State audit confirms MoPEP contract is like a cigarette filter - a ‘delivery device’ for toxic liability

On May 12, 2009, State Auditor Susan Montee released the findings of special petition audit for the City of Rolla and the Rolla Municipal Utilities (RMU). Thousands of Rolla citizens had signed petitions to get the city - particularly the city’s utility department - audited by the state for a number of reasons such as rampant nepotism, but primarily because of the disastrous impact the switch to MJMEUC/MoPEP as a wholesale power supplier had on the city’s electric rates in 2006 and 2007 and continuing. State Auditor Montee, during her public presentation of the audit, described MJMEUC/MoPEP as “a shell corporation” and in the audit said the MoPEP contract “may” have made all MoPEP member cities “joint venture” partners in what is now over $2.1 BILLION in revenue bond debt to buy into more than a half dozen coal-fired power plants located in several Midwest states. For “joint venture” read “joint liability.”

All towns that have been suckered into MoPEP contracts and MJMEUC’s UPPA contracts should read the Rolla audit carefully. Everything the auditor said about Rolla’s liability as a “joint venture” partner with MJMEUC/MoPEP applies equally to all other MoPEP members and may also apply to the seven cities that signed UPPA contracts with MJMEUC.

The audit confirmed what the chief petitioners, Donna Hawley (now a member of the Rolla city council) and Tracey Watson, claimed from the beginning that the 2005 Amended MoPEP contract the Rolla city council signed without reading was not an industry-standard commodity agreement to provide cheaper electricity due to MoPEP’s claimed “economies of scale,” it was a contract contrivance or machine to feudalize small towns into a “collateral farm” so MJMEUC could, without the knowledge or consent of local officials and taxpayers, pledge the collective electric revenues of the now 33 MoPEP members to leverage a $10 million bank loan into over $2.1+ BILLION in revenue bond debt. Thus, “The MoPEP Machine.” All MoPEP member cities are now responsible for paying off any and all debts and obligations of MJMEUC/MoPEP because in the contract they signed blindly they agreed to pay all MoPEP’s “direct costs” of every kind “without limitation.” The “direct cost” pass-through and the “unlimited” nature of the pass-through debts was a key factor in the determination that their contracts may have made them “joint venture” customers with MJMEUC/MoPEP not just simple electric customers.
The $2.1+ BILLION in revenue bonds MJMEUC has issued as of this date have been used to purchase equity interests – ownership shares - in seven coal-fired power plants being built in the Midwest. In Missouri it is illegal for public bodies such as cities and school districts to make such equity investments, i.e. ownership positions usually in stocks or bonds. If they are, as the state auditor suggests, business partners in a joint venture then the MJMEUC investments are equally their investments and thus are all illegal. Given the results of this state audit, it may be belaboring the obvious when we point out once again that it is terminally stupid for elected officials to delegate to their utility department managers, people who typically have no education in high-risk finance and investing, the voting power to plunge their cities into over $2.1 BILLION in high-risk ‘deals’ that the cities know nothing about, do not understand and have no control over.

Many other MJMEUC members and members of its parent organization MPUA wisely avoided participation in the MoPEP scheme but to date 33 or 34 members have blundered into it without understanding what they were really getting into. That is why the MoPEP contract is said by some to have one other use - as a Darwinian test to identify the dumbest towns in Missouri.
State Auditor Montee explained in the Rolla audit why - contrary to what MoPEP officials and their advocates have claimed - these reckless equity investments in power plants are in fact direct liabilities of each MoPEP city member:

“Currently, RMU ‘Notes to the Financial Statements — Commitments and Contingencies,’ include general comments about MJMEUC and MoPEP with little or no detail about RMU ownership interest in power generating facilities under construction and/or to be constructed and the potential ownership costs. However, pursuant to Governmental Accounting Standards Board statements, it appears the relationship between the RMU and the MJMEUC/MoPEP may be a joint venture. Additionally, joint venture participants must disclose specific information including information regarding ongoing financial interest and/or financial responsibility and information to evaluate whether the joint venture is accumulating significant financial resources or causing a financial burden on the participating government in the future.” -State audit report No. 2009-4 (emphasis ed.)

Don’t be misled by the state auditor’s seemingly tentative use of “it appears” or “may be.” The State Auditor and the Attorney General’s office are not judicial bodies so they must give most of their opinions in the form of “may” or “might” especially when they are dealing with newly uncovered miscreants such as the MoPEP Ponzi Scheme, an investment swindle that hasn’t yet been taken apart in a court of law to expose and define its multiple illegal components. When either of these very focused and experienced groups of experts, the Attorney General or the State Auditor tells you that you “may” be breaking the law you should be very alarmed because their opinions, however tentatively expressed, are based upon decades of experience and well-researched facts. If six medical experts tell a man he has only weeks to live…the wise man plans a funeral, he doesn’t book a cruise.

The Auditor is said that Rolla citizens are being given “little or no detail about RMU ownership interest in power generating facilities under construction and/or to be constructed and the potential ownership costs.” If these coal-fired plants are such great investment deals why is information about the city’s financial involvement in MoPEP’s massive coal-fired investments being withheld from the citizens of Rolla and the people of other MoPEP member towns? MJMEUC CEO Duncan Kincheloe should be bragging to everyone about his great investment coup. Why is he so shy in sharing this information with his unwitting “joint venture” partners, the rubberstamping MoPEP committee who voted for all this debt?

The purpose of the full disclosure required of joint venture partners is so each joint venture partner can “evaluate whether the joint venture is accumulating significant financial resources or causing a financial burden on the participating government in the future.” Why do the MJMEUC board and CEO Kincheloe not want the 33 governments that signed their MoPEP contract to see and be able to “evaluate” whether these investments may be a “financial burden on the participating government in the future?”

The consequences of the Rolla Audit…

What is true of Rolla is equally true of all other MoPEP cities. To give a true picture of the liability of each city involved in the MoPEP “joint venture” other independent city auditors that perform annual city audits must now use the percentages of member participation in Exhibit M (must be updated annually as Kincheloe issues more revenue bonds to buy into more plants) of the MoPEP contract to calculate and report that city’s full MoPEP liability. The auditors of those cities that don’t include this liability information in their audits are doing a lousy job. One has to wonder why they do not warn their city clients of this shocking problem which will affect the city in the credit market.

The idea that a flimsy “shell corporation,” as Montee described MJMEUC/MoPEP, could, in so few years, gain control and manipulate so many towns in our state and load them up with billions in revenue bond debt without a single local vote or even the knowledge of the local taxpayers and voters is appalling. It tells us that the democratic safeguards and constitutional controls we have always taken for granted have had a massive systems failure and have left us naked to other predators. With one 32-page contract which lazy elected officials and city attorneys in one town after another didn’t bother to read or tried to read and couldn’t understand, voters in each of those towns were suddenly disenfranchised and denied the protection of the laws and constitutional provisions that have, prior to the MoPEP scheme, protected them from unfair and uncontrolled taxation. Raising utility rates beyond what is required to run the utility department and siphoning off the excess ‘profits’ to spend on other things is a hidden tax and a violation of the Hancock Amendment.

If the MoPEP method of “Governance by Contract” becomes the model for other multi-governmental projects — where municipal commitments for essential services are controlled by unread contracts that never end and which allow people who are ignorant of finance to exercise illegally delegated legislative powers that secretly burden us with billions in liabilities - then the financial viability of our communities will be suspect in every credit marketplace and our communities will be burdened with uncontrolled hidden taxes that will choke off all hope of economic development. If “Governance by Contract” spreads without challenge, local government - as a democratic organization accountable to the voters - is finished.