Dan Horn

dhorn@enquirer.com

Hamilton County Prosecutor Joe Deters says he will likely wait for federal authorities to complete their investigation of the Metropolitan Sewer District before he launches his own examination of the agency.

Cincinnati officials asked Deters to get involved Tuesday after a city audit found that the sewer district suffered from poor oversight and violated city policies for years, potentially wasting millions of dollars that its customers paid in sewer rates.

Deters, however, said officials at the U.S. Department of Justice have told him they already are investigating the agency.

"They indicated they are doing it and to pretty much stay out of the way," Deters said. "I can act independently, but I'm not going to reinvent the wheel if they're in the middle of something. I'll let them do their stuff."

The Enquirer previously has reported the FBI is investigating spending practices at MSD, but neither the FBI nor the U.S. Attorney's office have confirmed their interest in the sewer district. Both again declined comment Tuesday. Deters is the first local official to speak publicly about federal involvement.

The city's auditors did not conclude anyone broke the law at MSD, but they did recommend sharing their findings with prosecutors and the Ohio Ethics Commission. They said the problems at MSD were serious and widespread.

"This was a significant breakdown in internal controls," said Jim Goetz, who co-chaired an auditing team that included members from inside and outside city government.

The audit, launched in February after a series of Enquirer articles about MSD's spending practices, concluded the agency hired too many consultants, failed to bid some of its big contracts and bankrolled a private foundation with money from its ratepayers.

The problems identified by the auditors occurred as the agency began a court-ordered, $3 billion overhaul of the sewer system, which includes hundreds of miles of pipes, treatment facilities and pumping stations across Hamilton County. The agency is run by the city, but county officials oversee its budget.

The auditors found significant problems in the way MSD's administration, led by former Director Tony Parrott, handled the launch of the massive project. They said the agency's leaders "regularly deviated" from city rules on procurement and repeatedly failed to bid contracts that should have been subject to open competition.

Many of the problems auditors noted, including contracting issues and the private foundation, have been the subject of Enquirer articles in recent months. City officials began making changes at MSD to address the concerns months ago, and the auditors credited current City Manager Harry Black and new MSD Director Gerald Checco for tightening the agency's procurement practices.

Black and Mayor John Cranley both blamed their predecessors for MSD's woes, and the auditors mostly agreed.

"Many of the findings are disturbing," Cranley said. "We have inherited an ugly mess."

Led by Goetz, a retired financial expert, and former Assistant City Manager Bill Moller, the auditors said MSD's problems began in 2007 after former City Manager Milton Dohoney wrote a memo giving Parrott near total authority over contracting at MSD.

The Enquirer found that the memo allowed Parrott and others at MSD to approve about $680 million in spending with little oversight from anyone outside the agency. According to the audit, that led to the hiring of many more consultants than necessary and to several major problems in the way the agency hired contractors and conducted its day-to-day operations.

Parrott has said the hiring of outside consultants was needed to help the agency quickly ramp up for the big sewer overhaul, and because MSD lacked the people, skills and resources to do many of the jobs in-house. The auditors said some of the moves can be justified, but their review found several areas of concern.

The auditors found that MSD:

Repeatedly extended the contracts of companies under master service agreements, rather than giving others a chance to bid for the work. The Enquirer found that some of those companies ended up doing millions of dollars of additional work that often was unrelated to their original contracts.

Allowed consultants to recommend the hiring of other contractors and to do performance reviews of full-time MSD staff. The auditors said the agency relied too heavily on consultants, creating conflicts of interest and unnecessary spending.

Failed to closely follow federal rules for acquiring property related to a sewer reconstruction project in South Fairmount, where MSD purchased dozens of homes to clear the way for the project. The auditors said those mistakes could "jeopardize future eligibility for state and federal funding."

Did not use a competitive process to pick professional service contractors, including former City Councilman Sam Malone, who made more than $330,000 from MSD while working as a subcontractor for Columbus law firm Bricker & Eckler. Malone, who is not a lawyer, did not do legal work and should not have been hired under such a contract, auditors said.

Used money from ratepayers to start and maintain a private foundation that benefited MSD's student intern academy, a summer program that brought in hundreds of high school students for job training and to teach life skills, such as balancing a check book. The Enquirer found hundreds of thousands of dollars were diverted to the foundation.

The private foundation, known as the Project Rebuild Foundation, was especially troublesome, the auditors said. All three of the foundation's trustees, Parrott, Biju George and Margie Anderson, worked at MSD as administrators, an arrangement the auditors say should be stopped immediately because of possible conflicts of interest.

"We recommend that no city employee sit on the board of or have a fiduciary responsibility for a public charity or foundation whose purpose is primarily for the benefit of a city department," the auditors wrote.

They also noted that some contractors helped the foundation with its fundraising efforts, either by sponsoring student interns or hosting events. They found draft letters from Parrott to contractors thanking them for their contributions, and they cited a "partnership appreciation hour" hosted by Kokosing Construction Co. at the Moerlein Lager House in 2014.

The auditors questioned whether it was appropriate for a city employee to solicit contributions and recommended that the city refer the matter to the Ohio Ethics Commission. They also said the ethics commission should determine whether some of the interns who got summer jobs had ties to city employees.

Overall, the auditors said, the student intern academy offered uncertain benefits at a high cost to ratepayers. It also was a distraction to MSD staff at a time when they were struggling to meet the demands of the court-ordered sewer overhaul.

"Current and former MSD employees related that time devoted (to the academy) negatively impacted responsiveness to the needs of MSD," the audit said.

The auditors also looked into an old controversy involving Parrott's residency claims. The former director had said he lived in the city, as required by city law, but was disciplined and lost 40 hours vacation time when he was found to actually live in Butler County.

The auditors said a more serious penalty might be in order if Parrott deliberately misled city officials on his annual financial disclosure statement. They recommended an outside agency determine "if there are grounds for any criminal proceeding."

Hamilton County Commissioner Chris Monzel, who has complained for several years about oversight at MSD, said he welcomes the city's audit, but the findings come too late to save millions of dollars in ratepayer money.

"Unfortunately, I'm not surprised," Monzel said of the audit. "The disappointment is that it's taken so long to get this action from the city."

The county and city have been at odds for years over how best to run MSD and the two sides now are engaged in a federal court fight for control of the agency. The agreement that put the city and county in charge of MSD expires in less than two years, at which time a new organizational structure must be created.

Cranley said he hopes the audit and a full accounting of MSD's problems is a first step toward a better arrangement. He said he doesn't know if anyone broke the law, or if MSD was just poorly run, but he said he wants to find out.

"Those responsible should be held responsible," Cranley said.

Read the audit: