Risky Business

A former employee says Maricopa County is better at covering up than cleaning up its environmental hazards. And that could get the county in trouble for financial fraud--again.

Michael Walters worked with worst-case scenarios every day. It's ironic, then, that he still wasn't prepared for the one coming at him until it hit.

On November 22, he sat in the office of his supervisor, Roland Bergen--a guy he'd considered his best friend--and listened as Bergen read from a prepared script informing Walters he was fired. Then, while security stood by, Bergen escorted Walters out of the Maricopa County Administration building. "He hugged me by my car," Walters recalls, "and he told me, 'It would be better for you if you'd keep quiet about this.'"

And then Walters' employment with the county was officially over. He didn't even have a chance to clean out his desk. All for doing what he thought was the right thing.

"I was devastated," he recalls. "That friends would turn against you, that associates would work with you for years, and then not stand with you, but in fact, stand against you . . . everything just went topsy-turvy."

As an analyst in Maricopa County's division of risk management, Walters had been the office's golden boy. His performance evaluations came back with the highest possible ratings. He'd been singled out for praise in e-mails by Deborah Larson, the county's chief financial officer, who was known for more acidic comments. He was, he says, a happy bureaucrat, content with his place in county government.

Walters was hired, in part, to help the county assess its environmental liabilities--the amount of money it would cost to clean up its waste sites, health hazards and pollutant spills. So he created a spreadsheet -- with imaginary numbers--for the county to use as the starting point for an audit of those risks. Walters plugged in a probable range of $33.3 million to $48.6 million for the county's total liability, a number that came literally from nowhere because the county had never assessed its environmental cleanup costs. The real number, Walters stresses, could be anywhere from "a million to a billion" dollars.

Months later, Walters says, he discovered the county had published the hypothetical numbers--in official financial statements and bond documents--as if they were real. That could be fraud, according to Securities and Exchange Commission disclosure guidelines.

If the numbers are baseless, as Walters contends, it could mean the county has once again failed to disclose significant information required by federal regulators. A similar failure got Maricopa County in trouble with the SEC just two years ago when the county was charged with fraud for not reporting its budget deficit.

Moreover, it raises questions about how the county will pay for a rash of environmental problems. According to county employees' e-mail obtained by New Times, those problems are serious--and costly. Internal county messages describe years of environmental, health and safety violations at the county hospital, "an environmental catastrophe waiting to happen" in the Maricopa Medical Examiner's Office, and problems with asbestos exposure in county buildings.

Maricopa County could also face thousands of dollars in fines and penalties if outside agencies determine county employees were covering up health hazards, as the e-mails suggest.

And Walters himself has filed a $4.7 million claim against the county for wrongful termination.

Speaking up about the county's liabilities turned Walters into one. "We must find a way to quietly eliminate him," Deborah Larson wrote in an e-mail about Walters. Two months later, Walters was fired.

Maricopa County insists its financial statements are accurate and that it's dealing with environmental problems in a safe and timely manner.

But if Walters is right, some real problems are buried deeper than toxic waste in the county's budget--and it's Maricopa County taxpayers who'll cover the cost.

Michael Walters is the kind of guy you'd want working for the government. Hired by Maricopa County in 1992, he is bright, hypereducated and friendly--180 degrees opposite the stereotype of the cranky, slow and overpaid civil-service hack.

For a long time, Walters' bosses appreciated this, or seemed to. In 1995, Bergen, then the county's environmental liability manager, gave Walters an "exceptional performance" rating--the highest possible. In January 1996, Walters was commended for helping the county save $210 million and given a cash award.

Even Deborah Larson, who in 1995 was brought in to clean up the county's fiscal mess, praised Walters in some e-mails. (Last year, Larson resigned after biting comments she made in e-mails about county employees and contractors were made public.)

In a private message to Walters in April 1996, Larson gushed: "Your work has done so much to buy down future liabilities, and this is probably recognized only among the ranks of managers and attorneys . . . so others deserve to know, too." (Ellipses in original.)

But shortly after Larson sent him that message, Walters went from golden boy to marked man. Risk management was moved into the offices of the finance department, and Walters saw, for the first time, the numbers the county was reporting as its environmental liability.

