THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Sunday, November 19, 1995 TAG: 9511200249
SECTION: FRONT PAGE: A1 EDITION: FINAL
SOURCE: BY ALETA PAYNE, STAFF WRITER
DATELINE: VIRGINIA BEACH LENGTH: Long : 248 lines
School division leaders, including the superintendent and board chairman, were informed nine months ago about the budget problems that were identified recently by an independent audit.
Those warnings never made it to the full School Board.
A Dec. 29, 1994, midyear analysis of the school system's $340.8 million budget, by then-Internal Auditor Kevin A. Jones, found millions of dollars in miscalculations, overexpenditures and other mistakes.
Jones completed his report a week after then-Superintendent Sidney L. Faucette forecast a potential $7.4 million shortfall in the division's budget. Faucette ordered stringent spending reductions to avoid a year-end budget crisis.
The report floated in limbo until March when it was discussed by the School Board's audit committee. It was composed of Faucette, School Board Chairman June T. Kernutt and board member Susan L. Creamer.
Jones also sent copies to these school administrators: James L. Pughsley, then deputy superintendent, now interim superintendent; K. Edwin Brown and M. Anne Meek, both of whom are executive assistants to the superintendent; John S. Kalocay, chief operations officer; Mordecai L. Smith, chief financial officer, now on suspension; and Karen H. Bischoff, school board clerk.
The findings in Jones' audit report presaged what an independent accounting firm would determine almost a year and a $12.1 million deficit later - that there were problems with the budget document itself, from the way it was developed to the manner in which it was used.
The story the report told and the way it was handled go to the heart of questions about how the school system could overspend its budget by $6.4 million while overestimating its income by $5.7 million.
Although Jones wrote the report in December, it did not get to the audit committee until March. The delay, in part, was caused by the resignation in January of James Darden, who was chairman of the board and a member of the audit committee. Kernutt replaced Darden and became a member of the audit committee.
When the audit committee of Faucette, Kernutt and Creamer met with Jones in March, Jones said, they discussed his findings. The report cited:
$2.4 million in mathematical and typographical errors.
``Gross inaccuracies and inconsistencies in the calculation of salaries and fringe benefits.''
Budgetary transfers in excess of $10,000 without the required board approval.
Despite the warnings the report should have sounded, school officials can find no record of the report being delivered to the whole School Board. Kernutt declined to comment on it. Creamer did not return phone calls.
The other nine board members said either that they did not recall the report or were emphatic that they had not received it.
``There was a general discussion as to formal communication from the audit committee to the board,'' said Jones, who left the division's internal auditor post in April. He said in a recent phone interview that Faucette agreed at the audit committee meeting to provide the other nine board members with a synopsis of the findings.
``What happened to that I don't know,'' said Jones, who declined to answer other questions about the report.
By the April 18 School Board meeting, assurances were given to board members that the school system would finish the year with a $3 million surplus. The assurances were made by Smith, the chief financial officer at that time.
Faucette left the division this summer after four years as superintendent to head schools in Gwinnett County, Ga. A statement released by his office on Nov. 10 said that Faucette had been advised not to discuss the budget in light of Commonwealth's Attorney Robert J. Humphreys' decision to request a special grand jury investigation.
Board member Elsie M. Barnes said she first saw Jones' report when portions of it were published in the The Virginian-Pilot after the shortfall was made public in August. She said the report would have affected her decisions and questions over the months when the board was repeatedly assured that finances were under control.
She declined to comment further.
At the early-morning meeting Aug. 28 when board members were notified of a deficit, Creamer said she had been questioning the district's financial position since October 1994 and was told repeatedly that necessary measures were being taken to balance the budget.
``I received a memo late last night telling me that we are in a deficit situation,'' said Creamer at the August meeting. ``I want to know why I had to wait until yesterday to find out we were in a deficit situation. It could not have happened overnight.''
Jones' report pointed out a shortfall in funding for a number of programs. One was special education. The report describes a deficit arising from education salaries and tuition payments the school district makes to special schools outside the district for the severely handicapped.
Jones found that the special education budget submitted to the central school administration office was reduced, but the special education division was not told of the changes.
The accounting firm that completed an independent audit this month, KPMG Peat Marwick, echoed Jones' findings by saying that administrators in charge of individual ``units'' of the budget were not involved enough in coming up with the numbers.
Based on work sheets given last week to The Virginian-Pilot by the special education program's top administrator, the numbers he and his staff submitted were more realistic than those that made it into the 1994-95 budget approved by the School Board.
Smith, the chief financial officer at the time, said Wednesday that Faucette regularly looked to special education as a place to trim expenses to make the budget balance. Later, Faucette would find a way to restore money to the special education division, Smith said.
``Sid would often go down the list and say, `Mort, we need to decrease these line items by x percent.' He would always look at special ed,'' Smith said.
``That's not my call. That was Faucette's call.''
Robert Mitchell is director of the Office for Programs for Exceptional Children, the department that includes special education.
Mitchell requested more special-education teachers in the city's high schools, middle schools and elementaries.
In the budget Faucette submitted to the School Board, the number of special-education teachers was increased. But the number of teachers was less than what Mitchell requested.
For instance: The special education staff wanted 13 more middle school teachers than were budgeted by Faucette.
Mitchell also asked for 18 additional high school special education teachers, but only eight were included in the budget Faucette submitted to the School Board.
