Special review Maricopa County Community College District improper enrollment in the Arizona state retirement system and loan of public monies

              Special Review
Maricopa County Community
College District
Improper Enrollment in the Arizona State
Retirement System and Loan of Public Monies
Special Investigative Unit
Debra K. Davenport
Auditor General
APRIL • 2009
A REPORT
TO THE
ARIZONA LEGISLATURE
The is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting services
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Senator Thayer Verschoor, Chair Representative Judy Burges, Vice Chair
Senator Pamela Gorman Representative Tom Boone
Senator John Huppenthal Representative Cloves Campbell
Senator Richard Miranda Representative Rich Crandall
Senator Rebecca Rios Representative Kyrsten Sinema
Senator Bob Burns (ex-officio) Representative Kirk Adams (ex-officio)
Audit Staff
George Graham, Manager
Erin Mullarkey, Auditor II
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.azauditor.gov
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
April 20, 2009
Members of the Arizona Legislature
Maricopa County Community College District Governing Board
Dr. Rufus Glasper, Chancellor
Maricopa County Community College District
In June 2008, the Office of the Auditor General became aware of certain allegations, such as
noncompliance with laws, involving the Maricopa County Community College District. As a result,
we have performed a special review of selected matters of the District. The review was conducted
under the authority vested in the Auditor General by Arizona Revised Statutes §41-1279.03.
The review consisted primarily of inquiries and examination of selected financial records and
other documentation. Therefore, the review was substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards. Accordingly, we do not
express an opinion on the adequacy of the financial records or the internal controls of the District.
We also do not ensure that all deficiencies in internal controls or other conditions that may require
correction or improvement have been disclosed.
The accompanying report describes the Office’s findings and recommendations as a result of
this special review. As outlined in its response, the District does not agree with the findings, but
plans to implement most of the recommendations.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on April 21, 2009.
Sincerely,
Debbie Davenport
Auditor General
In June 2008, Auditor General staff began a review to determine whether the
Maricopa County Community College District (District) had improperly enrolled
employees of three nonprofit corporations (nonprofits) in the Arizona State
Retirement System (ASRS). As a result of our review, we determined that the District
misrepresented at least 26 nonprofit employees as district employees, improperly
loaned the cost of their salaries to the nonprofits, and improperly allowed 22 of these
nongovernmental employees to participate in state and district benefits.
One of the primary benefits these nonprofit employees received was participation in
the state retirement system. Although these employees were not eligible to
participate in the state retirement system as employees of the nonprofits, the District
made them appear to be district employees. Over the past 21 years, the District’s
actions allowed 22 of the nonprofit employees to participate in the ASRS. The other
4 employees did not participate in the ASRS, although they were afforded other
district employee benefits.
District administration determined in January 2008 that the District needed to correct
the situation and discontinue the arrangements; however, the District did not notify
the ASRS of potentially ineligible employees, and did not discontinue the
arrangements with two of the nonprofits for another 7 to 9 months. Furthermore, the
District had not yet discontinued the remaining arrangement as of February 2009. We
submitted our report to the ASRS, which has the authority to determine whether the
22 employees should be removed from the ASRS.
The District’s actions were unlawful when it loaned public monies by improperly
placing all 26 nonprofit employees in its payroll system, paying their salaries and
benefits, and later accepting reimbursement from those employees’ nonprofit
corporations. Detailed records were available only for the past 6 fiscal years, during
which the loans totaled more than $3 million. These actions violated the Arizona
Constitution, Article IX, §7, which prohibits the gift or loan of public monies to
corporations.
Office of the Auditor General
SUMMARY
page i
State of Arizona
page ii
Office of the Auditor General
TABLE OF CONTENTS
1
3
13
15
10
14
Introduction & Background
Finding 1: District improperly included nondistrict
employees in state retirement plan
Finding 2: District unlawfully loaned public monies to
nonprofit corporations
Recommendations
Figures:
1 Typical Employer Actions Performed by District and Nonprofit
Corporations
2 Unlawful Loans to Nonprofit Corporations
page iii
State of Arizona
page iv
Maricopa County Community College District (District) is the largest system of
community colleges in Arizona. The District includes ten colleges, two skill centers,
and several education centers located throughout the metropolitan Phoenix area. Its
mission is to “provide access to higher education for diverse students and
communities,” and it serves more than 250,000 students annually. The District
employs more than 13,000 faculty and staff.
In 1987, the District entered into an arrangement with the Arizona
Community College Association (ACCA), a nonprofit corporation, to
process payroll for ACCA’s employees and to allow them to receive
district benefits, such as medical insurance, and participate in the state
retirement system. ACCA agreed to reimburse the District for those
costs. ACCA served as an avenue of communication for Arizona
community college districts, and its staff compiled reports for the
districts.
The District began similar arrangements with the Arizona Business and Education
Coalition (ABEC) in 2002 and the East Valley Partnership (EVP) in 2003. According to
a district administrator, the ABEC arrangement was proposed by ABEC when a
prospective ABEC employee expressed interest in state retirement benefits as part of
employment negotiations. The District first declined this proposal, but that decision
was later reversed by high-ranking district officials. Another district official
characterized these arrangements as a way of helping a community partner by
providing an “administrative home” for the companies, which were small and thus
had difficulty performing their own administrative tasks. District officials believed the
District would benefit from the nonprofits’ activities; however, they could not quantify
these benefits, other than potentially expanding the District’s involvement in teacher,
workforce, and regional economic development. Furthermore, the District
acknowledged that it could have partnered with the nonprofits and achieved these
same benefits without adding the nonprofit employees to the District’s payroll.
Although all three nonprofit corporations are involved with some aspects of public
education and government, they are not themselves governmental entities and are
not eligible to receive loans from the District.
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
The District could have worked with the
nonprofit corporations and achieved the
same educational goals without adding
nonprofit employees to the District’s
payroll.
In July 2007, district staff became aware of a March 2006 Auditor General report that
questioned a similar arrangement in Santa Cruz County. The District recognized that
its arrangements with nonprofits were similar to Santa Cruz County’s, and were
therefore also problematic. However, it was not until January 2008 that the District
decided the arrangements needed to end. The District did not remove the EVP
employees from district payroll until August 2008 and the ABEC employees until
October 2008. As of February 2009, the District had not yet removed two ACCA
employees from its payroll system. According to the District, ACCA is in the process
of dissolving. The District has been unable to provide a definitive answer on when the
District will end the arrangement with ACCA.
State of Arizona
page 2
District improperly included nondistrict
employees in state retirement plan
From 1987 through at least June 2008, the District improperly paid salaries and
employee-related benefits to the employees of three nonprofit corporations, and then
received reimbursements from those nonprofits. Two of the arrangements were
discontinued in 2008, but one was still in place in February 2009. Calculations in this
report include amounts through June 2008, the most recent complete fiscal year that
these arrangements were in place.
