Opinion ID: 2787659
Heading Depth: 2
Heading Rank: 2

Heading: The District’s Governmental Contracts

Text: ¶3. After it was formed, the District worked with the United States Army Corps of Engineers to develop a comprehensive development plan under which the District entered into a series of eight contracts with various departments of the federal and state governments to operate its water parks.3 1 Miss. Code Ann. § 51-15-103 (Rev. 2003). In addition to Lamar County, the fourteen counties originally included in the District were Clarke, Covington, Forrest, George, Green, Jackson, Jasper, Jones, Lauderdale, Newton, Perry, Smith, Stone, and Wayne Counties. 2 Miss. Code Ann. § 51-15-129 (Rev. 2003). 3 These include: (1) the United States Department of the Interior’s Land and Water Conservation Fund; (2) the United States Department of Agriculture’s Natural Resources Conservation Service through programs with the Soil Conservation Service and National Watershed Protection and Flood Prevention Act Program; (3) the United States Army Corps 2
¶4. The District established four water parks under contracts with the United States Department of the Interior, which provided funding from its Land and Water Conservation Fund (“LWCF”).4 These contracts, under the “Project Termination” heading, provide that the federal government may seek specific enforcement of its contracts in case of a breach of performance by the State. And the District’s general obligations for the “Use of Facilities” under the LWCF contracts require that: 1. The State shall not at any time convert any property acquired or developed pursuant to this agreement to other than the public outdoor recreation uses specified in the project proposal attached hereto without the prior approval of the Director. 2. The State shall operate and maintain, or cause to be operated and maintained, the property or facilities acquired or developed pursuant to this agreement in the manner and according to the standards set forth in the Manual. ¶5. Finally, the 2008 LWCF State Assistance Program Manual—referenced in the District’s contracts—provides post-completion operation and maintenance obligations: Property acquired or developed with LWCF assistance shall be operated and maintained as follows: 1. The property shall be maintained so as to appear attractive and inviting to the public. 2. Sanitation and sanitary facilities shall be maintained in accordance with applicable health standards. of Engineers; and (4) the Mississippi Natural Heritage Program. 4 Parks established under the LWCF program include: (1) Flint Creek Water Park in 1967; (2) Archusa Creek Water Park in 1969; (3) Little Black Creek Water Park in 1970; and (4) Maynor Creek Water Park in 1972. 3 3. Properties shall be kept reasonably open, accessible, and safe for public use. Fire prevention, lifeguard, and similar activities shall be maintained for proper public safety. 4. Buildings, roads, trails, and other structures and improvements shall be kept in reasonable repair throughout their estimated lifetime to prevent undue deterioration and to encourage public use. 5. The facility shall be kept open for public use at reasonable hours and times of the year, according to the type of area or facility. 6. A posted LWCF acknowledgment sign shall remain displayed at the project site . . . . ¶6. The LWCF Manual also provides the following escape from operation and maintenance costs when facilities become obsolete: “Project sponsors are not required to continue operation of a particular recreation area or facility beyond its useful life.” According to the District’s 2011 audits, the “estimated useful lives” of the District’s assets are 5-30 years for buildings, 5-25 years for building improvements, 5-50 years for improvements other than buildings, 5-20 years for equipment, and 15-50 years for capital leases. Obsolescence may also arise, among other reasons, if “changing recreation needs dictate a change in the type of facilities provided,” or “park operating practices dictate a change in the type of facilities required.” B. Soil Conservation Service and National Watershed Protection and Flood Prevention Contracts ¶7. Three of the District’s water parks were established with funding through the United States Department of Agriculture’s Soil Conservation Service Department and the National 4 Watershed Protection and Flood Prevention Act Program.5 Under the Dry Creek contract, the relevant provision provides that: The Dry Creek Water Management District and the Pat Harrison Waterway District agree that all land acquired on which Federal assistance is provided will not be sold or otherwise disposed of for the evaluated life of the project, except to a public agency which will continue to maintain and operate the recreational development in accordance with the operation and maintenance agreement. ¶8. Under the Turkey Creek Soil Conservation Operations and Maintenance Agreement, the District agreed to operate and maintain “project measures” developed through the program and to use the real property “for the purpose for which it was acquired and in accordance with the [Operations and Maintenance] agreement.” The District’s maintenance obligations require only that: A. The Sponsor will: 1. Be responsible for and promptly perform or have performed without cost to the Service . . . all maintenance of the structural measures determined by either the Sponsor or the Service to be needed. 