Forensic Investigation Report of RAWA 4.21.17

FORENSIC, LITIGATION & VALUATION SERVICES

FORENSIC I NVESTIGATION OF R EADING EADING AREA WATER AUTHORITY

T ABLE I.

II. III.

IV.

OF

C ONTENTS

Overview .............................................................................................................................. 3 A. Retention and Scope .................................................................................................... 3 B. Qualifying Language ................................................... ................................................................................................... ................................................ 4 Background .......................................................................................................................... 5 Analysis ................................................................................................................................ 8 A. RAWA’s Relationship with Miller Environmental and Mr. Miller ............................ 8 1. Relevant Language in Contracts for Contract Management Services ................. 8 2. Relevant Language in RAWA Contracts with Miller Environmental for Meter Reading Services .................................................. ................................................................................................ .............................................. 15 3. Fees Charged by Miller Environmental to RAWA ............................................ 18 B. Waived Fees and Customer Billing Issues ......................................... ................................................................ ....................... 32 1. Olivet Boy’s and Girl’s Club ............................................................................. 33 2. Masano Auto Group ....................................................... .................................... 42 3. Stokesay Castle .................................................................................................. 48 4. City Light Ministries................................................. .......................................................................................... ......................................... 51 5. GoggleWorks ................................................. ..................................................................................................... .................................................... 52 6. Mr. Ernie Schlegel ............................................................................................. 56 7. Other Billing Issues............................................................................................ 57 C. Other Matters ..................................................... ........................................................ 63 1. Bond and Other Debt Financing / Capital Projects ............................................ 63 2. RAWA Board Approvals of Cash Disbursements ............................................. 70 D. Recommendations for Additional Analysis .............................................................. 72 Conclusion ................................................. ........................................................................................................ ....................................................... .................. 74 A. Miller Environmental ................................................................................................ 74 B. Olivet Boys and Girls Club ....................................................................................... 75

Forensic Investigation of Reading Area Water Authority

Table 4. Table 5. Table 6. Table 7. Table 8. Table 9. Table 10. Table 11. Table 12. Table 13. Table 14. Table 15. Table 16.

Miller Environmental Invoices – Source Water Detail ......................................... ............................................. .... 24 Estimate of Potential Unsupported Source Water Hours and Fees Paid to Miller Environmental ........................................................................................................... 27 Stokesay Project Costs .............................................................................................. 49 GoggleWorks Unbilled Fire Service Fees ........................................... ................................................................. ...................... 55 Evergreen – Reported v. Actual ................................................................................ 59 Hydrojet – Estimated Charges .................................................. ................................................................................... ................................. 61 Our City-Reading/Panevino/WFMZ– Estimated Charges ........................................ 61 Improper Billings – Total Estimated Undercharged Un dercharged Fees ....................................... ......................................... .. 62 Principal and Interest Paid on Debt ................................................ ........................................................................... ........................... 64 Interest Expense and Changes in Net Position ............................................. .......................................................... ............. 64 Aggregate Maturities of Long Term Debt, as of o f December 31, 2015....................... 65 Debt Issuance Fees .................................................................................................... 66 2011 Bond Closing Disbursements ........................................................................... 67


I. A.

OVERVIEW

RETENTION AND SCOPE 1.

In January 2016, law enforcement authorities recommended to the City of

Reading’s (the “City”) new Mayor, Mr. Wally Scott (“Mayor Scott”), that he meet with forensic professionals from Baker Tilly Virchow Krause, LLP (“Baker Tilly”) to address concerns surrounding the City’s contracting process, as well as construction activity and the costs associated with the Wastewater Treatment Plant (“WWTP”). After Baker Tilly met with Mayor Scott and other city officials, Mayor Scott shared concerns about other areas of operations, including concerns about the Reading Area Water Authority (“RAWA”). 2.

Per our discussion with Mayor Scott, Baker Tilly offered to perform a preliminary

forensic assessment, at no cost to the City, to address potential issues facing the City, RAWA and the Reading Parking Authority (“RPA”), as well as assist assist in the proper scoping needs. Baker Tilly met with certain members of RAWA’s Board (the “RAWA Board”), senior management, and RAWA’s former solicitor, Mr. Michael Setley (“Mr. Setley”), to initiate the preliminary forensic


B.

