Balancing the County Budget Deficits

                              on the Backs of Children

Editor’s Note: We want to thank all our readers for following the multi-part series “Balancing the County Budget Deficit on the Backs of Children.” Part 31 concludes the series, but we will return in a few days with more on the subject of the county’s $20 million misappropriation of the treasury.

Part 31 -- The Final

 
Today
Summing it Up, An analysis 

In this series based on official public records we have shown an inflexible Modoc County Children and Families Commission, one unwilling to accept and follow the advice of its executive director and a lone commissioner, that Prop. 10 Trust Fund moneys be removed from the county treasury.
   
In fact, it’s been detailed that the commission knew its money was being spent to cover other county department debts, including the Modoc Medical Center -- especially when Treasurer Cheryl Knoch routinely revealed that was the case in 2002 -- seven years before then-CAO Mark Charlton exposed the on-going treasury misappropriation and put Modoc County into a financial spin.
   
Knoch’s admission apparently was not enough to motivate the commission to move the money out of the treasury, even though there were strong implications from Auditor Judi Stevens that she also was using Prop. 10 money for purposes other than the state-mandated use -- all against state law.
   
The commission understood that Prop. 10 was new and it required certain duties and responsibilities. Could the meetings have been conducted more professionally? Was there a list of requirements and internal controls set by  Prop. 10 law? 
   
They all knew the law and the proper procedures in following it because the executive director and other commission members contacted various counties with inquiries. These other counties all offered to help and apparently provided Modoc County with their processes and procedures for the commission and programs.
   
In 2001, before Michelson was fired, Modoc County was not in compliance with the state and Prop. 10 requirements. The commission knew this, it had the opportunity and access to do it right, and it did not take action to correct the problems.
   
Within this background there is the discussion with Knoch at the commission’s Feb. 13, 2002 meeting, following the firing of Donna Michelson. Knoch’s comments should have sent up two red flags -- one red flag for illegal use of county treasury funds and another for illegal Prop. 10 accounts and management.This alone was sufficient justification for a qualified audit.
   
Because Executive Director Donna Michelson and apparently other commission members had contacted various counties, the commission had knowledge of the key issues needed to run a Modoc County Children and Families Commission  program and for receiving and managing Prop. 10 funds. Someone, in addition to Michelson, should have taken action.
   
The question begs to be asked, did Knoch know, or should she have known, that even in 2001 and 2002 that she was apparently wrongly managing county funds, and particularly the Prop.10 funds, considering the state had provided specific guidelines and laws for the use of those funds?
   
The questions pile up, and for now some remain unanswered.
   
Why was Modoc County Supt. of  Schools Carol Harbaugh so consistently adamant about keeping the Prop. 10 funds in the treasury even when she acknowledged in her April 2, 2002 memo that the state wanted those funds -- in every county -- to be kept separate?
   
And when there was pressure to remove the funds from the treasury why did Harbaugh suggest they reside in her office?
   
Why did Harbaugh want Executive Director Donna Michelson directly under her control, and why was she allowed to operate on behalf of the commission without direction or authorization?
   
Did Cantrall, who has maintained an apologetic innocence of the misappropriation ever since its disclosure, read the minutes of the Feb. 13, 2002 -- as she should have -- which would have made her aware of the misappropriation? It’s been established that she wanted the funds to remain with the county treasury, even in face of violating the law.
   
By osmosis alone, if not directly aware, Cantrall’s successor on the commission, then-supervisor Mike Dunn, should have been acutely aware that the misappropriation was taking place -- at one point he was chair of the commission.
   
When in 2001, Modoc County CAO Mike Maxwell and Auditor Judi Stevens did not want to sign an MOU with the Children and Families Commission, members of the commission had a great opportunity to operate independent of the county. They missed it.
   
The Modoc County Children and Families Commission of 1999-2002 was a group of individuals serving a purpose directed by state law that they apparently did not have the training and knowledge to perform effectively -- and to do it as required by state law and code.
   
But there were sufficient safety nets among them to prompt them and provide them with correct processes and actions. In all due respect, they were not as dumb as they appeared to be.


