THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Sunday, March 3, 1996 TAG: 9603010204
SECTION: VIRGINIA BEACH BEACON PAGE: 06 EDITION: FINAL
SOURCE: The School Board
LENGTH: Long : 396 lines
The following is an excerpted section from the report issued Wednesday by the special grand jury investigating the financial problems of the Virginia Beach City Public Schools: The School Board
The School Board, which can only act through a majority vote of its members essentially ignored both warning signs and actual warnings from former Chief Financial Officer Hal Canary and Internal Auditor Kevin Jones. There seems also to have been a lack of communication both among board members and between board members and school administration personnel - including the Superintendent.
We make specific findings as follows:
Audit Report No. 2 was provided to the Superintendent, Chairman Meekins, and Mrs. Creamer. Audit Report No. 8 was provided to the Superintendent, Dr. Faucette, Chairwoman Kernutt, and Mrs. Creamer. Both of these reports by former Internal Auditor Kevin Jones, detail financial and budget problems and recommend remedial action. Amazingly, these reports were never shared with the School Board as a whole although Board members on the Audit Committee rashly and, in our judgment, inappropriately, assumed the Superintendent would share audit results with the rest of the School Board.
The Internal Auditor reported to the School Board only through the Superintendent. The Audit Committee charter adopted by the School Board made it difficult to get audit findings to the full board in a timely fashion.
Although some members of the School Board questioned budget practices at various times throughout the fiscal year 1994-95, no board member pursued the matter as aggressively as, in our judgment, it should have been. The Board approved transfers totaling $43 million without any stated reservations. Indeed, despite clear warning signs and actual warnings raised by the Internal Auditor to the Audit Committee, a clear majority of the School Board never even questioned the fiscal situation until after the end of the '94-'95 fiscal year.
The selection process by which the Chief Financial Officer candidates were screened was a sham; Mordecai Smith's selection as Chief Financial Officer was essentially ``fixed.'' At Smith's request, a number of School Board members recommended his promotion to the Superintendent. In addition, Dr. Faucette appointed a Chief Financial Officer applicant screening committee which contained two school administrators who had also written letters of recommendation for Mr. Smith. This would obviously make it difficult for any Superintendent to make an objective recommendation to the Board. It is overwhelmingly clear that the selection of Mr. Smith as both interim and permanent Chief Financial Officer was based on School Board politics and without regard to merit.
In their testimony before us, some board members expressed misgivings about selecting Mr. Smith as permanent Chief Financial Officer. One board member testified that Dr. Faucette told him that he had to promote Smith solely for political reasons. Notwithstanding, the uneasiness some board members had about Smith's suitability, the School Board voted unanimously to promote him to that position on a permanent basis.
We find it most inappropriate that several members of the School Board and two members of the selection committee created by Dr. Faucette and chaired by Dr. Pughsley, wrote letters of recommendation for Mr. Smith to be selected as permanent Chief Financial Officer. It is obvious that at least some of the members of the School Board overstepped the boundary of propriety by interfering with employment matters.
In testimony before the Grand Jury, a number of School Board members also commented on Mr. Smith's ineptitude and their resulting lack of confidence in him. Still, despite his clear incompetence and repeated violation of School Board policies, some of those same Board members were among the seven who voted on Feb. 6, 1996, to reinstate Smith to the position of Director of Budget Development.
It is obvious to us that, as a group, the Virginia Beach School Board does not yet appreciate what has occurred. Some Board members, notably Mrs. Kernutt, Dr. Spiva and Mr. Hall, seemed puzzled by the attention drawn to the situation. As they reminded the Grand Jury, the School Division returned surpluses totaling some $30 million to the city in the last decade. While all Board members who testified that the School Board had technical, legal responsibility for what occurred, they all place the real blame squarely on the former superintendent, Dr. Faucette. Both Dr. Spiva and Mr. Hall, rather arrogantly in our judgment, implied that had the City Council fully funded the School Board's budget request, this deficit might not have occurred.
In our opinion, of all the Board members who testified, only Mr. Taylor seemed to have a real grasp of both the magnitude of the situation and the Board's degree of culpability for it. One school administration official who testified before us opined that at least one Board member, Dr. Spiva, was ``in denial'' over the whole budget situation. We concur but, in our judgment, this diagnosis applies to a clear majority of the entire School Board.
