KentuckyWired audit reveals secret 2015 agreement to divert state revenue to nonprofit tied to Congressman Rogers

A recent audit of the KentuckyWired project has revealed a previously undisclosed 2015 revenue-sharing agreement between the state and a nonprofit tied to Congressman Hal Rogers, which could divert a significant portion of future state revenue from the project.

The Kentucky chapter of the conservative political advocacy group Americans for Prosperity has called for Gov. Matt Bevin to cancel this arrangement with the nonprofit — pushed through by the administration of former Gov. Steve Beshear at the end of his term without any legislative oversight, according to the audit — saying it “stinks of cronyism and politically connected deal-making.”

KentuckyWired was first hatched in 2014 as the brainchild of Rogers and Beshear to help eastern Kentucky’s struggling economy by building a statewide broadband network. The public-private partnership (P3), which is already past the original scheduled date for its completion, has been plagued with delays, cost overruns and skepticism about its viability.

State Auditor Mike Harmon released the findings last week of his office’s special examination into KentuckyWired, revealing that despite initially being sold by Beshear as a project that would cost taxpayers $30 million and have most of its funding come from private investment, the state’s actual financial obligations will total almost $1.5 billion over the next 30 years.

Harmon’s office found a number of significant changes to the project were made late in Beshear’s second term in 2015 that shifted risks and obligations to taxpayers without proper government oversight and transparency, with its funding model reliant on speculative wholesale revenue that had not received an independent analysis.

One notable example from Harmon’s report involved a memorandum of agreement on June 25, 2015, between the state and the Center for Rural Development (CRD) — a nonprofit created in 1996 and largely controlled since then by Rogers, who has served 19 terms in the 5th District — to partner on the project.

Under the terms of the agreement, CRD would secure $23.5 million in federal funding to go toward the construction of the network infrastructure in eastern Kentucky, with CRD owning this segment of the broadband network for 30 years and granting the state full access and use of it during that time.

However, not only did Deputy Secretary Steve Rucker of the Finance and Administration Cabinet sign this MOA without it being reviewed by the legislative Government Contract Review Committee, but Harmon’s examination also discovered a previously unknown addendum to the agreement that set up a revenue-sharing plan to transfer a large portion of net revenue from the KentuckyWired project toward CRD.

Under the three-page addendum, CRD would not just receive 100 percent of the net revenue for network segments within KentuckyWired’s three “rings” located in eastern Kentucky, but 50 percent of such revenue along the “I-75 spine” of the network that runs from Cincinnati through Georgetown, Lexington and Richmond down to Somerset. All of the revenue within the three other rings of the network would go to the state.

The examination found that this addendum had the same printed date as the MOA, but did not have any signatures. The document was supplied to the auditors by CRD.

Harmon’s examination states that neither the MOA nor its addendum were reviewed by the Government Contract Review Committee made up of state legislators, adding that “it is not clear what authority a deputy finance secretary had to make such a significant outlay of Commonwealth funds without legislative approval.”

Auditors also found that as of late August of this year, Macquarie — the main private sector partner of the project whose revenue estimates the state relied on — was still unaware of the specific terms of this revenue-sharing agreement between the state and CRD.

In the fall of 2015, Rucker went on to become the executive director of the Kentucky Communication Network Authority (KCNA) — the agency tasked with overseeing the KentuckyWired project — but resigned a year later after heavy criticism over revenue shortfalls and mismanagement.

The June 25 revenue-sharing agreement was also signed by Lonnie Lawson, the president and CEO of CRD. Lawson and CRD’s manager of broadband implementation, Larry Combs, did not reply to a request from Insider Louisville to speak about Harmon’s audit and their MOA with the state.

State Auditor Mike Harmon

Harmon also took KCNA to task over faulty revenue estimates for the project that lacked specifics and were totally reliant on private partner companies with their financial interests and motives.

While Macquarie estimated that KentuckyWired would generate $1.3 billion in revenue for the state, this model has not been updated for 18 months and was — according to Harmon’s report — deficient at the outset as it included $539 million in federal education grants that appear unlikely to come to fruition, calls for the price of “middle mile” fiber access to increase each year despite increased private sector advances in broadband infrastructure, and does not take into account the revenue-sharing agreement with CRD that would siphon away a large amount of the state’s total revenue.

Among the numerous other instances of failed government oversight of the project highlighted in the auditors’ examination was the administration’s final sale and issuance of the KentuckyWired bonds in the summer of 2015.

After being approved by the Kentucky Economic Development Finance Authority on June 25, the revenue bonds were set to be reviewed a month later by the state legislature’s Capital Projects and Bond Oversight Committee. However, on July 9, the co-chairs of that committee — Sen. Chris Girdler, R-Somerset, and Rep. Kevin Sinnette, D-Ashland — sent a letter to Finance Cabinet Secretary Lori Flanery informing her that this meeting was canceled and due to the time-sensitive nature of the sale of the project’s bonds, “the Cabinet should proceed with those sales.” Eleven days later, Flanery wrote the co-chairs to let them know that she was proceeding with the bond sales.

