Updated Dec. 12
The cash crisis at the Oklahoma State Department of Health, which was years in the making, raises questions about which agencies and state officials could have caught the agency’s reported financial mismanagement.
At first glance, state government appears to have the powers and expertise to detect financial irregularities occurring at the health department from 2011 to 2017.
The State Auditor and Inspector’s Office does operational audits, performance audits and investigative audits on state agencies, cities, boards, councils and commissions. Many are aggressive and detailed.
The Office of Management and Enterprise Services, the state’s finance office, employs budget analysts and a state comptroller who monitors “the state financial processes and systems to improve controls, compliance, reporting and efficiencies.” It also authorizes transfers of cash by agencies, which must fill out forms and justify the actions. (Cash transfers involving federal funds are at issue in the investigation.)
The State Board of Health’s finance committee oversees the department’s budget decisions. It also has an Office of Accountability Systems that coordinates audits and investigations of complaints about breaches of “laws, rules, regulations, mismanagement, gross waste of funds” and more.
As it turns out, none of those entities caught or exposed mismanagement at the health department. None of their leaders have taken any blame, although the health board voted Tuesday to fire the director of the Office of Accountability Systems.
But the scandal could lead to changes in the oversight of financial practices at state agencies. Preston Doerflinger, who until recently headed OMES, said last month he believes there is “a need for a different level of visibility into agencies that receive federal funds.”
The health department and OMES are under pressure from legislative leaders to disclose what went wrong and what should be fixed. The Legislature approved $30 million in additional funds to cover a budget gap resulting from the scandal. On Monday, legislators questioned three officials about the issues, including Doerflinger.
Here’s how the oversight functions of several agencies relate to the financial mismanagement at the Health Department.
The Health Department found itself as much as $30 million short by late summer and tried to make up the difference by canceling contracts, getting money back from another agency and billing consolidated city-county health departments in Oklahoma City.
> On Friday, the health department said it would eliminate 198 jobs by March, or almost 10 percent of the agency’s work force. Among those, 37 were eliminated immediately, and the other 161 will come from reductions in classified positions under the state’s merit protection system.
>Severance payments from the reductions will be paid out of a $30 million supplemental appropriation the Legislature made in November. That money was also used to meet payroll, close out accounts from prior budget years and pay back internal funds.
State Finance Agency
OMES collects budget information and monitors agency financial transactions. State law gives the finance office authority to stop transfers of money within an agency or cash transfers from agency accounts if they don’t meet certain requirements.
Doerflinger has said the health department overextended its budgets and used restricted state and federal funds from other programs to make up shortfalls.
“The budgets that were presented to us were balanced budgets,” he said in early November. “Monies were being moved from various funds – and in some cases, restricted funds – to be utilized for operations.”
Doerflinger hasn’t commented further or provided more details. Oklahoma Watch has made open-records requests for emails and other health-department documents, but none have been provided.
Doerflinger said the finance office was limited in tracking health-department funds because most of the agency’s money came from federal programs. Federal funds often have specific, legally required uses and often are passed along to final recipients, although agencies may collect an administrative fee.
The health department had a total budget last year of $403 million; about $55 million of came from state appropriation. The issue was compounded by dual financial systems, with an antiquated internal financial system at the health department needing to be reconciled with the state’s central accounting system.
In referring to the need for more “visibility,” Doerflinger added, “That is another conversation we’ll be having with the Legislature, with statute changes to allow someone within state government to have that heightened level of visibility into those agencies that receive various pots of money from different sources.”
Agencies have to notify OMES if they want to move cash from their accounts to other agencies and if they deviate from their fiscal-year budget plans. The agency has budget analysts assigned by cabinet, so the same budget analyst responsible for the health department also gets financial information from the Department of Human Services, the Oklahoma Health Care Authority, the Department of Mental Health and Substance Abuse Services and others.
Among the financial issues raised about the department were “borrows” against other state funds and federal funds, including those for various HIV/AIDS programs.
Agencies must seek permission from OMES to transfer money from one major budget category to another, said OMES spokeswoman Shelley Zumwalt. For example, the health department received rebate money from baby-formula manufacturers for their participation in the federal Women, Infants and Children nutrition program. That rebate money would have to be moved from one fund category to another at the department.
Because the health department had its own financial system, OMES was limited in what it could examine in the way of internal transfers of non-state–appropriated money, such as federal funds, grants or fees, Zumwalt said. In effect, she said, OMES could track money related to the department’s appropriation but relied on its internal financial statements for all other funding sources and transactions. The department has hundreds of internal accounts.
However, if the health department was moving money among federal and state accounts, including risking its ability to make payroll, it’s unclear why that wouldn’t have appeared in the transactions that OMES tracks.
