Rialto Unied School District

Contract and Purchasing Review

January 6, 2014

Joel D. Montero
Chief Executive Officer

FISCAL CRISIS & MANAGEMENT ASSISTANCE TEAM

January 6, 2014 Mohammad Z. Islam, Acting Superintendent Rialto Unied School District 182 East Walnut Avenue Rialto, CA 92376 Dear Superintendent Islam, In July 2013, the Rialto Unied School District and the Fiscal Crisis and Management Assistance Team (FCMAT) entered into an agreement for a review of the districts purchasing functions. Specically, the agreement stated that FCMAT would perform the following: 1. Using a sampling of transactions from the current scal year, review the districts purchasing policies, processes, and procedures including workow requirements, and provide recommendations to increase efciency and reduce costs. 2. Review internal controls related to purchasing. 3. Review purchasing policies and procedures related to payments to vendors, including but not limited to purchase orders and contracts for professional services, construction and other services. 4. Determine whether the district is in compliance with the Education Code and the Public Code regarding bid limits. 5. Period of review for the selected contracts will be July 1, 2009 through present. This report contains the study teams ndings and recommendations. FCMAT appreciates the opportunity to serve the Rialto Unied, and extends thanks to all the staff for their assistance during eldwork. y Sincerely,

Joel D. Montero Chief Executive Ofcer

FISCAL CRISIS & MANAGEMENT ASSISTANCE TEAM

TA B L E O F C O N T E N T S

Table of Contents
About FCMAT ......................................................................................... iii Introduction ............................................................................................ 1
Background ...................................................................................................... 1 Study Guidelines ............................................................................................ 1 Study Team....................................................................................................... 2

Executive Summary .............................................................................. 3 Findings and Recommendations..................................................... 5

Purchasing Overview .................................................................................... 5
Board Policies .............................................................................................................6

Staffing and Organization ........................................................................... 9 Purchasing Process ...................................................................................... 11 Bidding Process ............................................................................................ 13 Accounts Payable ......................................................................................... 15 Conflict of Interest ....................................................................................... 17 Transactions Review .................................................................................... 19
Purchase Orders.......................................................................................................19 Contracts ....................................................................................................................19 Vendors...................................................................................................................... 23

Purchasing / Credit Cards ..........................................................................25 Employee Incentives / Awards.................................................................29

Appendix ................................................................................................31

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A B O U T F C M AT

iii

About FCMAT
FCMATs primary mission is to assist Californias local K-14 educational agencies to identify, prevent, and resolve nancial and data management challenges. FCMAT provides scal and data management assistance, professional development training, product development and other related school business and data services. FCMATs scal and management assistance services are used not just to help avert scal crisis, but to promote sound nancial practices and efcient operations. FCMATs data management services are used to help local educational agencies (LEAs) meet state reporting responsibilities, improve data quality, and share information. FCMAT may be requested to provide scal crisis or management assistance by a school district, charter school, community college, county ofce of education, the state Superintendent of Public Instruction, or the Legislature. When a request or assignment is received, FCMAT assembles a study team that works closely with the local education agency to dene the scope of work, conduct on-site eldwork and provide a written report with ndings and recommendations to help resolve issues, overcome challenges and plan for the future.

Studies by Fiscal Year

90 80 70 Number of Studies 60 50 40 30 20 10 0
92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12

FCMAT also develops and provides numerous publications, software tools, workshops and professional development opportunities to help local educational agencies operate more effectively and fulll their scal oversight and data management responsibilities. The California School Information Services (CSIS) arm of FCMAT assists the California Department of Education with the implementation of the California Longitudinal Pupil Achievement Data System (CALPADS) and also maintains DataGate, the FCMAT/CSIS software LEAs use for CSIS services. FCMAT was created by Assembly Bill 1200 in 1992 to assist LEAs to meet and sustain their nancial obligations. Assembly Bill 107 in 1997 charged FCMAT with responsibility for CSIS and its statewide data management work. Assembly Bill 1115 in 1999 codied CSIS mission. AB 1200 is also a statewide plan for county ofces of education and school districts to work together locally to improve scal procedures and accountability standards. Assembly Bill 2756 (2004) provides specic responsibilities to FCMAT with regard to districts that have received emergency state loans. In January 2006, SB 430 (charter schools) and AB 1366 (community colleges) became law and expanded FCMATs services to those types of LEAs.
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A B O U T F C M AT

Since 1992, FCMAT has been engaged to perform nearly 850 reviews for LEAs, including school districts, county ofces of education, charter schools and community colleges. The Kern County Superintendent of Schools is the administrative agent for FCMAT. The team is led by Joel D. Montero, Chief Executive Ofcer, with funding derived through appropriations in the state budget and a modest fee schedule for charges to requesting agencies.

FISCAL CRISIS & MANAGEMENT ASSISTANCE TEAM

INTRODUCTION

Introduction
Background
The Rialto Unied School District is located in San Bernardino County and provides services to nearly 27,000 students at 19 elementary schools and 10 secondary schools. Because of stafng and administration changes and observed practices, the district has concerns regarding the strength and appropriateness of its procurement processes and internal controls. In July 2013 the Rialto Unied School District requested FCMAT to review its procurement services. The study agreement species that FCMAT will perform the following: 1. Using a sampling of transactions from the current scal year, review the districts purchasing policies, processes, and procedures including workow requirements, and provide recommendations to increase efciency and reduce costs. 2. Review internal controls related to purchasing. 3. Review purchasing policies and procedures related to payments to vendors, including but not limited to purchase orders and contracts for professional services, construction and other services. 4. Determine whether the district is in compliance with the Education Code and the Public Code regarding bid limits. 5. Period of review for the selected contracts will be July 1, 2009 through present.