Benefits that the nonprofits’ employees received as a result of these arrangements
included participation in the Arizona State Retirement System (ASRS), which
provides retirement benefits for employees of the State of Arizona and
its political subdivisions (counties, community college districts,
incorporated cities and towns, school districts, and certain other
governmental entities). Nongovernment employees are not eligible for
membership, although the ASRS may approve certain nonprofit
corporations, such as councils of governments, to participate if their
primary purpose is to perform a governmental service. As of February
2009, the ASRS had never been approached for, nor had it granted approval for, any
of the three nonprofits in question to participate in its benefits plan.
The District submitted the necessary employment documents and retirement system
application forms to enroll 22 nonprofit employees in the ASRS. The District failed to
seek permission from ASRS officials or gain formal advice from its legal counsel on
the propriety of adding these workers to the ASRS. To fund an employee’s retirement
benefit and long-term disability plan, both the employer and employee are required
to pay the ASRS a percentage of the employee’s salary, set at 9.45 percent each for
fiscal year 2009. Since 1987, the District paid more than $200,000 to the ASRS for the
employer’s portion of retirement contributions for these ineligible nongovernment
employees and accepted reimbursement from the nonprofits for these costs.
Office of the Auditor General
page 3
FINDING 1
The District improperly allowed 22
nondistrict employees to enroll in the
state retirement program.
Although the District has asserted that these nonprofit employees are district
employees, many factors demonstrate that the workers are not district employees,
but are instead employed by their respective nonprofit corporations. Moreover, by
improperly including ineligible participants in the ASRS, the District may have put
these individuals’ retirement options at risk.
Nonprofit employees were not district employees
according to district policy
The District has implemented the Specially Funded Program Policy to describe
policies and benefits that apply to district employees whose positions are funded
from external sources. For example, the District could pursue a grant from a federal
government agency and use the grant monies to pay the salary of the district
employee performing the research funded by the grant. Another example of external
funding is when the District enters into an agreement to provide technical training for
a local manufacturing company; district employees provide the training, and the
company pays the District a negotiated fee. The district employees providing the
services in these examples would be considered externally, specially funded
employees. The District states that it treats specially funded employees much like all
other district employees, that district employment policies apply to these workers,
and that it developed the Specially Funded Program Policy to regulate these
externally funded positions.
The District claims that Arizona Business and Education Coalition (ABEC), Arizona
Community College Association (ACCA), and East Valley Partnership (EVP)
employees are district employees who are a part of the District’s Specially Funded
Program. Although the District labels the nonprofit employees as specially funded
district employees, the District routinely circumvented or ignored the Specially
Funded Program Policy when processing the nonprofit employees. The District
provided records for 21 of the 22 nonprofit employees who participated in the ASRS
through the District, stating that the other employee had been either temporary or
part-time and thus did not have a file. These files, other documents, and interview
statements demonstrate numerous ways the District did not follow the Specially
Funded Program Policy.
Positions not established in accordance with policy—According to the
District’s Specially Funded Program Policy, employee positions can be established
through proposals that are funded through a grant, contracts, or restricted donations.
However, the District was unable to provide contracts negotiated between the District
and any of the three nonprofits, or any other documentation that outlined the terms
of any grants or donations from these nonprofits.
State of Arizona
page 4
Employees not hired in accordance with policy—The Specially Funded
Program Policy provides that the District will determine the need for specially funded
positions and then follow certain procedures to hire the employees to fill them.
However, the nonprofit employees were generally hired by their respective nonprofits
and later added to the District’s system. For example:
• The District could not provide job application forms for seven of the nonprofit
employees. Additionally, for nine other nonprofit employees, the District
provided job application forms that were dated after the District had already
processed the nonprofit employee as a district new hire.
• The District’s Specially Funded Program Policy requires the
District to advertise specially funded positions for a minimum of 5
working days. The District could not provide a valid district job
posting for any of the 21 nonprofit employees. In fact, the District
confirmed that it did not post job announcements for 18 of the 21
positions and stated that documentation was no longer available
for the other 3.
• One file contained a job posting advertised by the nonprofit. This job posting
states, “This position is with the Arizona Community College Association, a
voluntary dues-paying non-profit organization,” and, “This position reports to the
Executive Director of ACCA.”
• Three EVP employee files contained letters from the EVP Chairman to the
District, requesting that the existing EVP employee be added to the District’s
payroll system. Each letter states that the reason for the EVP’s request is so the
individual can have a “competitive benefit package.”
• One ABEC employee file contains an e-mail in which a district administrator
indicates that ABEC has hired an executive director who will “be part of our [the
District’s] payroll and benefits.”
• District employees purported to be the supervisors of the nonprofit employees
stated that the nonprofits hired the employees, and the District’s role was limited
to processing the administrative paperwork generated by the nonprofits’
actions.
• 15 of the 21 files contained employment agreements negotiated between the
nonprofit employees and their respective nonprofit corporations; the District did
not sign these agreements.
Employment not terminated in accordance with policy—The Specially
Funded Program Policy states that the District and the employee have the right to
terminate employment. The policy does not provide that employment may be
Office of the Auditor General
page 5
The District’s role was limited to
processing administrative paperwork
generated by the nonprofits’ decisions.
terminated by an external entity. Seven employees submitted their resignations to the
nonprofits, not the District. Additionally, a nonprofit notified one employee that she
was being terminated because the nonprofit’s Board of Directors had eliminated her
position. Furthermore, several of the district employees purported to be the
supervisors of the nonprofit employees stated that the nonprofits terminate their
employees and indicated that the District did not have the ability to terminate
nonprofit employees. Although one district official described her involvement in the
discipline and termination of one of the nonprofit employees, the District did not
provide any documentation of these events; in fact, the employee’s file contained his
resignation letter to the nonprofit.
Although 14 of the 41 employment agreements between the nonprofits and their
employees contain language providing that the employee, the nonprofit, or the
District may terminate employment, other sections of those same agreements have
contradictory language suggesting that the District does not have the ability to
terminate the nonprofit employee. This contradictory language, the district
employees’ statements, and the way the nonprofits actually handled terminations
demonstrate that the District did not, in practice, have the ability to terminate the
nonprofit employees.
Benefits not administered in accordance with policy—The Specially
Funded Program Policy defines the benefits that specially funded employees may
receive. Although the District claimed that the nonprofit employees were required to
follow district policy, at least 13 employees received benefits greater than those
allowed by the policy in effect at the time. For example:
• At least 8 nonprofit employees were granted 20 or 25 vacation days annually,
although the policy allowed a maximum of 12 days.
• At least 7 nonprofit employees were allowed to carry their unused vacation time
into the next year, although the policy stated unused time could not be carried
over.
• At least 3 nonprofit employees were approved to receive payouts of unused
vacation time upon termination, although the policy required that unused
vacation time be forfeited upon termination.
• At least 1 nonprofit employee was allowed to accrue personal days, although
the policy did not allow personal days to accrue.
One of these employees was a former ACCA Executive Director who directed the
District to continue to issue paychecks to her for nearly 3 months after her last day
worked so that she would receive pay for about 39 accrued vacation days, 4 accrued
personal days, and two holidays that had not yet occurred. The former Executive
Director’s letter to the District stated in part:
State of Arizona
page 6
“This letter is to inform you that I have submitted my resignation
as Executive Director of the Arizona Community College
Association . . . As a reminder, I was never an employee of the
Maricopa Community College District, which allowed me to
negotiate an exit strategy (as noted above) directly with the chair
of ACCA.”
