THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Thursday, February 29, 1996 TAG: 9602290340
SECTION: FRONT PAGE: A1 EDITION: FINAL
SOURCE: BY TOM HOLDEN AND ALETA PAYNE, STAFF WRITERS
DATELINE: VIRGINIA BEACH LENGTH: Long : 421 lines
In blunt and unsparing language, a special grand jury investigating the school district's finances called upon seven school board members Wednesday to resign or face prosecution.
The jury's stunningly critical report, which described board members as ``unfit for further service,'' blamed the district's worst financial crisis on the School Board, the former superintendent and the recently reinstated budget director.
Last year's $12.1 million deficit and other fiscal problems were the direct result of reckless and incompetent financial conduct by former Superintendent Sidney L. Faucette and Chief Financial Officer Mordecai L. Smith, the report concluded.
The demand that board members leave office immediately marked the first time in the city's history a public body had been so dramatically disciplined and it set the stage for a period of uncertainty unmatched in the Commonwealth's second largest school system.
None of the school board members contacted Wednesday evening planned to immediately comply with the jury's call to resign. Commonwealth's Attorney Robert J. Humphreys said he would prosecute them if they failed to leave office.
Already reeling from the resignation of two board members earlier this month and the arrival of a new superintendent last week, the school system could soon have an entirely new slate of top leaders on the eve of an election.
The report was released exactly six months after the district first announced it ended the fiscal 1994-95 with a $7.4 million deficit. That figure later ballooned to $12.1 million following an independent audit by KPMG Peat Marwick.
Despite any calls that Faucette be held accountable beyond the court of public opinion, the jury said it would be pointless to prosecute him because the most severe penality for malfeasance of office is the loss of one's job.
Faucette told reporters in Gwinnett County, Ga., where he has been superintendent since this summer, that he does not plan to resign unless asked to by a majority of the five-member board. A meeting has been scheduled tentatively between Faucette and his Georgia school board for Friday.
But it was the findings of the jury that took center stage Wednesday. Among its other demands, the special grand jury called for changes in state law and a more severe financial penalty for public officials who violate laws that prohibit public officials from spending more than they have. The jury wanted the personal liability set at up to $100,000 instead of the current $250.
The jury also found that systemic problems in the school district contributed heavily to the deficit problem. Under Virginia's unique school funding arrangement, there is no incentive for either the School Board or the administration to be fiscally prudent, the jury said.
The advantage for the board is not having to balance educational programs or buildings against what the public can pay in taxes. The School Board, the jury said, currently presents a budget late in the city's overall budget process permitting little time, if any, for city staff review.
In demanding the resignations of all but two board members, the report said all failed to exercise oversight and ``some have demonstrated arrogance, lack of remorse, and/or lack of appreciation for what occurred.''
Board members are described as naive and are criticized for their ``blind trust'' of a ``supposedly professional staff.''
The report calls for chairwoman June T. Kernutt, vice-chairman D. Linn Felt, Elsie M. Barnes, Ulysses Van Spiva, Joseph D. Taylor, Ferdinand V. Tolentino and Tim Jackson to resign.
Among other things, the report says that the board ignored warning signs of impending problems, Smith's appointment was based on board politics, and board members failed to aggressively question budget practices.
The jury took particular exception to Smith's reinstatement on a probationary basis to the Director of Budget Development job earlier this month.
``If any further evidence were needed that the Virginia Beach School Board has completely lost touch with reality, it can be found in recent personnel and accounting decisions,'' it reads.
According to the report, some of the board members who voted to reinstate Smith had testified before the grand jury about his ineptness and their lack of confidence in him.
Most of the board members reached Wednesday declined to comment.
Jackson said he hadn't yet read the report.
``I'm going to do what's right,'' he said. ``I have to read the report, consult with my friends and attorney. Then I'll make my decision.''
Attorney Joseph L. Lyle Jr., who has advised the board on matters related to the shortfall, said he had recommended to his clients that they not comment.
``I think that their position as citizen volunteers serving the public places them in the position where they are entitled to rely on information from their staff and superintendent. To me, that would rebut any notion of malfeasance.''
