State audit finds Scranton School District gave questionable payouts, health insurance

Oct. 25--The Scranton School District budgeted recklessly, gave health insurance to nonemployees, paid unapproved rate increases to its bus contractor and provided questionable payouts to former employees, according to a state audit released Tuesday.

Calling it the worst audit he has ever seen, state Auditor General Eugene DePasquale said his investigation shows "serious financial instability" and an "extreme level of board and administrative staff dysfunction" rarely seen in audits.

"It is long past time for the dysfunctional Scranton School District board and the staff to start acting like responsible adults, and to be blunt, get their heads out of their asses and focus their energies on doing what is right for the district's 10,000 students and thousands of taxpayers," DePasquale said at a press conference at Scranton City Hall. His blistering comments elicited several gasps from the audience.

The 110-page audit includes nine findings and 38 recommendations for improvements -- suggestions that district officials on Tuesday pledged to take seriously and implement.

"We agree with his findings," Superintendent Alexis Kirijan, Ed.D., said. "There are many things we need to address."

Financial problems

Many of the findings in the audit, which covers July 2012 through June 2016, deal with the district's poor finances.

"This is by far the worst debt situation of any school district in the state," DePasquale said. "To put it bluntly, Scranton School District can be compared to a compulsive shopper: recklessly spending more than it's bringing in."

From 2012 to 2015, the district accumulated a general fund deficit of $25 million, meaning it spent $25 million more than it received in revenue. During that time, district spending increased almost 13 percent. The district also spent more than $2.7 million during that period to settle special education lawsuits. The board allowed the district to borrow from restricted funds and obtain bonds to sustain current operations.

"While blaming state and local governments and its taxpayers for the district's financial woes can be a popular sport, that is not the case with the Scranton School District," DePasquale said. "The problem with this district's finances is not about revenue. It is about wasteful spending and general mismanagement."

In June, the state placed the district on financial watch status, the first in a series of steps that could lead to state receivership. Under receivership, a state-appointed official could make decisions that lead to layoffs and school closures. The district's deficit is expected to reach $40 million by the end of the year.

"There is way too much finger-pointing going on in this district, and no one is taking responsibility for anything," DePasquale said. "Unless the district makes significant operational changes and reverses the current state of its financial affairs, it may well be placed in financial recovery status which means loss of local control of district operations."

Mechanic benefits

For 12 years, the district gave a South Scranton mechanic and his wife medical and dental benefits -- which was both "improper" and not approved by the board, according to the audit. The benefits ended when the auditors questioned them earlier this year.

Between 2010 and 2016, the district paid $672,321 to Dan Sansky of Danny's Auto Service. Payments to the West Elm Street shop for 2005 through 2009 could not be determined because district officials said those records were unavailable beyond the seven-year retention period. However, DePasquale said the district likely paid Sansky $1 million or more.

Efforts to reach Sansky were unsuccessful Tuesday.

The district gave the mechanic benefits and payments without having him fill out proper paperwork and required IRS documents. DePasquale expects the IRS to conduct an investigation. As is common procedure with audits, the state attorney general office also will receive a copy of the audit, he said.

Auditors also found that the mechanic submitted vague invoices for payment directly to the district's business office, instead of through the maintenance office, which could have documented that the services were actually completed. Purchase orders were prepared by the chief financial officer after Sansky submitted the invoices to the district.

The invoices did not include specific services provided, hourly rates or the actual time spent working on the vehicles. When using other vendors for mechanic services, the district followed proper procedures.

Bus overpayments

For at least a decade, state officials and others have criticized the district and its awarding of no-bid busing contracts to DeNaples Transportation. In a prior audit, DePasquale called on the board to bid services as a way to save money. Instead, the board and district "thumbed their nose at me," he said. The latest no-bid contract, given to DeNaples last year by the board, goes through 2021-22. Directors Cy Douaihy, Mark McAndrew and Tom Schuster voted against the contract extension.

In the 10 school years from 2007 through 2016, the district paid the contractor $26.1 million -- including more than $4 million in questionable fuel surcharges. Those surcharges are the result of a 2006 addendum, never signed by the board, that gave DeNaples an additional 4 percent fuel surcharge yearly. The company continues to get the yearly increases, though the board never voted on the surcharge.

Within 10 years, the daily bus rate climbed from $193.13 in 2006 to $306.54 in 2016.

"The contract allowed for the establishment of daily rates that had no relationship to actual fuel costs, mileage or occupancy of the buses, and the district did not question the daily rates charged by the contractor," DePasquale said.

Attempts to reach DeNaples Transportation officials were unsuccessful.

Auditors also found the district's transportation expenditures exceeded "final formula allowance" by more than $11 million during the 2012-13 through 2015-16 fiscal years. Though DePasquale admitted the formula is "antiquated" for urban districts, other urban districts do not exceed the formula at such an alarming rate, he said.

