The hiring programs established by these Texas school districts generally worked as follows:  For a fee ($100-$750), retiring teachers (mainly from other districts) were hired to work on their final day before retirement.[1]  However, they did not teach on that final day of employment:  Instead, they served as janitors, cooks, or clerks.  These nonprofessional positions were, ostensibly, qualified for Social Security coverage, and, therefore, FICA tax was withheld.  The teachers were usually told to save their pay stubs and W-2 forms (showing the FICA tax withheld) to serve as evidence (to be presented to SSA) of their entitlement to Social Security spousal and survivor benefits.  
 

The general mechanics of the loophole were reviewed by SSA and GAO, and the loophole was deemed to be legal (albeit regrettable).  Effective July 1, 2004, the loophole was formally curtailed by legislation (the Social Security Protection Act of 2004). 

Our previous communications with Cong. E. Clay Shaw, Jr. and Commissioner Barnhart

Last year, we contacted Congressman E. Clay Shaw, Jr. and expressed our belief that, although the loophole, per se, was judged to be legal, some school districts were bending or breaking rules in order to use that loophole.  They were merely pretending that their last-day workers were in employment qualified for Social Security coverage, when they were not.  If we were correct in our belief, the GPO loophole was not available to these workers - even though the one-day employment preceded the change of law on July 1, 2004.  We advised Congressman Shaw that this was a significant issue, for the financial implications could be enormous.

1. Texas school districts have no authority to give Social Security coverage to employees who are members of the Texas Teachers Retirement System (TRS) unless the districts are specifically given that authority by their Section 218 agreements.  (And, of course, the mandatory coverage rules don't apply to members of TRS.)  However, the Section 218 agreements of some districts do not extend Social Security coverage to workers in part-time positions.  This begged the question:  Were these one-day workers (who were all members of TRS) in full-time or part-time positions?  If they were in part-time positions, they did not qualify for Social Security coverage and, in turn, did not (and do not) qualify for the GPO loophole.
2. In many cases, the "processing fees" paid by the teachers to the hiring school districts were much larger than the expected wages.  It seemed that the fees might, in reality, constitute a return of the wages paid.  If that was, in fact, the case, the employment was not bona fide, and thus, not qualified for Social Security coverage.  Again, this would cause the GPO loophole to be inoperative.

In her response to the Congressman (which he shared with us), Commissioner Barnhart stated:

It is true that many part-time positions are not covered under Section 218 agreements in Texas.  However, it is also true that full-time positions exist that may be filled part of the time.  So, when we determine if a position is covered under a Section 218 agreement, we must look at the status of the position, not the status of the person who fills it.

The Commissioner made reference to the specific case of the Anahuac Independent School District.  Its hiring program involved using the one-day workers as substitutes for absent full-time teachers.  Therefore, she concluded that the positions were full-time, even though the employees may have worked part-time hours within those positions.  

Although we could not argue with her logic with regard to Anahuac, our concerns regarding the other school districts were unabated.  We were left to wonder how SSA could be certain that the other Texas districts used their part-time workers in full-time positions?  Our concerns grew after Freedom of Information Requests revealed that, of the dozens of school districts with one-day hiring programs, SSA had reviewed only Anahuac and Coleman.  (And, as explained later, both districts made significant misrepresentations to SSA during its reviews.)

In response to Congressman Shaw's second concern, regarding the large fees paid to the districts, the Commissioner reached the following conclusion:

The fact that these substitute teachers paid the Anahuac Independent School district a fee for processing their job applications did not change the fact that Anahuac ISD, as the employer, controlled the conditions of employment (underline added).

Based upon this reasoning, Commissioner Barnhart concluded that "an employment relationship existed."

We could understand the logic of this finding, but only if the fees were, in fact, for "processing their job applications."  What if the superintendent of a district admitted that the fees were specifically intended to recover the minimum wages and FICA taxes paid (and not the "processing"costs)?  Would the Commissioner have reached the same conclusion regarding the existence of an employment relationship?  To us, it seemed unlikely, for the following reason:  Such a finding would fly in the face of a 1976 Social Security Ruling.  That case involved a 71-year-old lady who claimed benefits on the basis of work performed for her sister.  Although she had been paid, she admitted to having subsequently paid back the wages to her sister.  In denying her claim, SSA noted:

Of particular significance to the Appeals Council and an even stronger indication that a true employment relationship did not exist was the revelation made by the claimant during the course of her appearance before the Appeals Council that she paid back to her sister whatever her sister paid to her.  In actuality, the claimant received no remuneration for the services performed for her sister (underline added)[2]

We think that the ruling, cited above, merely states the obvious:  Some expectation of compensation is always required for bona fide employment.  If a person pays for his own wages (not to mention, the employer's share of FICA taxes) he is not really an employee - whether or not his work is (supposedly) supervised by someone else.  A person who pays his own wages is, in reality, a volunteer - and doesn't qualify for Social Security coverage.

