OC Fairgrounds CEO Kathy Kramer is under scrutiny over a 2016 audit, which uncovered a potential illegal severance agreement with a fired employee that led to an overpayment of nearly $75,000 that state auditors now say could be illegal.
Auditors from the California Department of Food and Agriculture (CDFA), which oversees the state-run fairgrounds, considered the overcompensation a “likely gift of public funds.”
That raised red flags for OC Fair and Event Center Vice President of Finance Adam Carleton, who last month confronted Kramer publicly at the monthly OFEC board of directors public meeting.
Since Kramer was hired in January 2015, the fairgrounds have gone through four VPs of finance.
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The OC Fair overpaid the employee in question, $44,468 in wages, $6,670 in recruitment and retention, $5,152 for medical insurance, $13,668 in pension and $4,474 in additional leave hours — totalling about $75,000 in compensation over eight months they didn’t work at the fairgrounds.
Carleton told Voice of OC he resisted creating an accounts receivable in an attempt to recoup the overpaid wages from the employee, as auditors recommended, because he was concerned about the legality of the move and wanted the fairgrounds’ attorney to look at the legal opinion from state human resources department attorneys, which considered the separation agreement “likely illegal.”
That resistance led Kramer to suspend him in December, Carleton said. He confronted Kramer during public comment at the Feb. 28 OC Fair Board of Directors meeting.
“I can put up with a lot of stuff, a little bit of waste, gotta make things happen — I get that. But I don’t put up with things that are illegal,” Carleton told the board. “When this happened, I realized you got a big problem. I told her (Kramer) such. And when I told her this appears of them (auditors) describing a felony, she went nuts on me.”
Auditors first revealed the findings with fairground executives in April 2017, according to an audit memo from CDFA Chief Auditor Ron Shackelford.
Kramer didn’t officially respond to the findings until May 2018, according to the fairgrounds’ response letter to the 2016 audit. Shackelford’s memo said the CDFA expected a response within 30 days and when the auditor’s recommendations would be implemented — no later than 60 days after Shackelford’s April 2017 letter.
“I was personally involved in that audit and I have first hand knowledge of it,” Carleton told the board. “Ever since, April 2017, CEO Kramer has ridden me — giving me confusing and conflicting assignments.”
Kramer said the fairgrounds staff worked with the auditors and the pension fund manager, the California Public Employees Retirement System (CalPERS), to reimburse the employee for the pension contribution. She didn’t mention collecting overpaid wages from the employee, but said future separation agreements will go through the state human resources department.
“We believe we have satisfied the final 2016 audit findings,” Kramer said, after running through a timeline of events surrounding the audit.
Her timeline, which is attached to the staff report (starting page 29), is unclear.
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According to Kramer’s April 11, 2018 timeline entry, the start of the 2017 audit was contingent on the board adopting updated state contracting policies by July 2018.
But an April 10, 2018 email, provided by Carleton, between him and the CDFA auditor who conducted the 2016 audit, Jason Jones, says different.
“My management is asking about the timing on the response for the 2016 preliminary audit. Would it be possible to get the response this week? They are concerned about starting a new audit with the last one and the HR issue (employee overpayment and separation agreement) still outstanding,” reads CDFA auditor Jason Jones email to Carleton.
The 2017 audit has been completed but hasn’t been released by the CDFA yet, spokeswoman Terry Moore said.
Although Kramer received the finalized 2016 audit in October 2018, some board members didn’t see it until December.
“Well, I can only speak for myself — I was not aware of the audit until late December of last year, which would be about two and a half years after the initial process began,” fair board member Doug La Belle said in a March 5 interview.
La Belle, a retired Chino Hills city manager, requested the item be agendized as an action item heading into the Feb. 28 meeting, but it was only listed as a discussion item, so the board couldn’t take any action. The nine-member board ended up directing staff to bring it back as an action item for its March 28 meeting.