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: 1) Their re-instatement of Mordecai Smith to the position of Director of Budget Development; and, 2) The refusal to this point of the School Board to substantively take action toward the subject of the consolidation of financial record keeping functions and other services with city staff.
Based upon the documents we have seen, the School Board was well aware of Mr. Smith's shortcomings in the financial area and, as discussed elsewhere in this report, his repeated violation and circumvention of the School Board's own policies, by a vote of 7-4, they nevertheless chose to reinstate him.
We required that those members of the School Board who voted to reinstate Mordecai Smith appear before us and explain their reasoning. Mr. Hall testified that he did not believe Mr. Smith should be reinstated but voted in favor of it anyway because ``the votes were there anyway.'' The other Board members testified that they voted the way they did because Dr. Pughsley had not made a sufficient case for termination and because they felt that Mr. Smith had rebutted Dr. Pughsley's accusations. All of these Board Members with the exception of Mr. Tolentino admitted that they gave no more than a cursory examination of the documents prepared by Dr. Pughsley.
We have subpoenaed and examined the four-inch thick volume of documents prepared by Dr. Pughsley supporting his recommendation to terminate Mordecai Smith. We have also examined Mr. Smith's written response to Dr. Pughsley's allegations. Even a cursory reading of Mr. Smith's response reveals inconsistencies with the documentary evidence and with his testimony before us.
It is clear that none of the seven members of the School Board who voted to reinstate Smith thought critically about the evidence presented to them. An analysis of the available evidence available to these Board members reveals the following:
The budget transfer information presented by Smith in his opening statement relates to FY 95-96 transfers not FY 94-95 transfers as he asserts. There were 27 budget transfers in excess of $10,000 processed between July 1, 1995, and Aug. 11, 1995, which did not receive Board approval. Of these, 19 related to school allocations. Eight other transfers were recorded and the agenda packets and Board minutes reveal that the Board never approved them.
The documentary evidence prepared by Dr. Pughsley and the Internal Auditor indicated that during FY 1994-95, there were 21 transfers in excess of $10,000 which were not approved by the Board pursuant to Board policy - not 27 as stated by Mr. Smith. Mr. Smith used FY 95-96 data to support his FY 94-95 practices.
In his ``Rebuttal'', under ``School Allocations'', Mr. Smith justifies 19 transfers not presented to the School Board for approval by referring to a Budget Management Document. Dr. Pughsley prepared this Budget Management Document during the fall of 1995 in the wake of the FY 94-95 $12.1 million deficit. Since this document was not even in existence during FY 94-95, it could not possibly have exempted these allocations from Board approval. In any event, this Budget Management Document states specifically on page 9 that the regulation regarding transfers does not allude to ``exempting'' school allocations as asserted by Mr. Smith.
Mr. Smith asserts that in FY 1994-95, the Superintendent authorized an ``Expenditure Realignment.'' There are no documents in either the Superintendent's files or Mr. Smith's files to verify this statement.
Mr. Smith's ``Rebuttal'' asserts that all ``realignments'' for FY 95-96 were done at the request of departments heads. In fact, a total of $322,214 could not be traced to a specific request by any budget manager to be transferred.
The transfer identified in his rebuttal under ``Delayed Spending Strategy,'' moves $674,284 from the Electrical Services line item into 27 unit codes. This line item was not included in the $12 million transfer. In several instances, funds transferred ``out'' of a line item by the Board in the $12 million transfer were unilaterally restored by Mr. Smith without approval.
Mr. Smith's statement that all transfers were made in accordance with School Board policy is blatantly false. School Board minutes do not support Mr. Smith's claim and, as noted above, the Budget Management Document that he asserts justifies his actions did not exist when the actions took place.
Given the overwhelming evidence of his record as both Director of Budget Development and the Chief Financial Officer, we are incredulous that seven members of the school board: Dr. Spiva, Dr. Barnes, Admiral Felt, Mr. Hall, Mr. Jackson, Mr. Tolentino and Mr. Bennis voted to reinstate Mordecai Smith. We certainly see no reason why any future budgets Mr. Smith might develop will have any more credibility than those he has developed in the past.
