“Misled does really not do justice for this bait-and-switch on the taxpayers,” State Auditor Mike Harmon said after the 124-page report was released.

Changes in the plans for Kentucky Wired shifted the burden of costs from private partners to taxpayers. Australian-based Macquarie Infrastructure Developments LLC and a consortium of contractors were originally supposed to bear the brunt of the debt burden, but state officials decided to take advantage of tax-exempt bonds by creating Kentucky Wired Infrastructure Company, a nonprofit corporation.

But that effort to reduce costs to Kentucky taxpayers will likely only make them cough up more. That was just one in a series of follies uncovered by Harmon’s office, including officials ignoring warnings related to pole attachments issues and projected revenues and depending too heavily on the word of their private partners.

“Were the problems with Kentucky Wired foreseeable?” the report asks.

“Many of the problems identified in this report were not only foreseeable, they were actually foreseen,” the report answers.

Auditors uncovered at least three written warnings given to Kentucky officials before the project agreements were signed:

• The state’s Department of Education said the bidding to provide services to K-12 schools would not be eligible for E-rate funds. This was a significant portion of the revenue needed to fund the project.
• A private contractor warned there would be problems obtaining rights to the pole attachments needed to build the backbone of the project across the state. The report notes this issue has caused massive delays and resulted in millions of compensation payments to contractors. Original estimates in the project agreement underestimated the number of poles owned by AT&T and Windstream – in fact the Windstream estimate was off by more than 90 percent.
• Auditors also report that Kentucky officials received written advice by outside counsel, but the full extent of this is still unknown due to a claim of attorney-client privilege.

The executive order that on Aug. 17, 2015, created the Kentucky Communications Network Authority to manage Kentucky Wired is also misleading, according to the audit. The order claimed the public-private partnership formed to build the broadband network “leverages private sector funding for most of the construction cost of the project” and that private-sector partners “bear the construction and operational performance risk of the project” while the state would maintain ownership of the network.

Auditors said those claims were “doubtful” and “inaccurate.”

“The indication that private sector funding would be leveraged for most of the construction costs and that the private sector partners bear the construction risk are not accurate based on the agreements signed prior to this date,” the report says. “Furthermore, the statement that the Commonwealth retains ownership of the network does not acknowledge the significant portions of the network owned by the Center for Rural Development pursuant to a [memorandum of agreement] signed prior to this date.”

Some $270 million in bonds were sold with the understanding that $11 million in federal E-rate dollars would flow into the coffers after Kentucky Wired connected schools with broadband. But after former finance cabinet deputy secretary Steve Rucker became head of the KCNA, private providers called foul and the state abandoned the bid process for the money after the conflict-of-interest issue arose. Rucker resigned his post, but the damage was already done.

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