Thurston County did not comply with state law when it used millions of dollars to remodel and equip its administrative headquarters, a state audit found.
The audit findings relate to improvement made at The Atrium, a 90,000 square-foot leased office building at 3000 Pacific Ave. SE in Olympia.
The county moved its administrative offices and department from its aging courthouse campus on Lakeridge Drive to The Atrium in 2022 to expand and reorganize its facilities. That year was the subject of a recent accountability audit by the Washington State Auditor's Office.
Officials from the state auditor's office presented their findings during a conference with the Board of County Commissioners on Monday. Adverse findings are significant, County Auditor Mary Hall said, because they can affect the county's bond rating, making it costlier for the county to borrow money.
During the meeting, Commissioner and Board Chair Tye Menser said there was a "lack of clarity or disagreement" between the state and the county about what the rules required the county to do. He said he doesn't believe the report gave the public a comprehensive picture of the situation.
"We've gone back and forth on the substance of the legal provisions in the meetings and I frankly don't necessarily agree with the findings." Menser said. "I think that our lawyers have made a stronger case than what your lawyers have put forward as the contrary authority."
What does the report say?
A preliminary draft of the report obtained by The Olympian states the county failed to follow state procurement laws when it spent $7.5 million in Real Estate Excise Tax 1 (REET 1) funds for tenant improvements and $242,224 for furniture and equipment at The Atrium.
Additionally, the report indicates the county improperly used nearly $1.9 million in REET 1 funds to buy furniture and equipment. State law says such funds may be used only for capital projects, the report says. Capital projects are typically defined as a long-term, high-value project that improves, adds to, or builds upon a property, plant, or equipment.
In this case, the report says the furniture and equipment purchases did not meet the state law's definition of an allowable capital project.
"Essentially, we're saying that the county should have gone out to competitively bid this project or required that the building owner competitively bid this project," Audit Lead Melissa Dixon said. "And that the county should not have used those funds (REET 1) for the purchase of furniture and equipment."
Forgoing bidding means the county could not be sure it paid the most reasonable prices for goods and services, according to the report. It also means it's uncertain if all interested contractors or vendors had a fair opportunity to bid.
"State bid laws are designed to protect public resources, promote openness in government, and prevent fraud, collusion and favoritism in the awarding of public contracts," the report says.
The report says the public did not receive the "full intended benefit" of tax revenues when the county used restricted funds for "unallowable purposes." The report also notes the county's REET 1 fund had a negative cash balance of about $327,000 at the end of 2023.
How did the county respond to the audit?
In its official response, the county said it "acted in good faith," and believed it was following state law. This belief was based on an in-depth review of state law and consultations with the county's legal counsel, the report says.
"The County had absolutely every intention of following state law and sought legal guidance and extensive consultation to gather information for decision making," the county's response says. "The analysis is complex with nuances in language that are subject to interpretation."
The issue with the tenant improvements has to do with how the county structured its lease agreement for The Atrium. The county says it opted for a "direct reimbursement model," whereby the landlord was "reimbursed for the cost of tenant improvements at the outset." The county says it did this to save taxpayer dollars.
Alternatively, the county says it could have followed an "amortization model," in which rental payments are increased to reimburse the landlord over time. This would not have required competitive bidding, the county says.
"As this was an issue about how The Atrium lease was structured, the County does not believe the public was negatively impacted by a lack of competition for the tenant improvements," the county says.
Competitive bidding was used to procure most of the nearly $1.9 million in furniture and equipment. However, the county admits it made an amendment to buy additional glass panels that were not included in its original contract and not bid on.
As for the use of restricted funds, the county says it believed buying furniture and equipment was an allowable use of REET 1 funds.
"The County believes personal property, such as furniture or equipment for the building, is associated with the capital project as defined in RCW 82.46.010(6)(b)," the county says. "In making this determination the county relied upon the explicit intent language of the statute."
The county also attributed the negative cash balance in the REET 1 fund to a slowdown in the housing market which caused a "steep decline in expected REET revenue."
The county commission developed a plan to transfer funds from building reserve funds and unrestricted interest earnings to REET 1 following a budget amendment on Dec. 15, 2023, according to the county.
However, the county says it "accidentally" missed a transfer and processed it in early January with a December effective date. This resulted in a positive fund balance but a negative cash balance at the end of 2023.
"No other fund was impacted or lost interest earnings during the temporary period of the negative cash balance," the county says. "REET interest earning (or charges) are redirected or swept to the general fund. Only the general fund was impacted by negative interest charges."
How can the situation be fixed?
The report recommends the county repay nearly $1.9 million to the REET 1 fund for the "unallowable" furniture and equipment expenses.
The county also has been advised to put more "controls and procedures" in place to ensure it follows state law when using public funds to procure public works and goods.
A process also should be implemented to guarantee county funds, such as REET 1 in this case, do not have negative cash balances going forward, according to the report.
Commissioner Gary Edwards has consistently been opposed to spending on The Atrium. On Monday, he wondered if the county perhaps overpaid for tenant improvements, furniture and equipment at the building.
"I'm not in a position of pointing fingers, I just think the public got a bad deal and I don't know how we rectify it exactly," Edwards said.
Dixon said the county did keep track of what it was paying for as it reimbursed the building owner.
"There was a process in place where all the itemized receipts were reviewed and approved at the county level for reasonableness and to make sure that there wasn't anything unallowable being charged in there," Dixon said.
Auditor Mary Hall said her office was not involved in how this deal was structured until after the fact.
"I think we would have provided additional guidance had we been involved in the process because we view things through a different lens," Hall said. "It's not dissimilar to how the state auditor looks at things."
In their official response, the county says it's committed to improving its monitoring process by involving the county auditor and the Financial Management Committee in its decision-making process.
Lisa Carrell, a program manager for the state auditor, told the commission on Monday the final report will be published online in about a week.
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