Thus, although we appreciated the logic of Commissioner Barnhart's conclusions, and we respected her authority to make such interpretations, we were not confident that her responses were applicable in relation to each and every individual school district.  We felt the need to gain more information about the individual school districts and their one-day hiring programs.  For this reason the PPTO undertook its own audit of several Texas school districts.

The PPTO audit

The Public Program Testing Organization (PPTO) conducted an audit of the one-day worker programs of several Texas school districts.  Our objective was to ensure that Social Security coverage was given only to workers in positions qualified for that coverage.  Although most audit activities took place between March and July, 2005, several audit-related inquiries were made before and after those dates.[3] 

The PPTO contacted about 60 districts, known to give some or all workers Social Security coverage.  We found that about 30 of the districts had one-day hiring programs for retiring teachers, and we analyzed those programs by using the Texas Public Information Act to request relevant documents from school district officials.  In addition, we had many conversations concerning these matters (both verbal and written) with superintendents, business managers, and other school officials.  As a CPA with 25 years of audit experience, I personally performed most of the audit procedures.
 

We found no significant irregularities in the programs of several of the districts we reviewed.  They did not charge excessive fees, did not schedule scores of one-day workers on the same day, and did not violate their Section 218 agreements.  The programs of these districts met the standards set forth by SSA, as articulated by Commissioner Barnhart.  However, we identified 15 other school districts, shown in Table 1, below, that withheld FICA tax even though their one-day workers did not qualify for Social Security coverage.  The workers did not qualify because they were not in positions given Social Security coverage by the relevant Section 218 agreements, and/or because the employment was obviously not genuine. 

Table 1
 

A few notes about Table 1

Next to each school district name, you will find the approximate student population of the district.  We have provided this information so that you can assess how large these one-day worker programs were, relative to the size of the districts.  For example, West has only 1535 students - district wide - yet it hired 1795 extra "custodians" in a 13 month time-span. 

In the third column of the table, you will find the "processing fees" collected by each district.  In total, these 15 districts collected nearly $10 million, and virtually every bit of it came from employees in the one-day worker programs.  (With one minor exception, real workers were never charged for these "processing fees.")
 

Although $10 million is substantial, it is a mere pittance compared to the estimated damages that will be inflicted upon the Social Security trust fund.  (See Column 4.)  Assuming that the average one-day worker will collect $93,000 in spousal/survivor benefits (GAO's estimate), the trust fund will lose $2.1 billion due to the abusive conduct of these districts.  That is a truly amazing amount, particularly when it is realized that the total student population of these 15 districts - combined - is equal to only 15% of the student population of a single school district - Houston.

General audit observations regarding the Section 218 agreements

In the state of Texas, there is no uniform definition of "part-time."  Each district establishes its own definition.  Therefore, we asked school officials several questions designed to ascertain how their respective districts distinguish full-time from part-time employment.  Some of our questions were general ("How many hours do custodians have to work to be considered full-time?"), and some of our questions were specific to Social Security ("Do you have a policy regarding who does and doesn't get Social Security coverage?"  "Is every part-time worker in your district given Social Security coverage?").  We expected that there might be multiple definitions of "part-time," and we wanted all of the definitions used by each district. 

As you can discern from the table, 11 of the 15 districts were found to be in violation of their Section 218 agreements.  In each case, the one-day workers they hired were in excluded part-time positions - no matter which definition of "part-time" was used.
 

Further, it appears that some of the 11 districts knowingly disregarded the part-time exclusions in their agreements.  In other words, the statements made to us by district officials suggest that they knew of the part-time exclusion in their Section 218 agreements, but did not apply the restriction to the one-day workers. 

With regard to other districts (among the 11 with Section 218 agreement violations), it wasn't clear that they knew of the part-time exclusions in their Section 218 agreements.  However, it was very clear that they were violating those agreements.  Again, their one-day workers were part-time, no matter which definition of "part-time" was used.  In addition, the officials of many of  those districts freely admitted to giving Social Security coverage to workers in part-time positions (the Section 218 agreements notwithstanding).
 

Whether the districts were acting out of ignorance or connivance, the bottom line is the same:  The one-day workers hired by these 11 districts were not, in fact, in qualified Social Security employment.  Therefore, they were not, and are not, entitled to use the GPO loophole.

General audit observations regarding the issue of bona fide employment

With regard to all of the 15 districts in Table 1, above, we found evidence that the employment was not bona fide, for the reason already discussed:  The wages of the workers were repaid to the "employer."  That was freely admitted by officials in several districts.  However, in some cases there were additional factors indicating that the employment was not bona fide:

In short, we believe that there is an abundance of evidence to establish that the one-day hiring schemes were not bona fide.  This is another reason we believe that the one-day workers were not in qualified Social Security employment, and were not, and are not, entitled to use the GPO loophole.
 

