Three months before the Oklahoma State Department of Health acknowledged it was in a budget crisis, it had $15 in its main account and at least $600,000 in bills due.

story by Meg Wingerter | photos by The Oklahoman | design by Richard Hall

published April 15, 2018

While most of Oklahoma City was taking a lunch break on a hot and sticky Thursday in late July, Jan Fox learned her office was facing a crisis.

A $600,000 bill to pay the insurance premiums of low-income HIV patients had arrived, but an email from the Oklahoma State Department of Health's payments office said the department couldn't cover the cost.

That couldn't be right. Fox, a career government employee who'd overseen the state's HIV program since 2010, knew the budget showed the HIV fund had $3.1 million available for bills like these.

“What do you mean, our funds have been depleted…???,” Fox wrote to the department's payments office. “WE CANNOT allow our contractors to go without the payment that they need to continue processing premium payments for our clients with HIV!!!!"

But the money was gone.

Years' worth of misspending had grown into a multimillion dollar scandal that left the department, one of the state's largest, facing financial disaster. Warning signs had gone unheeded for months, and the day of reckoning was near for the $400 million agency.

Within the next six months, the department's top official would resign under a cloud, soon followed by much of his leadership team. Employees would face furloughs, and nearly 200 would lose their jobs. Child abuse prevention programs and community health centers would endure $3 million in cuts. The Legislature would have to come up with $30 million for an emergency bailout, one of the largest in recent memory, at a time when they were struggling to balance the state's budget.

Lawmakers and law enforcement also would launch investigations on multiple fronts trying to determine just exactly what had happened.

Less than a month before the telltale email had hit Fox's inbox, Health Commissioner Terry Cline had assured the state budget office that all was well within his department.

But, in fact, the department had been overspending for at least two years, creating a debt reaching into the millions.

For almost a year, department leaders had ignored warnings from staff, failed to take action once they acknowledged they overspent and even threatened employees who might reveal the extent of the problem to the public. Even after the missing HIV funds showed the department was headed toward financial collapse, its leaders tried to hide the problem for another three months.

Perhaps as alarming, other state oversight agencies were ill-equipped to spot the trouble — raising the possibility the state could find itself in a similar situation in the future.

No one at the Health Department has been accused of embezzlement or intentional misuse of money. One employee would later tell a House investigative committee that top officials had good intentions in spending on health programs, but failed to understand that they didn't have an unlimited pot of money.

“In my opinion, the folks that were leading this agency were not villains,” Deborah Nichols, the department's chief operating officer, told lawmakers in December. “The problem is they're really bad business people.”

Deborah Nichols


Looking back, former employees and others now say, red flags about the department's financial health had been fluttering for quite some time.

From a 12-story headquarters tucked along a tree-lined street on the University of Oklahoma Health Sciences Center campus, the department's leaders oversaw about 2,500 employees throughout the state, responsible for everything from operating health clinics to registering birth certificates to inspecting nursing homes.

That headquarters building, a glass and concrete structure built in the early 1970s, offered one of the earliest clues that something had gone wrong in the department.

In January 2016, work on a planned $8 million renovation of the top three floors came to an unexpected halt, after employees who worked on those floors already had relocated their desks. Not long after that, Nichols learned the whole project had been shelved, she told the Special Investigative Committee to Review Agency Mismanagement of Taxpayer Funds in December.

“All of a sudden in January the project is stopped,” Nichols told lawmakers in a question-and-answer session that lasted more than an hour. “They don't have the $8 million.”

Over the next few months, Nichols testified, she started to hear complaints from contractors unrelated to the renovation that the Health Department wasn't paying on time.

Nichols, a former health insurance industry executive who'd only joined the department the previous year, told lawmakers she raised the issue with top officials. Unfortunately, the department was led by a “clique” that resisted input from perceived outsiders, she said.