While stating that no General Assembly action was required to issue the bonds at the time and that actions of the CPBO committee are nonbinding, Harmon’s examination said it was “notable” that “hundreds of millions of dollars in obligations can be incurred without legislative approval.” It also stated that beginning in July 2020, a new law will require the legislature to approve P3 capital project contracts that are more than $25 million.

Girdler did not run for re-election to the state Senate in 2016. He was an aide for Congressman Rogers for over six years until taking office in 2013, and numerous articles and news releases from that time show that he was also a board member for the Center for Rural Development. It is unclear if Girdler was still a board member of CRD in the summer of 2015, as he did not respond to a Facebook message from Insider and CRD did not reply to inquiries for this story.

Further review of the CRD revenue-sharing agreement

On Tuesday, Americans for Prosperity-Kentucky issued a news release calling for Gov. Matt Bevin to cancel the newly disclosed revenue-sharing agreement between the state and CRD, saying it “would potentially divert tens of millions of taxpayer dollars” to the nonprofit, despite CRD having “invested none of its own funds in the project.”

“This arrangement stinks of cronyism and politically connected insider deal-making,” stated AFP-KY’s state director Andrew McNeil. “It’s unclear why this giveaway was negotiated by the Beshear administration. It’s crystal clear that taxpayers are getting the bad end of this horrible deal. Gov. Bevin’s administration can right this wrong by canceling the agreement with the Center for Rural Development.”

In an interview with Insider, Harmon said that he would not “get into the weeds” with the question of whether this agreement with CRD should be canceled by the state, as “our job in the auditor’s office is to basically find the data, confirm the data and report the data. Obviously, that’s more of a management decision — management being the governor, General Assembly, KCNA — for them to look at that particular aspect of it.”

Asked if the lack of a signature on the MOA addendum acquired by the auditor’s office calls into question whether that revenue-sharing agreement with CRD is legally binding, Chris Hunt — the auditor who oversaw the examination of KentuckyWired — said that wouldn’t be for their office to determine, rather “KCNA, the agency over this project, or the Center for Rural Development. Those are the parties to the agreement.”

Hunt also reiterated that no one provided auditors with any analysis or estimate of just how much net revenue from the KentuckyWired project would go toward CRD, noting “that’s one of our recommendations to KCNA, that someone needs to conduct that analysis to determine what that portion is.”

A statement released by KCNA after the release of Harmon’s examination said the agency would thoroughly review the findings and “continue our efforts to correct the problems and delays that were present from the KentuckyWired project’s inception in 2015.”

Randy Lutke, the spokesman for KCNA, would not address the state’s revenue-sharing agreement with CRD, but told Insider that the agency still expects the construction of the entire network of fiber to be complete by 2020 and that “if the current plan continues, KentuckyWired will pay for itself” through the revenue it generates.

Spokespersons for Bevin did not reply to an email from Insider asking about the potential of cancellation of the CRD agreement, but the governor has repeatedly blasted Beshear’s handling of the KentuckyWired project as corrupt and incompetent.

Asked about Harmon’s findings, Congressman Rogers sent a statement applauding the auditor “for doing his job to ensure taxpayer money is not wasted or abused — it simply cannot be tolerated at any level,” and also expressing “confidence that Governor Bevin’s office is righting the ship for the sake of the next generation.”

U.S. Rep. Hal Rogers

However, Rogers also reiterated his familiar call for the necessity of “high-capacity broadband access in every county,” and that “despite the immense challenges of this historic project, it is imperative that it move forward.”

Asked specifically about the revenue-sharing agreement with CRD and calls for this MOA to be voided, Rogers’ spokeswoman, Danielle Smoot, emailed a statement praising CRD’s to help initiate the original idea for the broadband project and reiterating the congressman’s support of the nonprofit leading and managing its continued implementation in eastern Kentucky.

“As a Member of Congress, Mr. Rogers does not negotiate state contracts or agreements associated with any projects,” wrote Smoot. “However, he is supportive of the Center’s diligent efforts to lead and manage this complex project across one-third of our state and any compensation deemed necessary by the Commonwealth.”

Former Gov. Steve Beshear, whose administration was raked over the coals in Harmon’s 125-page examination for its botched and questionable finalization of KentuckyWired in 2015, issued a statement reiterating that “the project is and was bipartisan, supported by myself and Congressman Hal Rogers as well as both Republican and Democratic legislative leadership.” Beshear also attempted to cast blame at Bevin, stating that “if managed appropriately with real leadership, the project would be up and running already.”

Harmon has referred his report to the executive branch Ethics Commission for further review and possible action by that agency due to potential violations detailed in the report, and his office is continuing to exam the time frame between when the original RFP issued for the project in 2014 and the agreements altering the project were signed and finalized in September 2015.