The School Board eventually approved hiring more special education teachers than Faucette had requested. And it is at this point in the process that a major financial mistake occurred.
The board added more special education teachers, but not additional money to cover the teachers' salaries.
For example: the number of elementary school special education teachers was increased by 16, but the salaries were cut by $300,000.
It wasn't until May - less than two months before the end of the school year - that the miscalculation caught up with the School Board. Faucette informed the School Board then that the budget for special education teachers was off by $2.5 million.
While administrators acknowledge they don't always get what they ask for in the budget process, they are supposed to get what they need to meet local, state, and in the case of special education, federal guidelines.
Mitchell said special education programs might have been an easy target for Faucette to cut. Strict federal guidelines would make it difficult for the board to refuse later requests for additional money.
``When we ask for teachers and we (initially) don't get them, but we need them for federal regulations, we usually get them,'' Mitchell said.
However, special education wasn't the only problem area.
Both Jones' report and the Peat Marwick audit found numerous instances in which money was shifted from one program to another without the knowledge of the administrators who ran those programs.
In some instances, amounts greater than $10,000 were transferred without the consent of the School Board.
The reports say these transfers were made in violation of School Board policy.
While it may never be known what private conversations took place, it is clear that no one publicly stepped forward to tell the School Board and the public that the district's financial situation was more dire than portrayed.
It may be attributed to what several school administrators have described as a ``culture of fear'' that they say characterized the central office under Faucette's tenure.
``There was a clear pattern of those who displeased the superintendent leaving town or leaving the central administration,'' said one administrator who declined to be identified.
Among those who say they lost their jobs for crossing Faucette is former Assistant Superintendent Andrew Carrington, now a superintendent in South Carolina. Carrington was forced out of his job two years ago, in part for alleged procurement violations.
His ouster was upheld by a federal judge, but another lawsuit, in which Faucette is a co-defendant, is pending.
``Staff members were worried across the board,'' Carrington said recently in a phone interview. ``If they said anything against him, they were taken to task.''
Another former official who did not want to be identified agreed that some insiders kept silent for fear of losing their jobs if they voicedconcerns that would then be ignored.
``Things broke down four years ago when they turned (the system) over to one person carte blanche,'' he said.
Among the administrators who received copies of Jones' audit report were Brown and Meek, both now executive assistants to the superintendent and interim superintendent Pughsley.
Pughsley has been out of town since Wednesday and was not available to comment on this story.
Brown said he took his concerns about the budget and the problems administrators were having with it to Faucette.
Meek said the report stunned her. But, she added, it would have been unacceptable under division policy for her to take her concerns directly to the board.
``I would not have been comfortable volunteering advice to board members,'' she said. ``There's a board policy that says the superintendent controls communication with the board. And I did not feel I could go around the superintendent.''
Smith, the chief financial officer, now on suspension, said in an interview Wednesday, he did not receive the Jones report. Smith said he remembers discussing the report with Jones.
Smith was director of budget development when the 1994-95 budget was assembled.
On the last page of his report, Jones wrote this: ``The Director of Budget Development has reviewed this report. He has expressed substantial agreement with this report.''
In numerous places in his report, Jones attributed miscalculations, inappropriate transfers and financial misjudgments to Smith.
Smith said he agreed with some of Jones' findings. But Smith said he inherited many of the problems cited from the previous chief financial officer.
In December '94, internal report found millions of dollars in errors. ILLUSTRATION: Graphic
PROBLEMS HIGHLIGHTED IN BOTH AUDIT REPORTS
Dec. 29, 1994, memo from Internal Auditor Kevin A. Jones:
1. ``There were gross inaccuracies and inconsistencies in the
calculation of salaries and fringe benefits.''
2.``Current budgetary practices often dictate that a percentage
increase is to be applied to prior year's budgetary amounts to
calculate next year's budgetary amounts. This practice results in
short falls or errors since no consideration was given to historical
or actual expenses.''
3.``For the year ended June 30, 1994, there were over $2 million
in 1993-94 purchase commitments carried forward to the 1994-95
school year.''
4. ``There is a projected short fall in the special education
budget of approximately $2.6 million in salaries and payments for
tuition.''
5.``During our review and analyses, we found budgetary transfers
processed by the Director of Budget Development after July 19, 1994,
which were not approved by the School Board.''
6. ``Administrators often learn of budgetary transfers affecting
their unit codes after the transfers have been made.''
7. ``We also found instances where budget transfers greater than
$10,000 were made by the Director of Budget Development after July
9, 1994, but were not approved by the School Board.''
Nov. 7, 1995, audit by KPMG Peat Marwick:
1. ``Personal services costs in instruction, pupil transportation
and operations and maintenance were, on a combined basis, over
budget by over $5 million.''
2. ``Several budget unit directors were not provided historical
financial information to provide input on their non-payroll
expenditure budgets.''
3. ``Approximately $1 million dollars of unfilled purchase orders
were canceled in June of 1994. These purchase orders were reissued
in July 1994.''
4. ``Special education contractual services were over budget by
$2 million.''
5. ``Budget transfers of $43 million were made throughout the
year.''
6. ``The budget directors did not have influence over budget
transfers. Expenditures were sometimes charged to a budget unit
without the director's knowledge or approval.''
7. ``Evidence of explicit Board approval for all budget transfers
over $10,000 made in fiscal year 1994-95 could not be obtained.''
KEYWORDS: VIRGINIA BEACH SCHOOLS BUDGET INVESTIGATION by CNB