Community college district's audit of secret $8M insurance rebate fund exposes violations

Los Angeles Times

20-03-2025

A forensic audit summoned by a Santa Ana community college district that last year chanced upon $8.1 million in insurance rebates secreted away in a fund held by a third-party vendor returned troubling findings about administrators' actions across decades.
Accountants contracted by the Rancho Santiago Community College District Board of Trustees reported current and former district employees violated California's education code, state budgetary guidelines and the board's own policies by failing to publicly disclose the fund's balance, including in annual district audits. (The district oversees Santa Ana and Santiago Canyon colleges, along with two educational centers).
Meanwhile, district administrators made $3.6 million in withdrawals from a member risk management fund (RMDF) — paying off budgetary shortfalls and at least one legal settlement — without disclosing the source to board members or advising them the money was being held outside the district, according to the auditors.
Released during a March 10 board meeting, the audit's findings call into question not only the motives of the public school employees who recommended and managed $287 million in insurance premiums, but the practices of the Cerritos-based joint powers authority that held the banked dividends, the nonprofit Alliance of Schools for Cooperative Insurance Programs (ASCIP).
Travis Casner, a certified fraud examiner and partner overseeing forensics and litigation for Houston-based firm Weaver, said the nonprofit agency failed to provide statements to school districts enumerating their individual holdings within the risk management deposit fund, reporting only the total, non-delineated fund balance in its own audits.
ASCIP further enshrined two now-retired Rancho Santiago cabinet members — John Didion, former vice chancellor of human resources, and former Vice Chancellor of Fiscal Services Peter Hardash — along with current Assistant Vice Chancellor of Fiscal Services Adam O' Connor, in governance roles with the organization from 1998 through 2021.
In a joint powers authority like ASCIP, representatives from members served by the entity make up an agency's board. But the two RSCCD administrators' executive positions at ASCIP granted them the authority to decide when rebates, or excess premiums, were returned to more than 100 public school members statewide in the self-funded insurance risk pool and how much each district, including their own, received.
Under their leadership, Rancho Santiago took in more than $12 million in rebates — at one point receiving up to one-third of all the dividends paid out by ASCIP that year, even though the district's premiums amounted to just 10% to 12% of the money paid into the pool.
'When the fund balance for the district was $7.2 million at the end of December 2023, that represented 33% of ASCIP's entire [RMDF] balance across all participants, which is disproportionately high,' Casner told Rancho Santiago trustees. 'The district was leaving more funds in that fund, compared to other districts.'
Casner tracked activity in and out of the account from 1997, interviewed multiple officials, read emails between district administrators and leaders of ASCIP and waded through governance committee meeting minutes to glean how and when the agency authorized rebates among its 140-district membership. Hardash and Didion did not reply to the auditors' requests for interviews, he noted.
The auditor found modest rebates, amounting to less than $300,000 per year, were returned to Rancho Santiago between 1997 and 2018, when premiums paid for workers' compensation and property and liability coverage exceeded the amount of claims paid out.
That changed, however, after Rancho Santiago switched its employee medical and health coverage to ASCIP in 2015, a move proposed by Didion, the district's former vice chancellor, whose ties to the JPA date back to at least 1994 and continue to this day.
The district annually put from $23.8 million up to $30 million into the healthcare risk pool and, in the nine years that followed, spent more than $241 million to retain health coverage.
'When the district became a member of the health benefits program in 2015, at that point the premiums paid by the district represented about 10% of ASCIP's total membership — all the other 20 community college districts and school districts, all 140 of those collectively ' Casner told trustees. 'That changed the dynamic of the rebates, as far as the dollars.'
Rancho Santiago's rebates, or returned excess premiums, climbed from the less than $300,000 collected from workers' compensation and liability each year to as high as $2.2 million in 2021, according to a table included in Weaver's 46-page report.
Yet under Didion and Hardash, and the administrators who succeeded them, the unreported funds continued to grow. In multiple emails obtained by Weaver, O'Connor and Rancho Santiago's risk manager, Don Maus, made references to rolling over rebate after rebate, as 'Peter' had done.
'This fund kind of started as a rainy day fund for small, unbudgeted purchases, then evolved into an emergency fund that was not on the district's financial record,' Casner said.
Conflicting loyalties