The nature of the audit evidence

In the district-by-district summaries which follow you will find the key results of our audit, including the nature of the evidence and the sources of that evidence.  You will see that one district (West ISD) had a 2-track employment scheme in regard to Social Security coverage.  It provided coverage to 1795 custodian "posers," who each worked only 6.5 hours.  At the very same time, West enforced the part-time employment restrictions in its Section 218 agreement to deny Social Security coverage to its REAL nonprofessional workers.  These lower-income employees - workers without the relatively opulent pensions of the teachers - received no Social Security coverage whatever, despite working up to 8 hours per day and up to 30 hours in a week.  In fact, to this day, these workers get no Social Security coverage from West.

Another district (Port Arthur) executed a written agreement specifying that it would receive a $400 fee, plus any wages and taxes it paid to the one-day workers.  In other words, it required the one-day workers to finance their own wages, and it even put this requirement in writing.  None of the other workers at Port Arthur was required to pay such fees.
 

Other districts also admitted to charging fees to so that they'd recoup the wages paid.  For example, the superintendent of Yoakum ISD wrote that the fees charged by the district "defrayed the cost of having to pay them a minimum wage...."  He added that there was residual fee income sufficient to "purchase everyone in the district a Christmas present."  Again, the other workers at Yoakum - i.e., the real workers - were not required to pay any fees.

We determined that Coleman ISD, the pioneer of all one-day worker programs, made several misrepresentations to the SSA, in 2001 and 2002.  For example, it told SSA that 6 to 8 hours of work in a single day constituted full-time employment.  However, Coleman's business manager stated that hours in a single day are irrelevant:  Coleman determines part-time vs. full-time status on the basis of hours in a week.  And, her statements were confirmed via an examination of Coleman's Section 218 agreement, which specifies that 20 hours or less per week constitutes part-time employment. 
 

These are just a few examples.  For each of the 15 districts, we have evidence that strongly suggests that the employment was not covered by the Section 218 agreement and/or the employment was not bona fide. 

"Double-dippers" versus the Social Security trust fund

Before concluding, it might be useful to put certain matters in perspective.  From my years of practice as a public CPA and auditor, I know that SSA generally tries to implement the spirit of the law, even if minor infractions of the rules must be overlooked.  For example, if we were dealing with a person who had worked for nearly 10 years in FICA employment but, due to a technicality, was one day short of the amount needed for benefits, I suspect that SSA would make every effort to find a way for that person to get his last day of covered employment and, thus, his benefits.  That would be laudable, and would probably be compatible with the intentions of Congress.   

In the case at hand, however, we must remember that the will of Congress, manifest in the GPO legislation, was to not give spousal or survivor benefits to those with their own substantial benefits.  Therefore, the PPTO believes that SSA should have no incentive, whatever, to bend or ignore the law in order to help people "double-dip" by exploiting the GPO loophole.  We feel that those who attempt to circumvent the law (i.e., GPO restrictions) by using a loophole should do so at their own peril.  And, if they fail to properly execute that loophole, they should not expect, nor get, understanding and compassion from the SSA.  
 

After all, in many ways the school districts behaved like the promoters of illegal tax shelters - the only difference being that the districts sold Social Security benefits, whereas tax shelters sell tax breaks.  And, the teachers who participated in these schemes were no less culpable.  A $200-per-day teacher knows that he will not advance his career or economic position by switching to a $40-per-day janitor job - especially if he has to pay related fees of up to $750.  The teachers who played this game never sought to earn money through genuine employment.  Rather, they sought to make a windfall from the Social Security trust fund - our trust fund. The above statements notwithstanding, we pass no moral judgments here.  We just want the laws to be enforced.  Those who worked in genuine and covered employment on their last day are entitled to the benefits of the loophole.  However, those who did not meet the technical requirements of the loophole are owed nothing.

How much is $2 billion?

Finally, let's put the $2 billion into perspective.  It is as much as the entire 2004 United States Housland Security budget - combined - for:

In short, $2 billion is a lot of money. 
 

We hope that the Office of Inspector General will aggressively investigate the matters raised in this report by promptly launching its own audit of these 15 school districts.  Time is short due to the statutory time limits for correcting Social Security earnings records.  Unless an inquiry is commenced by April, 15, 2006, some losses will become inevitable.

The PPTO will gladly share its detailed audit results with your office, and help it in any possible way.  Please don't hesitate to contact us for that assistance, or with comments or questions.
 

Thank you for your attention to this important matter.

Sincerely,
 

Joseph N. Fried, Director

SUMMARY OF DISTRICT BY DISTRICT AUDIT RESULTS

West ISD (1795 one-day workers)

Violation of Section 218 agreement

West is a small district with just 1535 students at all age levels,[6] yet it hired 1795 one-day workers in the span of about 13 months.[7]  Only two of the 1795 "custodial" employees worked after June 30, 2004 - the last day the GPO loophole was available.[8]  Workers who are members of the Teachers Retirement System (TRS), and are in part-time positions, are excluded from the Social Security coverage provided by West's Section 218 agreement.[9]  However, West provided Social Security coverage to 1795 extra janitors who worked just one day each, and were active members of TRS.  If they were employed in part-time positions, they did not qualify for Social Security coverage.  Therefore, we tried to determine West's policy for defining full-time vs. part-time employment.

