Friday, Sept. 12, 2008 | In the wake of the hidden bonus scandal at the Southeastern Economic Development Corp., one major question remained unanswered: How the agency paid out more than $1 million in bonuses and extra compensation during the last five years while remaining within its overall budget.
The answer: The agency was continually understaffed, leaving constant vacancies that were budgeted for, but not filled, sometimes for months or years on end, according to internal SEDC documents.
The documents show that by not paying budgeted salaries, and by leaving key positions vacant, SEDC effectively made available a pool of money in its budget that could be tapped to pay staff members tens of thousands of dollars in bonuses each year while the agency still hit its budget.
An audit released Wednesday identified the salary savings from vacant positions as the source of the bonuses.
“Remaining budget funds and salary savings from terminated employees and unfilled positions allowed SEDC to provide supplemental income increases,” the audit states.
By failing to staff key positions, the audit states, SEDC also left itself vulnerable to changes in management because the agency had created a culture where every key decision was made by one person — SEDC President Carolyn Y. Smith.
The budgeted, but unpaid, salaries therefore had a three-pronged effect: making money available to pay Smith and other employees hundreds of thousands of dollars in bonuses; weakening the managerial structure at the agency; and cementing Smith’s autocratic rule over SEDC.
Documents obtained by voiceofsandiego.org through the California Public Records Act show, for example, that during most of fiscal year 2006-07, the agency employed just nine or 10 full-time employees, while it had budgeted to employ 14. For most of fiscal year 2006-2007, SEDC had 12 full-time staffers and one part-time clerk. It had budgeted for 14 full-time and employees and one part-time employee.
The $243,000 the agency saved by not paying those salaries in fiscal year 2006-07 helped SEDC meet its budget even while it paid out an unbudgeted, $312,885 in bonuses and extra compensation to its employees that was not approved by SEDC’s board or the City Council, the records show. In fiscal year 2007-08, the agency saved $140,148 in unpaid salaries and paid out $315,047 in bonuses and extra compensation.
The remainder of the extra compensation payments came from two accounts vaguely titled in SEDC’s budget as “Misc. Salary & Wages” and “Allow. For Overtime/Bonus/Merit.”
Smith has consistently said that the bonuses were approved by SEDC’s board and the City Council because the budget contained those two lines. But, for several years, the agency has far exceeded the amount it had forecast in its budget for non-salary compensation and has paid most of the bonuses and extra compensation out of the money it saved by not hiring employees it had budgeted for, the documents suggest.
While the agency has consistently spent less on personnel than its annual budget allows, any savings should have been spent on the expansion of programs at the agency or the hiring of additional personnel, said Linda Lampkin, research director at the Economic Research Institute, a company that surveys nonprofit salaries.
“Most nonprofits would say ‘If we’re under budget, let’s expand a program or hire extra staff to enable us to provide better service and to do a better job,’” Lampkin said.
SEDC is a city of San Diego redevelopment authority, however it is structured outside of the typical bureaucracy as a nonprofit.
But, between fiscal year 2003-04 and fiscal year 2006-07, as SEDC’s bonus payments tripled in size, SEDC let staff go and did not fill the vacancies left behind. For most of fiscal year 2003-04, SEDC had 13 full-time staff members. In fiscal year 2006-07, the agency spent most of the year with nine full-time staffers.
In an interview about the hidden bonus programs in June, Smith and SEDC attorney Royce Jones defended the extra compensation paid out to staff by pointing out that the agency always stays within its budget for personnel costs.
The agency is free to move money around within its budget, Smith and Jones argued. If there is money free from unpaid salaries, they said, there’s nothing wrong with shifting that money to pay other line items in the budget.
“[The City Council] is looking at the bottom line,” Smith said, gesturing at the agency’s personnel budget. “Within these categories — they may change.”
The auditors concluded that the obfuscation involved in the bonus program “rose to the level of fraud,” leading Mayor Jerry Sanders to ask District Attorney Bonnie Dumanis to investigate the agency for possible criminal acts.
By not filling positions within its organization, SEDC has operated for several years at less-than-full-strength.
The audit released Wednesday found that SEDC had serious organizational and personnel problems, that it lacked focus and vision and that it had poorly communicated its goals to other city departments.
Those findings led the auditors to recommend that the agency immediately hire at least two key employees to positions that had been vacant for years.
And the auditors concluded that power and authority within SEDC has been almost entirely vested in Smith, who unilaterally runs nearly all aspects of the agency, including coordinating projects; negotiating with developers; managing all communications with the public, the board and city officials; and hiring consultants.
If Smith leaves, the auditors concluded, the agency does not have a staff member who could take over all of her duties. SEDC hasn’t had a vice president of operations since March 2006.
Smith is due to leave office in early October. She was ousted by the SEDC board in July in the wake of the bonus scandal and is working out a 90-day notice period.
SEDC has also not had a manager of projects and development since May 2000, though that position has appeared in the agency’s budget since fiscal year 2003-04. (In the budget for fiscal years 2006-07 and 2007-08, a footnote says that the position was “budgeted but not funded.”) The audit states that Smith was planning on hiring someone to the position in 2009, by which time the position would have been budgeted for, but not filled, for six years.
Smith, who was terminated by SEDC’s board of directors in July, will leave office in early October. The new SEDC board is currently searching for her replacement.