 

Balancing the County’s Budget Deficits

                                   on the Backs of Children

                                                                  By Ray A. March
Part 30

June 30, 2009
June 30, 2010
The Warnings Keep Coming

Note the dates, they appear similar and can be overlooked: June 30, 2009 and June 30, 2010.

An example of fiscal Russian roulette being played in Modoc County can be found in two consecutive outside audits of the Children and Families Commission, now under the flag of First 5.
   
The audits for fiscal years ending in 2009 and 2010 strongly advise the commission that it runs the risk of losing all its Prop 10. Trust Fund deposits with the county treasury.
   
For two years in a row the outside audit firm made this repeated exact statement:
   
“The commission maintains its cash in the Modoc County Treasury, which is not insured or collateralized…the total amount of pooled funds invested by all agencies in the Modoc County treasury exceeds the amount of cash available.
   
“This is a result of a significant deficit balance in Modoc County’s portion of the pooled cash in the county treasury due to negative cash balances in some County of Modoc funds. The county has been able to provide all funds requested by the commission and is in the process of rectifying the situation.
   
“However, as long as cash is not available for all pooled fund balances in the county treasury, the commission is at risk for not being able to recover its deposits.” (Italics added).
   
The total amount of Prop. 10 cash in the county treasury in 2009 was $523,444. In 2010 the amount was $491,626, according to the audit report submitted by Haws, Theobald & Allman of Susanville and Chester.
   
For the last fiscal year 2010-11 the total revenue received was $434,458.91, according to Treasurer Cheryl Knoch.
   
Next: Part 31
    In summation, an analysis

Kindergarten Roundup

Surprise Valley Elementary School is hosting "Kindergarten Roundup" during Open House today from 5:30 to 6:30 pm in the school office. 

Any student who will be age five on or before Nov 1, 2012, is eligible to register for regular Kindergarten. Children turning five between Nov 2, 2012 and Dec 2, 2012 are eligible to register for Transitional Kindergarten (TK) during this time also.

Please contact Surprise Valley Elementary School at 279-6161 for details regarding items needed to register, such as copies of your child's birth certificate, social security and immunization card.

Balancing the County’s Budget Deficits

                               on the Backs of Children

                                                                      By Ray A. March

Part 29
From April 2, 2002 through Oct. 24, 2002
A Consolidation of Maneuvers

Three months after Donna Michelson was fired the state of California encouraged all local Children and Families Commissions to be fully independent of their county treasuries. Although Prop. 10 law mandated there would be no co-mingling of funds at the county level, local records do not show what prompted the state to take this position.

Even with the order Modoc County Supt. of Schools Carol Harbaugh was in disagreement with the state, and reluctantly supportive of the commission establishing a separate checking account from which it could make nominal draws.
   
Wearing the appearance of a compromise, Harbaugh wrote in an April 2 memo to her fellow commissioners that Auditor Judi Stevens told her the same day the memo was written  that a separate checking account -- not a complete removal of Prop. 10 Trust Funds from the treasury -- could be established at a local bank.
   
“While I may have helped the commission set up the separate checking account for commission business, I want to remind members that I personally do not approve of the use of a separate checking account and the commission ‘removing’ itself from the services and resources of local public agencies and/or already established private nonprofit organizations,” Harbaugh wrote in the memo, taking credit for the partial removal of Prop. 10 funds from the county.

* * *

On April 21 Commissioner Phillip Smith renewed the commission’s intentions of going after Rosemary Nelson with an accusation that she had a conflict of interest stemming from an application for unemployment insurance payments filed by Donna Michelson that according to Smith, was sent to Nelson’s office instead of the commission’s.
   
“This  suggests that there exists a personal relationship between you and our former executive director that may interfere with your unbiased participation in business dealings with her,” Smith charged.
   
Without the suggestion of a meeting to resolve the alleged conflict of interest, Smith essentially told Nelson in the letter that she should admit her guilt.
   
“We ask that you acknowledge your dereliction of duty in failing to notify the other commissioners of pending action through the Employment Development Department,” Smith wrote, “and we ask that you declare your allegiance to the stated goals of the entire commission, that being the development of programs that meet the needs of our county’s children above all else.”