Each of the three nonprofit corporations is governed by a board of directors. Many
district officials interviewed stated that, as part of their district job duties, they
currently or had formerly held a position on one of these boards. These district
officials indicated it was their duty to represent the District’s interests while serving as
a member of the nonprofit board. Some of these district officials believe that the
District fulfills employer responsibilities because they are also members of the
nonprofit boards. However, the documents in the nonprofit employees’ files indicate
that the nonprofits, not the District, control the major facets of the nonprofit
employees’ employment, and district officials only generate the administrative
paperwork necessary to implement the nonprofits’ decisions.
Nonprofit employees were not district employees
according to ASRS and IRS guidelines
In addition to not being compliant with the District’s Specially Funded Program Policy,
the nonprofit employees were not district employees according to ASRS or Internal
Revenue Service guidelines.
ASRS officials state that to participate in the state retirement system, a person must
work at least 20 hours per week for 20 weeks in a fiscal year, and must truly be an
employee of an approved, participating employer. When there is a question about
whether a person is truly an employee, the ASRS examines each case on its own
facts and looks at evidence other than merely whether the entity qualifies a person
as an eligible employee. ASRS officials also consider factors such as whether the
employer sets the hours of work, provides the location and tools for performing the
work, and has direct supervision over the employees.
The Internal Revenue Service provides guidance on how to determine whether
someone is an employee. An employer/employee relationship is defined by the
degrees of behavioral and financial control that the employer exerts. Supervision is a
key aspect of the employer/employee relationship. For example, according to IRS
guidelines, an employer would instruct an employee when, where, and how to work,
and would control the business aspects of the employee’s job, such as how much
pay the employee will receive. ASRS rules have similar definitions of an employment
relationship, stating that the employer has the right to control and direct an employee,
and that the right to terminate employment “strongly implies” the right to control.
Office of the Auditor General
page 7
“As a reminder, I was never an
employee of the Maricopa Community
College District . . . ” - Former
Executive Director of ACCA
The District’s own policy defines “supervision” as follows: “‘Supervise’ means to
make day-to-day decisions regarding the employment of a person employed by the
Maricopa County Community College District, such as work assignments, change in
responsibilities, work schedule, and other decisions in direction of such person.”
However, district supervisors did not make day-to-day decisions regarding the
nonprofit employees. The following statements were made to auditors by purported
district supervisors of the nonprofit employees:
• ACCA:
º The ACCA Board (not the District) is the body that hires, contracts with,
directs, and terminates the ACCA Executive Director, who in turn performs
these functions for the other ACCA employees.
º The ACCA Executive Director does not answer to the District’s Chancellor
or the District’s Governing Board.
• EVP:
º The EVP Board (not the District) decided on and implemented actions
related to its employees such as hiring, directing, approving time-off
requests, evaluating, setting pay rates, and terminating.
º The District’s role was to perform any administrative tasks necessitated by
those actions.
• ABEC:
º One former supervisor stated that ABEC used its own processes to hire the
ABEC Executive Director, who in turn hired the other ABEC employees. This
supervisor stated she delegated supervision of the other ABEC employees
to the Executive Director and met with the Executive Director regularly to
advise her on various issues; however, ABEC handled the Executive
Director’s performance reviews. Another former supervisor stated that the
ABEC Board directed the ABEC Executive Director on how to perform her
job, while the district supervisor would advise her on any administrative
issues such as forms that ABEC employees needed to fill out.
º A different former supervisor stated that ABEC employees were hired,
directed, managed, and terminated by the ABEC Board (not the District),
and that no supervisory duties were performed for the ABEC employees.
This supervisor described the District’s role as that of a fiscal agent for
ABEC, limited to managing the paperwork needed to get the ABEC
employees through the District’s payroll system. This former supervisor
explained that because ABEC is a prestigious coalition of business and
State of Arizona
page 8
education groups, it is very important that ABEC be an independent,
autonomous entity and not represented as a small department under the
direction of the District. It would have been inappropriate for the District to
create an appearance that it was directing the actions of ABEC or ABEC’s
Executive Director.
In addition to statements that district employees made, documents on file with the
District also illustrate the nature of the employment relationship between the nonprofit
employees and the nonprofit corporations.
Employment agreements—The District provided 41 annual employment
agreements for the three nonprofits’ current and former employees. The agreements
typically state that the employee will report to and be evaluated by the nonprofit, not
the District. The District does not define the expected work result, much less how,
when, or where it is to be achieved. Furthermore, the nonprofits dictate the wages,
benefits, and pay increases the workers will receive, with the nonprofit informing the
District after these decisions have been made. For example:
• All 41 agreements provided that the employee’s job duties would be determined
solely by the nonprofit.
• Thirty-seven of the 41 agreements state that the employment agreement may be
terminated by the employee or by the nonprofit. Thirty-one of these refer to the
agreement between the employee and the nonprofit as an “employment
relationship.”
• Thirty-three of the 41 agreements indicated that the employee’s annual salary
would be determined solely by the nonprofit. The remaining 8 agreements did
not address who would review and adjust the annual
salary.
Other communications—In addition to the employment
agreements, other communications illustrate the nature of the
relationship between the nonprofit corporations and the
nonprofit employees:
• A letter from the Executive Director of ACCA to the District
states, “The attached minutes of the Arizona Community College Association
reflect the Board’s decision on staff salary changes. They also reflect the
decision to change the amount of vacation time allotted for the Executive
Director and the provision to carry over current unused vacation time into the
next fiscal year . . .”
• When a former Executive Director of ACCA applied for a position with the
District, she listed ACCA as her current employer and stated, “I want to work for
the Maricopa District,” as one reason for leaving her job with ACCA.
Office of the Auditor General
page 9
“MCCD has graciously allowed two East Valley
Partnership employees [to be] employees of
MCCD for the purpose of providing them with
group insurance and retirement benefits.”
- Letter from East Valley Partnership to the District
• A letter from the EVP Board to the District states, “For the past year, this revenue-neutral
funding process has allowed our staff to accomplish the goals and
objectives of the East Valley Partnership while enjoying the benefits of being
employees of MCCD . . . We have continued to autonomously operate the affairs
of the East Valley Partnership as a separate and distinct entity, while at the same
time receive guidance and direction on policy and procedural matters . . .”
• A letter from the EVP Board to the District states, “For the past year MCCD has
graciously allowed two East Valley Partnership employees, [President and CEO]
and [Vice President], to be externally funded employees of MCCD for the
purpose of providing them with group insurance and retirement benefits. We
greatly appreciate MCCD helping us this way.” The letter further states that the
EVP Board of Directors had approved salary increases for the two employees
about 6 months previously, and states, “We have been paying the difference
between their old salaries and the new utilizing a third-party payroll service . . .”
