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Audit might raise price of bonds

The recent state audit of the Island County Treasurer's office could trigger a rate hike in insurance bonds for elected officials, if Island County's insurer doesn't decide to drop the county altogether.

According to state law, county officials are required to furnish a bond that says they will faithfully perform the duties of their office, as well as account for all money that belongs in county coffers.

But two Dec. 28 audit findings from the state auditor's office claim the county treasurer's office doesn't have sufficient controls to protect against the potential for misappropriation of funds.

Though audit manager Nestor Newman called the report "chilling," Island County Treasurer Maxine Sauter disagreed with the state's findings. She claimed her office has "never had a missing penny, ever" and said she is unwilling to change her current practices.

Though the audit carries no enforcement weight, the findings may cause the county's official bond provider, Safeco, to balk at continuing on with their present policy with the county, said Island County Risk Manager Betty Kemp.

"If our current provider of these bonds decides that last year we had a finding and now we have a finding again, then either they'll decide not to take the risk at all, or they would say we're willing to underwrite but it will cost a little bit more," Kemp said Wednesday.

The recent state audit is the second in two years that notes a serious lack of financial safeguards in the treasurer's office. Although none of the last eight audits of Island County has cited evidence of missing funds, six of these reports have expressed concern about the potential for misappropriation.

Kemp said there will not necessarily be any consequences from the audit findings, but if the possibility exists, it is her job to notify county department heads.

"It's only my job to say what the exposure will be and hope it doesn't happen," she said.

Set in the context of recent history, it seems unlikely that a critique of the treasurer's office will go entirely unnoticed.

In 1997, Safeco decided to stop bonding Island County officials when a state audit report that found weaknesses in the way the treasurer's office handled cash, a circumstance that had to be rectified by Kemp.

"I had to go out and shop for new bonds," she said.

Kemp eventually found one company, American State Insurance, that was willing to underwrite the new officials' bonds. She said she had to replace the bonds of all county officials through the company.

Since then, Safeco bought out American State. Now the county may be in same situation it had in 1997, Kemp said.

"Now we are back to the underwriting philosophy of Safeco, who terminated our bonds in 1997," said Kemp.

According to Paul Hollie, a media relations representative at Safeco, the company systematically assesses bonds when they come to term, unless something arises during an official's coverage period that would cause them to take a look at whether there was a question of heightened risk. In this case, Hollie said, the company always refers to local statutes in making their decision.

"As I understand it, these things are already mandated through legislation," Hollie said in response to the question of what Safeco might do in light of an audit. "What a company like ours would do is take a look at the local statute."

In determining the status of a bond when it comes time to renew, Hollie said, decisions are driven predominantly by market conditions and the terms of applicable local statutes and regulations. Most bonds last for one year, he said.

Because the insurance industry as a whole has been shaken by the Sept. 11 attacks, rate structures are being closely examined by everyone for any factors that might cause bond prices to go up.

"We're currently revisiting some of the rate structures," said Hollie.

Kemp said she is not certain what the consequences of the most recent audit of the treasurer's office might be, if any. Either way, Island County officials are required to be bonded, whether it's with Safeco or a different provider.

Right now, Kemp is awaiting the final findings of the audit, which will be forwarded to the underwriters at Safeco.

"We just face whatever comes, and hopefully this can all be taken care of," she said. "I'm hoping that it can be worked out between the treasurer's office and the state auditor, so we aren't going to be perceived as having a problem."

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