The Oklahoma State Department of Health's main building, located on 10th Street in Oklahoma City. Credit: Whitney Bryen / Oklahoma Watch
These boxes contain the documents of the grand jury report on its probe into the Oklahoma State Department of Health financial crisis. Credit: Paul Monies / Oklahoma Watch

Updated May 21 

A reported cash crisis at the Oklahoma State Department of Health that led to job cuts and an emergency injection of $30 million was more of a mirage than the real thing, a months-long grand jury investigation and audit found in separate reports released Thursday.

The state’s multicounty grand jury didn’t hand up any criminal indictments, but it did fault former top officials at the health department for creating a “slush fund” to pay for pet projects and years of financial mismanagement.

The grand jury said no federal or state money was embezzled and it didn’t uncover evidence that any former managers at the agency personally benefited from the activities.

With Findings, Waves of Disbelief Roll Across State

“There are no winners as a result of this exhaustive investigation – only losers,” the grand jury concluded in its report. “Senior leadership, who no doubt wanted only the best for public health in Oklahoma, resigned in disgrace due to their mismanagement of a state agency on a public stage. Taxpayers have lost trust in their state government for letting this crisis develop and for compounding it with wasted tax dollars and unnecessary layoffs.”

Mismanagement allegations at the health department first publicly surfaced in September as the agency announced furloughs and cuts to contracts just months into the new fiscal year. By late October, Health Commissioner Terry Cline and his top deputy, Julie Cox-Kain, had resigned along with Felesha Scanlan, business planning director.

Read the Grand Jury’s Full Report

Those resignations kicked off a tumultuous series of events that included job cuts, loss of funds for child-abuse prevention programs, multiple investigations by state and federal agencies and the $30 million emergency appropriation by the Legislature in November. But from the grand jury report and the investigative audit, it appears none of those actions were needed.

Q: Why were no criminal indictments handed up by the grand jury?

In short, because there was no money missing or embezzled. The cash crunch the agency appeared to have found itself in was because top accounting employees thought they couldn’t spend a certain class of money called restricted funds on other agency purposes. The agency did come close to running out of money, but only because its internal accounting system was so old and complicated that nobody inside the agency had a good picture of all the finances.

“This was a problem that over a period of years got worse and worse,” Attorney General Mike Hunter said at a Thursday news conference. “There’s actually been a succession of CFOs (chief financial officers) that the Department of Health has hired, and those employees moved on in a very short period of time. You’ve got multiple years, you don’t have good leadership, you’ve got archaic systems. An individual comes in and looks at the mess and decides its insolvent, but they really don’t have the ability to look at the mess because you have so many accounts and such poor financial management.”

Q: What will happen to the almost 200 health department employees who lost their jobs?

It’s too early to say. Most of the positions were eliminated, so it’s not just a case of bringing them back to work. And some may not even want to come back to an agency that still has a lot of work to do toward fixing its financial problems. Aside from the 200 layoffs, others have retired or left the agency for other jobs since news broke of the scandal. The health department now has about 1,600 employees, down from 2,000 in October.

Sterling Zearley, executive director of the Oklahoma Public Employees Association, said he was very surprised by the report’s findings. His association plans to meet soon with interim Health Commissioner Tom Bates to see what options might be available for former agency employees. Their severance packages may have to be paid back on a prorated basis if they go back to work for the health department, Zearley said.

“It amazes me that there’s no one accountable for this,” Zearley said Thursday. “Over 200 employees went through a RIF (reduction in force) and were left in a very stressful situation for them and their families, not to mention the agency services that were reduced or not delivered in a timely manner when those people left their jobs.”

Q: Did the grand jury think state laws on embezzlement and mismanagement are too narrow?

Yes. In its report, the grand jury said it was “lamentable” there was no criminal statute covering the “mismanagement, deception and obfuscation” at the health department. It recommended the Legislature look at existing criminal statutes and consider adding a section that would cover what went on at the health department.

“If there was criminal activity here, we’d be prosecuting it,” Hunter said. “We can all be mad. We can be outraged, which I certainly am. But at the end of the day, we couldn’t find anything we could prosecute.”

