G.E.R.S. Grants $5.7 Million Lump Sum Loan To KFC Franchise Owner; Fails To Account For Use Of Funds

ST. THOMAS — In a condemning 63-page audit report on the Government Employees’ Retirement System’s (G.E.R.S.) Alternative Investment Program (A.I.P.) — described as “investment opportunities that have not been identified by the traditional public equity or fixed income capital markets,” and administered by G.E.R.S.’s Board of Trustees — the Office of the Inspector General (O.I.G.), found an abundance of deficiencies that have already attracted the ire of government employees, who see the board’s lack of careful vetting of companies that it borrows money to, as part of the reasons why the pension program is broken.

G.E.R.S., the audit found, could lose over $40 million in a speculative deal, has made illegal investments, and approved a loan totaling $8.2 million for the development of a local grocery store, even after being advised not to by an outside financial consultant.

But there are many more examples of the Board of Trustees’ glaringly bad judgement, according to the audit findings, including a lump sum loan of $5.7 million to a local fast food chain, which G.E.R.S. revealed to be Kazi Food, LLC, franchise owners of the local Kentucky Fried Chicken fast food chain, with stores in the territory and Hawaii.

The audit report says that on September 24, 2013, G.E.R.S. approved a $6 million loan to the fast food chain. According to the loan agreement, the proceeds were to be used to pay transaction costs, fund the Debt Service Reserve Fund, refinance existing inter-company debt, and to finance capital expenditures for store refurbishments to include the building of at least two new restaurants and a warehouse facility. The loan agreement warned that funds should be used for no other purpose without the prior written consent of the lender (G.E.R.S.). The closing documents showed that the borrower received all of the funds, a net of more than $5.7 million at closing, on September 30, 2013, however, the audit report found several of the anticipated uses of the funds have not materialized to date.

The audit report goes on to say that in the company’s presentation, the funds, in addition to refinancing company debt, were to be used to “reimage all 8 restaurants in 2 years, build 2 new restaurants, establish a self-distribution service, with warehousing and logistics, and employ a total of 250 people in the Islands.” But the report says there was no evidence that G.E.R.S. took the adequate steps to ensure that the funds’ intended use were being met.

“We did not find any evidence in the file that G.E.R.S. took measures to ensure inter-company debt was satisfied. Furthermore, since the funds were disbursed in a lump sum at closing, there was no surety that the funds were used to refurbish the facilities in the Virgin Islands or build the additional restaurants and warehouse facility,” reads the report.

“We visited the 8 restaurants (4 on St. Thomas and 4 on St. Croix), and saw evidence of some renovations in five of the eight establishments, although we could not tell when they were done. We requested from G.E.R.S. officials evidence to show the nature and cost of the various renovations done, and how the $5.7 million was used; however, none was provided,” it added.

The audit report also noted that normally, for loans involving refurbishing or construction work, the funds are made available based on a percentage of completion involving actual site visits to ensure the funds were used as per the agreement. However, “there was no evidence that any of this was done for this loan.”

G.E.R.S., in one of its responses to the O.I.G.’s findings, said they concurred that the fast food chain investment was not adequately monitored, and said they would review their policies and procedures as necessary. But the board disagreed that its other investments under the A.I.P. were not adequately monitored, eliciting a rebuttal from Inspector General Steven van Beverhoudt.

“We found the G.E.R.S. Board of Trustees response to this finding divergent,” Mr. van Beverhoudt wrote. “In their response, the G.E.R.S. Board of Trustees admitted that they did not monitor the investment in the fast food chain, yet disagreed with our findings that they did not conduct efficient monitoring.

He continued: “We affirm our position, as the GERS Board of Trustees has never prepared a corrective action plan to resolve the issues from the forensic audit of the hotel, waived amendment fees to the airline after they violated covenants, and continued to provide additional funding to the grocery store after the initial loan for items that should have been considered in the initial proposal, and for start-up items that should be the responsibility of the business owners. It appears that the G.E.R.S. is absorbing the entire risk in this venture, while the owners seem to have very little to lose.”

Feature Image: K.F.C., Sunny Isle, one of three St. Croix branches of the fast food franchise owned locally by Kazi Food, LLC.

Image Credit: VIC.