Cline, the health commissioner, had served as an agency head under three governors. His top deputy, Julie Cox-Kain, had worked at the Health Department for 25 years and been second-in-command since 2014. Felesha Scanlan, the business planning director who was in charge of reporting financial information to the board overseeing the department, had an even longer tenure, 36 years.

None were receptive to an outsider telling them something was wrong, Nichols told the investigative committee.

“I always got pushback,” Nichols told lawmakers. “The answer was always ‘You don't understand.'”

By August 2016, Nichols told the legislative panel, she began noticing the department was having payroll problems. The department's accounting system, for reasons she didn't initially understand, wouldn't record the payments.

It wasn't just a glitch, but another red flag that the department was spending beyond its means.

The Health Department's accounting system tracks spending by program, which is particularly important for agencies that get federal money. The federal government can hit agencies with fines if they mingle or misuse money, even for other worthy programs. Money meant for an HIV program, for example, is not to be spent on children's immunizations.

While the Health Department tracks its spending, it doesn't cut its own checks.

That responsibility lies with the state's Office of Management and Enterprise Services, which pays the bills for many state departments and agencies.

That agency's system only verified that the Health Department's budget held enough federal funds to pay a bill — not whether the department was charging the bill to the right program. The system's limitations made it possible to overspend in some programs using funds meant for others.

Nichols told lawmakers she thought the practice probably had started innocently enough.

She speculated that perhaps as far back as 2011, the department may have had to make payroll for a program before federal funds to help cover those costs came in and took the money from another program intending to pay it back.

It's unlikely anyone would have noticed if they consistently paid the money back, Nichols told lawmakers.

Mike Romero

Because the department's accounting system wouldn't record overspending, the books appeared balanced, but Nichols knew something was off. No one could tell her what, though. The department had operated without a chief financial officer for months, after the previous CFO decamped for Colorado, and other leaders had frozen her out, she told lawmakers.

A small group of midlevel employees at the Health Department had kept detailed spreadsheets of the money the department had “borrowed” from programs. They didn't speak up about what they knew because top officials tended to retaliate against those who brought them bad news, Nichols told lawmakers.

Cox-Kain, the department's second-in-command, wanted to bring in a “crony” of hers who worked at another agency as CFO, Nichols later told the investigative committee. Nichols told lawmakers she insisted on bringing in an outsider to offer an independent view of the situation.

In April 2017, Mike Romero, a former accounting firm owner and flooring company CFO, took over the job. Other than a year working in the top finance post for the city of Miami, OK, Romero had no government experience.

He would later tell the investigative committee that he spent much of his first month on the job visiting regional health departments to get a feel for how the system worked.

When state auditors conducted a routine audit of the department in May and asked Romero and other staff if they knew of any evidence of fraud, he said no — but that he'd get back to them if he found any. At that point, Romero knew only that the department was having some issues balancing its books and was unaware of how big the problems really were.

When later asked by the House investigative committee why the May audit didn't detect the overspending, State Auditor Gary Jones said his office was only authorized to spot-check the department's records to make sure payments matched bills. Those records were accurate, he said — the problem was that the department had overstated how much money it had available to pay the bills, which auditors weren't assigned to check.

Had they checked, they might have found that, by that point, the department already racked up more than $7.7 million in off-book payments, with no clear way to replace that money.

Still, Cline and other senior leadership didn't seem worried, Romero would later recall. It took him two months to get his first face-to-face meeting with Cox-Kain, whom he expected to be more interested in learning about the department's finances, he said.

In the meeting, Cox-Kain seemed open to discussing the payroll problem, he later told lawmakers, but that willingness apparently was short-lived. Spring turned into summer, and the department still hadn't told its oversight board that it faced a budget shortfall, nor had it taken any action to address the growing problem.

Julie Cox-Kain

The gap widens

On June 30, Cline sent a letter to Office of Management and Enterprise Services Director Preston Doerflinger, whose office oversaw state agencies' budgets, saying his department could cover its expected needs for the new fiscal year that would start the next day.

That was false.