Study Guidelines
FCMAT visited the district on September 24-25, 2013 to conduct interviews, collect data and review documents. This report is the result of those activities and is divided into the following sections: Executive Summary Purchasing Overview Board Policies Stafng and Organization Purchasing Process Bidding Process Accounts Payable Conict of Interest Transactions Review Purchasing / Credit Cards
RIALTO UNIFIED SCHOOL D ISTRICT

INTRODUCTION

Employee Incentives / Awards Appendices

Study Team
The study team was composed of the following members: John F. Von Flue FCMAT Fiscal Intervention Specialist Bakerseld, California Leeann Errotabere* Director of Purchasing Clovis Unied School District Clovis, California Laura Haywood FCMAT Technical Writer Bakerseld, California

Sue Daniel FCMAT Consultant Porterville, California

*As a member of this study team, this consultant was not representing her employer but was working solely as an independent contractor for FCMAT.

FISCAL CRISIS & MANAGEMENT ASSISTANCE TEAM

EXECUTIVE SUMMARY

Executive Summary
FCMAT was commissioned by Rialto Unied School District to review its procurement services. In conducting the review, FCMAT interviewed staff and reviewed data and documents for compliance and adherence with law and industry best practices. The district supports the procurement process with policy, stafng, and systems. Its board policies, which lay the foundation for internal controls and efcient use of district funds, are current with legal statute and best practices. Several incidences were found of potential conict of interest wherein a district representative may have beneted from his/her approval of a contract. Also, no policy regarding employee incentives and/or awards was found; however, several transactions were approved for employee incentive items. District policies should be regularly reviewed and updated as needed to align with law and district priorities. The purchasing department is adequately staffed and organized. In addition, the purchasing staff is knowledgeable regarding the districts purchasing policies and procedures. The district should continue to support the department with appropriate stafng and regular training. The district maintains integration with the county ofces nancial system to ensure monitoring and accountability controls and should continue to use this system. The site and purchasing department staff identied areas of concern including contract approvals that are not always completed prior to service; outdated written processes and documents in the purchasing department; and the frequent utilization of vendor-supplied contracts instead of district contracts. In addition, the accounts payable staff expressed several concerns related to internal controls, including the highest level of administration not following proper procedures for purchases. FCMAT reviewed transactions made since 2009 to identify weaknesses in the procurement process. This report contains exhibits for purchase orders, contracts, and vendor audits that identify many instances of concern. Many of the issues found are not due to a lack of purchasing policies, stafng, or knowledge but due to a circumvention of such. Agreements have been entered into that do not follow the procurement vetting and approval processes. This has resulted in the district entering into questionable contracts and purchases that appear to not be in its best interest. Recurring concerns include overlapping contract services and dates, excessive rates, vague service contracts, consultant versus employee identication, and a lack of documentation to support the procurement. The districts purchasing processes could be complemented with more extensive use of credit cards by the purchasing ofce. Cards are typically used to streamline cumbersome processes and automate payments. With credit cards, accountability measures must be strong. A review of currently issued district cards identied areas in which policy was not followed and questionable purchases occurred.

Although the district maintains a strong procurement foundation of policy, stafng, and systems, indelity to the policies and procedures have led to concerns that the inappropriate and inefcient use of district funds has occurred. FCMAT found signicant material weaknesses in the districts enforcement of governing board internal controls, operational policies, and procedures related to the management and oversight of activities. These weaknesses appeared mostly through lack of adherence to policies and oversight at the highest level of administration, where

RIALTO UNIFIED SCHOOL D ISTRICT

EXECUTIVE SUMMARY

the purchasing department was bypassed and procurement procedures circumvented. Many orders were placed without a proper district purchase order, and several contracts were approved directly by the superintendent or superintendents ofce.

FISCAL CRISIS & MANAGEMENT ASSISTANCE TEAM

PURCHASING OVERVIEW

Findings and Recommendations

Purchasing Overview
In conducting this study, FCMAT interviewed representative district, department, and site staff; reviewed policies and procedures; and examined a sampling of district documents. To provide a more succinct report, the ndings and recommendations are predominately of a decit nature, meaning that items of concern are reported whereas appropriate, reasonable, and correct business practices are excluded. FCMAT reviewed key areas of the districts procurement process, including: purchasing, bidding, contracts, and stafng and organization. Internal purchasing controls and payment processes were reviewed and audits were performed on a random sample of transactions from July 1, 2009 to current scal year. In local education agencies (LEAs), including school districts, the process of purchasing supplies, equipment and services is dictated by statute, local board policy, and district procedures and practices. Sections of the Education Code, Public Contract Code, Government Code, and California Code of Regulations provide the legal basis and parameters within which a school district must conduct its purchasing functions. Board policies, regulations, procedures and guidelines add controls that are designed to protect school districts by meeting various purchasing and contract needs efciently while considering lowest cost and highest value. Effective internal controls provide reasonable assurance that a districts operations are effective and efcient, that the nancial information produced is reliable, and that the organization complies with all applicable laws and regulations. Weaknesses or the lack of many internal control elements lead to an environment where there is potential for fraud, misappropriation of assets and misuse of district assets. A system of internal controls consists of policies and procedures designed to provide the governing board and management with reasonable assurance that the organization achieves its objectives and goals. Traditionally referred to as hard controls, these include segregation of duties, limiting access to cash, management review and approval, and reconciliations. Other types of internal controls include soft controls such as management tone, performance evaluations, training programs, and established policies, procedures and standards of conduct. General guidelines and best practices for LEA purchasing include: 1. Board policies and regulations to provide the foundation and expectation that purchasing follows legal requirements, provides strong internal controls and meets procurement objectives. 2. Designation of staff member(s) responsibilities and authority throughout the purchasing process. 3. Standardized procedures for vendor selection, requisition generation, and issuance of purchase orders. These procedures should also establish competitive bidding processes to ensure prudent and optimal use of funds and appropriate minimum standards and compatibility requirements for supplies and services.

