Holmes Harbor Sewer District under state investigation
June 25, 2008 · Updated 1:52 PM
"Next board meeting ThursdayThe public will get another chance to talk about the Silver Sound Improvement Project on Thursday at the sewer district's offices on Chipshot Drive. The board of commissioners will meet there at 6:30 p.m. for its regular monthly meeting.Two hundred homeowners living within the Holmes Harbor Sewer District may have to pay back investors for $20 million in assessment bonds allegedly sold illegally by the district late last year.The 20-year bonds were issued on behalf of a Snohomish County developer last October to purchase property and build the infrastructure for a 40-acre, 535,000-square-foot Everett office park called the Silver Sound Corporate Center.The Washington state Auditor's Office and the state Attorney General's office declared the deal illegal in January and began an audit of the district in March.Now, a special state attorney general is trying to seize $10 million of the bond's proceeds from an out-of-state trust company, and the district itself will have to pay more than $25,000 in audit and legal fees.Three months into this audit, state and district officials still cannot say who will pay off the bonds, half of whose proceeds have already been spent on a development that does not even have a permit.Though officials with both state agencies are saying little about the investigation, Nester Newman, a state audit manager, said last week that his agency has not found a way out for sewer district ratepayers, who seem to be ultimately responsible for the bond.I don't know (a way out), Newman said.The sewer district's board of commissioners authorized the bond sale on Oct. 26, 2000, five months after being warned not to by the state Auditor's Office. In a three-week investigation of the matter, The South Whidbey Record discovered public documents that show the district's commissioners - Linda Zoll, Don Cardner, Bill Spalding, Heather Houlihan, and Don Wills - apparently ignored the advice. They approved the $20 million bond sale in return for a $100,000 cash payment to the sewer district from Silver Sound developer Terry Martin. The district's attorney, Charles Tull, also received $100,000 for serving as co-counsel for the bond issue.Within days of the bond sale, Martin - who does business as Silver Legacy Corporation - spent about $10 million of the bond money to purchase 40 acres of wooded property in Everett, to pay bills related to the bond sale, and to make a $1.24 million cash payment to his corporation. The remainder of the money is invested with a San Francisco trust company.All the expenditures were approved by Bill Spalding, who was the sewer district board president at the time.By Nov. 16, 2000, the state Auditor's Office had discovered what the commissioners had done and tried to find a way to undo it. At a May 3, 2001 board meeting, the district commissioners voted 5-0 to collapse the bond after being ordered to do so by the state Attorney General's office. The board also told the trust company, US Trust, to turn the remaining $10 million over to the Island County Treasurer's Office, again at the attorney general's behest. Collapsing a bond, said Cynthia Weed, a bond attorney with the Seattle firm of Preston, Gates, and Ellis, is much like calling a bond, an action that pays off a bond immediately instead of over time to avoid annual interest payments. By taking the action, the commissioners seem to be wiping out the bond's 20-year repayment schedule and should be required pay off bond investors. That will be difficult - if that is what the state orders the district to do after it releases its audit in late July - since half the bond proceeds are spent and the other half is being held by the trust company. Last week, Washington Special Attorney General Roy Koegen - who is assigned to the Silver Sound case - made his third request to US Trust to transfer the money to an account controlled by the Island County Treasurer's Office. As of Friday, that money had not been transferred, according to officials at US Trust and Island County Treasurer Maxine Sauter.Meanwhile, the district began to pay back on the bond. In March, the district made a $515,311.20 interest payment to bond investors. The bond's collapse in May should allow the district to avoid years of similar interest payments.This is not how this bond was supposed to work. When the conditions of the bond were written, the principal and interest was to be paid not by the sewer district, but by individuals and companies that Martin expected to buy into the Silver Sound Corporate Center.Martin is now a year behind on his construction schedule, has yet to obtain a building permit, and there are no corporate office buyers to make the bond payments. As a result, the assessment district established for the bond sale does not exist. If the state rules that the bond is in default and if a court finds the district's commissioners guilty of wrongdoing, said bond attorney Weed, district property owners could be assessed for the repayment of the bond.A question of confidenceAs the state's investigation began to gather momentum this spring, the Holmes Harbor Sewer District commissioners began losing confidence in Silver Sound. That marked a complete turnaround from their stance a year-and-a-half ago.In an interview with a South Whidbey Record reporter in September 1999, Commissioner Bill Spalding was a proponent of the bond sale. He said the $100,000 administration fee earned from the sale would boost the district's income.This is a positive move for the district, he said. Everyone who lives in the district will benefit by our sponsorship of this LID (local improvement district). It gives Holmes Harbor a better income, which will allow us to improve our facility.But by this April, Spalding had begun to