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Misplaced Trust 

An audit finds the city's public guardian shorting the treasury and misusing funds

Wednesday, Dec 15 1999
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Most San Franciscans are all too familiar with the insinuations of corruption that regularly swirl around several high-profile city agencies. The Human Rights Commission, for instance, has lately received visits from federal agents investigating possible fraud in minority contracting. The Department of Public Works, Muni, and the Airport Commission are periodically highlighted for suspicious contracts and apparent sweetheart deals. Even the once-sacrosanct Fire Department has been raked over the coals recently for its remarkable overtime expenses.

But few have heard of the public guardian. Like the Bureau of Agriculture, Weights, and Measures, the Office of the Public Guardian/ Public Administrator is blessed with a low profile. In light of a recent audit report, however, the public may want to pay more attention to this innocuous agency and its bleak history of official impropriety.

Every county in California has a public guardian, charged with taking care of people who fall between society's cracks, like indigent or mentally disabled people without friends, family or, even, concerned enemies. In San Francisco, the combined Office of Public Guardian/Public Administrator administers the estates of people who die without wills or heirs. The guardian is also the court-appointed conservator for people -- rich or poor -- who, for a variety of reasons, cannot take care of their own personal and financial affairs.

Right now, San Francisco's guardian controls about $32 million in estates and trust accounts for 2,000 individuals. Out of sight, Guardian Ricardo Hernandez and his staff of 50 have apparently been breaking the law in their handling of the funds.

According to a report issued by San Francisco Controller Edward Harrington on June 28, 1999, Hernandez has broken state law by using public money to create a million-dollar nest egg that doesn't appear on the city's books.

For eight years, the controller says, Hernandez used the hidden fund to buy computers, software, furniture, and consulting services from Panoramic Software Corp., a company located across the bay in Larkspur. The city's internal auditors also found that Hernandez violated the city charter when he deliberately bypassed all of San Francisco's contracting laws and fraud-detection systems to steer a multimillion-dollar contract to Panoramic. And the report concluded that Panoramic habitually overcharged the public guardian for its services. Indeed, according to the controller, Panoramic cannot even prove it did the consulting work for which it billed the guardian, because nobody kept hourly records of the work, or monitored the contract.

The city controller recommended that Hernandez be disciplined for these actions, but left the nature of the punishment up to the discretion of the guardian's now-retired boss, Steve Nelson, director of administrative services. Nelson summoned Hernandez to his office last summer for a private discussion of the charges, but only Nelson and Hernandez know what -- if any -- discipline was meted out, and they're not saying. The controller also recommended that Hernandez recover tens of thousands of dollars that his office overpaid Panoramic, but he has not done so.

Hernandez, 56, was appointed public guardian/public administrator shortly after his immediate predecessor, James R. Scannell, was arrested in December 1988 on 11 felony charges of conflict of interest, perjury, and bribery. Scannell was accused of accepting $25,000 in kickbacks from a Sacramento heir-finding company. In 1990, according to the District Attorney's Office and newspaper accounts, Scannell pleaded guilty in Municipal Court to one count of conflict of interest, paid a $1,000 fine, and did four months in county jail.

Scandal struck the Office of the Public Guardian again, in 1993, when a top official abruptly resigned after being accused by city investigators of embezzling more than $100,000 from indigent and disabled Social Security recipients.

State law requires the Public Guardian's Office to manage the assets of its clients, and to safely invest the money. The guardian deposits millions in cash, welfare checks, and unclaimed estates into accounts at the Bank of America. The office pays its clients' bills, plans their long-term care, and searches for heirs to estates. The guardian also uses the client cash to earn interest that is supposed to be deposited in the city's General Fund.

Keeping track of thousands of trust account payments, fees, and earned interest requires the use of customized software. And this is where Hernandez ran afoul of the law, according to the audit report.

Since the highest interest can be earned by pooling individual investments, the state's probate code allows the Office of the Public Guardian to lump all its clients' money together so it can buy relatively risk-free investments, such as municipal bonds. State law also allows the office to keep the "excess interest" it earns on these investments, basically the difference between the interest the accounts might have earned individually and the greater return from pooled investments.

The excess interest is supposed to be deposited in the city's General Fund, but the audit found that Hernandez has been keeping some of the money, and using it in questionable ways.