RIALTO UNIFIED SCHOOL D ISTRICT

PURCHASING OVERVIEW

Best practice documentation for purchasing includes a written rationale for the purchase selection and what competitive process was used, if any. Frequently used materials, supplies, and services should be vetted by the purchasing department and, once selected, that selection rationale should sufce for subsequent purchases. All nonstandardized purchases should require supportive rationale for vendor and product selection. Where the bidding process is used, the retained bid documents will provide satisfactory evidence. Where requests for proposals or qualications are utilized, the request document and proposals/qualications should be maintained along with the analysis describing the selection rationale. In the case of written quotes, all quotes should be retained along with a written explanation if the lowest quoting vendor was not selected. If verbal quotes are obtained, contemporaneous notes in the purchasing le should provide the names of the vendors solicited along with the prices quoted and an explanation of the selection rationale if the lowest quoting vendor was not selected.

Board Policies
Rialto Unied School Districts Board Policies 3000-3600 cover Business and Non-Instructional Operations. Specic policies related to the procurement processes include: Board Policy 3000 recognizes the board of educations duciary responsibility to oversee the prudent expenditure of district funds. It states that the board of education recognizes that business operations support the education program by maximizing and prioritizing resources and the board expects sound scal management from the administration. The policy further states that in order to best serve District interests, the superintendent or designee shall develop and maintain effective purchasing procedures that are consistent with sound nancial controls and that ensure the District receives maximum value for items purchased. S/He shall ensure that records of expenditures and purchases are maintained in accordance with law. Regarding expending authority, the policy states the Superintendent or designee may purchase supplies, materials, apparatus, equipment and services up to the amounts specied in Public Contract Code 20111, beyond which a competitive bidding process is required. The Board shall not recognize obligations incurred contrary to board policy and administrative regulations. The policy provides that the Board shall review all transactions entered into by the Superintendent or designee on behalf of the board every 60 days (Education Code 17605). The Superintendent or designee may authorize an expenditure which exceeds the budget classication allowance against which the expenditure is the proper charge only if an amount sufcient to cover the purchase is available in the budget for transfer by the Board. Further, Board Policy 3300 references purchasing procedures, stating, Whenever possible, goods and services purchased shall meet the needs of the person or department ordering them at the lowest price consistent with standard purchasing practices. Maintenance costs, replacement costs, and trade-in values shall be considered when determining the most economical purchase price. When price, tness, and quality are equal, recycled products shall be preferred when procuring materials for use in District schools and buildings. This board policy then concludes with, All purchases shall be made by formal contract or purchase order or shall be accompanied by a receipt. In order to eliminate the processing of numerous small purchase orders, the Superintendent or designee may create a blanket or open purchase order system for the purchase of minor items as needed from a vendor. S/He shall ensure that the open purchase order system details a maximum purchase amount, the types of items that can be purchased
FISCAL CRISIS & MANAGEMENT ASSISTANCE TEAM

PURCHASING OVERVIEW

under this order, the individuals authorized to approve purchases, and the expiration date of the open order. Board Policy 3314 recognizes the importance of developing a system of internal control procedures to help fulll the districts obligation to monitor and safeguard its resources. To facilitate warrant processing, the Superintendent or designee shall ensure that purchasing, receiving, and payment functions are kept separate. He/She shall also ensure that invoices are paid expeditiously so that the District may, to the extent possible, take advantage of available discounts and avoid nance charges. The Superintendent or designee shall sign all warrants and shall ensure that warrants have appropriate documentary support verifying that all goods and services to be paid for have been delivered or rendered in accordance with the purchase agreement. The District shall not be responsible for unauthorized purchases. Board Policy 3400 states, Board members, employees, consultants, vendors, contractors and other parties maintaining a business relationship with the District are expected to act with integrity and due diligence in duties involving the Districts assets and scal resources. Internal controls are to be developed that aid in the prevention and detection of fraud, nancial impropriety or irregularity in the district. The policy requires all employees to be alert for any indication of fraud, nancial impropriety, or irregularity within their area of responsibility. Any employee who suspects fraud, impropriety, or irregularity shall immediately report those suspicions to his/her immediate supervisor and/or the Superintendent or designee. In addition, the Superintendent or designee shall establish a method for employees and outside persons to report anonymously any suspected instances of fraud, impropriety, or irregularity. The Superintendent or designee shall have primary responsibility for investigations of suspected fraud, impropriety, or irregularity, in coordination with legal counsel, the Districts auditors, law enforcement agencies, or other governmental entities. The Superintendent or designee shall provide regular reports to the Board on the status of the Districts internal control procedures and recommend any necessary revisions to related Board policies or administrative regulations. Board Policy 3600 authorizes the use of consultants to provide expert professional advice or specialized technical or training services which are not needed on a continuing basis and which cannot be provided by district staff because of limitations of time, experience or knowledge. Individuals, rms or organizations employed as consultants may assist management with decisions and/or project development related to nancial, economic, accounting, engineering, legal, administrative, instructional or other matters. The board will not contract for vague services. Before contracting with a consultant, a written proposal or contract will detail: 1. The specic objectives to be accomplished by the consultant. 2. The specic tasks to be performed. 3. The procedures to be used in carrying out the tasks. 4. The target dates for the completion of tasks. 5. The method to be used to report results to the Board and/or to deliver any product (e.g., long-range plan, codied policy manual, etc.) to the Board.
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PURCHASING OVERVIEW

As part of the contract process, the Superintendent or designee shall determine, in accordance with Internal Revenue Service guidelines, that the consultant is properly classied as an independent contractor. District employees who perform extra-duty consultant services shall be considered employees even if the additional services are not related to their regular duties. Independent contractors applying for a consultant contract shall submit a written conict of interest statement disclosing nancial interests. These board policies and others related to the procurement process have been reviewed and adopted within the last four years and are current with legal statute and best practices. They provide a strong foundation for internal controls and efcient practices.