``We have not discussed the recommendation (that most of the board members resign) yet,'' Lyle said.
``Something like this has to sink in.''
The report is equally unsparing with Faucette, whom it accused of having a ``dictatorial management style'' and a ``reckless approach to spending decisions.''
According to the report, he ignored purchasing procedure and spent money impulsively. He ignored warnings of impending financial disaster from staff and surrounded himself with ``yes-men,'' forcing out those who could have been a hindrance.
``By many witnesses' accounts, Superintendent Faucette brooked little dissent from subordinates,'' the report reads.
Faucette's decision to bring in a private custodial firm, Servicemaster, came despite reservations by some of his senior staff and without clearly understanding the costs. He implemented their services districtwide, although the initial proposal called for limited use. The eventual buyout - $1.4 million - was an unbudgeted expense for the district in 1994-95.
The jury was no less forgiving in considering the more than $500,000 lease of Celebration Station and the $1.8 million Thalia II building, both on Virginia Beach Boulevard.
The report cites work Faucette did for a friend's company as ``a clear conflict of interest,'' which did not willfully violate state statute but should never have happened because of the appearance of impropriety.
It questioned the manner in which Smith was appointed chief financial officer, particularly because Faucette was aware of problems with Smith's job performance. Making Smith chief financial officer and director of budget development eliminated oversight for managing the 1994-95 budget and the development of the 1995-96 budget.
The jury dismisses as ``ludicrous'' Faucette's public statements following the discovery of the deficit that he was not a part of the budget development process for the last two years and that he was stripped of fiscal authority by the board's Budget Review Committee.
``The Budget Review Committee, by the admission of its members, was completely ineffectual and never made a single decision independent of the Superintendent or the School Board as whole, regarding any spending or revenue matter,'' the report reads.
Faucette's Virginia Beach attorney, Kenneth V. Geroe, said he had faxed a copy of the report to his client.
``I'm confident that while accepting his share of the responsibility, he would dispute some of the phraseology,'' Geroe said. ``It's written about as strongly as I can imagine. Some of the adverbs and adjectives chosen are extraordinary . . . There are parts he would flat out disagree with.''
Geroe said Faucette has always accepted that part of the responsibility was his, but that other factors were also at play and the report supports that.
Geroe said Faucette would likely be more concerned with public opinion in Georgia than here.
``I think Dr. Faucette still cares about the school children in Virginia Beach and his friends here. (But) I'd be real surprised if he wants to rehash this in Virginia Beach,'' Geroe said.
If the language condemning Faucette and the school board was harsh, it was no less so for Mordecai Smith, who as director of budget development was primarily responsible for planning and drafting the budgets in question.
Smith prepared the budgets for the last three fiscal years.
``None of these budgets reflected the real needs of the school system as a whole or of the various component budget units,'' the report said. The people who run the day-to-day operations of the budget were cut out of its development, and each budget was based on a percentage of the previous year's numbers.
The jury charged that Smith consistently and repeatedly made decisions that contributed to the district's $12.1 million deficit in fiscal year 1994-95 by underbudgeting, overspending and incorrectly predicting state and federal dollars.
Citing one glaring example, Smith shifted money within the budget and did not leave enough to pay the district's electricity bills in fiscal years 1994-95 and 1995-96.
In recent years the district had consistently spent more than $8 million annually for electricity. In fiscal year 1994-95, after originally budgeting enough money for electricity, Smith transferred almost $1.3 million from the electrical services account, resulting in insufficient funds to pay the electric bill.
``It was only through the intervention of (Virginia Beach City Manager James K.) Spore and his staff that Virginia Power waived the substantial and unbudgeted late payment fees which would have increased the deficit in that year even further,'' the jurors wrote.
``Then, for no apparent reason we can fathom, in Fiscal Year 1995-96, Mr. Smith budgeted only $7 million which will again be insufficient this year to pay the electric bill.''