Environmental liabilities include landfills, toxic-waste dumps, underground storage tanks, contaminated groundwater and other varied ecological nightmares that the county is required to clean up. The projected costs of those cleanups are supposed to be reported in the county's annual financial reports.

Walters recognized the numbers the county was using. After all, he'd made them up himself.

Walters never determined the actual costs of the county's environmental hazards himself; he was never supposed to. The county needed to hire an outside expert to do that. Instead, Walters' job was simply to design a spreadsheet of the county's known environmental risks--a document that would then be used as the basis for a formal study of the trouble spots and the cost of fixing them.

"These numbers were created entirely to be illustrative. . . . [They were] totally imaginary because I'm not an environmental dude. I'm a program manager," he says. "I've managed environmental programs and I've written on environmental topics, but I couldn't tell you the difference between asbestos and dust. . . . So when I was coming up with these numbers, they'd say, 'What do you think our asbestos problem is?' And I'd say, 'Somewhere between a million and a billion.'"

For example, on his spreadsheet, Walters put in a hypothetical range of "up to $3.35 million" for asbestos cleanup for the entire county.

But in an estimate prepared after consultants had reviewed Maricopa Medical Center, Walters' boss, Roland Bergen, projected a cost of $3.1 million for asbestos cleanup at the hospital alone. (That $3.1 million estimate also was never reported in the county's annual reports or bond documents.)

The study that was supposed to determine real estimates for Maricopa County's hazards was canceled abruptly. County officials won't say why, and Walters doesn't know.

Walters says John Paulsen, a deputy county attorney who works with risk management, and Victoria Taylor, a finance division staffer, reported his made-up estimates in the county's annual financial report, in a memo to the auditor general and in county bond documents.

"This is fraud on the consumers and the taxpayers," Walters says.
Taylor says she never saw the numbers until they were in the county's financial report. Paulsen refused to discuss the matter with New Times.

When Walters brought this up with his supervisors, no one was too eager to correct the problem, he contends. Maricopa County's officials didn't want to know how much environmental problems would cost, Walters alleges, because it would've been too expensive to pay for them.

"They certainly didn't want people to get wind of the fact that Maricopa County had maybe as much as a billion dollars in environmental liabilities that they hadn't set up any reserves to pay," he says.

After he started raising questions, Walters started getting pressure to join the team, or at least shut up, he says.

"They didn't take this well at all," Walters says. "They'd put together this rather sophisticated fraud, and here one of their own staff members had discovered it and was bitching about it. And all of a sudden, I went from being an exceptional performer in Maricopa County to being everybody's least favorite character."

Unknown to Walters at the time, he also became a target in Deborah Larson's infamous e-mails.

On September 19, Larson e-mailed Bergen (subject: The Shadow Knows . . . ), worried that Walters might be collecting information from the office.

"Forgot to mention--Loretta [Barkell] said Michael came in last Friday evening around 7:00 after he had called in sick that day," Larson wrote. "He seemed surprised to see her there. He said he had to pick up some paperwork or reading material or something for the weekend. I think we may have a real culprit on our hands. Lock everything up, and be sure the key is only in Loretta's hands."

Walters' October 25 performance review begins with praise. But couched in the evaluation's polite management-speak is what Walters took as a threat:

"Michael needs to utilize his considerable talents constructively: positively assisting his coworkers, developing his professional skills and actively supporting the goals of the department and administration. . . . Michael can either be a tremendous asset . . . or he can be self-destructive," Bergen wrote. "The choice is ultimately his to make."

"It was like [they were saying], 'Get with the program,'" Walters says. "I 'needed to share organizational goals and objectives.' Well, their organizational goals and objectives were illegal, and I wasn't going to share them."

For Walters, who got into government work because he thought it would be less cutthroat than the business world, it was a rude awakening.

"I tucked my tail between my legs . . . went back to my desk, and tried to behave in a manner that was responsible as a county employee," he says. "But once the cat was out of the bag, it was too late."

Now Walters believes that nothing he could have done would have prevented his firing.