Recommendations
The district should: 1. Regularly review and update board policies and administrative regulations to ensure they remain relevant and reect the latest statutory requirements and district objectives. 2. Ensure employees are aware of board policies and that policies remain accessible for public and staff reference. 3. Establish regular training on the identication and prevention of fraudulent activity for all business staff.

FISCAL CRISIS & MANAGEMENT ASSISTANCE TEAM

S TA F F I N G A N D O R G A N I Z AT I O N

Stafng and Organization

The Purchasing Department has six staff members. A manager, three buyers, one purchasing clerk and a purchasing assistant handle purchasing for all sites and departments. The functions of the manager, buyers and technicians are clearly outlined in district job descriptions. The job duties staff members communicated to the study team were consistent with their job descriptions. The manager determines the areas of responsibility for the buyers. These should be communicated throughout the district. Staff is meeting the mandates contained in the Education Code and Public Contract Code. Purchasing Department staff review online requisitions as submitted by the sites and departments. The manager and/or assigned buyer review requisitions for compliance with district standards and protocol, approving online and routing to appropriate department support staff. Buyers and a clerk are responsible for purchases of a distinct set of commodities and/or services. The volume of public works projects, in addition to the advanced job skill needed to properly bid and process those projects, should prompt consideration of an expanded job description of advanced buyer or buyer II, or an equal distribution of said projects to other buyers to create additional cross training and knowledge sharing in the department. Administration reported to the FCMAT team that staff cuts have occurred throughout the district, including the Purchasing Department. However, current stafng is consistent with staff levels observed by FCMAT in other school districts in California and is appropriate to accomplish purchasing for the district. FCMAT interviews with purchasing department staff indicated that the staff is extremely knowledgeable in acceptable purchasing procedures and guidelines mandated by Education Code, Public Contract Code, Government Contract Code and district policies.

Recommendations
The district should: 1. Regularly review and update job descriptions to ensure they accurately reect position qualications, requirements, duties, and supervisor. 2. Regularly review and adjust the duties of purchasing staff and stafng levels to t uctuations in workload and/or to adapt to new trends and procurement demands. Record these adjustments on the Areas of Responsibility chart for purchasing staff accountability and communication to district staff. 3. Maintain a segregation of duties. 4. Provide regular training and discussion on internal controls and their importance. 5. Include designated purchasing staff in district meetings that pertain to or affect purchasing services such as construction management, end-of-year, start-of-year, special grant/project meetings, etc., to improve communication with all involved. 6. Regularly train and cross train staff regarding proper application of all policies, regulations and procedures.
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S TA F F I N G A N D O R G A N I Z AT I O N

FISCAL CRISIS & MANAGEMENT ASSISTANCE TEAM

PURCHASING PROCESS

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Purchasing Process
The Rialto Unied School District system for purchasing begins with an electronic requisition that may be generated at any school site or department. It is then routed electronically via the San Bernardino County Ofce of Education nancial system through a predetermined work ow approval hierarchy. The review and approval is based on a specic dollar amount and/or funding source that is sent to the scal services division and nally to the purchasing ofce, where it is converted into a purchase order that will be transmitted to the vendor via fax or mail. The purchase order nancial and accounting data is integrated with accounts payable data to ensure accurate and authorized purchase, receipt and payment of items. The district utilizes the county ofces Finance 2000 nancial system to ensure audit accountability and release of vendor payments. This system was fully implemented in June 2011. The Purchasing Department has a page on the district website that includes staff listing and email links for department staff and links to guide staff in the procurement process, including extensive instructions on proper requisition data entry. Procurement policies, regulations and procedures are also communicated by email from Purchasing Department staff members to district personnel annually and as needed. These documents include, but are not limited to: Purchasing Year End Calendar REAF (Request to Enter into Agreement Form) B-44 Equipment Transfer Form PO Terms and Conditions Financial 2000 Access Revision Form Financial 2000 Account Lookup, budget transfers and EDU Report Financial 2000 Requestors Training Documentation Financial 2000 Approvers Training Documentation Bid Documents Site and department staff interviewed understand district purchasing protocols, but have raised concerns in some areas of purchasing, in particular: Contracts entered into that do not appear in the districts best interest, including those that require payment before services are delivered or completed, have vague objectives for vendor services, and do not have not-to-exceed parameters. District desk manuals, written processes, and areas of responsibility are not up to date.

Recommendations
The district should: 1. Regularly update desk manuals and documented processes. 2. Require all contracts to be processed through the purchasing and accounts payable departments to ensure the proper procedures are followed, services are not duplicated, and funding is available.

