Tech admins on leave after allegedly bending major finance rules

Date Published: 
June 23, 2017

Construction projects in the single-school Sussex Technical School District have caught negative attention from the state auditor.

It began with complaints to the Office of Auditor of Accounts (AOA) that a Laurel man had purchased land and immediately resold it to the school district at an 82 percent markup. He later became the project’s construction manager and allegedly charged the district high rates.

Meanwhile, he and the district allegedly adjusted invoices to avoid financial processes required by the State.

After the AOA report was issued June 8, the STSD Board of Education voted June 12 to place an undisclosed number of senior administrators on paid leave, “pending the outcome of an investigation into matters raised in the Auditor of Accounts’ report. … No further details will be provided in order to protect the privacy of personnel.”

Day-to-day operations of the district will be led by Principal John Demby and Supervisor of Support Services John Sell.

The AOA reviewed more than $3.8 million paid to Common Sense Solutions LLC (CSS) for the period from July 1, 2011, through Nov. 4, 2016, in the “Sussex Technical School District Land Acquisition and Construction Management Services Inspection” released June 8.

The Sussex Technical School District served 1,344 high school students from throughout Sussex County at the school in Georgetown for the 2016-2017 school year, as well as offering adult education and GED programs.

In 2010, the Department of Education (DOE) had approved Sussex Tech’s four renovation projects, totaling $17,275,200 (60 percent State funds, 40 percent local funds) for a bus entrance, HVAC systems, industrial shop renovation and district office renovation.

Overpaying for land

According to the AOA, Michael Horsey of Laurel was allegedly “intimately involved in the project at this time and was aware of Sussex Tech’s need to purchase the parcel of land for the [new bus] entrance.”

According to the report, late in 2010, Horsey and his wife, Kathleen, had founded Governmental Services LLC, which in April of 2012 purchased the land necessary for the bus entrance from Kruger Farms Inc. for $110,000. Two weeks later, the Sussex Tech Board of Education purchased that same land from Governmental Services for $200,000, “which represented a $90,000, or 82 percent, increase in value over the two-week period.”

The report states that, during the property transfer in July of 2012, Kathleen Horsey was the sole member of Governmental Services LLC. But, on that same day, Tech’s Facilities & Operations requested that Michael Horsey of CSS be awarded the project-manager contract for the bus entrance project. The school board approved the contract for $205,699 in November of 2012.

According to the AOA, STSD had no property appraisal done; there is no evidence of price negotiation; the district failed to keep detailed records; and the construction management contract was put to bid with too few details for other competing companies to adequately bid.

Additionally, compared to other state projects, the AOA found that the construction management firms on average usually charge 1.33 to 4 percent of the project’s overall value. CSS charged 8 percent on all three contracts.

In December of 2016, the AOA reported, Tech allegedly didn’t follow proper procedures for making change orders (the full school board wasn’t approving the increases in project price) or for bidding out projects (Horsey and CSS were granted additional construction management contracts for the later projects through “piggybacking,” instead of the full bidding process).

After the bus entrance project, the CSS contract was amended to add the HVAC systems and industrial shops renovations for another $828,123 apiece, plus reimbursable items at 10 percent markup over cost.

Despite issues being raised, the school board also piggybacked a fourth project: district office renovations for $79,500, plus reimbursable items at cost plus 10 percent.

The AOA stated that they believe that CSS marked up $262,600 in items that do not meet the contract’s definition of a reimbursable cost. Another $133,000 in charges lack supporting documentation, so AOA couldn’t determine if costs were calculated properly, they said.

Since the school board stopped reviewing change orders as a whole entity in 2015, “Sussex Tech paid CSS $1,546,529 without the Board’s oversight,” according to the AOA.

Bending the rules

For all purchases of more than $5,000, the state’s Budget & Accounting Manual requires a purchase order, school board approval and Division of Accounting review. There are more bidding rules for higher cost thresholds, at $10,000 and $100,000.

But the AOA alleges that Sussex Tech appears to have unlawfully circumvented State Procurement Code by encouraging costs to be split into many small invoices.

“Sussex Tech not only accepted and approved the payment of these numerous invoices, but encouraged the practice. AOA discovered emails from the former director of Facilities & Operations to several vendors, instructing them to split their invoices into amounts less than $5,000,” the report states.

