Audit finds multiple money problems at Md. education agency

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By Meg Tully

For MarylandReporter.com

MSDE_LogoThe Maryland State Department of Education kept more than $12 million of federal reimbursements for its own programs rather than return it to the state as required by state law, state auditors found in a report citing multiple problems with the department’s financial dealings..

The Office of Legislative Auditor’s report released Tuesday raised issues across the agency including improper handling of checks, spending that didn’t follow procurement guidelines, faults the business office for improperly handling funds and checks; and states MSDE neglected to report possible criminal or unethical activity of its employees for possible prosecution.

The audit also questioned if MSDE is doing enough to check criminal histories of child care workers and secure a system that processes $81.5 million in child care subsidies (See separate story.)

MSDE is responsible for a large chunk of state spending, overseeing about $7.4 billion in spending in fiscal 2015.

Three of eight audit findings in a previous audit needed to be repeated.

Audit demands reimbursement of millions in federal funds

MSDE is refusing to pay back $12.3 million that auditors determined should be returned to the state general fund.

Federal grants include reimbursement for indirect costs, like central overhead services provided for human resources or information technology. Auditors determined that other state agencies, such as the comptroller’s office, provided such services to MSDE and were eligible for cost recovery, but MSDE did not send funds back to the state after they got payments for those costs from the federal government.

Instead, MSDE claimed the amounts it got for indirect services ($27 million) were insufficient for its needs and retained the remaining $12.3 million in funds to pay for central service functions provided within MSDE.

“State law provides that funds recovered from federal sources for statewide indirect costs must be reverted to the general fund and it prohibits granting any waiver or exemption from this requirement,” the audit states.

MSDE agreed in the audit response to fix the issue in the future, but said it had not calculated the specific amount of state-provided services, which is why it wasn’t paid to the state. It also said it would not be paying the money back.

“However, MSDE does not have access to prior year recoveries,” the response states. “Therefore, it is not possible for MSDE to revert the prior year statewide indirect cost recoveries.”

Failure to prosecute criminal or unethical behavior

When MSDE received reports that employees were doing things like collecting a paycheck for hours they did not work, the department neglected to inform the proper authorities, auditors found.

Allegations of unethical or criminal behavior by state employees are supposed to be referred to the Office of the Attorney General’s Criminal Division and the governor’s chief legal counsel, the audit stated.

But during the audit period of July 1, 2011 to June 30, 2014, MSDE received five reports of such activity and reported none of them to the attorney general or governor’s counsel. Instead, MSDE conducted a limited review and in each case found evidence of improper activity including misrepresentation of hours worked and falsifying documents.

Then, MSDE chose not to expand its review because the agency has a 30-day timeframe to impose disciplinary action.

“However, without consulting the Criminal Division there is no assurance that the investigative actions were sufficient or that the resultant disciplinary actions appropriate,” the audit states.

In one case, MSDE found an employee was overpaid $3,592 one month, and allowed the employee to resign without being fired and simply pay back the money. But MSDE did not expand the investigation to see the extent of falsified time sheets, limiting it to that one month. In the four other cases, ultimately employees paid back the money or forfeited leave, and two resigned, one was fired and one received written counseling.

MSDE agreed to the audit recommendations for this section.

Procurement regulations lax

A test of MSDE purchase orders revealed that MSDE hasn’t always been following procurement regulations established to make sure money is well spent. This included paying invoices for thousands of dollars where support documentation did not match the bills vendors sent to the state.

From fiscal 2012 to fiscal 2014, MSDE issued 3,521 purchase orders for goods and services with payments totaling $277 million.

The auditors tested just nine of these purchase orders totaling $20.3 million and found issues like lack of documentation of how vendors were evaluated during the bid process. One $1.3 million contract lacked specific deliverables to allow performance monitoring and invoice verification, the audit found.

A review of six invoices for that contract also found that there were $222,500 worth of discrepancies between the invoices and supporting documents like timesheets and logs. For instance, the vendor charged $10,000 for hours that were not worked according to that documentation.

The audit also found MSDE often didn’t allow the 20-day minimum for bids, which would allow more competition. Four contracts were found during audit tests with bid solicitation of only five to nine days, with only one, two, or three bids coming in.

MSDE is working to address these issues, it stated in a response letter. On Oct. 26, 2015, it held a procurement meeting to reinforce state regulations, including the 20-day bidding time.

Business practices

The business office of MSDE has not been recording and restrictively endorsing checks immediately upon receipt, the audit found of checks related to grant reimbursements totaling $13.5 million. Instead, two employees handled them before they were recorded and endorsed – opening the door to fraud or theft.

MSDE said it had developed procedures to prevent this happening as the result of a prior audit but that the new findings were an “exception” and supervisors had reviewed procedures with the employees.

The audit also said MSDE failed to following accounting procedures like prenumbered receipt forms to record collections received, which prevents misappropriated checks.

Auditors also suggested that MSDE should require electronic payments for large sums  – some of more than a million dollars each — to increase control and accountability.

MSDE agreed with all of the accounting findings but argued against large payments being made electronically. They said it would eliminate some of the detail on how to apply payments to multiple programs, but auditors said that paperwork could be completed separately and in addition to electronic payments.

  • charlie hayward

    MSDE needs deeper and more frequent audits. They claim they kept millions of indirect costs associated with administration by outside central-service agencies because their own indirect costs were under-recovered. That is tantamount to saying MSDE has unilateral authority to retain money meant to reimburse others rather than fix its own indirect cost calculations. Mark that down as management by taking the path of least resistance. Failure to audit them annually is a wasted opportunity.

  • Lisa Moore

    All of this happened under the supervision of Lillian Lowrey. I wondered why there wasn’t a “big stink” when she broke her contract and left for Ohio. Guess there was a reason that she found “greener” pastures to invade.

    They need to start cutting the fat at the MSDE and start using that money to directly fund schools. Too much skimming off the top.

  • woodbinemom

    How do people in this agency keep their jobs? If someone in private industry did any of these things they would be fired that day, but if it is a gov’t agency “oh well, we will look the other way if you promise not to do it again”. No wonder people do not trust their government.