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PURCHASING PROCESS

FISCAL CRISIS & MANAGEMENT ASSISTANCE TEAM

BIDDING PROCESS

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Bidding Process
Public Contract Code (PCC) 20111 requires school districts to publicly bid for certain materials, supplies or services that are subject to a variety of bid thresholds and criteria. FCMAT examined the districts bidding processes and found its materials, services and supply acquisition and public works construction bidding procedures are based on the mandates outlined in Section 20111, which requires school districts to formally bid supplies, equipment, materials, services other than construction, and repairs. However, it provides exceptions for professional services. A unique set of laws applies to bidding on construction projects commonly referred to as public works projects. For these projects the public bidding requirement is found in PCC Section 22000, as follows: [Districts and Community Colleges] shall let any contract for a public project, as dened in subdivision (c) of Section 22002, involving an expenditure of $15,000 or more, to the lowest responsible bidder No inationary adjustment factor is provided in this code section similar to that provided for bidding requirements of materials, etc., which had a public bid threshold of $83,400 at the time of this study. On November 18, 2002, the district adopted Resolution 02-0322, Uniform Public Construction Cost Accounting Procedures (UPCCAP). Per PCC 22034, the UPCCAP allows the district to streamline the bidding process. The cost accounting procedures increased the bid limit for public works projects to $125,000, thus allowing a contract to be let by informal bid. This resolution maintains PCC contract protection, operates within the law, and will expedite needed services for the Maintenance and Operations Department. Also, per PCC 22034(f ), with four-fths board approval, the board may award a contract up to $137,500. FCMAT found the district staff knowledgeable of public contract code. The district procurement process aligns with legal requirements, and the purchasing department follows the processes. Professional development should continue to maintain a knowledgeable staff and to ensure the procurement processes stay current with legalities.

Recommendations
The district should: 1. Continue to align the materials, supplies, and public works project bid thresholds to the thresholds required of all K-12 local educational agencies in California. 2. Continue utilizing the Uniform Public Construction Cost Accounting Act Procedures (pursuant to PCC Section 22000) for smaller public works construction projects. 3. Offer ongoing professional development for Purchasing Department staff.

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BIDDING PROCESS

FISCAL CRISIS & MANAGEMENT ASSISTANCE TEAM

A C C O U N T S PAYA B L E

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Accounts Payable
The accounts payable staff must ensure the proper process for procurement was followed and that goods or services were received before funds are disbursed. FCMATs interviews with Accounting Department staff indicated that the staff is extremely knowledgeable of acceptable accounting procedures and paperwork review guidelines mandated by auditors, county ofce staff, and district policies. Accounts payable staff expressed concern for district purchasing practices and desired support in the following areas. The district needs to: Review the amount of food purchased on administrative credit cards. Address the issue regarding the sites/departments not turning in packing slips on orders. Review instances where sports shoes purchased for employee incentives. Discontinue the practice of personal cell phones purchased on district credit card. Continue to cross train staff in other departments.

Recommendations
The district should: 1. Review concerns and needs addressed by the accounts payable staff. 2. Establish procedures and systems to address those concerns deemed valid.

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A C C O U N T S PAYA B L E

FISCAL CRISIS & MANAGEMENT ASSISTANCE TEAM

CONFLICT OF INTEREST

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Conict of Interest
The district provided FCMAT with the board policy in compliance with Government Code 1090, which requires board members and designated staff to disclose any conict of interest and to abstain from participating in any decisions when a conict exists. The disclosure requirement is fullled through the annual submission of a Statement of Economic Interest (Form 700), which is required of the board, superintendent, deputy superintendent of administrative services and, to a lesser degree of disclosure, other district administration including the director of purchasing and administrative services. The other positions in the Purchasing Department are not required to complete this disclosure or provide any other disclosure of conict of interest. Additional steps available to help identify possible conict of interest, opportunity for collusion, and potential fraud include vendor verication and vendor afrmation of no conict of interest. Vendor verication should include a front-end check of all new vendors and annual review of the districts vendor master le. This verication should ensure the vendors have been processed through the appropriate approval process, test for any relationship with district decision-makers including name, address, and social security/taxpayer identication number, and conrm that the vendor is still in business. Vendor afrmation includes having the vendor complete and sign a form similar to Form 700 to verify their independence and lack of conict. Requiring these steps will substantially strengthen the districts internal control system.

Recommendations
The district should: 1. Maintain and publish board policy that requires compliance with Government Code 1090 and the disclosure of any conicts of interest. a. Ensure the board policy correctly identies all positions by title that are required to meet the disclosure requirements. b. Consider expanding the district disclosure requirement to include all positions in the Purchasing Department. 2. Establish and implement a vendor verication process to use for all new vendors and an annual review of the vendor master le. 3. Consider establishing and implementing a vendor afrmation process.

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CONFLICT OF INTEREST

FISCAL CRISIS & MANAGEMENT ASSISTANCE TEAM

TR ANSACTIONS REVIEW

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Transactions Review
FCMAT reviewed purchasing transactions including purchase orders, contracts, and vendor use to assess application of district policy, compliance with procurement laws, and existence of internal controls.

Purchase Orders
The following exhibit identies purchase orders issued since 2009 that were found to lack support documentation, contained irregularities, or were of other concern to the study team.
PO Description
student trip

PO #
PO101704

Vendor Name
Disneyland Resort

Date
9/15/2010

$ Amount
$8,110.00

Appropriate Backup
yes

Comments/Concerns
Concern: student listing not included Concern: usage appears excessive, used extensively by vendor ECS Concern: usage appears excessive Concern: appears excessive Concern: no Board policy or Board approval for employee incentive items

PO000990 PO004010 PO005570

Pitney Bowes Pitney Bowes Pitney Bowes

7/30/2009 2/4/2010 4/15/2010

$100,000.00 $100,000.00 $100,000.00

District postage District postage District postage employee incentives - frames

yes yes yes

PO005678

Positive Promotions

4/23/2010

$7,429.28

yes

Contracts
Contracts negotiated outside the Purchasing Department are not consistent with board policy. District funds have been disbursed prior to receiving services on contracts calling for upfront payments prior to services rendered. In addition, contracts were executed without a maximum dollar amount stated in contract documents, and without board approval. The following table lists contracts entered into since 2009 that were found to be of concern.
Contract Dates Service or Product to be Provided

Vendor Name

$ Amount

Comments/Concerns
recycling revenue records were reviewed 10/23/2009 - 8/15/2013 - contract terminated October 2013. District needed procedures in place to ensure amount of product picked up is equal to revenues received and that no cash for materials is being received by a District employee for said items

Allen Company

9/1/2013 8/31/2014 with right to extend 1/19/2011 Board Agenda Contract listing 3/23/2010 Board Agenda Contract listing 8/11/2011 5/31/2012

payments to district vary by type of recyclable material

pick-up of recyclable materials Financial Advisory & Implementation Services for GO Bonds Financial Advisory Services Coordination of Middle School Sports Program

Caldwell Flores Winters (CFW) Caldwell Flores Winters DC Taylormade Consultant Services

$95,000.00

Potential unnecessary services.