As shown in Figure 1, auditors determined that the District does not recruit, hire,
direct, supervise, evaluate, or terminate the nonprofit
employees, and furthermore does not consistently
perform any typical employer actions except for issuing
paychecks and providing benefits. Therefore, the ACCA,
ABEC, and EVP employees were not district employees.
Contributors’ retirement unresolved
The District’s actions may put the employees’ retirement
benefits at risk since the ASRS may choose to remove the
employees from the system and refund the retirement
contributions made while they were inappropriately
enrolled. Thirteen of the nonprofit employees participated
in ASRS only through the District, for time periods ranging
from less than a year to over 11 years. Some of those 13
employees may now need to make other retirement
plans; for example, 1 employee has contributed over
$30,000 that could have been invested in a different
retirement plan. The other 9 employees have participated
in the ASRS through other eligible government entities
prior or subsequent to their employment with the
nonprofits and have legitimately earned years of service
toward their retirement through the ASRS. For these 9
employees, the time they worked for the nonprofits and had their paychecks
processed through the District was improperly added to their years of service. If the
ASRS allows the improperly added time to remain in the employees’ accounts, these
State of Arizona
page 10
District Nonprofits
Recruit and hire 1
Negotiate salary 1
Set work hours 1
Assign job duties 1
Provide work space 1
Provide equipment 1
Supervise work 1
Issue paychecks 1
Provide benefits 1
Evaluate performance 1
Award raises 1
Extend contract 1
Terminate employment 1
Typical Employer Actions Performed
by District and Nonprofit Corporations
Figure 1:
Source: Auditor General staff analysis of IRS Publication 15-A, “Employer’s Supplemental
Tax Guide,” for use in 2008, Arizona Administrative Code R2-8-104, effective
4/12/1984, and district files.
9 employees may be able to retire prematurely and receive a higher monthly benefit
than they would otherwise have been entitled to. Some of these 9 employees may
also need to make other retirement plans, as they could lose approximately 1 to 7
years of credited service earned under these arrangements. Furthermore, the
District’s arrangement allowed 1 employee to improperly receive several years of
long-term disability benefits and then retire in 2004 with more than 20 years of
service.
Office of the Auditor General
page 11
State of Arizona
page 12
District unlawfully loaned public monies to
nonprofit corporations
To allow the nonprofit employees to receive district benefits, including ASRS
participation, the District agreed to pay their salaries and benefits with
district monies and then receive reimbursement from the employees’
nonprofit corporations. This practice constituted a loan of district
monies, which is prohibited by the Arizona Constitution, Article IX, §7,
which states that a political subdivision shall not give or loan its credit
to any individual, association, or corporation. The District began
making these loans in 1987, but detailed records were only available
for the past 6 fiscal years, during which the loans totaled more than $3 million.
For all three nonprofits, the District’s loan arrangements generally functioned as
follows:
• The nonprofit informed the District how much the employees should be paid.
• The District processed the nonprofit employees’ paychecks biweekly, including
salary and other employment-related costs such as benefits and payroll taxes.
• The District submitted monthly invoices to the nonprofit for these payroll costs.
• The nonprofit paid the District, in full and generally within 1 month of the invoice
date. Figure 2 illustrates the accumulated loan amounts for fiscal years 2003
through 2008 (amounts for earlier years were unavailable). During those years,
the monthly invoices (loan) for each nonprofit ranged from about $6,000 to over
$44,000. From the payment of salary, payroll taxes, and ASRS contributions for
the first paycheck of the month, it generally took between 44 and 70 days for the
District to receive reimbursement from the nonprofits.
Office of the Auditor General
page 13
FINDING 2
The District unlawfully loaned more
than $3 million during a 6-year period.
As illustrated in Figure 2, these arrangements started as early as 1987 and continued
through at least June 2008. Even though the nonprofits reimbursed the District for all
payroll costs, including the employer portion of benefit costs, the District never
should have made the loans, according to the Arizona Constitution, Article IX, §7. The
Arizona Attorney General has issued opinions stating that to comply with the Arizona
Constitution, distributions of public monies that may be considered gifts must be for
a public purpose, and the value of the benefit received by the public must not be far
exceeded by the consideration paid by the public. No public purpose for these loan
arrangements was documented in district files. The District’s loans to the three
nonprofit corporations do not appear to meet this test because these loan
arrangements were designed primarily to benefit the nonprofit employees, not to
serve a public purpose. The District did not need to make loans to the nonprofits in
order to benefit from the nonprofits’ activities, and the nonprofits could have
processed their own payroll.
The arrangements described in Findings 1 and 2 where the District improperly
enrolled nonprofit employees in the ASRS and unlawfully loaned public monies to
private organizations have been found before at other public entities. For example, in
March 2006, the Auditor General found that Santa Cruz County improperly made
loans to a nonprofit corporation to cover that nonprofit’s payroll costs and
inappropriately allowed employees of the nonprofit to participate in the County’s
benefits program, including ASRS membership. Additionally, in September 2007, the
Auditor General reported that the Maricopa County Regional School District No. 509
misused public monies when it paid a nonprofit corporation’s employees’ salaries
and also provided employee benefits to these ineligible employees.
State of Arizona
page 14
Number of
Employees Involved
Nonprofit
Year
Incorporated
Years of
Improper
Loans Current
Current
and
Former
Accumulated
Loan
Amounts1
Arizona Community
College Association 1987 1987-2008 3 13 $1,175,487
Arizona Business and
Education Coalition 2002 2002-2008 3 8 983,553
East Valley Partnership 1987 2003-2008 4 5 1,063,161
Total 10 26 $3,222,201
Figure 2: Unlawful Loans to Nonprofit Corporations
Source: Auditor General staff analysis of district files and detailed accounting data.
1 Amounts represent accumulations for fiscal years 2003 through 2008. Documentation of amounts loaned before fiscal year 2003 was unavailable.
Although district management began questioning the propriety of the arrangements
in July 2007, some of the loan and benefit arrangements have continued up to the
date of this review. To help ensure the proper use of public monies and district
resources, the District should spend monies in accordance with district policies and
state law. Specifically, district officials should ensure that the following actions are
taken:
1. The District should immediately take steps to cease its improper and unlawful
loaning of public money by terminating the remaining reimbursement
arrangement with ACCA.
2. The District should contact the ASRS to determine what actions need to be
taken regarding the 22 nongovernmental employees that it allowed to
participate in the ASRS.
3. The District should ensure that it provides employee benefits, including ASRS
membership, only to qualified employees.
Office of the Auditor General
page 15
RECOMMENDATIONS
State of Arizona
Rather than responding directly to the facts stated in the report, the District’s
administration has taken the highly unusual tactic of employing outside legal counsel
to prepare its response. This response appears to have been written to divert
attention from the evidence by attacking and attempting to discredit the Office of the
Auditor General. This Office has nothing to be gained or lost in determining whether
the employees of the nonprofit organizations actually were district employees and
entitled to participate in the Arizona State Retirement System (ASRS). The Office of
the Auditor General is an independent agency of the State Legislature and made its
determinations after substantial and impartial examination of all relevant facts.
