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Auditor calls Holmes Harbor Sewer District bond deal illegal

"Where did the money go?The Silver Sound sale has put about $10 million in expenses and interest payments into the pockets of a number of attorneys, investors, and other parties. Here is a breakdown of how the money was spent.$225,520 - Pacific Northwest Escrow$215,950 - Signal Mortgage$100,000 - Holmes Harbor Sewer District$27,500 - IBIS Securities, LLC$140,000 - Schuering, Zimmerman & Scully, LLP$100,000 - Langabeer, Tull & Lee$85,000 - Robert M. Haight (bond underwriter)$10,000 - U.S. Trust$3,000 - Cox, Castle & Nicholsen, LLP$27,500 - Royce Printing$40,000 - Davis Wright Tremaine, LLP$100,000 - David Smith (developer's attorney)$35,000 - Ogden Murphey & Wallace$6.21 million - Land purchase$1.24 million - Silver Legacy (developer)$570,000 - Interest payment to bond holders$600,000 - IBIS Securities (discount on bonds)Total: $9.72 millionSource: U.S. Trust and Holmes Harbor Sewer District.Commissioners ignored warnings, state audit findsOn Friday, hundreds of ratepayers in the Holmes Harbor Sewer District learned that a $20 million bond sale approved by their elected commissioners last October violated state laws.In a 73-page audit report released over the Internet Friday, the Washington State Auditor's Office proclaimed the deal illegal on numerous levels and pointed a finger at the district's commissioners, its engineer, and its attorney as being responsible. The office of Washington State Auditor Brian Sonntag started its investigation of the matter early this year after an audit manager with the agency discovered that the district's commissioners ignored his advice to halt the bond sale.Sonntag said Friday that the content of the audit report grew almost up to the minute it was published. He said this case could be the state's second largest public bond default since a multi-billion dollar default by the Washington Public Power Supply System (WPPSS) in the early 1980s. Whether the bond goes into default depends on legal decisions to be made in court.In the WPPSS case, the Auditor's Office did not take appropriate action soon enough. This time, Sonntag said, the auditors tried to stop the deal before it happened.We were there a year-and-a-half ago, he said.Sonntag said two of his agency's employees warned members of the district's board of commissioners not to sell the bonds, bonds that were to be used to develop land in the city of Everett for a commercial office complex called the Silver Sound Corporate Center. An audit manager with the agency warned then-district commissioner Bill Spalding against the sale, Sonntag said. Another auditor's employee had a personal meeting with Spalding to advise against the sale.Unfortunately for district ratepayers, Sonntag said, Spalding and the commissioners chose to ignore that advice.We can't stop them from making decisions, he said. We gave them our best advice early on in the process. The audit report states that the sewer district commissioners violated state law in a number of ways. Commissioners' actions ruled illegal in the report were:* The creation of a utility local improvement district (ULID) outside district boundaries and the issuance of bonds to support it;* Failing to deposit $20,025,000 in bond proceeds with the Island County Treasurer's office or the treasurer's designated fiscal agent;* Paying more to the district's co-bond counsel, Charles Tull, in connection with the issuance of the bonds than required by the district's written contracts with the counsel; * Paying the developer of the Silver Sound Corporate Center, Terry Martin, the developer's attorney, and the developer's lender nearly $1.5 million of bond proceeds, without any documentation or basis for these payments;* Spending bond proceeds to purchase the entire 40-acre property included in the ULID, including private property deeded to the developer;* Allowing the developer to sign contracts for public improvements to the property;* Spending public funds for a private purpose and planning to lend its credit to a private party by agreeing to fund non-public improvements:* Approving improvements and other expenditures in the ULID before amending the district's comprehensive plan to include them;* Failing to submit the plan amendments to Snohomish County, Island County, the Snohomish Health District and the city of Everett for approval.* Failing to keep complete records of commissioners' meetings as required by the Open Public Meetings Act.In the fifth paragraph of the document, the auditor states that he is referring the Silver Sound matter to the United States Securities and Exchange Commissioner, the Washington state Department of Financial Institutions, the Island County Prosecutor's Office, and the Washington State Attorney General for any action they deem necessary. The report says the auditor's office believes actions taken in the course of the bond sale may constitute malfeasance.The auditor's report does not make any conclusions about who is responsible for paying off investors who put their money into the Silver Sound bonds. Those bonds are still on the market, but have no sale value.The district spent about half the bond proceeds, $10 million, to pay for the bond issue's administrative expenses, to purchase the Everett acreage, to pay the district a $100,000 administrative fee, and to make a $1.24 million payment to Silver Legacy, LLC, a corporation owned by Terry Martin and his wife.All those expenses were approved by Spalding and the district's engineer, Les Killingsworth.The total expenses for issuing the bond were higher than all but one public bond issue in 2000, and were the highest on a dollar-for-dollar basis, according to the auditor's report. The sewer district paid $56.90 per $1,000 of bonds, or a total of $1,139,400, to make the deal. Issuance costs for 131 other bond issues in the state that year ranged from $2.86 per $1,000 of bonds to $6.14 per $1,000.Sonntag said these figures sent up a red flag for his agency.It cost a lot of money to issue inappropriate bonds, he said.Charles Tull, the sewer district's attorney, reported in a public meeting Thursday night that Martin is trying to get a loan to pay off bond investors. He said Martin expects to get confirmation for the loan next week.Sonntag said he hopes that is true, for the sake of the district's ratepayers.That's my first and foremost concern (the ratepayers), he said.Sonntag said he does not believe his agency's report will lead to any changes in public bond sale law.Those laws are pretty clear, he said.He also noted that Holmes Harbor Sewer District ratepayers, at the very least, are definitely on the hook for paying more than $30,000 in audit expenses. The standard bill for an audit for a taxing agency the size of the Holmes Harbor Sewer district is about $3,000, he said.About $10 million of the bond proceeds are currently invested with the Bank of New York and have been frozen by the State Attorney General's office. The agency has also frozen the $100,000 paid to the district for selling the bonds. "

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