When Smith assumed the titles of both budget director and chief financial officer, he was responsible for revenue forecasts. It was here that the jury leveled some of its most harsh criticism, calling the forecasts ``unreasonable, unreliable and in some measure, purely fictitious.''
The jury also said Smith was directly responsible for initiating the $43 million in budget transfers, shifts in the budget that both the jury and the KPMG Peak Marwick audit said made the entire budget ``absolutely useless for planning or management purposes.''
Smith also declined to honor a subpoena from the special grand jury for files, financial records and a laptop computer belonging to the School Division.
On Sept. 25, when he was placed on leave by former Interim Superintendent James L. Pughsley, Smith removed the computer from his office at night. During the jury's proceedings, Humphreys asked why he did not comply with the subpoena, Smith reportedly said he turned the files over to the school district.
When investigators obtained those records from the district, they found gaps in the records and the computer was still missing. It has never been located.
Smith also gave conflicting testimony to the jury about projected revenue from the federal government.
There are three basic sources of money for the school district: the city, the state and the federal government. The federal money is based on a census of military dependents in the school system's previous year. This income has historically been forecast with a fair amount of precision, the report said.
Smith repeatedly contradicted himself, according to the report. While appearing before the jury, Smith testified that he projected federal impact aid for the fiscal year 1994-95 to be between $8 million and $9 million and that proof existed in the form of a spreadsheet. No such spreadsheet exists, the jury reported.
At one point, Smith then testified that he expected the impact aid would be $15 million as late as June 1995, a projection he said he based on conversations with a Department of Education official Carrie Jasper.
When interviewed by jury investigators, Jasper denied telling Smith the aid would be that high. She reportedly told the jury that Smith knew in the fall of 1994 the impact aid would be only $8 million, which would have been consistent with historical trends.
Jasper then produced a copy of a letter she sent Smith on Nov. 1, 1994 and which was stamped as received by the School Division on Nov. 8, 1994.
``This letter in substance corroborates Ms. Jasper and refutes Mr. Smith's testimony,'' the jury said in its report.
But the jury found that Smith made more than $2.9 million in unauthorized transfers under the guise of ``realignment.'' On some occasions, the jury found, Smith broke down a large transfer amount into separate transfers each less than $10,000 in order to circumvent the policy requiring board approval.
``Mr. Smith's pattern of arbitrarily charging expenses to accounts without regard to either their propriety or consultation with the appropriate budget manager is something for which he makes no apologies,'' the jury wrote.
Smith referred calls to his attorney, who is out of town.
The jury makes a point of saying that the problems found in the district's top leadership were not indicative of the system as a whole.
``We found it refreshing that, in the midst of the environment described in this report, some dedicated men and women remained focused on the mission of the Virginia Beach Public Schools even when their superiors were not.''
District spokesman Joe Lowenthal: ``This is not an indictment of the school system. We are in the business of educating children. We have done that and will continue to do that.'' MEMO: Coming tomorrow: What community leaders and parents have to say, what
happens next and details on the 1996-97 budget.
AN OVERVIEW OF THE REPORT
Editor's Note: This is an edited version of the overview of the
report of the Virginia Beach special grand jury investigation of the
Virginia Beach school division.
THE DEVELOPMENT OF THE DEFICIT(S)
Prior to 1991 and particularly under the leadership of former
superintendent, Edward Brickell, conservatism was the watchword in
projecting both federal impact aid and payments and average daily
membership numbers. As a result, the school division routinely finished
the fiscal year with a surplus. This surplus, which by law must revert
to the city, was customarily re-appropriated by the City Council to the
School Division for expenditure on capital projects.
Sidney Faucette was hired as division superintendent in 1991 and
promptly demonstrated a dislike for the reversion of money to the city
at the end of the fiscal year. Many members of the School Board shared
the superintendent's discontent with the practice; with the concurrence
of the School Board, the superintendent began encumbering ever larger
portions of any projects surplus for future school year purchases. This
money, which often existed only on paper, became known in the school
division as ``year-end funds.'' Faucette at the helm, school
administration directors and members of the School Board began to rely
on this money to fund unbudgeted or underbudgeted expenditures.