QUALIFYING LANGUAGE 5.

The analysis and findings herein (the “Report”) are based upon the documentation

provided to date,2 as well as our experience in performing similar financial analyses and forensic investigations. While we have no obligation to update this Report for information that comes to our attention after the date hereof, we reserve the right to do so, and may do so if requested. Further, to the extent a party issues a response to the analysis and findings contained herein, we will evaluate any such response and may provide our own response or update our analysis and findings if deemed appropriate. 6.

This Report was prepared for the sole use of RAWA.

The publication of,

distribution of, or access to this Report is not intended to, and does not, create any right to rely on the contents hereof by any other party. Further, nothing contained herein shall be construed to create third-party beneficiary rights in any other party. 7.

We did not audit, review, or compile the underlying accounting data and other

information provided to Baker Tilly in the course of our analysis. We have performed this analysis


II. 8.

BACKGROUND

RAWA operates and maintains the City’s water system and promotes the following: The Water Authority was established on May 20, 1994, and is a body corporate and politic, organized under the Municipal Authorities act. The Authority has been incorporated pursuant to appropriate action of the governing body of the City of Reading, Berks County, Pennsylvania (the “City”) and exists under and is governed by the Act. The Authority has the power to, among other things, acquire, hold, construct, improve, maintain and operate water filtration plants, trunk lines and water distribution systems.3

9.

During the course of our procedures, we met with the following individuals: a.

Mr. William Murray (“Mr. Murray”), RAWA’s Executive Director;4

b.

Ms. Suzanne Ruotolo (“Ms. Ruotolo”), RAWA Administrator;

c.

Ms. Sandra Kieffer (“Ms. Kieffer”), RAWA Accountant;

d.

Ms. Jessica Thomas (“Ms. Thomas”), RAWA Accounts Payable;

e.

Mr.

Tony

Reynolds

(“Mr.

Reynolds”),

RAWA

Distribution

Superintendent;5 f.

Mr. Mike Reider (“Mr. Reider”) RAWA Watershed Manager; and


one of the parties to be prevented from fully enjoying its own separate interests that naturally occurs without the influence or pressure that can occur when related parties are involved in transactions.7 As a result, Baker Tilly Tilly focused on several individuals and organizations that could influence transactions at RAWA as follows: a.

Miller Environmental Inc. (“Miller Environmental”) and Mr. Dean Miller (“Mr. Miller”). Miller Environmental, founded in 19948 by Mr. Miller, among others,9 is located in Reading, PA, and provides water and wastewater treatment services, including meter reading and billing services, dewatering and stabilization, process evaluations, and hauled waste programs, to municipal and industrial clients on a contract basis.10 Mr. Miller is the principal/president of Miller Environmental and was the former Executive Director of RAWA and also served as the Plant Manager. Miller Environmental also provided meter reading services to RAWA. b. Mr. Michael Setley (“Mr. Setley”). Mr. Setley was formerly the solicitor


1995.12 Mr. Setley is a now a partner at Georgeadis Setley and is also a founding principal of Concord Public Financial Advisors, Inc.13,14 c. Concord Public Financial Advisors, Inc. (“Concord”) served as the financial advisor on RAWA’s bond financing and Mr. Setley also served as bond counsel on the bond financing transactions.15 In addition, Mr. Setley is a founding principal of Concord Financial.16 ,17 d. Cardno/BCM (“BCM”) and Mr. Tom Weld (“Mr. Weld”). Mr. Weld is the consulting engineer for RAWA, who is employed by BCM. e. Mr. Ernie Schlegel was the former Chairman of the RAWA Board.18


III. 11.

ANALYSIS

The following sections address the various procedures performed in connection

with our analysis and related findings. In general, the subsequent sections address transactions between RAWA and Miller Environmental (including Mr. Miller), RAWA’s decision to waive fees on behalf of certain customers c ustomers and failure to properly bill certain customers, RAWA’s use of bond financing, and RAWA’s approval of cash disbursements.

A.

RAWA’S RELATIONSHIP WITH MILLER ENVIRONMENTAL AND MR. MILLER 12.

In September 2000, Miller Environmental began providing RAWA contracted

management services. Over the years, that relationship expanded to include executive director services, as well as providing meter reading services.

1.

Relevant Language in Contracts for Contract Management Services

13.