We find that the School Board failed in its oversight responsibilities toward the Superintendent and his administration. While some Board members who may have served on either the Audit or Budget Review Committees, had access to more information than others, no member of the School Board ever made a serious inquiry concerning the revenue stream either at the time the FY 94-95 budget was proposed and adopted or at any time prior to the conclusion of the fiscal year. In addition, despite being asked to approve some $43 million in budget transfers throughout the 1994-95 fiscal year, only Mr. Hall ever cast a negative vote to approve either a financial statement or requested budget transfer and he did not do so until the fiscal year was virtually concluded. We noted in the videotapes of the Board meetings that several Board members would occasionally ask very pertinent questions regarding a budget transfer or financial statement and either Dr. Faucette or Mr. Smith would dissemble or promise to provide an answer at some unspecified point in the future. Interestingly, both Smith and Faucette responded the same way when questioned directly by us or the Commonwealth's Attorney about certain issues. To this date, Mr. Smith and Dr. Faucette have provided only a fraction of the information they asserted existed to support and corroborate their testimony and ``promised'' to furnish to the Special Grand Jury.
As many School Board members testified, they simply trusted the administration. That any such trust was abused by Dr. Faucette and Mr. Smith is now unquestionable; but the point is that trust in supposedly professional staff should never reach the level of ``blind trust.'' The fact that it did in this case is, in our view, an indictment of the School Board rather than an excuse for what occurred. The Superintendent
The former Superintendent, Dr. Sidney Faucette, likewise bears full legal and substantial moral responsibility for the present and potential deficits. While we have no doubt that Dr. Faucette did not intentionally bring about the deficit, it is abundantly clear that his dictatorial management style, his reckless approach to spending decisions, and his abhorrence for any surplus that might revert to the city, more than anything else brought about the environment where deficit spending could occur so easily.
Specifically, our factual findings in this regard are as follows:
Based upon the statements and testimony of many school division officials and upon his own demeanor before us, the former Superintendent, Dr. Faucette, was largely uninterested in fiscal or budgetary matters. He spent tax money impulsively on expensive projects without regard for his own budget and established procurement procedures. He repeatedly ignored fiscal warnings from both former Chief Financial Officer Hal Canary and Internal Auditor Kevin Jones.
Servicemaster approached Dr. Faucette in October of 1993 and proposed a contractual relationship for their services with our school division. Servicemaster flew a number of school administrators to their headquarters in Illinois to study such a relationship. Dr. Faucette did not consult with these administrators prior to his decision to enter into the contract. On behalf of the school district, Dr. Faucette signed the contract despite reservations from some senior school officials and without a clear understanding of the costs of transition. The Servicemaster contract was originally proposed as a pilot program for eight schools. Dr. Faucette chose to implement their services citywide. Proper procurement requirements were not strictly followed. Even though a cost-benefit analysis showed long-term savings, the short-term effect was an increased expenditure for custodial services. The subsequent decision to buy out the Servicemaster contract in FY 94-95 required an additional unbudgeted expenditure.
The decision to lease Celebration Station with the option to purchase and to purchase the Thalia II building represent additional major, off-budget expenditures which were implemented by Dr. Faucette. In both cases, the broker approached Dr. Faucette about the School Division acquiring these properties. Dr. Faucette himself conducted all negotiations. Again, the normal procurement process was not followed. In the case of Thalia II, the school division's Office of Facilities Management wrote a memo to Dr. Faucette advising him of air quality and other concerns about the potential purchase. Their efforts and advice served no purpose because the Superintendent executed the contract without waiting for input from the school division's own experts.
During his tenure as Superintendent, Dr. Faucette also served as a consultant to a company called Educational Resource & Development Institute (ERDI). This is a company based in Lincoln, Nebraska, which consults with businesses who seek to sell their services or products to school systems around the country. The principle stockholder of this company is Michael Kneale, a former school superintendent and a close friend of Dr. Faucette's. Dr. Kneale, through another of his companies, Kneale Enterprises, also sells his services as a consultant, motivational speaker, and facilitator to school districts and corporations nationwide. During FY 94-95, ERDI paid Dr. Faucette $7,200; during this same period of time, the Virginia Beach School Division paid Dr. Kneale over $29,000 for his consulting and facilitation services. We regard this relationship as a clear conflict of interest. Dr. Faucette's contract gives him permission to perform outside consulting work. Because the evidence is that Dr. Faucette disclosed this relationship to the School Board and received their permission to continue in it, it is clear that any violation of the State and Local Conflict of Interest Act (2.1-639.1 et seq. of the Code of Virginia (1950) as amended) was not a ``willful'' violation as required for conviction under that statute. Nonetheless, this appearance of impropriety should have been noted by Dr. Faucette and never permitted by the School Board.
