Allegations about a $35,000 embezzlement and credit card purchases at a Kentucky brewery, restaurants and a grocery store were among the questions raised about Southern Water’s finances during a hearing in Frankfort last week. 

The hearing, held in a case in which the Southern Water & Sewer District is seeking an emergency rate increase of 32.3 percent, included testimony from district officials, as well as officials working with Utilities Management Group, the district’s CPA firm and the Kentucky Rural Water Association.

Numerous topics related to the request for a rate increase were discussed at the day-long hearing, and significant emphasis was placed on the district’s financial condition. It also featured frank comments from PSC officials about the district’s former management.

The district, which officials say has been operating with a $40,000 to $50,000 monthly deficit, is seeking the rate increase because of a “dire” financial situation. 

Numerous questions were raised about expenses that are detailed in the Southern Water general ledger for 2018. The 182-page ledger is filed on the PSC website in this case along with ledgers from two prior years.

Former employee allegedly embezzled $35,000, was never criminally charged

PSC Assistant General Counsel Nancy J. Vinsel asked Southern Water Office Manager Paula Burke and CPA Jeff Reed about $6,000 that former district employee Tina Mosley paid the district between March and December 2018. 

Burke informed her that Mosely allegedly embezzled about $30,000 in funds from the district, but neither she nor Reed could remember the exact amount.

The district entered into an agreement with Mosely in 2015, which required her to repay $35,000 to Southern Water, starting with a lump sum payment of $15,000 and continuing with $500 monthly payments until the balance was paid. In exchange, the commission agreed not to seek prosecution of Mosley, and the agreement noted that it did not bind the county from seeking to prosecute her. 

No charges were ever filed against Mosely, and Burke reported that Mosely has repaid the funds to Southern Water. Neither she nor Reed could answer questions about where the funds that were allegedly embezzled came from. 

“I have no idea,” Reed said. “I don’t have any of the details.”

The PSC is seeking a copy of the agreement. 

Unexplained credit card purchases 

at a brewery, restaurants, 

grocery store

In testimony, Burke reported that Southern Water had one credit card in 2018 and it belonged to former district Manager Dean Hall, who recently resigned. She also testified that Hall turned in most of the receipts to her and she would file them without anyone reviewing or approving them. 

The credit card receipts, according to testimony, were not sent to Southern Water CPA Jeff Reed along with monthly bills he logged in financial reports — testimony that raised questions with PSC officials.

“So, there was nobody looking at these meals? They were just paid?” Vinsel asked Burke.

“Correct,” she responded.

Vinsel and others reported that Southern Water paid for an unusually large number of purchases at restaurants. 

Some of the purchases were made with the district’s credit card, while others were recorded elsewhere in the general ledger. 

Vinsel questioned several credit card charges, including a $639 charge at Peking in Pikeville, a $135 at the Hofbrawuhaus Newport Brewery & Restaurant in northern Kentucky, a $160 bill at Joe’s Crab Shack in Louisville and an undisclosed bill at the McDowell IGA for purchases that were made for a funeral. 

The ledger does not detail $1,669 in credit card purchases made in 2018 and it records all “bankcard” purchases only as “bankcard.” It shows that, in addition to the credit card and/or bank card purchases highlighted at the meeting, Southern Water also paid $6 to McDonalds, $15 to Champs, $69 for three Peking Restaurant bills, $54 to El Azul Grande, $43 for two visits to Subway, $358 for nine visits to Walmart and $19 to Sound House Music in 2018. The 2016 and 2017 ledgers record payments of $9 to McDonalds, $444 to Champs, $22 to Peking, $22 to Dairy Queen, $40 to Wendy’s, $98 to City BBQ, $123 to TGI Fridays, $28 to Sir Pizza, $120 to Renos Roadhouse and $87 to Mi Hacienda, as well as charges to Walmart and other stores. 

Vinsel asked Burke whether the district had more specific information on the reasons for these purchases, noting the receipts don’t show who received the food and why Southern Water needed to pay for it. Burke told her that Hall would provide her a receipt if he had one and that some receipts included handwritten notes about the purchases, while others did not. At one point, Burke told Vinsel, “I guess there was a trust issue” between her and Hall. 

PSC Chairman Michael Schmitt suggested that Southern Water ratepayers should not have to fund some of these purchases.

“Whatever it is, it’s hard to understand how ratepayers ought to have to pay a $639.86 for a dinner or dinners at the Pikeville Peking restaurant on Feb. 16,” he said. “I mean, and there’s a lot of Peking Restaurant charges throughout here. Who liked to go to Peking?”

“I guess Dean,” Burke said, chuckling.  

As part of the application process for a higher rate increase, Southern Water determined how much additional revenue it needs — more than $900,000 — based on revenues and expenses in 2018.   

Vinsel explained that in asking the questions about these credit card purchases at restaurants, the PSC is working to determine whether these expenses should be removed from the amount of revenue Southern Water is seeking to obtain in the rate increase. 

Alan Vilines, a consultant with the Kentucky Rural Water Association who drafted Southern Water’s rate increase application, testified that credit card purchases revealed in the hearing could result in a “small amount of trim” from the district’s revenue request, but he said Southern Water is still in need of an “immediate” rate increase. 

