1. The District's management paid for contracted services it did not receive, exceeded its authority provide wholesale fiber optic services and failed to inform the District's elected officials about the activies being performed under these contracts.

Background

In 2001 and 2002, the District entered into contracts with Benton Rural Electric Association (REA), GVNW and PowerTelNet (PTN) to assist theDistrict in becoming a wholesale telecommunications provider. These contracts, as presented to the elected Board, appeared to be allowable and for a public purpose.

Benton REA Contract No. 130-941

The original draft of this contract alled for the District to pay Benton REA for costs, plus 10 percent, releated to starting a retail Internet business in Grant County. The District's legal counsel told District management that the contract exceeded the District's authority to provide only wholesale internet activities. District management then came back to the Board with an entirely different contract.

The new contract was to pay Benton REA $15,000 per month for monitoring the District's connection to the Zipp fiber network with the requirement that the contractor provide timely notification to the District of system failure or interruption in connectivity. In addition, the contract stated Benton REA was to assist theDistrict with the design, installation and operation of its fiber optic/telecommunications system. These other provisions would be paid for on a unit price basis which is outline in an appendix in the contract.

GVNW Contract No. 130-945

The contractor was to provide modifications to the District's telecommunications facilities and fiber optic network to enable the District to operate an internal telephone service and to potentially provide wholesale telecommunications services. In addition, the contractor was to recommend which telephone switch would be best suited for integration of telephone services into the District's telecommunications facilities and its fiber network.

PowerTelNet Contract No. 130-1026

This contract outlined the steps necessary for the contractor to complete the process to obtain a Commercial Local Exchange Carrier (CLEC) license for $109,000. In the contract were specific objectives and milestones and deliverables.

NoaNet Contract No. 130-991

In April 2002, the District entered into a contract with NoaNet in which NoaNet was, in part, required to provide 80 Hours of Level-3 Engineering support each month at 30 minute increments and logged with each respective ARWeb Remedy trouble ticket. In exchange for providing these serivces, theDistrict would apply a credit to the monthly NoaNet billing for services provided to NoaNet, also as part of this agreement. The District provides monitoring services for NoaNet and charges them monthly for this service.

Description of Condition

During our review of these contracts, District records, discussions with District personnel, and the review of support provided for the specific payments, we found that the District's management had entered into these agreements with the intent of receiving services other than those outlined in the agreements. Specifically, we noted:

• The overall intent of the Benton REA contract, and subsequent agreements with GNVW and PTN, was to set up Benton REA as retail telecommunications provider in Grant County. The payments under the agreement were to cover the costs of Benton REA, plus 10 percent. This fact is supported by internal e-mails, communications between the District and Benton REA, internal notes and memos and interviews with District management staff. The total amount paid under this agreement to date is $604,577.75.
• The District did not have documentation to support what the District was to receive under the contracts. Including the amount paid under the Benton REA contract, the total unsupported payments are $994,577.75.
• The District exceeded its authority provided by state law when it used public funds to set up a non-profit business as a retail telecommunications provider.
• District management withheld information concerning the contracts from the District's elected commissioners.

In addition, we noted the District could not provide support for the $240,000 paid under the NoaNet contract. As noted in the agreement above, NoaNet was required to support each 30-minute increment of work performed. The District did not verify or require this support be provided.

Cause of Condition

District management did not ensure the District's Board understood the intent of the contracts and payments. In order to get the contracts approved, District management, with the assistance of the specific contractors, rewrote the original, draft agreement to include services the District and the contractor were never going to receive. In addition, the District Board did not sufficiently monitor activities to ensure that payments were legal, allowable and appropriately supported.

Effect of Condition

The District made unallowable payments totaling $1,234,416.90.

Recommendations

We recommend the District:

• Make every effort to seek the return of money paid under these contracts.
• Establish and follow policies and procedures to ensure contracts and subsequent payments on contracts are legal, allowable, and supported with adequate documentation.
• Confine its activities to those authorized by state law.

Applicable Laws and Regulations

Article VIII, Section 7 - Credit Not To Be Loaned.

"No county, city town or other municpal corporation shall hereafter give any money, or property, or loan its money, or credit to or in aid of any individual, association, company or corporation, except for the necessary support of the poor and inform, or become directly or indirectly the owner of any stock in or bonds of any association, company or coporation."

RCW 42.24.080. Claims against for contractual purposes states:

"All claims presented against any county, city, district or other municpal corporation or political subdivision by persons furnishing materials, rendering services or performing labor, or for any other contractual purpose, shall be audited, before payment, by an auditing officer elected or appointed pursuant to statute or, in the absence of statute, an appropriate charter provision, ordinance or resolution of the municipal corporation or political subdivision. Such claims shall be prepared for audit and payment on a form and in the manner prescribed by the state auditor. The form shall provide for the authentication and certification by such auditing officer that the materials have been furnished, the services rendered or the labor performed as described, and that the claim ins a just, due and unpaid obligation against the municipal corporation or political subdivision: and no claim shall be paid without such authentication and certification: PROVIDED, That the certificates as to claims of officers and employees of a county, city, district or other municipal corporation or political subdivision, for services rendered, shall be made by the person charged with the duty of preparing and submitting vouchers for the payment of services, and he or she shall certify that the claim is just, true and unpaid, which certificate shall be part of the voucher."

RCW 43.09.200 Local government accounting - Uniform system of accounting.

"The state auditor shall formulate, prescribe, and install a system of accounting and reporting for all local governments, which shall be uniform for every public institution, and every public office, and every public account of the same class."

"The system shall exhibit true accounts and detailed statements of funds collected, received, and expended for account of the public for any purpose whatever, and by all public officers, employees, or other persons."

"The accounts shall show the receipt, use and disposition of all public property, and the income, if any, derived therefrom; all sources of public income, and the amounts due and received from each source; all receipts, vouchers, and other documents kept, or required to be kept, necessary to isolate and prove the validity of every transaction; all statements and reports made or required to be made, for the internal administration of the office to which they pertain; and all reports published or required to be published, for the information of the people regarding any and all details of the financial administration of public affairs."

RCW 54.16.330 Telecommunications facilities--Construct, purchase, acquire, etc.-Purposes-Limitations--Eminent Domain.

"(1) A public utility district in existence on June 8, 2000, may construct, purchase, acquire, develop, finance, lease, license, handle, provide, add to, contract for, interconnect, alter, improve, repair, operate, and maintain any telecommunications facilities within or without the district's limits for the following purposes:

(a) For the district's internal telecommunications needs; and,

(b) For the provision of wholesale telecommunications services within the district and by contract with another public utility district.

Nothing in this subsection shall be construed to authorize public utility districts to provide telecommunications services to end users."