On September 12, 2000, Miller Environmental submitted a proposal to provide

contract management services to RAWA’s water treatment plant (“September 12, 2000 Proposal”). The proposal submitted by Miller Environmental referenced a September 8, 2000 meeting at which


local Berks County resident and must be able to respond to emergencies and after hour requests.” Additionally, the proposal also noted, “Finally, we have determined that the successful bidder must have a local support staff that can meet the aforementioned requirement to fill in during any unexpected absence of primary manager.”21 Based on its submitted proposal, Miller Environmental expected to provide all of these services to RAWA. 14.

The September 12, 2000 Proposal also highlighted that Miller Environmental

operated and maintained 55 other water and wastewater treatment plants in Pennsylvania and Maryland, including 11 projects located within Berks County, and also included multiple references.22 15.

On September 22, 2000, RAWA contracted with Miller Environmental

(“September 2000 Contract”) to provide an “experienced and qualified water filter plant manager responsible for the management of all operational, and maintenance activities of [RAWA’s] water filter plant.”23 The contract designated this individual with the title of “Plant Manager of the facilities,” but referred to the individual as the “Contract Manager” throughout the contract.24


of services to include Executive Director services, in addition to water filter plant responsibilities (“January 2004 Amendment”).26 17.

On January 29, 2015, RAWA and Miller Environmental entered into a ne w contract

for Miller Environmental to provide Executive Director services for RAWA effective February 1, 2015 (“January 2015 Contract”),27 the day that the prior agreement would have automatically renewed.28 The January 2015 Contract designated this individual individual with the the title of “Executive Director,” and referred to the individual as the “Contract Executive Director” throughout the contract.29 18.

When evaluating the three Contract Management Services contracts into which

RAWA and Miller Environmental entered for purposes of understanding RAWA’s relationship with Miller Environmental, the most relevant contract sections relate to: a.

Scope of services;

b.

Contract Term;

c.

Compensation; and


a.

19.

Scope of Services

The September 2000 Contract stated the Contract Manager shall remain an

employee of Miller Environmental and perform water filter plant services for RAWA, which included “planning, organizing, coordinating, supervising and directing all internal and external activities of the water filter plant facilities, and interaction with representatives of the state and federal governments, and other appropriate parties.”30 The contract also outlined 12 specific, additional responsibilities required of the Contract Manager, including planning and administering the maintenance of RAWA’s water filter plant facilities and recommending capital improvement projects to RAWA.31 20.

The January 2004 Amendment expanded the Contract Manager’s responsibilities

to include duties “similar to those previously performed by [RAWA’s] Executive Director.” 32 These responsibilities were in addition to those already established in relation to the water filter plant under the September 2000 20 00 Contract and would be required of o f the Contract Manager Mana ger when requested specifically by RAWA “from time to time.”33


organizing, coordinating, supervising, and directing all internal and external activities of the water authority facilities, and interaction with representatives of the state and federal governments, and

other appropriate parties.”34 This contract also outlined 12 specific responsibilities required of the Executive Director, again consistent with the language contained in the September 2000 Contract. A notable variation was the addition of the responsibility to “direct the the operation and maintenance of the facilities… which would include Source Water, Treatment, Distribution, and Administration, and continue all programs pr ograms which have been ongoing in each area.”35 Based on

discussions with RAWA personnel, we understand that these four divisions relate to three d ifferent plants and/or facilities that RAWA maintains and that the “Administration” category represents the administrative costs incurred by the Executive Execu tive Director in performing his responsibilities. b.

22.

Contract Term

The contract between Miller Environmental and RAWA for water filter plant

services was entered into on September 22, 2000, but the Contract Manager was to “commence providing the Services on September 19, 2000.”36 The contract’s stated termination date was


the issuance of the January 2004 Amendment, which amended the original contract’s term. Specifically, the January 2004 Amendment stated that the Contract Manager “shall commence providing the services… on February 1, 2004… until January 31, 2005”38 and allowed for continuous, automatic one-year renewal terms, until one of the parties gives 90-day advance written notice of termination.39 24.

