SALEM – Oregon's emergency preparedness agency misspent millions of dollars of Department of Homeland Security grants between 2010 and 2012, prompting federal officials to demand repayment, according to records recently obtained by The Oregonian/OregonLive.

Federal auditors now plan to audit three additional years of agency spending to check whether it misused money during those years, a letter from federal officials shows.

At the heart of the problem is how Oregon spent federal counter-terrorism grants. Audit and correspondence records obtained by The Oregonian/OregonLive show officials at the Oregon Office of Emergency Management broke the rules and used part of a $30 million grant to pay salaries of at least eight employees, including the director, deputy director and spokespeople. Those workers were not to be paid with the grants without federal permission, which the state did not have.

Those employees also did not file proper timesheets, federal auditors found. Grant money was also spent on rent, office supplies and travel when it should not have been, they said.

The state emergency response agency now faces a budget problem because of a possible $3 million repayment. Officials this month asked the Legislature for money to patch the budget hole.

The Oregon Office of Emergency Management is a little-known but critically important state government agency. It is overseen by the Oregon Military Department and runs a statewide disaster preparedness network meant to be Oregonians' lifeline in the event of a catastrophe or terrorism.

The commander of Oregon's defense forces, Maj. Gen. Michael Stencel, said Monday that he welcomes federal scrutiny of his agency's spending. Stencel, who has headed the Military Department since 2015, said he is taking steps to improve department operations.

Brig. Gen. Mike Caldwell directed the Office of Emergency Management on an interim basis while also serving as deputy director of the Military Department during the period federal auditors say $3 million was misused. Caldwell resigned in 2013 after accusations that he made inappropriate sexual advances toward a female subordinate. He is now a consultant.

Asked about the spending of Homeland Security grants, Caldwell said, "I don't recall any questions" by federal officials about Oregon's spending, adding that he did not remember "anything about homeland security." He said any misspending was the result of "ignorance" or disagreement with federal officials over spending rules.

"I certainly don't remember any decisions made where we said we'd try to purposefully game the system," Caldwell said.

Andrew Phelps, the agency's director since 2015, said Monday that the misspending "is not unique to Oregon" and that the state has appealed federal officials' demands for repayment. At least 20 other states or U.S. territories were found to have misspent parts of their homeland security grants, according to an audit by the Department of Homeland Security's inspector general.

The Military Department is hopeful its appeal of the $3 million debt will be successful in part because Oregon "chose to stop what we were doing" after federal officials alerted them to misused money, said David Stuckey, the deputy director since 2014.

Despite that, federal auditors were evidently alarmed enough by their findings to open additional investigations into spending from 2012-2015. Those probes are ongoing, according to a letter sent by the Federal Emergency Management Agency in late 2017.

New revelations of misspending come as the emergency prep agency has faced scrutiny from Oregon's own auditors and upheaval in its upper ranks.

A state audit released January 25 showed the agency is dramatically underprepared to deal with a large-scale disaster. And in 2016, a Marion County jury awarded the agency's previous director, Martin Plotner, nearly $1 million after Plotner claimed his bosses at the Oregon Military Department fired him for attempting to blow the whistle on improper spending and sexual harassment by Caldwell.

News of continued problems at the state defense agency has one key lawmaker alarmed.

Sen. Brian Boquist, R-Dallas.

Sen. Brian Boquist, R-Dallas and chairman of the Senate Veterans and Emergency Preparedness Committee, said the federal audits point to "serious systemic problems" within the Office of Emergency Management. He said allegations of mismanagement have persisted for years, despite assurances to the contrary by top brass at the Oregon Military Department.

"These false assurances are all in question now," Boquist said.

He added, "Talk is cheap. What we need is action to protect Oregonians. We should expect more out of our civilian and senior military leadership in Oregon."

'QUESTIONED COSTS' ABOUND

After federal audits uncovered misspending, state officials hired an independent auditing firm, West Linn-based Merina and Company, to do their own assessment of agency budgeting. That report was completed in 2014, but was "not accepted" by federal officials because auditors reviewed too few transactions and the "overall quality" of the audit was substandard, records show. Oregon then hired Moss Adams LLP to do a second audit, which finished in December 2016. Moss Adams auditors reached largely the same conclusions as federal officials.

A September 2017 letter from the Federal Emergency Management Agency states that Oregon will "jeopardize future financial assistance" if it does not pay back money spent on "questioned costs."

Oregon officials "accepted responsibility" for the poor decision making, a state document shows, but assert that leaders always "followed the intent" of federal spending laws. Officials said FEMA workers were shown how Oregon spent the grant money before the audit and were never told to change course.

Nevertheless, the state now faces a hefty debt during a budget cycle that leaves little room for error.

MORE MONEY REQUESTED

Earlier this month, Stuckey, the Military Department deputy, submitted a budget request to the Oregon Legislature saying his department will need at least $1.6 million to plug a hole opened by the feds' demand for their money back. The request was sent to Senate President Peter Courtney and House Speaker Tina Kotek. In it, Stuckey contends FEMA officials "overlooked" mitigating circumstances tied to misspending.

Kotek said Monday that she had not yet reviewed Stuckey's budget request, but added that she would not be surprised to learn of additional problems with the emergency agency because earlier audits flagged problems.

In its budget request, the Office of Emergency Management indicates the problem is not just a one-time hole due to the possible $3 million back payment, but an ongoing need to make up for federal funds it can't use to cover salaries and other costs. One document declares, in red boldfaced type, that the Office of Emergency Management needs a "significant and permanent" budget increase because of misspending.

-- Gordon R. Friedman

503-221-8209; @GordonRFriedman