To this end, Director Joseph Fried called West (in March, 2004), pretending to be a retiring teacher interested in using the Social Security loophole.  He was told that, for a $650 fee, he could get Social Security coverage for just 6.5 hours of work - to be performed on any day of his choosing.[10]  However, when he contacted West again (using a pseudonym), and indicated that he wanted a real

part-time custodial job, West's business manager, Peggy Kissinger e-mailed this reply to him:

We pay Social Security on paraprofessionals.  That includes maintenance, grounds, food service, secretaries, and aides.  We only pay on positions that work OVER 30 hours per week.  (The capitalization was Kissinger's.) 

This e-mail proves that Kissinger - a CPA - knew of the Section 218 part-time employment restriction, proves that the standard for a full-time position was "over 30 hours," proves that the standard applied to janitorial work, and proves that West was prepared to enforce the standard for an ostensibly REAL custodian (versus a professional posing as a custodian). 
 

We used the Texas Public Information Act to acquire corroborating evidence.  We obtained a copy of West's Section 218 agreement, directly from the Texas State Social Security Administrator, Carolyn Fry.  It includes a notation that defines part-time position:  "30 hrs wk or less."  In addition, timesheets were obtained for West's (real) part-time nonprofessional workers. [11]  An inspection of those timesheets shows that all of the employees worked hours averaging between 20 and 30 hours per week.  Despite the fact that some of the employees worked 6, 7, or even 8 hours in a single day, none received Social Security coverage.  This is additional evidence establishing  that West was and is aware of the part-time work exclusion in its Section 218 agreement, and used and uses it to deny Social Security coverage to those working 30 hours or less per week (no matter how many hours are worked in a single day). 

Clearly, the 1795 custodian posers, who worked only 6.5 hours each, did not meet West's definition of full-time employment (i.e., than 30 hours per week).  However, is it possible that they were substituting in full-time positions?  (If so, they would qualify for Social Security coverage, despite working part-time hours.)  No.  In a written statement to me, Kissinger stated:  "No participant served as a substitute for a West ISD employee.  Tasks were performed as they materialized."  Indeed, they couldn't be substitutes:  The number of one-day retiring teachers far exceeded the number of regular employees. 
 

Finally, it should be noted that there was no expectation that this employment would last for more than one day.  The standard instructions issued by West to each worker stated:  "[T]his packet is being mailed to you in order for you to work your final day in the Texas Teacher Retirement System under the West ISD system..." (emphasis added).  Other correspondence noted that the day of work would last just 6.5 hours.[12]

No matter how they're viewed, West's1795 one-day "jani-teachers" were not qualified for Social Security coverage.  They worked part-time hours, in part-time positions and, thus, were excluded from Social Security coverage by West's Section 218 agreement.  Without that coverage, they did not, and do not, qualify to use the loophole.
 

Lack of bona fide employment

 Even if we were to set aside West's Section 218 violations, the one-day employees would not have qualified for Social Security coverage.  In a Social Security Ruling, it is stated that a return of the wages paid, back to the employer, is a strong indication that the employment is not bona fide.[13]  And, bona fide employment is required for Social Security coverage.  Each of West's one-day employees was paid minimum wage - $5.15 per hour, and his/her total wages for the day was just $33.48 (i.e., 6.5 hours times $5.15).  Despite the very low earnings, West required a "processing fee" of $500 (which was subsequently increased to $650, and ultimately, $750).  These fees were paid by the one-day workers, but not paid by any of West's regular employees.[14] 

According to a written statement by Kissinger, the fees were "used for expenses and fund balance" (emphasis added).  "Fund balance" in a school district is analogous to "retained earnings" or "accumulated profits" in a corporation.  Any amount that went into the fund balance would be a return of the wages paid, and would indicate a lack of bona fide employment.  In other words, if only $33.48 of the $500 fee amount went into West's fund balance, the wages were repaid.  We don't know the exact amount of the fees that went towards processing costs vs. fund balance, because Kissinger said that she didn't have an estimate.  However, it is exceedingly hard to believe that processing costs could even equal a fraction of the fee amounts charged.[15]  After all, ADP, and similar commercial payroll services, charge less than $10 to set up a new employee on the payroll.
 

Finally, it strains credulity that a school district with only 1535 students would need 1795 custodian assistants in just 13 months.  And, it is even harder to believe that the school district would need 603 of those workers in a single month.[16]  That month, coincidently, was June, 2004, the last month of the GPO loophole.[17]  This large concentration of workers in a short time span, and the virtual termination of all hiring on June 30, 2004 - the last day of the loophole, are new and compelling evidence that the employment was not bona fide.

Given the large and selectively-charged fees, the admission by the business manager that the fees went (at least partly) into the district's fund balance, the fact that an estimate of actual processing costs was never prepared, the very large concentration of one-day workers in this tiny school district, and the virtual shut down of all one-day hiring after the loophole expired, we can conclude that this employment was not bona fide and, therefore, not qualified for Social Security coverage.  Without that coverage, the loophole can not be used. 
 