Based upon correspondence between the two, Dr. Faucette was well aware of the shortcomings of Mordecai Smith as Director of Budget Development and the problems Chief Financial Officer Canary was having in supervising him. He nevertheless fired Canary, promoted Mr. Smith to Chief Financial Officer, and permitted Smith to remain Budget Director. This eliminated any remaining oversight to management of the FY 94-95 budget or the preparation of the FY 95-96 budget.
We find the facts and circumstances surrounding the appointment of Mordecai Smith as interim Chief Financial Officer on Aug. 16, 1994, and later as permanent Chief Financial Officer on Feb. 22, 1995, to be very disturbing. The former CFO and Mr. Smith's supervisor, Hal Canary, documented his serious reservations about Mr. Smith's performance as Director of Budget Development. The former Internal Auditor, Kevin Jones, likewise made his reservations known. We have seen correspondence from Dr. Faucette to Mordecai Smith where he complains about having to ``rewrite'' his budgets. Dr. Faucette testified that he was well aware that Mordecai Smith lacked the experience and ability to manage the financial affairs of the second largest school division in the Commonwealth but insists that he was forced to promote him by the School Board. Dr. Faucette testified that he was told by members of the School Board that he better recommend Mordecai Smith's appointment because ``. . . there were six votes to appoint him anyway.'' Dr. Faucette testified that, in retrospect, he should have resigned rather than accede to the appointment of a Chief Financial Officer he knew to be incompetent. We agree.
Contrary to the public statements made by Dr. Faucette to his current School Board in Gwinnett County, Georgia, Dr. Faucette worked very closely with Mordecai Smith in the preparation of the budgets in both FY 1994-95 and FY 1995-96. He was clearly a ``hands-on'' Superintendent when it came to major spending decisions.
Dr. Faucette, both in his public statements in Georgia and to a lesser extent in his testimony before us, asserts that the School Board brought on the problems by stripping him as Superintendent of authority in the fiscal area and turning it over to a Budget Review Committee. To anyone who has seen the videotapes of the School Board meetings or reviewed the correspondence addressed to and from Dr. Faucette, this defense is ludicrous. 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 a whole, regarding any spending or revenue matter. The Chief Financial Officer/Budget Development Director
As Director of Budget Development, Mordecai Smith was primarily responsible for the planning and drafting of the budgets under investigation and which have had or currently have, serious financial problems. Later, as Chief Financial Officer, he assumed responsibility for administering all of the financial affairs of the school division. In our judgment, he lacked the knowledge and expertise to perform either of these positions effectively.
Our specific findings in this regard are as follows:
Mordecai Smith, initially as Budget Director and later as Budget Director and Chief Financial Officer, prepared budgets in FY 93-94, 94-95, and 95-96. None of these budgets reflected the real needs of the school system as a whole or of the various component budget units. The budget was based upon a percentage of the previous year's budget and was implemented without sufficient input from those who ran the day-to-day operations of the school system. Mr. Smith did not use historical data nor did he provide it to the budget managers. As just one example of this, Smith took steps that resulted in insufficient funds for electricity in both FY 94-95 and FY 95-96. In recent years, the school division has consistently spent over $8 million annually for electricity. In FY 94-95 after originally budgeting sufficient funds 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 the City Manager, Mr. 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. Then, for no reason we can fathom, in FY 95-96 Mr. Smith budgeted only $7 million which will again be insufficient this year to pay the electric bill.
Later, as both Budget Director and Chief Financial Officer, Mr. Smith was directly responsible for revenue forecasts which were completely unreasonable, unreliable and in some measure, purely fictitious. Mr. Smith was also directly responsible for initiating $43 million in budget transfers during FY 94-95 which made the budget absolutely useless for planning or management purposes.
