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Report: Water agency misspent $32 million

WASHINGTON — Investigators have confirmed that a federal water agency misspent $32 million in funds meant to protect fish and wildlife in the Klamath Basin, a finding that Obama-era officials attempted to sideline after whistleblowers first alerted them to it.

According to a report from the U.S. Office of Special Counsel, sent to President Donald Trump and obtained this week by McClatchy, the U.S. Bureau of Reclamation for eight years effectively handed the money to a Klamath water project controlled by private irrigators, with few or no controls on how the funds were spent.

The bureau, part of the Interior Department, shut down the water bank in 2016 after two whistleblowers alleged it was transferring money to irrigators that was intended for environmental purposes. But agency leaders have continued to dispute any wrongdoing and have apparently taken no administrative action against those responsible.

"At the Bureau of Reclamation, misappropriating millions of taxpayer dollars is a no-harm-no-foul offense," said Paula Dinerstein, senior counsel for Public Employees for Environmental Responsibility, a D.C.-based group that represented the two federal whistleblowers.

PEER and the two employees, retired fisheries biologist Keith Schultz and natural resource specialist Todd Pederson, said they know of no Bureau of Reclamation official who has been reprimanded by the agency. They are urging that Trump's nominee for Reclamation commissioner, Brenda Burman, revisit the issue once she is confirmed.

Schultz, in a telephone interview from his home outside of Seattle, said he was pleased to see the findings of the Office of Special Counsel, an agency Congress created in 1979 in part to protect federal whistleblowers. But Schultz said he was disappointed that the OSC didn't recommend the Department of Justice launch an investigation into possible criminal wrongdoing with the Klamath money.

"There was misappropriation of funds," Schultz said. "This was going on for a while."

For now, the Bureau of Reclamation and the Interior Department are sticking with a position they issued in October, when the Office of Inspector General similarly faulted the bureau for misspending federal funds, a spokesman said. "Reclamation maintains that (the reimbursement program) has been an important tool in dealing with water issues in an over-allocated basin," the bureau said at that time.

The upper Klamath Basin, which straddles Oregon and California, has long been a flashpoint for conflicts over irrigation water, wildlife refuges and the Endangered Species Act. Amid a drought in 2001, the Bureau of Reclamation cut off subsidized irrigation water to more than 1,000 farms to reserve supplies for threatened fish, triggering tense protests.

Ever since, the Bureau of Reclamation has sought to ease concerns of Klamath farmers and their champions in Congress. Up until 2007, the bureau created a subsidized "water bank" program to free up water to benefit salmon downstream. To reduce demand for federal irrigation water, the program paid farmers to idle land or make greater use of groundwater.

The bureau spent $30 million on the water bank, but results were spotty and farmers complained about red tape. So in 2008, the bureau entered into an agreement with the Klamath Water and Power Agency, an organization created by California and Oregon irrigation districts, to manage the water bank and its successor, the Water User Mitigation Project.

Prior to the contract, the Klamath Falls-based KWAPA had no board of directors and no staff. By the time the bureau terminated the contract in 2016, it had allowed the local agency to receive $41.25 million in federal funds, according to the U.S. Office of Special Counsel.

According to Schultz, he started questioning the legality of the arrangement when his Bureau of Reclamation superiors began pressuring him to transfer money from his budget to help finance the water bank. "For years, they would siphon off money from other projects to pay for this," said Schultz, who was a bureau fisheries section supervisor in Klamath Falls at the time.

Pederson, a natural resources specialist based in the bureau's mid-Pacific office in Sacramento, said he got involved in his capacity as president of the local National Federation of Federal Employees union.

"It was a tough nut to crack," said Pederson, who said that he and Schultz assembled thousands of pages of records to back up their allegations.

Schultz resigned from the bureau in 2014, and the next year, he and Pederson sought the help of Public Employees for Environmental Responsibility, which took their findings to both Office of Special Counsel and then the Interior Office of Inspector General. The OIG started its audit that year, prompting the bureau to end its payments to the Klamath Water and Power Agency. The next year, the bureau terminated the contract, prompting the water and power agency to fold.

In their complaints, Schultz and Pederson made two major allegations. First they alleged that the bureau did not have statutory authority to transfer federal funds to KWAPA. They also argued that the expended funds served a private instead of a public purpose, such as protecting fish and wildlife.

In a 2016 report, Interior's Office of Inspector General validated these findings and others by Schultz and Pederson. Water that was supposed to flow to Klamath wildlife refuges, the OIG concluded, did not arrive or only arrived late in the season, after irrigators' needs were met.

Altogether, the inspector general found that KWAPA had expended $32 million improperly, with $28 million used to compensate farmers for using groundwater instead of federal irrigation supplies. It also found that the remaining $4 million went to salaries, rent, travel and other expenses that the OIG considered "questionable" or "unallowable" under the law.

In its report, the OIG recommended three steps for preventing a repeat, including stronger review by the Interior's main legal expert, the solicitor. But in its response, the Bureau of Reclamation rejected nearly all these findings, arguing that the agency has long had authorization to provide cooperative assistance to third parties.

Interior Secretary Sally Jewell, an Obama appointee, sided with the agency and against her inspector general's office and the whistleblowers, disappointing agency watchdogs.

"Sally Jewell could have settled this whole thing while she was in office," said Jeff Ruch, executive director of PEER. "Instead she just accepted Reclamation's explanation."

In its Aug. 8 report to Trump, the Office of Special Counsel faulted the bureau's response to the inspector general's report and urged it to reconsider.

Information provided by OIG and whistleblowers "makes a compelling case that the true purpose of the agreement was to benefit private irrigators, not fish and wildlife," said the Office of Special Counsel report, which was released with little fanfare, published deep within the agency's website.

Klamath irrigation officials continue to dispute that money was misused or that any area farmers did anything wrong. "Our position has not changed," said Scott White, executive director of the Klamath Water Users Association. Like federal officials, he declined to comment beyond a statement the group issued last October about the case.

Pederson said he was disappointed the special counsel didn't make stronger recommendations, including holding Reclamation officials accountable. "There needs to be major reforms at the bureau level to make sure this doesn't happen again," he said.