Review of farmland program halted even though federal audit found $300,000 problem

Lexington overcharged the federal government more than $300,000 for conservation easements to protect two farms from future development, a federal audit found, prompting a local review of the city’s farmland preservation program.

The review, however, was abruptly halted in June 2015 by members of the Rural Land Management Board, which oversees the city’s Purchase of Development Rights program. City lawyers then scrubbed the board’s 40-minute discussion about the issue from the minutes of the meeting.

Susan Straub, a spokeswoman for the city, said the law department was trying to protect the city from legal liability, not hide the board’s actions, when it removed the audit discussion from the minutes of the meeting.

Some of the same board members who helped stop the local review now support an audit of the PDR program, saying they previously objected because issues raised in the federal audit hadn’t yet been resolved.

“It’s not that we were hiding anything; it’s procedure versus fact,” board member Frank Penn said. “At the time, we didn’t have any facts.”

Some members of the Urban County Council, which appropriates roughly $2 million a year for the PDR program, said they were made aware of the findings of the federal audit, but they weren’t aware that attempts to conduct a local review of the PDR program and its previous management had been halted.

A full audit should be conducted of the local program, they said.

“I think what they view as transparent appears very secretive,” said Councilwoman Amanda Bledsoe, who chairs a council budget committee that oversees PDR’s budget. “We audit our concession stand sales. Why wouldn’t we audit a program that gives millions of dollars each year? I think it’s important in all aspects of government that we are transparent and we determine our effectiveness and show our return on investment for taxpayer dollars. We need to know if this program is successful or not.”

Federal agriculture officials are trying to determine how much, if anything, Fayette County must repay the Natural Resource Conservation Service. Typically, the federal conservation service picks up half the cost of buying conservation easements that protect farmland from future development.

No resolution has been reached, but many members of the Rural Land Management Board think the city won’t have to repay the federal government any money.

Lexington Mayor Jim Gray said he thinks a more thorough local audit should be conducted after the issues identified in the federal audit of the conservation service are resolved. Gray said the city has made changes to the PDR program and its oversight, including adding a commissioner of planning to oversee the program.

“I believe the board is making a decision on this as soon as the federal audit of our partner agency is final,” Gray said. “I strongly encourage the board to request an audit of our program at the appropriate time.”

Dueling appraisals

Fayette County’s PDR program was created in 2000 with the goal of preserving 50,000 acres of farmland. Under the program, farm owners sell their rights to develop the land to the government.

To date, the program has allocated $77 million — $37 million in local money, $24 million in federal money and $16 million in state funding — to buy conservation easements on Fayette County farmland. The program has preserved 29,165 acres and has been heralded by some as a model conservation program and has been copied in other jurisdictions.

The 2015 audit was conducted by the Office of Inspector General for the U.S. Department of Agriculture and covered several programs operated by the Natural Resources Conservation Service.

That audit raised questions about two land transactions in which Fayette County allowed land owners to hire appraisers to conduct counter-appraisals after they disagreed with the one paid for by the program. The audit covered transactions that closed in 2012 and 2013. In each case, the counter-appraisals were higher, and in each case, the board and the landowners agreed on compromise figures. However, in both cases, the audit found that the PDR program forwarded only the higher counter-appraisal figure, not the compromise figure, to the federal conservation agency.

In one instance, the board-hired appraisal for a farm on Spurr Road was $2,900 an acre. The owner obtained a second appraisal that valued the development rights at $4,100 an acre. The board compromised and settled on $3,500 an acre. The Fayette County program forwarded only the $4,100 figure, and the federal program was charged about $215,000 more than it should have been charged.

In the second case, the board’s appraisal for a 315-acre farm on Royster Road was $3,150 an acre. The landowner’s counter-appraisal was $3,850 an acre. The board compromise figure again was $3,500 an acre, but Fayette County forwarded only the $3,850 appraisal to federal reviewers, causing the federal government to pay $109,000 more than it should have paid, according to the audit.

Some conservation service staffers knew they were paying for a landowner-obtained appraisal but told federal investigators they approved it because it had passed a technical review, according to the audit. But another state-level conservation service employee told auditors they weren’t aware that the appraisals were landowner-obtained.

“The first appraisals were never submitted to NRCS for technical appraisal review and thus were not considered by NRCS,” said Sam Miller, a public affairs specialist for the federal conservation service.

Billy Van Pelt, the former director of the purchase of development rights program who left in October 2013, said he thinks a legal opinion from a lawyer hired by “rural land interests” that was submitted to the Rural Land Management Board in June 2015 cleared the city of any wrongdoing.

The opinion, written by Lexington attorney Michael Meuser, declares there is “no basis” to claim the PDR program “overcharged the federal government” or that the city has “any legal liability to refund any federal funds.”

Van Pelt noted that the appraisals and closing documents in the two land transactions in question were reviewed by federal conservation officials. Those appraisals clearly stated who paid for them, he said. The federal government also had to approve the breakdown of how much it was going to pay and how much the local government would pay.

To resolve the issue, the conservation service agreed to obtain a third appraisal on both farms rather than seek repayment of $1.3 million, the total amount the federal government paid for its portion of the two conservation easements.

According to the May 2016 minutes of the Rural Land Management Board, an appraiser who worked for the same firm hired by both the Spurr Road and Royster Road landowners has been hired to do the third appraisal. The minutes say the latest appraisals are identical to the previous landowner-obtained appraisal: $4,100 an acre for the Spurr Road farm and $3,850 an acre for the Royster Road farm.

