An independent investigation of the South San Luis Obispo County Sanitation District concluded that former administrator John Wallace mismanaged the agency for close to a decade, prompting its board of directors to unanimously vote Wednesday to send the report to the county district attorney, the state attorney general and the FBI to review for possible criminal charges.
The investigation also found evidence of a conflict of interest and said Wallace misused his position to hire his own private company to do engineering and administrative work for the district.
The district board authorized the investigation last year in an attempt to put to rest lingering public concerns over the rash of controversies that has plagued the district over the years. In addition to the conflict of interest, concerns included lawsuits filed by former employees, notices of violation from state regulators and a massive sewage spill in 2010, for which the district was fined $1.1 million. The district is appealing the fine.
“I’m very happy to see that it’s finally come to fruition,” Arroyo Grande Mayor Jim Hill said on Tuesday, before the sanitation board’s vote. “I’m glad that we are finally able to get this out there for the public.”
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Hill is one of three members on the district board — with Grover Beach Mayor John Shoals and Oceano Community Services District director Matthew Guerrero — and has long been critical of management practices at the district.
On Thursday, Wallace told The Tribune he was saddened the board would not give him more time to correct “discrepancies in the report and factual information,” before sending it to law enforcement.
“Obviously we are disheartened because we thought it was a fair request to give us more time,” he said. “This report took about seven months to prepare, and we just got it on Sunday. ”
Wallace said he and his legal counsel will review the report over the next few weeks and present their findings at the next sanitation board meeting.
The report, prepared by Knudson and Associates, claims Wallace mismanaged the district during the latter part of his 27-year tenure and used his position as a district administrator to gain work for his company, the Wallace Group.
A lot of it was very troubling.
Matthew Guerrero, South San Luis Obispo County Sanitation District director, on the investigation of John Wallace
The 124-page report includes an in-depth study of the district’s financial operations between 1986 and 2013, as well as interviews with more than 30 individuals involved in the district and the Oceano Wastewater Treatment Plant’s operations during that time span. Approximately 23 pages of the report were redacted from the published version because they contained sensitive plant and personnel information.
Much of the remaining report focuses on the district’s relationship with Wallace’s firm, the Wallace Group, which provided engineering services to the district under one contract for 25 years — an arrangement the San Luis Obispo County Grand Jury in 2011 also criticized as a conflict of interest.
According to the report, between 1999 and 2009, the total hours billed to the district by the Wallace Group for administrative and engineering work increased from about 81 hours per month to more than 663 hours per month, and monthly invoices increased from $3,600 to a high of $70,000. The number of people employed by the Wallace Group charging hours to the district also grew from seven in 1999 to 28 in 2010. During that time, Wallace was the only person with the district, besides the board of directors, who reviewed and approved his company’s billings to the district for administrative and engineering work, the report states.
The tangled relationship included Wallace having business cards made for his Wallace Group employees with the district logo on them and had the district pay for the cards, investigators found.
“In our opinion, there was a clear lack of controls related to the accounting of the district’s payments to Wallace & Associates and the Wallace Group, and an apparent conflict of interest in Wallace as district administrator approving billings to the district for administrative, engineering and other services provided by the Wallace Group,” the report says.
The investigation also found that between 2003 and 2012, the district’s overall revenue declined while expenses grew steadily, so that it was operating at a deficit each year during that same time span.
On Thursday, Wallace said the hours billed to the district by Wallace Group employees increased in the latter part of his tenure because of a number of large projects and regulatory items started at that time. He said more information will be included in his response to the sanitation board.
The Knudson investigation additionally cited two incidents in its conclusion that Wallace misused his position as district administrator to obtain work for his company:
According to investigators, in 2009 Wallace told an administrator with the state Department of Parks and Recreation that the sewage dump station at the Oceano Dunes State Park Recreation Area violated discharge regulations, and suggested the department hire the Wallace Group to draw up new engineering plans.
The administrator pointed out that the state department had its own engineers. The report stated that the administrator “recalled at the meeting (with Wallace) that she felt Wallace was threatening to close down the dump site if she didn’t use his firm.”
Wallace subsequently denied the dump station permit but the state continued to operate it anyway.
In the second case, the owner of Yo Banana Boys, a business servicing campers at Oceano Dunes, wanted to build a sewage dump station in 2008 as one its services. The owner told investigators that Wallace suggested using the Wallace Group to design the station while the owner was pursuing a discharge permit from the district. The owner declined, but after he obtained the necessary permits and opened the station in 2009, Wallace shut it down a month later “without giving a real reason,” owner Dave Kraus told investigators.
In 2013, Kraus met with John Clemons, who succeeded Wallace as acting district administrator, and Clemons authorized reopening the dump station. Clemons told investigators that in both cases, he saw no reason why either dump station was denied a permit.
On Thursday, Wallace said the two incidents were “a huge misunderstanding,” that he would explain in his response to the sanitation board.
“I feel confident that we will provide information that will exonerate a lot of this,” he said.
District board members and the public reviewed the investigation at Wednesday night’s meeting over several hours.
I have to go back to my constituents and say, ‘Guess what, we screwed up and now you’re going to have to pay for that.’ I don’t sleep well about that, and I hope you don’t either.
Tim Brown, Arroyo Grande Councilman
“What happened here is Mr. Wallace did what Mr. Wallace could get away with,” said Arroyo Grande resident Beatrice Spencer. “He took advantage of people who were not paying attention.”
Wallace was not present at the meeting, but Wallace Group business development and marketing manager Chris Gardner spoke on his behalf, to ask the board to continue the discussion to another meeting.
The board instead directed staff to forward the report to District Attorney Dan Dow and other law enforcement agencies to determine if charges should be brought against Wallace. The board also said it would be open to hearing Wallace’s response during public comment at its next meeting.
“I think we all have really strong feelings, and I echo the sentiment of the public regarding this particular report,” Guerrero said Wednesday night. “A lot of it — I read it a couple of times — a lot of it was very troubling.”