, the report added.
The report said that the "apparent absence of concrete program services appears to have allowed WMSA to build up a significant reserve of over $250,000 from county/taxpayer funding."
The report also notes that the other senior employee of WMSA is the executive director's daughter, who has been employed by WMSA for 15 years as an accountant/office manager and was hired "at the recommendation of the CPA" in violation of WMSA's anti-nepotism policy, which the board retroactively modified after her date of hire.
Compensation paid to the executive director, her daughter and other employees total $156,916, according to the 2010 IRS 990 Form. The funds appear to be the bulk of WMSA's monthly operating expenses, aside from office rent and accounting expenses, the report said.
According to a 2010 IRS 990 Form, Perreira received annual compensation of $96,207. The organization's revenues documented in the IRS form for that year was $251,636, all from grants.
The report added that WMSA made a campaign contribution to Friends of Alan Arakawa when Perreira and her spouse attended a political fundraiser/gala for the mayor at the Grand Wailea. A WMSA check dated May 5, 2011, was signed by Perreira.
Campaign contributions by tax-exempt charities are strictly prohibited, the report said.
In testimony during the state investigation, Perreira said she was instructed to attend the event by the board. WMSA maintains in the report that it did not know this event was a political fundraiser, although it was logged in Arakawa's report to the Campaign Spending Commission.
Arakawa's campaign officials said Tuesday that once Arakawa found out earlier this year as a result of the state investigation that the Friends of Arakawa received the campaign contribution from WMSA, the Arakawa group returned the contribution to the nonprofit organization. Those officials said that the attorney general's office told them that it was not illegal for Arakawa's political group to accept the funds, but the campaign returned the money anyway.
The Maui News obtained the state report from the county through a Freedom of Information Act Request. The report was released to requesting media Tuesday morning.
* Melissa Tanji can be reached at email@example.com.