If those appraisals are accepted, Fayette County won’t have to repay the federal government.

Miller, the conservation service spokesman, said those appraisals are under review.

“NRCS will provide a final determination in this case when all technical reviews are completed,” he said.

Since 2014, the federal government has been clear that counter-appraisals hired by landowners won’t be accepted, said Beth Overman, the current director of the PDR program. The PDR program also makes landowners aware that if they are eligible for federal funding, counter-appraisals are not allowed.

‘Quit reviewing it’

Despite questions raised by the federal audit, some Rural Land Management Board members strongly objected to an internal review and a local audit of the program suggested by Lexington Planning Commissioner Derek Paulsen in May and June 2015.

During the May meeting, Paulsen said he instructed Overman to look at previous easement cases in which the landowner obtained a second appraisal to determine whether there were problems with what the federal government was charged before 2013..

“We have started to go back and looked at other farms,” Paulsen said in May 2015. “One of the questions that we had was: ‘Has this happened before?”

“Where I think we need to go is to have a more full audit,” Paulsen said at the time.

Board members asked questions during the May meeting but didn’t object. In June, though, several board members asked for a halt of the review because the federal audit was already creating questions about the program from council members.

Don Robinson, a board member, said the audit had created a “cloud that we had somehow … mismanaged money.”

Board member Kristin Clark also asked that all references to “overcharging federal partners” be corrected or removed from documents the board received in May.

Penn, who didn’t attend the May meeting, said during the June meeting that a review of previous land transactions was premature. The money wasn’t misspent, he said.

“I’m not concerned about what we did with the money,” Penn said during the June meeting. “The money went to buy another easement.”

Penn said he was concerned that there was a cloud over the program.

“My name and reputation is tied to this,” he said.

Clark said Overman should quit reviewing previous land transactions in which there was a second appraisal. But a database that Overman was compiling of all purchase of development farmland should continue, she said.

“Yes, we need a database, but quit reviewing it. To me, you’re looking for problems that way. It’s past,” Clark said during the June meeting.

The Herald-Leader obtained audio recordings of the May and June meeting. The board’s minutes in June 2015 said only: “Discussion of NRSC” audit. In the August 2015 minutes, a city lawyer said the board’s discussion had been removed from the June minutes because of legal concerns.

“City attorneys work with all kinds of boards and commissions across government to protect the city from lawsuits,” Straub said. “They to try to keep the government from getting sued, and try to limit the damages when we know we’re going to get sued. It would be irresponsible to do otherwise.”

Before the review was halted, city officials found other cases in which the federal government was charged a higher price than the board appraisal.

“We don’t know if there was anything wrong,” Paulsen said recently.

A Herald-Leader review of land transactions from 2008 to 2014 shows that there were at least six cases in which the landowner obtained a second appraisal. It appears that the conservation service was charged for either the higher landowner appraisal or a compromise price in each of the six transactions.

For example, the program-paid appraisal for a 216-acre farm on Georgetown Road was $2,900 an acre, but the farm owners’ counter-appraisal came in at $6,000 an acre. The board compromised at $5,000 an acre, one of the highest per-acre costs the program has ever paid.

The federal government has not asked to review previous transactions in which the landowners obtained a second appraisal, Paulsen said.

Since 2014, the board hasn’t allowed second appraisals for any farm seeking federal funds. However, the local ordinance hasn’t been changed to prohibit a second appraisal for easements bought with local or other funds.

Penn said the program allowed second appraisals in the beginning because conservation easements were so new. Now, nearly 16 years of comparable easements are available, and a second appraisal might not be needed, he said.

Transparency

Opinions about the need for an audit of the PDR program now appear to be shifting. Board member Nathan Billings said during the June 2015 meeting and again in an interview in late August that a more thorough and far-reaching audit of the nearly 16-year program is the right thing to do.

“I fully support the PDR program and believe it is a great benefit for Fayette County,” Billings said recently. “Like all programs that receive public money, I believe transparency and accountability is of the utmost importance. I believe the future of the PDR program is dependent on council funding and the council’s confidence that the program is working as it is intended.”

Robinson and Penn both now say they would support an audit of the PDR program. Penn said he was concerned that the Urban County Council was being told by Paulsen in summer 2015 that it might have to repay the federal government before the audit was finalized. It was too early for that, he said.

After the Herald-Leader began asking questions this summer about the issue, the board decided Aug. 29 to form a committee to explore possible changes to the PDR program.

Billings, who made the motion, said he thought that if the board didn’t make suggestions, changes will be made for them.

“When you are a leader, you get out in front and you take hold and review what works and what doesn’t and make recommended changes,” Billings said. “I am concerned if we don’t do it, people will do it for us, and it will have adverse implications for the program.”

Paulsen said earlier this month that the federal audit should be resolved before the city pursues a local audit of the program.

“We don’t have the final findings of this audit of our national partners yet, so we don’t know what it will recommend or require, but it has already provided a good opportunity to take a hard look at the PDR program,” he said. “The PDR program is 15 years old. It has had a lot of successes — it protects 30,000-plus acres of farmland. But we also found several areas where we can improve, including more transparency, better monitoring and more targeted recruitment of farms into the program.”

This story was originally published September 9, 2016 at 12:05 PM with the headline "Review of farmland program halted even though federal audit found $300,000 problem."