A state audit has found the agency in charge of all of the state’s energy programs gave a $3 million grant to a start-up non-profit that was incapable of taking on the responsibility of the contract.

And while the audit found no misuse of funds, it concluded Efficiency Maine Trust should have known Maine Green Energy Alliance — the nonprofit set up by Gov. John Baldacci’s former counsel — “lacked the capacity to adequately administer federal funds when the grant was received.”

The report by the Office of Program Evaluation and Government Accountability, or OPEGA, was released Monday to the legislature’s Government Oversight Committee.

“The good news is nobody stole any money,” said Sen. Roger Katz, R-Augusta, co-chair of the committee. “The bad news is the people’s business is not being conducted in a way we should expect.”

Sen. Margaret Craven, D-Lewiston, defended the alliance at the Statehouse hearing: “As far as I can see, there was no criminal activity or wrongdoing once the questions were asked.”

The OPEGA report said the grant was given to “an organization that was not yet set up to administer, account for and make decisions about use of those funds in the manner expected of entities that spend public funds.”

The report also said, “No instances of inappropriate uses or missing funds were used.”

Efficiency Maine Trust was established by the legislature in 2002 to promote energy savings, improve the environment and promote “sustainable economic development.” Their $41 million grant program is funded by fees on consumer’s electric bills, federal grants and the greenhouse gas program.

In May, OPEGA was asked to conduct a review of how the grant funds to the alliance were used and if they were properly accounted for. That request came from the state legislature’s Committee on Energy, Utilities and Technology after media reports stating the alliance had failed to fulfill its grant requirements.

Under a federal stimulus grant, the alliance was to have signed up 1,000 households for energy retrofits. Six months into the grant, they had signed up only 50 and the program was terminated by the trust.

During the six months of the grant, wrote state investigators, the alliance had poor financial controls, didn’t follow certain federal requirements for hiring or procurement, failed to maintain important expense records, allowed the executive director to approve his own expense records and engaged in apparent conflicts of interest when it paid a board member for his services. Those failures have led a federal auditor to question $272,000 of the alliance’s expenses.

Efficiency Maine Trust should have recognized the alliance’s shortcomings before awarding it the grant, wrote OPEGA’s investigators, who said it was “questionable” whether the award should have been given to the alliance in the first place.

The staff at Efficiency Maine Trust, wrote OPEGA, “was not sufficiently diligent in assuring MGEA had the capacity, controls and structure in place to properly administer and account for grant funds before the initial grant disbursement. Extra efforts to mitigate the financial and compliance risks associated with MGEA would have been prudent …”

The reported added that “the questionable decisions and actions resulted from MGEA pursuing its performance goals before having its administrative house in order, rather than from any unethical or illegal intentions.”

Media reports earlier this year also questioned the ties between alliance founder Tom Federle and Democrat Baldacci. Federle had worked as counsel to Baldacci before starting a lobbying firm in Hallowell and then founding the alliance, which was awarded the grant after a Baldacci staffer urged Efficiency Maine to do so. The reports documented the large number of Democratic legislators hired by the alliance, as well as those seeking Democratic office in the 2010 election.

OPEGA wrote that “the public questions raised about the motivations and performance of individuals involved with MGEA are reasonable given the facts associated with this organization and the sequence, timing and nature of certain activities and decisions.”

While OPEGA determined MGEA staff did not engage in inappropriate partisan activities while on the job, the report said, “In the early months of this project both EMT (Efficiency Maine Trust) and MGEA failed to recognize, or sufficiently address, the financial, compliance and public perception risks associated with MGEA.”

And taxpayers’ money was wasted, they said.

“Grant funds were used to cover start-up and certain administrative costs that would not have been necessary if EMT had contracted for this work with an already established entity. We also identified several instances of expenses incurred that might have been avoided with better planning, and some goods and services that may have been more economically purchased if more formal procurement practices had been in place.”

Michael Stoddard, executive director of the Efficiency Maine Trust, provided the Maine Center for Public Interest Reporting with a draft of a new policy the trust’s board will consider at its September meeting.

It establishes a checklist for determining the capacity of organizations that want to apply for grants such as the one given to the alliance.

It states, in part, that “The Trust will exercise due diligence during and after the grant application and award process to determine if the named sub-recipient could pose to potential risk to the Trust, the administration of the grant and/or the success of the program(s) funded by the grant.”

Likewise, the OPEGA reports suggests that legislation could be passed in order to ensure state grant recipients have the capacity to handle the reporting and administrative demands related to public funding.

Seth Murray, the alliance’s former executive director, said Monday after the hearing, “Are there things I would have put in place in terms of our controls? Definitely.”

But, added Murray, “We were a start-up organization trying to get going as quickly as possible to hit our performance goals.”

The report was presented to the legislative committee by OPEGA director Beth Ashcroft.

The committee on government oversight meets again Sept. 6 to hear responses to the report by the Efficiency Maine Trust staff and Maine Green Energy Alliance.

The Maine Center for Public Interest Reporting is a nonpartisan, non-profit news service based in Hallowell. Email mainecenter@gmail.com or visit pinetreewatchdog.org.