$18,000.00

Potential overlapping services. Per contract, initial payment was made prior to services being received.

$21,200.00

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TR ANSACTIONS REVIEW

Vendor Name
DC Taylormade Consultant Services Educational Consulting Services Inc. (ECS)

Contract Dates
9/15/2011 5/31/2012

$ Amount

Service or Product to be Provided

Coordination of Middle School Transitional Sports Program

Comments/Concerns
Revised contract for services. Per contract, initial payment was made prior to services being received.

$24,200.00

Excessive contract length acting for vacant District administration position. $15,000 set up fee plus cost per student fee based on student attendance numbers Contract had many issues including the services received, district involvement required, and verication of services received prior to payment. Contract was paid based on deputy superintendent approval. This contract did not include an annual not to exceed amount. Invoices found for May 6, 2010 indicate District was billed for 14 hours, May 7, 2010 was billed for 21.5 hours at two different rates - 43 hours were invoiced for April 2-9, 2010 and additional 12 hours were billed for April 8-9, 2010, District was billed for 15 hours for May 19, 2010 and May 27, 2010 and June 9, 2010, District was billed for 16 hours on June 8, 2010. This contract is highly suspect as it is vague and could lead to duplication of services.

Educational Consulting Services Inc. (ECS)

3/25/2009 6/30/2012

Saturday School Attendance Recovery Program

Educational Consulting Services Inc. (ECS)

6/10/2009 6/30/2012

various hourly rates based on type of service provided to District

consultant services for Finance & Accounting, Curriculum & Instruction, Human Resources, Building & Facilities, Leadership, Management, Risk Management, State Reports, Interim Positions and other related administrative duties consultant services for Finance & Accounting, Curriculum & Instruction, Human Resources, Building & Facilities, Leadership, Management, Risk Management, State Reports, Interim Positions and other related administrative duties

Educational Consulting Services Inc. (ECS)

6/16/2009 6/30/2012

various hourly rates based on type of service provided to District

Multiple contract Board agenda items were submitted by a paid consultant who also appears to be acting as a District employee - preparing Board agenda items and signing contracts on behalf of the District ECS consultant acting in position above should not have been issued additional contracts while acting in a District administrative position. Initial payment made prior to services being received. Vendor selection concern: unknown selection process, also not record of contract Board approval Potential duplicate services - Educational Consulting Services Inc. (ECS) and New Directions for Academic Advancement are also providing leadership services

Educational Consulting Services Inc. (ECS)

8/26/2009 6/30/2012 2011/2012 thru 2013/2013

$24,000.00 per year

Mandated Cost Services

Nike

N/A

Pivot Learning Partners 12/8/2010 Board Agenda contract listing 8/26/2009 Board Agenda contract listing

Pivot Learning Partners Pivot Learning Partners

$191,800.00

staff development

Potential duplicate services

$52,500.00

not stated in agenda info

Potential duplicate services

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Vendor Name

Contract Dates

$ Amount
amount based on Bond Sales - not to exceed 1% of bond authorization

Service or Product to be Provided

Comments/Concerns

Program Management Integration (PMI)

10/27/2011 9/30/2014

G.O. Bond Measure Program Implementation & Support Services

Unknown selection process - Potential overlap of services provided by Caldwell Flores Winters Unknown selection process: appear to include Lease/Leaseback bid processing for District Public Works Projects - need to conrm process was completive and subcontracts not hand selected cash settlement for dispute with District Concern about contract with a service provider in which a dispute required a cash settlement in the recent past. Contract also includes a $1,000 District termination fee - NO contract written by the District should impose penalties on the District 300 guests at $25 per guest - listed as student incentive funds - if adults were present, they should have paid to attend

PMI RJ Allen & Associates (John Pruitt)

12/20/2011 2/19/2013 June 23, 2009

$346,887.25 $10,000.00

Support Services Settlement Agreement investigative services and human resources training, consulting & assessment School Board workshops, research/review of Board meetings Basketball Awards Dinner

RJ Allen & Associates (John Pruitt)

September 23, 2009

$5,000.00

RJ Allen & Associates (John Pruitt) Sierra Lakes Golf Club

May 15, 2013

$5,000.00

6/1/2010 2/9/2011 Board Agenda Contract listing (2/10/2011 4/15/2011) 2/23/2011 Board Agenda Contract listing (2/24/2011 - 4/30/2011)

$7,500.00

Total School Solutions

$19,842.00

Departmental Efciency Study

Potential duplicate services

Total School Solutions

$19,842.00

Departmental Efciency Study

Potential duplicate services Potential duplicate services - Educational Consulting Services Inc. (ECS) and New Directions for Academic Advancement are also providing leadership services

