[Rabbi Meir N. Hertz, Lakewood, June 30, 2010 ] State Auditor Stephen M. Eells recently issued a scathing Audit Report on the Lakewood School District’s performance and fiscal operations. The Audit covers the 3-year period July 1, 2006 to June 30, 2009, during which the District spent a total of $286 Million. The Report details 11 serious Findings, and paints a picture of a systemic fiscal breakdown, evidenced by dozens of examples of fiscal and operational mismanagement. The Auditor concludes that “. . . financial transactions included in our testing . . . were not reasonable and were not properly recorded in the accounting System” and goes on to state that “A significant number of documents were processed by the business office without proper approvals and supporting documentation.” He found the problems serious enough to warrant criminal investigation, stating that “Certain questionable items will be referred to the Division of Criminal Justice.”

The NJ Department of Education for nearly a decade rated all six Lakewood District schools as “failing”. Now the harshly critical fiscal audit proves that it is the District’s inept administration that is at the root of the problems, not the student populations, as District administrators often claim.

To be sure, while all 11 Findings were serious, some of the specific underlying problems identified were relatively minor, while others were quite significant. Taken together, however, the emerging picture of the District’s bumbling management of public funds demonstrates a need for a system solution and a thorough overhaul. But with its dismal record of turnstile turnover of 5 superintendents (Cannava, Garcia, Luick, Lawson, Silva), and 4 business administrators (Fuoto, Knox, Resnick, Finger) over 5 years – ’05-’09 – there is little hope that things will change any time soon. The modus operandi has been and continues to be to shrug off the problems (and the audit reports), scapegoat the just-departed or just-demoted superintendent or business administrator, and declare all the problems resolved, by saying “We have now finally turned the corner”. While there are many such hollow statements, a typical example is readily available in the 2005 demotion of then Business Administrator Kathryn Fuoto. As reported in the local press, Lakewood’s Board Attorney publicly declared, “Under the board’s plan, Ms. Fuoto loses her position as the school business administrator and will be assigned to the position of assistant school business administrator at a reduction of more than $20,000 in her annual salary,” Inzelbuch read. “By taking this action, the Lakewood Board of Education believes that the public can be confident that the school system is moving to correct any deficiencies in the Lakewood school district’s business practices and operations.” Small wonder that longtime Lakewood BOE observers believe that the District’s problems run much deeper. Superintendents and business administrators come and go not on their merits, but on the whim of those who have seized control of the Board of Education, running it as a private patronage playground, to the detriment of the students, their parents, the teachers, and all Lakewood taxpayers.

Examples of the “minor” issues noted in the current Audit Report include:

• An instance when 34 teachers went on a field trip to Washington, D.C. from the Metro Park train station in New Jersey. An Amtrak train was taken to Washington, D.C. at a round trip cost to the District of $5,000. The District also paid separately for a bus from New Jersey to drive empty to Washington, D.C. to shuttle them around the area, for an additional $3,900.

• “Inappropriate payments made from the payroll account. Disbursements from the district’s payroll bank account should be directly related to net payroll expenditures as approved by the district. Inappropriate activity was disbursed from the payroll bank account and appeared on the bank statements from December 2007 to April 2009. We noted payments made to various vendors (i.e. JC Penney, Verizon, HSBC Bank, etc.) for amounts up to $1,000. Total inappropriate payments approximated $5,000. . . . we observed the inappropriate payments continuing through April 2009. The district did not provide any type of documentation that would indicate that these payments were investigated by law enforcement.”

• “Internal purchasing controls need to be strengthened to safeguard assets. Our review disclosed that the documentation to support transactions was often vague, inadequate, or incomplete.” Examples include:

1. One hundred seven of 124 expenditures tested lacked all required approvals.
2. Sixty-one of 136 expenditures tested lacked proper supporting documentation. Twelve of these expenditures had no support on file.
3. Payment amounts for 32 of the 124 expenditures tested were incorrect. For
Example, the district is providing occupational, physical, and speech therapy services to public and non-public children. The district has approximately 16 employees and 50 consultants providing these services. [T]he district pays these consultants approximately $1.7 million annually. We summarized two invoices and found that the invoiced amounts should have been $5,500 which was $9,500 less than the actual billings.” In other words, the District approved billing at 272%, or nearly three times, the correct amount.

Some of the more significant issues identified include:

• District-wide financial statements are prepared using the accrual basis of accounting; expenses should be recognized at the time they are incurred. In fiscal year 2007 only ten months of health benefits were recognized in the financial statements, resulting in a $1.2 million underreporting of expenditures. The district failed to recognize the liability for May and June 2007 and continues to base its financial statements on a method not consistent with generally accepted accounting principles.

• Also, there is a clause in the business administrator’s contract that stipulates that his 2009-2010 employment contract was “dependent on there being a surplus” for the 2008-2009 school year. This clause further increases the risk of improper activity by providing an incentive to misstate financial activity or statements.

