Officials of the Community Services Administration made a special concession to Philadelphia's Hahnemann Hospital in 1975 that has improperly increased its share of federal funds by more than $1.5 million.
The antipoverty agency explicitly sanctioned the extraordinary subsidy on Oct. 1, 1975, when it formally cleared a controversial $14.5 million federal construction grant that Congress had appropriated for Hahnemann earlier in the year.
Treasury Department officials told The Washington Post that the arrangement CSA officials made with the hospital was improper and a clear violation of longstanding rules governing the disbursement of federal grants.
In setting down a list of so-called "special conditions" for the Hahnemann project CSA officials not only pave the way for early delivery of U.S. Treasury checks for the entire $14.5 million, but also told the hospital it could bank the money and keep the interest on it as well.
"I would think it is not only unusual but improper," said one Treasury Department lawyer who suggested that the government ought to try to recover the extra $1.54 million in interest that has accrued to Hahnemann's construction fund thus far. "It is money lost to the United States. It is illegal in that it augments the money appropriated for the grant."
The half-completed, 21-story hospital project in downtown Philadelphia has been under federal grand jury investigation in connection with allegations that Reps. Daniel J. Flood (D-Pa.) and Joshua Eilberg (D-Pa.) may have profited from the undertaking. Apparently in response to inquiries by The Post, CSA lawyers have now started scrutinizing the assignment of the interest income to Hahnemann.
Under Treasury Department regulations promulgated years ago, federal grants above a certain amount - $250,000 at the time of the Hahnemann transactions - are supposed to be given in the form of letters of credit and only gradually converted to cash, to meet current bills.
Letters of credit, however, earn no interest. Hahnemann got U.S. Treasury checks from the outset and sent them straight to the bank. Almost all of the money remains unspent in a special, segregated Construction Fund account at the Girard Trust Bank in Philadelphia.
According to the bank's records, the $14.1 million still left from the originial $14.5 million congressional appropriation had earned $1,544,654.71 in investment interest as of Jan. 19, 1978. All of the money, principal and interest, is earmarked under a trust indenture with the Girard Bank for "completion of construction costs."
CSA Controller R. Thomas Rollis Jr. said yesterday that as he recalled it, the hospital's attorney (primarily Lawrence Corson of Eilberg's Philadelphia law firm) had had "conversation with the (CSA) program office" about the interest income.Rollis said he also had conversations about "early release" of the $14.5 million federal grant with Flood's then- administrative assistant, Stephen Eiko, but Rollis was vague about what was said.
Eiko was convicted of federal bribery charges in another case last October and has since started cooperating with federal prosecutors and reportedly furnishing them with testimony about the activities of Flood and Eilberg. In the case of the Hahnemann project, it was Flood who rammed through the special $14.5 million grant for the hospital as chairman of the House Appropriations Subcommittee on Labor, Health, Education and Welfare and related agencies. Eilberg's law firm was hired in the spring of 1975 to help complete the financing of the $64 million replacement hospital.
The project has been marked by other signs of special treatment at CSA in addition to the assignment of interest income.
Ostensibly worried about the financial feasibility of the undertaking, for instance. CSA officials decreed on Oct. 1, 1978 - as another "special condition" - that none of the federal money was to be used for items such as "architect fees and other related costs."
Within little more than a month, however, the chief of CSA's Special Programs Division, Jack Ramsey, responding to pleas from Hahnemann Hospital representatives, recommended waiving the restriction so that the agency could immediately advance $2.6 million for items such as architects' fees of $1.6 million - which Ramsey now describes in a memo to Rollis as "directly related to construction."
The CSA obliged with a $2.6 million payment two weeks later, on Nov. 19, 1975, long before complete financing for the project had been arranged.
Ramsey was also the official who laid down the "special condition" of Oct. 1, 1975, giving Hahnemann the interest income. "Interest may revert back to the grantee," the proviso states. "However, such interest earned shall be used for completion of construction costs only."
Exclaimed one official in the Treasury Department's Bureau of Financial Operations on being told of the provisions: "They can't say that. I cannot see an agency saying, "Take the (interest) money and keep it."
Once Ramsey approved the CSA grant on Oct. 1. Hahnemann officials and their lawyers, primarily Corson of the Eilberg firm, began pressing for quick payment of the $14.5 million so that they could start collecting interest on it.
Then, while CSA officials hesitated, the hospital commissioned a feasibility study that made advance payment of the federal grant, plus interest, an essential element of the delicate financing package. At first, the hospital had been relying on Peat Marwick Mitchell & Co. for the study, but after months of work they withdrew.The reasons are not entirely clear but one anonymous, handwritten account in CSA files entitled "Discussion Notes Re Hospital" reads, in part, "feasibility study delayed by PMM . . . 'screwed by PMM.'"
In any case, the hospital turned to Booz Allen & Hamilton Inc. On March 10, 1976, Hahnemann Hospital Senior Vice President Douglas McArthur wrote CSA an urgently phrased letter about the need for all the federal money so it could start earning interest.
Alluding to the forthcoming Booz Allen & Hamilton study, and the projected $39.5 million bond issue that would flow from it, McArthur protested:
" . . . (F)ailure to have all funds on deposit on or before settlement will render the Feasibility Study invalid as being based upon false assumptions, and will render the Official Statement for the bonds misleading and inaccurate . . . At this point, we expect that all funds will be in place, and if not, we stand to lose the project, and would be subject to substantial litigation, as well as substantial financial losses . . ."
Finally, in a conversation with Corson, CSA's Ramsey agreed to send a courier to Philadelphia with the money on Aug. 2, 1976. Controller Rollis asked Treasury for an $11,917,714 check and reportedly sent one of his chief financial officers to hand-carry it to Philadelphia. It went into the bank Aug. 5, 1976, and has been earning interest for the benefit of Hahnemann Hospital since.
So, according to quarterly financial reports of the hospital, has most of the $2.6 million that the CSA has provided the previous fall.
Instead of $2.6 million, only $476,400 appears to have been paid out. "Some of it went for architects' fees and some went to us - that's a financing fee, "Romanus J. Buckley, executive director of the Philadelphia Hospital Authority, said. "And some of it went for permits - yes, building permits and things like that - but not much. . .. They didn't spend it the way it was proposed. I don't know why."
Thus, the bulk of the grant, $14,114,167.18, remains in the care of the Girard Trust Bank, according to hospital authority records, and has grown by now to $15,658,821.89. Hospital authority accountants expect it to keep climbing to about $16 million before any of it is paid out for construction costs.
Treasury Department officials said that, at least theoretically, the government has a right to the $1,544,654.71 in interest. The rules were redrafted recently to state that:
"Any interest income earned by a recipient organization on federal funds shall be promptly refunded to the federal program agency. . . ." The only exceptions to that rule are state governments which were exempted in 1968.
Asked what authority CSA or any of its officials had to assign interest income, in advance, to Hahnemann Hospital's construction project, CSA General Counsel Frank Jones said through a spokeswoman: "These questions are currently under review as is the entire case. As of this momeny, the general counsel does not have the answers to the specific questions that you asked."
CSA spokeswoman June Carter Perry said Ramsey told her he had worked with the agency's then-general counsel H. Rodger Betts and assistant general counsel Phil DeVany on the "special conditions" attached to the $14.5 million grant.
Ramsey could not be reached for comment about who might have asked him to sign over the interest to Hahnemann for the precariously financed project. His office said Friday afternoon that he had gone home and his home said Friday night that he had gone to West Virginia.