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March 21, 2016 05:37 PM

Audit: State Had Inadequate Oversight Of GEAR UP Grant

The South Dakota Board of Education is in the hot seat tonight, after an audit uncovers how the department handled millions of dollars in grant money.

Under federal law, the state must submit a single audit every year and the 2014 report exposed the problems with how Mid Central was handing millions in GEAR UP funds. 

The Department of Education told us months ago that it terminated its contract with Mid Central to run the GEAR UP grant program because of the ongoing audit problems into 2015.  But we have never seen that report until now.

State education officials had months to compose its response to the state's Department of Legislative Audit. But on Monday, that report is public and takes a critical stand of the Department of Education's oversight of Mid Central and the American Indian Institute for Innovation, which received the GEAR UP grant money to actually run the program.

As our investigation exposed in September, Scott Westerhuis, who killed his family and himself after the grant was pulled, and Stacy Phelps, were running AIII, but were not reporting everything they were doing.  

AIII took $1 million in GEAR UP grant money, and the 2015 audit finds that it should have been audited according to Federal law every year since 2012, but it was not. 

Stacy Phelps, head of AIII and Dan Guericke, director of Mid Central, are facing felony charges, and are accused of changing AIII's contract with Mid Central in order to avoid a required federal audit of AIII. 

The audit finds that the Department of Education and Mid Central did not have the controls in place to make sure federal rules under the grant were being followed.  

The audit reports that Stacy Phelps was paid nearly $100,000 in 2014 in two separate payments, but that AIII's own tax forms showed zero compensation for phelps. There is also a discrepancy for Nicole Westerhuis' multiple salaries between what she was actually paid and on tax forms.

Mid Central didn't disclose those relationships or the transactions that took place in its audited financial statements. 

The 2015 report says the Department of Education didn't address the risks and exposed itself to potential violation of federal regulations and an increased risk of fraud, waste and abuse of grant funds.

The Department of Education defends itself, saying it implemented more review and monitoring of Mid Central in 2015. They also said those measures are the reason it ended its partnership with Mid Central.

State education officials said, while it did risk assessments of organizations that handle grant money for it, it will perform more in-depth risk analysis and review of key staff starting next year.  It will also start requiring grantees to submit a conflict of interest policy and disclose any related parties.

The audit also goes into all the problems with match.  States are required to match every dollar given in federal funds. Those can come in the form of salaries, office space, donations.

The audit says that Mid Central couldn't substantiate $165,000 in teacher salaries at GEAR UP partner schools as a qualified match, or how much work, if any those teachers did for GEAR UP.

The report finds that Mid Central carried match over from year to year for Microsoft-brand software totaling $2 million. That isn't allowed under federal grant rules and auditors say the price of that software was inflated and could not be substantiated. 

The report also says the Department of Education should not have paid Stacy Phelps and Scott Westerhuis before they received documentation of the work they did.

Unlike all other Mid Central Employees, Westerhuis and Phelps were paid in a lump sum at the end of the year for a total of $89,000.  And Mid Central didn't produce documentation of the work they did until the audit was underway. 

The Department of Education says transferring the GEAR UP grant administration to the Board of Regents will ensure that federal requirements will be met in the future.  

To view at the full report, visit the state Department of Legislative Audit's website(PDF).
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