MOORLACH UPDATE — HR Performance Audit — May 19, 2011

The Board of Supervisors created the Performance Audit Department about three years ago.  The County has external audits performed annually by independent, outside CPA firms.  It also has internal audits performed by the County’s Internal Audit Department.  Accounting audits are one thing, but management audits are another.  Financial audits review internal controls, such as segregation of duties, in order to obtain a good financial reporting of the County’s activities and to detect, hopefully, fraud.  A management audit reviews what the department is doing and how it could perform those functions more efficiently and effectively.

Our Performance Audit Department has prepared very unbiased and factual reports since its inception.  The performance audit reports on the Planning  Department, the jails’ use of overtime, and IT have been tough reads, but provide road maps for constructive improvement.  I would dare anyone to find another municipality that self-evaluates in such a rigorous manner.  Sometimes the truth hurts, but it should also make you stronger.  For a stimulating read go to the Performance Audit Department’s latest report at http://www.ocgov.com/ocgov/Info%20OC/Departments%20&%20Agencies/Office%20of%20the%20Performance%20Audit%20Director.

The first article is the lead in today’s OC Register.  The second was from last week in the Voice of OC.  The Voice of OC piece is an excellent lead in for today’s LOOK BACKS.

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Auditor: County HR department ignored state rules

By KIMBERLY EDDS

Orange County’s Human Resources Department has routinely approved unjustified raises and promotions, sidestepping county and state rules to benefit its own employees and those of the county’s chief executive office, according to a scathing new report by the county’s performance auditor.

Auditors said mismanagement by the county’s Human Resources has made the county more expensive to run and less productive. Auditors said $149.3 million can be saved by changing the way Human Resources does business. Correcting those problems could be the answer to solving many, if not all, of the county’s financial woes.

Human Resources employees admitted to auditors that they made little effort to review the required explanations for raises and promotion requests submitted by the county CEO’s office or by others in Human Resources.

"They are our bosses and it would not be advantageous for us to deny their requests," an employee told auditors. "Somewhere in time, we stopped caring as much about classification/compensation."

CEO Tom Mauk, many of whose employees benefited from the irregularities, has responded with a memo criticizing Performance Auditor Steve Danley and his office. A request by The Register for the memo under the state public records act was denied by Mauk’s office, which said the memo was about confidential personnel and legal issues. Danley also declined a request for the memo.

County Supervisor John Moorlach said the broken system would be fixed.

"We’ve done the detection, now comes the correction," Moorlach said. "We’ll look at all suggestions and move forward."

He added: "I’m proud this (auditing) group is willing to tell the truth."

The auditor found:

• Human resources officials repeatedly violated county policy by permanently promoting employees into temporarily classified positions. The most egregious violator was the Public Administrator/Public Guardian, which permanently promoted employees into temporary roles 13 times in three years.

• A sampling of Human Resource’s automated filing system found at least 75 cases where the rules were broken while promoting employees. Twenty of those cases benefited CEO employees whose promotions were approved despite insufficient or absent justification. Another 16 were approved for Human Resources employees without the required justification. In one case a Human Resources employee was allowed to review and recommend his own pay raise.

• A performance incentive program to reward outstanding non-management employee performance has become nothing more than a handout, with 95 percent of county employees earning the reward of 40 extra hours of leave. That program costs the county the equivalent of 189 full-time positions every year, the report said. Eliminating it would save the county $9.3 million in productivity losses.

• Of the county’s 977 managers, 804 received performance evaluations last year which entitled them to raises. Just four of the county’s managers received ratings of "needs improvement."

• The county paid $7.1 million to employees who speak another language, but there is little effort to ensure employees are using the skill. The county also paid a total of $203,000 last year to 53 employees – mainly CEO and Human Resources employees – simply because they deal with confidential information

• Thirteen departments still paid more than 25 percent of their employees for unused leave despite a CEO directive to grant annual leave payouts only in "hardship" cases. The "hardship" payouts cost the county $2.7 million last year.

• Human Resources approved numerous reclassifications and pay increases to positions assigned to the new OC Community Resources without board approval, a violation of county policy. The CEO staff report to the Board of Supervisors never mentioned the potential reclassifications or changes in pay, leaving county supervisors in the dark.

• All county employees are forced to participate in a county health plan even if they already have health insurance from another source, resulting in the county paying into medical plans which may never be used. Allowing employees to opt out of county health insurance could save as much as $3.8 million, the report found.

