State auditor general calls for criminal probe of Vitalistic charter school [The Morning Call (Allentown, Pa.)]

Sept. 17--Pennsylvania Auditor General Jack Wagner will ask the Lehigh County District Attorney's office to conduct a criminal investigation of Vitalistic Therapeutic Charter School after auditors uncovered possible ethical and conflict-of-interest violations stemming from improper payments to the families of employees and trustees, "illegal" loans and improper state lease reimbursements totaling more than $630,000.

An audit released Monday shows that the charter's founder and former CEO Naomi Grossman paid herself $100,000, in addition to her salary, to run the charter school and a nonprofit preschool during the review period of July 1, 2006, to Oct. 21, 2010.

The payments could be classified as "improper financial transactions or fraudulent activity" that would jeopardize the viability of the charter school and the preschool, which has since closed due to money problems, the audit states.

In addition, Grossman paid her son $3,825 during the 2007-08 and 2008-09 school years with "no documentation to show the purpose of the payments," the audit states. Grossman's daughter-in-law also got $500 in the 2007-08 school year for undocumented services.

In a phone interview, Grossman denied all allegations in the audit report, including payments beyond her annual salary.

"Impossible," she said. "I never paid myself anything."

Other family members of employees also profited off of taxpayers, according to the audit, which faulted the board of trustees for failing to maintain operational and financial control over both the charter school and preschool.

The husband and son of Vitalistic's current business manager, Linda Alderfer, were paid $14,118 for construction services "with no record of board approval" in 2009-10. Alderfer was a member of the non-elected trustees board at that time. State charter school law and the Ethics Act prohibit direct family members of non-elected trustees and employees to be paid for work at the same charter school.

"The number of family relationships surrounding these transactions makes it difficult for the public to be assured that their taxpayer dollars were being used in the best interest of the Charter School's students," the audit states. "Moreover, the risk of misuse in this situation is compounded by the fact that the charter school did not seek approval from the board of trustees, and by the fact that that board of trustees does not appear to have been independent."

The lack of oversight led to $93,000 disappearing from the charter school's money market account and $1,365 in checks written to jewelry and gift stores, the audit states.

In a phone interview, Grossman said the auditor general's office denied her requests to speak to them when they were conducting the audit prior to her removal by the board of trustees in May 2010. Grossman said her son, a psychologist, was paid the larger amount to conduct a seminar and he and his wife got paid the $500 each to help run the school when she was recovering from a stroke.

"I'm sorry," Grossman, 80, of Allentown said. "The only thing I deserve is an apology."

Vitalistic's current board president Joyce Thompson and Acting CEO/Principal Ron DeIaco also did not return requests for comment.

Wagner's office forward the report to Lehigh County District Attorney and the State Ethics Commission for further review since auditor general cannot conduct criminal investigations or issue civil penalties.

Martin said he had not seen a copy of the report and could not comment.

Allentown schools Superintendent Russ Mayo said Wagner's report raises major concerns over the "veracity and authenticity" of what has been going on at Vitalistic since it was founded as a regional charter in 2001.

"Based on the findings of the auditor's report it would be appropriate for district attorney to consider prosecution,' Mayo said.

The state audit confirmed many of the same findings first reported 10 months ago in The Morning Call. A Nov. 27 story exposed Vitalistic's money and management problems and a plethora of critical special education audits done by the state Department of Education and poor audits concerning its old mental health program licensed under the state Public Welfare Department's partial hospitalization unit.

The story documented how Vitalistic lost its Public Welfare license after auditors with a managed-care company could not determine students received more than $200,000 in mental-health counseling.

The newspaper story also uncovered that Vitalistic had lent nearly $250,000 in tax money to the preschool and then forgave the loan despite state law saying a charter school cannot loan money.

Wagner's report also noted the improper billing and financial relationship between the charter school and preschool.

The report uncovered additional problems with the partial hospitalization program -- and the web of improper family relationships at Vitalistic. Auditors found that the preschool improperly billed the charter school for $168,000 non-partial hospitalization students whose care was not funded by the state in 2010. The charter school paid down $143,000.

The audit states the bills were approved by the preschool's director, Kelli DeIaco, who was a member of the board of trustees and whose preschool salary was improperly covered with tax dollars. In addition, she is married to former board president Creed Hyatt, and she is the daughter of acting ceo/principal.

The audit concludes that the bills Kelli DeIaco authorized "essentially constituted" nothing more than illegal loans from the charter school to the center.

"Again making loans to the center was not within the powers granted to the charter school by the legislature," the audit states.

The report also faulted the administration and trustees for another "illegal" charter-to-preschool loan, which auditors pegged at between $210,146 and $291,979. The loan was meant to cover construction but went to the preschool's payroll, the audit states. But the audit states given the "numerous" financial transactions Grossman performed without board approval, "there can be no assurance" of the final loan amount, which the board of trustees eventually forgave.

