Whidbey bond sale shot down
Published 9:00 pm Friday, August 3, 2001
By Brian Kelly
Herald Writer
FREELAND — A group of Whidbey Island sewer district commissioners illegally sold more than $20 million in public bonds to help a private developer buy land for an office complex in south Everett, the state auditor announced Friday.
The complex and controversial deal has rattled people here, led to the resignations of two sewer district commissioners and raised serious questions about why public money was used to finance a private deal despite warnings from state authorities.
A state auditor’s report released Friday detailed how Holmes Harbor Sewer District commissioners took the unusual step of creating a utility local improvement district, not in Freeland, but in Everett 25 miles away, and then used that district to sell public bonds. Such districts are normally formed to finance projects such as wastewater treatment plants and major pipeline projects.
A total of $6.2 million in bond proceeds were used by developer Terry Martin to buy a 39.45-acre property for the project, despite state prohibitions against such actions, according to the audit.
"A government body cannot use public funds to benefit a private interest where the sole beneficiary is that private interest," state Auditor Brian Sonntag said.
"The only one who is going to benefit from this project is the developer from outside of state, and there is no identifiable benefit for the ratepayers or the people who live in the district," he said.
State officials got word of the proposed utility local improvement district in early 2000 and warned commissioners that state law prohibited a sewer district from creating an improvement district outside its boundaries. Commissioner Bob Randolph resigned just before commissioners Don Cardner, Linda Zoll and Bill Spalding approved the deal, which gave Martin funding for Silver Sound, a six-building office complex to be built near the Boeing plant in south Everett.
Commissioners told auditors they agreed to the deal because the developer had promised to pay the district $100,000 in administrative fees.
It’s not clear whether residents in the sewer district will be held liable for retiring the bonds, Sonntag said. That will probably be resolved in court. Residents in the Harbor Holmes Sewer District, which serves roughly 500 customers near Freeland, are meeting with attorneys to discuss the situation.
Sonntag said the case has been forwarded to the Island County Prosecutor’s Office, the state Department of Financial Institutions, and the federal Securities and Exchange Commission. Sonntag has also asked the state Attorney General’s Office to review the deal to determine if the commissioners should be charged with misconduct.
"We’re going to be looking real hard at this report and the referral," said Cheryl Reid, a spokeswoman for the Attorney General’s Office.
The state may file a lawsuit to have the bond sale declared null and void.
"As part of that, we’re also looking into the possibility of enjoining further payment of the bonds until a judge issues that kind of declaration," Reid said.
Sonntag said it’s the first time his office has alerted the SEC about a questionable bond sale during his more than eight years in office. And if the bond sale goes belly up, the default will be the biggest in the state since the $7 billion nuclear power plant fiasco involving the Washington Public Power Supply System in the 1980s, he said.
Commissioner Zoll, reached at her home Friday, announced she had just resigned from her position, but declined further comment. Commissioner Cardner also declined to answer questions Friday. He referred all questions to Charles Tull, the sewer district’s attorney.
In the audit report, the state auditor blamed the commissioners for ignoring advice from other attorneys about the development deal, instead relying on the advice of Tull and lawyer Michael McCall, both of whom handled the bond sale, and others who stood to gain financially from the bond sale.
Tull’s law firm was paid $100,000 for its work on the bond sale, while McCall’s law firm received $140,000.
Tull did not return a phone call to The Herald on Friday. He was in a meeting with a client, according to his office. McCall, who is based in Sacramento, Calif., was unavailable for comment, his secretary said.
District commissioners submitted a written response to the charges in the audit, saying they relied on the advice of their attorneys. They also added that state officials never warned them in writing that the deal was illegal.
"That’s pretty laughable, actually, to try to blame somebody else," Sonntag said.
The commissioners were the elected officials who made the decision, he said.
The auditor’s report also said the district violated state law by depositing proceeds from the bond sale in a California bank instead of having the Island County treasurer handle the transactions. The district also apparently overpaid its lawyers who did work for the bond sale and violated the state Open Public Meetings Act while holding district meetings, according to the audit.
On Whidbey Island, the fallout has been tremendous. The controversy has forced postponement of several home sales, said Erl Bangston, the broker and owner of Coldwell Banker Tara Properties in Freeland.
But Bangston was optimistic.
"Initially, there was a huge panic, which is normal. The flood is coming, the flood is coming, the sky is falling," Bangston said. "As people settle down, they’re being rational. And I think there’s a resolution out there."
Shirley Oden, who has owned a home in the Holmes Harbor Sewer District for five years, said that once news of the controversy leaked out, the sale of her house was put on ice.
"That put the cat among the pigeons," Oden said. "Several people instantly lost their buyers. My sale is on hold."
When Ibby Gaunt, who lives in the sewer district, first learned of the bond problems, she went to her bedroom and cried. She said she was shocked.
Despite all the troubles, Oden was able to see one bright spot Friday.
"We’re getting extra-good attendance at sewer meetings these days," she said.
Herald Writer Karl Schweizer contributed to this report.
You can call Herald Writer Brian Kelly at 425-339-3422 or send e-mail to kelly@heraldnet.com.