Further, despite the inflammatory rhetoric and numerous misstatements and
misrepresentations in the District’s response, the fact remains that although the
District sought to create an appearance that these persons were district employees,
it was the nonprofits that performed such actions as: recruiting and hiring these
persons, negotiating with them on their salaries, assigning their job duties, evaluating
their performance, and terminating employment. The District, despite being given
multiple opportunities, could not present physical evidence to support its many
claims about the District’s role in these arrangements. Further, as described in the
report, although the District is now emphatic that it legitimately hired these persons
as district employees, it has already terminated its arrangements with two of the three
nonprofits.
It is unfortunate that the District did not consult with the ASRS or the District’s legal
counsel when the issue of enrolling these persons in the ASRS first arose, and that
neither the District nor the nonprofits sought to determine whether the nonprofits
could qualify for membership in the ASRS on their own merits. Finally, as noted in our
report, the District’s actions have ultimately put the affected employees’ retirement
benefits at risk since the ASRS may now choose to remove them from the system
and refund their contributions.
Most of the points raised in the District’s response are already addressed in our
report. However, we have addressed some of the most egregious misstatements
directly within the District’s response.
Office of the Auditor General
AUDITOR GENERAL REPLY
TO DISTRICT RESPONSE
State of Arizona
Office of the Auditor General
DISTRICT RESPONSE
MARICOPA
COMMUNITY
COLLEGES
www.maricopa.edu
Rufus Glasper
Chancellor
2411 West 14th Street
Tempe, AZ
85281 6942
VIA U.S. MAIL
April 10, 2009
Debbie K. Davenport
Office of the Auditor General
2910 N. 44 th Street, Suite 410
Phoenix, AZ 85018
Re: Maricopa Community College District/Arizona State Retirement System
Dear Ms. Davenport:
This letter responds to the Auditor General's Final Report issued to the Maricopa
County Community College District (the "District") on March 10, 2009. Please see
attached document.
Respectfully,
Rufus Glasper, Ph.D., CPA
Chancellor
Telephone
480.731.8100
Fax
480.731.8120
Email
r.glasper@domail.
maricopa.edu
A Community of Colleges... Colleges for the Community
Chandler-Gilbert Estrella Mountain GateWay Glendale Mesa
Paradise Valley Phoenix College Rio Salado Scottsdale South Mountain Skill Centers
The Maricopa Counb' Community College District is EEO/AA institulion.
Maricopa County Community College District
Response to Report on Special Review
Page 1 of 10
Maricopa Community Colleges Response to ASRS Special Review: April 2009
Despite an opportunity to rectify the litany of errors in the Auditor General’s first draft report issued
on October 17, 2008,1 your office once again has engaged in result-oriented auditing by drawing
conclusions based on incomplete and erroneous information. By collecting evidence to support only
one side of the issue, the Auditor General has violated its fundamental duty to provide a fair and
balanced audit. Once again, the Auditor General has reached the wrong result.
Despite its expansive fifteen page attack on the District, the Auditor General initially directed the
District to limit any response to just three pages. This effort to gag open discussion on important
issues that affect many taxpayers is inappropriate and without basis. Further, your office has given
the District just days to respond despite taking more than ten months to conduct the two audits. Our
analysis of some of the numerous flaws in the March 10, 2009 Report is set forth below.
Summary of the District’s Position
The audit addressed a simple issue: did the District employ the individuals who served the nonprofit
organizations? The answer is clearly “yes.” Under these facts, any competent court would find that
the workers in question are employees of the District. Here, the District Governing Board hired these
employees and provided them retirement benefits consistent with the Board’s statutory powers. The
District recruited and interviewed the employees. All hiring procedures such as employment
paperwork was processed through the District. The District’s policies applied to the employees and
set forth their terms and conditions of work. Additionally, the District was engaged in setting
salaries, awarding raises, and extending contracts for these employees.
District administrators informed your office that they considered the workers in question to be
employees of the District. Moreover, the employees themselves looked to the District as their
employer. They received benefits and pay from the District. They relied on the District’s policies.
They had supervisors who were District employees. The obvious conclusion is that the workers in
question were employees of the District.
Yet, your Report again reaches the wrong result. Although the Auditor General is tasked with
“investigat[ing] both sides of competing claims rather than collecting only the evidence that supports
1 The Auditor General withdrew its October 17, 2008 Report. The Report was so fatally flawed that
the Auditor General was required to interview additional witnesses, review new evidence, and take
other affirmative actions. This Report suffers from similar fatal flaws.
AUDITOR GENERAL REPLY: The Auditor General did not withdraw the preliminary draft
report. The October 17 draft report was provided to the District as a courtesy so the District
could communicate any questions or concerns about the review’s findings prior to publication.
To ensure that the District’s many concerns were adequately addressed, auditors collected and
examined additional evidence, although not required to do so. This additional investigation
did not contradict or negate the findings of the preliminary draft. Rather, it provided
additional supporting evidence, which was added to the report in order to address the District’s
concerns.
Maricopa County Community College District
Response to Report on Special Review
Page 2 of 10
or refutes one side of an issue,”2 the Report subverts its duties to be impartial. Impartiality is crucial
because:
Drawing conclusions with incomplete or erroneous information not only weakens
credibility, but can actually harm the State, if the Legislature or an entity takes action
based on flawed conclusions and recommendations.3
Despite its own principles, the Report repeatedly advances only one side of the issue – the side
advocated by your office. The Report ignores crucial facts (e.g., the Board authorized the hirings),
overlooks relevant laws (e.g., the Board’s statutory authority to hire employees and provide benefits),
and omits crucial testimony (e.g., the witnesses all stated the individuals were employees of the
District). These omissions have the objectionable effect of misleading those readers who were
deprived of the true facts.
As set forth below, the conclusions in the Report are the result of “incomplete and erroneous”
information.
BACKGROUND4
The District serves more than 250,000 students annually and has more than 13,000 employees. Of
those 13,000 employees, approximately two hundred are “externally funded” from outside sources
such as private companies and local, state, and federal government.
The District is governed by the District Governing Board (the “Board”). Importantly, the Board has
broad statutory authority to hire employees “it deems necessary” and to implement policies. See
A.R.S. § 15-1444(A)(6) and 15-1444(B)(4). The Board also can provide retirement benefits to its
employees. See A.R.S. § 15-1444(B)(7).
Under this statutory authority, the Board implemented the Specially Funded Program Policy (the
“Policy”) regarding the employment of “externally funded” employees. Since the enactment of this
Policy in 1982, the District has hired hundreds of employees and properly provided them with
benefits. Other higher education institutions in Arizona engage in the same well-known practice.
Under the Policy, the Board publicly approved the employment of individuals who served three
nonprofit organizations: Arizona Community College Association (ACCA), Arizona Business and
Education Coalition (ABEC), and East Valley Partnership (EVP). Each of these organizations
provides services to the public. For instance, ACCA, which serves the community college districts,
responds to requests from the legislature for information regarding the community colleges. ABEC,
an organization advocating education, promotes teacher preparation. EVP supports economic,
governmental, and educational development.
2 See Auditor General Performance Manual.
3 Id.
4 A complete recitation of the facts is provided in the District’s response to the October 17, 2008
Report and are incorporated herein by this reference.