In effect, Smith and the commissioners were asking for a loyalty oath in complete disregard for Nelson’s fundamental rights to a presumption of innocence until proven guilty.

* * *
On July 1 Nelson fired back with a two-page single-spaced letter addressed to now chair Mike Dunn, sitting on the commission as a representative of the Modoc County Board of Supervisors. She sent copies to State Sen. Rico Oller, Assemblyman Sam Aanestad, state Children and Families Commission chair Rob Reiner and Attorney General Bill Lockyer.
   
“It is with sincere regret that I am tendering my resignation effective immediately,” she wrote. “I have given this decision a great deal of thought and believe it would be going against the principles of my conscience to remain as a commissioner.”
   
As for Smith’s accusations of conflict of interest and assumption of guilt, Nelson was outraged.
   
“I feel my integrity and principles have been impugned by the assumption of my guilt without even talking with me,” she responded. “This is a violation of my constitutional rights,” she continued. “It sounds like the Wild West when my family had their language beat out of them for no honorable reason, but their survival insures that I have a voice that cannot be arbitrarily taken without proof of guilt.”
   
She then went on to blast the commission for continuing to keep the majority of Prop. 10 Trust Funds in the county treasury.
   
“Balancing the county’s budget deficits on the backs of children is not within my realm of principles,” she wrote in answer to the commission’s unwillingness to move Prop. 10 funds.
   
“We adults have responsibilities that we are woefully failing and I cannot participate in using Children’s Prop. 10 monies to balance budgets. Children do not have a vote nor do they have a voice at the table of business. They depend on our integrity.”

* * *

On July 25, following her resignation from the Modoc County Children and Families Commission, Nelson wrote a personal letter to Attorney General Bill Lockyer reminding him of the Prop. 10 law that “no money’s in the California Children and Families First Trust Fund shall be used to supplant state or local general fund money for any purpose.”
   
Nelson, as it has already been shown, had copied her July 1 letter to Mike Dunn to Lockyer. The letter in which she went into specific detail exposing Modoc County’s alleged violation of Prop. 10 law.
   
On Aug. 2 Lockyer’s senior assistant attorney general James M. Humes responded to Nelson with a classic, innocuous and non-committal letter in which he wrote thanking Nelson for her letter.
   
“Please be assured that the commission and its attorneys in this office are aware of the requirements that commission funds are to be used only to supplement existing levels of services and are not to be used to supplant state or local funds,” he replied.
       
* * *

The Modoc County Children and Families Commission was not finished with Donna Michelson.
   
On Oct. 10 Supervisor Mike Dunn, still commission chair, somehow sent her a letter with no address on it demanding repayment of  $1,256.75 for work she had done that should have been paid -- not to her -- but to the commission.
   
Michelson replied two weeks later disagreeing with Dunn and referred him to tapes of commission meetings in which it was discussed that she and not the commission was to be compensated for the work she did.
   
In fact, Michelson added, “I do believe the commission owes me money,” and not the other way around.
   
Next: Part 30
    It’s now 2009 and 2010 and the warnings keeping coming.

AG Investigation Into Misappropriation to Begin

Criminal investigators from the Attorney General’s Office have arrived in Modoc County and will begin interviewing witnesses in the AG’s probe into the county’s financial scandal tomorrow, April 17, at a secure, undisclosed location.
   
Various county officials are expected to be interviewed in the AG’s inquiry of the 10-year-long misappropriation of an estimated $20 million in restricted treasury funds.
   
“The first witnesses are ‘low level’ county employees,” said an informed source speaking on the condition of anonymity.
   
The investigation is expected to continue through the week.

Balancing the County’s Budget Deficits

                                   on the Backs of Children

                                                                      By Ray A. March

Part 28
 
Feb. 13, 2002
Smoking Gun: Treasury Helps Pay MMC Debt

Less than two weeks after the Children and Families Commission fired Donna Michelson, Modoc County Treasurer Cheryl Knoch openly informed the commission that the treasury helps pay the balance of funds that run in the negative. Such as the hospital.
   
This disclosure by the county’s elected official responsible for deposits to the treasury was exactly what the embattled Michelson had been saying for more than a year -- that Prop. 10 Trust Funds were being misappropriated.
   
