Knitz Reportedly Blocked Inquiries Into Overcharges : Water district: Suspended manager rebuffed efforts to clarify nearly $500,000 in costs, finance officers say.

The suspended general manager of the Santa Margarita Water District blocked repeated attempts to require justification of nearly $500,000 in questionable costs paid to an engineering firm that had given him gifts, according to the district’s financial officers.

Both the district’s finance director and controller say they were also rebuffed by Walter W. (Bill) Knitz and his assistant, Michael P. Lord, time and again as they tried to recover an additional $75,000 in overcharges paid to the same Mission Viejo engineering firm.

Knitz and Lord have reported receiving at least $11,000 in gifts from MacDonald-Stephens Engineers over the past six years. The gifts, which the two men listed on the financial disclosure forms they are required to file annually under state laws governing conflicts of interest, ranged from hunting and fishing trips valued at $1,000 or more to trips purported to cost up to $2,700.

In addition, Lord’s daughter, Susan, was employed by MacDonald-Stephens for two years beginning in 1988.

Over the past four years, the company has been awarded more than $4 million in no-bid contracts by the district. Company officials have acknowledged some overpayments but said that in many instances, they had undercharged the district and that the charges evened out, according to district memos on the subject.

Although Lord and Bill Dye, the district’s chief engineer, would have reviewed the questionable bills as they were approved by the district’s finance and engineering subcommittees, the ultimate authority to recommend payments to the board of directors rested with Knitz. Board members said they were never notified of any overcharges.

Knitz eventually ordered Finance Director James W. Clark to write off all the overcharges identified in an internal audit, and angrily demanded to know why Clark had authorized such an audit in the first place, Clark said.

On at least four other occasions, Clark or Controller Carol Megara met with either Knitz, Lord or both and asked that the overcharges be refunded to the water district. Megara said she approached Lord last August about what to do with nearly $75,000 in outstanding invoices to MacDonald-Stephens, and Lord said he would refer the matter to Knitz.

Sometime in August of last year, Knitz ordered Clark and Megara to write off MacDonald-Stephens debt to the district.

“Bill Knitz told us that he wanted the invoices to go away,” Clark said. “I thought, ‘Hey, he’s the boss.’ If he wants to authorize a cancellation of a receivable, he has that authority.”

Knitz’s attorney, Marshall M. Schulman, vehemently denied the allegations.

“It didn’t happen that way at all,” Schulman said. “Nothing was ordered written off. I don’t know what (Clark and Megara’s) motives are, but maybe they are trying to fill the void” left by the suspensions of Knitz and Lord.

Knitz and Lord were suspended with pay by the district’s board of directors last month, pending the outcome of a joint investigation by the FBI and the Orange County district attorney’s office into possible corruption at the district. Board members said that the fate of both managers would be decided by May 24.

Lord’s attorney said his client had done nothing wrong. Dye declined comment.

Neither Dave Stephens nor David MacDonald, co-owners of MacDonald-Stephens, returned calls for comment.

Board Chairman Don B. Schone said he learned of the reported overcharges only last week and that he promptly relayed the information to other board members two days later.

“Obviously, we are very concerned and surprised that we weren’t notified of this by Mr. Knitz,” Schone said. “We are taking this matter very seriously, and it will play a part in the final disposition of what happens to Mr. Knitz and Mr. Lord.”

The board has notified MacDonald-Stephens that it is still responsible for the overcharges and has asked for full documentation, district spokesman Scott Hart said.

Clark said that he has recently given Schone a copy of an audit detailing both questionable and unauthorized charges that had been identified on invoices submitted by MacDonald-Stephens from 1987 through 1991. The audit was completed in July, 1991, and shown to Knitz and Lord in early 1992, Clark said.

“Mr. Knitz was extremely angry that an audit had taken place,” Clark said. “He wanted to know who the hell said that accounting could do this.”

Clark said he instructed the district’s auditor, Carl Schoonover, to look through the MacDonald-Stephens invoices and determine whether $493,988 in unsubstantiated “out-of-pocket” charges were justified. According to water district documents, Schoonover concluded that MacDonald-Stephens had not provided adequate documentation.

According to documents obtained by The Times under the state’s public records law, between July and December, 1992, Schoonover wrote five different draft reports about the questionable and unauthorized billings.

Clark said that Lord ordered the draft reports softened each time in favor of MacDonald-Stephens and even asked that the final draft be written to say the audit was done at Knitz’s request, a detail which did not appear in earlier drafts.

In the first draft, Schoonover recommended that MacDonald-Stephens resubmit its invoices and provide supporting documentation for the $493,988. But by the last draft, Schoonover questioned the legality of asking the contractor for supporting documentation, noting that it “may be difficult and time-consuming at this point for MSE to reconstruct and support these charges on their invoices, particularly if their records . . . are in any way lacking.”

Yet the final version concluded:

” . . . It seems compelling to us that the district should ultimately be satisfied that the material charges were properly paid for,” Schoonover wrote.

Clark said he sent the final version to Lord last December but never got any response.

In addition to the $493,988 in questioned billings, Clark and Megara identified nearly $75,000 more in what they said were outright overcharges: $9,452 in calculation errors, $6,361 in duplicate payments and $59,080 in incorrect billing rates.

Knitz and Dave Stephens, part-owner of MacDonald-Stephens, told Clark and Megara in separate meetings last year that hourly rate changes were built into the engineering company’s contracts. Clark disagreed, saying that the contracts voted upon by the district board had specific hourly rates for the engineers and support personnel who would execute the contract.

Megara drafted for Knitz’s signature two letters to Stephens asking for supporting documentation on several charges. Stephens responded by meeting with Clark and Megara.

During that meeting, held in March, 1992, Stephens acknowledged the other overpayments, Clark said, but insisted that Dye had allowed MacDonald-Stephens to submit invoices without copies of paid invoices and other detailed documentation. Stephens has made no attempt to reimburse the district, Clark said.

Stephens complained to Knitz as recently as February about the district dunning him for payment of the $75,000 in overcharges, Clark said. Knitz told Clark he thought the matter had been resolved. When Clark said he had asked Lord for specific written authorization to cancel MacDonald-Stephens debt, Knitz said he thought he had seen a written request but wasn’t certain where it was. Knitz and Lord never mentioned the invoices again.

Lord’s attorney, Thomas M. Goethals, said his client did nothing wrong.

“Mr. Lord was a hard-working administrator for the district and tried to follow guidelines,” Goethals said. “It seems like he was in the role of middleman in this situation and did the best he could.”