Total School Solutions

2011-2012 school year

$123,525.00

support schools in building leadership capacity

In fall 2010, the purchasing agent undertook a complete review of the district contract process. A template was created, reviewed by legal services, amended and nally adopted as the district-approved form. No formal training was given to any staff as to the changes or expectations in this new process. Also during this time, the district continued to accept and process contracts submitted by outside vendors. The district continues to allow vendors to make changes to the accepted form and processes them as received. Staff reported that amendments are sometimes made to contracts, and these changes are not always communicated with staff. Staff also reported instances of addendums received to contracts that were never originally processed. The nature of the contract and consultant category makes it difcult for a district to standardize. The district determines there is a need for service that it cant provide internally. Each service is potentially unique and dependent on a specic set of circumstances. Template language cannot cover all conceivable needs. However, the district must strive to ensure that it meets the board required expectations and follows all state and federal regulations. FCMAT review of district contracts revealed the following:

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Contract with Educational Consulting Services Inc. (ECS) spanning June 16, 2009 to June 20, 2012 was for nance and accounting, curriculum and instruction, human resources, building and facilities, leadership and management, risk management, state reporting, interim positions and other related administrative duties. This contract lacked not-to-exceed language. Four different hourly rates were dened, depending on the services rendered. The contract signatory for ECS was the president of the corporation, who also signed all contract/consultant services requisitions on behalf of the district. He continued to sign until June 29, 2011. On January 13, 2011, he signed the Nike/Rialto USD Agreement as assistant superintendent of business. On July 1, 2010, he was added to the district-paid Pacic Care plan for health insurance, dental, vision and life insurance policies. This person was provided a designated district ofce, equipment, and on occasion, a district vehicle. When staff were interviewed about his title and position with the district during that time, there was confusion. Half of those questioned believed him to be a district employee. Half of those questioned believed him to be working under contract. After reviewing all information gathered, FCMAT believes he was incorrectly identied and paid under the IRS regulation as a contractor in determining employee vs. contractor status. In addition, this assignment conicted with board policy that a contractor could not hold a district position, because this person represented himself as assistant superintendent. With regard to this position, the district is out of compliance with federal and state income tax reporting laws for federal income tax, social security, Medicare, state income tax and possibly the State Teachers Retirement System. Audit of this violation could result in past due taxes, late penalties and nes, all payable by the district. It is extremely important that the district ensure that safeguards are in place to make sure this situation does not occur again. The district needs to implement use of Form SS-8 to guarantee correct status in the future. Contract with Nike 2011-2014. The contract does not show any board approval. In addition, the provision for 10% rebate in the form of free Nike product, valued at retail, for all Nike purchases made through Brand Athletics per year, is highly irregular and suspect. No process is in place to monitor the rebate amounts. Nike directed all district inquiries to the superintendent, and district staff were unaware of any free product distribution until recently. There is also no record of who received the merchandise. It is more common and acceptable practice for companies to extend a straight dollar percentage discount applied at the time of purchase. Contract for Educational Consulting Services Inc., for Saturday School Attendance Recovery Program (SSARP), dated from March 25, 2009 to June 30, 2012. This contract favors the vendor and is highly questionable because during this time, the company president also served in the district as a decision-making administrator. The contract should have been terminated and resubmitted to the board with full disclosure of possible conicts of interest.

Vendors
Vendor history was reviewed for the period of July 2009 to October 2013. The following exhibit identies vendor usage history including time used, amount paid, and FCMAT concerns.

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Vendor Name
Educational Consulting Services Medical Billing Technologies Program Management Integration

Report requested -7/1/2009 through 06/30/2013 - expenditure dates as noted

$ Amount

Comments/Concerns
Consultant fees appear excessive. Three (3) separate concurrent contracts to this company with payments for 35 month period averaging $42,313.51 per month. Fees appear excessive for 9 service months. Were invoices reviewed for proper calculation of fees due based on actual bond sales amount? Contract states payment on total bonds.

9/9/2009 - 7/24/2012 12/21/2011 - 10/4/2012

$1,480,973.00 $284,832.30

12/20/2011 - 2/19/2013

$346,887.25

Effective internal controls provide reasonable assurance that a districts operations are effective and efcient, that the nancial information produced is reliable, and that the organization complies with all applicable laws and regulations. The districts internal controls, the principal mechanism for preventing and/or deterring fraud or illegal acts, have been compromised by lack of adherence by the highest level of administration. Weaknesses or the lack of many internal control elements have led to an environment where there is potential for fraud, misappropriation and misuse of district assets. FCMAT found signicant material weaknesses in the districts enforcement of governing board internal controls, operational policies and procedures related to the management and oversight of activities. These weaknesses appeared mostly through lack of adherence to policies and oversight at the highest level of administration where the Purchasing Department was bypassed and the procurement procedures were circumvented. Many orders were placed without a proper district purchase order, and several contracts were approved directly by the superintendent or superintendents ofce.

Recommendations
The district should: 1. Require proper backup documentation to ensure appropriate procurement procedures were followed. 2. Review costs of vendor contracts and payments to ensure reasonable and appropriate rates as well as a not-to-exceed contract amount. 3. Ensure the vendor contracts clearly identify services to be delivered and do not overlap to prevent duplicative services and billing. 4. Institute a process to ensure consultants do not meet the denition of employee. 5. Ensure there is no conict of interest wherein the person authorizing the contract also benets from its acceptance. 6. Ensure that orders are processed with proper district requisition submittal to the Purchasing Department. 7. Prohibit the processing of contracts that circumvent the procurement system.

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8. Establish a district environment, led by the board of trustees and the highest level of administration, of high ethical conduct and no tolerance for inappropriate actions.