Incredibly, Knoch was saying the treasury not only covered Modoc Medical Center debts but apparently other county departments as well. The commission’s minutes of the Feb. 13, 2002 meeting state:
   
“Ms. Knoch provided an explanation of how the county currently manages the incoming funds, explaining that every fund currently in the county treasury helps to pay the balance of funds that run negative, such as the hospital.” (Boldface emphasis added).
   
Eight years later on March 30, 2010 during a workshop session conducted by the Monday Night Group in an effort to investigate how the county managed to misappropriate an estimated $20 million from the treasury, Knoch was feeling pressure.
   
“This money needs to be replaced in the county treasury,” she said from a seat in the audience. “I’m the one who is going to prison and be behind bars.”
   
Remarkably, at the Feb. 13, 2002 meeting of the commission, Phillip Smith said he was satisfied with keeping the Prop. 10 funds in the care of the county treasury, according to the minutes.
   
Commissioner Rosemary Nelson, Michelson’s only ally and apparently appalled at Smith’s blatant position, countered that the children under the Prop. 10 program come first and the hospital debt was not the responsibility of the Children and Families Commission.
   
“…children need to be the commission’s priority and to satisfy the hospital’s debt is not these children’s nor the commission’s responsibility,” Nelson retorted, according to the minutes.
   
Unmoved with Nelson’s argument, Smith said, “he feels just as strongly that the hospital needs to be available to those same children…in the community.”
   
Undaunted, Nelson pointed out that the commission does not receive regular fiscal reports from the county nor does it have a memorandum of agreement with the county for services.
   
Attending this meeting in addition to Nelson and Smith, according to the minutes, were Tracey Cochran, chair; Dr. Edward Richert, Donna Geldreich, Alice Lybarger and Carol Callaghan as Carol Harbaugh’s alternate. Commissioners Patricia Cantrall and Rusty DuVall were noted as absent.
   
The difference of opinion between Nelson and Smith in 2002 personifies much of the debate in 2012 with one faction arguing there was justification in the misappropriation because treasury money was going to support the hospital while another faction argues that the misappropriation was illegal and those responsible should be held accountable.
   
No action was taken by the commissioners following Knoch’s oral presentation. The minutes do not reflect who recorded them.
   
(However, on Feb. 22, 2011, nine years after Knoch made her admission to the Children and Families Commission the Modoc County Board of Supervisors unanimously voted to pursue a $12.5 million claim naming Knoch and former auditor Judi Stevens as the two officials who “most likely” violated state law in the misappropriation of the treasury.)
   
In a manner that appears to be political tradition, the commission could not rest under the criticisms of CPA Kristin Domenichelli when she wrote that Knoch’s three-point memo was a jaded and misleading scare tactic, but instead the commissioners were ready to strike back at Domenichelli with criticisms of her “behavior.”
   
Cochran brought an item to the agenda that was intended to discuss “Ms. Domenichelli‘s unprofessional behavior at the last meeting and regarding her communication with Ms. Michelson,” but the matter was tabled.
   
Next: Part 29
    Wrapping it up

BULLETIN

State Attorney General to Investigate Modoc County

Criminal investigators from the state Attorney General’s Office (AG) are coming to Modoc County next week to launch their probe into the county’s $20 million misappropriation of treasury funds.
   
The inquiry into the county’s financial practices, which could have statewide repercussions, may also lead to felony charges against county officials, according to a source familiar with  AG procedures who spoke on the condition of anonymity.
   
The investigators are expected to begin interviewing top level county officials, including members of the Board of Supervisors April 17, in the first phase of what is anticipated to be an initial two-week search for evidence and documents, according to the source who said there are a number of  reasons for the AG’s investigation.
   
Attorney General Kamala Harris believes she has an ethical and moral obligation to investigate treasury misappropriations, and it does not matter how small the county. If county officials commit a felony Harris believes they should be held accountable.

(This is contrary to DA Christopher Brooke who has declined requests of past Modoc County Grand Juries to prosecute various county officials, saying he has no criminal basis to do so.)
   
The statute of limitations for prosecutions is four years. The AG considers the “point of discovery” as 2009, when former CAO Mark Charlton went public with his disclosure that county officials had been misappropriating treasury funds for years. There is one year left in the four-year statute of limitations.
   