The PSC is seeking a listing of all charges to restaurants and grocery stores in 2018 in a post-hearing data request. 

Hall’s truck had heated leather seats, Sirius music subscription 

Several questions were raised about Southern Water trucks at this hearing, including the amenities that were available on Hall’s truck, a 2016 Chevy Silverado. 

It was reported that Hall’s former truck had heated leather seats and a subscription to SiriusXM Radio. That subscription costs about $20 a month, the general ledgers show. 

Donald Compton, special projects manager for UMG, said that the truck has been parked at the district since Hall was injured and stopped working in March. He said the radio subscription is still active, but “will be taken care of.”

Several questions were raised about Southern Water’s purchase of five trucks in 2017. The district bought the trucks on a two-year, $126,000 loan in 2017 and is still making payments on them. 

The PSC has alleged that Hall obtained the loan on two-year basis to avert a requirement that the PSC approve all loans over two years. On the stand, Reed confirmed the loan was based on a six-year payment plan. Reed said he wasn’t aware of the loan before it was approved. 

Justin McNeil and Kent Chandler of the Kentucky Attorney General’s Office of Rate Intervention asked several people about promissory notes for loans at Southern Water, pointing out that one promissory note only contained Hall’s signature. 

Schmitt referenced these truck loans when he asked questions about whether Reed and his employer, Michael Spears, provided guidance to Southern Water staff about potential breeches in law like that truck law. 

PSC Vice Chairman Robert Cicero asked numerous questions about the district’s internal controls for finances, pointing out that both Spears, who employs Reed, and Richard Paulmann, who has done audits for Southern for years, are not responsible, via their contracts, for providing guidance on internal controls over finances. 

“This is more of a microscopic examination of the need for an emergency rate increase, and to make that determination we would like to have a good feeling that what Southern is doing internally represents a management philosophy that can go forward and be successful, and I’m not sure that we’re at that comfort feeling yet,” Cicero said.

Compton reported that UMG changed the way that Southern Water permitted gasoline purchases on Fleet cards since it started managing the district this year. He said nine of the district’s 11 vehicles are now parked on the lot instead of being driven home by employees. He also reported that UMG reissued Fleet cards, assigning them to specific employees, started requiring employees to record their mileage and placed tracking systems on all vehicles.

Questions raised about electrical contractor 

Another topic repeatedly discussed at the hearing was Southern Water’s payments to an electrical contracting company in Martin. 

The PSC is seeking invoices that Frazier’s Electric has provided Southern Water since 2015 as part of this case. 

Burke testified that Southern Water does not have a contract with the company. 

Vinsel asked Burke why she wrote checks totaling $62,500 to Frazier’s Electric, when invoices totaled $33,000.

When Vinsel asked why Southern paid the company $30,000 more for services it provided, Burke said there was a “large sum” that Southern Water owed Frazier when she became the office manager. 

She said Hall told her to write checks for more than what was owed to the company.

“I just done what I was told,” she said. “I was told to, you know, write them a check for $5,000 each month and that’s what I did.” 

Chambers and McNeil also asked questions about Frazier Electric. Chambers pointed out that the company had about 126 invoices in 2018, and 30 percent of those invoices were for work provided at Southern Water.

“Does it seem odd that they need this Frazier’s Electric so often?” Chambers asked.

Schmitt: Southern Water was ‘grossly mismanaged’ 

Schmitt commended the district’s current board for its efforts to improve problems there, he chided the work of the past administration. 

He asked Chairman Jeff Prater, “I don’t envy your position being on this board or any of the members, the new members of this board, because, to be honest, I think Southern Water and Sewer District was grossly mismanaged. Do you have an opinion on that yourself based on the three months or so you’ve been there?”

Prater declined to “cast blame on anyone.”  

“I think that things just developed over a long period of time there that shouldn’t have and I’m certain there’s some tough decisions to make. No one wants to raise anyone’s rates, but there’s no way that we can move forward without additional revenue.”

Schmitt continued the questions, asking Prater whether part of his job as vice president of operations with the Big Sandy Rural Electric, requires him to ensure meters are working properly.

“That’s what a competent manager and a competent board of directors is supposed to do,” Schmitt said. See that that’s done, isn’t that correct?” Schmitt said. 

He was talking about UMG officials finding between 700 and 750 meters on Southern Water’s system that were described as “zero read” meters. He asked Prater whether Hall should have known those meters were reading zero.

“If you don’t know that, you’re not doing your job. You’re incompetent or your corrupt. It’s only one of the two, isn’t it? You’re either competent or corrupt?” Schmitt asked.

Noting that this problem “must have been going on for years,” he said Southern’s board “gave up their duty up” by not addressing it. 

“Obviously, someone failed to do their due diligence and I don’t know if that fault lies with the previous board, the previous manager, or whomever it may lie with, but, obviously, someone failed to do what had to be and what needed to be done,” Prater told him. 

Schmitt also complained about Southern Water commission minutes, calling them “the worst minutes I have ever seen in my 48 years of practicing law.” Prater said he’s taken steps to improve that issue — along with numerous other problems that were discussed at the hearing.

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