A state audit of the Southeastern Public Service Authority concludes that the agency lacks a clear business focus, its leaders made poor decisions on debt financing, tension exists among its member communities, and it faces an uncertain future.

But both former and current board members of the regional waste-disposal agency were surprised to hear that money had reportedly been diverted from approved, budgeted projects to unbudgeted, unapproved ones.

In the 80-page report released last Friday, auditors said that “SPSA spent funds on capital projects not included in the Board approved budget … management transferred the funds from a project included in the budget to a project not included in the original budget without notifying the Board.”

The report did not provide any specific examples of unbudgeted, unapproved projects receiving funding without the board’s knowledge.

“I’m surprised,” said Charlie Wrenn, a former SPSA board member and Franklin city councilman, when asked about the money transfers. “Had I been approached on it, I would have said, ‘Let’s not do it that way.’”

Wrenn said that during his eight-year tenure on the board, he never heard of money being transferred to unbudgeted, unapproved projects.

“If it was 20 years ago, there may have been no policy then,” said Wrenn, who resigned from the SPSA board this summer after losing re-election to his City Council seat. Councilman Barry Cheatham now represents Franklin on the SPSA board.

Suffolk City Councilman Leroy Bennett, a current SPSA board member, told the Suffolk News-Herald that he was also surprised by the news. He said other board members were also unaware of the transfers.

“There were things (in the audit report) that I don’t think any of the board members knew,” Bennett told the paper.

SPSA was created in the 1970s to handle most of the garbage in South Hampton Roads. Eight communities – Isle of Wight and Southampton counties and the cities of Franklin, Suffolk, Portsmouth, Norfolk, Chesapeake and Virginia Beach – are served by SPSA.

Rowland L. “Bucky” Taylor, who took over as executive director of SPSA on Aug. 2, said in a written statement that “the information in the report will receive immediate consideration and implementation.” He added that SPSA welcomed the state audit.

Taylor previously served as Franklin’s city manager and the county administrator for Southampton.

In their report, auditors found that over the years SPSA looked into several ideas to make more money. Among these were a 2004 proposal to operate landfills in Wake County, N.C., and Page County, Va., and a 2006 discussion over possibly accepting waste from New York City. The SPSA board ultimately rejected both plans.

But the auditors criticized the ideas, saying they “have contributed to (SPSA’s) lack of focus on its core businesses … these ideas have a cost associated with their implementation, and if not part of a sound business strategy and plans, they can also divert resources with little or no gain.”

Auditors said they were concerned that the authority will use 40 percent of its 2009 budget, almost $41 million, on debt reduction.

“By having such a large amount of debt outstanding and significant debt service requirements, SPSA will have to continue to contribute a considerable amount of its resources to paying off its debt,” the report said.

Taylor acknowledged that SPSA’s ability to pay down its debt was an issue. In his written statement, he said the authority’s board had, in the past, “pursued borrowing practices which are now recognized as having created fiscal stress.”

Harmony among the eight localities SPSA serves will be elusive, auditors reasoned, because two of the state’s fastest-growing cities – Suffolk and Virginia Beach – cut their own deals with the authority. Those deals create “tension among the remaining member communities,” the report said.

Suffolk agreed to host the regional landfill, and in exchange the city does not pay a tipping fee for municipal solid waste. The audit reported that the city’s contract also compelled SPSA to upgrade the road to the landfill and to build and operate two more transfer stations in Suffolk after the landfill was expanded. The new transfer stations reportedly cost SPSA about $22.5 million.

Virginia Beach signed a contract with SPSA that allows the authority to deliver up to 300,000 tons of ash to that city’s landfill, according to the audit. SPSA, in return, pays for the annual operating and indirect costs for the landfill. In 1997, the authority paid $5 million for the landfill to be expanded. SPSA also purchased and started operating a transfer station in the city and paid to build another one.

The contract also caps Virginia Beach’s tipping fee, through 2015, at $53.88. Auditors said that the cap on tipping fees, for fiscal 2008, saved the city almost $6.8 million.

By comparison, the six other localities pay a $104 tipping fee.

“The special arrangements with Suffolk and Virginia Beach have a significant impact on SPSA,” the report said. “Not only has SPSA forgone tipping revenues from these localities, but many in the public have a negative perception of these arrangements. Other communities perceive these arrangements as an inequity.”

It’s an inequity that is clouding SPSA’s future. The audit report said that since the authority’s management has been unable to get the eight localities to agree to new contracts, “SPSA has an uncertain future after 2018,” when the current contracts expire.

“Should some or all of the participating members, or some combination of members, desire to continue to participate in a regional solid waste disposal authority … then SPSA and its current valuable assets will be the foundation for continued service,” according to a press release from the authority.

In the same release, Taylor added that “the quicker we can get together and move forward with these items, the sooner SPSA will be able to plan its activities and direction for the next ten years until 2018 when our current community member contracts expire, and how we might serve the communities who may choose to stay after 2018 if that is their choice.”

Taylor said SPSA was considering an independent study to present to the eight communities with alternative waste disposal options after 2018.

When asked if Isle of Wight was planning on staying in SPSA past 2018, James Brown – vice chairman of the county Board of Supervisors and a SPSA board member – said “yes, we are. At this point we are.” Brown added that he had not yet seen the audit report.

The audit report said private haulers provided SPSA with most – 59 percent, or 937 tons – of the solid waste it received in 2007. Haulers from the eight member localities brought in 536 tons of garbage, or 33 percent of the 2007 total.

The report also said that together, Virginia Beach and Chesapeake provide SPSA with over half of the municipal waste it receives. By comparison, Isle of Wight, Southampton and Franklin combined give SPSA only 7 percent.