During 1996 and 1997, the city's guardian earned $1.3 million in excess interest; but Hernandez only deposited $530,000 into the General Fund. According to the controller, this oversight violated state law. After Hernandez became guardian in 1989, he moved excess interest money into a special fund and used it to pay Panoramic Software's bills. Panoramic was paid almost $500,000 a year for providing computers and consulting services.

Controller Harrington says this practice went on for eight years, although his office's audit only looked closely at two years -- 1996 and 1997 -- after a whistle-blower filed a complaint about the practices. The controller found no evidence of fraud and theft, but he referred the whistle-blower's allegations of kickbacks to District Attorney Terence Hallinan, whose office will "neither confirm nor deny" the existence of the referral.

Panoramic has a long history with the Guardian's Office. After Scannell was arrested and arraigned, the computer company he used, Computer Decision Corp., changed its name to Panoramic Software Corp. In 1990, Hernandez took it upon himself to sign a new contract with the company, circumventing city purchasing rules by not telling the city attorney, the purchaser, or the controller that he was hiring the consulting firm. When Panoramic's contract ended in 1995, Hernandez did not put it out to bid. He signed yet another contract with Panoramic without following city procedures. According to the controller, these back-door contracts were executed in violation of the city charter. The fees paid to Panoramic never showed up on the city's books, because the guardian deducted Panoramic's payments directly from the secret nest egg.

Hernandez should be familiar with city contracting rules. Before his appointment as guardian by former Mayor Art Agnos, Hernandez spent 10 years as head of the city's Rent Board. Before that, Hernandez was an aide to former Mayor Dianne Feinstein. Yet, when confronted by the controller about bypassing city contracting laws, Hernandez told auditors that he believed Panoramic was the best company for the job. Hernandez did not explain why he had failed to deposit all of the excess interest income in the General Fund, as required by the California Probate Code.

Hernandez declined to be interviewed for this story. According to the audit report, though, Hernandez defended his actions on the basis of past practices, saying he was merely continuing policies used by his predecessor, Scannell. In a written audit response, Hernandez "took full responsibility for any laxity in not following the city's standard purchasing process." He promised to remit excess interest earnings to the General Fund in the future, although he disagreed with the controller's assertion that he was not following state law. He presented no counterargument to the controller's finding, however.

According to the controller's audit, Hernandez allowed Panoramic to charge $19,000 a month for accounting services, and for managing the guardian's banking and investment activities. Peter Kirkwood, co-owner of Panoramic with Arthur R. Von Waldburg, says that he typically sent one of his employees to the Guardian's Office every day. Yet, hourly records were not kept, because the contract did not require it, he says.

Panoramic could not give the controller any records detailing the services it supplied; nevertheless, the controller was able to determine that the guardian was double-charged $64,000 for "extraordinary consulting" that should have been covered under the company's monthly fee. Panoramic's Kirkwood says he and his partner "are pleased with the audit and have promised to cooperate with the restructuring" of their contract.

There were other overcharges, and what the controller termed "questionable practices." For instance, Panoramic charged $5,000 a month for a basic software license and "general maintenance," instead of the $3,000 allowed by the contract. The controller complained that Hernandez "could not show that the $456,000 [he] paid to Panoramic during 1996 and 1997 for training and consulting services was reasonable." And instead of buying office furniture and computer equipment through the city's bulk-purchase system, Hernandez gave Panoramic excess interest money to buy the items, outside the city's normal purchasing system.

According to the controller, Hernandez also engaged in the "highly questionable practice" of moving money around on his books to make it appear that he was meeting revenue goals, when he was not. The controller also found that the guardian's computer system, which guards $32 million in cash, has security weaknesses allowing unauthorized users to make changes to the financial programs.

The controller directly instructed Hernandez to withhold $64,000 in payments to Panoramic to compensate for past overcharges; and in his audit response, Hernandez promised to do so. But Hernandez's deputy, John D.R. Clark, says that Panoramic has suddenly come up with additional bills that offset the repayment required by the controller. It appears that the $64,000 is a wash.

The controller also discovered a number of other management problems, many related to mishandling client finances. While the employees of the guardian are generally meeting the basic needs of their clients, the controller determined that Hernandez is a "poor" manager of the financial affairs of his charges. Yet, Hernandez still has his $90,000-a-year job. And Panoramic Software Corp. is still in charge of his accounting and banking systems.

As a result of the audit, however, Hernandez is now depositing excess interest into the General Fund; and he is preparing to put the computer consulting contract out to bid in March 2000. Panoramic's Kirkwood says he is available to help the guardian write the request for proposals.

About The Author

Peter Byrne

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