She Noticed $200 Million Missing, Then She Was Fired – Scott Morris, Bay City News Foundation (12/31/2020)

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Earlier this year, the governing board of one of California’s most powerful regulatory agencies unleashed troubling accusations against its top employee.

Commissioners with the California Public Utilities Commission, or CPUC, accused Executive Director Alice Stebbins of violating state personnel rules by hiring former colleagues without proper qualifications. They said the agency chief misled the public by asserting that as much as $200 million was missing from accounts intended to fund programs for the state’s blind, deaf and poor. At a hearing in August, Commission President Marybel Batjer said that Stebbins had discredited the CPUC.

“You took a series of actions over the course of several years that calls into question your integrity,” Batjer told Stebbins, who joined the agency in 2018. Those actions, she said, “cause us to have to consider whether you can continue to serve as the leader of this agency.”

The five commissioners voted unanimously to terminate Stebbins, who had worked as an auditor and budget analyst for different state agencies for more than 30 years.

But an investigation by the Bay City News Foundation and ProPublica has found that Stebbins was right about the missing money.

Just days before Stebbins was fired, CPUC officials told California’s Department of Finance that the agency was owed more than $200 million, according to a memo obtained by the news organizations. The finance agency launched an investigation into the uncollected funds.

The news organizations’ investigation also found flaws in the State Personnel Board report that Batjer used to terminate Stebbins. Three former CPUC employees said in interviews that the report contained falsehoods. The report alleged that the auditor who discovered the missing money was unqualified. But hiring materials obtained by the news organizations show that state officials had determined that the auditor was the most qualified candidate, awarding him an “excellent” rating in every category.

Batjer, a former casino executive, was appointed by Gov. Gavin Newsom to lead the commission in July 2019, the same month Stebbins briefed the commissioners on problems with the agency’s accounting practices. Early on, Batjer scrutinized Stebbins’ personnel decisions, according to previously unreported text messages obtained by the news organizations. Shortly after she was sworn in as president in August, Batjer texted a former colleague in Newsom’s cabinet.

Batjer told Julie Lee, who was serving as California’s acting secretary of Government Operations, or GovOps, that she was “very concerned”: She believed the auditor was not qualified for the job and was upset that Stebbins had given him a raise after putting him in charge of additional employees. Batjer had previously served as head of GovOps, which oversees the State Personnel Board.

“I find this outrageous!” Batjer wrote to her old colleague. “I’m terribly worried. Thanks much for any advice/help you can get before this gets much worse.”

“Let’s get together and figure this out!” Lee responded. “We will help you fix, don’t stress.”

The commissioners appear to have violated state transparency laws when they later exchanged text messages among themselves about whether to fire Stebbins. California law prohibits the majority of a public body from discussing matters under its jurisdiction outside of a regular meeting, particularly to build a consensus, legal experts said.

“I can’t imagine her remaining,” Batjer wrote a fellow commissioner in a private text message.

Stebbins filed a wrongful termination suit against the CPUC this month. In a series of interviews, the most extensive since her termination, she described an agency mired in disorganization and ineptitude. An experienced administrator, she was recruited by the previous president to clean up a dysfunctional agency. She found some of her employees did not know basic information about the utilities they were supposed to be regulating — in one case, lacking even current contact information for regulated water companies. Audits dating back to 2012 had found ineffective budget management and a need for improved fiscal monitoring.

“You’ve got just systemic issues,” Stebbins said in an interview. “The only way you can make those changes is to really tear it apart.”

Batjer did not respond to requests for an interview. The other commissioners did not return emails seeking comment. The CPUC has not yet responded to Stebbins’ lawsuit. Through a spokesperson, Lee denied that she triggered or influenced the investigation into Stebbins. The State Personnel Board declined to comment on their investigation.

In response to detailed questions, commission spokeswoman Terrie Prosper said that Stebbins’ allegation of $200 million in missing fines and fees was the result of a misunderstanding of the commission’s accounting practices.

Prosper did not address the apparent open meeting violations, citing pending litigation. But she said Stebbins’ manipulation of the hiring process warranted her dismissal. She acknowledged “some inaccuracies” in the state personnel report but dismissed them as “nonsubstantive details.”

“Her allegation that she was dismissed for finding alleged budget irregularities flies in the face of the clear public action taken by the CPUC,” Prosper said.

A Cleanup Job

The CPUC was formed in the early 20th century to regulate railroads. Since then, numerous other industries have been placed under its oversight, including giant electric and gas monopolies, phone companies, water providers and transportation companies like Uber and Lyft, making it one of the most powerful agencies in California.

But in recent years, the CPUC has faced accusations that it has become too cozy with utilities. In 2010, a PG&E gas line exploded in the San Francisco suburb of San Bruno, killed eight and destroyed 30 homes. The CPUC president at the time, a former energy executive, resigned after it was revealed he and his staff were helping a PG&E executive pick the judge for an upcoming rate case.

