Westlock County ratepayers may be on the hook for more than $200,000 after an investigation into a lease agreement has uncovered a significant deficit.
At their June 14 meeting, councillors were briefed on an item listed as ‘Horizon North issue,’ pertaining to a lease agreement between the county and Horizon North for a laydown yard at the county industrial park.
The briefing revealed a slew of problems including unbudgeted costs, breaches of the Municipal Government Act (MGA), lack of council motions to proceed with work and that former administrator Peter Kelly continued to act as CAO after his term was completed.
It was determined the county is projected to pay $205,683 for work to prepare the eight-acre site for use as a laydown yard.
“It’s pretty apparent that some processes weren’t followed appropriately. It’s not how the county does business,” said reeve Bud Massey.
“It identified some weaknesses in our procedures and processes and that is going to be corrected, it’s already being worked on.”
CAO Duane Coleman said it’s unclear what the actual deficit will be since the work has added value to the property. He added the costs should be recouped whenever the lots are sold.
“I don’t know if you could characterize it by losing money or not. It will be somewhat dependent on where negotiations go,” said Coleman.
“Obviously the money that was spent added value to the lot. The lot value is there, whether the lot value is recouped today or down the road. When it’s sold those costs recoup based on those horizons.”
Councillors have not yet determined what they will do to budget those funds, but are expected to make a decision at their June 28 meeting. A decision to approve the expenditure must also be made since councillors never approved the spending.
“When administration brings us a request for decision, the options will be weighed at that time,” the reeve said.
“They’re going to give us the best possible options after they’ve carried on some additional discussions. It would be premature to say what those options are today and what’s going to happen.”
Coleman explained the item on Tuesday’s agenda was simply to bring councillors up to speed on the situation.
“Administration wasn’t looking for any council motions, we just wanted to brief council where it was at and we’ll move forward with a subsequent RFD,” said Coleman.
In response to a legal opinion from county lawyers, which indicates the payment structure could be considered a loan, council must now rescind a previous motion to enter into a three-year lease with Horizon North to bring the contract into compliance. Section 256 of MGA precludes a municipality from lending money or guaranteeing payment of a loan, unless the loan or guarantee is made to a non-profit organization, or a municipally controlled corporation.
“It’s not a loan. And that’s what was presented to us in the past,” Massey said.
“We cannot loan money as a municipality, so it would be as we call in the normal world ‘leasehold improvements’ but it cannot be a loan.”
At their Dec. 16, 2016 meeting, councillors ratified a lease agreement for the property to Horizon North at a cost of $2,500 per month for a term of three years.
In order to recoup costs, monthly lease payments have been readjusted to $6,170.
Coleman said Horizon North has already begun to pay the adjusted lease payments, in absence of a current agreement and the two parties will work towards creating a new lease that reflects the new payments.
“We’ll have to negotiate with them. There’s some outstanding issues that are in camera because they’re part of negotiations,” he said.
“Once we get clear direction from council, administration will negotiate, or attempt to negotiate a revised contract with them.
“All indications we’ve had from them is they like the site, they’re looking at a long-term commitment in the community and we have a positive working relationship with them.”
Council was briefed that in September 2014, Muller Realty approached the county indicating that Horizon North was interested in leasing lots at the industrial park. The company was interested in paying $5,500 per month and doing the work to strip the site of clay themselves at their own cost.
Kelly then offered that the county public works would do the work which included stripping and removing topsoil and laying and compacting clay berms and gravel. Director of engineering and infrastructure Bill Mills estimated the initial cost at $55,000 to $75,000, but the full scope of the job was unknown.
In spring 2015, Kelly directed municipal staff to focus on the project and it resulted in incompletion or delays of smaller projects.
Costs, however, began skyrocketing and were estimated at over $100,000 and the project wasn’t near completion. There is no indication that Kelly ever informed Horizon North of the cost overruns.
In November 2015 Kelly finally invoiced Horizon North for $190,000 to the company’s surprise.
“I am very confused [former CAO] on how we got from $55,000 to $190,000 without any written approval from the North East District Manager or General Manager,” reads an e-mail excerpt from Horizon North to Kelly.
The deal was reworked for Horizon North to pay the county $56,000 up front and for the rest of the work to be paid back over a three-year lease at an interest rate of 3.5 per cent.
In December 2015 council ratified a deal that would see Horizon North pay $2,500 per month in lease payments over three years.
Investigation revealed Kelly never brought site improvement cost to council for approval. This was in breach of Section 248(2) of the MGA, which requires council approval for any expenditure of a non-budgeted amount of $10,000 or greater.
Kelly continued conversation with Horizon North to get the deal ratified, even after his tenure with the county was done. Text messages from Kelly to the company on April 4 and April 8 inquire to the status of the lease and reference involvement with Massey.
Following Kelly’s departure, the Horizon North file went missing.