Many of the withdrawals were made by Didion, who served on various ASCIP governance committees dating back to 1994, according to records obtained by the Daily Pilot from the agency, including the executive committee, from 1998 to 2016, when he was an officer for eight years.
Upon retiring from Rancho Santiago in 2016, Didion accepted a paid contracting position earning $96,000 per year as the managing director of Captive Insurance for Public Agencies (CIPA), a Hawaii-based wholly owned subsidiary he personally helped ASCIP form in 2005 to handle bond construction-related insurance and on which he served as a board member until his retirement from the district.
When Didion retired, Hardash took over, serving as a member or alternate member on ASCIP's board until his retirement in 2021. The following year, O'Connor joined as an alternate with potential voting power.
Hardash also assumed Didion's seat on the Hawaii-based CIPA in 2017, after being nominated by his former Rancho Santiago colleague, email records obtained by Weaver indicate. Didion transitioned back to serving on the captive's board in 2024, and the pair of retirees continue to broker in public school insurance business through the agency today.
'[Didion] and Mr. Hardash were both making decisions about whether to defer rebates or have them paid back to the district while, at the same time, being more involved in ASCIP's executive committee, including as president, vice president and treasurer, which creates the inherent conflict of interest,' Casner determined.
Kept in the dark
The auditor also shared bylaws created by the joint powers authority to govern the holding and return of insurance dividends to individual member districts. Those rules stipulate ASCIP is to provide quarterly statements to member districts, including balances and interest accrued, and report those individualized amounts annually to its executive committee.
'At no point did the ASCIP financial statements ever include individual member balances,' Casner said.
Keeping districts in the dark appeared to be intentional, according to the auditor, who shared a Nov. 22, 2016 email from ASCIP's then-Chief Financial Officer Lynn Truong to Hardash and other board members, following a meeting of the agency's finance committee.
'Since some concerns were raised after the meeting regarding the disclosure of the individual member balance this year, we have decided to hold off on including the list of districts with their balance until next year,' Truong wrote. 'By then the members would have had a couple of years to reduce their balance, which is consistent with what we communicated to the Board.'
One exhibit included in Weaver's final report is an email correspondence between Rancho Santiago's risk manager, Don Maus, and Truong about channeling rebates into the off-books fund.
'We would like to deposit our rebate into our RMDF, but the instructions say that we must have Board approval. I don't believe we've needed that before. Is this something new?' Maus asked.
'Actually, you can just have Peter Hardash sign the form and send it to us,' Truong replied. 'My apologies. There was an error on that instruction. It should have said 'ASCIP's Board approval required' not District's.'
Auditors are seeking more information from the agency about those correspondences. Casner also said the auditors' questions regarding the agency's creation of CIPA and Didion and Hardash's service on that board were shut down by ASCIP's legal team, which stated the captive was an entity separate from the joint powers authority.
ASCIP attorney Robert J. Feldhake, who also sits on CIPA's board of directors, did not respond to a request for comment.
Violations and 'next steps'
The forensic audit determined the district's failure to disclose risk management fund balances in financial statements and audits, and keeping the account's existence a secret from board members, conflicted with portions of California's education code describing how community college districts are to audit and report assets held outside their budgets.
State and Rancho Santiago's own administrative regulations regarding public inspection of a district's receipts and balances, and how and where such assets should be held and invested, also appear to have been violated, Casner maintained.
Rancho Santiago Trustee Phil Yarbrough heads the board's fiscal and audit review committee. Last June, upon learning of the $8 million that had been kept secret from the board, he immediately demanded the funds be remitted to the district and placed in reserves, in accordance with administrative procedures.
The veteran board member, following the March 10 meeting, said he and his colleagues were shocked to learn of the breadth and extent of the violations of law.
To his way of thinking, 'The next step is a lot of next steps.'
'I remain committed to the discipline and accountability of those responsible,' he said at the meeting. 'And I want to assure the public and the Rancho community that all necessary steps will be taken to rectify the situation and prevent this from ever happening again.'
Board President Daisy Tong echoed Yarbrough's assertions.
'This was a lot of information to process in a quick timeframe,' she said after Casner's presentation. 'I'm sure we're going to have discussions on this item again — this is not a one time and we're done [situation].'