The Ennis School Board did in fact spend money improperly when building the new school and in its employment contracts with former superintendent Doug Walsh, according to a draft audit report presented to the board Monday evening.
The report looked at the school district’s finances dating back to 2007 and was presented at a joint school board and Madison County Commissioner meeting Monday night.
The audit was done at the request of the commissioners and with the cooperation of the school board. It analyzed a variety of different aspects of the district’s finances over the past five years including expenditures relating to the new school, expenditures for two houses purchased by the district and employment contracts with Walsh.
The audit was done by Denning, Downey and Associates out of Kalispell and cost the school district about $60,000.
An audit was part of a suggested remedy outlined in an opinion issued by Montana Attorney General Steve Bullock last February. Bullock’s opinion stated that it was illegal to spend adult education and transportation funds on a new school building.
Kim Downey presented the draft of the audit report on behalf of her firm.
According to the report, auditors found that more than $7 million spent out of Adult Education, Transportation and Flexibility Funds since July 1, 2007 were “unallowable,” Downey said.
Another $805,136 spent out of those funds “could not be determined as to their allowability,” read the draft report.
“We didn’t have sufficient information to make that determination,” Downey said.
Essentially, auditors looked to make sure the money spent out of the three accounts was properly allocated. The money for which the auditors couldn’t determine allowability, the main issue was the lack of clear allocation rationale, she said.
When auditors look at how funds are spent, they look for clear rationale as to how the money was allocated. When that can’t be determined then there is not certainty on whether or not the money was spent properly, Downey said.
However, most of the more than $800,000 whose allowability couldn’t be determined was related to the building of the school, she said.
“A good portion of those were construction related, but not all,” Downey said.
There was a discussion about how to improve the district’s allocation methods, but Downey said there wasn’t a single way to allocate funds.
“You can come up with all kinds of methods, but for the outside person looking in it should be reasonable,” she said.
But the money allocated from the adult education and transportation funds to the flexibility fund for the construction of the school was considered an unallowable expense, Downey said.
Since Bullock issued his opinion in February, this news was no surprise to the school board.
However, board member Jim McNally noted that the Montana Office of Public Instruction, in a letter written August 2010, said there was nothing wrong with how the funds were being spent for the school.
“When we were doing that (transferring funds to build the school) OPI gave us the authority to do it and the attorney general’s opinion turned that around,” McNally said.
Downey acknowledged this as well and said the Bullock’s opinion did indeed contradict the direction from OPI.
The audit also looked at whether or not the money paid to Walsh as an independent contractor from 2004 to 2008 should have been reported on a 1099 or a W-2. A 1099 is the IRS tax form used for independent contractors. The W-2 form is the IRS form used to report salaries for employees.
Downey’s report found that Walsh should have been considered an employee rather than an independent contractor up through 2008. In total, the audit found that more than $270,666 that was reported on 1099s should have been reported on W-2 forms.
“Doug Walsh was serving on these contracts as an employee and not an independent contractor,” she said.
The issue of Walsh’s employment status is at the heart of findings in the findings from the Montana Teacher’s Retirement System. The TRS findings from August 2011 say that Walsh and the school district owe TRS for improperly paid retirement benefits and unpaid contributions. The decision in 2011 said the school district owed about $189,000 and Walsh owed about $572,000.
TRS’s findings essentially claimed that Walsh wasn’t really a contractor and should have been considered a fulltime employee and not able to receive retirement benefits. The school district and Walsh are appealing the TRS decision.
When Downey said Walsh should have been paid as an employee rather than a contractor, McNally pointed out that the issue is a legal question and Downey was expressing her opinion.
Downey told the board she was looking at the issue based on the rules for 1099s.
“Our determination was he did not meet the independent contractor rules,” she said.
However, being that the question is the heart of the TRS appeal, McNally asked for something in the audit report to reflect that.
“I think in your final report something needs to be mentioned in the report that this is under litigation,” McNally said.
The audit report also addressed two homes purchased by the school district in June 2006. The homes were apparently purchased as rentals for teachers. One home was $202,176 and was purchased from the transportation fund. The other house was $208,716 and purchased with adult education funds.
Both the adult education and transportation funds are supported by non-voted levies.
Neither of the purchases were allowable, Downey said.
There was some board discussion as to what should happen with the two houses and how it could impact the general fund.
If the money from the transportation and adult education funds that was improperly used to buy the houses was to be replaced, it would likely come from the general fund and would result in a severe deficit in the general fund, Downey said.
If the school district sold the houses, the money would go into the general fund, she said.
School board member Craig George said he was interested in moving forward, but wanted to take the opportunity to correct things that shouldn’t have happened in the past, referring to the purchase of the two houses.
“There are certain things I feel we can go back and correct,” George said.
However, the board made no decision on how to deal with the issue and Downey didn’t have much to offer in way of suggestion.
“What the resolution here is, I don’t know,” she said. “I know you can go from this point forward and make sure it never happens again.”
The board unanimously voted to accept the audit report with a few additional pieces of information from Downey. She will also provide the board a letter outlining her recommendation for addressing the issues brought to light by the audit some time this week. The board will presumably discuss the recommendations at a later meeting.
Ultimately, despite the findings that money was improperly spent, much of what the audit found wasn’t a surprise, Downey said.
“Part of the point of this was to find out if there was anything out there you really didn’t know about,” she said. “I didn’t find much.”
Some of what Downey found were essentially errors in how things are tracked in the district and how different costs are allocated. For instance, in the past utilities at the school have been paid equally out of three funds: transportation, adult education and general funds. That’s changing, said current school district superintendent John Overstreet.
“It’s going to be a gradual move back to what might be a little more proper,” Overstreet said. “It’s going to take some time but we will come up with a plan. We will make the corrections.”