Stebbins was hired as the agency’s executive director in February 2018 to bring fresh scrutiny to its finances and operations.

Stebbins was disturbed by what she found at the CPUC. Fiscal mismanagement and disorganization made holding utilities accountable impossible, she said. She ordered extensive audits of agency divisions, accounting practices and specialized programs for providing services to impoverished and disabled California residents.

She quickly fired the head of the Water Division, who oversaw 110 investor-owned utilities serving about 6.3 million residents. Stebbins said that the division wasn’t keeping basic records like contact information for the utilities it regulates.

An audit found division staff members were often not conducting required on-site visits and when they did, the inspections were brief and incomplete. When a utility was found out of compliance with regulations, the division rarely issued citations, even when violations persisted. One utility had been collecting fees from ratepayers for 19 years and failing to send the money to the CPUC, Stebbins said.

“It was a nonfunctioning division, and it’s still for the most part nonfunctioning,” Stebbins said.

Millions Past Due

One audit Stebbins ordered found the CPUC was doing a poor job collecting on debts. It found $49.9 million in outstanding collections as of the end of 2019. That included more than $12 million in enforcement fines, more than $22 million in telecommunication fines and more than $14 million in reimbursable contracts. About $21.1 million had been due since before 2017.

“Given that nearly $50 million is owed to the CPUC,” the audit said, “CPUC should investigate whether the program areas utilize appropriate collection efforts against companies with delinquent payments and to what extent follow up occurs.”

In a statement to the news organizations, the CPUC argued that it was aggressively collecting overdue fines and fees but that those efforts were mired in court actions or appeals. In particular, the agency said two defunct companies owed nearly $19.8 million in fines from a 2010 investigation. The matter was taken to court and an appeals court upheld a judgment in the CPUC’s favor in July.

The audit also hinted that there could be much more owed that is not accounted for in the official book of record. For certain surcharges and fees, the CPUC allows companies to self-report what they owe and does not track whether they have paid.

In early 2019, Stebbins hired Bernard Azevedo, a former colleague, as director of administrative services. Azevedo had been an accountant with the state for 30 years, most recently as a branch chief for the Air Resources Board. Among other things, Azevedo started looking carefully into the self-reported fees.

What he found shocked him. A large portion of the fees were collected as surcharges on customer bills, particularly phone bills, to fund vital assistance programs for poor and disabled people. But the CPUC was doing a poor job of tracking what the utilities owed, he said. Those in charge of the assistance programs were monitoring the money, rather than the accounting office. So at the end of each fiscal year, accountants simply reset the amount due to zero, assuming the fees had been collected.

Azevedo estimated that the utilities owed the CPUC more than $150 million beyond the $49 million identified in the audit.

“We don’t know what we’re collecting,” Azevedo said in an interview. “We don’t know who’s paying; we don’t know how much they’re paying.”

“I have real concerns,” Azevedo said. “This is a lot of money.”

Azevedo estimated that the Lifeline program, which provides phone service for low-income Californians, could be short $61 million. The Deaf and Disabled Telecommunications Program, which provides devices to people with disabilities, could be missing $6.3 million. The California Teleconnect Fund, which provides low-cost service to schools, libraries, community colleges, hospitals, health clinics and other community organizations, had not received some $10 million owed by utilities.

Stebbins alleges that the agency collected only $21 million in the 2018-19 fiscal year. Its strange accounting practices made it difficult to tell which utilities paid or if they paid the right amount.

“I’ve never seen it done this way by any organization I’ve worked for in 34 years in auditing and accounting for the state,” Stebbins said.

During Stebbins’ termination hearing, Batjer said, “the CPUC did not have $200 million in uncollected fees” and pointed to the audit report, which found only $49.9 million was uncollected.

But a letter from the CPUC’s outside counsel Suzanne Solomon that was sent to Stebbins’ attorneys a few days before Batjer’s remarks contradicted Batjer. Solomon acknowledged an additional $141 million owed as of June 2019 but argued that the CPUC expected to collect those fees the following year.

In a statement, the CPUC alleged that Stebbins and her attorneys made “many false allegations” that “reflected a misunderstanding of the state’s accounting system and methods.”

Stebbins and Azevedo say that they are confident that they had discovered a real problem. But their investigation was cut short when they were both fired. Stebbins said, “I think there’s millions and millions of dollars more out there that have not been reported.”

A New Boss

In April 2020, two investigators with the State Personnel Board contacted Stebbins. They wanted to know about several recent hires. Stebbins didn’t think much of it at the time.

But a month later, an attorney from the state Attorney General’s Office emailed her a draft report from the State Personnel Board that alleged she violated civil service rules and hired former colleagues who weren’t as qualified as other candidates. She was directed to submit a response within a week.