Q: What happens to the $30 million in extra funding the health department got from the legislature?

The grand jury said it should be used for additional performance and investigative audits to uncover possible fraud, misuse and mismanagement at other state agencies. It also recommended the legislature mandate regular performance audits at state agencies. Of course, it will be up to the legislature on how it wants to spend the $30 million if it requires the health department to return the money.

Q: How bad is the health department’s internal financial system?

It still works, but barely. The agency’s internal system, called FISCAL, dates to 1982 and is only accessible via text-based commands through a system that is no longer supported. Replacement parts for the system have been bought from foreign countries because they can’t be found in the United States. The health department’s system doesn’t communicate or synchronize with the state’s financial program, called CORE, which is maintained by the Office of Management and Enterprise Services.

“As a result, the department’s reliance on an antiquated and ineffective accounting system internal to the OSDH failed to accurately depict the financial position of the department,” the grand jury report said.

The grand jury recommended the health department move to the state’s CORE system and use some of the money it already has from its “slush fund” to pay the costs for that move.

Q: What’s next for the health department and the Board of Health? 

Interim Health Commissioner Tom Bates took over in March and has been meeting with employees and leaders at partner agencies. Bates is a former assistant attorney general and most recently was a special advisor to Gov. Mary Fallin focusing on the implementation of a court-mandated improvement plan at the Department of Human Services.

The health department didn’t initially comment on the report and audit, saying it wanted to review them. But the agency issued a statement late Friday where Bates expressed regret at the unnecessary job cuts.

“During my initial days at the agency, I became concerned that people unnecessarily lost their jobs through the reduction-in-force (RIF) that was executed prior to my arrival,” Bates said in the statement. “Those concerns were confirmed yesterday, and to the people and families impacted by the RIF, I am truly sorry.”

Bates said the health department is still looking for a permanent chief financial officer and controller, but it has been difficult to attract candidates amid the agency’s financial difficulties. He also said the health department had 231 additional resignations since last October and is looking to fill several positions, including nurse surveyors to help inspect nursing homes and other care facilities.

In addition, Bates said the agency is crafting its budget for fiscal year 2019, which starts July 1. The Legislature appropriated $54.8 million to the health department for FY 2019, a 4 percent increase from 2018.

“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,” Bates 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.”

A new law, House Bill 3036, makes the health commissioner a direct appointee of the governor. It also strips power from the Board of Health and makes it an advisory body. The board has nine members who serve for nine-year terms. They are appointed by the governor and confirmed by the Senate. The new law takes effect in January.

Q: Who didn’t testify before the grand jury?

The grand jury report doesn’t refer to anyone by name, referring instead to job titles or initials. But a footnote mentions that the senior deputy commissioner, Julie Cox-Kain, was the only witness from the department’s senior leadership team who exercised his or her Fifth Amendment right against self-incrimination: “Thus, the grand jury was deprived of her view of the events surrounding the fiscal crisis at the Department of Health.”

Q: How did the “slush fund” work?

The investigative audit performed by Auditor and Inspector Gary Jones explains how the health department managed to build up a “slush fund” to conceal money from the legislature and its own financial department. It’s complicated, but because the agency receives federal grants, state appropriations and county tax revenue for its funding, its employees are paid from several different sources depending on their job function. Some employees, especially those at county health departments, spend their time on several different programs. The health department estimated those program expenses ahead of time and reconciled the actual hours worked on each program at a later date.

Any excess funds that were above the estimate for an employee’s “Time and Effort” report were put into a special account in the health department’s internal financial system, called FISCAL. That fund was labeled “Program Funds Recovered,” or 410H, and was given a 400-level account designation normally used for federal funds. Another “slush fund” was created from the agency’s revolving funds. The fund, 210H, received fee money from vital records (birth and death certificates) and some administrative fees from other programs.

“The slush fund allowed the OSDH to spend beyond its means for years without running out of money,” the grand jury report said. “The department kept the 400 federal and 210 revolving fund hidden from the oversight of the Executive branch and the Legislature.”