"While I agree with many of the recommendations, I disagree with the overall tone of the report which suggests that there are severe deficiencies which (Human Resources) has chosen to ignore," Human Resources Director Carl Crown wrote in the department’s 20-page response to the audit. Crown pointed out a series of accomplishments he said were ignored by auditors, including successful negotiations with several unions to defer or eliminate raises, saving more than $13 million and changing the way overtime is calculated, saving even more taxpayer dollars.

"Of particular concern is the implied questioning of the integrity of (Human Resources) staff," Crown wrote. "There seemed to be little attempt during the audit to gain a better understanding of the background for some of the personnel actions, authorities, context, or other factors weighing in these decisions."

Nick Berardino, head of the Orange County Employees Association, demanded that the improper pay raises and job reclassifications be recalled and brought before a neutral third party for re-evaluation.

"For several years we have been screaming at the top of our lungs, while rank and file workers were being furloughed and laid off, that managers and executives were lining their pockets and giving themselves raises," Berardino said. "It’s irresponsible and an affront to working families here in the county."

STATE WARNINGS IGNORED, HIDDEN

Over the last 10 years, the County of Orange’s Human Resources Department has been studied by the county’s grand jury seven times, three times by outside consultants, twice by the state, and twice by the county’s own internal auditor. Some improvements have been made in response to these studies, but numerous deficiencies remain, the auditors found.

State auditors warned the county in 2004 that it needed to correct the way it gives raises and promotions and how it classifies positions. State auditors returned again in September 2010, this time finding the situation even worse than before. Auditors warned that the county broke its own rules, but also failed to meet state requirements in several areas, including recruitment, hiring, equal employment opportunity and affirmative action. Those findings, nor the department’s response to the report, were never disclosed to the Board of Supervisors, according to the auditor.

In his response, Crown dismissed past audits and their findings as being "out-of-date and less relevant in today’s changing culture and environment."

But the auditors said that failing to rectify deficiencies could put the county at risk of losing future state and federal funding.

The audit criticized the HR department for failing as a leader and a role model, for repeatedly breaking its own rules and keeping the Board of Supervisors in the dark about problems and significant cost increases.

The department is "still underperforming in many areas, with significant negative impacts to the county as a whole," the auditors wrote

Human Resources isn’t even keeping tabs on its own operation. The department does not track basic performance measures, including turnover rates, cost per hire, time to hire a position, time lost, or the number of formal grievances and their outcomes. Also missing, the auditor found, is a system to track the frequency or cost of annual merit raises given to non-management employees, which make up 93 percent of the county’s workforce. Those pay increases cost the county $8 million last year, auditors reported.

"MANIPULATION OF THE SYSTEM"

Over time, a decentralized Human Resources system that failed to enforce even its own rules gave rise to a countywide culture that "creates a disincentive for agencies/departments to ‘play by the rules’ and encourages manipulation of the system," auditors found.

Most Human Resources staff report to county department heads and are often left to their own devices – with little repercussion for breaking the rules. Warnings by County Counsel of legal issues were repeatedly ignored by Human Resources or their legal advice was not even sought, potentially putting the county at risk for liability.

Some of the department’s problems are a result of being short-staffed, auditors said, but the department never asked for more people. Other problems are a result of the way Human Resources does its job.

Human Resources Director Crown also serves as the county’s lead negotiator when dealing with its two largest unions – the Orange County Employees Association and the Association of Orange County Deputy Sheriffs. That, auditors said, is a mistake.

"When negotiations are underway, staff is planning for, involved in, implementing, or interpreting the results from the bargaining table; there is little time for anything else," auditors wrote. "At the present time, the HR Director is unable to devote significant time to the primary aspects of the job which, as this audit demonstrates, is having a significant negative impact to the organization."

The auditors said the county is completely unprepared for labor negotiations in 2012 when 88 percent of its workforce will have their contracts expire. Those negotiations could include asking the unions to accept some of the auditor’s cost-saving recommendations, including:

–cutting pay 1 percent for all county employees, to save $14.4 million

–eliminating all employer pickups of required employee pension contributions except for the deputies’ union, to save $18.6 million

–requiring members of the deputies union to contribute 9 percent of their salaries to their pension instead of the current 5 percent, saving $6.6 million.

None of the auditors’ recommendations involve layoffs or furloughs.

"It cannot be overemphasized," auditors wrote of their 25 cost-savings recommendations, "that the current national interest in reducing the cost of government, alongside the County’s budget pressure, provides the most opportune time to consider the implementation of any one or more of these options."

The Board of Supervisors is scheduled to discuss the audit at its June 7 meeting.

Contact the writer: kedds@ocregister.com

Contact the writer: Staff writer Tony Saavedra contributed to this report.

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County Executives Gave Themselves Raises Amidst Budget Cuts

Amidst the tightening budgets of recent years, a slew of county executives were able to give themselves hidden pay raises by exploiting a bureaucratic loophole known as a salary classification change.