Absent any notice to the contrary, we understand that the January 2004 Amendment

continued to automatically renew for continuous one-year terms until the issuance of the January 2015 Contract, which again amended the contract’s term. term. Specifically, the January 2015 Contract extended the contract to a three-year term, which stated that the Executive Director “shall commence providing the Services… on February 1, 2015… until January 31, 2018”40 and allowed for continuous, automatic three year renewal terms, until one of the parties gives 90-day advance written notice of termination.41 c.

25.

Compensation

For the water filter plant manager services provided under the September 2000


expenses.”43 As such, we understand that RAWA was not responsible for compensating the Contract Manager for vacation time or other paid time off. off. Beginning on October 1, 2001, the hourly rate was slated to increase 5% annually.44 26.

As of the issuance of the January 2004 Amendment, the Contract Manager’s rate

had increased to $55.57 as a result of the annual 5% rate increases established in the September 2000 Contract.45 The January 2004 Amendment preserved this hourly rate of $55.57 for the the water filter plant services, and also added an hourly rate of $85 per man hour for the Executive Director services.46 Beginning on February 1, 2005, the two hourly rates rates were slated slated to increase increase 5% annually.47 The other terms related to compensation remained consistent with the September 2000 Contract. 27.

As of the issuance of the January 2015 Contract, the Contract Manager’s rate had

increased to $90.52 and the Executive Director’s rate had increased to $138.46 as a result of the annual 5% rate increases established in the January 2004 Amendment.48 Consistent with the transition to only contracted Executive Director services, the January 2015 Contract contained


the hourly rate was slated to increase 2.5% annually.50 The other terms related to compensation remained consistent with the January 2004 Amendment. d.

28.

Other Terms

We noted one other contract term that informed our analysis of the Miller

Environmental billings issued to RAWA. Particularly, Article 2.4, which was in effect for all three three contract iterations, indicates that Miller Environmental was required to report to RAWA the use of any personnel beyond the specific “qualified person as designated in writing by [Miller Environmental] and accepted by [RAWA]” entitled as the Contract Manager and/or Contract Executive Director.51 The use by the Contract Manager/Contract Executive Director of any additional outside contract personnel in the management of the facilities shall be justified only if the Contract Manager/Contract Executive Director can demonstrate that such functions cannot be performed by existing members of [RAWA’s] management and staff and any such use of additional outside personnel shall be reported along with the justification for such use to [RAWA]. [RAWA].52

2.

Relevant Language in RAWA Contracts with Miller Environmental for Meter Reading Services


staff to negotiate the contract and that the meter reading services should reflect a start date of January 2, 2003.53 30.

A comment was made in the November 26, 2002 RAWA Board meeting minutes

in the Solicitor’s report regarding a proposal from another vendor, Neptune, that the RAWA Board would need to decide if RAWA intended to continue c ontinue communication and continue with this project with Neptune. Neptune had submitted a proposal for meter replacements, replacements, meter maintenance and meter reading services. Mr. Robert Ludgate, Jr., a RAWA RAWA Board Member, made a comment that “made it clear the meter reading bid was already awarded to Miller Environmental.”54 31.

On January 17, 2003, RAWA and Miller Environmental entered into an agreement

for Miller Environmental to provide water meter reading services commencing on March 1, 2003 (“2003 Meter Reading Contract”).55 This contract was separate separate from from any of the aforementioned aforementioned contracts between RAWA and Miller Environmental Environmental regarding Mr. Miller’s Miller’s services. The 2003 Meter Reading Contract stated that Miller Environmental “has submitted a propo sal to read water meters for a period of time to be determined by [RAWA] and acceptance of [Miller


the parties gave 120-day advance written notice of termination.58 The compensation rate for for the meter reading services in 2003 was contracted for $29,624.22 per month, with a 5% annual increase beginning on March 1, 2004, and continuing on each anniversary a nniversary date until the expiration of the contract.59 32.

On May 6, 2010, Miller Environmental sent RAWA a letter (the “May 2010

Letter”) pursuant to Paragraph 8.9 regarding the 2003 Meter Reading Contract stating, “we are required to send a written notice to inform you of any change of our authorized representative for this Agreement. Our original authorized representative, Mr. DiSantis, is no longer with our firm and the position of Vice President is currently vacant.”60 The letter further states, states, “this is being done as an administrative and contractual formality on our part and no action is required on your part, other than to make a note of the above change for future contract correspondence.”61 33.