Maricopa County Community College District
Response to Report on Special Review
Page 3 of 10
The missions of the organizations were closely aligned with those of the District and the
organizations worked together closely. The District employed twenty-six individuals assigned to
these non-profit organizations; each of the organizations fully reimbursed the District for the
employees’ salaries and all benefit costs.
The District plainly employed the workers in question. The District hired the employees and
maintained employment files which contained applications, copies of identification cards, and
acknowledgments of loyalty to the District. The District’s employment policies, including benefits,
applied to the employees. The District also managed contract renewals, salary increases, and
absences – all consistent with its published, public policies.
Additionally, the District assigned supervisors who were District employees. Significantly, the
employees who served the nonprofit agreements have employment agreements which specify that the
District itself is the employer. The employment agreements state that the employees were hired “at-will”
and, as such, the employee, the non-profit organization, or the District may terminate the
employment relationship at any time.
ANALYSIS
A. Finding 1 Erroneously Concludes that the District Did Not Employ the
Individuals Who Served the Nonprofits.
1. The Auditors Overlook Controlling Laws Relating to the Employment
Relationships and, Thus, the Finding Is Incorrect.
In conducting an audit, the auditors were tasked with considering “key laws, regulations, and
provisions or contracts.” (Auditor General Performance Manual) The rationale for this is clear:
laws and contracts provide clarity to and govern relationships. As referenced above, the Board has
broad authority to hire “employees it deems necessary.” See A.R.S. § 15-1444(A)(6). The Board
also has broad authority to “adopt such policies as are deemed necessary” and can authorize benefits
for District employees. See A.R.S. § 15-1444(B)(4), (7).
The Report, however, utterly disregards controlling “laws, regulations, and provisions or contracts.”
These are crucial omissions because the laws and regulations determine the relationship between the
District and the employees. The Board, under its statutory authority, approved the hirings of each of
these employees in public meetings. The Report does not even mention that the Board approved the
hirings.
The failure to provide any weight to this key law defies standard principles of auditing and is
emblematic of the Auditor General’s bias.
The failure to reference the Board’s actions is curious. The Auditor General, which conducts
ongoing, annual audits of the District, never before questioned or raised concerns with these Board-approved
employees. For years, the auditors have reviewed the District’s files and have had access
to the Board’s meeting minutes. Each year, a team from the Auditor General’s office spends
countless hours at the District combing through the District’s files and records. The obvious
Maricopa County Community College District
Response to Report on Special Review
Page 4 of 10
conclusion is that the auditors always considered these individuals to be employees of the District.
The Auditor General does not explain why it is now blowing hot and cold on this issue.
Another law which the auditors conveniently overlook is the Arizona State Retirement System’s
definition of employee. ASRS’s administrative code explains that “individuals performing services
under contract in the exercise of a government function” are employees for the purpose of ASRS
benefits. See A.A.C. R-2-8-14. Here, the auditors have had access for many years to all of the
employees’ files and plainly know that they were “performing services under contract.” These
contracts specify that the individuals are employees of the District and will receive the District’s
benefits.
As for “exercise of a government function,” the Report ignores this issue too. In fact, the Report
shockingly concludes that the highly-regarded non-profits – despite exemplary records of service to
the community colleges, teacher preparation, and workforce development – served “no public
purpose.” (Report at 14) To reach this ridiculous conclusion, the auditors have rejected the testimony
of a number of well-respected District officials who testified as to the public purpose served by the
non-profits. Ignoring this testimony is yet a further example of the auditors’ desire to reach a
specific outcome without regard to the truth.
AUDITOR GENERAL REPLY: This is a mischaracterization of the report’s statement that
no public purpose of the loan arrangements was documented. The District has previously
acknowledged that any benefits it received from the nonprofits’ activities still would have been
received had the District not made the loans, and the report thus concludes that the loan
arrangements were designed primarily to benefit the nonprofit employees, not to serve a public
purpose. The nonprofit employees’ activities were defined by and performed on behalf of their
respective nonprofits, which are not governmental entities.
Another set of laws ignored by the auditors are the dual employer and loaned employee doctrines. It
is well-settled that an employee may have two employers when, for example, the employee works in
furtherance of both employers. See Graziano v. 110 Sand Co., 855 N.Y.S.2d 203, 205 (N.Y. App.
Div. 2008). Similarly, an organization may loan an employee to another organization. See 35 Am.
Jur. (Master and Servant) § 541. When that happens, the worker is an employee of both the
organization to which she is lent, as well as the organization who loaned the worker. The Report
fails to address these well-known doctrines because they contradict the auditors’ preordained
conclusions.
The Report asserts that the District never sought permission from ASRS to enroll these employees
for retirement benefits. (Report at 3) This assertion fails for several reasons. First, ASRS itself
directed the District to enroll all employees who were Board-approved. Specifically, in 2002, ASRS
audited the District and concluded that the District could qualify more employees for retirement
benefits. ASRS then directed the District to be more inclusive in enrolling employees in ASRS.
Without question, all of these employees were Board-approved and, thus, were properly enrolled in
ASRS. Second, the District accepted applications, processed eligibility paperwork, and maintained
these employees on the membership rolls for years. It would be plainly inconsistent for ASRS to
argue that the employees were not members when ASRS has been providing the employees with
membership benefits forms for years. It is incomprehensible that the auditors bypass these facts.
Maricopa County Community College District
Response to Report on Special Review
Page 5 of 10
2. The District Hired the Employees in Accordance with the Policy.
The Report makes the cavalier assertion that the employees were “not hired in accordance with the
[Specially Funded Program Policy].” (Report at 5) However, the Report only considers one side of
the issue – namely, the side that supports the prejudged result. For example, the auditors ignore that
the District only hired the nonprofit employees for one-year terms – as required by the Policy. The
auditors also ignore that the District initiated the paperwork for annual increases and extensions of
assignments. Moreover, the District also hired all individuals as “at-will” employees. The District’s
actions on these points are all fully consistent with the Policy.
The Report asserts that the District did not comply with the Policy because it could not provide job
applications for just seven of the twenty-six nonprofit employees. (Report at 5) Yet, the auditors
acknowledge that a significant number of the employees who served the nonprofits had completed
applications. Further, the auditors do not allow for the possibility that, over the course of many
years, applications may have been lost or misplaced. Similarly, the audit fails to account for possible
changes in practices over the twenty-seven years of the Policy (such that applications may not have
been required at all times). It is incorrect to broadly conclude that the District did not comply with
the Policy on employment applications when the auditors found so many in the employees’ files.
Nitpicking some minor omissions does not support the Auditor General’s sweeping generalizations.
An audit of any state agency would likely reflect similar findings.
The auditors also point to a single isolated instance where a job posting stated that a position reported
to the Director of ACCA (rather than the District). Although this may be true, the auditors
disregarded the testimony of a District Governing Board member who explained that she was a
member of the board that directly supervised the Director of ACCA. Plainly, the District was
involved in the supervision of ACCA and it is incorrect to conclude the District somehow
sidestepped the Policy. Thus, the auditors, after combing through hundreds of documents, take
language out of context to discredit the District’s position.