Hudson ISD (1603 one-day workers)

Violation of Section 218 agreement

Hudson is a small district with only 5 buildings and a total of 2270 students,[18] yet it hired 1603 one-day "custodians" in a short time span, which ended on June 30, 2004 - the day the loophole expired.[19]  Workers who are members of the Teachers Retirement System (TRS), and are in part-time positions, are excluded from the Social Security coverage provided by Hudson's Section 218 agreement.[20]  However, Hudson provided Social Security coverage to 1603 people who worked just one day, and were active participants in TRS.  If those workers were employed in part-time positions, the workers did not qualify for Social Security coverage.  Therefore, we tried to determine how Hudson distinguishes part-time from full-time employment.

The evidence came in the form of verbal statement made on June 13, 2005 by Hudson's Maintenance Director, Billy Russell.  When Director Joseph Fried called Mr. Russell, ostensibly to inquire about employment, Russell said that all of his employees worked full-time - 40 hours per week.  He added that they could work fewer hours, but if they didn't work more than 20 hours in a week, they'd be part-time, and would lose full-time benefits.  We were able to corroborate this information by reviewing the Texas State Social Security Administrator's copy of the most recent 218 agreement on file for Hudson.  It includes the following definition of part-time:  "20 hrs. wk or less." 
 

Clearly, the 1603 one-day custodians hired by Hudson worked part-time hours.  However, is it possible that they were substituting in full-time positions?  No.  Mary Ann Whiteker, Superintendent, and Julie Kimble, Payroll Accountant stated (in writing) that the one-day workers were doing "short-term jobs/tasks," and that "0%" did work that was normally done by workers in full-time positions.  In addition, when asked whether usage of the one-day workers resulted in layoffs or work reductions among full-time employees, they replied, "no."

No matter how they're viewed, Hudson's 1603 one-day workers were not qualified for Social Security coverage.  They worked part-time hours, in part-time positions, and should have been excluded from Social Security coverage by the district's Section 218 agreement.  Without that coverage, they did not, and do not, qualify to use the loophole. 

 

Lack of bona fide employment

Even if we were to set aside Hudson's Section 218 agreement violations, the one-day "jani-teachers" did not qualify for Social Security coverage.  A Social Security Ruling asserts that a return of the wages, back to the employer, is strong evidence that the employment is not bona fide.[21]  And, bona fide employment is required for Social Security coverage.  Each of Hudson's one-day employees was paid total wages of no more than $41.20, yet paid a fee, back to Hudson, of about $300.[22]  This fee was paid only by the one-day workers - not by any other workers.

The following admission by the superintendent and the payroll manager, made in a typed statement responsive to one of our questions, proves that the fees charged ($300) were a recovery of the wages paid ($41.20):

A fee was charged to defray the following costs...employee wages, FICA taxes (emphasis added)

In other words, the one-day workers paid for their own wages (as well as the employer's share of the FICA tax).  This is strong evidence that the employment was not bona fide. 
 

Finally, it strains credulity that a district with only 30 regular custodians would need 1603 extra "custodians" - 1199 of which worked exclusively in the month of June, 2004 (the month before the loophole expired).  These numbers, and the fact that the hiring stopped on June 30, 2004, are compelling evidence that the employment was not bona fide.

Given the large and selectively-charged fees, the admission by district officials that the fees were, in part, a recovery of the wages and taxes paid, the extremely large concentration of workers in a one-month time span, and the termination of the program on the last day of the loophole, we can conclude that this employment was not bona fide and, therefore, not qualified for Social Security coverage.  Without that coverage, the loophole can not be used. 
 

Lindale ISD (3800 one-day workers)

Violation of Section 218 agreement

Lindale is a small school district, with 7 buildings and 2892 students, in total, yet it hired about 3800 extra workers in a short time span.[23]  Workers who are members of the Texas Retirement System (TRS), and are in part-time positions, are excluded from the Social Security coverage provided by Lindale's Section 218 agreement.[24]  However, Lindale provided Social Security coverage to 3800 extra "custodians" who worked just one day each, and were active participants in TRS.  If the extra workers were employed in part-time positions, they did not qualify for coverage.  Therefore, one of our audit objectives was to determine how Lindale defines "part-time" employment. 

The evidence came in the form of the following written statement by Lindale's Chief Financial Officer (CFO), Zane Beck: 

We have 9 cafeteria workers who work less than 20 hours per week, and are, therefore, considered part-time.[25] 

Thus, Lindale defines "part-time" as under 20 hours in a week. 
 

Clearly, Lindale's 3800 one-day employees were "part-time" (because they all worked less than 20 hours).  However, is it possible that they were substituting in full-time positions?  No.  In a written statement, Beck stated that the one-day workers were not substituting for full-time workers, and the usage of the one-day workers did not cause the layoff or work reduction of full-time workers.  He added:

This program was an accommodation.  We simply created a one-day position as a ‘custodian assistant' to help in whatever areas that needed attention that day.  Quite frankly, by the time we processed these people for payroll and provided a short orientation, there was only 4 or 5 hours to actually perform the custodial tasks (emphasis added).  

