Initial audit report finds ‘secret’ contract, unauthorized payments

By: Kristyne E. Demske | St. Clair Shores Sentinel | Published June 22, 2016

 ST. CLAIR SHORES — With news of an allegedly secret contract, potentially improper associations, an unapproved purchase and salary payments exceeding those contained in contracts, the Lake Shore Board of Education voted to waive attorney-client privilege and share the results of the executive summary of a forensic audit with the community June 13. 

At a special Board of Education meeting held in Lake Shore High School’s auditorium to accommodate the expected crowds, attorney Craig Lange read verbatim the executive summary of the forensic report conducted by Chris Peterson, of UHY Advisors. The company was hired by the board in April to take a look at expenditures from the district’s international fund, made up of tuition money paid by Chinese students who spend a year of high school in the district.

Among the findings of UHY were that there were disbursements of $3,500 during the 2014-15 school fiscal year and $3,700 from July 1, 2015-March 31, 2016, for utilities, taxes and other expenses at a home on Taylor Street near the Taylor International School, where the Chinese students reside in a dormitory during the school year. The property was purchased in the name of Yang Li, a language teacher in Lake Shore Public Schools, because, according to what administrators at the district told UHY, there were six more male students than female students in 2014-15. 

“No formal agreement exists to support these disbursements,” Lange read from the executive summary. 

Now, he said, the building houses chaperones for the Chinese students because there is no such imbalance in the genders this year. 

Lange said the audit also uncovered a master agreement contract between China Link LLC, the company facilitating the foreign exchange program with Lake Shore, and the school district, signed in March 2011. The contract’s existence appeared to be “secretive,” he said, and was signed by former Superintendent Chris Loria on behalf of the district.

Board of Education President Shannon Ketelhut said that the board signed its first contract with China Link April 25, a six-year agreement. That, she said, was the first contract with China Link authorized by the board. After the June 13 meeting, Ketelhut said she was “very surprised, shocked,” when the board discovered the existence of the 2011 contract.

In an interview June 14, Ketelhut explained that the board originally entered into a 20-year agreement with Beijing Haidian Foreign Language Shi Yan School around 2010, but it did not contain any financial information. 

“It was more of an agreement to do an exchange,” she said. “It didn’t have anything to do with the dormitories or anything like that.”

Unbeknownst to the Board of Education, she said, a contract was allegedly signed with China Link LLC, an American company that fosters the exchange of students, in March 2011 that contained financial information, including what the district will be paid for each Chinese student and what it will provide the students in return. 

“We did not know about that contract at its inception. We found that contract, and that’s sort of what started this,” Ketelhut said, referring to the forensic audit. She said the board became aware of the contract during a request for information some months ago. 

It is not so much the contents of the contract signed in 2011 that the board has a problem with, Ketelhut said, as it is that the board was not aware of its existence and does not even know how the China Link company is involved in the process, since the original agreement was made between the Board of Education and the actual school in Beijing.

“As a Board of Education, we are representatives of the community, of the taxpayers, and we are to be given the opportunity to decide the financial pieces of what should be for the district, and we were not given that opportunity,” she said. 

Calls to Loria were not returned by press time.

Nevertheless, Ketelhut said June 13 that she is still in favor of the program — she just wants it to be “honest and transparent and within the law.”

“I feel like this program is beneficial to our students and our district, and it doesn’t change the way I feel about the program.”

The executive summary of the audit also stated that UHY discovered that Li is directly affiliated with China Link, and that contract “does not appear to have been discussed by the board.” The executive summary states that the contract may violate district policy regarding vendor relations and even a state of Michigan statute regarding contracts of public servants with public entities. Li recently resigned from the district.

“It is our understanding that Yang Li resigned ... following the discovery of her link with China Link,” Lange read from the UHY summary. “The school board approved a new China Link contract subsequent to Yang Li’s resignation.”