A day earlier, Scanlan, the department's business planning director, had sent an email to Cox-Kain, Romero, Nichols and four other people calling the budget situation “bleak.” She told them the department faced a budget gap of at least $8 million and possibly as much as $12 million. Cline wasn't included on the email, and it isn't possible to prove whether he knew the balanced budget claim was a lie.

Romero responded in a group email that the number might even be higher, that the department had to reduce its expenses immediately and warned “the only meaningful path” to do that was through layoffs.

Cox-Kain didn't see it that way.

In a July 5 email, she expressed hope the department could “forgive borrows” of certain funds — in other words, simply wipe the debt off the books. She also suggested the numbers might be wrong — noting that senior leadership had canceled its monthly budget meetings “since our reporting has been off so much of late.”

She was partially right — the $12 million budget gap didn't accurately show the department's financial position. In fact, the total gap was much larger.

In early July, Nichols, at last, got her chance to warn Cline of the impending disaster. They met for 45 minutes.

“It was a pretty no-holds-barred conversation. I was pretty clear with him that the agency was on the verge of financial collapse,” she later told lawmakers.

But nothing changed.

On July 18, Romero and Nichols met with top leadership and drove the point home, again.

But this time the news was even worse.

Romero and Nichols were allotted an hour to explain the financial situation, Romero said. They told Cline, Cox-Kain and others that, accounting for overspending from previous years, the Health Department budget actually stood $29.4 million in the red. While some top officials looked “aghast,” he said, Cline and Cox-Kain seemed “unfazed.”

“As soon as the 60 minutes had elapsed, Dr. Cline looked at his watch and said, ‘That's an hour, we have to move on,' and the discussion was summarily ended,” Romero later told a reporter. He was then asked to leave the room because the chief financial officer wasn't considered part of senior leadership, and he'd only been invited to give a presentation.

When about a week later, on July 26, the department realized it could not pay its $600,000 HIV insurance bill, it went into “incident command” mode, a status usually reserved for epidemics or natural disasters, when quick decision-making can save lives.

What it meant in practice, Romero said, was that all decisions had to go through Cox-Kain, who, possibly seeking to contain the growing scandal, threatened to discipline any employees who released budget information without her permission.

That same day, department leaders sent an email to the entire staff saying that it faced a deficit of “less than 10 percent of the agency's total budget,” which was true. The message blamed the gap on reductions in state and federal funding. It made no mention of the millions of dollars in overspending.

The next day, after Fox had sent her the incredulous email about the missing HIV funding, Cox-Kain sent an email of her own to Nichols with a plan to get $3 million dollars back from the Tobacco Settlement Endowment Trust. The Health Department had given about $8.5 million to the trust to fund community health programs. Cox-Kain asked that any unused funds be sent back.

The trust didn't object and sent the money. But for Romero and Nichols, the arrangement only raised more concerns. The trust was only supposed to be reimbursed for actual expenses. Why then did the Health Department provide so much money up front, they wondered? And was it OK to simply ask for it back?

On Aug. 1, now worried about possible fraud within the Health Department, Romero, Nichols and another finance employee went to the auditor's office with their concerns. Romero told auditors about the misspent federal funds, the questionable maneuver with money given to the trust and what he called a “culture of fear and intimidation” that kept employees from alerting the Board of Health.

Jones, the state auditor, later told the investigative committee that his staff went to work gathering information to determine whether Romero's concerns were warranted.

Despite later claims that the Office of Management and Enterprise Services didn't learn the Health Department had financial problems until October, emails show at least two employees were aware of the trust transfer by Aug. 4, because they helped coordinate it. It isn't clear whether they told their supervisors, but the transfer could have been a warning sign, because it came only a month after Cline had said the budget was balanced.

Terry Cline

Neither the auditor's office nor the Office of Management and Enterprise Services alerted the Board of Health. It was only on Aug. 12, a month and a half after top health officials acknowledged to each other they had a budget gap in the millions, that the board overseeing their department learned the truth.