wonder if Silver Sound Corporate Center would ever be built. At that point, construction was months behind schedule and Martin had yet to file a complete permit application with the city of Everett.What is next? Spalding said at an April 5 board meeting, according to the meeting's minutes. The $20,000,000 (in) bonds are in the market, the project is six months old with no progress.At the same meeting, Commissioner Zoll said she did not have faith in the project and complained that the district had at that point paid $15,500 in state audit fees due to the bond sale.Zoll - who became board president after Spalding moved out of the district three weeks ago - may have good reason to have little confidence in Martin's project. The developer currently has seven large-scale residential and commercial projects under development. He has not broken ground on any of these projects.Speaking about 19 other development projects Martin has undertaken, Ray Allshouse, the director of the Snohomish County Building Department, said Martin has a small company and has tended not to stay with large projects when completing them has become difficult from a permitting or financial standpoint.He doesn't have the dollar backing the big companies do, Allshouse said Friday.Making the deal even worse for the sewer district is the fact that Martin seems to have legally opted out of ever paying for the bond he was given. In the bond's official statement, Martin exempts himself and future owners of his project from repaying the $20 million bond and any interest payments. Language in the document states: There is no assurance that the Developer or any other owner has the ability to pay the Assessment installments as they become due or that, even if they have the ability, they will choose to pay such installments.The commissioners distanced themselves from Martin by voting in May to rescind letters of commitment for two more development projects, Padilla Heights and Vintage Woods, and to terminate utility local improvement districts (ULIDs) created for both. For Padilla Heights, a planned residential development in Skagit County, Martin asked the commissioners to sell $7 million in bonds. That sale never took place.Investors lose confidenceAlso losing confidence in Silver Sound are the investors who purchased the bonds. Robert Trimble, who lives part time on South Whidbey, invested $1 million in the bonds. He said he became concerned recently when he examined the profit numbers and projected property values Martin gave the sewer district and investors. According to the Snohomish County Assessor's Office, the land Martin spent $6.2 million in bond proceeds to purchase last October is assessed at only $1.5 million. In the official statement for the Silver Sound Improvement Project, Martin estimates that the Silver Sound Corporate Center will be worth $88 million when finished. Figures in the bond's official statement project Silver Sound to be worth about $30 a square foot when roads and drainage are installed. The price for comparable property in the area, Trimble said, is about $5.50 a square foot.It's a ridiculous over-valuation, he said Wednesday.Trimble also said that there is little chance investors will see an income from Silver Sound. But he said the state investigation should expose enough of the apparent wrongdoing in the matter for his investment company to return his principal and pay interest he should have earned prior to the bond's collapse.Property owners remain at riskWhile investors might be safe, the financial risk for Holmes Harbor Sewer District property owners appears to be high. Evenly divided among 508 taxable parcels in the district, the payoff on $20,025,000 (the exact amount of bonds sold) would require a $39,419 assessment against each parcel.Attorney Cynthia Weed said Thursday that property owners within a taxing district that sells a bond are generally responsible for its repayment. Working against district members is the fact that the bonds are uninsured. Weed said that is obvious in the bonds' unrated status and in what she called the extraordinarily high 7.8 percent interest being paid to investors. Only riskier, unrated bonds would carry a rate that high, she said.Tull, the sewer district's attorney, disagrees with this evaluation of the bond. He said this week that sewer district members have nothing to fear.I don't think the ratepayers will be harmed, he said. Why the deal appears suspectWithin days of last October's bond sale, both the state Auditor's Office and Attorney General's office declared the sale and the subsequent investment of the $20,025,000 violate state laws regarding such sales.In a Jan. 30, 2001 memorandum responding to a Nov. 16, 1999 inquiry from Nestor Newman, Suzanne Shaw, an assistant attorney general with the state, ruled junior taxing districts like the Holmes Harbor Sewer District may not establish ULIDs outside of their borders.The memo refuted a Nov. 14 memorandum from the district's attorney, Charles Tull, and bond counsel, Mike McCall, in which the two lawyers interpreted the Revised Code of Washington (RCW) to justify creating the Silver Sound ULID. Shaw said the interpretation is wrong.She wrote in her memorandum, ... a water or sewer district may only create a local improvement district or utility improvement district within its own boundaries. In May, state Auditor Brian Sonntag became personally involved in the Silver Sound matter. In a May 10, 2001 letter to the sewer district's commissioners, Sonntag notes that the bond investment with US Trust also flouts state rules. According to the RCW, Sonntag wrote, only the Island County Treasurer may account for and pay all bonded indebtedness for the District.Also questionable was Martin's use of bond proceeds to purchase the Silver Sound property. According to Snohomish County records, 15 acres