"I had discovered the fraud, and certainly I wasn't going to help them perpetrate it against the community," he says. "They certainly had some problems with me staying there."

As evidence, Walters points to an October 3 e-mail he obtained. The message, from Deborah Larson, is marked "Confidential."

"Had a confrontation with Michael today about funding for the environmental audit," Larson wrote. "We must find a way to quietly eliminate him. His knowledge of the [self-insured trust] and our environmental liability could be devastating if revealed to his friends at ADEQ or the SEC. If the rating agencies get wind of these shenanigans all our work could be undone. Check his phone and computer records. We must find a good reason to dismiss him or David [Smith, county administrator] will never allow it. Roland will resist his termination, but, I will work with him. Keep this strictly confidential, I do not want his elected friends to get wind of this until we are ready to act."

Even Walters is surprised by the tone and bluntness of this smoking gun.
"I'm glad they were just talking about firing me and not . . . well, I hope they were just talking about firing me," he says.

The county was unable to find this e-mail when New Times asked for it, under the state public records law. Loretta Barkell, a finance division employee who was one recipient of the message, acknowledged receiving the e-mail but said she couldn't remember the specific contents. Jane Huff, head of the county's computer services division, was also listed as a recipient. Huff denies deleting or destroying the message.

But Walters thinks it fits the bizarre, cloak-and-dagger turn his entire experience with Maricopa County has taken.

"I've met people under cover of darkness, in parking garages, so they could hand me documents because they're afraid of associating with me," Walters says.

Another county employee, who spoke to New Times on condition of anonymity for fear of being fired, supports Walters' version of events. The employee claims to have attended a meeting where Walters' termination was discussed, around September of last year.

"It was decided they would--the term they used was 'sweep'-- Michael's computer," the employee recalls. "They were looking for anything they could use to relocate him, or Deborah [Larson] could use to fire him."

The reason they wanted to look into Walters' computer, this employee says, was because Bergen thought Walters might be using it for non-county business, and in case Walters had saved e-mails from Bergen and Larson.

The employee says Huff "confidentially swept his computer that day or the day after that meeting. . . . From that, I watched the demise of Michael. It took some time, but I watched it happen." (Huff denies this; she says she was never asked to sweep Walters' computer.)

Deborah Larson resigned from county government at the beginning of this year, shortly after being suspended for the comments she made in her e-mails. Roland Bergen resigned later to take a job at Intel. Neither returned phone calls from New Times.

Walters recently filed a $4.7 million claim against Maricopa County for wrongful termination under a statute which prohibits firing an employee for refusing to take part in an illegal act. He is quick to point out, however, that he doesn't think of himself as a whistle-blower, or a disgruntled employee.

"A whistle-blower is somebody who complains about something that's occurring where they work. This happened to me, and after it happened to me, I told people what had happened," he explains. "It's not in my nature to be a whistle-blower. . . . I thought they had not followed the rules, and I tried to point it out to them, and boy, were they mad."

If Walters is right, the county has failed to disclose significant information on its financial statements--again.

Last year, Maricopa County was charged with fraud by the SEC for failing to report an operating deficit of nearly $100 million on financial statements and in county-issued bond documents. The county signed a cease-and-desist order as part of a settlement with the SEC, in which it agreed it violated antifraud regulations and promised not to do so again. The county's former advisers, the firm of Peacock, Hislop, Staley and Given, as well as Larry Given, who was in charge of the account, were fined a total of $75,000.

The county's real punishment came when Moody's Investors Service and Standard and Poor's, two financial agencies, dropped Maricopa County's bond rating from AA to A. Dropping the rating made the bonds the county issued worth less to investors, because the bonds paid back at a lower rate of interest.

That was when Deborah Larson was brought in as a financial whiz kid to help the county clean up the mess. She was successful in getting Maricopa County off its spending binge and back in the black, as well as back in the good graces of the bond-rating agencies.

But any new accounting sleight of hand could put the county back on the financial community's bad-check list.

Failing to disclose environmental liabilities is a violation of SEC guidelines and accepted accounting practices, according to Karen Smith, assistant professor of accounting at Arizona State University.