At a board retreat held in a fourth-floor conference room of the Oklahoma State University student union building, Cox-Kain gave a presentation that acknowledged the department faced a funding shortfall but emphasized it was manageable and again falsely blamed declining state and federal appropriations.

When she invited Romero to comment, he laid out a different, more accurate picture. He told the board the budget gap exceeded $29 million, though he left out his suspicions of fraud.

To Romero, it seemed the board didn't grasp the magnitude of the situation. Board members seemed surprised and asked some questions, he said, but the meeting moved on to a presentation about fighting syphilis, and he never heard from the board afterward.

“It just went over like a lead balloon,” he later said in an interview.

The state office handling the health department's payments learned about the precarious financial situation about two weeks after Romero's presentation to the Board of Health.

Jones later told lawmakers his office had spent all of August investigating the situation at the Health Department. He said he notified then-Office of Management and Enterprise Services Director Doerflinger on Sept. 1 that the Health Department might not make payroll.

Doerflinger told lawmakers he didn't learn the urgency of the Health Department's problems until late October, something Jones told lawmakers he found implausible.

“I don't know what part of not making payroll doesn't throw up a red flag,” Jones said.

In spite of the worsening situation, Cox-Kain and Cline still were focused only on the expected $10 million deficit for that fiscal year, Nichols said — not the nearly $30 million total shortfall that had built up over the previous few years.

“We could not get them to focus on any of that old debt that had been created,” she said. “They never believed the numbers. They believed there was money in the system because they'd been transferring money around.”

Even as late as Sept. 21, when the Health Department had nearly $11 million in off-book costs for the year, Cox-Kain still wanted to discuss a cash-management plan and suggested they find out what federal funds they could legally tap, Romero told lawmakers. She didn't seem to grasp that the department had almost no cash left to manage, and an email she sent in October suggested she hadn't read daily reports about how much cash the department had, he said.

“I kept saying, ‘The cash doesn't exist,'” he said. “I don't think these folks understood that they would go bankrupt with this methodology because I don't think they even understood how it worked.”

Preston Doerflinger

Truth breaks out

On the morning of Sept. 27, Health Department heads met with regional administrators and directors at the Oklahoma City headquarters. They'd received no communications about the budget other than mass emails with few details like the one the department had sent in late July.

What they learned was unpleasant: They and their staff faced furloughs, buyouts or layoffs.

In the meeting, according to an email he sent to top staff, Cline pledged to “improve our internal controls.” Even so, officials still gave “misleading” information about state and federal budget cuts driving the problem, Romero told lawmakers.

“No one's telling the truth that you've over-expended your dollars,” he said. “I was so angry I could barely say a word.”

Finally, the next day, two months after the department couldn't pay its HIV bill and at least two years after it began overspending, Cline requested a special audit. He told top staff in an email that he had considered requesting one “a couple of months ago,” but delayed to avoid burdening staff. That audit is ongoing.

Ultimately, the department would abandon the buyout idea, because it couldn't afford to put together packages that would entice enough employees to leave.

In mid-October, it became clear that the department couldn't afford layoffs either, because it only had enough money to offer former employees three months of health insurance instead of the usual 18 months. The Office of Management and Enterprise Services would have had to give special permission to offer the lower amount.

For the Office of Management and Enterprise Services, the request to pay less to laid-off employees and to furlough employees was the first clear indication something was wrong at the Health Department, Doerflinger's successor later told the investigative committee. But it wasn't until an Oct. 11 meeting with the Health Department that the other agency's officials understood the scope of the problem, said Denise Northrup, the office's interim director.

“It was at that meeting we discovered the problem was much more significant,” she told a House investigative committee.

Even then, Office of Management and Enterprise Services employees didn't seem to understand the source of the problem, Nichols told lawmakers. They recommended moving around federal funds until more money came in, and then repaying them, she said — the idea that had gotten the Health Department in trouble in the first place.