Mr. Smith declined to honor a subpoena issued by the Special Grand Jury for files, financial records, and a laptop computer belonging to the School Division which Smith removed from his office at night after he was placed on administrative leave by Dr. Pughsley. When the Commonwealth's Attorney asked him why he had not complied with our subpoena, Smith answered that he elected to return the files to the School Division instead. When the investigative staff of the Special Grand Jury secured the records Smith turned into the School Division, it was noted that there are apparent gaps in these records and the computer has never been produced for either the Special Grand Jury or the School Division.
Mr. Smith gave conflicting testimony before us. He initially testified that he actually projected approximately $8 million to $9 million in federal impact aid for FY 94-95 and that documentation existed in the form of a spreadsheet that would corroborate this testimony. No such spreadsheet apparently exists. He testified that it was Dr. Faucette who insisted on projecting a completely unrealistic $12 million from the federal government. Dr. Faucette vehemently denies this. We are inclined to believe Dr. Faucette, at least in this instance, because Mr. Smith later contradicted his earlier testimony when he asserted that he had every reason to expect that the actual impact aid figure would be $15 million as late as June of 1995. He testified that this was based upon information he had been given by officials in Washington. When asked which official had given him such assurances, his response was Carrie Jasper at the Department of Education. When interviewed, Ms. Jasper denied making any such assurance. On the contrary, she stated that Mr. Smith knew during the fall of 1994 that the 1994-95 impact aid payment would only be approximately $8 million, which would have been consistent with historical trends. Ms. Jasper produced a copy of a letter sent to Mr. Smith dated Nov. 1, 1994; a copy of the same letter which we obtained is stamped as received by the Virginia Beach School Division on Nov. 8, 1994. This letter in substance corroborates Ms. Jasper and refutes Mr. Smith's testimony.
Mr. Smith testified that he knew it was inappropriate to base the revenue forecast for aid from the Commonwealth on the September enrollment. He explained that he allowed for a 2 percent drop off between September and March, in his revenue estimate. The numbers in the budget do not corroborate this statement.
The Interim Superintendent, Dr. Pughsley, recommended Mr. Smith's termination based, among other things, upon his repeated violation of the School Board's transfer policy. This recommendation was amply supported by the documentation assembled by Dr. Pughsley and the Internal Auditor, Victoria Lewis.
We have received documents supporting the allegation that Mr. Smith made more than $2.9 million in unauthorized transfers in FY 95-96 under the guise of a ``realignment.'' Mr. Smith collected all but five copies of the budget approved by the School Board and has been utilizing a budget document that reflects his unauthorized transfers to manage the school division rather than the budget document approved by the School Board.
On some occasions, Mr. Smith deliberately broke down a large transfer amount into separate transfers each less than $10,000 in order to circumvent the policy requiring Board approval of such transfers.
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. While examples of this pattern are too numerous to list here, one example which particularly disturbed us was his transfer of charges for indoor air quality improvements at the Great Neck Middle School to the fund designed to finance needed renovations to accommodate compliance with the Americans with Disabilities Act. The appropriate budget manager, Anthony Arnold, the Director of Facilities Management for the school division, was never consulted and when he found out about it after the fact, he properly questioned the legality of Mr. Smith's actions. Mr. Smith advised Mr. Arnold that he felt that the action was legal but never sought an opinion to that effect from the City Attorney. Ironically, there was an appropriate budgeted line item for indoor air quality work but Mr. Smith had already drained that account with other budget transfers.
Mr. Smith clearly violated School Board policy in transferring several million dollars in FY 94-95 and FY 95-96 without the necessary approval by the School Board.
As noted earlier, Mr. Smith testified to the Grand Jury that he had been ordered to inflate the revenue estimates by Dr. Faucette. We reject that assertion simply because, if it were true, Mr. Smith would not have persisted in his false projections of a surplus based upon these revenue estimates after Dr. Faucette's departure to Gwinnett County, Ga. ILLUSTRATION: Photos
Dr. Sidney Faucette
Mordecai Smith
KEYWORDS: VIRGINIA BEACH SCHOOL BOARD SPECIAL GRAND JURY REPORT
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