I recently found this example of mismanagement through the B-Town Blog.
The summary:
King County Water District No. 49 underpaid the City of Seattle by $510,719 and failed to properly account for this underpayment.
More in depth:
Like many other Water Districts, King County Water District No. 49 purchases water from the City of Seattle according to a Water Purveyor Contract. The cost of the water is based on Revenues the District No. 49 charges its’ customers (you and me) and the flow of water (think of one big meter from the City to the Water District). Because the contract is based on revenues, the parties to the contract must look to the past to determine the Revenues received from the water users in Burien and Normandy Park in order to calculate that actual amount the Water District No. 49 pays the City of Seattle for the water it received. Because the contract is also based on the flow of water (the big meter) and rates vary for conditions such as peak times and peak flow the parties to the contract must look at the big meter. Simply put, the Water District’s actual water costs are not instantly known; therefore the District No. 49 pays a water flow bill until the revenues are known and then there is an adjustment. Section III, paragraph III.I, page 21, of the Contract clearing states: Annually, by August 31, the City of Seattle will provide the Water District No. 49 of actual costs incurred…… It further states that: In determining the amount or revenue to be recovered (adjustment) from the purveyor (District 49), any balance of past purveyors’ revenues over costs (water flow bill) will be credited against gross revenue requirements or any shortages due to failure to recover past costs from purveyors will be added to gross revenue requirements. This is referred to as the “Purveyor Balance.”
My research indicates that in 2006 King County Water District No. 49 began having a shortage or underpayment in this account until it was recognized in late 2011 and therefore had grown to $510,719. A provision, a reserve and, or, a contingent liability account should have been created to account for this in 2006. It is noteworthy that the current District Manager who is responsible for all these mistakes joined the Water District 49 in November of 2006.
What is especially troubling is this Contract has been enforce since 1982. What is even more disturbing is "accounting materiality" is set at 10 percent of total expenses. That is to say, this is a big deal; an error in recognition or measurement is a "material reporting event" if it amounts to 10% or more of total expenditures. For the period in question this $510,719 error represents 14% of total expenditures YET THE STATE WASHINGTON AUDITOR'S OFFICE NEVER ISSUED A FINDING. In my request for information, I very politely as WHY?
From the 2011 Audited Financials:
Purveyor Balance Liability
The District purchases all of its water from the City of Seattle (City). All water purchases prior to 2011 were made under a 1982 Water Purveyor Contract, in which all districts party to the contract agreed to share 70% of the proceed or deficit in the City's Purveyor Balance Account (PBA). The PBA tracks the balance of payments and costs under the 1982 contract. A deficit represents costs that have yet to be paid.
In the year ended December 31, 2011, the District and the City settled the PBA, with the District agreeing to pay the $510,719 over 5 years, at a variable interest rate based on the City's actual cost of debt, which was 4.7% in 2011.The first payment of $111,750 was paid in 2011.
Purveyor balance liability - payable through the year 2015, with variable interest rate assuming the current 4.7% interest rate, the remaining annual payments are shown as follows:
Principal Interest Total
2012 $ 92,998 $ 18,752 $ 111,750
2013 97,369 14,381 111,750
2014 101,946 9,804 111,750
2015 106,656 5,013 111,669
Totals $ 398,969 $ 47,950 $ 446,919
