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Auditor to review contract awarded for proposed reform plan for KC Public Schools

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The State Auditor’s Office will review the process by which the Department of Education awarded a contact to Indianapolis-based Cities for Education Entrepreneurship Trust (CEE-Trust) for it to develop a plan by which the Kansas City Public School District could be retooled.

CEE-Trust was awarded a $385,000 contract over three companies whose bids were substantially lower. Education Commissioner Chris Nicastro says the company’s bid described the approach most favored by the Education Department.

E-mails show Department officials favored CEE-Trust before the process went to bid, even suggesting assigning the task to that company through a memorandum of understanding before the State Board of Education rejected the idea.

Some state lawmaker have since called Nicastro and the process used to select CEE-Trust “untrustworthy,” and have called for the Commissioner’s job.

In a statement the Auditor’s Office says it, “previously requested information from the DESE in December and based upon the reply and documentation furnished by the DESE have determined that a limited review and analysis is warranted.”

Audit will probe Corrections Department execution procedures, drug procurement (AUDIO)

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Death penalty opponents and attorneys representing condemned men say the Missouri Department of Corrections is keeping too many secrets and could be breaking state law in the way it’s obtaining drugs to carry out lethal injections. The State Auditor’s Office will explore some of those issues in the course of the audit of Corrections announced last week. 

The State Auditor's Office could look at the executions of Joseph Paul Franklin (left) and Allen Nicklasson during the course of the audit it is conducting of the Department of Corrections.

The State Auditor’s Office could look at the executions of Joseph Paul Franklin (left) and Allen Nicklasson during the course of the audit it is conducting of the Department of Corrections.

Media reports say the Department acquired the pentobarbital used in the execution of Joseph Paul Franklin in November from a compounding pharmacy in Oklahoma that is not licensed in Missouri. This has some officials asking whether that violates state law or falls into some sort of “gray area.”

Deputy State Auditor Harry Otto says the audit can include any executions that fall in its timeframe, the two fiscal years that will end June 30. That would include the execution of Franklin and the execution of Allan Nicklasson December 11, as well as any executions that happen through June 30. The only other execution for which a date has been set is that of Herbert Smulls, scheduled to happen January 29.

“There is a fair amount of public interest in this subject,” Otto says, “so we’ll look to see whether the Department has followed its own policies and procedures with respect to the execution protocol. The changes that they made … did they make them pursuant to their own policies and procedures? And we’ll try to evaluate whether or not there was any violation of state law.”

How deeply auditors will explore execution procedures depends on what they learn as the investigation is conducted.

“An auditor keeps probing until he feels he’s gotten the full story,” says Otto. “If we ask questions and they lead to further questions which leads to another angle or pursuing that to the ultimate answer … we keep going until we get the answer. If we picked one … and there are some unanswered questions, it’s likely we would pick the next one and see if that was repeated or if that was isolated.”

State law provides that some components of execution procedures be kept confidential, such as the identities of members of the execution team. Otto says his office has the authority to find out things that members of the public or the media could not because of those protections. That doesn’t mean that information would become public, however.

“There’s still confidentiality with respect to what you tell the auditor. That doesn’t always get published,” Otto tells Missourinet. “When we learn of things that are otherwise protected and they become part of our work papers, they remain protected. In other words, simply because we got the identities of certain parties, that doesn’t mean we’re going to publish those identities in our report, nor can our work papers be [obtained in a Sunshine Law request].”

Otto says if any violations of law are made public, the Auditor’s Office would refer them to the proper law enforcement agency. An audit report could be ready by this fall.

Listen to the interview with Harry Otto, 11:16

House lawmakers consider fate of Second Injury Fund

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Momentum is growing in the state House for the elimination of Missouri’s Second Injury Fund.

The Fund was created in 1943 to encourage employers to hire World War II veterans who were injured but could still work. It would later pay compensation in cases of workers returning to a job after an injury making claims when they are injured again.

Money in the fund comes from a surcharge on businesses’ workers’ compensation insurance that was capped at 3 percent in 2005. Since then lawmakers say it has become insolvent.

Attorney General Chris Koster stopped settling Second Injury Fund cases in 2009, leaving them all up to the courts, and quit paying new awards in 2011. There are now more than 28,000 pending cases.

State Auditor Tom Schweich released a report last week saying the Fund has only $3.2 million and owes $28.1 million in unpaid obligations.

House Speaker Tim Jones (R-Eureka) said in his opening day address that if the fund can not be saved without raising taxes on employers, the state should begin winding down the fund. In light of Schweich’s report, he now says, “I think the direction we will likely have to go is with a winding down of the Fund as 23 other states have done and take care of that backlog of claims.”

Koster said last year he also would prefer to eliminate the Fund.

Jones says he doesn’t yet know who will lead on the issue in his chamber, but Representative Chris Kelly (D-Columbia) is working on a bill to do away with the Fund.

