Audit: Kentucky Was Warned About Broadband Contract

Sep 27, 2018

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In October 2015, state officials in Kentucky signed a contract to install 3,000 miles of fiber optic cable in an effort to bring high-speed internet access to all 120 counties. Today, the project is at least four years behind schedule because of persistent delays that have cost taxpayers a projected $96 million.

But a new report from Republican Auditor Mike Harmon says state officials were warned in writing at least three times about the problems before signing the contract, but ignored them. Harmon said he has sent the report to the Executive Branch Ethics Commission "for further review and possible action."

"Many of the problems identified in this report were not only foreseeable, they were actually foreseen," auditors wrote in a 124-page report released Thursday. "No official or former official interviewed during this examination was able to explain why the decision to proceed was made. The decision ultimately cost taxpayers tens of millions in penalties, past and anticipated settlements, and costs of delay shouldered by the general fund."

The audit is the latest takedown of Kentucky Wired, an ambitious project hailed as an economic savior for an eastern Kentucky economy that had been devastated by the loss of coal jobs. Former Democratic Gov. Steve Beshear and Republican U.S. Rep. Hal Rogers announced the deal. Beshear left office in December 2015. Matt Bevin, his Republican successor, has committed to finishing the project. But leaders in the Republican-controlled legislature, furious about the costly delays, threatened to kill the project earlier this year. They relented when state officials told them it would likely cost taxpayers $500 million and hurt the state's credit rating.

The complex contract required the state to borrow more than $300 million to build the network. The state planned to use about $12 million in federal K-12 education money to help make its annual payments. But shortly after signing the contract, state officials learned they could not do that. Auditors said in June 2015, three months before the contract was signed, former Education Commissioner Terry Holliday wrote a letter to former Finance and Administration Cabinet Secretary Lori Flanery telling her she could not use the money to make those payments.

Flanery told investigators she was "unaware of the importance of the K-12 contract, which was the basis for 45 percent of the project funding." Auditors noted this was "unlikely."

Most of the cables will be hung from existing utility poles. But to do that, state officials had to get permission from the companies that owned those utility poles. Auditors found state officials assumed this would be easy to do and did not allow enough time to reach these agreements. This caused significant delays in construction, which cost the private contractors lots of money. The contract required taxpayer money to cover those losses.

But in August 2015, about three weeks before the contract was signed, a private contractor warned state officials they would likely have trouble securing an agreement with AT&T, which owns thousands of poles the state needed to use.

"If ATT gets cranky and agrees to proceed but does so slowly or takes a while to decide that they will not allow this — we will miss our dates," company officials from Ledcor wrote in an email to state officials.

Auditors said state officials got a third warning from the outside attorneys they hired to advise them on the contract. But they noted the "specificity or severity of this warning, and who it was addressed to specifically, was not possible to assess because (state officials) withheld the documented communication due to a claim of attorney-client privilege."

When the project was announced, state officials said publicly its private sector partners were borrowing the money and assuming most of the risk for the project to protect taxpayers. But state officials later changed the terms of the deal to take advantage of tax exempt bonds. The changes lowered the overall cost of the project, but shifted most of the responsibility of the debt to taxpayers from the private sector. In a news release, Harmon said he still has questions about this and plans to continue investigating, issuing subpoenas if necessary "in an attempt to get to the bottom of what happened."