"I am astounded by these allegations."
-- FCPS Superintendent Tom Shelton
-- FCPS Superintendent Tom Shelton
District says it will join Budget Director in requesting an audit
by OEA and State Auditor
by OEA and State Auditor
"Once Tom [Shelton] was made aware of the dire situation on October 18, 2012,
he failed to advise the Board or to take immediate and decisive steps
to address the critical financial situation that faced the district.
Instead, he continued to spend as if there were no crisis
and with some of the expenditures being in
violation of Board Policy..."
--FCPS Director of Budget and Staffing Julane Mullins
In recent months board member Amanda Ferguson had been pressing Shelton for a better explanation for the cause of the deficit only to be criticized sharply by some fellow board members, and dismissed by Herald-Leader columnist Merlene Davis as childish in a condescending article. Along the way Ferguson questioned a couple of suspicious money transfers. She apparently had the wrong transfers, but the right idea.
Today the picture looks a lot different.
Tomorrow the Board is set to resume discussions.
Today the picture looks a lot different.
Tomorrow the Board is set to resume discussions.
Anatomy of an irregularity
Whenever the school district asks the Fayette County Board of Education approve the escrow of funds, a journal entry is made. This entry removes funds from the general ledger (which is like a check book) and posted on a balance sheet (which is like your savings) account for future expense.
It’s like taking funds from your checking account and placing them in savings account for future of one- time expenses.
In this case, the Board approved the draft budget with a checking account total that was improperly inflated by the $20 million because - unbeknownst to them - it was still in the “checking account.” That would have been fine IF the $20 million had already been moved to the “savings account.” But that had to be done no later than July. Once Ms. Mullins discovered the error, the district had to put the money back into the “checking account” to pay for expenses. Boom.
TO: Fayette County Board of Education Members
FROM: Julane Mullins, Director of Budget and Staffing
DATE: May 26, 2014
RE: $20 Million Deficit
CC: Adam Edelen, Auditor of Public Accounts
Marcia Seiler, Executive Director Office of Education Accountability
I have worked in the Budget and Staffing office for 16 years and have been the Director of Budget and Staffing for ten years. In light of the current situation that is facing the Fayette County Schools, I feel compelled to provide this information to the Board to shed light on the facts surrounding the current budget crisis and suspected violations of law and numerous acts of mismanagement, fraud, waste and abuse of authority that have resulted in the current state of affairs.
As is outlined in greater detail below, the Director of Finance Rodney Jackson failed to make a journal entry as discussed in the tentative budget discussions. Subsequently the journal entry was not made until December 6, 2011 six months after it should have been. By then, the Annual Financial Report had been sent to KDE (due July 25, 2011) which was expected to have those funds committed or reserved per our budget discussions in May.
Thus, the December 6, 2011 Journal entry for $20 million was irregular not because of the amount of the journal entry or the reasons for it. The Board had approved the escrowing of funds at its May meeting. We had established a practice of the Board approving the escrow funds in May, and Rodney making the transactions prior to the submission of the Annual Financial Report due to KDE on July 25th. The Journal entry was irregular because of the date of the entry. It is clear that Rodney knew of the significant problem with this journal entry. You will note he used the words “correct unreserved account” when his department made the journal entry.
However, rather than to alert anyone of this occurrence, and to lessen the financial implications for the district’s 40,000 students and 6,000 employees, Rodney sat silently by while Tom came in as new superintendent with a $13 Million spending plan.
Additionally, the Working Budget for 2012-13 had already been approved by the Board with numbers that were improperly inflated (by $20 million) due to his six month delay.
It was not until late June 2012 while doing routine end of year activities and while looking at expenses vs. revenue, that I discovered the December Journal Entry. I questioned Rodney, who insisted he had done everything right. Mary and I ultimately discussed it when Mary returned from vacation. Rodney downplayed the significance of the problem and told Mary that I was over-reacting.
As budget discussions continued in the fall, it appeared to me that neither Mary nor Rodney had notified Tom. With Mary’s permission I met with Tom on October 18, 2012 and showed him the documentation. He said, “Are you telling me the budget for the last two years has been inflated by $20 million with recurring expenses.” I indicated “yes.” Once Tom was made aware of the dire situation on October 18, 2012, he failed to advise the Board or to take immediate and decisive steps to address the critical financial situation that faced the district. Instead, he continued to spend as if there were no crisis and with some of the expenditures being in violation of Board Policy as outlined below.
In December and January, Rodney, Mary, Tom and I met for the 2013-2014 Draft Budget. I asked if we were going to work on a plan to reduced expenses to stop the fund balance from further decline. Tom indicated yes, I suggested $10 million per year for the next three to get us to a point where we were operating with recurring expenses only and give us an opportunity to build our fund balance to a level of safety to be able to cover summer payrolls and any unexpected expenses such as unfunded mandates and midyear budget reductions. He indicated that he wanted to start with budget training for cabinet. This was done over a period for four to five weeks and had minimal impact upon the significant problem.
Tom’s spending continued despite the critical situation. During the tentative/working budget we added STEAM, 2nd Year of Expansion for CGW, picked up additional expenses for Opportunity Middle College previously funded with a grant, 1% salary increase, $360K for a match for spending money smartly grant and $80K for administrator to oversee grant, $165K for Chief Academic Officer and Rodney even added another position for Financial Services to the general fund. All of these had significant budget implications.
When reviewing information in my office, we realized there were several problems with Financial Service’s accounting practices. They were posting revenue against expense accounts; this practice makes it impossible to truly see how much a program costs to operate because it appears that they are spending less than they really are therefore you can never budget properly. We also found where Rodney had posted revenue against budgets in Financial Services to free up additional funds in their budget. I presented Mary with documentation about this and she indicated that she would contact the internal auditor. I was never asked to provide any information.
