A Few Words About the State “Audit”

from the naïve citizen who set it all up

My report to the State Auditor’s Office was thirty pages long with over a hundred pages of documentation. The whole process took nearly three years. No one told me I wouldn’t get an audit out of it all. In the end, they called it a “petition engagement.” The actual workload appears to have been done by one accountant over a couple of months. Essentially the school district’s numbers were reformatted into the flimsiest financial review I’ve ever seen--four, thin sheets. Thankfully the whole thing was bound together with a stiff cardboard cover, otherwise it would have kept blowing off my desk from my breath. I’d hoped for more, but there was no political upside in this for the SAO.
Why would bureaucrats, on the request of some lowly citizens, step into a controversy like the Red Plan, ruffle a bunch of movers-and-shakers and embarrass a school district? Besides, unraveling the $60 million money trail for East High alone would probably have taken a team of accountants five years. Dig too deep and God knows what kind of Red muck you might find.
The Audit Manager counseled me to just try to put it all behind me now, and look to the future. I said, “That’s the kind of Pollyanna bunk the people controlling the School Board keep preaching. The future will likely be riddled with the same mistakes if officials aren’t held accountable. I turned to you for that accountability, for some clarity. That was your mission, here. And I think you’ve failed in that mission.” To put it mildly, I was annoyed.

Half free, or so they said.

JCI called the Red Plan “a once in a generation opportunity.” The question has always been: for whom? The Red Plan was sold to us with a promise as veracious as a telemarketing scam: the plan was supposed to SAVE us so much money, it was “half-free, already paid for.” Huge savings were supposed to be pooled in a special, designated fund, and this money was supposed to be funneled into bond payment. There were even supposed to be millions of extra dollars ($3.5 million this year, $65 million total), for “educational programs, curriculum upgrades and technology opportunities.”
At the 7/22/14 special school board meeting, called to announce the results of the petition engagement, the State Auditor’s Office confirmed suspicions that Red Plan savings are far below projections. “Significantly less” is the phrase the auditor used. The School Board majority and administration deny, deny, deny, but the Red Plan has been harming instead of helping education. As the auditor put it, “other General Fund resources have offset the deficit of the designated account.” In other words, the designated fund, rather than being a brimming pool of Red Plan savings, has been a big, dry sponge sucking up money from the rest of the budget.

Purchase your school before they’re gone.

Failure to sell property was verified as another contributing factor to the Red Plan’s shortcomings. But the claims about failed property sales were not, and have never been examined closely enough. For the past five years, ISD 709 has been hiding behind botched property sales as its most ready excuse for budget shortcomings. Local media gave district leadership a free pass for this fiasco, because the real estate market crashed in ‘08. Anyone who gambles with the public’s money, however, IS responsible if the gamble goes south. And the market isn’t the only reason property sales went south. Sales went south because the whole scheme was a DUMB IDEA to begin with.

Schools are tough-to-move properties. Even Johnson Controls, in its Property Assessment Report, used the phrase, “limited-market property,” to describe a school. Hard to believe, but the corporate hustler tried to warn the district that a school has “a layout that restricts its utility to the use for which it was built.” The School Board, by refusing to sell to other educational organizations, eliminated its most viable customer. And the big fire sale was a brilliant gem of fiscal reasoning. On top of seven schools vacated by the Red Plan, the district was also trying to move an old school once rented by Edison, plus its facilities management building and a warehouse on Garfield Avenue. Dumping a total of ten large, expensive, hard-to-move properties on the market at the same time in a little town like Duluth was BOUND to fetch top price.
Rockridge school is rumored to finally have an offer, but how much? Woodland school sold for half its appraised value, and we got one whole dollar for Lincoln Park. The district has downgraded its expected take from property sales from $26 to $16 million, and is unlikely to get that. Board member Johnston pointed out during the special meeting that some kind of accounting adjustment should be made for reality. The full cost of the Red Plan, with bond interest, is $480 million. Property sales--both as a panacea and a problem--have always been greatly exaggerated.

Soft Costs are hard to swallow.

Art Johnston is an engineer and the only member of the School Board who knows anything about construction. He kept trying to warn everyone that Red Plan soft costs--expenses for architectural design, etc--were running twice what they should be. The total soft cost figure he kept touting (and district management and the media kept pooh-poohing) was $84 million. The figure the State Auditor came up with--$84,184,982--matched Mr. Johnston’s figure almost to the dollar. The Board’s Lone Ranger was right once again, but remains a distant contender for citizen-of-the-year. Most of the power establishment of this town wants to wallow in misinformation. The News Tribune, our supposed government watchdog, informed us way back at the start of things that Johnson Controls “as program manager will oversee about $30 to $35 million of the project’s soft costs.”