2. Obtain prior Service approval of all plans, designs and specifications for maintenance work involving major repair. B. The Service will upon request of the Sponsor and to the extent that its resources will permit, provide consultative assistance in the preparation plans, designs and specifications for needed repair of the structural measures. 5 Parks established through the Soil Conservation Service and National Watershed programs include: (1) Dry Creek Water Park in 1966; (2) Turkey Creek Water Park in 1967; and (3) Big Creek Water Park in 1979. The District also received funding through this same program for the creation and operation of a flood control structure at Sowashee Creek in 1971. 5 ¶9. Notably, the contract provides that “[a]dmission or users fees shall be charged only as necessary to produce revenues required by the Sponsor(s) to . . . provide adequate inspection, operation, maintenance, and replacement of the [project measures].” Additionally, under the National Watershed Program’s 2009 Manual, “[t]he term of the [Operation and Maintenance] agreement expires when the evaluated life of the works of improvement has been met.” ¶10. Finally, under the Big Creek Soil Conservation Agreement, the District agreed to “assume responsibility for operation and maintenance in accordance with the Operation and Maintenance Agreement.” Like the Turkey Creek contract, the Big Creek contract also contains the same language from the National Watershed Program’s 2009 Manual about the operation and maintenance agreement expiring at the end of the improvements’ life span. C. Lease Agreement with the Army Corps of Engineers ¶11. In establishing the Okatibbee Creek Water Park, the District leased the land and water areas from the United States Army Corps of Engineers. The term of the original lease agreement was for fifty years—beginning July 1, 1968, and ending June 30, 2018. But in 1973, the District and the Army agreed to a supplemental lease agreement providing: This lease may be relinquished by the lessee at any time prior to tender by the Government and acceptance by the lessee of any cost-sharing payments pursuant to The Contract by giving to the Secretary of the Army, through the District Engineer, at least 30 days notice in writing. Subsequent to such tender and acceptance, this lease may be relinquished by the lessee at any time after 30 June 1999 by giving notice as provided above. So, while the District’s lease term does not expire until 2018, the District has the option to terminate the lease at any time by giving thirty days’ written notice to the Army. 6 D. Agreement with the Mississippi Wildlife Heritage Committee ¶12. Finally, the District maintains a state historic site at Dunn’s Falls through a 1982 agreement with the Mississippi Wildlife Heritage Committee. As part of its agreement with the State, the District agreed to various obligations, including: 4. Pat Harrison Waterway District agrees to maintain with paint the property lines which have been established by the property survey . . . . 5. Pat Harrison Waterway District agrees to assign an employee to live on the Dunn’s Falls property and shall be responsible for any salary or other expenses which might result from this employment. 6. Pat Harrison Waterway District agrees to enforce the rules and regulations adopted by the Pat Harrison Waterway District Board . . . . III. Lamar County’s Withdrawal from the District and the Withdrawal Statute ¶13. On September 6, 2011, Lamar County notified the District that it was exercising its right to withdraw under Mississippi Code Section 51-15-118, which provides that “[t]he withdrawing county shall be responsible for paying its portion of any district bonds, contractual obligations, and any other indebtedness and liabilities of the district that are outstanding on the date of such county’s withdrawal from the district.” 6 Under the statute, the withdrawing county’s obligation “shall be determined through an independent audit conducted by a certified public accountant.” 7 IV. Litigation Between the District and Lamar County 6 Miss. Code Ann. § 51-15-118 (Rev. 2003). 7 Id. 7 ¶14. In January 2012, Wolfe, McDuff & Oppie, PA—the District’s own certified public accounting firm—sent Lamar County an “Independent Accountant’s Report” which claimed that Lamar County’s portion of district bonds, contractual obligations, and other indebtedness and liabilities was $9,201,619. Lamar County disagreed, and this litigation soon followed. A. Petition for Injunction and Appointment of Independent Auditor ¶15. The District fired the first shot in May 2012, by filing a petition in the Chancery Court of Forrest County, seeking an injunction. Lamar County responded with a motion for partial summary judgment, claiming it did not owe the District for contractual obligations incurred after September 6, 2011. Lamar County also requested that the court appoint an independent auditor to determine the amount it owed under Section 51-15-118. ¶16. After all of the Forrest County Chancery Court judges recused from the case, this Court appointed the Honorable Hollis McGehee as Special Judge. Judge McGehee promptly held a hearing and issued an order granting partial summary judgment to Lamar County. Judge McGehee rejected the Wolfe audit and ordered the parties to attempt to agree on a certified public accountant to perform an independent audit to determine Lamar County’s obligation as of September 6, 2011. Both parties later agreed on the certified public accounting firm of Tann, Brown & Russ Co., PLLC, to perform the independent audit.
