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Audit: Education Dept. and Mid-Central Didn’t Monitor GEAR UP Grant Correctly

The statewide Single Audit Report for FY2015 spends eight of its 316 pages outlining the failure of the state Department of Education and its subcontractor, Mid-Central Educational Cooperative, to properly administer the federal GEAR UP grant.

Audit Finding No. 2015-003 supports the suspicion aroused by tangled corporate web revealed shortly after the spectacular murder-arson-suicide carried out last September 17 by Mid-Central’s apparently felonious business manager, Scott Westerhuis: Westerhuis moved GEAR UP responsibilities to a separate non-profit corporation, the American Indian Institute for Innovation to shield his graft from public audit. Auditor General Marty Guindon concludes that Mid-Central gave AIII a subaward, not a contract, that should have been but never was subjected to a Single Audit:

Section 400(d) of Circular A-133 describes the responsibilities of a pass-through entity with regard to the federal subawards made to subrecipients. These responsibilities include monitoring the activities of subrecipients to ensure compliance with federal laws and regulations. Federal law requires that subrecipients expending $500,000 or more in Federal awards during their fiscal year have an audit conducted in accordance with the requirements of the Single Audit Act and Circular A-133.

According to AIII’s Internal Revenue Service Form 990-PF (form 990) filed for 2012, 2013, and 2014, the AIII recognized revenue from direct and pass-through federal awards in excess of $500,000 in each of these three years. Thus, we believe AIII should have had a Single Audit for the years 2012, 2013 and 2014. However, we found no evidence that Single Audits of AIII for those periods were performed. Neither the DOE nor MEC had internal controls in place to ensure that MEC’s agreement with AIII was correctly identified as a subaward and that AIII had complied with the Single Audit Act [Single Audit Report FY 2015, issued 2016.03.21, p. 272].

The audit notes that Scott Westerhuis, Nicole Westerhuis, and Stacy Phelps all engaged in cross-employment between Mid-Central, AIII, and/or Westerhuis’s Oceti Sakowin Education Consortium that should have been reported but was not:

Since key employees of MEC were also in compensated officer positions of AIII, a significant subrecipient of GEAR UP pass-through funds, there were significant risks that needed to be addressed by specific subrecipient monitoring procedures at the DOE and MEC. Procedures implemented by the DOE did not address these risks and as a result, the DOE exposed itself to potential violation of federal regulations, and an increased risk of fraud, waste, and abuse of grant funds [Single Audit Report FY2015, p. 272].

Finding No. 2015-004 says that Mid-Central engaged in some shaky math in calculating matching funds for the federal GEAR UP grant. Most significantly, Mid-Central appears to have claimed more matching funds than budgeted for software from Learning Solutions for Schools of Rapid City and not spent enough on matching funds for teacher compensation. Hmm… more money going to private vendors than teachers… why does this sound familiar?

Finding No. 2015-005 says the state was not properly monitoring Mid-Central payroll charged to GEAR UP. Specifically, DOE reimbursed Mid-Central for unusual year-end lump-sum payments to Scott Westerhuis and Stacy Phelps totaling $88,973.03 in Federal Fiscal Year 2014. The Audit did prompt DOE to dig up documentation “to substantiate that the costs were allowable.”

On all three findings, the Audit recommends that the Department of Education get its poop in a group. DOE grovels, Yes, Master! We’re trying!

On all three findings, DOE shifts blame to the independent auditor, Schoenfish and Company:

The Department also reviewed the independent audit reports for signs of risk in the operations of MEC. Each year, the independent audit reports came back with no significant findings [Single Audit, pp. 273, 276, and 278].

On the matching funds, DOE says Mid-Central is still giving them the runaround:

The Department has made multiple requests to MEC for match documentation since the termination of the contract with MEC. The Department has not received timely and sufficient responses from MEC. As a result, the Department has engaged a specialist to help in acquiring adequate supporting documentation for match for the Gear Up grant. The Department will identify and catalog existing match documentation and conduct outreach to Gear Up sub recipients to document recoverable match  [Single Audit, p. 276].