That’s just one of the big bombshells dropping this week on the fifth floor of the Hall of Administration as the county’s performance auditors go into the final stages of privately briefing county supervisors on their long-anticipated report (six months in the making) about the county’s human resources department.

In addition to the classification compensation issues, the management audit, due to be formally unveiled by months’ end, looks at how officials are handling (and mishandling) numerous areas of the department such as recruitment, training and employee benefits.

Human Resources has had longstanding issues and been the focus of numerous grand jury reports in recent years.

For example, an August 2005 grand jury report – "Another Crisis: Pensions, Health Care and other Benefits" – was severely critical of HR officials and how they mishandled performance incentives as well as pension deals. (http://www.ocgrandjury.org/reports.asp )

As the department that incubated several pension enhancement deals like the 3 percent at age 50 benefit for deputy sheriffs and the 2.7 percent at age 55 benefit for general employees, Human Resources was in many respects the backdrop the 2006 election cycle.

The basic allegation in GOP-inspired campaigns was that HR officials were too cozy with unions and not open enough with elected officials about the impacts of policies being adopted.

County Supervisor John Moorlach largely based his 2006 campaign on the behind-the-scenes dealings between HR officials and labor groups.

HR woes at the county government were even highlighted when county supervisors hired current CEO Tom Mauk back in 2004. Mauk happens to be up for a performance review on today’s closed session supplemental agenda.

Mauk – who sent out a scathing email criticizing the work of Performance Auditor Steve Danley on the HR audit – could not be reached for comment Monday evening.

Danley declined comment.

Correction: A previous version of this story stated that Orange County CEO Tom Mauk did not return calls seeking comment. He did return calls, but could not be reached Monday evening.

— NORBERTO SANTANA, JR.

FIVE-YEAR LOOK BACKS

2006

May 17

In Frank Mickadeit’s OC Register column, titled “You’ll see your paper ballot but you can’t touch,” he concluded with the subheading “Rumor & Observation.”

Treasurer John Moorlach, running for supervisor, is showing off a letter from the county employees unions to their membership calling him “the greatest threat to our personal financial security of any politician in Orange County history.”  Come on.  At best, he’s only the second-greatest.  Remember Bob Citron?

May 21

The lead editorial by Steven Greenhut for the Sunday OC Register Commentary section was titled “Moorlach vs. the dragons – On pension liability, especially, he speaks truth to union power, and thus has become a target.”  It included wonderful artwork by Jocelyne Leger, showing me on a horse with a shield and a lance.  Here it is in total.

Most of us who are interested in politics can remember a time or two when, being so disgusted by a particular candidate running for office, we threw our hands into the air and declared something to this effect, "I would vote for anyone instead of so-and-so, even for Mickey Mouse or the homeless guy sleeping on the park bench."

Once in a while Anyone actually wins the race, but usually it is by accident. I’m thinking of Steve Rocco, an unknown elected in 2004 as a trustee for the Orange Unified School District, despite his dark cap, dark glasses and dark conspiracy theories about the people who had him arrested for stealing a sausage at Albertson’s.

Usually, Anyone doesn’t have much of a chance in an election where anyone pays attention. But usually might not count in this election cycle when it comes to Orange County’s Second Supervisorial district, encompassing coastal areas and nearby cities in the north part of the county. That’s because this time Anyone has a massive war chest, courtesy of a special interest group itching to display its power.

The current supervisor is Jim Silva. He is termed out and running for the Assembly, trying to replace Tom Harman, who – isn’t term-limits-induced musical chairs fun? – has won the GOP primary for a Senate seat vacated by John Campbell, who was elected congressman after Chris Cox was named SEC chairman.

The leading candidate for this non-partisan primary is county Treasurer John Moorlach, who in 1994 predicted the coming Orange County bankruptcy. No one listened, chalking up his predictions to election-year hyperbole, given that Moorlach was running for the spot against then-Treasurer Robert Citron.

According to Register reports, Citron "borrowed short, invested long and left behind incalculable economic ruin." Moorlach figured it all out while there was still time to do something about it, and sent a letter to the Board of Supervisors providing the nuts-and-bolts information about the dangerous Ponzi scheme Citron was involved in with public funds. Chairman of the board Tom Riley dismissed the letter. The entire establishment rallied behind Citron, earning Moorlach the reputation of a Cassandra – a wise prophet who was mostly ignored.

Well, Moorlach was right. Orange County experienced the largest municipal bankruptcy in U.S. history. Moorlach was appointed, and then elected as the county’s new treasurer and tax collector, where he has been one of the most level-headed, fiscally responsible voices one will find anywhere.