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Purchasing / Credit Cards

A purchasing card is a form of credit card issued to individual employees or a district department with specic restrictions on how, when, where and what the user can purchase. Use of purchasing cards has seen a dramatic rise in recent years, with many government organizations now using them to remove cumbersome procedures, reduce costs and lessen the workload on staff. Organizations typically use purchasing cards for low-value merchandise, as it offers a mechanism to do these transactions at a signicantly lower cost than traditional methods. The use of these cards by school district staff provides for quick procurement of items under $500. Organizations have started to use purchasing cards as a strategic form of payment in accounts payable, in addition to the traditional high-volume, low-dollar transactions. Organizations are replacing checks with purchasing cards and automating the payment to the supplier. This is one of the fastest-growing uses of purchasing cards, which can also generate a small revenue stream back to the district. Employees who are issued purchasing cards are expected to follow their organizations policies and procedures related to their use, which include review and approval of transactions according to a set schedule. The organization can implement a variety of controls for each purchase card, such as a single-purchase dollar limit, a monthly limit, and merchant category code restrictions. Some of the benets of decentralizing small and urgent purchase transactions include: 1. Staff can expedite purchases, which provides better service to students. 2. Purchasing cards reduce the number of manual reimbursement claims, lowering administrative costs. 3. Purchasing cards allow staff to make Internet purchases and place orders from vendors that normally do not accept purchase orders. 4. Purchasing cards reduce the use of blanket purchase orders that can lead to purchasing abuse, thereby improving internal controls. 5. Purchasing cards allow better utilization of technology to analyze spending and vendor activity, and improve compliance with school district policies and regulations. As a precaution, a cardholders purchasing card activity should be reviewed periodically by someone independent of the cardholder. Audit review can be conducted by Accounts Payable staff when processing monthly statements for payment. FCMAT discussed the potential use of purchasing cards during interviews with school district staff. Several staff members stated that these cards would enhance the purchase tools offered by the Purchasing Department. The district has board policy stating that authorized employees may use district credit cards while attending to district business but under no circumstances may personal expenses be charged on district credit cards. The review of district credit cards belonging to the superintendent and superintendents ofce shows many questionable and/or excessive charges.

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Date
8/8/2009 9/9/2009 11/9/2009 7/17/2011- current 8/8/2011 12/7/2011 3/23/2012 5/20/2012 5/27/2012 5/27/2012 9/21/2012 3/29/2013 6/2/2013

Purchased By
Superintendent Superintendent Superintendent Supt. Ofce Supt. Ofce Supt. Ofce Supt. Ofce Supt. Ofce Supt. Ofce Supt. Ofce Supt. Ofce Supt. Ofce Supt. Ofce

Charged To
Mimis Caf, Local Restaurant Misc. Food Charges, used once Misc. Food Charges, used seven or more AT & T Paypal Nike Terribles Casino, Las Vegas Nike Nike El Torito, Local Restaurant Mables Flowers Nike Mimis Caf, Local Restaurant

Amount
$86.39 56.02 573.08 59.98 15.00 4141.57 294.74 1275.68 643.20 273.32 74.03 1140.80 291.13

Concern
Charge made on weekend Normal Spending pattern Unusual increase in activity Recurring, regular monthly service charge Unusual to see Paypal Should be processed under contract in place Receipts and invoices need to be checked Should be processed under contract in place Should be processed under contract in place Charge made on weekend Gift of Public Funds Should be processed under contract in place Charge made on weekend

The following areas of concern are most notable: Regular, recurring charges for established monthly fees like AT&T services. Annual membership fees for each card. Orders placed and paid to vendors that are under contract with district and should be processed and paid using regular procedures. Charges being made locally, not during travel for the district, to eating establishments during the weekends. Charges to ower vendors, which is generally considered a gift of public funds. Charges to a Las Vegas casino.

Recommendations
The district should: 1. Adopt and enforce a policy of purchasing card use that is fair and consistently applied. This policy should include restriction and/or termination of use for noncompliant card holders. 2. Educate all users in the proper use of purchasing cards through formal training sessions, and require cardholders to sign a contract stating that they understand and agree with the use policy.
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3. Implement the use of purchasing card jackets and color coding or other visible branding on the card to differentiate it from personal credit cards and decrease the possibility of its mistaken use. 4. Provide use of a card for the purchasing department to facilitate and streamline purchasing.

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Employee Incentives / Awards

Several district transactions identied employee incentives and/or awards; however, no current district policy was found authorizing such. The following transactions were thus found to be in question: ESPN Zone, employee incentive dinner paid for with donation contributions, $7,614.06. Nike, products carried by superintendent to award to employees individually. While FCMAT was told these were obtained as part of the rebate incentive, there are also several thousands of dollars in Nike products ordered on the superintendent ofces credit card. See the credit card review exhibit for details. Oscars, individual statues, engraved and awarded to employees, purchased from USA Trophy in Laguna Hills, picked up personally by the superintendent. Approximately $148.50 before engraving was paid per statue. When business ofce staff contacted Trophies 2 Go for a quote on same product, they received a quote of less than $18.55 with free engraving. More than $14,000 was spent with the Laguna Hills vendor, when the statues could have been obtained for approximately $2,000. Embroidered Scarves were purchased for staff incentives. Positive Promotions, $7,429.28 was spent for employee incentive frames. Employee reimbursement for lunches on travel or conference day. The district routinely reimburses employees for lunch expense on days when they attend a meeting, conference or training outside of their regular duties. While this is an allowable reimbursement according to IRS law, if there is no overnight stay or rest period during the business day, it must be reported as taxable income. The district has brought its process into compliance with IRS Publication 463 for the current year.

Recommendations
The district should: 1. Consider adopting a policy for employee incentives and/or awards. 2. Review current practices and cease those that do not align with or are not allowed by board policy, including employee incentives and awards. 3. Review and align procurement procedures to ensure maximization of purchasing value.

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A P PD ER NA DF IX T

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Appendix
Study Agreement

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DR A PP AE FN TDIX

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DR A PP AE FN TDIX

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