Obligations ¶17. Tann, Brown & Russ produced an “Independent Auditor’s Report,” a “Schedule of Lamar County’s Portion of the Pat Harrison District’s Bonds, Contractual Obligations, and Other Indebtedness and Liabilities,” and “Notes to the Schedule of Lamar County’s Portion 8 of Bonds, Contractual Obligations, and Other Indebtedness and Liabilities.” Lamar County filed these audit reports with the court in December 2012. The audit excluded the District’s perpetual park operating costs from the schedule of contractual obligations.
¶18. In its audit, Tann, Brown & Russ excluded the perpetual park operating costs from its calculation of the portion of the District’s contractual obligations Lamar County was obligated to pay, explaining: As discussed in Note 6 to the schedule, the District has included $146,524,357 as an estimate of the present value of the District’s future costs (net of park user fee revenues) to operate the Okatibbee Creek Park through June 30, 2018, and to perpetually operate its other recreational parks. In our opinion, the estimated future costs to operate the Okatibbee Creek Park through June 30, 2018, and to perpetually operate the District’s other recreational parks should not be included in the schedule because they are not contractual obligations of the District as of September 6, 2011, in accordance with Section 51-15-118 of the Mississippi Code.8 ¶19. The report further explained why the perpetual park operating costs were not contractual obligations: The District’s lease agreement with the U.S. Corps of Engineers for the Okatibbee Creek Park is not a contractual obligation because it is cancelable by the District. In addition, while the District’s agreements with the National Park Service and Natural Resources Conservation Service generally require the continued use of the District’s other parks for outdoor recreational 8 In Note 6 accompanying the schedule, Tann, Brown & Russ explained that it had calculated the perpetual park operating costs using the Gordon Growth Method. The Gordon Growth Method is formula used to calculate the future value of businesses and other assets based on the assumption that future revenues, expenses, and other costs will continue to grow at a constant rate. All expert accountants in this case agreed that the Gordon Growth Method was an appropriate method for calculating the District’s perpetual park operating costs. 9 purposes, these agreements do not require a specific amount of expenditures at the parks. Furthermore, the District’s agreements with the National Park Service, Natural Resources Conservation Service, and U.S. Corps of Engineers allow the District to charge park user fees to offset the park operating costs. Consequently, the amount of the District’s net cost to operate the parks is within the District’s control and is not a contractual obligation in accordance with Section 51-15-118 of the Mississippi Code. ¶20. After explaining its reasoning for excluding the perpetual park operating costs, the Tan, Brown & Russ audit then provided the following conclusion and calculation: If the perpetual park operating costs of $146,524,357 were excluded from the schedule, Lamar County’s portion of the Pat Harrison Waterway District’s bonds, contractual obligations, and other indebtedness and liabilities as of September 6, 2011, would be decreased by $18,648,448, and Lamar County’s portion of the Pat Harrison Waterway District’s bonds, contractual obligations, and other indebtedness and liabilities as of September 6, 2011, in accordance with Section 51-15-118 of the Mississippi Code would be $337,088. ¶21. While Tann, Brown & Russ excluded the perpetual park operating costs as contractual obligations in the schedule, it did consider other future contractual obligations, including the District’s project grant commitments described in Note 4, and the District’s operating lease and service contract obligations described in Note 5. Note 4 explained that: The District awards grants each year for various projects in its member counties. Grant awards generally cover 50% of the eligible project costs up to a maximum grant amount of $25,000. These grant commitments are payable after each project’s completion based upon documentation of the costs incurred by the grant recipient. ¶22. Note 5 explained that “[t]he District has entered into certain equipment operating leases and service contracts with non-cancelable terms.” Both of these future contractual obligations were included in the schedule of contractual obligations.
10 ¶23. The Tann, Brown & Russ audit did not declare the specific accounting standards it used, stating only that it “conducted [the] audit of the schedule in accordance with auditing standards generally accepted in the United States of America.” Relevant to this case are two generally recognized accounting standards, either or both of which provide guidance as to what should and should not be classified as contractual obligations. ¶24. The Financial Accounting Standards provide guidance on analyzing and preparing financial statements for businesses and nonprofits. Under these generalized standards, liabilities are defined as “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” ¶25. By contrast, the Governmental Accounting Standards—the District’s CPA used these standards when it performed the District’s 2011 audit—provide guidance on analyzing and preparing the financial statements of state and local governments. These standards provide that,“[f]or an obligation to be a liability, it should be a present obligation,” meaning “[t]he event that created the liability has taken place.” This is distinguishable “from a commitment that may become a liability in the future when the event giving rise to the liability occurs. The government may be able to withdraw from or avoid the commitment until a future event giving rise to the liability occurs.”
