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Peñitas funding dispute with USDA leads to lawsuit

Peñitas owes L&G Concrete Construction $1.5 million for work done on the city’s sewer project, according to a lawsuit filed in the 398th District Court.

Because it has not received the city’s payment, L&G Concrete Construction owes $87,000 to ACT Pipe and Supply, a subcontractor that originally filed the lawsuit against L&G in August. L&G turned around and pulled the city of Peñitas in as a third-party defendant.

City of Penitas logoCity Manager Oscar Cuellar said Tuesday that Peñitas is caught in the middle of the disagreement. The U.S. Department Agriculture is providing the funding, but has delayed the final payment on the project because of a series of missteps since construction began.

“There is money to pay them. The problem is there is a lot of paperwork that needs to be straightened out,” Cuellar said.

The USDA won’t issue a final payment until the city pays back $421,000 that was reimbursed in 2012, before the project was completed,Cuellar said. When the project started, there wasn’t enough funding to cover all of the streets. Instead of cutting the project, Juan Ortiz, the city manager at the time, told USDA the city would make up the difference in expense. Then, the next city manager, Noe Cavazos asked for reimbursement on the city’s expenses, according to Cuellar. USDA employees at the time told Cavazos the project was ahead of schedule and behind on budget, so they issued the $421,000 reimbursement.

There are two issues USDA now has with the reimbursement. First, it shouldn’t have been made until the end of the project, Cuellar said, and the second issue is that USDA has a signed letter from Ortiz stating the city did not intend to get reimbursed for the money. Nobody knew about the letter, Cuellar said, and things would have been simpler had USDA denied the reimbursement at the time of the request.

That reimbursement sat in the bank until the city started paying USDA back on the $6.4 million loan, Cuellar said. In 2011, the project wasn’t finished yet, so no revenues were coming in to pay off the debt. The city paid USDA $89,000. Then, in 2012, it paid $137,000. By 2013, a few homes were connected but and the city paid interest-only payments of $23,000 and $18,000.

In 2014, the city made $358,000 in revenue on the system, paid USDA $230,000 and for the first time had money left over to pay for personnel and maintenance of the system.

As a result, Cuellar said, the $421,000 is gone. The city has approached a bank to request a loan to pay back USDA, but obtaining the money won’t be easy, Cuellar said. The city may be denied because it spends more than it makes, and in that case, Cuellar said they’ll have to keep shopping for banks until one agrees to lend the money.

“So while this is waiting, they’re refusing to release any money. L&G said they’d wait for us as long as they could as long as they don’t get sued, but some pipe supplier went and sued them,” Cuellar said. “USDA said, ‘Well at this point, we want the whole thing resolved before we go further.”

USDA has asked for an alternate plan, and Cuellar said the city and its engineers are working on it.

Another of the main issues, Cuellar said, stems from the fact that the city itself has been through two city managers since the project initiated and the folks at USDA who originally worked with the city are no longer working for the agency.

Cuellar said after the project began, USDA cut its staff, encouraging people to retire early.

In the beginning, the sewer project was broken up into four phases, he said, but employees of the USDA told Peñitas it could combine the first three into one project because money was available at that point to fund all three. Cuellar said the USDA now wants the invoicing for construction broken up into the three different phases to account for all expenses because the projects should not have been combined. All the paperwork has to match up for the audit, USDA employees told Cuellar.

Also, the original contractor on the project declared bankruptcy, so USDA at the time allowed L&G to step in and finish out the last phase of the project. The current folks at USDA are questioning that move as well, Cuellar said.

“Basically, they’re expecting a lot of information from us that we don’t have. We’ve asked for documentation from our engineer,” Cuellar said. “We want to know what specifically was paid for for phase 1, phase 2, phase 3.”

He said the city showed USDA emails authorizing the city to move forward with the project. He said the city also tried to convince the current group at USDA to at least release a smaller amount of money, like $600,000, to L&G, so it could pay its subcontractors. But the folks at USDA said it was too late to do that because the paperwork had already been sent to its regional office.

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