“It's very clear from that recommendation that from their vantage point, they did not have a really clear understanding of the state of the agency finances or the comingling that goes on with federal funds,” she said.

Romero would later say the meeting proved that the Office of Management and Enterprise Services knew the Health Department could misuse federal funds and was willing to allow the practice to continue.

Northrup countered that her agency's employees were just asking questions to determine the Health Department's financial condition.

“In the course of the discussion, the budget staff inquired about the availability of all and any funds to assist with making payroll,” she said in a letter to a House investigative committee. “This inquiry has been characterized as a recommendation — it was not. It was a discussion addressing any and all possibilities.”

Whatever Office of Management and Enterprise Services employees' intentions were, they didn't have a solution. The Health Department was out of money.

On Oct. 30, the Board of Health held an emergency meeting. After 30 minutes meeting behind closed doors, Cline and Cox-Kain resigned. Scanlan would do so the next day.

The board appointed Doerflinger, then state finance secretary and Office of Management and Enterprise Services director, to fill in as interim commissioner.

Northrup said, to her knowledge, Gov. Mary Fallin only learned of the Health Department's financial troubles the day Cline resigned.

Solutions in the works?

In the short term, the resignations solved little.

The Health Department still was scrambling for cash. On Nov. 7, Doerflinger warned that the department wouldn't be able to pay its employees by the end of the month without $30 million in supplemental funds, which the Legislature voted to supply a week later as part of a package that tried to patch the state's $215 million budget shortfall. Fallin vetoed much of the bill, but allowed the special funding for the Health Department to move forward. The bill passed the House 17-13 and the Senate 29-14.

On the same day Doerflinger requested the extra funding, Fallin signed an executive order creating a commission to recommend improvements to the Health Department's budgeting process and service delivery. In March, the commission released its ideas to improve services, but made no budget recommendations, saying they couldn't obtain the needed information.

On Nov. 20, House Speaker Charles McCall appointed the special House investigative committee, chaired by Rep. Josh Cockroft. The committee questioned six current and former state employees in a series of hearings in December and January, but has yet to issue a report.

Nichols, one of the first Health Department employees to raise the alarm about financial problems, resigned shortly before she testified to the committee. She declined to comment on her reasons for resigning, but the announcement came about a week after she had questioned an information technology project the Health Department and the Office of Management and Enterprise Services had approved. Nichols declined to discuss her time at the Health Department. Cline, Cox-Kain, Doerflinger and Scanlan didn't return messages seeking comment.

As the committee began to investigate, Health Department employees were dealing with the fallout from their budget crunch. Employees who earned more than $35,000 were required to take one unpaid furlough day every two weeks for about two months, ending in late December. Between December and March, the department laid off 187 employees, or about 10 percent of its workforce, saving about $10.5 million annually.

The department also cut grants to child abuse prevention programs and community health centers to save about $3 million. Advocates called the cuts shortsighted because of the long-term cost of foster care for abused children.

Using those savings and money from the $30 million emergency appropriation, the department had paid back all but $7.4 million of the money it had “borrowed” from some of its accounts.

Now, disagreements would surface on how to handle the remaining debt.

In a Jan. 23 memo, the Office of Management and Enterprise Services staff suggested that the Health Department could wipe some of its “borrows” off the books — the same position Cox-Kain had taken months earlier — and recommended seeking an attorney general's opinion to clarify the issue.

Romero, the Health Department CFO, objected. In an email, he reminded them the Health Department had told the Legislature it needed the $30 million to cover payroll and to repay the misspent money. Using the money for anything else would raise questions, he warned. He also questioned why the Office of Management and Enterprise Services needed an outside legal opinion about what he considered standard operating procedure.

“Since when does the AG tell us what generally accepted accounting principles are?” he asked.

By then, he'd had enough. On Feb. 1, Romero submitted his resignation.

“I believe that the process for the financial recovery for the OSDH is currently tainted with multiple conflicts of interest,” Romero wrote in his resignation letter.