¶26. Predictably, the District took issue with the Tann, Brown & Russ report, primarily the exclusion of perpetual park operating and maintenance costs from the schedule of contractual obligations. In January 2013, the District filed objections to the independent auditor’s report, 11 objecting “to the auditor’s adverse opinion,” and requesting that “the [c]ourt strike that opinion and rely solely on the auditor’s schedule and render judgment that the amount Lamar County owes” upon withdrawal “is $18,985,536.” The District argued that Tann, Brown & Russ’s refusal to characterize perpetual park operating costs as contractual obligations was a “legal opinion.” ¶27. Lamar County then filed responsive pleadings and the District filed a rebuttal, including a rebuttal auditor report. In May 2013, the State of Mississippi intervened, filing a motion for leave to file an amicus curiae brief. Lamar County then filed a response to the District’s rebuttal and the State’s amicus brief. ¶28. On August 19 and 20, 2013, the trial court held a hearing on the District’s objections. The District called four witnesses: Scott Hodges (the Tann, Brown & Russ auditor who performed the independent audit), Hiram Boone (executive director of the District), George Decoux (comptroller of the District), and Jim Koerber (the District’s rebuttal auditor). In response, Lamar County called John Adler (the County’s own expert accountant).
¶29. Hodges explained that “[t]he contracts existed, but the contracts did not require all of those expenditures. The contracts only required continued use of the parks for recreational purposes.” Hodges further explained that the historical costs the District used to calculate the perpetual operating costs “were not required by those contracts. Those costs were incurred, but they were not required by the contracts.” And Hodges noted that “[i]t’s availability of use, not a spending of money that the [District’s] contract[s] require[ ].” Hodges elaborated on the point: 12 If [the perpetual park operating costs are] within their control, it’s not an obligation. An obligation is something that . . . an outside force is obligating you to do[,] not within your control. It’s not your decision. You’re obligated by contract to do it. So by definition, if it’s within their control, it’s not an obligation. ¶30. Hodges further explained, “[i]f an entity has a contractual obligation, it should be disclosed in the annual financial statements.” The perpetual park operating costs were never included in the District’s financial statements before Lamar County’s withdrawal. ¶31. Finally, in explaining Tann, Brown & Russ’s role in the process, Hodges testified: “[o]ur job was to determine if it was in accordance with the statute. And so, that’s what we did, is determine that [the perpetual park operating costs] that [the District] included was not in accordance with the statute.” Hodges reiterated that the main focus of the audit was to calculate what Lamar County owed under Section 51-15-118, which was paramount in his mind to either Financial Accounting Standards Board or Governmental Accounting Standards Board standards.
¶32. Hiram Boone, the executive director of the District, testified about the District’s value to the state and its obligations. Boone emphasized that the District did more than manage parks and that the District’s responsibilities included periodically inspecting dams and other flood-control structures. Boone said these obligations required continued support from the counties in the District. Boone also noted that the water parks throughout the District spurred regional economic growth and development. ¶33. However, during cross-examination, Boone conceded that the District’s obligations under the contracts were quite amorphous: 13 Q. None of the contracts that Pat Harrison Waterway District has with the federal government tells the Pat Harrison Waterway District how it has to operate the facilities, does it? A. Yes. We have certain responsibilities to the LCWF to operate those structures. Q. All it [says] you have to do is use them for outdoor public recreation, correct? A. That is part of it. When they were built, it was intended for flood control, erosion control, flood protection downstream as a water supply. They could be used for drinking water, industrial or irrigation purposes. So those structures are operated for multiple use besides recreation. Recreation is one of the side benefits. Q. I understand that. But with respect to the contracts that the LWCF applied to. A. Yeah. Q. All they say is you need to operate them as outdoor public recreation . . . [f]acilities, correct? A. Yes. Q. Okay. They don’t tell you how much money you have to spend on them, do they? A. No. But they—when you say properly maintained, it takes whatever it does. ¶34. Further, Lamar County cross-examined Boone about the District’s low park entrance rates compared to other Mississippi state parks. For example, the District charged $30 per person for an annual individual entrance pass to its parks, whereas the State of Mississippi charged $42 for the same pass. The District also greatly undercut the State when it came to annual boat-launch passes: $102 at a state park compared to just $65 at the District’s water parks.
¶35. George DeCoux, the District’s comptroller, testified that the Tann, Brown & Russ auditors had never asked him if the District could increase park user fees to balance its budget and perpetually maintain its parks. During cross-examination, DeCoux also 14 confirmed that “on most things other than camping and cabins,” the District’s park user fees were less than State park user fees.