"If it's probable, it definitely has to be included as a liability. Definitely," Smith says. Failure to include a reliable estimate of that amount can lead to action by the SEC and lawsuits from bond purchasers, she says.

The county also might have violated SEC guidelines by not reporting its probable environmental costs as a separate item under liabilities on its 1996 annual report. Instead, county officials chose to lump the amount into the long-term debt account, where no one could see it, according to e-mail from finance division staff.

Because of its previous problems with the SEC, the county did take steps when issuing new bonds to reassure investors. For example, Maricopa County hired Squire, Sanders and Dempsey to make certain it was complying with disclosure requirements on one of the bonds--a bond Walters says uses the flawed numbers.

Squire, Sanders and Dempsey did not return calls from New Times, but William DeHaan, who acted as bond counsel to the county on that sale, says he doesn't think investors have anything to worry about.

DeHaan says that since one of the 1995 bond issues was insured, investors will get paid the rate they were promised, no matter what.

"In those other deals, people got mad, not because they questioned whether they were going to get paid, but because their bonds were rated less than they expected," he explains. "In this context, the bonds will always be rated triple-A because of the rating of the bond insurer."

DeHaan says that even if the environmental numbers are wrong, it still might not affect the county because the amount of cleanup costs might not be relevant. The county only has to report what's "material" to the county's financial health or to the particular bond, he says.

However, if the county's bond rating is lowered again, DeHaan concedes that it could affect other county bond issues, which are not insured.

The bond agencies don't yet know if a lack of disclosure of environmental hazards could affect the bond rating.

Eric Goldstein, who works with Maricopa County for Moody's Investors Service, is inclined to think not.

Since litigation--especially environmental litigation--is highly speculative anyway, Goldstein says, the amounts don't mean much. "So I think we felt, in and of itself, it was not a rating factor," he says.

David Hitchcock, a director in the public finance division of Standard and Poor's, isn't so sure no harm has been done. His company has downgraded counties' bond ratings for environmental costs before.

"I can't say, without knowing more about the issues, whether there's any sort of misleading element or not. We have followed up with the county, and they seem to have some good explanations at this point," he says.

Still, Hitchcock says his firm wants more information from Maricopa County.
Standard and Poor's will be asking Maricopa County exactly how it estimated environmental liabilities at the next meeting with county officials, Hitchcock says. Right now, though, the county isn't exactly forthcoming about how it did its math.

Maricopa County's elected officials and staff won't say much about Michael Walters' claim or about environmental liability.

County staffers initially agreed to interviews, then canceled. Then they agreed to answer questions only in writing. Then, citing potential litigation with Walters, the Arizona attorney general and the SEC, Maricopa County's Board of Supervisors and county officials refused to comment beyond a two-page written statement.

"Maricopa County categorically denies that false information was reported in its financial statements and/or any other financial reports including those submitted to rating agencies or potential bond buyers," county administrator David Smith said in a letter to New Times. "The estimates provided by the County Attorney's Office to the State Auditor General and reported by the Department of Finance were based on the best information available at the time. The County's financial statements clearly state that the reported amounts are estimates."

Smith refuses to answer questions about why Walters was fired, even though Walters signed a release allowing the county to discuss his personnel matters with New Times.

Beyond defending the reliability of the estimates, Maricopa County officials won't say how they came up with the numbers.

Andrew Kuhn, who works in the division of finance, was the one who actually put the estimate of liability in the county's most recent financial statements. He told New Times he got the amounts from an August 29, 1996, memo written by John Paulsen, the deputy county attorney assigned to risk management.

The memo, which was written to the auditor general in response to a request for an evaluation of environmental claims, is the same one Walters says contains the dummied-up numbers. Tom Manos, the county's chief financial officer, gave a copy of the memo to New Times upon request.

Paulsen, however, can't or won't say what the memo's estimates were based on. Instead, he threatened to have New Times charged with a crime for having the memo.

"Well, that's a confidential document, and if you have a copy of that, I have to know where you got that," Paulsen says. "Did Mr. Walters give that to you? Well, if you have a copy of a confidential document, I think you should talk to our charging agency before I answer any of your questions."

