By John Schaffner

The Atlanta City Council has received the long-awaited, much-anticipated external audit of operations of the city’s Department of Watershed Management (DWM), which disclosed that the department is sitting — possibly illegally — on $3.9 million it should have refunded to thousands of customers.

Among other major items divulged in the audit conducted over almost a year by KPMG:

• The department’s delinquent accounts now total more than $50 million, and the department fails to collect millions more every year.

• Bills are based on estimates, rather than meter readings, for 10,000 accounts every month.

• The rate increases put in force in 2008 were based on overestimates of how much sewer upgrade work the department could accomplish and the actual cost of completing those projects.

The $500,000 audit, which was authorized by the council last May in conjunction with considering DWM’s proposed water and sewer rates for the fiscal 2009 budget, included 83 recommendations for improvement — regarding everything from financial management to meter repairs and water loss — which were presented in full to the council during a briefing May 6.

City Council members had been cautioned to keep their responses to the audit low key, the city administration fearing that questions regarding the way the city has set rates and the department’s huge debt could seriously hurt Atlanta’ s ability to obtain money on the bond market, which is crucial to completing the $4 billion sewer system overhaul.

The City Council agreed May 4 to try to borrow up to $750 million to keep moving forward with the sewer system overhaul. City officials are nervous about the possibility of Atlanta’s credit rating dropping to junk-bond status. Atlanta is hovering just above that rating, and a drop could imperil the city’s ability to keep borrowing.

Atlanta will have to wait a month to find out how much money it can borrow and at what interest rate.

Because of the tenuous status in the bond market, council members have been advised to be guarded in how they discuss the Watershed Management Department, its finances and the borrowing until the bond issue succeeds.

Some of that money is crucial because it is needed to pay for projects for which the city has already let contracts but lacks the money to fund because of the cancellation of a $600 million line of credit.

The city also has up to $223 million in new projects for which Atlanta might not be able to borrow the money.

Another hurdle is just around the corner. Watershed Management has an additional $900 million in variable-rate debt that the administration says must be transferred within 90 days to fixed-rate financing or it will become prohibitively expensive.

Watershed Management Commissioner Rob Hunter and city Chief Financial Officer Jim Glass fear the entire $4 billion sewer project — about $3 billion of which is mandated by two federal court decrees — will unravel if financing falls apart.

The audit issue that council members seemed most concerned about initially is that the water agency owes Atlanta ratepayers millions in refunds.

The KPMG audit revealed that Atlanta’s water department has kept almost $4 million that should have been refunded to 29,000 customers who closed their accounts. Apparently, part of the problem is that no one told customer-service reps about changes last year in the city code.

In January 2008, the City Council required refunds of customer deposits within 60 days of closing an account. Deposits also must be refunded to customers with five years of uninterrupted service.

Instead, Atlanta refunds your deposit if and when you ask for it. Deposits for many older accounts were “reset” to January 2007 when the city switched to new software. That means some refunds would be delayed up to 59 months.

As of February, the auditors found more than 13,000 customers were due refunds of $50 or more.

Watershed Management’s procedures “appear to conflict with current city code and may conflict with state law regarding disposition of unclaimed property,” the auditors said. A conflict with city code could well mean the activity is illegal.

The auditors also found that planned increases in water rates may be too high and recommended the City Council consider giving customers some relief. Rates have climbed by 70 percent since 2004 and an additional 80 percent are planned over the next four years.

Current Atlanta rates are the second-highest in the country for systems of comparable size.

The average Atlanta household pays $107 a month for water and sewer service, an amount that will top $150 by 2012 with planned rate hikes. The auditors said a monthly bill today should be no higher than $80.

Of the 83 recommendations presented in the audit, Atlanta’s water management agrees either in whole or in part with 75 and has already said it will take appropriate steps to implement them.

But DWM and Glass have expressed concerns about the methodology used in preparing the audit. Glass has said some of the findings are fundamentally flawed because of the auditors’ failure to take the changed financial situation with the global economy and credit markets into account.

DWM is concerned that KPMG did not perform a “risk assessment” of each recommendation to determine whether the recommendation would be cost-effective and efficient to implement, nor did the auditors prioritize the 83 recommendations to help the department determine which ones should be implemented first.

In one section of its report, KPMG recommends doing one or more of four things with excess revenues:

• Set up a reserve account to be used for rate stabilization.

• Pay down existing debt.

• Begin funding some capital projects with cash upfront.

• Reduce rates.

DWM considers the first and third options to be feasible. But it thinks paying down debt that carries a lower interest rate than the department can get now is not a good choice, and the department says that reducing rates is just not feasible now.

The full 170-page KPMG audit and the agency’s response are available at