As for whether lawmakers have any idea where money might come from to cover unpaid liabilities, House Budget Committee Chairman Rick Stream (R-Kirkwood) says, “Not yet.”

Auditor: DED must improve due diligence, understand its role

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An audit that began with the investigation into Mamtek says the Department of Economic Development (DED) has taken some steps to improve its due diligence procedures, but could take more.

The Mamtek facility sits empty at the north end of Moberly.

The Department’s Division of Business and Community Services is responsible for due diligence and reviewed Mamtek in the spring of 2010. Mamtek was offered $17.2 million in incentives and Moberly issued $39 million in bonds to finance a sugar refinery. The project failed in September 2011.

Then Secretary of State Steven Tilley late last year asked State Auditor Tom Schweich to investigate the deal. State Auditor Tom Schweich began the review late last year into that and other projects.

Schweich notes the Department already updated its due diligence procedures in February 2011 and he says the improvements were significant. He says there are still some things that aren’t being done that should be.

“One area that’s of particular interest to me coming from the private sector is whenever due diligence is done in the private sector, especially for a startup company, you don’t just look at the entity because it’s new. You go to the principals … the people. The CEO, the principal shareholders, whoever it is that’s really running the show and you look and see what’s their criminal history, what’s their financial history, and determine whether they’ve had failed projects in the past. So those are a few holes in the new procedures that we think could be tightened up.”

Specific to the Mamtek project, the audit says state and local officials could have done a better job evaluating the claims made by the company, such as the existence of a plant in China and the existence of company equity or ability to raise it.

Schweich says prior to February 2011, the agency wasn’t following its own procedures. He says now they are following their own updated procedures, and his office has recommended more steps that he is confident will be implemented.

He isn’t satisfied with the Department’s response to the audit, however.

Read the audit summary and the full report (pdf).

DED points out, as it has in the past, that no incentives were ever awarded to Mamtek because it never met job creation and investment requirements. Schweich says that’s not enough.

“Taken to its extreme, then why do any due diligence? Why not just give everybody tax credits and wait until the jobs materialize. The fact of the matter is (DED is) more than just a switch that turns on and off tax credits. They have expertise in that department. They are supposed to look into the viability of projects before they award even contingent tax credits.

“People rely on them. Maybe not legally … I’m not going to get into the legalities of it. I don’t know if Moberly was legally allowed to rely on BCS or not, but a small city which doesn’t have a whole room full of financial analysts and experts and tax credit experts sees that DED said, ‘Yeah, we think this is a good project,’ and even if they’re not legally allowed to rely on it, as a factual matter they’re going to.”

The audit also looked into the “stacking” of economic incentives:  when one project claims multiple incentives for the same work. It was calculated the state issued tax credits totaling more than $134 million to project costs claimed under more than one program between fiscal years 2000 and 2011. For every $1 of project costs, a developer could be issued up to $3.27 in federal and state tax credits.

The Tax Credit Review Commission recommended the legislature bar projects from claiming multiple tax credits, and the auditor’s office recommends BCS develop cost containment measures with the legislature.

Another finding was that the Governor’s Office in fiscal years 2010 and 2011 paid more than $149,000 for about 160 flights for the Governor’s Office, circumventing the legislative appropriations process. Many of those flights were for media appearances by the Governor promoting economic development incentive awards and projects that were predicted to create jobs. 22 flights costing more than $6,000 are reported to have had no clear benefit to DED or BCS.

A DED spokesperson declined to speak to Missourinet about the audit, referring to the Department’s response found in the report. An e-mail to the Governor’s office seeking a response was not answered.

Audit charges cost shifting, poor travel documentation in Governor’s office

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Auditor Tom Schweich’s office has released a report that says the office of Governor Jay Nixon made its finances look better by shifting expenses to other state agencies.

Missouri Governor Jay Nixon (left) and State Auditor Tom Schweich

The audit says between January 2009 and June 2011, about $1.7 million dollars of the Governor’s office’s expenses were charged to other state agencies. That kept the Governor’s office and mansion from exceeding its appropriation in the state budget for each of the 3 years in the audit.

About $770,000 in salaries for several Governor’s office employees were paid wholly or in part by fourteen state agencies.

Auditor Schweich says the shifting of expenses to other agencies’ appropriations makes determining the actual costs of operating the Governor’s office difficult, as well as for the agencies involved. “For example in 2009 the Governor had $31,000 in charges from the airplane that exceeded his appropriation. They had originally been charged to his office. Somebody realized, ‘Uh-oh, we just exceeded the appropriation,’ and charged them off to another agency … that’s pretty direct proof that they knew they had violated the appropriation. They also knew it should have been charged to the Governor’s Office, and then in order to avoid or circumvent the appropriations process they just transferred that money right over to (the Office of Administration).”

The report says during the 30 months covered, Governor’s office employees flew 334 days on state planes at a cost of $565,000. 96 percent of that cost was paid for by various state agencies, who also paid for another $37,000 in travel expenses and $406,000 in various other operating expenses. Schweich says that has been noted in earlier audits by himself and his predecessor, Susan Montee.