County supervisors throughout California have been following Modoc County’s fiscal developments on the Modoc Independent News blog and are instructing their administrators to see if they too, can use restricted funds illegally and get away with it.
   
County administrators are reporting to the State Controllers Office their concerns that their boards of supervisors will try the same tactics as Modoc County, which they see as illegal.
   
“Attorney General Harris knows this and has told her staff that what the people in Modoc County are doing is wrong,” the source said. “She says it’s a felony, and that she has an obligation to investigate. Also, she knows that other large cities and counties are thinking of doing this.”
   
Modoc County is going to be used by the AG an example to send a message to other counties and municipalities that illegal use of treasury funds is not going to be tolerated.
   
Modoc County CAO Chester Robertson, when asked by the Modoc Independent News to confirm the AG investigation, dodged a direct answer saying he had placed a call to the AG's office and had not heard back from them.
   
“They have not contacted my office or the county offices,” Robertson said. “I heard they are coming, but I don’t have specifics because they have not contacted my office.”
   
Even so, Robertson did say he has advised members of the Board of Supervisors of the impending investigation and that they may be interviewed.
   
He did say he wanted to know “what the AG investigation meant to the county, what the intentions of the AG were and what the implications of these allegations meant to local officials.
   
“Woolverton hasn’t said specifically why they are coming,” Robertson said, referring questions to Gary Woolverton, former Modoc County district attorney, who Robertson said the AG notified rather than his office that it was starting its investigation.
   
Woolverton drafted the initial “performance bond claim” alleging various county officials were responsible for the misappropriation. Calls left with Woolverton’s office were not immediately returned.
   
The impending investigation was confirmed by Supervisor Dave Allan, who said the county was notified on April 11 of the AG’s intention to meet with county officials.
   
"The Attorney General's office is coming on Tuesday,” Allan said. “They say they're going to talk to people and write a report."
   
Allan said he, Robertson, Supervisor Loren “Shorty” Crabtree and Woolverton met April 11, the same day Woolverton informed them of the investigation to discuss their preparation for the AG meeting. He did not specifically say what the county’s plan was for working with the AG investigators.
   
Various county department heads are speculating among themselves as to why the AG investigators have chosen April 17 to begin their interviews and document search  because that is the day Auditor Darcy Locken, Treasurer Cheryl Knoch and Robertson wrap up their “pay ourselves back“ special session workshop with the Board of Supervisors.

A surprised Locken told the Modoc Independent News that she had not been notified by Robertson that an AG investigation would start next week.

                            -- Ray A. March

Editor’s Note: Barbara March, publisher of the Modoc Independent News and this blog, contributed to this article.
   

Balancing the County’s Budget Deficits

                             on the Backs of Children

                                                               By Ray A. March

Part 27

Feb. 1, 2002
Michelson Cleans Out Her Desk

On the Friday following her firing Donna Michelson delivered various documents to Rosemary Nelson with a cover memo stating she trusted Nelson would inform the commission that she had received them. The unidentified documents were to have been presented to the commission at its Jan. 30 meeting, Michelson told Nelson.
   
“During the extremely hasty exit from the Modoc County Children and Families Commission (meeting) where I was escorted from the building by Chief of Police Larry Picket at the direction of Commissioner Carol Harbaugh, these items and documents were simply overlooked,” Michelson said in her memo to Nelson.
   
This was also an opportunity for Michelson to thank Nelson for her support.
   
“I enjoyed the brief time I got to know you as a commissioner,” Michelson wrote. “I sincerely appreciated your neutrality and fairness in all matters. I look forward to working with you in the future under more equitable circumstances.”
   
In a matter of weeks Nelson received an accusatory letter from Commissioner Philip Smith charging the neutral Nelson with conflict of interest and that she should remove herself  “from any further business that deals with Ms. Michelson.”
   
The commission had successfully freed itself of Michelson, now it had Nelson in its sights.
   
Next: Part 28
    Treasurer Cheryl Knoch openly informs the commission that treasury funds are used to off-set negative balances in other departments such as the Modoc Medical Center.