Schools blind to red flags in district audits

The Charleston County School District is facing an $18 million budget shortfall this year, and some district leaders say a culture of overspending is to blame.

Year after year, red flags have gone up about financial problems within the Charleston County School District.

Audits revealed unauthorized expenditures, expensive accounting errors, botched revenue estimates and violations of the district’s own spending policies. Each year, district leaders vowed to make a change when auditors brought these issues to light. But some of the problems never went away.

Now, as the school board contends with an $18 million budget shortfall that was discovered in September, some district leaders are saying the major deficit — 4 percent of the $407 million general operating fund — could have been avoided.

Chief Financial Officer Michael Bobby resigned last Monday amidst concerns about the budget, but school board members and the district superintendent have said that spending problems go all the way down from district-level employees at 75 Calhoun St. to school principals around the county.

School board member Todd Garrett, who sits on the board’s Audit and Finance Committee, said the multi-million dollar shortfall is due in part to “a system-wide cultural issue,” with district employees spending money “irrespective of the budget.”

Broadly, district leaders have reported that they overestimated property tax revenues by $9.36 million and overspent the budget by $8.75 million, the latter primarily on salaries and benefits. The board is awaiting results this week from an internal audit and has also commissioned a special forensic audit, a deeper dive into the ledgers that is often used to find evidence of fraud.

“This has been years in the making,” said Garrett, who joined the school board in 2012. “This hasn’t been something that’s happened in the last 12 months.”

This year was not the first time the district overstated or overestimated its revenue streams. In 2011, the district reported that it had received $2.275 million in grant money from the American Recovery and Reinvestment Act in the first quarter of the year. An audit revealed the actual amount was about $585,000.

The same year, the district gave $1.7 million of Recovery Act funds to charter schools but failed to report the transaction to the U.S. Department of Education, according to an audit.

Also in the 2010-2011 school year, an auditing firm scrutinized 40 transactions carried out on district-issued procurement cards and found 18 instances of improper authorization or documentation.

In the 2012-2013 school year, the district overpaid at least $99,000 to terminated employees, including one former teacher’s assistant who took $34,188 worth of paychecks to the bank after ceasing to work for the district in June 2010. The same year, the district paid $40,000 worth of Head Start funds to employees who no longer worked in the Head Start program.

In 2012, the district learned that it hadn’t even followed the proper procedure for hiring an auditor. The State Financial Accountability Authority is required to approve all auditing firms for school districts, but in an email to district officials, state Audit and Certification Manager Jimmy Aycock wrote that his office hadn’t signed off on the district’s annual auditing firm selections since 2008.

“It certainly seems a misunderstanding occurred in 2008,” Aycock wrote.

School board Chairwoman Cindy Bohn Coats said the district’s current financial straits were due in part to “a persistent history of inadequate financial updating and reporting to the board.” Coats also cited “a lack of accountability, ownership and discipline for staying within budgets” as a cause for the current $18 million shortfall.

Former District Superintendent Nancy McGinley, who left the district in October 2014, said that if board members like Coats and Garrett saw problems with financial discipline and reporting during her tenure they did not report them to her.

“To make a general comment now that things were out of control, well, they never flagged those things for me in my evaluations, and they certainly were very supportive of giving Michael Bobby a contract extension and a raise,” McGinley said.

That’s not to say that the district didn’t deal with financial problems though, she said.

“If there was a recurring problem, it was with the P-cards,” McGinley said, referring to the procurement cards that allow certain employees to make purchases with district funds. In 2014, a procurement audit of all 36,000 procurement card purchases over the course of a fiscal year found eight instances in which employees split up an expense into multiple transactions to subvert the district’s authorization rules of purchases over $2,500.

McGinley said any problems involving procurement cards were likely a matter of “individual discipline.”

“Someone should have been fired or reprimanded,” McGinley said. “There were really clear guidelines.”

In one instance in September 2011, the district fired a teacher and athletic director at Garrett Academy of Technology for improper use of his P-card. The district said in a State Board of Education hearing that the teacher, William Kerr, improperly used his P-card to pay travel expenses for six family members who accompanied him and the boys’ varsity basketball team to a tournament in Puerto Rico.

School board member Todd Garrett said the district ended up spending $9.36 million over its budget this year largely because district employees were effectively cutting the board out of important spending decisions. He declined to name any particular employees who had done this.

“Essentially the budget had no meaning because as soon as we passed it, it would be changed,” Garrett said. “The final budget our external auditor got was not what we passed. It had been amended again and again and again.”

Board members got the chance to see a draft of the latest external audit last Monday, but since they were not allowed to take copies out of the meeting they were not willing to comment on specific cost overruns or which employees had authorized them.

Superintendent Gerrita Postlewait said the district’s current financial straits were not “any one person’s fault.”

Postlewait said the district will have to set “clearer parameters around how the money can be spent.” Asked to give an example where money was spent improperly in the past, she said school principals have sometimes blown their budget in the process of hiring new teachers.

When a new hire is authorized, the district tells a principal how many full-time positions they can fill and how much money they can spend on salary. In the past, Postlewait said, a principal might receive authorization to hire one full-time teacher, but instead she would spend the money on hiring two part-time employees halfway through the school year. This in turn can leave the district on the hook for further expenses when those two employees return the next year.

“Sometimes in the context of the moment they were appropriate decisions, but they had longer-term financial implications,” Postlewait said.

Looking forward, Postlewait said the district will have to make changes to prevent another shortfall like the current one. For starters, she said, she will ask for a monthly report on the district’s expenditures as compared to the budget.

“We probably will leave with a more centrally controlled budget process with tighter controls and more discipline, supported by an IT system that’s up to the challenges of tracking daily account activity,” Postlewait said.

In past years, school board members sometimes sparred with district officials, including McGinley and Bobby, over what they perceived to be a lack of transparency. Several times between 2012 and 2014, board members including Elizabeth Moffly and the Rev. Chris Collins called for more stringent performance or forensic audits, but the board never approved them.

“We had red flags all along, but the chair didn’t want to do anything,” Collins said.

But Coats, the board chair, said district employees were already ignoring the advice they got from basic external audits. She said the latest round of audits will likely turn up some old problems.

“We had the exact same problems in our external audits year after year,” Coats said.

Reach Paul Bowers at 843-937-5546 or twitter.com/paul_bowers.

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