On September 29, 2011, the first amendment to the 2003 Meter Reading Contract

was executed (“2011 Meter Reading Amendment”), which increased the meter reading scope due to changes that Miller Environmental claims “occurred with meter reading technology, quan tity of


34.

On February 23, 2012, RAWA and Miller Environmental entered into an Amended

and Restated Agreement to provide Water Meter Reading Services c ommencing on March 1, 2012 (“2012 Meter Reading Contract”).63 The scope of services remained the same as the 2011 Meter Reading Amendment, however the the contract term and the compensation rate were adjusted. The three-year contract was stated to terminate as of February 28, 2015, but allowed for perpetual, automatic three-year renewal terms, until one of the parties gave 90-day advance written notice no tice of termination.64 As of the issuance issuance date of this contract, the the monthly meter reading rate would have increased to $45,956.89 per month as a result of the annual 5% rate increase established in the 2003 Meter Reading Contract.65 The 2012 Meter Reading Contract reduced that monthly rate to $44,956.89 to reflect “a $1,000 per month reduction to compensate [RAWA] for performance monitoring personnel expense incurred by [RAWA].”66 This rate was contracted to “remain unchanged” through February 28, 2015 and allowed for subsequent adjustment per the agreement of RAWA and Miller Environmental.67

3.

Fees Charged by Miller Environmental to RAWA


Table 1.

RAWA Expenses for Services Provided by Miller Environmental68

Year 2008 2009 2010 2011 2012 2013 2014 2015 Total

36.

Plant Manager and Executive Director $ 117,085 123,628 177,343 183,813 214,849 353,469 401,360 365,097 $1,936,644

Water Meter Reading Services $ 451,906 474,501 498,226 523,137 538,294 539,483 539,483 539,483 $4,104,513

Total $568,991 598,129 675,569 706,950 753,143 892,952 940,843 904,580 $ 6,041,157

During the September 29, 2016 RAWA Board meeting, Mr. Stock requested a

resolution to terminate the contract between RAWA and Miller Environmental for the provision of the contracted Executive Director Director effective 5:00 p.m. on September 30, 2016. This was done mutually by RAWA and Miller Environmental. During 2017, RAWA terminated its contract with Miller Environmental for meter reading services. a.

37.

Miller Environmenta Environmentall Billings for for Contract Contract Management Management Services Services

During the course of its relationship with RAWA, Miller Environmental provided


worked by Mr. Miller. Not until RAWA began questioning Miller Environmental’s final invoices did it learn that invoiced hours included time for individuals other than Mr. Miller, but the hours were purportedly “adjusted” downward in an attempt to reconcile the Executive Director hourly rate charged and the va value lue of services provided by Miller Environmental personnel other tha n Mr. Miller. 38.

Table 2 summarizes the Miller Environmental invoices related to the Executive

Director services charged to RAWA from February 2015 through September 2016, the period during which the January 2015 Contract Contract was in effect. During this period, in recognition of the terms of the January 2015 Contract,70 Miller Environmental invoiced RAWA under the following categories: Source Water, Treatment, Distribution and Administration. The information included on these invoices included the hours charged for services provided (in total rather than by day and person) under each of the four disciplines.


Table 2.

Miller Environmental Executive Director Invoices – January 2015 Contract – Hours by Discipline71

Service Period72 Feb. 2015 Mar. 2015 Apr. 2015 May 2015 June 2015 Jul. 2015 Aug. 2015 Sept. 2015 Oct. 2015 Nov. 2015 Dec. 2015 Jan. 2016 Feb. 2016 Mar. 2016 Apr. 2016 May 2016 June 2016 Jul. 2016 Aug. 201673 Sept. 201674 Total

39.

Rate $141.91 141.91 141.91 141.91 141.91 141.91 141.91 141.91 141.91 141.91 141.91 141.91 145.45 145.45 145.45 145.45 145.45 145.45 145.45 145.45

Source Water Hours 50 103 128 71 68 60 50 52 54 46 49 42 39 40 48 42 38 44 38 48 1,109

Treatment Hours

Distribution Hours

Administration Hours

11 9 17 9 17 23 23 31 36 39 54 48 56 52 47 45 50 42 35 22 665

15 27 9 13 14 18 18 14 30 48 56 61 53 48 50 47 51 54 40 32 697

136 131 58 123 114 108 83 76 89 72 55 97 81 72 64 52 55 55 68 78 1,665

Total Hours 211 269 210 215 213 209 174 173 209 205 214 248 229 212 209 186 194 195 181 179 4,135

Total Amount $29,943 38,174 29,801 30,511 30,227 29,659 24,692 24,550 29,659 29,092 30,369 35,194 33,308 30,835 30,399 27,054 28,217 28,363 26,254 26,036 $592,336

Table 3 details the total hours charged by Miller Environmental, and calculates the


Table 3.