He’s not Anyone, but is definitely Someone. And Moorlach wants to win a seat on the board of supervisors, where he can offer needed adult supervision at a time when another financial crisis is pending – one that could top the severity of the 1994 bankruptcy. Unfortunately, he is facing opposition from the groups that have helped cause the coming crisis, namely the public employee unions that are mad as hell at Moorlach for spoiling their tax-raiding party.

For a couple of years now, Moorlach has been predicting trouble with regard to public-employee pensions and health-care benefits. This issue is occurring almost everywhere. For instance, a New York Sun editorial this week looks at the "$800 billion question" facing municipalities and corporations nationally. "That’s the total unfunded liability of defined-benefit pension plans in the public and private sectors," the newspaper wrote. "In other words, millions of American workers are counting on receiving $800 billion in pension benefits that no one knows how to pay for."

Continue along this line and we will face massive tax increases and cuts in other services.

Throw in the unfunded health-care liability and the numbers get extremely dismal. Moorlach understands this, and warned that the supervisors in 2004 should not make matters worse by spiking pensions by 62 percent retroactively for county employees. Three board members ignored Moorlach. A year later, unfunded liabilities spiked in Orange County, and now the public is stuck with another problem. Moorlach puts the unfunded liability levels for the county at a total of $3.4 billion (the retirement and health-care liabilities for all county employees above the amount of assets earmarked to cover them). The grand jury in June 2005 released a report called "Another County Crisis" confirming what he had been saying.

Moorlach‘s a smart guy, but it’s not that he is some prophetic genius. What he does is simple: look at the numbers and tell it like it is. Politicians don’t like to do that because they are too busy courting votes from interest groups. Members of public safety unions in this county can retire in their early 50s after 33 1/3 years of work with 100 percent of their pay forever. Other county employees can retire at age 55 with 81 percent of their final pay. This is incredibly generous, especially given that most private-sector workers get far-less generous pensions. All Moorlach is saying is that elected officials cannot continue to offer benefits beyond the ability of taxpayers to pay for them. The unions are gearing up for what they call a "reopener" – a new contract deal that will, of course, further increase their salaries and benefits. It’s an endless cycle, and it would be nice to have another sensible voice on the board.

The unions are desperate to stop Moorlach. So they found Anyone, in the form of an unknown councilman from the city of Stanton. A softball coach and school teacher by profession, David Shawver is what some might call a lottery candidate. Becoming a supe would be the gig of a lifetime for him, so he is betting that a big-bucks union campaign will be the equivalent of winning the Powerball.

It’s not like Shawver’s past actions would be reassuring to taxpayers. In Stanton, Councilman Anyone has pushed forward an Orwellian home-inspection program that requires home sellers to pay the government a $150 fee and allow inspectors to poke all around their property – including the interior – looking for unpermitted additions and code violations. Shawver was censured by fellow council members in 1992. "He interrupts, he calls people names, he pouts, he fakes being asleep," said a former mayor, in a Register article. Yes, he’s the perfect candidate for union officials who are adept at bullying boards for more tax dollars.

A May 12 letter to Orange County Employees Association members from the union’s leaders asks permission "to use $10 of your already collected dues money to defeat John Moorlach. … If that’s not okay with you, just mail or drop off a note at OCEA headquarters by Friday, May 19, with your name, your department or agency, and the phrase, ‘Don’t use any of my dues to defeat John Moorlach.’" Gee, how many members will risk the abuse of proactively refusing to earmark their money to the Anyone for Supervisor campaign? If all union members allow their dues used this way, that’s $180,000 raised by the stroke of a pen. Now we see why politicians are so reluctant to speak truth to union power.

One hit piece sent by the sheriffs deputies union to deputies calls Moorlach "an anti-union radical who will destroy your pension." That’s not even remotely true, given that negotiated pensions are binding contracts. Moorlach could actually save the pensions by assuring they are properly funded.

The union also is waging a campaign against Chriss Street, the treasurer candidate and Moorlach ally who also helped predict the bankruptcy. The treasurer sits on the pension board, which decides the assumptions upon which pension benefits are based. For instance, the current board recently voted to increase the long-term annual earnings assumption to 7 3/4 percent from 7 1/2 percent. Bump up earnings predictions and you hide the level of pension debt. That shows why they want an ally as treasurer.

Most important, though, the unions want an ally as supervisor. Then they can keep getting more of what they want despite the financial disaster that is now starting to stress municipalities nationwide. They would like to elect Anyone who will do their bidding. Fortunately, taxpayers have a Someone who might be able to stop them.

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