By setting up the 410H slush fund, the agency effectively stopped the legislature from “sweeping” the account when it needed to calculate the agency’s appropriation for the next fiscal year.

“To be clear, none of the dollars kept in the OSDH slush fund appear to have been used in an illegal manner,” the grand jury report said. “However, by not correctly reporting its budgetary figures, and by hiding these monies in a way that the Legislature would not know they existed, the OSDH requested and received appropriations from the Legislature by presenting itself in a false financial position. These PFR monies allowed the OSDH to continue spending at levels well beyond its supported revenue.”

Q: What did the grand jury find about the “front-loading” of contracts between the health department and the Tobacco Settlement Endowment Trust and the University of Oklahoma Health Sciences Center?

The grand jury agreed with the auditor’s office that certain contracts the health department had with TSET and OU were against state law: “In both cases, the contracts advanced dollars prior to services or products being provided.”

The TSET contracts date to 2011 and were to start the Certified Health Community grant program, which the legislature later expanded to schools. The health department sent a total of $8.5 million to TSET in several payments in 2011. Some of that money was used on the programs, but TSET still held more than $4 million for the programs by the time the health department hit its cash crisis in the fall of 2017.

“After explaining that she had millions at TSET, in August 2017, the Senior Deputy Commissioner entered into an agreement with TSET to return $3 million from what remained of the TSET contract,” the grand jury report said. “This left $1.4 million at TSET to continue the programs through June 29, 2018. However, after the Senior Deputy Commissioner resigned, the Interim Director requested the return of the remaining balance from the contract on November 9, 2017.”

Similarly, the health department signed a $1.5 million “upfront” contract with OU Health Sciences Center in 2011 to recruit, train and educate minority students in public health. About $400,000 was spent on that program, with $1.1 million returned to the health department.

The grand jury report said $9 million of the $10 million for the TSET and OUHSC contracts came from the health department’s “slush fund.” It said the agency didn’t use state appropriations for the Healthy Communities and Healthy Schools program, as mandated by the legislature.

“It does not appear that federal funds were used inappropriately, nor does it appear that funds were used for a non-health related purpose, but the programs were funded in a manner not conforming to state law,” the report said.

Grand Jury Findings Include
  • “The Department of Health was never insolvent. The department had ample cash to pay all of its expenses, including payroll, through the end of the fiscal year … The emergency supplementary appropriation was unnecessary and remains unspent in the department’s fund balances.”
  • “The Department of Health, through manipulation of federal and state funds, maintained a ‘slush fund’ that allowed the department to overspent without consequence.”
  • “The Department’s reduction in force (RIF), which eliminated the jobs of 198 Oklahomans, was unnecessary. The Department had sufficient money, both budgeted and in its slush fund, to pay for these positions.”
  • “Annual budgets submitted to the Legislature and OMES (Oklahoma Office of Management and Enterprise Services) had no basis in reality; federal dollars received and spent were routinely overstated by tens of millions of dollars.”
  • “The Oklahoma State Board of Health failed to provide proper oversight.”
  • “The multicounty grand jury finds reprehensible the inept practices and processes conducted by the Department of Health before and after the alleged crisis came to light.”

Read Oklahoma Watch’s previous stories on the health department crisis:

Oct. 20: State Health Department Faces Unexplained Cash Crisis

Oct. 30: State Health Department Head, Deputy Resign Amid Questions Over Agency Finances

Nov. 2: Questions Deepen over Cash Shortfall at State Health Department

Nov. 6: Health Department Woes Enlarge State Budget Crisis

Nov. 30: Grand Jury Looks into Health Department Mismanagement as Lawmakers Widen Probe

Dec. 10: Where Were the Watchdogs in the Health Department Crisis?

Dec. 15: Health Department Records Show Allegations of Deliberate Deception

Dec. 25: Oklahomans in Need Could Pay the Price for Health Department Crisis

Jan. 10: Health Agency ‘Bloat’ Included Fallin Effort to Remake Public Health

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