The new audit likely will examine why the city failed to collect thousands of dollars in impact fees from the developer who built the homes. The state review isn't expected until at least next year, though.
The outstanding fees for sewer connections and school impacts range from $3,000 to $20,000 each for some homeowners in the Kendall and Denny neighborhoods. Homeowners first learned about them in 2012, when the city's attorney sent a letter demanding payment.
City policies require the building department to collect the fees before issuing final permits. Records show that the city knew about the unpaid fees well before some of the homes were ever sold.
The city now says it can't get the money out of the developer and adds that state law prevents it from writing off the loss. Instead, it says the neighbors ultimately will have to pony up the unpaid fees if they ever sell or refinance their homes.
The auditor's office acknowledged this week that the issue has been on its radar for years. The office at one time contemplated investigating whether fraud was involved.
"We looked into the possibility of fraud in preparation of the 2010-2011 accountability audit but determined that there was no indication of misappropriation of funds, so there was no fraud to pursue," auditor spokesman Thomas Shapley said.
Last year, the city requested a criminal investigation into what went wrong in the building department. A sheriff's detective assigned to look into the situation concluded that one city inspection document was forged, but said there was insufficient evidence to prove who was responsible. The questionable document was for a house that has no outstanding fees.
Shapley on Thursday said the auditor's office had a whiff of the problem back in 2009. His office recommended in 2010 that the city implement better internal controls in its building department.
The auditor's working papers from its 2010-2011 review of the city's books contains a lengthy entry about Dynasty Homes, the LLC that built the properties now under scrutiny.
"The unpaid fees originally came to the attention of the City back in the winter of 2008 when (the permit coordinator) began her employment with the City," according to the report.
The state auditor noted that the city waited nearly four years to recover some of the unpaid sewer connection and school impact fees from the developer.
There's no mention that the city was attempting to collect from the neighbors, who, in some instances, bought their homes years after the city discovered the problem caused by the permit coordinator.
The city also appears to have failed to disclose to title companies that the fees were owed. Records show that the city only notified companies involved in the home sales that the properties owed outstanding water and sewer bills, not that the connection fees were never paid.
According to City Manager Larry Bauman, the city's finance department was unaware of the outstanding fees because the building department didn't keep it in the loop. The city has since fixed those communication problems, he said.
The neighbors first learned about the unpaid fees from a letter city attorney Thom Graafstra sent out in April 2012. The homeowners were given two weeks to make arrangements to pay up. The city later retracted the letter, apologized for its aggressive tone, and said it needed to investigate further.
"The City is unable to determine the reason on how the homes were able to be sold without the fees being paid ...," the auditor's working papers said.
The city's missteps, while on the auditor's radar, never rose to the level of a written finding.
"They had already realized the problem. They were already addressing the problem within their legal authority," Shapley said.
The permit problem was never detailed in the state audit of Snohomish, published in February. The auditor's office working papers are public records and they were released to The Herald Thursday.
Meanwhile, based on the neighbors' complaints and questions from reporters, the auditor's office plans to revisit the uncollected fees at the city's next accountability audit, covering 2012 and 2013. That audit won't be completed any sooner than 2014.
The city remains steadfast in its position that its hands are tied by state law.
Records show that the city in large part pinned the blame on its former permit coordinator. They say she wasn't following the city's own policies in collecting the fees before issuing permits.
The woman was fired in 2008, but the city later wrote her a $20,000 check to settle a labor grievance. They also wrote her a letter of recommendation.
"We have looked at this over, and over and over again from every side that we can and we are here at this place where we have to legally collect the money from the property," Mayor Karen Guzak said Wednesday.
She said the city would find itself sideways with the auditor's office if it forgave the fees.
It remains unclear what steps the city took to try to collect the fees from the developers. One builder, Jeff Gray, paid the fees soon after talking with police.
The other, George Fischer, wrote the city a letter last year, saying "As you are aware, I am not in a financial position to help pay the fees. However, I do want to assist in any other way possible."
No one from the city is talking about what they did to try to recoup the fees from Fischer.
Guzak said she's not the expert on the facts. Bauman refused to explain what steps the city took to collect the fees owed by the builders.
"I'm really not interested in talking to you any more about this story," Bauman said Wednesday.
Meanwhile, homeowners say they haven't heard anything new from the city. They have been heartened by public reaction to their situation after The Herald's story on Sunday.
"It just reinforces that we're on the right side of this issue," Larry Coyle said.
Coyle, one of three homeowners told he owes about $20,000 in unpaid fees, said he's worried that city leaders are "going to hunker down and weather the storm and hope it goes away."
"If the visibility of this goes away, there's no reason for them to change their behavior," he said.
The neighbors plan to attend Tuesday's City Council meeting to once again press their case.
"We're going to try to get as many people as we can down there, pull people in from the street if we have to," Coyle said.
Diana Hefley: 425-339-3463; firstname.lastname@example.org
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