Island County has done a poor job of monitoring the spending of the Freeland Water and Sewer District on its $40 million sewer project, state officials said in a recently released audit of Island County.

The Washington State Auditor’s Office released its annual audit of the county Monday, and state auditors faulted county officials for not keeping a closer eye on the sewer district’s compliance with a 2009 contract that funneled $2.5 million in grant funds from the county to the Freeland sewer project.

The state auditor’s office criticized the county for paying $24,654 in expenditures that were not allowable under the agreement — including $15,530 that was spent before the contract between the county and the sewer district was even signed — as well as for approving thousands of dollars in airline tickets and travel costs for local officials and Chet Ross, president of the Freeland Chamber of Commerce.

State officials also said the county authorized $23,580 in payments to the sewer district that were not properly documented.

County officials bristled at the dreadful audit, which also faulted the county for poor internal controls over cash-handling and off-kilter bank statements in the clerk’s office.

Budget Director Elaine Marlow stressed the county had taken corrective steps well before the audit ever began.

Marlow recalled that an internal audit of the reimbursements to the Freeland sewer district was launched in early 2011.

She also noted that all new payments to the sewer district — including reimbursements that total nearly $400,000 — were put on hold.

Public money was not at risk, Marlow said.

“It’s important for everybody to understand that the state auditors came in after the fact,” Marlow said.

“The county already had taken proactive steps and by withholding that $368,000 payment for the sewer district, there was zero risk to the county,” she said.

Marlow added that the amount called into question represents less than 1 percent of the total grant funds allotted to the sewer district.

“We continue to be good stewards of public funds,” Marlow said. “We identified the deficiencies and we took steps to correct the action.”

Others in county government were also taken aback by the state audit. Island County Commissioner Angie Homola wrote the state auditor’s office Sept. 23 to complain that the audit included the detailing of the problems with expenditures by the Freeland sewer district.

Homola said the audit should be rewritten, and the expenditure problems with the sewer district should be removed from the report.

County officials said they were not given enough credit for discovering the trouble and taking aggressive steps to correct the expenditure problems.

Elected officials in Freeland and the county campus in Coupeville have been talking about a new sewer system for the South End’s commercial hub for years, but opposition to the $40 million project has grown rapidly as property owners have learned that they will bear the brunt of the costs for the sewer system through special assessments on their properties.

Some critics have claimed the assessments will easily run into the tens of thousands of dollars for property owners, and some may have to sell because they can’t afford the costs of hooking up to the new sewer system.

Concern over the sewer project has led two Freeland residents, Marilynn Abrahamson and Lou Malzone, to challenge incumbent sewer commissioners Jim Short and Rocky Knickerbocker for their seats on the district board in the November election.

“They tried to sell us a bill of goods that the sewer is a panacea for all our pollution problems,” Abrahamson said.

Knickerbocker, the president of the sewer district board, did not return a call to the Record late last week, and could not be reached earlier this week.

Abrahamson and others have criticized sewer district officials for the vast amount of money that has been spent on consultants for the project, which includes everything from public relations work on Whidbey to lobbying services in Washington, D.C.

Concern over spending on consultants began last year, but erupted in June amid reports that sewer commissioners and their guests had spent thousands of dollars for $200-a-night hotel rooms, dinners and drinks, and tickets to tourist activities during a visit to the nation’s capital.

Officials defended the expenditures at the time, and said taxpayers had been reimbursed for any expenses that were not legally justified.

Island County gave the sewer district $2.5 million in Rural County Economic Development grant funds for the development of a new sewer system to serve the Freeland area, and sewer district officials have submitted more than $1.7 million in bills for costs incurred on the project since 2009.

According to county finance records, most of the money has gone to three consultants: Tetra Tech, an engineering and consulting firm based in Pasenda, Calif.; Davido Consulting Group, an engineering consultant with offices in Freeland and Seattle; and Macaulay & Associates, a real estate appraisal company based in Everett.

A total of $686,932 has been billed to the county for services from Tetra Tech. Invoices from Macaulay & Associates total $240,325 so far. Davido Consulting Group has billed the county for $221,131 in costs related to the Freeland sewer project.

The legal firm of Foster Pepper has submitted invoices for $17,533 for the project, and the law offices of Hendricks-Bennett have submitted bills for $2,350.

Edwards & Associates, which provides administrative services for the sewer district, has amassed $35,001 in costs related to the sewer project, according to county finance records.

County funds have paid for a wide variety of activities related to the project, according to invoices reviewed by the Record.

Costs include paying the district’s secretary to read articles about the sewer project in the local newspaper, sending the sewer district’s newsletter to its customers, the preparation of question-and-answer handouts for the public by the district’s attorneys, media training sessions for those involved in the sewer project, having a consultant pen an article on the project for the Freeland chamber’s newsletter, and having a consultant write a draft resolution for an amendment to the county comprehensive plan.

Sewer district consultants have also been paid to respond to Freeland property owners who have expressed concerns on the project, and to write a script for sewer commissioners to use during a contentious public hearing on the project in April.

Sewer commissioners have also asked the county to reimburse them for attending public meetings on the sewer project, and for costs to maintain the sewer district’s website, according to documents reviewed by the newspaper.

The state audit released this week also noted the county paid property taxes that should have been paid by the sewer district.

Marlow, the county’s budget director, said the county has been unwilling to cover the payroll costs of sewer officials.

She also said the latest bills from the district are still on hold, and payment on any expenditures will be withheld pending settlement and reimbursement by the district for unallowable expenditures.