• Employee salary accounts were not budgeted properly. For example, the fiscal year 2007 budget was increased four percent to $31.9 million which was $1.8 million lower than the $33.7 million actual salaries.

• Management not properly monitoring extra compensation payments. Extra compensation totaled ten percent of payroll for fiscal year 2009, or approximately $4.4 million. We tested 103 employees and 700 vouchers for extra compensation payments during calendar year 2008 and identified the following issues:

1. Thirty-three percent of the employees received extra compensation payments in excess of what should have been paid based on BOE approval. The excess totaled approximately $45,000.

2. Supporting documentation for 49 percent of the vouchers submitted was not found. Often payments were made with little or no support. Total unsupported payments amounted to approximately $667,000 of the extra compensation dollars tested. A total of $600,000 related to missing employee attendance records documenting payment for unused leave time.

3. Thirty percent of vouchers paid did not receive prior BOE approval and/or the direct supervisory approval for payments amounting to approximately $200,000. In addition, vouchers needed approval from the administration and the business office. Seventy-seven percent lacked the proper signatures and dates on the payment vouchers.

4. Three percent of the vouchers were submitted more than 60 days after the work was completed. There is no time limit set by management for submission of vouchers. Some vouchers were submitted a year after work was completed.

• Another significant Finding refers to an issue previously raised and extensively discussed in the community—the question of a conflict of interest in the Board attorney holding dual positions with the District. The Audit Report notes that “The district’s board attorney also works as an employee of the district. The board attorney was paid $326,000 for fiscal year 2009 as a vendor and was also paid $123,000 plus benefits as an employee in the title Non-Public Special Education Consultant.” The Report recommends that “the Board of Education refrain from hiring individuals who are also current vendors in situations which might present the appearance of a conflict of interest during the performance of their duties. We also recommend that the controls be strengthened to adequately document time reporting requirements where vendor and employee situations exist.” An apparent reference to the lack of adequate timekeeping.

Interestingly, the Report did not delve into, or at all deal with, the host of related problems highlighted during—and since—the April School Board elections. For example:

(1) the Minutes of the BOE Finance Committee Meeting of May 5, 2010 contain the following: “Mr. Finger [District Business Administrator, mnh] noted that 192/193 funding allows for 6% administrative costs. During the year Mr. Inzelbuch gets paid from the general account, but at the end of the year the money is taken back from 192/193”. The 192/193 refers to special education programs for nonpublic school students funded under New Jersey Chapters 192 and 193. These programs for many years have been administered in Lakewood by Catapult Learning. Mr Finger states that Catapult effectively has waived collection of its administrative fee, which in turn is used to compensate the Board attorney for his position of NonPublic Special Education Consultant. The State Auditor obviously was not aware of this cozy relationship. Otherwise it is safe to assume that he would not leave unexamined the troubling fact that the Board attorney is paid from the NJ State-funded administrative fees, earned but “waived”, by Catapult Learning, for years the District’s sole-source nonpublic special education services provider. Is there anything wrong with this apparent quid pro quo, under which the vendor is granted a monopoly by the attorney, in return for putting him on its payroll? That’s very much still an open question, not dealt with in the instant Audit.

(2) Nor did the Audit deal with the ‘legal opinions’ solicited and obtained from 3 attorneys hand-picked by the Board attorney, (why 3?) to the effect that no conflict exists. Key facts were misrepresented to these attorneys. For example, the fact that the Board attorney in both his capacities of attorney and special education consultant is intimately involved in deciding individual special education and related services cases.

(3) Nor did the Auditors tackle the simple, but thorny question of how the Board attorney is allowed to bill the District hundreds of thousands of dollars in legal fees for thousands of hours supposedly worked as its attorney, while simultaneously supposedly engaged in the “fulltime” salaried position as nonpublic special education consultant at $123,000 annually, all while simultaneously running a very busy, fulltime, sole practitioner law practice.

(4) Nor did the Audit examine the credentials of the NonPublic Special Education Consultant. Does he have ANY special Education training, certifications, degrees, and/or experience?

(5) Other vexing issues are just as troubling, but remain unanswered. Why does the Lakewood District need to employ 4 attorneys plus 3 consultants for its special education programs? In most New Jersey districts, even larger ones, the entire Special Education arena is overseen by a Director of Special Education. What is going on in Lakewood that requires 7 professionals and $1Million in professional fees annually to manage or hide? Wouldn’t this money be better spent on education and related services?