In addition to the above, however the salary Tom had promised to Lu Young, the Chief Academic Officer was not consistent with our current salary schedule. I was directed to expand the Hay Additive in the Salary Schedule and not to add the information regarding the increase to the cover memo presented to the Board so as not to “flag” it. I did as directed even though this is not consistent with the philosophy of “transparency” with which Tom indicated that he would conduct the business of the school district.
In a manner not consistent with past practices on taking such matters to the Board, Tom also granted significant pay raises to Mary Wright and Vince Mattox without Board approval, without adjustments in their position descriptions.
Also, Board Policy requires Board approval for transfers of over $50,000. In May of 2013, Tom wanted transfers in his budget in excess of $50,000 to include two $75,000 transfers to Navigo and directed that these budget transfers be made despite the fact that they violated the Board Policy requiring approval for such expenditures. In July, 2013 he added a change in this policy to the annual policy revision so that he could continue to make transfers in excess of $50,000 without the knowledge or approval of the Board. A few of the documents that support the facts I have outlined are attached.
In sum, I recognize the serious and significant situation that all of us have been placed in and I am concerned that once this critical information was given to those that could address it, they failed to do so, continued to make expenditures that only compounded the problem and began implicating me and my department. So, in addition to providing this information to you, I have provided it and additional information to my attorney, to the Kentucky State Auditor of Public Accounts and to the Office of Education Accountability and am asking for a full investigation relative to the district’s current situation including my concerns of violations of law, mismanagement, fraud waste and abuse of authority.
While you have heard a great deal of concern from employees about a fear of retaliation for speaking out, I do believe that is a valid concern and I realize that by providing this information to you, the Auditor of Public Accounts and OEA and requesting a full investigation, I risk being retaliated against by the superintendent. I also recognize that under state law, Board members cannot become involved in personnel matters and therefore cannot protect me. While I certainly hope that I will not be retaliated against, I have already retained counsel and am prepared to avail myself of the protections afforded by state and federal law.
This from the Herald-Leader:
Fayette school official calls for investigation,
says $20 million 'irregularity' led to budget crisis
The director of budget and staffing for Fayette County Public Schools sent an email Monday to board members, saying a $20 million "irregularity" was the cause of the district's current budget crisis.
The email, provided to the Herald-Leader by board member Amanda Ferguson, said Julane Mullins sent the information about the irregularity to Kentucky Auditor Adam Edelen and Marcia Seiler, Executive Director of the state Office of Education Accountability. Stephenie Hoelscher, a spokesman For Edelen's office, said he received the allegations Tuesday and was reviewing them.
"I feel compelled to provide this information to the board to shed light on the facts surrounding the current budget crisis and suspected violations of law and numerous acts of mismanagement, fraud, waste and abuse of authority that have resulted in the current state of affairs," Mullins wrote in the email.
Mullins did not immediately respond to a telephone call from the Herald-Leader asking for comment.
The email said a $20 million entry into the budget in 2011 was "irregular" because Rodney Jackson, the district's director of finance, made the entry on Dec. 6, 2011, six months after it should have been included.
Because of the late entry, Mullins said, the working budget for 2012-13 was approved by the board with numbers that were inflated by $20 million.
Jackson was in a meeting Tuesday and could not immediately be reached for comment.
Mullins said in the email that when she discovered the irregularity, she met with Fayette County Superintendent Tom Shelton on October 18, 2012, and showed him the error.
The email said Shelton, after seeing documents about the error, said to Mullins: "Are you telling me the budget for the last two years has been inflated by $20 million with recurring expenses"?
Mullins said she told Shelton that was correct, and once "Tom was made aware of the dire situation on October 18, 2012, he failed to advise the Board or to take immediate and decisive steps to address the critical financial situation that faced the district."
"Instead, he continued to spend as if there were no crisis and with some of the expenditures being in violation of board policy," Mullins' email said.
For example, Mullins said, Shelton granted significant pay raises to Chief Operating Officer Mary Wright and Vince Mattox, School Chief Officer of Community and Government Support, and without board approval, and without adjustments in their position descriptions.
Board policy requires approval for transfers of more than $50,000. But Mullins said in May of 2013 Shelton wanted transfers in his budget in excess of $50,000 to include two $75,000 transfers to NaviGo, a career and college preparation company.
NaviGo was founded by one of Shelton's friends Tim Hanner, who has implemented a pilot program in Fayette County high schools.
Mullins said in the email that Shelton directed that these "budget transfers be made despite the fact that they violated the board policy requiring approval for such expenditures."
"I realize that by providing this information to you, the Auditor of Public Accounts and OEA and requesting a full investigation, I risk being retaliated against by the superintendent," Mullins wrote to the board. "I also recognize that under state law, Board members cannot become involved in personnel matters and therefore cannot protect me. While I certainly hope that I will not be retaliated against, I have already retained counsel and am prepared to avail myself of the protections afforded by state and federal law."
Shelton did not immediately respond to questions from the Herald-Leader about the salaries or the NaviGo contract.
But Shelton wrote the board an email in response to Mullins' email to the board, saying he has "been made aware of the correspondence that was received by the Board from Julane overnight."
"I am astounded by these allegations," he said in the email, which also was provided to the Herald-Leader. "Please be assured that we will conduct a full investigation and provide a corresponding report in writing related to each of these concerns. If necessary, we can work with the State Auditor's Office and OEA, or any other external investigator as needed."
In regard to the $20 million budget entry, district spokeswoman Lisa Deffendall said Fayette school officials "have already reviewed these entries and the only question is the timing of the entries, not the validity of the transfers or any related approvals."
"We will be requesting that OEA and the auditor's office review the situation as well," she told the Herald-Leader.