Did the district know that the one-day workers, who were all TRS members, were not covered for Social Security under Lindale's Section 218 agreement?  Yes.  When asked, "is every part-time worker in Lindale given Social Security coverage?" the CFO responded (in a written statement):  "[A]ll part-time workers who are not drawing benefits from the Teacher Retirement System of Texas are covered by Social Security" (emphasis added).  This shows that the CFO correctly understood that part-time workers who do receive TRS (e.g., the retiring teachers) are not supposed to get Social Security coverage.[26]
 

No matter how they're viewed, Lindale's 3800 one-day workers were not qualified for Social Security coverage, and the district knew it.  They worked part-time hours, and in part-time positions.  Therefore, they were excluded from coverage by Lindale's Section 218 agreement.  Without that coverage, the GPO loophole can not be used.

Even if we set aside Lindale's Section 218 agreement violations, the one-day "jani-teachers" were not qualified for Social Security coverage.  A Social Security Ruling asserts that a return of the wages, back to the employer, is strong evidence that the employment is not bona fide.[27]  And, bona fide employment is required for Social Security coverage.  Lindale paid only $41.20 for the day of work, yet charged fees ranging from $200 to $500.[28]  These fees were paid by the one-day workers, but not by any other Lindale employee. 

Further, the fees constituted a complete recovery of the wages paid.  The CFO (Beck) made this clear in the following written statement: 

Fee was charged according to market conditions ...Costs that were defrayed were the salaries paid to participants... (emphasis added)

If the fees were set by the "market," they do not sound like legitimate "processing costs."  And, if the salaries were defrayed by the fees it means that the employees paid for their own wages.  This is strong evidence that the employment was not bona fide.
 

Beyond this, consider the large number of people hired by this small district in a very short time span - one which ended on June 30, 2004 - the day the loophole expired.  

Why would Lindale need so many extra custodians in such a short time span, and why did the need for them end on June 30, 2004?  These large amounts, which dwarf the number of Lindale's permanent custodial work force, are compelling evidence that the work was not bona fide.[29] 
 

Given the large and selectively-charged fees, the admission by the CFO that the fees defrayed "salaries paid to participants," the extremely large numbers of workers on single days, and the near-cessation of all hiring after the GPO loophole expired, we can conclude that this employment was not bona fide and, therefore, not qualified for Social Security coverage.  Without that coverage, the loophole can not be used.

Premont ISD (2287 one-day workers)

Violation of Section 218 agreement

Premont is a very small district, with just 962 students, in total, and 3 buildings; [30] yet the district hired 2287 one-day retiring teachers in less than 2 years.[31]  All hiring stopped on June 30, 2004 - the last day of the GPO loophole.  Workers who are members of the Teachers Retirement System (TRS), and are in part-time positions, are excluded from the Social Security coverage provided by Premont's Section 218 agreement. [32]  However, Premont provided Social Security coverage to 2287 people who worked just one day, and were active participants in TRS.  If these ex-teachers were employed in part-time positions, they did not qualify for Social Security coverage.  Therefore, our objective was to determine Premont's policy for classifying full-time vs. part-time employment.

Premont's business manager, Phyllis Carlile, did not dispute that the one-day workers were in part-time positions.  In fact, she indicated that each program participant was given a letter, drafted by Premont's attorney, indicating that, as one-day workers, they were not entitled to full-time benefits.  However, Carlile asserted that Premont's Section 218 agreement extended Social Security coverage to part-time positions.  She was unable to provide us with a copy of the Section 218 agreement, so we obtained one directly from the state of Texas State Social Security Administrator.  Contrary to Carlile's assertion, the Section 218 agreement indicates that workers in part-time positions are not covered for Social Security, and it includes the following definition of part-time:  "20 hrs a wk or less." 
 

Is it possible that Premont's part-time workers were working in full-time positions?  No.  As noted, Premont's business manager admitted that they were in part-time positions.  And, in a written statement she said:  "In all instances these workers were in addition to our full time employees."  She also responded, "no," when asked whether usage of the one-day workers resulted in layoffs or work reductions for the full-time employees.   In addition, the district's superintendent, David Garza, stated (in a telephone call) that, for the most part, "whatever came up" was given as work. 

No matter how they're viewed, Premont's 2287 one-day workers were not qualified for Social Security coverage.  They worked part-time hours, in part-time positions, and were not qualified for Social Security coverage by the district's Section 218 agreement.  Without that coverage, the loophole can not be used. 
 