“The whole process concerns me and that’s why I basically asked that this be agendized as an action item. I think it’s important the board, as a whole, consider the reportable findings … in the audit and decide what we want to do in terms of a response,” La Belle said. “I have some thoughts that I’ll share with the board on the 28th … I think it’s important that we have that discussion in a public forum.”
Meanwhile, fair officials hired a private investigator to look into Carleton. While fair officials won’t specify what the Morley Group, Inc. investigators are looking at because of personnel reasons, a letter from Kramer to Carleton indicates they were hired to investigate him. Carleton gave Voice of OC the email.
“A licensed independent investigator has been retained to conduct an objective investigation, and will be contacting your attorney to meet with you. You will have the opportunity to respond to the matters in question, and share any relevant information with the investigator,” reads Kramer’s Feb. 1 letter.
The contract with the private investigators began Feb. 1 for an hourly rate between $150 to $350 per hour, depending on how many personnel are working on the investigation. The contract caps the total at $49,000, which is just below Kramer’s $50,000 contract signing limit. Anything over that limit, would require board approval.
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The fairgrounds are no stranger to controversy.
Former Gov. Jerry Brown ended privatization efforts of the 150 acres in 2011 following his predecessor Gov. Arnold Schwarzenegger’s attempted maneuver to sell the land to a private company. Board members are appointed by the governor.
Throughout the attempted sale of the fairgrounds there were legal battles, state legislature skirmishes and an appeals court decision that put the brakes on the sale until Brown took the fairgrounds off the auction block.
More recently, the stables almost went the way of the horse and buggy in 2018 after a proposed master site plan, developed by a Chicago-based firm, recommended demolishing the equestrian center for an RV park. The firm insisted it met with “stakeholders” to form the master plan. According to the contract, those stakeholders were the OC Fairground’s executive management, sales and marketing team and local businesses — it didn’t list fairgoers, residents or equestrian center users. The idea was eventually scrapped after the equestrian community and their supporters rallied opposition to the plan.
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Kramer became CEO in January 2015 and Carleton was hired as VP of finance in September 2016.
The 2016 audit, principally the former employee’s overpayment, seems to be what drove a wedge between the two public executives.
“Although the employee did not work at the [OC Fairgrounds] from July 2016 through February 8, 2017, the employee continued to receive their current salary, recruitment and retention (R&R) pay differential, California public employees retirement system (CalPERS) credit, accrue annual leave,” reads the 2016 audit. “Based on the above information, the [OC Fairgrounds] overpaid the employee for work that was not performed and therefore may be considered a gift of public funds.”
Carleton, in a March 5 interview, said, “A gift of public funds is a very nice way of saying misappropriation … I told her (Kramer), this audit, we gotta talk to the attorney about this.”
Auditors from the CDFA had the California Department of Human Resources (CalHR) attorneys reviewed the separation agreement.
“Our office has since reviewed an opinion from the CalHR Legal Division that states in part that the settlement agreement is likely an illegal contract because it violates [state HR codes],” reads the audit. “CalHR Legal Division concluded that despite its illegality, the 32nd DAA likely cannot void the contract and recover the amount paid to the employee.”
Despite CalHR’s findings, the auditors still recommended the OC fairgrounds create an accounts receivable and collect the $44,468 in overpaid wages from the employee, according to email exchanges between Carleton and state auditors.
“We need a letter from our Attorney … authorizing this transaction. Due to the specific circumstances involved, I believe I am obligated to discuss this matter with him prior,” Carleton wrote in a Dec. 10, 2018 email to his staff.
The next day, Dec. 11, Kramer suspended Carleton.
“You will remain on ATO (Administrative Time Off) pending completion of the investigation into possible errors in your work and misconduct. This is a result of recent findings of substantial financial errors in your work, as discussed today,” reads the suspension letter signed by Kramer.
The letter didn’t specify any errors or misconduct.
What it did do was spur Carleton to go public.
Spencer Custodio is a Voice of OC staff reporter. You can reach him at scustodio@voiceofoc.org. Follow him on Twitter @SpencerCustodio.