The district also incorrectly reported the number of charter and nonpublic school students it transported, resulting in a reimbursement overpayment of $128,590 to the district by the Department of Education.

Spending questioned

Auditors also found several other instances of questionable spending. Twice in three years, while the district was in a declining financial position, it offered enhanced retirement incentives -- an additional $15,000 annually for seven years -- without a commitment to specific offsetting cost reductions and without a prior cost-benefit analysis.

The retirement incentives for the 2014-15 school year did not contain any minimum age or service requirements, which resulted in five employees taking the incentive by leaving the district with fewer than 20 years of service. Two teachers had fewer than 10 years of service.

"As a result of these incentives, the district added more than $1 million to its ongoing general fund liabilities for the 2015 calendar year alone," DePasquale said.

In addition, the audit found the district failed to request and obtain overdue health insurance payments from three former employees, including from one former employee who still has an outstanding balance of $17,896.

Auditors also flagged separation agreements with two former employees that resulted in "questionable use of taxpayer funds and possible inadequate reporting of retirement wages." The board voted to enter into separation agreements with its former superintendent, William King, and former solicitor, Harry McGrath, with each agreement containing provisions for transitional services and compensation. However, the district could not provide evidence of any work performed to justify the compensation. McGrath died in 2015.

District response

In a statement provided after the press conference, Kirijan said the district is well aware of the need for operational management and educational changes. Two years ago, the district developed a strategic plan with an embedded financial plan to begin the work to get the district back on track, she said.

Although DePasquale addressed buy-out incentives, he did not mention the cost of the collective bargaining agreements and the need for more cooperation from the unions, she said. The district is also "keenly aware" that bidding the bus contract must be done.

"The audit is a snapshot in time," Kirijan said. "I am optimistic that the plan the district has in place to improve student achievement and bring the district to financial solvency over time is doable. By strategically realigning resources, properly distributing workloads, providing teacher and leader training, realistically managing the budget and working together, the district will regain financial solvency over time and student achievement will improve."

Douaihy, who attended the press conference with Kirijan and Bill Gaynord, chief human resource officer, called the findings "disturbing but not surprising." He said he would investigate how the district is continuing to pay DeNaples for the surcharges from the unsigned addendum.

Members of the board received copies of the audit Tuesday.

Director Paul Duffy said he would review each finding and recommendation closely.

"I want to look into what we can take from the audit and what we can implement as soon as possible," he said.

Schuster, chairman of the budget and finance committee, said he also welcomes the results of the audit.

"It's nice that all of this comes to the surface," he said. "The findings were definitely needed."

McAndrew said he first learned about Sansky receiving benefits three years ago and told district officials it needed to end immediately. He said he was shocked to learn that it had not.

"I'm going to embrace the auditor's recommendations," McAndrew said.

Director Bob Lesh said he took issue with DePasquale's comments.

"I don't appreciate the language he used," Lesh said. "It's very insulting, very demeaning. There's no room for that."

Lesh, the only school director on the board when Sansky began receiving insurance, said he didn't know how the practice started.

"We're not there every day," he said. "Sometimes administrators do make mistakes."

He also questioned how someone from Harrisburg could criticize the district, when the state can't even pass a budget.

Efforts to reach other board members, including President Bob Sheridan, Vice President Carol Oleski, Robert Casey and Jim Timlin, were unsuccessful Tuesday. As an auditor in the auditor general's office, Casey has previously said he could not comment on the district audit.

Directors planned to meet Tuesday night and tonight in closed-door executive session to discuss the audit and financial situation.

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Nine findings from audit

n Chronic operating deficits and a negative general fund balance led the district to incur unsustainable amounts of debt.

n Administrators and the board failed to perform their fiduciary responsibilities regarding a $26 million busing contract with DeNaples Transportation that included more than $4 million in questionable fuel surcharges over a 10-year period.

n Transportation expenditures significantly exceeded the Pennsylvania Department of Education's formula allowance by more than $11 million during the 2012-13 through 2015-16 fiscal years.

n Staff incorrectly reported the number of charter school and nonpublic students transported, resulting in an overpayment of $128,590.

n For more than 12 years, the district circumvented payment procedures, improperly provided health benefits and failed to issue any of the required tax documents to the IRS for a mechanic performing services as a nonemployee of the district.

n The board approved two enhanced retirement incentives, one with flawed language and both without a cost analysis, resulting in increasing general fund liabilities.

n The district continued to provide health insurance to former employees after the employees failed to pay their premiums.

n The district entered into two separation agreements with former employees that resulted in questionable use of taxpayer money and possible inadequate reporting of retirement wages.

n Weak controls over information technology inventory exist.

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