GPS Fraud, Waste & Abuse Report #7: Illegal Payments and Tax Evasion

As every forensic accountant knows, reimbursements to employees for expenses incurred in performing their duties is ripe for fraud, waste and abuse, particularly in government entities. In GPS, it appears to have become an art form: recharacterizing expense reimbursements as a cover for paying illegal expenses from the public purse. Let’s explore some obvious GPS financial shenanigans like *consulting* that isn’t really consulting; overpaying consulting invoices to boost payments to privileged persons; forgiving a contractual obligation to pay *liquidated damages* for breaking an employment contract; paying an allowance (taxable income) and also *reimbursing* expenses incurred for the same purpose; and finally, *reimbursing* future expenses. However you look at it, GPS plays fast and loose in hocus-pocus transactions that create a financial windfall for selected employees. You won’t be surprised to see that GPS superintendent Christina Kishimoto’s name is linked to those transactions. 

It appears that GPS recharacterized a “consulting” payment because travel reimbursement was prohibited when Christina Kishimoto interviewed an out-of-state applicant for a vacant position. After Christina Kishimoto’s top choices for two leadership positions in GPS were rejected by the Governing Board on May 27, 2014, Mark Gabrylczyk’s name appeared on Vouchers 5040-5062, Sep-Oct 2014, for “Consulting Expenses” in the amount of $750.00. Superintendent Mark Gabrylczyk had been fired resigned in June 2015 from his position in Idaho; media reports showed he was looking for positions in districts around the country during the summer and fall months.

The subject of payment of travel expenses for candidates had been addressed by the Governing Board. During the superintendent search leading to Kishimoto being hired earlier in 2014, the firm conducting the search paid those expenses for all candidates who interviewed with the GPS Governing Board. Payments in amounts shown on the contract of the firm Ray and Associates appeared on GPS vouchers; travel expenses for candidates did not appear. The Arizona Attorney General public service orientation guidance is instructive: “State officials recruiting others to State service should know that the Legislature has forbidden expending any appropriations for transportation or other travel expenses, for moving expenses, or for bringing any person who is not an Arizona resident to interview for prospective employment unless such monies are appropriated for such specific purposes. A.R.S. § 35-196.01(A).” Appropriations require a vote of the governing board in a public meeting … BEFORE the funds are spent.

Kishimoto’s recharacterization of this payment to Mark Gabrylczyk as “consulting expenses” indicates a purposeful fraudulent scheme that most likely was concealed from the board. Apparently, Kishimoto charged expenses for hiring a consultant without revealing that she had interviewed an out of state applicant who certainly did not have a sterling work history (which a Google search would have revealed immediately in great detail). Of course, there was no way of assuring the Governing Board that the benefits to be realized from payment for a candidate’s transportation or other travel expenses substantially and demonstrably exceeded the costs GPS incurred (a consideration required because of the Gifts of Public Funds clause in the Arizona Constitution) when it was absolutely prohibited to pay those costs in the first place. Sounds like a repetition of how the GPS governing board did not approve GPS employee travel, doesn’t it?

In the case of former Interim Superintendent Jim Rice, the amount of the invoice and the amount of the check he was issued for *consulting services* he provided after his employment contract ended were vastly different. Kishimoto’s administrative assistant performed the only oversight noted in the public records GPS produced about this matter, including records where Rice invoiced $1,562.50 but was paid $5,687.50. GPS also produced a consolidated report of payments to vendors for 2013-2015; Rice had received $6,198.10. The difference between the check issued to Rice and the amount shown on the consolidated report is $510.60.

Oh, lookie here: Jim Rice also was “reimbursed” for $255.30 for traveling between his office and his home, an amount that should have been reported on an IRS Form 1099 for 2014 in addition to an IRS Form W-2 for Rice’s GPS employment. Reimbursement for that particular travel violates state and federal laws. And gee whillikers, if you double pay for that *travel,* the amount is exactly $510.60, just like the discrepancy that appeared on the consolidated vendor payment report! What a coincidence!!

The public records GPS produced in response to requests for payment information were incomplete, but nonetheless were filled with inconsistencies indicating fraud. In November 2016, the GPS Administrator newsletter acknowledged GPS had been misclassifying independent contractors. The belated attempt to clean up the mess doesn’t excuse the deliberate misuse of authority and public funds, let alone the fraudulent schemes to enrich select “consultants” and GPS employees.