 

Other findings

The executive summary from UHY also contained findings from an investigation into the shared services agreement with South Lake Public Schools, which was executed and approved by the Board of Education in October 2015 and dissolved in April 2016. 

The forensic audit, however, uncovered $75,000 of additional compensation paid to three employees in Lake Shore Public Schools after the approval of the contract.

“There are no provisions for additional compensation for employees of Lake Shore Public Schools in the shared services agreement,” Lange read from the summary. “The board was not aware and did not approve or authorize the payments.”

The payments, according to the audit summary, were allegedly approved and authorized by Loria. 

According to the summary read by Lange, Business Manager Frank Thomas received an additional $40,000, Assistant Superintendent for Administrative Services and Operations Donald Kling received an additional $10,000, and Dave Hambaum, director of transportation and operations, received an additional $25,000.

Although the employees’ contracts have a stipend provision with regard to additional pay for extra duties, Lange said that stipend is limited to 4 percent of additional compensation, and what was paid allegedly exceeds that limit.

 

Reaction

After the release of the findings, the Lake Shore Board of Education voted unanimously to move some money from the international fund to repay the district and its teachers.

Superintendent Joe DiPonio recommended that the board approve the immediate payback of all money used from the district’s Durant fund with money from the international fund. He said that in 2012, Durant funds were used to renovate Taylor Elementary, converting it to dormitories. 

The Durant fund is money that the district received from a special education class-action lawsuit against the state begun in 1980 and ultimately decided in 1997.

A plan had been put in place to repay Lake Shore’s Durant fund with $50,000 per year from money paid by the Chinese students in tuition. But now, DiPonio said, there is currently $1.7 million in the international fund, taking into account pledged tuition dollars for the 2016-17 school year. Actual available funds not counting that money amount to about $850,000, he told the board. 

“That leaves us with enough money to immediately pay this back,” he said June 13. “I feel that it is in our best interest to immediately repay those funds.”

The amount to be repaid, approved unanimously by the Board of Education, was about $523,414. 

In addition, DiPonio also recommended that the board restore 1 percent of teachers’ salaries automatically cut in January when it was found that the district had a decrease in enrollment of 60 students. The automatic cut is part of the teachers’ contract, but was not made “out of necessity.”

“We are in a financial position to restore that, as well as to maintain that for next year,” he said. 

The district has gained about 260 students over the past six years, he said, and the restoration of the 1 percent would cost about $120,000, again to be paid out of the international fund. The Board of Education unanimously approved this move as well.

Emily Tims, president of the Lake Shore Federation of Teachers and the art teacher at Rodgers Elementary, explained that teachers in the district experienced a step freeze in 2011, as well as a 5 percent pay cut. They were given a step increase in the 2014-15 school year, and now the 1 percent increase approved brings the teachers up to a net 3 percent cut. 

“It’s very disappointing that this was done without board approval,” she said of the findings of the audit report. “It’s a wonderful cultural experience. I think it’s a win-win. There’s no reason to have a secret contract.

“The teachers have been asking these questions for years.”

A former student of the district agreed.

“(There are) $75,000 of funds that don’t quite seem to be going in the right places,” said Joshua Denzler, a 2013 graduate of Lake Shore High School. “I saw the teachers in this room, people that practically raised me. I saw them lose their homes, I saw them go on food stamps ... because we didn’t have enough money to pay them. 

“There was a sense of complacency that drew us to this point. There have been concerns about this since I was in high school. I think my hope is that, as a district going forward, we will investigate things to the fullest extent. There was so many indicators that something was off, and we didn’t see them.”

DiPonio and members of the Board of Education, however, told the audience that they hope they can move forward with the district from this point. The final report from UHY will be available before July 1, DiPonio said, but he hopes that the healing process can begin now.

“At some point, Lake Shore has got to move on and move into another day,” DiPonio said. “We have to come together as Lake Shore always has and work together for another day, and I am confident and hopeful that day begins tomorrow.”