Stebbins was bewildered. She said she found the report wildly inaccurate — she didn’t believe she had violated any civil services rules. She confronted several commissioners. “I had some fairly passionate discussions with commissioners. I honestly could not in any way convince them that the report was incorrect, none of them would listen to me,” Stebbins said. “It was weird because I had a good relationship with the commissioners and all of a sudden I didn’t.”

Text messages reveal the commissioners were already deeply engaged in discussion about her termination. They complained about Stebbins’ behavior and consoled one another emotionally. They seemed taken aback by the vehemence of Stebbins’ arguments.

On July 8, Commissioner Clifford Rechtschaffen wrote to Batjer, “It is clearly apparent that it’s untenable for her to stay working here and we should be working from that assumption.”

Batjer wrote back, “I can’t imagine her remaining.”

Rechtschaffen also wrote, “It’s not tenable for her to stay,” to Commissioner Liane Randolph the same day.

“Poor Marybel is really struggling with this,” Rechtschaffen wrote to Randolph, who was recently nominated to head California’s Air Resources Board.

Under California’s Bagley-Keene Act, it is illegal for a majority of commissioners to discuss an issue among themselves outside of a meeting. It is legal for two commissioners to discuss issues between themselves, but if they relay it to a majority outside of a meeting, it becomes illegal. In the case of the CPUC, a majority is three commissioners.

Public officials who violate the law can face misdemeanor criminal charges, but it is rarely enforced.

“You can’t do anything outside of a public meeting that results in a discussion between a majority,” said Kelly Aviles, an attorney specializing in government transparency. “You can’t do anything indirectly that you can’t do directly.”

Some topics, such as personnel matters, can be withheld from public view by discussing them in a private session, but the closed sessions must be conducted the same way as any other meeting. For a discussion to be private, the members must cite law that allows the topic to be discussed in a closed meeting. “Just because you can discuss something in closed session, it doesn’t allow this kind of free-for-all and you can now discuss it outside of meetings,” Aviles said. “You can’t. You’re bound by the same requirement.”

As the weeks went on, the agreement between the commissioners to fire Stebbins grew stronger. On July 14, Randolph summed up the results of the commissioners’ text stream: “We all agree” to fire Stebbins.

Aviles said that building a consensus outside of a public meeting is also a violation. “You’re not even supposed to be discussing matters that are in the body’s subject matter jurisdiction outside of a public meeting. The fact that they’re coming to a consensus is just the cherry on top,” she said.

Fired

Stebbins was placed on administrative league leave on Aug. 4. A few days later, Batjer took the unusual step of sending the State Personnel Board report to all 1,400 CPUC employees.

Batjer used the report to justify firing Stebbins at the public hearing.

“It is appalling and disgraceful to engineer the hiring of a marginally qualified former colleague over more qualified candidates, spike the person’s pay and then make false statements attempting to justify the compensation,” Batjer said during Stebbins’ termination hearing, making an apparent reference to Azevedo.

But interviews and documents show numerous inaccuracies in the report. For instance, investigators understated Azevedo’s qualifications. Azevedo, the report said, did not have experience with budgets or facilities management. But he had previously served as branch chief at the Air Resources Board for nine years, where he managed a staff of 65, implemented a new fiscal management system and created an internal audit unit. According to Azevedo’s appeal, each other candidate had a decade less experience in government.

Notes from Azevedo’s interview, reviewed by the news organizations, showed his responses were rated “excellent” in all categories, well above the other candidates for his position. The report alleged that the agency’s human resources department later determined that other candidates should have received better scores, but offered no explanation.

As to the raise, Stebbins increased Azevedo’s salary from $10,010 to $14,922 per month after putting him in charge of several additional departments. The personnel board argued that Azevedo wasn’t eligible for such a large raise and the job should have been readvertised.

Batjer went on to accuse Stebbins of trying to cover up her misconduct. “You repeatedly suggested that the commissioners should use our political influence to — in your words — make the SPB report go away,” Batjer said. “The commissioners took an oath to uphold the California Constitution, including the merit system rules, and your suggestion was abhorrent.”

Stebbins acknowledged saying the report should “go away” but said that she had only wanted the commissioners to hear her out and recognize that the report’s allegations were false. Once they did, she thought the issue would go away. “None of it’s relevant, none of it’s real, none of it’s true, and they did not want to listen,” she said.

Private Life

For the first time in more than 30 years, Stebbins now finds herself out of government work.

Her time is spent these days preparing for her lawsuit: cataloging her experiences for her lawyers, filing public records requests and preparing her testimony. But many of her goals remain the same, she said, including effecting change in the agency and uncovering the depth of its fiscal morass.

“A couple people warned me, they said, ‘Be careful, this isn’t going to be favored, people aren’t going to like you, because you’re doing things nobody’s ever done,’” Stebbins said. “When I finally was terminated, one of my team said to me, ‘You’re the first person who came in here, you effectuated change, you made stuff happen, you were cleaning up the organization and they fired you.’”



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