Finding - BALD'S methods for setting and reducing guarantee amounts were inadequate, procedures to control the guarantee process were lacking, and responsibility for guarantee administration was fragmented.
Finding - The lack of an aggressive, timely guarantee forfeiture and release program led to a backlog of over 2000 guarantees worth more than $52 million which should have been released or placed in forfeiture.
Finding - King County code language and guarantee forms provided inadequate, inconsistent, and piecemeal authority and direction for the financial guarantee process.

Financial guarantees, commonly referred to as "bonds," are intended to ensure satisfactory and timely completion and/ or operation of capital improvements. Some guarantees are required by State statute and various sections of the King County Code. Other guarantees are posted at the option of the applicant to obtain approvals in advance of completing improvements or permit reviews, e.g., subdivision performance and Section 308 guarantees.

Financial guarantees can be classified as performance or maintenance guarantees. Performance guarantees are intended to insure that an applicant will satisfactorily complete specified work within an established time frame, typically one year. Maintenance guarantees are intended to warranty the workmanship and materials used in constructing roads and drainage facilities, or installing landscaping, for a specific period of time, typically one or two years.

Overall, the financial guarantee process was hampered by the absence of or inadequate procedures to control the intake, administration, and release of performance and maintenance guarantees; and responsibility for the guarantees was fragmented among various sections in BALD.

As a result:

• guarantee amounts were not likely to capture the full costs of project construction, e.g., a sample recalculation using R.S. Means data indicated an average guarantee shortfall of 47%;
• different forms of financial securities were accepted by various sections; and
• a sample of guarantees found that 11% were missing required signatures.

Additionally, the lack of a timely and effective final inspection process resulted in guarantees being held indefinitely by BALD. Fifty percent (50%) of the overdue guarantees had been posted prior to 1986.

Although BALD was tracking the guarantees held, two incompatible tracking systems were used; the data tracked contained errors, inconsistencies, and omissions; and reporting was minimal.

• Financial institutions' records differed from BALD records in 69% of 418 guarantees sampled.

As a result, the status of guarantees could not be readily determined by BALD staff.

The audit recommended that BALD adopt an objective cost model for determining financial guarantee amounts; develop written procedures to control the guarantee intake, administration, and release processes; centralize responsibility for guarantee administration; establish a comprehensive tracking and reporting system using the Sierra PERMITS system; assume responsibility for initiating final project and permit inspections; and consolidate final inspection responsibility for both maintenance and defect guarantees within a single County agency.

Finding 2. The lack of an aggressive, timely guarantee forfeiture and release program led to a backlog of over 2000 guarantees worth more than $52 million which should have been released or placed in forfeiture.

Audit staff reviewed information on 5,367 guarantees contained in two databases maintained by BALD. As of September 1991, 2,070 guarantees worth over $52.8 million were past their performance or maintenance dates. Three types of overdue guarantees predominated:

• 893 commercial landscape performance and maintenance guarantees, valued at $16 million;
• 245 commercial site development guarantees, valued $14.6 million; and
• 296 subdivision (plat, short plat or PUD) performance guarantees, valued at $14.4 million.

Fifty percent (50%) of the guarantees were worth less than $5,000 each, accounting for 4% of the total value unreleased guarantees. In contrast, 12% of the guarantees were worth more than $50,000 each and accounted for 69% of the total dollar value.

These cases should have either been released or enforced and referred to the Prosecuting Attorney's Office (PAO) for forfeiture action. However, few cases (5%) had actually been referred to the PAO. The rest remained in limbo in BALD files.

One of the factors leading to this backlog was BALD's failure to identify overdue guarantees. BALD depended on the applicant to notify them if a guarantee needed to be released. Because BALD did not have adequate tracking and reporting procedures, the guarantee was likely to be held by BALD indefinitely if the applicant did not call for its release. In addition, the lack of staff dedicated to forfeiture administration and poor communication between BALD and the PAO meant that few guarantees referred for forfeiture action were resolved in an effective manner.

The initial impacts stemming from the failure to identify guarantees for enforcement and forfeiture are that it becomes more difficult to collect on the guarantee, and the value of the guarantee erodes with inflation.

In addition, if the guarantees are not released, public roads and drainage facilities tied to the guarantees are not formally accepted by the County. There are two consequences: first, the roads and facilities may not be maintained, and second, the County loses State gas tax revenue which is based on the number of miles entered in County road logs.

• A sample of overdue performance guarantees with public infrastructure indicated 50% had not been accepted for maintenance or maintained, although the lots had been sold and developed.

Finally, these unreleased guarantees may represent unfinished or poorly constructed work which could have possible public health and safety implications.

The audit recommended that BALD develop an aggressive forfeiture program and reduce the backlog of guarantees by developing procedures and criteria for reviewing and prioritizing "old" guarantees; developing reports to track and identify guarantees past their performance and maintenance dates; with the PAO, establish forfeiture case management guidelines; and with the Department of Public Works, establish protocols to handle cases for which the guarantee cannot be collected to ensure that projects are maintained, and to accurately account for forfeiture funds collected and corrective work performed.

Finding 3. King County code language and guarantee forms provided inadequate, inconsistent, and piecemeal authority and direction for the financial guarantee process.

King County code authority for requiring and administering financial guarantees was scattered throughout the Code as a series of requirements attached to specific permit sections. The authorizing language was, however, often inconsistent and unclear, and failed to spell out the rights and obligations of both the applicant and County, particularly in the event of a default. Guarantee documents contained minimal or ambiguous information and were inconsistent with the code. No written instructions or Development Assistance Bulletins were available on when, why, and how guarantees are to be posted. As a result, a lack of clear direction and communication between applicants and County may have compounded delays in processing and enforcing guarantees.

Although performance guarantees were frequently posted at the applicant's request to secure final plat approval prior to constructing plat improvements, the County did not specify minimum levels of construction beyond an "adequate drainage system." Moreover, this single requirement was not defined through operating procedures or forms. If King County were to employ Snohomish County's approach, and define a series of required minimum improvements, it would improve the likelihood that remaining work could be completed without negative environmental impacts and within the mandated timeframes.

The audit recommended that reviewing the statutory requirements contained in the King County Code to strengthen, consolidate and clarify statutory authority within a single code chapter. The code revisions should also define "default," the resulting consequences to the applicant, and the County's rights in the event of default. County policy should determine (and administrative procedures reflect) minimum levels of work to be completed prior to accepting performance guarantees, in lieu of capital improvements, for final plat recording.

The audit also recommend that all guarantee documents and agreement forms be reviewed and revised for consistency with code requirements, and that public information materials on the posting and enforcement of guarantees be developed and distributed.

Updated: 04/30/08