The auditors’ other flimsy conclusions are nonsensical. For instance, the Report claims that the
District was limited to merely processing paperwork. (Report at 5) To reach this dubious
conclusion, the auditors fail to mention that District supervisors met with the employees to set goals
and strategy. The District and the employees who served the nonprofits worked collaboratively to
pursue the District’s missions. District employees served on the boards of the nonprofits and
supervised the employees’ work. The District also recruited and interviewed the employees and was
actively engaged in extending employment contracts and awarding raises. These facts, like many
others, are omitted from the Report.
The Report also complains that a district administrator stated that an individual who served the
nonprofits would receive benefits through the District. (Report at 5) Again, the Report ignores the
Board’s clear statutory authority. The Specially Funded Program Policy, as enacted by the Board,
makes it perfectly appropriate for the District to provide benefits to its employees.
Finally, the Report asserts that the District did not sign some employment agreements for the
employees who served the nonprofits. (Report at 5) Yet, the Policy does not require this. Moreover,
the auditors ignored testimony that the agreements were reviewed and approved by the District’s
legal counsel. The agreements plainly indicated that the individuals, who are subject to the District’s
Maricopa County Community College District
Response to Report on Special Review
Page 6 of 10
policies, received the District’s benefits. The District also retained the right to terminate the
employees’ employment. The auditors have failed to consider all the evidence on the issue,
rendering the conclusions erroneous.
3. The District Had the Authority to Terminate Employment.
Next, the Report concludes that the District did not “have the ability to terminate the nonprofit
employees’ employment.” (Report at 5) This conclusion exemplifies the absurdity and one-sided
nature of the Report.
Here, the employees who served the nonprofit organizations were all hired under the Specially
Funded Program Policy which clearly states that “Maricopa Community Colleges may terminate
employment without cause upon two (2) weeks notice.” Furthermore, the employment agreements,
which cite to the Policy, also state that the District had the right to terminate the workers’
employment. The audit team’s conclusion on this point is plainly incorrect and reflects the absurd
lengths to which the auditors went to defy reality.
An alarming omission on this point is the auditors’ conscious decision to ignore several witnesses’
testimony that the District had the authority to terminate the employees’ employment. Two highly-respected
District administrators personally told auditors that they were involved in a termination of
an employee from ABEC. One of those administrators specifically supervised the termination. The
Report disregards this testimony.
But there is more. A long-time (but as of December 2008 former) District Governing Board member
told the auditors that she personally was aware that the Board terminated one employee’s
employment. Another District administrator told auditors that the District had the authority to
terminate employment. Thus, no less than four District witnesses corroborated that the District could
and did terminate employees’ employment. None of these witnesses have any reason to misstate the
facts. The auditors’ blatant disregard of this crucial evidence reflects a prejudged outcome.
In conclusion, the Report is plainly wrong regarding the District’s ability to terminate employment.
The inexcusable disregard of these policies and this testimony renders this finding erroneous.
4. The District Issued Benefits in Accordance with the Policy.
Next, the Report incorrectly concludes that the District did not administer benefits consistent with the
Policy. (Report at 6) However, the audit team reaches conclusions without addressing all of the
evidence on the issue. Importantly, the Report offers no evidence whatsoever that the workers in
question received different medical benefits, workers’ compensation, sick leave, bereavement leave,
holidays, or leaves of absence compared to other District employees. Plainly, the employees who
served the nonprofits were treated the same as other District employees with respect to nearly all
benefits.
Although there are many forms of benefits provided by the District, the Report focuses on the limited
issue of whether several workers in question received vacation benefits inconsistent with the Policy.
(Report at 6) Because the Report does not specify the years in which these alleged inconsistencies
occurred, it is difficult to ascertain whether employees received additional vacation time. An initial
Maricopa County Community College District
Response to Report on Special Review
Page 7 of 10
review suggests that the auditors have misinterpreted the Policy. In any event, even if the nonprofits
had occasionally allowed extra vacation time, it was perfectly appropriate for them to do so because
they were fully reimbursing the District for those vacation days and these were minor deviations
from the Policy.
As usual, the auditors strain to find any minor inconsistency among the hundreds or thousands of
actions taken under the Policy in order to condemn the entire process. The Report fails to consider
all the evidence on the issue, rendering the conclusion erroneous.
5. The Workers in Question Are Employees of the District.
Next, the Report concludes that the workers in question are not employees under the “ASRS and IRS
guidelines.” (Report at 7) As an initial matter, the Report only makes a passing reference to the
ASRS test and does not offer any analysis or explanation for why the individuals are not employees
under the ASRS test. This conclusory statement, while typical, is insufficient to support a finding
that the District did not employ the employees who served the nonprofit organizations. Moreover, as
presented above, the individuals are employees under the ASRS test. (See Page 4, above)
Similarly, the Report sets forth a limited analysis under the IRS test. (Report at 7-8) In cursory
fashion, the Report incorrectly asserts that the “District does not recruit, hire, direct, supervise,
evaluate, or terminate the nonprofit employees….” (Report at 10) Consistent with its practices, the
auditors present a one-sided review of the facts.
If the auditors addressed all the evidence, the Report would reflect that the District was actively
engaged in all aspects of the employment process. The Board hired the workers in question. The
District recruited, reviewed resumes, and processed hiring paperwork. A number of District
employees served on search committees. The Report overlooks all of these facts.
The Report also erroneously concludes that the District was not involved in the negotiation of
salaries or awarding raises. District employees did evaluate whether funding existed for positions
and worked with the nonprofit boards to extend contracts. Because District employees were on the
boards of the nonprofits, they were aware of funding availability and reviewed raises and decided
whether to implement them. It is incorrect to conclude that the District had no involvement in
salaries, raises, and extensions of contract, when the evidence strongly suggests otherwise.
Notably, the Report ignores numerous other indicia of an employment relationship. For example, the
Report fails to address that the employees received District handbooks. They used District electronic
mail addresses. Employees had official District employee identification badges to enter the
buildings. The Report addresses none of these indicia of employment, all of which were known to
the auditors.
Rather than fairly consider this evidence, the Report blithely concludes that the workers in question
were not employees because the District did not supervise them. The Report argues that
“supervision” means authority over “day-to-day decisions.” (Report at 8) Yet, the auditors ignore the
nature of externally funded employees who do not work directly at the District and, thus, are not
subject to “day-to-day” supervision. Externally funded workers are individuals who work at external
businesses and agencies. Day-to-day supervision is not required in the Policy nor would it be
Maricopa County Community College District
Response to Report on Special Review
Page 8 of 10
feasible given the nature of these employees’ work. Thus, the Report’s lack of sophistication on this
point is fatal.
AUDITOR GENERAL REPLY: This new definition of “externally funded workers” does not
match the District’s specially funded program policy, which defines “externally funded
workers” as “those that are funded through a grant, contracts, or restricted donations.” This
new definition is offered in this district response without any documentation or explanation.