Lack of bona fide employment

Even if we were to set aside Premont's Section 218 agreement violations, the one-day workers did not qualify for Social Security coverage.  A Social Security Ruling asserts that a return of the wages, back to the employer, is strong evidence that the employment is not bona fide.[33]  And, bona fide employment is required for Social Security coverage.  Carlile represented to us that each one-day worker earned a total of $40 for his day of work, and paid a $500 fee back to Premont.  No other employees paid this fee.  She didn't have an exact figure, but estimated that it took about 3 hours for Premont to process each application.  Obviously, 3 hours of payroll processing time did not cost Premont $500 in labor costs, so most of the $500 fee exceeded the cost of processing.  Was this excess in fees (over processing costs) an offset to the wages paid to one-day workers?  To Carlile it was, apparently.  When asked:  "How much fee income was collected from temporary workers by Premont," Carlile wrote down amounts that, we later learned, were net of wages paid.  In other words, she regarded the wages as an expense related to the revenue raising, rather than as an expense of normal school operations. 

Even after subtracting the wages paid, the remaining fee income was enormous (well over $1 million).  In a telephone conversation, we asked Carlile what was done with that money, and she responded that the high school auditorium was completely refurbished, a new "Distance Learning Center" was created (complete with its own building and new computers), and more money still remained for other pending projects.  In light of these disclosures, it seems clear that the $500 constituted a return of the wages paid (several times over).  In other words, each one-day worker effectively paid for his/her own wages.
 

Finally, Premont hired very large numbers of one-day workers in very short time-spans.  Although Carlile did not provide specific details, we were able to estimate the number of one-day workers in 2003 and 2004, by using the fee income information given to us.[34]  In 2004, alone, there were an estimated 1670 one-day workers, a number that is equal to over 173% of the entire student population (1670/962 equals 173%).  In addition, Carlile told us (on the telephone) that there were individual days in May and June, 2004, where Premont employed "over 200 workers."  Yet, according to Carlile, there was no more hiring after June 30, 2004 - the last day the loophole was available.  For a tiny district, with just 962 students at all age levels, these high employment concentrations, and the sudden termination of the program, are compelling evidence which indicate a lack of bona fide employment.

Given the large and selectively-charged fees, the reporting of the wage expense as an offset to the fee income (rather than an expense of normal operations), the extremely large concentration of workers in short time spans, and the admission that the program was ended on the day the loophole expired, we can conclude that this employment was not bona fide and, therefore, not qualified for Social Security coverage.  Without that coverage, the loophole can not be used. 
 

Coleman ISD (3659 one-day workers)

Coleman's misrepresentations to SSA

Coleman is a tiny district with 4 schools and a total of just 1019 students (at all age levels),[35] yet it hired 3659 one-day aides, food service workers, and custodians.[36]  Coleman was a pioneer, so to speak, in the one-day worker scam.  In 2001, it hired a couple of law firms to set up its one-day worker program, and it sought SSA's blessing for that program.  Using FOIR, we obtained the file from SSA, and reviewed the statements made by Coleman.  SSA gave Coleman its blessing, but it was based on many Coleman misrepresentations - if not outright lies:

Thus, Coleman set up a prototype one-day worker program, and got SSA's blessing for it.  However, that approval was based upon Coleman's misleading, dissembling statements. 
 

Violation of Section 218 agreement

Workers who are members of the Teachers Retirement System (TRS), and are in part-time positions, are excluded from the Social Security coverage provided by Coleman's Section 218 agreement. [39]  However, Coleman provided Social Security coverage to 3659 one-day "custodians," who were active members of TRS.[40]  If they were employed in part-time positions, they did not qualify for that coverage.  Therefore, we tried to determine Coleman's policy for defining full-time vs. part-time employment.

Using the Texas Public Information Act, we asked Coleman's superintendent, Royce A. Young, for documentation of the district's policy for defining full-time hours.  In response to this request, we received nothing specific, except for a "TRS-ActiveCare" Enrollment Guide.  It stated that, to be eligible for that particular health care benefit, an employee has to work 10 or more hours per week.  No other definitions were provided, and there was nothing given to us that supported the contention that one day of work (6 to 8 hours total) constituted a full-time position (as Coleman had indicated to SSA).
 

We already knew, however, that Coleman's general definition of a full-time position was one requiring work of more than 20 hours in a week.  In 2003, PPTO director Joseph Fried called Coleman's business manager, Judith Wilkinson, and pretended to be polling Texas school districts on how they define part-time vs. full-time employment.  Was it based on hours worked in a day, or in a week?  How many hours?  She replied that hours in a day didn't matter.  At Coleman, full-time employment, for nonprofessionals, meant over 20 hours in a week. 

And, recently, in June, 2005, Fried called Barbara Kirkpatrick, Coleman's Food Service Director. Using a pseudonym, he inquired about employment for next school year.  She explained that everyone in food service worked full-time, as determined by the number of hours worked in a week.  Her crew, she explained, worked varying hours each day, but averaged around 32 hours per week (although they could average a little less and still be considered "full-time").  Kirkpatick's statements were compatible with those of Wilkinson (who said "over 20 hours" was the requirement for full-time employment). 
 

In addition, we were able to obtain strong documentary evidence, supporting the over 20-hour-per-week definition of full-time employment.  We obtained a copy of Coleman's Section 218 agreement (the most recent on file) from the Texas State Social Security Administrator.  It includes a notation defining part-time position as "20 hrs or less per week." 