Paulsen refused to make any further comment even though other county staffers say that he is the source of the estimates. The county's bond counsel, the bond-rating agencies and a bond underwriter also say the information was supplied by the county attorney.

Without an explanation from the county, it's hard to tell exactly where Maricopa County officials pulled the numbers from.

In the official 1995-96 financial report, Maricopa County lists a probable environmental liability of $38 million, and a possible environmental liability of $314.6 million.

But when Bergen prepared the numbers for that annual report, he estimated a probable liability of $45 million in an e-mail. In an August 1996 memo to the auditor general, Paulsen reported probable liability as $33.3 million to $48.6 million. Possible liability is listed at "up to $349 million."

In another e-mail in September, Bergen conceded no one knows the extent of the county's environmental liabilities--an admission that supports Walters' contention.

"Because we do not know the extent of the County's enviro exposures," Bergen wrote, "we do not want to foreclose any future financial recovery options at this point."

County administrator David Smith won't offer details, but he says it's hard to chart liability in the murky waters of environmental litigation.

"The very nature of environmental liabilities makes it difficult to estimate their ultimate financial impact," Smith said in the official response. "However, Maricopa County has historically been conservative in its estimates. Actual costs, when determined, have usually been less than what had been estimated."

Smith adds that the state auditor general reviewed the county's estimates and concluded that the financial statements fairly represent the financial position of Maricopa County.

Still, ASU's Karen Smith says, the county can argue for its estimates, but there isn't a "close but no cigar" defense in financial reporting.

"A bad estimate is worthless, really; it's just as bad as no estimate," the professor explains. "Any users of those statements could certainly call the county on it, like an investor does a corporation."

Since the countywide audit Michael Walters was designing was never done, there is no overall, reliable assessment of the county's environmental risks.

Maricopa County is developing a database to "continue to refine its estimates of environmental liabilities," David Smith said in his letter. Still, the hazards the county is aware of, according to county documents, could cost large chunks of change--especially if county officials didn't follow the rules about reporting and fixing those problems.

According to what Bergen wrote in various e-mails, the county has already violated multiple laws.

"On another matter . . . near and dear to the heart of the county . . . is the fact that apparently there has not been an asbestos related environmental regulatory compliance law, mandate or regulation that MMC staff DID NOT VIOLATE within the past five years. Consequently, we may have self-reporting obligations to ADEQ, EPA, OSHA, our employees, third party contractors, landfills, the public, etc.," Bergen wrote last June. "This is technically what we refer to in the environmental liability arena as 'some serious shit!'"

Violating these laws can be expensive, if the county gets caught. In another e-mail concerning the proposed remodeling of county court buildings, which have similar asbestos problems, Bergen noted that fines can mount rapidly.

"Regulatory fines can be as much as $25,000 per day if OSHA, EPA or ADEQ should find us in violation (which presently we may or may not be) of asbestos regulations," Bergen wrote on October 30.

In a June 20, 1996, e-mail to Larson (subject: Looney Tunes Updates), Bergen detailed serious asbestos problems.

"In every area we survey at MMC, we find asbestos--EVEN the areas that were supposedly 'abated' during the remodeling activities of the last five years. We are abating all friable ACM as we find it in the course of conducting the survey," Bergen reported.

For example, Bergen said there was asbestos in every fire door in the hospital. "It is a dangerous condition because every time a bed, cart or gurney is rammed into a door (which only happens approximately 1000 times a day in the normal course of hospital operations), there is a fiber release, which creates the potential for human health hazard exposure, which triggers a . . . violation and increases the potential for toxic tort liability," he wrote.

According to records of Maricopa County's environmental services department, the asbestos-containing fire doors have since been removed. The county was fined $550. But asbestos still exists in the hospital, and at least one exposure was apparently never reported to county environmental services.

Maricopa County's problems were not limited to the hospital. In June 1996, county employees described the potential for infection and explosions at the Maricopa County medical examiner's office.

"There has been a lot of equipment installed without regard to the internal air quality of the building and the safety of all the employees," facilities manager Hal Hoover wrote in an e-mail to Larson. "We will ask for [the medical examiner's] cooperation in getting this resolved ASAP. Right now if there was a 'hot' infectious disease in the building, everyone would be exposed. Scary thought and a great liability. We are on top of the remediation."