(6) Certainly the heaviest cloud hanging over the Lakewood Board attorney’s holding dual District positions is the scandal described in a recent eye-opening article, based on a Report released March 2 by the New Jersey Office of Inspector General. That exposé reported that Michael A. Angelini, a South Jersey lawyer ‘farnagled’ his outside consultancy into a “salaried” position. Here is the lead paragraph:

“For sheer chutzpah and audacity at tapping the public till a prize goes not to a Pennsylvanian but to New Jerseyite – to “legal counsel” for the South Jersey (toll) Transportation Authority (SJTA), Michael A Angelini. The guy though clearly an outside consultant managed to persuade someone at SJTA years ago that he should be paid as if he were an employee and enrolled in the state pension system called PERS (Public Employees Retirement System). And he worked his scheme like a true artist, putting to shame the crude thieves out west in Harrisburg PA.” Sounds familiar? Wait it does not stop there. The article continues:

“Angelini broke all the established rules of what constitutes a salaried employee in (1) not being subject to direction as to how, when and where he worked as salaried employees are (2) not working set hours (3) not devoting substantially fulltime work to the “employer” (4) in publicly offering his services to all and sundry via his law firm and its website (5) maintaining separate premises, staff and premises from that of the “employer” (6) in billing “hours” worked as well as the “salaries” (7) handing off “salaried” work to associates his law firm paid by the firm (8) failing to gain permission or report “outside” work to his “employer” as required by state regulations (9) writing official correspondence not under the “employer” letterhead but under the letterhead of his law firm.”

The striking similarities to the Lakewood Board attorney case speak for themselves. In the LBOE case, it appears that perhaps not “all” but “only” 8 of the 9 established rules of what constitutes a salaried employee (as opposed to an “independent contractor”) were broken. However, this is offset by another factor which makes the Lakewood case apparently more egregious. In Lakewood, the attorney claimed a “fulltime” second salaried position as NonPublic Special Education Consultant at $117,000 for his minimal hours of “employment”, in the SJTA case the attorney had the “decency” to claim only a “part-time”, $30,000 salaried position.

Another lead article in PolitickerNJ.com detailed demands that “[T]he members of the South Jersey Transportation Authority Board of Commissioners should immediately resign following a scathing review of the state Inspector General that revealed gross waste and mismanagement of state funds, Assemblymen John Amodeo and Vince Polistina, both R-Atlantic, said today.

“The spending at this authority has been obscene and those who have been in position to stop it have failed taxpayers and broken the public trust. They should leave public office immediately,” said Amodeo, who in December wrote to the then-Transportation Commissioner after the SJTA refused to immediately provide a copy of a resolution on the commission’s agenda.

“Now we know why this authority has cloaked its operations and has treated taxpayers with disdain,” Amodeo added. It is significant to note a chilling line in the OIG News Release dated March 2, 2010: “Many of these abuses had gone on for years, and but for OIG’s review, it is unlikely they would have been found.”

Just as important is the OIG’s finding that SJTA executive management and Board resisted OIG’s review and recommended corrective actions until such time as new executive management and Board leadership was installed. Thereafter, the “OIG encountered greater cooperation and enthusiasm for strengthening SJTA’s internal controls.” (ibid.)

It should be noted that the Lakewood School District’s annual 2010-2011 anticipated budget, at $138 Million total expenditure net of transfers is significantly larger than the SJTA annual budget of $91 Million. So the potential for abuse, waste, and mismanagement is that much greater.

For further exploration of this potentially explosive local scandal, we encourage you to carefully read the original Reports issued by the New Jersey Office of Inspector General and to draw your own conclusions.

Perhaps most troubling is the fact that the Lakewood BOE reinstated the board attorney to his second position as NonPublic Special Education Consultant just 16 days after he “voluntarily” resigned from that position when he found himself facing the specter of a scandal. This Board action does not bode well for the future of the Lakewood School District. It clearly signals a ‘business as usual’ attitude, and that the LBOE operative maxim remains “If you get caught, you’ve only learned to be more careful next time”. Hopefully, the recently-elected team of new Board members, who ran on a platform of fiscal responsibility, accountability, and transparency—but are presently outnumbered 5 to 4—will succeed in changing the direction of the Lakewood BOE once they gain the needed majority. To change course they will need to first wrest control from those who hijacked this District, and then replace their team of lackey administrators, so aptly described by State Senator and Township Committeeman Robert Singer as “the gang that couldn’t shoot straight.”

Endnotes:

[1]  The full State Audit Report, including the District’s Response, is available at,  www.njleg.state.nj.us/legislativepub/Auditor/34708.pdf

[1]  See Tri-Town News report on the demotion of BA Kathryn Fuoto, available at http://tritown.gmnews.com/news/2005-06-23/Front_page/001.html

[1]  See article at http://www.tollroadsnews.com/node/4650 , and OIG site at,  http://www.state.nj.us/oig/pdf/News_Release_MAA_12_15_2009.pdf

[1] See full article at www.politickernj.com/arep/37331/amodeo-and-polistina-sjta-board-members-should-resign-after-inspector-generals-finding-wa

[1]  See http://www.state.nj.us/oig/pdf/News%20Release-3-2-2010.pdf

[1] Available at http://www.state.nj.us/oig/pdf/report-3-2-2010.pdf and here.