The fiscal handwriting was on the wall when the fiscal year 1993-94
budget could not be balanced only by transferring funds from proprietary
or enterprise accounts. The need for this action demonstrated flagrant
financial mismanagement. In our opinion, any prudent financial manager
should have known that since these funds would not be available for
future budget bailouts, the underlying revenue/expenditure imbalance
would have to be aggressively addressed. The former chief financial
officer, Hal Canary, obviously recognized the gravity of the situation
and cautioned the superintendent, Faucette, in writing.
There is ample evidence that the red flags were noticed by the
then-chief financial officer, Hal Canary, and then-internal auditor,
Kevin Jones, as early as 1993. For an unexplained reason, however, the
superintendent, the budget director and at least some members of School
Board disregarded their explicit forecasts. As early as August of 1993,
the internal auditor advised the School Board Audit Committee,
consisting of Faucette, then-Chairman Samuel Meekins, and board member
Susan Creamer, that major problems existed in the budget and school
finance procedures. Jones detailed several pages of recommendations in
that report which were likewise ignored. Similarly, in October 1993,
chief financial officer Canary projected $7 million in expenditures over
budget for fiscal year 1993-94.
By witnesses' accounts, Faucette brooked little dissent from
subordinates. It is abundantly clear from the evidence that Faucette
preferred to surround himself with ``yes-men.'' The evidence indicates
that he deliberately sought the retirement of Fred Benham, who as
assistant and later deputy superintendent oversaw the fiscal operations
of the school division during the years when conservatism was the
watchword and year-end surpluses were common. He eliminated the position
of director of accounting and consolidated many of the responsibilities
of that position with the chief financial officer. Faucette also
requested the resignation of Canary, who was among the first to warn the
superintendent that the division's fiscal policies were potentially
disastrous. The internal auditor, Kevin Jones, resigned in frustration
when Faucette and Mordecai Smith repeatedly ingored his warnings that a
deficit was looming.
During fiscal year 1994-95 and fiscal year 1995-96, the School Board
budget represented unrealistic revenue projections and meaningless
expenditure estimates. Rather than allowing the budget directors to
advise the superintendent of their needs and explain their priorities,
the Mordecai Smith dictated what each director's allotment would be. As
a result, some budgets units failed to reflect clearly necessary goods
and services. It is also clear from the evidence that Smith literally
fabricated some numbers. The budget document was useless as either a
planning or management tool.
Budget managers were often uninformed about budget transfer decisions
affecting line items in their areas of responsibility. Smith routinely
transferred money from accounts without consulting with the directors
involved. Shortfalls in individual accounts frequently resulted. To make
up for the shortfall in one account and to achieve an ostensible
balance, Smith transferred money from other accounts. These transfers
often caused those accounts to move into the red and usually
necessitated future transfers to bring them back into line. This domino
effect cascaded throughout the budget.
School officials made substanstial unbudgeted expenditures without
significant regard for the existence or source of available funds.
Faucette made at least three spur-of-the-moment decisions which
seriously impacted the fiscal year 1993-94 and fiscal year 1994-95
budgets. They were the Servicemaster contract, the subsequent buyout of
that contract, the lease of Celebration Station, and the purchase of
Thalia II. While there is no evidence of any illegality at this time,
all of these transactions were handled in an irregular manner. Faucette
negotiated some of these contracts himself and did so, at times, without
prior consultation with the division personnel who would normally be
involved with procurement and facilities acquisition.
For example, the Purchasing Department and the Office of Facilities
Management studied the Thalia II purchase and expressed written
reservations to Faucette about the purchase only to learn that the
superintendent had already executed the purchase contract without
waiting for these reports.
Celebration Station was leased by the school division in August of
1992, yet the lease payments were apparently not included in either the
fiscal year 1993-94 or 1994-95 budgets. Although money to fund the lease
was included in the fiscal year 1995-96 budget, the funds budgeted were
only sufficient for two months.