of the Silver Sound property Martin was to have deeded to the district for infrastructure development and maintenance purposes is still in private hands. Though the district paid about $9,000 in title insurance for the property, it does not own any part of the deed to the 40 acres Martin purchased. The Snohomish County Assessor's Office shows the property is co-owned by Silver Legacy and Marc and Joan Bhend. The Bhends were the sole owners of the land prior to Martin's $6.2 million payment.The district may never be able to own any part of the land. In a March 26, 2001 letter to the district, Everett City Planner Gary Doughty told the commissioners that it is illegal under his city's ordinances for Martin to transfer ownership of a portion of his property to the sewer district. This legal snag was apparently never addressed in discussions between the commissioners and attorneys prior to the bond sale.As a result, it is possible the public money was used to benefit a private company, something forbidden by Washington's state constitution. According to Article 8, Section 7 of the constitution, which was referenced by attorney Weed, No county, city, town or other municipal 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 ...Last month, the Attorney General's office also forced the sewer district to turn over the $100,000 fee Martin paid the agency to the Island County Treasurer.State knew ahead of timeWhen the state Auditor's Office issues its final audit in late July, it may have to name itself as being partially culpable for failing to stop the bond sale. According to sewer district Commissioner Zoll, the state Auditor's Office never notified the district in writing to abort the sale.Auditor Newman did tell the district to stop its plans for the bond sale, but apparently did so only verbally. A phone call from Newman to the district on June 26, 2000, detailed in a handwritten note in the district's records, shows Newman warned against selling bonds for Silver Sound. That was five months prior to the sale.Zoll acknowledged that Commissioner Spalding received a message from Newman sometime prior to the bond sale, but said Newman did not specifically warn against selling the bonds. Zoll deferred any further comment on the matter to the sewer district's attorney.There's nothing I can really say to the press because I have no idea what is in the (state) audit, she said.The district's other commissioners were similarly silent when questioned this week. They are adhering to a gag order drawn up by attorney Tull until after the state audit is made public. Also refusing to comment in detail on the bond sale and state investigation were auditor Newman, assistant state attorney general Stacia Hollar, Tull, special attorney general Koegen, and Terry Martin.Deal years in the makingDistrict records show the commissioners and Tull began their dealings with Martin in March 1998 when the developer asked the commissioners to sell bonds for a Snohomish County residential development called Mona Lisa Estates. That sale never occurred, nor did a bond sale Martin requested later in 1998 for a commercial/residential development near the Swinomish Indian Reservation.On March 18, 1999, Martin again came before the board, asking the commissioners to establish a ULID on property he planned to buy in Everett and to sell $18 million in bonds to finance part of the $38 million price for a commercial office development. He offered to pay the district a significant fee to handle the sale. At a later meeting, Martin asked that the bond sale be set at $20 million.Martin said he would also transfer 15 acres of his development to the sewer district at a later date and pay the district a fee to maintain public works and drainage associated with the project.Bob Randolph, who served as a Holmes Harbor Sewer District commissioner during this time period, said he was overwhelmed with what Martin wanted. He resigned from the board at its Aug. 24, 1999 meeting, just minutes before Zoll, Cardner and Spalding voted unanimously to pursue the bond sale. Another commissioner, Rick Brown, had resigned two weeks earlier for reasons he said were unrelated to the Silver Sound project.In his letter of resignation, Randolph listed Silver Sound as his reason for quitting.It made no sense to me, Randolph said in a recent interview. Randolph also said his vote would not have mattered anyway.I couldn't have made a difference. I thought they might go through with it. I also thought they might exercise due diligence.The remaining board members received no public pressure from ratepayers during meetings in 1998, 1999 and 2000. Don Wills and Heather Houlihan replaced Randolph and Brown in April 2000. Meeting minutes show that few members of the public, outside of Martin and his attorney, attended meetings and public hearings addressing Silver Sound. No members of the sewer district, other than the commissioners, commented on the project. How a bond worksWhen a taxing district sells a bond, it is asking investors to loan money to the district for a particular purpose. Once the district has that money in hand, it is the responsibility of the district's elected officials to spend the money for the purpose laid out in the bond's official statement, a document distributed to all investors.Cynthia Weed, a bond attorney with the Seattle firm of Preston, Gates, and Ellis, said municipal bonds, like the assessment bonds sold by the Holmes Harbor Sewer District, are generally the safest investment on the market. They also pay the lowest interest rate, currently about 5 percent. Bonds are rated for safety. A bond with an AA rating, like those sold by the South Whidbey Parks and Recreation District in recent years, is considered extremely safe. An unrated bond, like that sold by the Holmes Harbor Sewer District, is considered to be more risky. "