¶36. Finally, the District called Jim Koerber, the District’s own certified public accountant and expert. Koerber had “no problems” with the numbers in Tann, Brown & Russ’s audit, but he disagreed with Tann, Brown & Russ’s exclusion of perpetual park operating costs as contractual obligations, because he believed that decision was a legal conclusion outside the purview of a Certified Public Accountant. He testified that “[t]here [wa]s no accounting basis to exclude those contractual obligations.” ¶37. Koerber also testified that he primarily relied on Financial Accounting Standards concepts to classify the perpetual park operating costs as contractual obligations, and that he looked to Governmental Accounting Board standards when he classified perpetual park operating costs as contractual obligations, finding that those standards also justified his classification. However, Koerber conceded that there was no real difference between the two standards. ¶38. On cross-examination, the District challenged Koerber’s stance on including the perpetual park operating costs as future contractual obligations: Q. My question was, if you went to the Pat Harrison Waterway District on September 6, 2011 and asked for contracts that had these numbers that would be owed, due and payable at some point in the future, there is no contract that contains those numbers. A. Oh. That’s correct . . . . Q. I’m just trying to establish that unlike with contractual obligations and the figures that are there, there are no supporting contracts you could go lay your hands [on] and say [“]here are the amounts that are due and payable under those contracts.[”] 15 A. No, sir, it would not be specified in the contracts . . . [,][b]ut I do want to be clear [ ] that . . . there would be a cost to operate those contracts. ¶39. After Koerber testified, the District rested.
¶40. Lamar County then called John Adler, the County’s own CPA and expert, who testified that Tann, Brown & Russ conducted the audit in accordance with generally accepted professional auditing standards and accounting principles. Alder unequivocally stated that Governmental Accounting Standards Board principles should be used in determining whether the perpetual park operating costs were contractual obligations. ¶41. Alder disagreed with Koerber and agreed with Tann, Brown & Russ’s exclusion of the perpetual park operating costs as contractual obligations, because “there [wa]s no contractual obligation that they spend money.”
Operating Costs from the Schedule of Contractual Obligations ¶42. When the hearing concluded, Judge McGehee took the matter under advisement and later issued his ruling, adopting the Tann, Brown & Russ audit’s schedule of liabilities. Judge McGehee found that Lamar County withdrew from the district on September 6, 2011, and that an independent auditor had determined that Lamar County’s portion of “contractual obligations . . . that [we]re outstanding on the date of [the] [C]ounty’s withdrawal” was $337,088. ¶43. Judge McGehee also found “that under the provisions of Section 51-15-118, Lamar County [wa]s not responsible or liable for perpetual park operating costs,” and “that 16 perpetual park operating costs are not provided for in Section 51-15-118.” The trial court supported its finding with the following reasons: (a) Section 51-15-118 does not specify perpetual operating costs as an obligation; (b) Section 51-15-118 provides that the county is responsible for those “that are outstanding on the date of such county’s withdrawal from the District,” and there were no such perpetual operating costs outstanding on September 6, 2011; (c) Section 51-15-118 provides that the determination shall be by an independent audit and that has been done and accomplished in accordance with the statute and by agreement of the parties; (d) Section 51-15-118 provides that the determination should be made by a certified public accountant. The legislature, by this provision, indicated its clear intent that accounting standards would be applied in making the determination. The applicable accounting standards in this case are promulgated by the Governmental Accounting Standards Board (“GASB”). GASB standards, which were introduced . . . during the hearing, do not support a finding that the perpetual park operating costs fall within the specified obligations of the withdrawing county; (e) [T]he District’s own financial records, its own prior audits, do not include the claimed perpetual park operating costs as a liability of the District; (f) [T]he contracts that the District has with the federal government . . . do not require the level of activity that the District has assumed and there is no obligation upon the District consistent with the position it takes and thus there is no contractual obligation, liability[,] or indebtedness relative thereto which can be imposed, in proportionate part, upon the withdrawing county; (g) [T]he contracts that the District contend give rise to its claim for perpetual park operating costs do not constitute contractual obligations or liabilities under GASB standards which, under the statutory scheme as specified in Section 51-15-118, must control; 17 (h) [E]ven if GASB does not control, the District’s position is not supported by any evidence other than its own claim which is clearly contradicted by its own records; (i) [A]s a footnote, the [c]ourt cannot conceive that the legislature intended that a withdrawing county would be responsible for operating costs in perpetuity because: (a) it would be contrary to the whole concept of withdrawing—why withdraw? (b) it specifically stated that the measuring date is the date of withdrawal. ¶44. After Judge McGehee issued his thorough and well-reasoned ruling, the District appealed to this Court.