Saddest watchdog I’ve ever seen. Didn’t hear a single, woozy “woof-woof,” as the bandits made off with the loot.

In the same astute article, run on 6/19/07, the paper claimed JCI would receive “about $4.5 million for managing the remodeling and new construction.” As of December 31st, 2013, the State Auditor’s report verified $56,525,688 had gone to Johnson Controls. One of the biggest criticisms of the report is that it didn’t break down the figure. It didn’t show what Johnson Controls paid out to subcontractors. But does anyone believe JCI paid out $52 million, leaving itself with a measly cut of $4.5 million? Anyone who does believe that is welcome at my house anytime. I’d like to make you a deal on some nice junk in my basement.
During the special meeting, member Westholm requested documentation from the State Auditor for soft cost expenses. Member Johnston made that request as well. He also requested documentation of the money paid/to and paid/out by Johnson Controls. Johnston expressed concerns about possible “double-dipping.” He was worried costs that should be included (and paid for) out of construction billing might be double-billed under soft costs. Any thorough report should have already included that documentation. The fact that the documentation wasn’t provided illustrates just how flimsy and thin the report was. The itemized list of soft costs was certainly questionable. Even Chair Miernicki, not known as a tough inquisitor on budget management issues, questioned why property acquisition was listed as a soft cost.
Simple math--subtracting the $56.5 million paid to Johnson Controls from the grossly inflated total soft cost expense of $84 million--extrapolates another revealing figure from this scanty auditing exercise The resulting figure ($27.5 million) is the minimum amount paid directly by the district for soft costs. Some of this money ties into that slippery contractual incidental called “reimbursables.” Remember those glossy Red Plan progress photos? Whew! JCI’s head honchos must have had a bunch of them super-sized, framed in gold and hung all over corporate headquarters.

You’re kidding! There’s money left over?

One more interesting fact was revealed by this engagement I arranged with the State Auditor’s Office. As of last December 31st, the auditor’s calculations show an extra $6.4 million left over, after Red Plan expenses. This raises some interesting questions, like why wasn’t some of this money used for the new tile roof on Congdon school? The stated purpose of the Red Plan was to make all our school new or like-new, so why wasn’t a new roof included? Why did Duluth taxpayers have to cough up some $800 k? And what happens to those extra millions, now? Is that money going to be funneled into bond payment, to give the abused public some relief?

Member Seliga-Punyko didn’t ask these questions on behalf of the public, because she was a no-show for the meeting. Member Harala asked who the superintendents were during the Red Plan and gave no reason for her inquiry. Member Loeffler-Kemp tried desperately to get a statement of vindication from the auditor.

“We (the district and the Board) followed everything in the legal way we needed to, right?” She said, sticking a question mark on a statement.

“I wouldn’t say that.” The auditor responded. “…we identified the process.”

“And we followed it.”

The auditor demurred and chuckled a bit from being pushed. Loeffler-Kemp pressed harder.

“The process you identified.”

Chair Miernicki jumped in and tried some different words: “The conditions were met.”
“The conditions were met.” Loeffler-Kemp repeated.

The auditor refused to hand them the stamp they wanted. Instead, she handed the baton off to her in-house attorney, who said, “That kind of conclusion is not the kind of conclusion we included in the report.”

Nice try for that Get Out Of Jail Free card.

As usual, stress rose up around Members Welty’s and Johnston’s persistent questioning. When Chair Miernicki tried to corral his questioning, Welty responded with pointed forcefulness: “With all due deference, Mr. Chairman, I’m asking questions that concern this report. I’m discovering the limitations of the report, which is something I need to know.” Welty’s questioning brought to light a seldom acknowledged point about the district’s finances. Axing 188 teachers to balance budgets does reduce costs, but obviously is not really a savings.
Both Welty and Johnston wanted to ask more questions. As the lead petitioner I wanted them to, as well. But Miernicki announced he would shut the meeting down at six o’clock, and he did, with the iron fist of a King. The aristocracy currently controlling this city seems to have trouble with the concept of representative democracy. Board members still had lights on, still had questions to ask, and the Chair just shut them down. The Chair of a Board, or the President of a Council has absolutely no right to do that. If members of a Board or Council wish to continue speaking on an agenda item, the President or Chair can only legally adjourn a meeting with a motion. He or she can not arbitrarily adjourn by regal dictate.

No one apparently gives a damn,