Miller Environmental Executive Director Invoices – January 2015 Contract – Calculated Average Hours Charged per Week75 Service Period76 Feb. 2015 Mar. 2015 Apr. 2015 May 2015 June 2015 Jul. 2015 Aug. 2015 Sept. 2015 Oct. 2015 Nov. 2015 Dec. 2015 Jan. 2016 Feb. 2016 Mar. 2016 Apr. 2016 May 2016 June 2016 Jul. 2016 Aug. 201678 Sept. 201679 Total

40.

Hours

Hours/ Week77 Hours/

211 269 210 215 213 209 174 173 209 205 214 248 229 212 209 186 194 195 181 179 4,135

53 67 53 54 53 52 44 43 52 51 54 62 57 53 52 47 49 49 45 45 52

Absent additional detail from Miller Environmental, we are u nable to determine the

accuracy or legitimacy of the hours charged. RAWA terminated the Miller Miller Environmental contract


of Miller Environmental’s invoices, Mr. Murray asked Miller Environmental for clarification regarding hours billed on the August and September 2016 invoices. 41.

An October 14, 2016 e-mail from Mr. Miller responding to Mr. Murray’s

questions about the final invoices explained the invoicing process as follows: The first page is the invoice that gets sent to the Authority [RAWA] broken out by each discipline that we were responsible for and hours charged for each of those disciplines. The second and third page is the hours which Jesse [Goldberg]80 actually dedicated to source water protection during that month with some description. If you compare Page 1 source water protection hours to Page 2 and 3 actual hours you will see the hours have been reduced for invoicing purposes for source water protection.81 42.

In connection with an internal RAWA review of amounts paid to Miller

Environmental, Mr. Murray met with, and obtained additional detailed monthly hours from, Mr. Goldberg. The monthly listings were similarly similarly formatted as the two attached to Mr. Miller’s explanation e-mail. We compared Mr. Goldberg’s/Miller Goldberg’s/Miller Environmental’s recorded hours to the Source Water section of the Miller Miller Environmental invoices. Table 4 summarizes the hours charged by Miller Environmental, Environmental, the invoice amount, and the specific specific hours recorded for Mr. Goldberg Goldberg as


Table 4.

Miller Environmental Invoices – Source Water Detail82 Executive Director – Invoice Amount – (Source Water)

Service Period Nov. 2015 Dec. 2015 Jan. 2016 Feb. 2016 Mar. 2016 Apr. 2016 May 2016 June 2016 Jul. 2016 Aug. 201684

43.

Rate

Hours Charged

$141.91 141.91 141.91 145.45 145.45 145.45 145.45 145.45 145.45 145.45

46 49 42 39 40 48 42 38 44 38

Amount Charged $6,528 6,954 5,960 5,673 5,818 6,982 6,109 5,527 6,400 5,527

Mr. Goldberg % of Goldberg Detailed Hours 33% 44% 31% 29% 29% 34% 29% 28% 36% 33%

Detailed Hours 140 112 138 136 138 139 147 136 122 116

Effective Hourly Rate83 $46.63 62.09 43.35 41.71 42.16 50.23 41.70 40.64 52.46 47.65

Table 4 details the Executive Director rate, hours charged, and the total amount

charged by Miller Environmental for providing “Source Water” service. service. Separately maintained records of Mr. Goldberg’s Source Water hours exceed the hours invoiced, which is consistent with Mr. Miller’s acknowledgment in his October 14, 2016 e-mail to Mr. Murray that Mr. Miller reduced Mr. Goldberg’s hours “for invoicing purposes.”85

However, Miller Environmental

charged RAWA for hours worked by Mr. Goldberg at Mr. Miller’s Miller’s Executive Director rate. While

Forensic Investigation Report of RAWA 4.21.17

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