When GPS instituted *hostage fees* in employment contracts, Christina Kishimoto was desperate to keep employees from jumping ship in the middle of the year. Later, we learned that although the contracts specified that the board could forgive the hostage fees upon individual consideration of departing employees, Christina Kishimoto and her minions took over that job and made their own decisions about who paid the hostage fee and who did not. Perhaps they were unaware that the IRS considers a debt that is forgiven as income to the recipient. Yep, propelled by arrogance and ignorance, Christina Kishimoto waded into yet another pit of quicksand in employment law. New board members, she’s trying to pull you in, too!

According to the IRS, if a debt is canceled, forgiven or discharged, you must include the canceled amount in your gross income, and pay taxes on that “income.” Do you think GPS filed required IRS Forms 1099-C when hostage fees were forgiven? Certainly, when Westie requested IRS forms as public records from GPS, no IRS Forms 1099-C were produced. Like so many of the boneheaded maneuvers GPS financial folks pulled in recent years, this stunt could backfire spectacularly on former GPS employees who did not report that additional income. GPS could be on the hook for back taxes as well for penalties and interest for screwing up so many basic payroll functions in the past several years. Let’s hope the IRS doesn’t go after those employees who were not aware they were receiving taxable income due to GPS duplicity.

In terms of Kishimoto’s total compensation, it appears that allowances (taxable income) and reimbursements of accountable plan expenses are duplicative. It’s pretty much impossible to determine which of Kishimoto’s fringe benefits over and above her base salary are paid as allowances as opposed to reimbursements; that’s by design, as are many of the GPS shenanigans. Some of the payments shown in vouchers appear to be reimbursements for expenses that are itemized in allowances described in Kishimoto’s contract. That could allow Kishimoto to collect the allowance as part of her salary and also collect reimbursements of expenses that should have been covered by the allowance.

One such allowance appears to be prohibited by Arizona statute, as discussed in an Attorney General Opinion. That allowance is described in Kishimoto’s employment contract as an annual “Civic Responsibility Expense” payment of $3,000.00, paragraph 2I. There should be no question that such payments violate the Gift Clause and Arizona law, but the allowance is in Kishimoto’s contract and GPS also pays expenses for civic activities, as shown by vouchers.

Kishimoto’s self-serving expenditures of public funds, as well as her reimbursements for expenditures that violate state law are prohibited. From Arizona’s Attorney General:

The Legislature has not authorized school districts to pay dues for district employees and board members to join private civic organizations… The only mention of membership dues in the statutes governing schools is the authorization for districts to pay dues “for membership in an association of school districts within this state.”  A.R.S. § 15-342(8).

Although not expressly authorized by statute, dues for organizations that directly concern education or aspects of managing a public school district may be justified to the extent they enhance the district’s ability to fulfill its statutory responsibilities.  However, the connection  between  membership dues for private civic organizations with a more general purpose (such as the Chamber of Commerce, Kiwanis, and Rotary Clubs you identified in your opinion request) and a district’s statutory responsibilities for educating children is too attenuated to conclude the Legislature impliedly authorized those expenditures. Thus, there is no express or implied statutory authority for school districts to pay for dues to private civic organizations.

It appears Kishimoto also submitted for reimbursement of future expenses. “This will be used for Dr. Kishimoto’s expenses per the superintendent’s contract” appears on vouchers from at least September 2015 through the present. It sure looks like someone is drawing down the amount specified as an allowance in Christina Kishimoto’s contract; what do you think the chances are that she collects the allowance AND files for reimbursements? Do you think there’s any chance Christina Kishimoto’s reported taxable income includes that allowance? You never know with the way GPS ping-pongs salaries and reimbursements between the Talent Office and the Business Office. What a deal!

The Fine Print: Westie’s Fraud, Waste & Abuse Reports chronicle deliberate misuse of authority and public funds, abuse of authority, gifts of public funds and intentional violations of Arizona statutes and administrative rules by Gilbert Public Schools top-level administrators at the behest of superintendent Christina Kishimoto. Word of warning to those who might consider the business-as-usual tricks employed by GPS admins in the past: it won’t help to lose files, forge signatures or *create documentation* after the fact. Everything in the FW&A Reports has already been reported to state and federal elected officials and enforcement agencies.

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