"Charter schools receive public funding from school districts only for performing legally authorized services," the audit states. "To expend these funds for other than their intended purpose is therefore illegal."

Vitalistic's board of trustees fired Grossman as head of the charter school and preschool in May 2010, the same month Vitalistic sought a five-year charter renewal from Allentown and Bethlehem. During the renewal process, Vitalistic officials did not informed the districts about the charter's turmoil. Allentown granted renewal; Bethlehem did not; the state did.

In March, Grossman's replacement, Nancy Egan, resigned, alleging the board of trustees and other administrators were undermining her attempts to correct years of fiscal mismanagement. Egan claimed she uncovered payroll and insurance problems and a pile of over-due bills.

After the Allentown and Bethlehem school districts conducted their own Vitalistic investigation, their school boards voted to hold charter revocation hearings in late October.

Meanwhile, Vitalistic has yet to open for the 2012-13 school year. Its school building was sold last month by the defunct preschool to pay off debt. Vitalistic officials have told Bethlehem and Allentown school officials it plans to move to Calvary Baptist Church, 111 Dewberry Ave., in Bethlehem.

But Bethlehem and Allentown officials have not received a signed lease, and Vitalistic has twice postponed the start of school for its roughly 120 students, from Sept. 10 to Monday and then to Wednesday.

The lack of a building has caused Allentown and Bethlehem officials to threaten to withhold Vitalistic's per pupil tuition payments that are due later this month. If the districts do not pay, Vitalistic can petition the Department of Education for direct payment.

In the meantime, Deborah Hartman, Allentown's executive director of special education and lead liaison to charter schools, has tried to find Vitalistic's students and parents. Vitalistic has told her office they have 120 students, but her office has not received current enrollment records.

So Hartman has used last school year's rosters to send letters to parents, inviting them to enroll their children in Allentown schools. The letters also warn their children may not be getting a "free and appropriate public education" under federal law and inform parents they have to abide by state truancy and compulsory education laws.

Hartman said she got nasty responses form some parents while others have enrolled in Allentown schools -- with no special education records from Vitalistic accompanying their children.

Over in Bethlehem, Superintendent Joseph Roy has asked the Department of Education to take over jurisdiction of Vitalistic. In a Sept. 5 letter, Roy said Bethlehem can ill afford to pay for a costly legal fight Vitalistic plans to wage to keep from losing its charter.

Tim Eller, Education Department spokesman, has said the request is under review.

The charter school traces its origins to Vitalistic Therapeutic Center, a nonprofit preschool Grossman founded in the early 1970s in Allentown. The preschool, which was located at 14th and Hamilton streets in the city, served disabled students like Grossman's autistic daughter, Leah, before they could openly and freely attend regular public schools under federal special education laws.

By the mid-1990s, the preschool was running out of funding. Grossman sought to keep the preschool operating through an infusion of tax dollars by starting an independent public school under the state's 1997 charter school law.

In 2001, Grossman succeeded when the Allentown School Board approved her application for a regional charter school and the state Charter Appeal Board overturned Bethlehem's denial of the same charter. The charter's mission was to serve poor, at-risk students, with emotional and learning disabilities, in kindergarten through third grade. The heart of the charter's mission was intensive mental health counseling offered through the partial hospitalization program.

Under Public Welfare regulations, such patients must receive a minimum of three daily hours of medically supervised psychiatric, psychological or other care, including medication, individual, group or family therapy, and recreational, social or vocational activities.

Since its founding, Vitalistic has received more than $20 million in tax dollars to cover the education and Public Welfare components of its charter.

Part of the tax payments include $43,074 in improper lease reimbursements for its old west Bethlehem school building that was owned by the preschool, according to the auditor general's report. The charter school law prohibits lease reimbursements for buildings owned by a charter school or a so-called related party that shares the same administration or board of trustees as Vitalistic and the preschool did.

Despite the money and billing problems, Vitalistic was sitting on a fund balance of up to 48 percent of its total budget -- or four times the legal limit of regular public school districts -- in 2008- 09 school year.

Other audit findings include Vitalistic not having 75 percent of its staff certified to teach in violation of charter school law. The report also found Vitalistic did not have proper criminal background checks for bus drivers. Administrators and board of trustees were faulted for not keeping adequate meeting minutes or filing annual financial disclosure statements.

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KEY VITALISTIC AUDIT FINDINGS</p>

-- $378,146 to $459,979 in Illegal taxpayer-funded loans to nonprofit sister preschool.

-- $100,000 payments founder and ex-CEO Naomi Grossman gave herself.

-- $93,000 withdrawn from charter account between 2005-06 and 2007-08 school years

-- $43,074 in improper state lease reimbursements that must be repaid.

-- $18,433 payments to family members of Grossman or some trustees

Source: Pennsylvania Auditor General's Office

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