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Audit: Iowa schools group lost $1M on risky deals

By Ryan J. Foley
Associated Press / April 5, 2012
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IOWA CITY, Iowa—A troubled Iowa schools group lost more than $1 million in public funds on risky investments, wrongly claimed $500,000 in federal grant money and improperly allowed executives to keep computer equipment when they resigned, according to an audit report released Thursday.

The report by the office of State Auditor David Vaudt adds new details to the prior mismanagement of the Iowa Association of School Boards, a nonprofit operated with public money to provide services to school districts. Iowa lawmakers blasted the group's travel, spending and compensation for executives in a wide-ranging scandal two years ago, but an FBI investigation ended without criminal charges filed.

Tom Downs, who took over as the association's director last year, said the report marked the final of many investigations and would allow the association to move on from a scandalous past. He said the association had taken steps to address the findings and assured its 339 member districts that similar problems would not happen again.

"Black eyes haven't kept fighters from stepping back into the ring and moving forward," he said. "I think the indication is our voice is again being heard."

The group's board asked Vaudt in October 2009 to review its financial statements after a "significant and rapid decline of association resources." Thursday's report said auditors delayed their review while the association went through additional management turnover and turmoil in 2010, got reorganized and responded to a variety of other investigations first.

The audit faulted the association for using public funds to participate in "speculative investments and transactions" despite receiving a warning in 2004 from the Iowa Attorney General's Office that they may be illegal. A subsidiary of the association created to provide energy services to Iowa school districts lost more than $1 million in commodity derivatives in 2008, and a second subsidiary entered into a financial investment known as an interest rate swap agreement that had lost $258,000 as of 2010, the report said.

The association's former chief financial officer, Jon Muller, said auditors were mistaken. He said the derivatives were not investments, but tools that were "wildly successful" in helping school districts avoid drastic fluctuations in the cost of natural gas. The interest rate swap agreement was a way for the association to pay a fixed monthly mortgage on a new building, he said.

Auditors rejected those explanations. The new leaders of the association told auditors they had suspended such investments while lawyers review whether they are subject to a state law banning the use of public funds for market speculation.

"These investments and transactions not only put public funds at risk of loss, but also resulted in losses as previously noted," the report said.

The audit also showed the association was forced to pay back the U.S. Department of Education nearly $500,000 on a federal grant meant to help school districts improve student performance on assessment tests. Association officials mistakenly used the money for expenses that had already been paid for by a similar state grant, and repaid the money in 2010 after discovering the problem.

They told the federal government the departure of Muller the prior year led to confusion and a lack of financial expertise, but that they had adopted new policies to prevent similar problems.

The audit also faulted the association for allowing Muller, former CEO Ron Rice and executive Lawrence Sigel to keep thousands of computer equipment when they departed in 2009. Sigel was given two laptops, a printer and other accessories when he started a school finance consulting firm, which was to bill the association $100,000 annually for his services starting in 2009; Rice kept his laptop and printer and Muller kept his computer, the report said.

Auditors said they could not determine whether the computers had sensitive association information stored on them, but noted that state law says it is a serious misdemeanor to use public property for private gain. Group officials said they were aware of the law and would not allow similar arrangements in the future.

Sigel said Wednesday the computer equipment was part of his consulting contract with the association, which was approved by the board and ended after three months. Muller said the computers were technically owned by the association's for-profit subsidiary, and so the law should not apply.

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