Oklahoma Health Department crisis stemmed from misunderstanding of slush funds
Oklahoma City — The Oklahoma State Department of Health appeared bankrupt because no one at the top fully understood the accounting mechanisms that had built up a “slush fund” worth millions, according to grand jurors and state auditors.
The grand jury report released Thursday said department heads grossly mismanaged by submitting budgets that balanced only on paper, hiding extra cash and only telling the Board of Health what top officials wanted it to hear.
Perhaps even more startling, the grand jury found the department was never in imminent danger of financial collapse, as lawmakers were told before they voted for a $30 million special appropriation. Some lawmakers have released statements accusing department officials of lying to them, but the grand jury report only refers to confusion, not perjury.
The grand jury didn't issue any indictments, because it found none of the mismanagement was prosecutable under Oklahoma law. No one has been accused of stealing agency funds.
Attorneys for former Commissioner Terry Cline and former Senior Deputy Commissioner Julie Cox-Kain, the department's two top officials at the time the scandal broke, didn't return calls seeking comment.
According to the reports, the perceived financial crisis hinged on one problem: Health Department officials had stashed state cash in what appeared to be untouchable federal and state accounts for years — and new financial management believed the money was actually restricted, not just packaged as if it were. The $30 million deficit was based on the idea that the department had to pay back all of the money it had borrowed from different funds over the years, which wasn't true, state auditors said. If the department didn't need to pay those funds back, it had enough money to keep operating without major changes.
The apparent misunderstanding cost 198 people their jobs through layoffs. Interim Commissioner Tom Bates said the department is reaching out to “numerous” laid-off employees to meet critical needs in local health departments.
“During my initial days at the agency, I became concerned that people unnecessarily lost their jobs through the reduction-in-force (layoff) that was executed prior to my arrival. Those concerns were confirmed yesterday, and to the people and families impacted by the RIF, I am truly sorry,” he said in a statement.
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Sterling Zearley, executive director of the Oklahoma Public Employees Association, said the union will consult with an attorney in the next few days to determine what options might exist for the laid-off employees. He said he had never heard of a similar situation in the 30 years he's worked for either state government or the union.
The situation is particularly frustrating because the Health Department not only fired nearly 200 people, but also took millions that could have gone toward employee pay raises or core services, Zearley said.
“It angers me, and it's very frustrating to us because it didn't need to happen,” he said. “We'll pursue any recourses available.”
Bates, the interim commissioner, said the department has begun implementing some of the auditor's recommendations, including setting up separate accounts for restricted money and seeking a new chief financial officer. He also asked for patience while the department works through its finances and determines how much money it needs.
“While I understand the frustration of recent events at this agency, the worst thing we could do now is to spend money without a strategic budget plan that identifies critical priorities and maximizes our resources to serve the best interests of public health in Oklahoma,” he said. “Moving forward, we are not going to simply rebuild the old Health Department. Instead, we will use this situation to find additional efficiencies, improve financial controls and be better stewards of taxpayer dollars.”
Confusion over cash
For at least 25 years, the department had gradually built up an account nicknamed “the commissioner's fund” with excess state dollars, State Auditor Gary Jones said. At its peak in 2007 or 2008, the slush fund contained $40 million, though that had fallen to somewhere between $6 million and $7 million when auditors looked at it earlier this year, he said.
The Health Department was able to quietly amass so much cash because of its funding structure. The department has three main funding sources: state appropriations, which are a flat amount the Legislature agrees to provide each year; county millage dollars; and federal grants.
Some of the county and federal funds are tied to specific projects, and the Health Department has to show it spent money in approved ways to be reimbursed. Spending that money on unapproved costs, like salaries for employees working on different projects, could invite penalties from the federal government, including the loss of grants.
Some employees split their time between federal grant projects and other duties. Federal money pays for the hours they spend on approved projects, and state money makes up the rest. The state doesn't demand an hour-by-hour accounting, though — the Legislature gives an appropriation to cover what it thinks the Health Department will need for an entire year.
If employees did more work on federal projects than anticipated, that frees up state dollars to either cover cost overruns elsewhere in the department or to build a rainy day fund. The easiest thing the department could have done would have been to leave the money in the account where the state had placed it.
Leaving it there, however, could have made it a tempting target for lawmakers to sweep when they needed to balance the budget, the grand jury report said. So the Health Department quietly moved it into accounts designated for federal or county money, which lawmakers believed they weren't allowed to touch.
The Health Department had been engaged in questionable practices for years, Jones said, but no one successfully raised an alarm until 2017, when new Chief Operating Officer Deborah Nichols and Chief Financial Officer Mike Romero discovered the department's financial records were a mess.
The department was relying on a 1982 mainframe system, which included excessive restrictions on how funds could be used, Jones said. As Romero sifted through the department's financial records, he came to the conclusion health officials were moving restricted money around in improper or perhaps illegal ways.
The auditors and the grand jury concluded he was mistaken: most of the money the department was moving came from the state cash slush fund that had built up over time.
Romero took exception to that version of events. He said officials at the Office of Management and Enterprise Services, which manages the state budget, had specifically instructed him and then-COO Nichols to “borrow” federal money and pay it back later, and said the auditors were covering up their own failure to detect financial mismanagement.
“Hopefully there's never a real audit from the federal government, which could put our state in the position of owing interest on prior activity such as this; not to mention the risk to vital programs that rely on the flow of federal dollars by following the requirements mandated and enforced by the government of the United States,” he said in a written statement. “It's very difficult for me to suppose that if I had looked the other way and not assisted COO Nichols as the job required, everything would have gone along swimmingly for the Health Department.”
If the money in the slush fund actually had been federal and county dollars, Romero's conclusion that the department faced an immediate cash crunch would have been correct, because it couldn't have used the millions it was holding, Jones confirmed. As it was, the Health Department didn't need either the $30 million special appropriation or the layoffs, he said.
Jones said if the auditors had been allowed to investigate the situation at the Health Department thoroughly over the years, the situation might have been avoided.
“They had made this so complicated that they couldn't even understand it,” he said. “They artificially created restrictions on themselves that didn't need to happen.”