Plainly, the auditors’ narrow interpretation of supervision seeks to reach their prejudged results. In
this matter, the District served on the boards of the nonprofits and directed the employees’ work
through those boards. Further, District employees testified that they met with the employees
regarding goals of the organizations and how to meet those goals. The District was intimately
involved in monitoring and approving the employees’ absences, vacation, and sick leave. Yet, the
Report ignores or discounts all of this evidence.
On a final note, the Report argues that the District could not “quantify” the benefits of the nonprofit
employees. (Page 1) This is wrong. The missions of the nonprofits and the District were closely
aligned. The District provided direction to the nonprofits so that the District’s missions were met.
Further, the nonprofits provided service to the District such as work for the Legislature and
workforce development and teacher education.
In sum, the Report presents a one-sided, biased analysis of the IRS factors and wholly ignores the
ASRS test. Because the Auditor General has disregarded scores of evidence, this conclusion is
incomplete and erroneous.
B. Finding 2 Is Incorrect: The District Did Not Improperly Loan Public Monies Because
the Money Served a Public Purpose and the District and State Received Consideration.
Finding 2 in the Report incorrectly concludes that the District made loans of public monies to the
nonprofit organizations.
As with numerous other laws, the Report again ignores applicable legal standards. In Arizona, a loan
or gift is not improper if it has an appropriate public purpose and consideration is received. See
Wistuber v. Paradise Valley Unified Sch. Dist., 141 Ariz. 346, 350, 687 P.2d 354, 358 (App. 1984).
The auditors contend that the loans were only for the benefit of the employees who served the
nonprofit organizations. (Report at 14) This ignores the testimony of credible witnesses including a
former Board member and several District administrators who explained that the nonprofit
organizations provided significant benefits to Maricopa County and the District through workforce
development, services to the community college districts, and teacher education. The non-profits
clearly pursue public purposes which are closely intertwined with the mission of the District.
Moreover, the District received proper consideration as required by the law. Again, witnesses
testified as to the benefit of the services provided by the employees who served the nonprofits.
Curiously, the Report acknowledges that the District was fully reimbursed by the nonprofits, but
discounts this fact. (Report at 13) In other words, the State of Arizona bore absolutely no cost and,
thus, the taxpayers paid nothing for this public benefit. The Report ignores the legal significance of
all of these points. This finding is erroneous and must be reversed.
Maricopa County Community College District
Response to Report on Special Review
Page 9 of 10
C. References to Other Audits and Delay Are Misplaced.
The Report reiterates the false allegation in the October 17, 2008 report that the District delayed in
taking action. These issues have been refuted previously. Moreover, this claim is entirely without
basis, especially considering that the Auditor General’s own audit took ten months.
One baffling charge is that the District has not dissolved its relationship with ACCA, and has not
provided “a definitive answer on when the District will end the arrangement with ACCA.” (Report
at 2). Yet, the Report, in its one-sided nature, fails to account for the fact that ACCA continues to
provide services for the District and other community college districts in the State of Arizona. The
District cannot simply shut off this relationship because of the void that would be created.
Nevertheless, ACCA is in the process of winding down, as the Auditor General well knows. The
District advised the auditors of this point and continuously apprised them of the wind down, yet it
has been ignored. Further, the District previously terminated its relationships with ABEC and EVP.
Like the draft reports, the Report again refers to the findings of the March 2006 Auditor General
report regarding Santa Cruz County and, for the first time, refers to the Maricopa County Regional
School District No. 509 audit. (Report at 2, 14) These references improperly presume that the
District had an obligation to review these audits or knew of and ignored the audits. It is indisputable
that the Auditor General did not alert the District of these audits or ever suggest that there was any
problem and yet now relies on the audits to imply wrongdoing. This is patently unfair.
Again, the Report neglects to mention that the District took action on its own regarding the nonprofit
organizations. The Santa Cruz audit amounted to four cryptic paragraphs on several issues and
offered no value in terms of guidance. Yet, the District – on its own – began to investigate, met with
officials of the nonprofits, and initiated action to wind down the relationships with the nonprofits.
Although the Board and District were within their legal authority to employ the employees, the
District nonetheless began an orderly wind up of the relationships without any prodding by the
Auditor General.
D. Use of Self-Serving Quotations Are Inappropriate.
The Auditor General’s Performance Manual states that, “[i]t is expected that auditors use
professional judgment.” The Auditor General “serves as an independent source of impartial
information.” Consistent with these principles, it is expected that audits demonstrate professionalism
and courtesy to the entities and subjects of the audit. Yet, the Report is riddled with self-serving
quotations taken out of context to support the Report’s result-oriented conclusions. (Report at 9-10)
For example, the Report quotes from a letter from one nonprofit that thanks the District for providing
employees with insurance and retirement benefits. (Report at 9). Yet, the quote downplays language
that shows the same nonprofit considered the individuals to be employees of the District. Without
question, these quotations present an inaccurate and one-sided view of the issues. For those who are
unaware of the facts, these cherry-picked quotes from letters and e-mails – with no context – are
misleading and unfair. The quotations mischaracterize the employment relationships and the
District’s open and honest efforts to engage individuals who were serving a public purpose consistent
with the District’s mission.
Maricopa County Community College District
Response to Report on Special Review
Page 10 of 10
Like the flawed draft reports, the auditors are again implying that individuals intentionally bypassed
rules and regulations for personal gain. However, the auditors themselves have belatedly
acknowledged that no laws were broken and no intentional wrongdoing occurred. The record plainly
reflects that the Board had the authority to hire the individuals at issue.
AUDITOR GENERAL REPLY: While auditors have acknowledged from the beginning of
this review that there is no evidence of criminal law violations, auditors have not addressed the
issue of intentional wrongdoing.
E. Conclusion
Like the draft reports, the Final Report presents incomplete and erroneous information on every
issue, rendering the conclusions fatally flawed. As a result of the continuous one-sided, prejudged
results, the issues that are the subject of the Report must be examined by independent, outside
auditors without an agenda. The auditors cannot casually disregard applicable laws and relevant
evidence. If the Auditor General submits the conclusions in the Report, there is a substantial risk that
the Legislature or ASRS could act on flawed conclusions and recommendations and jeopardize the
retirements of many innocent Arizonans.
AUDITOR GENERAL REPLY: During a special review, the Auditor General’s function is
not merely to compile a list of data, but to analyze and interpret data and make sound
determinations about the facts, and to present those results in a synopsized format that is
useful to interested parties. As such, the public report does not detail all of the evidence
examined by auditors. Rather, the public report’s purpose is to summarize the most significant
findings determined by auditors at the conclusion of their review. The Auditor General’s
quality control process ensures that the reported findings, conclusions, and recommendations
are unbiased, adequately supported, and logical.
Plainly, the conclusions in the Report must be re-examined. Until the Auditor General presents an
impartial analysis of the laws, evidence, and testimony, the findings of the Auditor General are not
agreed to by the District. Nevertheless, as the auditors are well aware, the District is in the process of
winding down its relationship with ACCA, as it has previously done with ABEC and EVP. Further,
the District intends to continue to work in good faith with ASRS to address the issues relating to
those employees enrolled in the Arizona State Retirement System.