State auditors are challenging a company that runs Maryland's small-business loan programs for using part of the proceeds from its state contract to make political contributions, including some to lawmakers who sponsored legislation extending the contract.

Stanley W. Tucker, president of MSBDFA Management Group Inc., confirmed this week that state auditors have questioned the propriety of giving political candidates any of the nearly $1 million a year the company receives from the state.

Although it is not illegal for Tucker's private company to make political contributions, state officials said they are concerned about the perception that public money is being funneled into campaign coffers. They said they want to halt the practice.

Tucker said his company made about $21,000 in campaign contributions to various state and local candidates from 1995 to 1998.

Some of the money went to lawmakers who sponsored legislation last year that benefited the company by extending its contract, campaign finance records show.

Tucker acknowledged a separate problem -- that his company has contributed twice the $10,000 allowable amount in the current four-year election cycle -- but said the violation was "an honest mistake" that he is correcting.

Tucker's company has a contract to run state loan programs offered through the Maryland Small Business Development Financing Authority. Among other things, his company screens minority and small business owners who apply for the loans.

The state appropriated $6.9 million for the small business loan program this fiscal year.

The questions about the Tucker company's campaign contributions arose during a state audit.

"The auditors are saying we're using public money, but we are a private company providing a service to the [state]," Tucker said, adding his company is no different from a construction company with state contracts.

Assistant Attorney General Robert A. Zarnoch, who worked with auditors on issues relating to the contract, agreed that nothing in state law bars Tucker's private company from making campaign contributions.

"Is that alone illegal? No, as long as they are complying with the limits," Zarnoch said.

However, he said he understands why auditors raised questions about the propriety of the contributions, given the way that Tucker's company was formed and the nature of its contract.

Tucker formerly ran the small business loan program as executive director of the Maryland Small Business Development Financing Authority, a quasi-public agency.

The General Assembly voted to privatize management of the loan programs in 1994, allowing Tucker to set up his private company and awarding it a contract with the Department of Business and Economic Development.

"One thing is clear, if they were still a state agency, that [making contributions] would be illegal," Zarnoch said. "That can't be done by a government agency. But private people can do it. This is a little different than your average company, but it's still a private company."

Zarnoch said he has suggested ways the department could prohibit the company from giving politicians any contract funds. Such a restriction could be imposed through the department's annual budget bill or passed as specific legislation.

"They could certainly change this, and we've recommended they do so," Zarnoch said.

James D. Fielder, secretary of the department, said he shares the auditors' concerns about the propriety of the Tucker company's actions. "I look at it that this is a contractor that in the initial phases got 100 percent of its revenues to run a state program, and I think that is different, if not anything other than in perception," Fielder said.

He added, "When you have a contractor that receives 100 percent of its funding from a department to run a departmental program, there needs to be a close watch on everything."

Fielder said Tucker has argued that once the state pays his company for services performed, the money is no longer public and can be used at the company's discretion.

"Stan raised a very legitimate point," Fielder said.

He said he is exploring whether "we can restrict the use of state funds" any contractor gets to prohibit the money from being used for campaign contributions.

"It's something we would have to negotiate with the contractor. If we're able to put in language [prohibiting the use of state funds for contributions] we'll put it in." However, Fielder said such a prohibition might require a change in state procurement law.

Fielder said the concerns auditors raised about the Tucker company's campaign contributions prompted him in July to change the language of agreements with companies that get state grants for business expansion projects.

While defending his company's right to make campaign contributions, Tucker acknowledged that it has given twice the $10,000 allowed in the current four-year election cycle.

Violations are a misdemeanor under state elections laws.

Company officials had thought the limit was $10,000 each year, Tucker said. He said his firm contributed about $11,000 more than permitted and is asking candidates to return money that exceeded the limit.

"It was a very innocent mistake," Tucker said. "We dealt with it as soon as we found out. We misinterpreted the law."

Tucker said his company has revenue sources other than its state contract but would not identify them or say how much of the $21,000 used for campaign contributions came from the proceeds of its state contract.

Tucker's company benefited from legislation in 1997 that allowed state authorities to extend its three-year contract, which was set to expire in 1998. The legislation changed the contract's expiration date to June 30, 2002, with a five-year option to renew it through 2007.

Bills to extend the contract were sponsored by former Sen. Larry Young and Sen. Decatur W. "Bucky" Trotter and in the House by Dels. Hattie N. Harrison and Howard P. "Pete" Rawlings. The four are among legislators who got campaign contributions from Tucker's company.

The questions about the campaign contributions were raised in the preliminary findings of a legislative audit that is not complete. Auditors declined to comment on their findings.

Tucker said he was dismayed that the "preliminary discussion notes" of an audit report had come to the attention of a reporter before his company had a chance to respond to the initial findings of auditors.

"We're confident everything will work out fine," Tucker said. "We're going to deal with all of the issues in the audit."

Pub Date: 8/15/98