Under state law, the state auditor has to be invited to perform a special investigative audit or a performance audit, which examines how well an agency is managing programs. Audits can be requested by an agency, the governor, the attorney general or citizen petition. House and Senate leaders also can jointly ask for audits.
It’s been at least a decade since an agency-wide audit of the health department was conducted, according to the state auditor’s website. Some federal programs run by the health department are audited, however, and financial-statement audits are done for county health departments run by the state health department.
“We audit the federal programs if they meet a particular threshold or if they need to be done as part of federal standards,” State Auditor and Inspector Gary Jones told Oklahoma Watch. “…If something is brought to our attention that is a fraud issue or a potential fraud issue or misstatement of finances, then we’ll look at that. That’s basically what happened on the health department. We were there on a federal program and they came to us and said, ‘We’ve got other problems.’ We notified OMES and said, ‘There’s a problem here. These folks may not be able to make payroll.’”
Previous leaders at the health department requested a special audit from Jones at the end of September. In November, that special audit was later reclassified as an investigative audit by Attorney General Mike Hunter. Doerflinger also plans to ask Jones’ office to do a risk assessment of the department after the investigative audit is finished.
Jones’ office expects to finish the audit by February, when the Legislature convenes its regular session, said Trey Davis, spokesman for the state auditor.
Separately, Jones’ office does an annual “single audit” report, which covers all state agencies spending federal funds above a certain threshold. The threshold for major programs is about $21 million a year. Such programs are audited on a three-year, rotating schedule unless chronic problems have been discovered. Federal programs below the threshold are mostly audited by independent auditors.
At the health department, the single audit covers the WIC nutrition program – with pass-through money totaling $80 million per year – and some immunization programs at the agency.
In recent single audits, the health department was criticized for being months behind in reconciling the internal records of WIC funds. The 2016 audit found it hadn’t properly recorded cash expenses related to immunization programs; the delays led to a missed dealing for filing an annual federal report. The agency said it would fix the problem by June.
“Those are issues that really could cause a problem if you’re trying to keep track of how much money you have and where it’s at,” Jones said.
State Board of Health
The nine-member board is appointed by the governor and confirmed by the Senate, with each member serving nine-year terms. Eight board members are from different regions of the state, and one board member is at large.
The board has committees to monitor public health policy, finances and accountability, and ethics and audits.
In 2002, lawmakers set up the Office of Accountability Systems at the health department in the wake of a “ghost employee” scandal and a nursing home inspection bribery case involving a former acting health commissioner.
The Office of Accountability Systems reports directly to the Board of Health and investigates whistleblower complaints from agency employees, customers or members of the public.
By law, the Office of Accountability Systems keeps confidential “all actions and records relating to OAS complaints.” The health board goes into executive session at its regular meetings to hear matters investigated by the office.
The office was headed by the health department’s internal auditor, Jay Holland, who also reported to former Health Commissioner Terry Cline, who resigned in October. That dual line of reporting has raised questions over how whistleblower complaints are handled.
The board of health voted Tuesday to fire Holland, more than a month after he was placed on administrative leave.
In a statement at Tuesday’s meeting, board chair Martha Burger said Holland’s firing was necessary to restore confidence in the office and ensure that employees could file complaints and share their concerns without fear of retaliation.
The board has not responded to interview requests and left the meeting without taking questions from the media.
“The best I can tell you as to the delineation of duties between OAS and the internal auditor positions occupied by Mr. Holland is that those issues are something that the current leadership is looking into,” health department spokesman Tony Sellars said in an email Friday.
Earlier this year, the board clarified the responsibilities of the Office of Accountability Systems to align separate board and departmental policies dealing with how it handles complaints. It’s unclear when the board was first alerted to the financial problems at the health department.
Although not part of the auditing process, the Legislature approved health-department budgets every year since the cash transfers at issue began in 2011.
The House appropriations committee typically holds hearings at which they question agency leaders about overall spending and revenue. But lawmakers rarely dig into specific spending on programs.
Scrutiny may increase to a degree.
Earlier this year, the Legislature formed the Agency Performance and Accountability Commission, which held its first meeting on Thursday. The 10-member commission is charged with bringing a private-sector perspective to state agencies and can contract with the state auditor or outside auditors to do performance audits of the 20 largest appropriated agencies at least once every four years. It can issue recommendations to agencies and the Legislature.
“In general, the purpose of this commission is for all of us collectively to bring our private-sector experience to the table to assist in the process of getting state agencies more efficient,” said Tulsa businessman Bob Sullivan, the commission’s chairman. “This is key: It’s a performance audit. It’s not a financial audit. It’s not a forensic audit.”