The Department assures us no such monkey business will happen with GEAR UP in the Board of Regents’ hands, since the Department has “created a new position whose duties are to work on the Gear Up program to ensure that federal program requirements are being met and students continue to receive services.” Department staff are attending all sorts of training on grant management and will provide training and support to all of their grant partners.

The Department of Education directly handles $74.3 million in federal awards (see pp. 198–201). The state FY2017 budget runs $767 million through Secretary Schopp’s office. That’s an awful lot of money to trust to an office that let so much corruption go unchecked in Platte for so long.

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  1. Rorschach 2016-03-22 11:01

    Correct me if I’m wrong, but didn’t the DOE renew other contracts with MCEC after all of this went down?

    Why should anyone believe that:
    1) MCEC can handle any other grants correctly; and
    2) that the DOE is conducting adequate oversight over any other federal programs that it manages

    More audits need to be conducted before anybody else dies. It appears to me that DOE leadership is totally incompetent and needs to be replaced.

  2. caheidelberger Post author | 2016-03-22 11:08

    Ror, MCEC is still getting state money. However, didn’t DOE say MCEC gets to carry out its FY2016 contracts and then no more?

    Of course, if DOE was willing to cancel the GEAR UP contract before the end of the fiscal year, why wait on the others?

  3. 96Tears 2016-03-22 14:29

    Drip. Drip. Drip. Why does Melody Schopp still have a job?

  4. caheidelberger Post author | 2016-03-22 14:55

    Because the Governor is a drip? Drip drip drip?

  5. leslie 2016-03-22 15:02

    1. what didn’t they know and when didn’t they know it? They = Rounds

    2. how does EB5 lack of oversight correlate with Regents, SDDOE, NSU, GOED, and GOAC activities there and here?

  6. Mark Winegar 2016-03-22 18:08

    Yes Cory, it is a lot of money to trust to an office that let so much corruption go unchecked in Platte for so long. The fact it went unchecked clearly speaks of incompetence or worse.

  7. MOSES 2016-03-22 18:19


  8. M.K. 2016-03-22 19:58

    Everybody is shifting the blame. When corruption runs so deep.

  9. private richard 2016-03-22 20:12

    Schopp should resign or be fired for incompetence, and then investigated by the legislature ethics committee, if there is one. Gubner Dogood should explain how it went on for so long and why it wasn’t much of an issue until people died and the house burnt down. Come on state administrators. Serve the people and not your pocketbooks. Shout outs of shame to Guericke, Hubers, Phelps, and yes, Melmer too. By my reckoning you were all over-paid sycophants on the public education mammary, and your self-serving disgusts me when I think of all the hard-working and underpaid educators more deserving of a fatter paycheck than you. I sure enjoyed watching the perp-walk on keloland tonight. I hope there are more.

  10. grudznick 2016-03-22 20:23

    Young Ms. Schopp, a pretty lady who of course was in charge, might look at the soldiers down the line. Is she herself to be counting these accounts of the Mhecs and others or if she leaves are the doers who failed to do still out there doing? It seems you can’t just lop off the head of a dandylion and not expect it to grow back, you need to get the leaves and roots too.

  11. caheidelberger Post author | 2016-03-22 21:29

    Leslie keeps reminding us that Marion Michael Rounds put all these players in place. He put Melmer at the top of DOE. He put EB-5 at NSU in Bollen’s hands. He built a beef plant that couldn’t make deadlines or payroll.

    Daugaard took three years to cut Bollen off, and now he’s taking Bollen to court. Perhaps he’s on a six-yaer trajectory to axe this set of Rounds’s cronies in Education.

  12. caheidelberger Post author | 2016-03-22 21:38

    That ag map Doug links shows farm subsidies by county from 1995 to 2012, based on the famous Environmental Working Group data. Subsidies in 2012 reached $712 million, far more than the amount shown above, which makes me think the money listed in the Audit report isn’t subsidies (direct payments to farmers) but federal awards to the state to run various programs.