Estimates of student population for revenue projection purposes bore
little resemblance to reality. Mordecai Smith admitted under oath that
his federal revenue projections were essentially pulled out the thin
air; he insisted, however, that he did so at Faucette's direction.
Faucette categorically denied any such directive.
At the same time, Faucette admitted that he knew the amount budgeted
for federal impact far exceeded payments received in previous years.
Both Faucette and Smith acknowledged that basing the school
division's estimate of aid from the commonwealth on September enrollment
rather than the March average daily membership numbers upon which the
payments from the commonwealth are actually based, deliberately and
artificially inflated the revenue estimates. Faucette and Smith
testified that they opposed the use of the September numbers.
Given that Faucette was notified of the school division's potential
fiscal problems as early as 1993 and again in August 1994 and because
more that 85 percent of the school budget is personnel costs, the
``delayed spending plan'' implemented in December 1994 was a case of
``too little, too late.'' This rather tame response to a severe fiscal
problem reflects the inherent weakness that many senior educators have
in dealing with management and fiscal problems. They reach senior
management through their skills as educators, not as planners, managers
or financial experts.
The organizational and division of labor among the school division's
financial staff made reporting difficult and monitoring almost
impossible. Since the position was established, the internal auditor
reported jointly to the superintendent and the School Board. This
situation, combined with Faucette's and Smith's unwillingness to
cooperate, directly resulted in Kevin Jones' resignation. Faucette's de
facto consolidation of the positions of budget director, accounting
director, and chief financial officer in Mordecai Smith devastated the
school division's financial posture. Not only was Smith clearly
incompetent to perform any of these functions, there was no effective
oversight of his actions.
The strained relationship between the School Board/School
Administration and City Council/city staff also contributed to the
magnitude of the deficit. With the benefit of hindsight, it is now
obvious that if the School Board and school administration had had
better communication with city officials and if the city and School
Board had worked together with the school administration from the
beginning and had taken advantage of the experience of the city staff in
dealing with revenue shortfalls, the final fiscal year 1994-95 deficit
would have been greatly reduced.
The deficit resulted from overall unconcern, fiscal incompetence,
capital purchases made at the whim of the superintendent, and a naive
School Board which as a group, apparently did not regard financial
oversight as part of its responsibilities. The public should not lose
sight of the fact that to the extent that there is an adverse impact on
the education of our children, it is entirely due to the actions of the
Faucette, Smith and the members of the School Board. The fault is
theirs and is the responsibility of no one else.
Two pages of coverage inside/A6-A7
PILOT-ONLINE
The full text of the special grand jury's report is available on the
News page of Pilot Online at http://www.pilotonline.com/
ILLUSTRATION: [Color Photos]
June T. Kernutt, Elsie M. Barnes, Ulysses Van Spiva, Joseph D.
Taylor, D. Linn Felt, Ferdinand V. Tolentino and Tim Jackson
Sidney L. Faucette
STEVE EARLEY
The Virginian-Pilot
Joseph L. Lyle Jr., attorney for the school board, left, and Kenneth
V. Geroe, attorney for former Superintendent Sidney L. Faucette,
read over the grand jury's report.
REPLACEMENTS
Should any of the seven board members called upon to resign do
so, they could be replaced in one of three ways:
If they were originally appointed to the board by the City
Council then the Council names the replacement.
If they were elected, Circuit Court judges name a replacement.
After July 1, 1996, if a measure approved by both houses of the
General Assembly is signed by the governor, the remaining board
members choose the replacement.
Source: Virginia Attorney General's Office
The grand jury questioned Mordecai Smith's return as budget
development director.
Commonwealth's Attorney Robert J. Humphreys says he will prosecute
seven school board members if they don't resign.
STEVE EARLEY photos
The Virginian-Pilot
From left, attorneys Joseph L. Lyle Jr. and Kenneth V. Geroe, and
Virginia Beach city councilman Robert K. Dean read the grand jury
report. Said Lyle, the lawyer for the school board: ``Something like
this has to sink in.''
KEYWORDS: GRAND JURY VIRGINIA BEACH SCHOOL BOARD BUDGET by CNB