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BVU error flagged by auditor in 2016 letter

BVU error flagged by auditor in 2016 letter

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BRISTOL, Va. — The Virginia Auditor of Public Accounts first flagged BVU’s erroneous handling of an internal loan in a June 2016 letter that anticipated it would be repaid with OptiNet sale proceeds.

The authority’s subsequent use of $13.74 million to resolve that loan last year is at the center of a new lawsuit filed against BVU by the city last Friday in Circuit Court.

BVU received $48 million from the August 2018 sale of its former telecommunications division. The lawsuit, seeking $6.5 million, cites a 2009 agreement that said the city would receive half of sales proceeds remaining after any debt was paid off. 

State Auditor Martha Mavredes advised the “authority should re-establish an interfund receivable/payable, including foregone interest, between the electric division and the OptiNet division in the amount of $13,741,288,” in a June 9, 2016, letter to then-Gov. Terry McAuliffe, state lawmakers and BVU President and CEO Don Bowman.

Reestablishing that debt “could affect” the then potential sale, Mavredes wrote. “Because it will increase the amount of debt that the authority must pay off with proceeds from the sale and will reduce the number of funds available to satisfy grantors with claims on the authority’s assets.”

BVU used the sale proceeds to pay off more than $22 million of OptiNet debt, refunded about $12 million to state and federal granting agencies and used $13.74 million to resolve the restated electric system debt.

The city’s claim is based on a November 2009 transition agreement between the city and its utilities provider prescribing the two evenly divide any funds remaining from a sale after debts were resolved. At that time, BVU was a division of city government but became an independent authority in July 2010. The transition agreement was reapproved in February 2016, after a buyer came forward.

The lawsuit contends the $13.7 million was “extinguished” years before the transition agreement was signed and BVU used the “recommendation to zero out its anticipated liability to the city and keeps 100% of the net proceeds for itself.”

State auditors reviewed BVU operations in 2016 at the behest of the General Assembly, following a comprehensive federal corruption investigation. In October 2016, the state issued a 121-page report that included 56 recommendations to bring BVU into compliance with state and federal laws and best practices. It included the recommendation to reestablish the electric loan on BVU’s books.

In 2007, BVU eliminated an electric system loan totaling $23.3 million, but its methodology “was flawed,” according to state auditors who said it was proper to write off some, but not all, of that debt.

A 2006 change in state law eliminated restrictions on cross-subsidization and allowed BVU to cross-subsidize divisions “related to internet, broadband, information and data transmission services” but not telephone or cable TV, according to the letter.

The authority incorrectly applied a formula in the state law to eliminate the entire $23.3 million, but more than $9.09 million should not have been eliminated, according to the audit. Accrued interest on that amount from 2007 to 2016 amounted to $4.64 million, based on a 4.21% interest rate.

A February 2019 report by BVU’s audit firm Blackburn Childers Steagall noted BVU’s actions to comply with state audit findings, including putting the debt back onto BVU’s books. At the time of that report, that $13.74 million hadn’t yet been paid off.

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The city filed a lawsuit July 31, 2020, seeking funds from BVU.

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