    Nonetheless, it is interesting to see that I live in the king county of farm subsidies in South Dakota, Brown, taking 30% more than second-place Spink and 85% more than third-place Beadle. Those gleaming golden rows of corn along U.S. 281 brought to you by Uncle Sam.

  13. Michael Wyland 2016-03-23 11:13

    The strangest comment comes from Tony Vanhuizen in the Argus article:
    Gear Up audit: State should have spotted conflicts
    Dana Ferguson, 10:27 p.m. CDT March 21, 2016

    “Tony Venhuizen, chief of staff to Gov. Dennis Daugaard, said he did not think the department was aware of the “web” of conflicts of interest that existed at Mid-Central.”

    At the risk of sounding flippant, if this doesn’t strike you as weird and aggravating, you haven’t been following the story.

  14. Spike 2016-03-23 18:48

    Roger Campbell was South Dakota director of Indian education at the same time his wife was a “faciltator” for Mid central n went to the national Gear-up conference in San Francisco.. I’m sure her trip to Frisco greatly advanced the higher education institutional opportunities for native students in SD. No conflict there….I mean after all, the Gov’s chief of staff is his son in law. Right?

  15. grudznick 2016-03-23 18:52

    Who are the people you fellows think are cronies in the Education Department besides this Ms. Schopp? Should the entire department of people get gutted and start over?

  16. Donald Pay 2016-03-23 21:37

    Update on Nuclear Waste Coming to South Dakota….

    Some as yet unnamed entity in South Dakota submitted a proposal to the DOE to host a test of deep borehole disposal or radioactive waste, according to an article in Science, the prestigious journal of the American Association for the Advancement of Science.

    Within an article describing the failure of Pierce County, ND, to agree to host such a test proposed by a number international and state entities, comes the first official confirmation that South Dakota was one of four states who had entities deeply involved in this process in the spring through fall of 2015, if not many months or years before that.

    The relevant passage attributes to an official with the North Dakota Energy and Environment Research Center the fact that “programs in Texas, South Dakota, and South Carolina had submitted bids” before North Dakota’s bid was accepted. No information is provided as to who submitted South Dakota’s bid. North Dakota’s bid had considerable participation from entrenched nuclear power insiders, but lacked a credible local power base. That is what ultimately sunk the project.

    With the Rugby, North Dakota, now out of contention, DOE is back on prowl, and South Dakota could be back within DOE’s crosshairs. The North Dakota bidders could, perhaps, join forces with the South Dakota bidders and bring the project down south. I doubt, however, that the good folks in South Dakota would look at the project any more favorably than their northern neighbors.

  17. grudznick 2016-03-23 22:06

    Mr. Pay, I know it haunts your dreams about this drilling and burying business, but let us be realistic. Nobody is going to drill giant holes around Oelrichs SD to inject bug juice or any other radioactive arsenic water.

  18. leslie 2016-03-23 23:21

    tony’s comment needs to be a campaign badge

  19. comet 2016-03-24 00:24

    The “web of conflicts” existing at MCEC were not known by the Department?
    With a State Secretary, a Department Finance Manager, a past State Secretary and a past Director of Indian Ed keeping watch, I would suspect someone might be minimally curious. Over the course of 3 years, laboring to remedy incompetence, Dan Guericke thought the problem was hard math?

    Stephanie Hubers, despite the hot breath of DOE’s technical assistance efforts, kept the big cat in the bag for a lump sum and $800 monthly. With Steph on the QT, the Westhuis’ all by themselves squandered millions and millions over years and years without detection. Limited documentation of effort and meager results but no really big red flags went up for anyone at the department level (neither past or present). I agree with Michael, “weird and aggravating”.

  20. mike from iowa 2016-03-24 06:47

    the DOE was suspicious of “misuse” of gear up funds since 2010,

    Might be all the cover the DOE needs to avoid being labeled totally incompetent. The corruption in South Dakota starts at the top and trickles down and seems to be as pervasive as wingnuts in gubmint.

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