The AOA found repeated examples of such action. For instance, paving and drainage were billed around $49,000 and $48,000 — just shy of the 50,000 threshold for mandatory bidding. CSS appears to have sometimes reduced the 10 percent markup in order to avoid hitting the $5,000 mark, they said.

Demolition costs for the whole auto collision shop were split into 31 invoices, exceeding $123,000 in total, which undercut the competitive bidding requirements of the $100,000 threshold.

Conflicts of interest

The AOA also spotted an alleged conflict-of-interest, as Tech’s former director of Facilities & Operations retired in mid-2015 and was then hired as the CSS liaison on the Sussex Tech construction projects.

Former State employees — which includes public school district employees — may not “represent or otherwise assist any private enterprise on any matter involving the State, for a period of two years after termination of employment” if the person was directly involved with that matter during their time with the State.

That former director is the same person who allegedly encouraged the splitting of vendor invoices, initially attempted to select CSS for the bus entrance project before bid paperwork was completed and oversaw the piggybacking of the CSS contract.

In conclusion, “CSS turned their original HS Bus Entrance CM contract of $205,699 into nearly $4,000,000 in payments” by piggybacking two more projects, AOA stated. “As of May 1, 2017, the HS HVAC Systems, HS Industrial Shops Renovations, and District Office Renovations projects are still ongoing and incurring additional charges and fees from CSS.”

Employees noted that “each time someone began questioning the payments made to CSS, they were pushed out of the decision-making and payment approval processes.”

On June 8, the AOA noted that “CSS invoices are currently addressed to and approved by the Assistant Superintendent instead of the current Director of Facilities and Operations.”

CSS has been doing various Sussex Tech projects for years and was paid $3.87 million from mid-2011 to late 2016, according to AOA

“While CSS was initially hired to perform contract management services for the District that totaled $1,806,703 in CM fees, CSS was still paid another $2,066,728 for additional construction-related services. Many of these expenditures were incurred without proper review and approvals in accordance with the State-mandated thresholds and lacked adequate supporting documentation.”

Legislators concerned, teachers want to teach

Sussex County’s delegation of state legislators has urged the state’s Attorney General to investigate the issues involved in the AOA report on Sussex Tech and pursue criminal charges as needed.

“The report released today by the State Auditor of Accounts raises some troubling questions about Sussex Tech,” according to the legislators’ joint statement. “It calls into question how key operational and strategic decisions are being made at the school; how tax dollars are being spent; and if sufficient oversight is being exercised.

“We urge the State Attorney General’s Office to investigate these findings and aggressively pursue action should any criminal wrongdoing be found. We also want to thank the State Auditor of Accounts’ staff for their diligence and their thorough reporting in this matter.”

Meanwhile, Sussex Tech will be severing ties with CSS.

“As of June 30, 2017, the contract with Common Sense Solutions (CSS) will come to an end. There are no further plans to utilize CSS’s Construction Management services beyond that point,” according to a district statement.

They did not clarify who will continue to guide the project to completion.

Sussex Tech’s other immediate response was to cite decreases in personnel and attempts to improve: “Sussex Technical School District is currently attempting to improve both process and procedure as it pertains to the appropriate scrutiny of transactions and enforcement of fiscal policies. Decreases in personnel over the years has led to many individuals wearing various hats and/or splitting job duties, this has presented challenges as all were learning and continue to learn their role and responsibilities.

“Sussex Technical School District will continue to do the best job possible while serving our community. All input will be synthesized and assist with our efforts moving forward.”

Ultimately, a school’s purpose is to educate, and the teachers’ union, in commenting on the issue, upheld their focus as educators.

“In light of the recent audit, the Sussex Technical High School teachers’ association is, and will continue to be, unified as educators,” according to a statement from the Sussex Tech Education Association.

“The STEA supports full financial transparency and disclosure by the district in order to remain focused on our students and the education in which we provide. As teachers, we pride ourselves in preparing our students in career and academic readiness, and, through education, we strive to play our part in enhancing the Sussex County community.”

The full Sussex Technical report from the AOA is online at http://auditor.delaware.gov/reports.