Hoover's note prompted this response from Roland Bergen, describing earlier problems at the medical examiner's office:

"As an aside, Environmental Policy assessed the office in 1992. At that time it was best characterized as an 'environmental catastrophe waiting to happen.' . . . in one closet they had 12 one-gallon cans of Toluene (a highly flammable, highly explosive chemical) sitting on the shelf next to an 'ancient' bottle of Picric acid that had obviously crystallized. (This means that in this aged state it had the explosive volatility of Nitro Glycerine.) If the Picric acid had been . . . 'rattled,' . . . it would have exploded. The highly flammable Toluene would have then turned the entire building into a 'fire bomb' like something out of 'Apocalypse Now.' I literally had to call in the Phx. Police Department's bomb squad to dispose of the Picric acid."

In the e-mail, Bergen said he was instructed to back off the medical examiner's office. "I then brought the matter to the attention of my boss. He told me: 'Roland, just #%@*!! leave this #@!&*$#@!!! thing ALONE!!!"

Though Hoover and Bergen both note in later e-mails that the county is fixing the problems, it's not clear if these problems are resolved or if they were ever reported to employees or regulatory agencies.

The e-mails show that breakdowns in safety and the possible spread of diseases at the medical examiner's office were known to county officials--yet when an employee complained of those same problems to the state Division of Occupational Safety and Health in 1995, the county kept quiet. ADOSH didn't find the violations, and the county escaped any fines. However, a just-released internal report says the problems still existed in the office as recently as February.

The county won't talk about whether it has dealt with the numerous problems listed in the e-mails, or if it's properly reported hazards to employees or regulatory agencies. Smith's letter to New Times says only that "Maricopa County is currently prioritizing the remediation of known asbestos problems while continuing to identify potential new problems."

Maricopa County is largely self-regulating on these issues. There are requirements to inform employees of remodeling which might release asbestos, and other hazards, but it's up to the county's environmental services staff to enforce those regulations. There is no requirement for Maricopa County to inform ADEQ, OSHA or the EPA of air quality or asbestos problems at all.

If employees or citizens--county court personnel, people called to jury duty, patients in the hospital--have been exposed to asbestos or other hazards without proper notification, the county could have more environmental liabilities to report in its next annual statement. And in an age where scalding coffee costs millions in court, Maricopa County's numbers could get even bigger.

How the county plans to pay for cleaning up its messes has also been a subject of debate. For the past four years, the county has tried to fund its environmental liabilities through its Self-Insurance Trust Fund. But it's allowed the amount of money in the trust to drop--from about $50 million four years ago to $20 million at the end of this fiscal year.

That means money is already tight to pay for other claims against the county, let alone its toxic problems. Which is why the fund's trustees have decided to split off environmental claims from the self-insured trust.

This year, the county plans to pay for environmental costs through the general fund--which means environmental cleanups are now a part of the regular budget. The county has budgeted only $1.5 million for these costs. (This amount is not listed anywhere on the county's tentative budget; county spokesman Scott Celley says it's lumped in under the general government fund.)

The county won't say if $1.5 million is enough to pay for all the landfills, toxic-waste sites and hazardous materials on its property.

That's only half what the county spent on environmental problems from June 1995 to September 1996, according to county records.

As those figures demonstrate, environmental problems can get expensive quickly. Still, county administrator David Smith, in his letter to New Times, says that the county is "thoroughly committed to addressing its environmental responsibilities in order to protect public health, safety and welfare, while at the same time acting as a prudent steward of public monies."

Michael Walters, obviously, disagrees. Having spent several years dealing with the county's risks, he sees big problems ahead--which will only get worse if the county doesn't address them.

But worrying about environmental risks isn't his job anymore. After years of helping the county clean up after itself, he's now protecting his own interests. And he says he's prepared for the fight.

"I always assume, of course because I'm an optimist, that the truth will set me free," Walters says. "Someday, four years from now, a jury will find that Maricopa County, pardon my French, fucked me, and I'll be restored to my previous level of credibility and all those good things. But the ensuing four years does not look pretty.

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