The audit says 19 out-of-state flights on state planes cost about $92,800, and says the Governor’s office does not check to see if commercial flights would be cheaper.  It also says most lodging expenses, especially for out-of-state lodging, lacked documentation explaining why costs were higher than the auditor’s staff thought necessary.

The report ranks the performance of the Governor’s office as “Fair” on the Auditor’s rating scale.  Schweich says that means he will do a follow-up audit in 6 months or more.

See a summary of the audit and the full audit (pdf).

A request to the Governor’s office for comment has been declined. Instead, a spokesman points to the Governor’s official responses included in the audit report.

To the findings regarding the charging of Governor’s office expenses to other agencies, the response was, “The office accounts for its operational costs in a manner that properly reflects the nature of the work it performs.”

To the findings regarding travel expenses, Nixon’s office responds, “The office follows state travel policy. On occasion, circumstances require some deviations from the policy but efforts to ensure the most cost-effective means are implemented. The office will ensure that such instances are appropriately handled. As to the extended lodging stay, that arrangement was based on particular circumstances surrounding a particular work assignment. The office does not foresee those circumstances arising again, but should they arise, will again ensure that the arrangement is reasonable and cost-effective.”

Schweich says he doesn’t want the audit to be perceived as political because of its timing. Its release comes nine weeks before the General Election in which Nixon is seeking reelection. Schweich is a Republican, Nixon is a Democrat. The Auditor says, “It’s very important to me that this office not be political.”

Schweich says his office tried to release this audit in June, but ran into two problems. “One was our auditor-in-charge before that time was in a serious traffic accident and we had to delay for a few weeks because of that … we also had a several week delay trying to get access to the (Governor’s) mansion to do the inventory and that delayed us by another month or so.”

Still, the state Republican Party has seized on the findings. Executive Director Lloyd Smith accuses Nixon of enjoying “the perks of being governor, wasting money on a taxpayer-funded plane, nice hotels and fancy meals.”

The State Democratic Party has not yet released a statement on the audit.

State auditor slams management of Missouri Quality Jobs program (AUDIO)

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The State Auditor says the economic development department is mismanaging the Quality Jobs tax incentive program and overplaying its results.

Deputy State Auditor Harry Otto

Quality Jobs tax incentives are available for employers who create or retain full-time jobs, pay at least half the health insurance premium for them and pay at least the average wage in the county. Employers can receive tax credits or hold onto income tax withheld from the employees it keeps or hires.

Deputy Auditor Harry Otto says when an employer applies to the program it offers an estimate of the number of jobs it expects to create or retain. “Later the employers have to report the actual numbers of jobs retained, jobs created, dollars spent. What we’re saying is when you look at the actual numbers after the fact they are less than the projected numbers.”

The audit says those are the figures used to measure the economic impact of the program and calls them “significantly overstated.” 

Since the program was launched in 2005 DED has approved projects touted to create 45,646 jobs. According to the annual report on the program that estimate has been reduced by 18,960. So far, just over 7,000 jobs have actually been created.

It also says DED is not providing enough oversight into whether companies getting the credits are eligible for them. Otto explains, “We, I think, pointed out one where there’s still a disagreement as to whether or not the jobs were rolled I think from a parent to a subsidiary or from a subsidiary to a parent, that we don’t think that really the jobs were created. They were moved from one company shell to another.”

The auditor’s office also didn’t like how the employers DED authorizes to retain the income taxes they withhold account for it. Otto says, “The employer then reports to Department of Revenue … they’re the ones that are the tax collectors of the state. We think there should be more communication between DED and DOR to determine that the proper amount of withholding occurred and that the employer who created and/or retained jobs has retained the proper amount.”

See the “Citizen’s Summary” of the Auditor’s report here.

The auditor’s office gave the program’s administration a “poor” rating, making it the first state program to recieve that rating. Otto empasized that isn’t an assessment of the program, but how it’s been run. “That they could do a better job by acting responsibly with respect to a quicker turnaround or reporting of the information and then giving the General Assembly updated information all the time and not just relying on the initial estimates that were projected by the employers who said they would create or retain jobs.”

Otto says the findings were not well received by the Department. “We were told by DED in some cases the entire program hasn’t unfolded yet, so you can’t really look back and tell the entire thing is over but we say they should update their numbers … the numbers that they give to the General Assembly, because the General Assembly’s making decision based on these projections and if the projections turn out fo be inflated or too high, the General Assembly ought to know that.”

The auditor’s office also says data should be reported in a more timely manner. Otto says, “(DED) has established a November date for receiving information from employers and we think that’s too much time … we think that they could improve reporting by establishing an earlier date to have that information submitted to them.”

Missourinet’s call to the Department of Economic Development has not been returned. View its response to the audit along with the rest of the report from the Auditor’s Office here.

AUDIO:  Mike Lear interviews Deputy State Auditor Harry Otto, 10:09