A report released today by City Auditor Mary Hull Caballero's office shows a series of questionable purchases overseen by a manager in the Portland Water Bureau.

In response to a call last year to the auditor's fraud hotline, a member of Hull Caballero's team, Deborah Scroggin, examined a series of purchases of water meter equipment in 2018 and 2019 totaling $182,382.

Scroggin found that the purchases were made without a contract and appeared to be "fragmented" or intentionally broken into increments of less than $10,000 in order to avoid city purchasing rules. There were 16 such transactions between January 2018 and June 2019.

"City and state procurement rules prohibit breaking purchases into smaller amounts to circumvent competitive procedures," says the report released today. "Purchases exceeding $10,000 must be made through a more complex competitive procedure, according to state law and city code."

The investigation further found that Jon Koch, the salesman who sold the materials in question, is married to the Water Bureau's Customer Services Group Director Kathy Koch, who supervises Ron Drath, the Water Bureau employee who made the purchases.

Emails showed that Drath and Jon Koch had known each other for 30 years and that on at least two occasions, they had "shared information related to Water Bureau procurement decisions, which may have given [Jon Koch] unfair access to city purchasing power."

That cozy relationship could constitute a conflict of interest, the investigation found.

"Manager [Kathy Koch] appears to have some (and perhaps a significant) personal and financial interest in manager's spouse's [Jon Koch's] success as a salesperson, manager's spouse's continued employment with vendor, and vendor's success," the investigation found.

In response, the Water Bureau conducted its own investigation. The bureau found that Kathy Koch had disclosed in writing in 2013 that her husband worked for a Water Bureau vendor (although not since) and determined there had been "no ethical or procurement rule violations due to family relationships."

The bureau did restrict Kathy Koch from involvement in any future purchases from the company that employs her husband and required her to make full disclosure of her familial relationship to the vendor.

But Koch's supervisors did not agree that the purchases in question were  structured to skirt procurement rules.

"The Water Bureau did not intentionally fragment purchases in the procurement of water meter boxes," wrote Water Bureau Deputy Director Gabriel Solmer in response to the report. "[But] our investigation concluded that there are significant gaps and absences of procurement information, procedures, and trainings at the Water Bureau and perhaps throughout the city."

Portland Police declined to investigate the matter, so it ends there, although Hull Caballero said she hopes her office's report will send a signal.

"Ethics and procurement rules exist for a reason, and it is unacceptable for seasoned managers responsible for equipment and other purchases to say they are not aware of them," Hull Caballero said in a statement. "I am pleased the Bureau agreed to implement our recommendations."

Water Bureau Director Mike Stuhr issued a statement after the auditor's report was made public.

"We appreciate the critical work that the Auditor's Office does each day to support transparency and accountability," Stuhr said. Our joint investigation with the Bureau of Human Resources did not reach the same conclusions as outlined in the auditor's report. However, we continue to work with the Auditor's Office to identify opportunities for improvement."

The Water Bureau has:

·       Completed a joint investigation with Human Resources, as recommended;

·       Secured a new contract through the City's established competitive procurement process for meter equipment;

·       Formally signed conflict of interest disclosure forms;

·       Restructured work group reporting and purchasing approval to avoid even an appearance of a conflict of interest;

·       Participated in procurement training.