Few at state health agency knew how slush fund worked
It appears only three people in positions of power may have understood how the Oklahoma state Health Department’s finances worked — and even that might be an overestimate.
News about the department’s financial health could have caused whiplash over the past year. As of June 2017, the official line was that all was well with the department’s finances. By September, top officials said they were dealing with a $10 million budget gap. By the end of October, the department reported it needed $30 million to stabilize its finances and make payroll, and announced it would lay off 198 people in December to lower costs.
Then, this month, a multicounty grand jury and the State Auditor and Inspector’s office released their reports that showed the Health Department was never in financial crisis and has yet to spend $30 million the Legislature had appropriated to save it.
Attorney General Mike Hunter acknowledged the difficulty of understanding how officials failed to understand financial realities. Incompetence played a role, as did
a culture of fear at the Health Department, he said during a news conference announcing the grand jury’s findings.
“There’s plenty of blame to go around,” he said. “It’s hard if not impossible to comprehend why some of the decisions were made.”
Mike Romero, the department’s former chief financial officer, took exception to the characterization that he and others raised alarms unnecessarily.
“We kept hearing that everything was actually fine with the money if only the employees understood what they were doing,” he said. “This type of wordplay has no place in honest government.”
The Health Department’s finances are more complicated than some state agencies, because it receives money from state appropriations, federal grants and county millages. Some of that money can only be used for specified programs. Other dollars, like those the Legislature appropriates, can be used for almost any expense related to running the department.
If everything is running as it should, the federal and county money will be used for eligible programs, and the state money will fill in the gaps. When the Health Department had extra state money, however, officials hid that money in either its federal or county account, which the Legislature isn’t allowed to touch. Hiding the money kept lawmakers from sweeping it to balance the budget, and it gradually built up a “slush fund,” investigators said.
At its peak, the slush fund contained about $40 million, State Auditor Gary Jones said, and at least $7 million was left when his office began investigating the department.
Commissioner Terry Cline, Senior Deputy Commissioner Julie CoxKain and Business Planning Director Felesha Scanlan knew about the slush fund and used it to balance the budget when the department overspent, as it did in four of the past seven years, according to the grand jury report.
Cline and Scanlan didn’t respond to requests for comment, and Cox-Kain declined to comment through her attorney.
Under their watch, the Health Department also exaggerated its revenues and expenses in six of the last seven years, overstating its income by more than $60 million in some cases. State agencies sometimes inflate their budgets so they can spend any unexpected money that comes their way, Jones said.
It appears finance officials didn’t know about the slush fund and didn’t understand how far the budget was from reality, however. Those critical pieces of missing information set the stage for the mistakes that followed.
Problem noticed
In June 2017, Romero noticed a problem. The budget for the new fiscal year starting in July showed the department would spend $10 million more than it would take in.
Cox-Kain solved the problem by inventing a $10 million fund and submitting a budget with the false figures to OMES. Cox-Kain knew that the department could pull enough money from the slush fund to close the gap if cuts couldn’t save enough, Scanlan later told the grand jury.
Romero and Brian Downs, the department’s director of federal and state policy, quietly informed the House fiscal staff that they believed the budget wouldn’t balance by sending them the numbers without CoxKain’s alteration, but no one from the House caught the discrepancy.
As they dug deeper into the department’s internal financial records, Romero and the finance staff found as much as $30 million in “borrows” from the federal and county accounts. If those accounts had really contained only restricted money, and not slush funds, the department would have had to replace it or face the possibility of losing federal grants.
In some cases, the department actually did misuse restricted money.
In July, the department had to delay its monthly payment to cover insurance payments for lowincome people with HIV, because it had used the restricted Ryan White program funds to cover payroll. It isn’t clear why the department used the Ryan White money instead of the slush funds.
“The department’s willingness to use Ryan White Program rebate dollars to pay payroll – but not to transfer unrestricted funds to pay a $600,000 invoice – is impossible to explain,” the grand jury report said.
Shortly afterward, Romero and Chief Operating Officer Deborah Nichols went to the auditor’s office to inform them fraud could be taking place at the Health Department.
Romero also raised concerns at a meeting in September, but CoxKain reassured the Board of Health that the department’s financial situation was manageable.
Three board members interviewed by the auditor’s office said they considered themselves “passionate advocates of healthcare,” not financial watchdogs, and took a hands-off approach.
Cline, Cox-Kain and Scanlan also created a “culture of fear” that kept employees from raising concerns with the board, according to the grand jury.
In interviews with the auditor’s office, 21 current and former employees said they feared retaliation, including the possibility they could lose their jobs if they spoke up.
Confidence lost
It isn’t clear why Cline and Cox-Kain lost confidence in their ability to manage budget problems with slush funds.
On Sept. 25, they met with senior House leadership to tell them the department would use furloughs and offer a buyout to close a $10 million budget gap – which they had attempted to conceal only a few weeks earlier. Three days after meeting with lawmakers, Cline asked Jones to conduct a special audit.
On Oct. 18, Romero, Nichols and Downs met secretly with board President Martha Burger and two other board members, and told them the department was approaching financial collapse.
“Perhaps due to the publicity surrounding the department after requesting the special audit, the board seemed willing to listen and act,” the grand jury report said.
By this point, Cline and Cox-Kain had come to believe that the department faced a $30 million budget hole, though they hadn’t said so publicly, the grand jury report said. They resigned at an emergency board meeting on Oct. 30, and Scanlan followed suit the next day.
The board appointed Preston Doerflinger, director of the Office of Management and Enterprise Services, as interim commissioner, and he went to the Legislature for money.
After receiving the $30 million special appropriation, Doerflinger might have waited for more information from the audit in progress before pursuing layoffs. He didn’t, for reasons the reports didn’t explain. Doerflinger didn’t respond to a call seeking comment.
The official story of the department’s situation didn’t change over the next six months, even as Nichols, Romero and Doerflinger resigned. Other than a memo from OMES staff suggesting the department didn’t have to pay back its borrowing, there was no indication the Health Department’s situation hadn’t been dire, until Jones and Hunter held a joint news conference on May 17.
Interim Commissioner Tom Bates, who was hired in March expressed regret for the layoffs, and said the Health Department is seeking to recall some employees because it cut personnel too deeply and harmed its ability to serve the public.
Tony Sellars, the Health Department's spokesman, said the department sent out recall notices to 42 employees earlier this month, but only two agreed to return to work. Letters will go out to another 40 employees on Tuesday, he said, and the department will continue to notify laid-off employees of job openings moving forward.
The reasons for some of the decisions department officials made still aren’t clear, but Hunter suggested they may have made the mistake of assuming the worst when confronted with information they didn’t understand.
“This was such a complicated mess that there was a decision it couldn’t possibly work and it had to be a disaster,” he said.
We kept hearing that everything was actually fine with the money if only the employees understood what they were doing. This type of wordplay has no place in honest government.”
Mike Romero