The auditors were called in after the county District Attorney's Office began an investigation into alleged misappropriations of public funds related to work Mr. Hanretty performed earlier for the Woodside Elementary School District.
The Portola Valley district had already been wrestling with a projected deficit of about $800,000 when auditors announced in late April that their investigation was uncovering irregularities that would almost certainly result in an additional shortfall, also estimated at about $800,000. The shortfall and the total depletion of the district's reserve fund led to $2.1 million in spending cuts to balance the 2012-13 fiscal year budget.
During the June 20 session, board members and auditors were peppered with questions — some of them tinged with anger or frustration — from teachers, parents and other community members about how the mismanagement of funds and murky accounting could have gone on unobserved by the five-member board.
David Grisham of the Hemming Morse accounting firm gave example after example of Mr. Hanretty's non-standard recording-keeping and reporting practices, which at times included not presenting required information to the board.
He and other finance experts who helped to sort out the tangle of often unclear or inaccurate records Mr. Hanretty kept during his tenure, which began in 1999 when he was appointed the district's business manager, noted that a better system of oversight needs to be put in place — a task that has already begun.
Since the severity of the fiscal crisis came to light this spring, several board members have acknowledged that they had placed a high degree of trust in Mr. Hanretty, and lamented the fact that their trust had been misplaced. Board President Scott Parker said after the meeting last week that it has been hard "for all of us to absorb the impact of someone who has a low threshold of ethics," adding that Mr. Hanretty's alleged embezzlement constitutes "stealing from our kids."
Housing loan fund
An example of "non-standard" accounting practices and mismanagement of money revealed during the audit is the handling of a program begun by the late Bill Lane and his wife, Jean, to help district employees live nearby in spite of the exorbitant cost of housing.
The Lanes had created a fund of $200,000 to grant no-interest loans to help teachers and other employees pay for required deposits and moving costs to rent housing, or for up to $20,000 for a down payment on a home.
The money was to be paid back in a specified period through payroll deductions.
Rather than placing the money in a restricted fund, Mr. Hanretty merged it into the general fund, which made it possible to spend it on other uses and made it more difficult to keep track of.
The audit found that a number of payouts from the program were improperly made, including a $20,000 loan to Mr. Hanretty for an apparent refinancing of his home. Also, no payroll deductions were made for Mr. Hanretty's loan; since his resignation, he "has written personal checks to pay the balance of his loan," according to the audit report.
Questions remain about other payouts, some of which were not given out as repayable loans.
To put the fund back on track for the 2012-13 fiscal year, the district took $200,000 from the general fund to create an unrestricted account for the home loan program, further depleting available funds for unrestricted use.
When the program was created, the district was supposed to create a committee to review loan requests, which never happened, the report said.
Further muddying the district's financial picture, Mr. Hanretty overstated the receivables related to the home loan program, "which created the appearance that the district had more receivables than it actually did," the report said.
The allegedly embezzled money came from the district's solar energy project fund, which was bolstered by a $1.5 million federal grant. Auditors now say the grant has been jeopardized because money earmarked for the project was diverted to pay for technology and other expenses.
The audit found that six invoices charged to the district's solar project fund for work performed by Ron Perez Construction totaled the amount of money the company charged Mr. Hanretty for his home renovation project. The invoices had been doctored to reflect work on the solar project, district officials said.
But the report said there is no evidence that the firm, which stated when asked that it had done no work for the district, knew the money it was paid belonged to the district.
Superintendent Carol Piraino said the checks issued to the construction company didn't bear the district's name.
Pressed by the board and public about the circumstances that led to the financial morass the district now faces, Mr. Grisham of the auditing firm cited the merging of two positions — that of the superintendent and the chief business officer — into one in 2010, when Anne Campbell left the top position to become the county superintendent of schools.
Before that, Mr. Hanretty had been the assistant superintendent in charge of finances, technology and human resources, but with his promotion retained his role as keeper of the books. That essentially left the accounting with "no controls," Mr. Grisham said.
"The last control that you have (in a situation like that) is ethics," he said.
Claire Cunningham of the county counsel's office noted that the board, in its recent decision to separate the two positions again, has restored the "checks and balances that were there in the past."
"My recommendation moving forward is that you look for ways to increase your oversight," she said.
Board member Jocelyn Swisher pointed out that Mr. Hanretty withheld critical financial information at times, and noted that if fraud is occurring, mere oversight may not do the trick.
"You're right," Ms. Cunningham said. "There's no hundred percent guarantee. The best you can do is make it more difficult."
In addition to returning to separate superintendent and business officer positions, the district is creating an audit committee and is likely to appoint a budget committee to allow members of the public and school community to help provide oversight of the district's finances in the future.
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