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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The health department wouldn’t comment on the grand jury report or the investigative audit until officials had a chance to review both reports, spokesman Tony Sellars said.

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

Grand Jury Findings Include:

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

Read the Grand Jury’s Full Report here.

Oklahoma Watch is a nonprofit, nonpartisan media organization that produces in-depth and investigative journalism on a range of public-policy issues facing the state. For more Oklahoma Watch content, go to www.oklahomawatch.org.