Mountain Water District, a public water and sewer utility in Pike County, has paid more than $36 million in fees to a private management company since 2005 without adequate disclosure or evidence that ratepayers got a good deal, State Auditor Crit Luallen said Thursday.
The utility entered into the original 2005 contract with Utility Management Group without any public board discussion or review of the contract terms, "which resulted in costly management fees and conflicts of interest," Luallen's office said in an audit of the district it released.
One of the conflicts state auditors found was with a company owned by state Rep. Keith Hall, D-Phelps, which collected more than $171,000 for electrical work from the water district. He used a billing method that avoided competitive bidding and public discussion by the district's board.
As the area's state representative and a member of the House Appropriations Committee, Hall also helped to allocate state funds for the project he later won, Luallen said. The work was done in 2004 and 2005.
The auditors' report does not name Hall, but it identifies his company and his elected office. Luallen confirmed it was Hall during an interview.
"What we've learned raises the concern that there was a deliberate attempt to keep this from being competitively bid and to keep this from being reported to the water district board, all so it could be directed to one particular individual," Luallen said.
She said she is referring her entire audit to Attorney General Jack Conway and the Public Service Commission for possible action. The section of the audit about Hall has been referred to the Legislative Ethics Commission, she said.
This is just the latest example of a government agency "handing off" responsibilities to a private, for-profit company that prefers not to share financial data, Luallen said. Recently, her office issued similar warnings about privatization contracts awarded by the state prisons to Aramark and by the state Medicaid program to Passport Health Plan.
In the case of Utility Management Group, Luallen found the company had not undergone annual audits, and it refused to provide state auditors with cost-related records that could indicate whether its fees were excessive, she said in an interview.
After signing with UMG, the utility's costs escalated, creating losses for the district despite rising revenue, auditors said in their report.
"I believe that if you're going to assign public duties to private entities, you need even more accountability and transparency in place, and certainly not less," Luallen said.
'Things went south'
On Thursday, UMG executive Bob Meyer said he could not respond to the audit until he had an opportunity to read it. Meyer said UMG gave the auditors some documents but not others.
"We received a request from them asking for a number of records with financial details that we felt were proprietary. We responded with some information," Meyer said.
Mountain Water District board chairwoman Rhonda James said she was appointed by the Pike County judge-executive in 2008, after many of the events recounted in the audit happened.
"Since I've been on the board, we're trying to be as transparent as we can be," James said. "We recently held a special meeting, called so we could disclose everything we know about the new contract."
The water district last week signed a new five-year contract with UMG for $7.6 million a year.
The state audit was requested by Pike County Magistrate Chris Harris, who said he still is concerned about the water district board. UMG officials were major contributors to a group that targeted Harris in last year's election. They ran a controversial television commercial that included images of a woman in racy clothes.
"Board members were coming to the fiscal court and saying, 'We don't need this audit.' I think these are many of the same board members that were making the decisions when the problem was going on," Harris said.
"My concern has always been that the numbers there were just not making sense," Harris said. "Mountain Water had always been operating in the black, and when UMG took over, things went south in a hurry."
Hall was elected to the Kentucky House in 2000. His company, B.M.M. Inc., previously was awarded at least $3.2 million in sewer line projects by the water district. As a lawmaker, Hall helped the water district get millions in state funds for sewer line projects in his area, which presents a conflict of interest for him, a government ethics watchdog said in 2009.
Change orders had driven up the final cost of Hall's sewer line projects by an average of 58 percent by 2009, when the Herald-Leader first reported on them.
Luallen said her staff reviewed Hall's sewer line projects and determined they were bid and reported to the water district board, so auditors did not pursue them further.
By contrast, she said, Hall avoided the competitive bidding process for the electrical work necessary to connect more than 600 homes to sewer lines, usually charging $300 a home.
In fact, she said, the water district twice invited Hall's B.M.M. and other area companies to submit bids for the electrical work. The lowest bid was $275 a home. B.M.M. did not enter a bid either time.
"On July 26, 2004, B.M.M. submitted the first invoice for the electrical work on the project," auditors wrote in their report. "There are no records to explain why the vendors that responded to the bids were rejected or how B.M.M. eventually was selected to perform the work."
Auditors' interviews with Hall and water district officials indicate that Hall worked strictly with the district's then-superintendent, Will Brown, Luallen said. Brown refused to speak to auditors, citing litigation that he was involved in after leaving his job at the water district, she said.
Hall told auditors that Brown instructed him to submit invoices for his electrical work in increments of less than $20,000, which was the district's "small purchase authority limit." Anything less than $20,000 did not have to be competitively bid or reported to the district board, Hall said.
Of Hall's 10 invoices in 2004 and 2005, six were below the limit by $200 or less.
"Some of these invoices were splitting up work done on the same day just to keep the final price under $20,000," Luallen said.
James, the chairwoman of the water district, said Hall's electrical work was done before she joined the board.
"From what I can see, the board was never aware — there was nothing divulged to the board about any of that. That was all between our superintendent at the time and Mr. Hall," James said.
As long as Hall publicly bids for projects, the water district sees no reason he should not be allowed to perform work, James said. Hall's company currently is working on a long-term sewer project in the Phelps area, where Hall lives, she said. She did not know the cost.