The department's recovery also could be jeopardized by some significant information technology expenditures that still were planned, Romero said in his resignation letter.

Tony Sellars, spokesman for the Health Department, told a reporter that the department is reviewing the law and is working to resolve its financial problems. He said the department has budgeted about $16.7 million of the $30 million special appropriation to cover its payroll and debts.

“We will do whatever the law requires,” he said.

The CFO job still is vacant, as is the senior deputy commissioner post, vacated by Cox-Kain. Kim Bailey, former executive director of the Oklahoma Workers Compensation Commission, who had taken over as chief operating officer when Nichols resigned in November, also took on the CFO role.

Doerflinger also would leave only a few weeks later. He had sparred verbally with Jones, the state auditor, and Cockroft, the head of the investigative committee, but it was ultimately a nearly 6-year-old domestic violence police call that prompted his resignation.

Rep. Josh Cockcroft

The Board of Health elevated Brian Downs, director of state and federal policy, to acting commissioner. He held the acting job for about a month before the board named former Assistant Attorney General Tom Bates as the interim commissioner in late March. Bates most recently was a special adviser to Fallin on child abuse prevention. It isn't clear when the board might name a permanent commissioner.

Nearly six months after the financial problems came to light, Bates' task remains daunting. A corrective plan said the department will cut its budget by as much as $17.8 million, or one-third, this year. The department's financial team still is working to make sure financial information is reliable, Bates said. The department has spent less than anticipated since December because more than 200 employees left, on top of those who were laid off, he said.

“When you have instability, people leave,” he said.

It's difficult to say exactly how much money the Health Department may need from the state, because the team still is assessing how many people are needed to perform core functions like lab testing, nursing home inspections and registering births and deaths, Bates said. Some offices, like the department's internal auditor, clearly need more staff to prevent future misspending, he said.

After it becomes clear how much money the Health Department has and how many people it needs to carry out core functions, Bates said he plans to get input from lawmakers, employees and stakeholders about whether the department can offer any supplemental services — and if so, what they should be.

“We're going to build the house back brick by brick by brick,” he said.

Could it happen again?

The department still faces investigations on multiple fronts. The Oklahoma Attorney General's office, the FBI, the U.S. Department of Health and Human Services' Office of the Inspector General and a multicounty state grand jury have announced they are investigating whether any crimes were committed at the Health Department. None have released any conclusions.

While the U.S. Health Resources and Services Administration hasn't opened a formal investigation into the Health Department, it did demand an explanation of why the department failed to pay two of its HIV services contractors on time. If the feds aren't satisfied that Oklahoma has corrected the problem, they could cut the state's HIV funds, forcing the department to come up with more money on its own or leave patients without health insurance.

Representatives for the state auditor's office and the Office of Management and Enterprise Services, which also oversees the state budget, told lawmakers they couldn't be certain other agencies wouldn't face similar problems, though they said they weren't aware of any financial mismanagement.

Several agencies have supplemental systems like the Health Department's that don't connect directly with the state's PeopleSoft accounting system, said Northrup. The agency is looking at policies to force agencies to close their books on time.

“Not having visibility into that … is how this is able to happen over time,” she said.

Shelley Zumwalt, spokeswoman for the Office of Management and Enterprise Services, said budget staff still are working with the Health Department to make it easier to track money between their systems. They also still are working on resolving debts from previous years, she said.

“This isn't a financial problem that can be fixed in a day,” she said.

Jones said the auditor's office needs more resources and the ability to conduct performance audits of state agencies.

“A performance audit would have been a lot more likely to expose this quicker,” he said.

In her testimony to the investigative committee shortly after she resigned, Nichols urged lawmakers to view the Health Department's problems as part of a “systemic issue” of poor practices. The same thing could easily happen at other agencies, she said.

“It wasn't a single factor that led to this. It was a multitude of factors that came together in the perfect storm,” she said.