If "20 hrs or less per week" is considered part-time at Coleman, then its 3659 one-day "jani-teachers" were part-time workers.  However, is it possible that these part-time workers substituted in full-time positions?  No.  That's not possible, given that the one-day workers greatly outnumber the regular staff.[41]  In this tiny district, with just over a thousand students, there are not enough full-time custodians to necessitate thousands of substitute workers.
 

And, finally, did Coleman or its one-day workers expect the work to last longer than one day?  No.  The standard correspondence issued to the workers indicated that the work would only last one day.[42]

No matter how they're viewed, Coleman's 3659 one-day workers were not qualified for Social Security coverage. They worked part-time hours, in part-time positions and, thus, should have been excluded from Social Security coverage by Coleman's Section 218 agreement.  Without that coverage, they do not qualify to use the loophole.
 

Lack of bona fide employment

Even if we were to set aside Coleman's Section 218 agreement violations, the one-day "jani-teachers" did not qualify for Social Security coverage.  A Social Security Ruling states that a return of the wages, back to the employer, is strong evidence that employment is not bona fide.[43]  Coleman paid each one-day worker $38.63, yet charged fees ranging from $100 to $300.[44]  Although the district did not have a breakdown of actual processing costs, it estimated that it cost over $180 to process each one-day worker.[45]  If we accept this to be a reasonable estimate (although it seems very high), it would imply that a worker who paid a $200 fee, returned part of his wages, and a worker who paid a $300 fee, returned all of his wages.[46]

Unlike every other district we reviewed, Coleman also charged the fee to regular (permanent) workers.  However, the fee was refunded to anyone who stayed employed more than 30 days, so very few workers, other than the one-day retiring teachers, actually paid the fee.[47]
 

The concentration of workers within a short time span is another indication that the work was not bona fide.  There were 660 one-day workers, just within the month of June, 2004.[48]  Yet, school was not in session, the cafeteria was closed, and there was no summer school.[49]  These numbers, and the fact that the hiring virtually stopped after June 30, 2004 - the last day of the loophole - are new and compelling evidence that the employment was not bona fide. 

[1] As these were mostly tiny school districts, with small staffs, most of the participants in the one-day hiring programs were retiring teachers from larger school districts.

[2] Social Security Ruling SSR 76-13a [online] (Social Security Administration, 1976- [cited 14 May 2003]); available from http://www.ssa.gov/OP_Home/rulings/oasi/43/SSR76-13-oasi-43.html.

[3] This was not a formal audit in accordance with generally accepted auditing standards or governmental auditing standards, as we did not have access to all documents and other resources needed for such audits.  However, we were able to gather and synthesize substantial amounts of evidence, and have identified several potential irregularities that warrant further investigation by the OIG.

[4] Per GAO-03-498T, the estimated cost of the spousal/survivor benefits will be, on average, $93,000 per one-day worker.

[5] Anahuac gave coverage to 176 one-day workers, of whom 22 were not covered by its Section 218 agreement.

[6] The estimated student population is per "DistrictBug.org," a free Web site directory of unknown accuracy.  Access Web site at http://www.districtbug.org/state-TX.html.. 

[7] West's business manager sent us a 2-column listing of employment dates and employee names.  There were 1795 names on that listing.

[8] A few people were "grandfathered" from the changes to the law, and this may explain why two people worked after June 30.

[9] Per inspection of the Section 218 agreement between Texas and the school district, and inspection of the relevant modification to the original Section 218 agreement between Texas and HEW.

[10] Fried talked with Amy Podsednik, an employee in the business office.  She was the contact person at West for the one-day hiring program, according to a teachers' union Web site.

[11] These were documents obtained from West's business manager.

[12] The instructions and the other correspondence were documents obtained from West's business manager.

[13] Social Security Ruling SSR 76-13a [online] (Social Security Administration, 1976- [cited 3 October 2005]); available from http://www.ssa.gov/OP_Home/rulings/oasi/43/SSR76-13-oasi-43.html.

[14] This information was received from West's business manager.

[15] We suspect that an examination of West's general ledger of accounts would definitively show that most of the fee revenue went into "fund balance" (i.e., profits).

[16] This information was received from West's business manager.

[17] Effective 7/1/04, the Social Security Protection Act of 2004 ended (in most cases) use of the GPO loophole.

[18] Ibid., DistrictBug.org @ http://www.districtbug.org/state-TX.html. 

[19] Hudson's payroll accountant sent us a listing of employment dates and employee names.  We counted 1603 names on that listing.

[20] Per inspection of the Section 218 agreement between Texas and the school district, and inspection of the relevant modification to the original Section 218 agreement between Texas and HEW.

[21] Ibid., Social Security Ruling SSR 76-13a

[22] The per-unit fee amount was estimated by dividing total fee income by the total number of one day workers.  This information, and the wage amount ("minimum wage"), were provided by Hudson's superintendent and payroll accountant.

[23] Ibid., DistrictBug.org @ http://www.districtbug.org/state-TX.html.  The 3800 worker figure was obtained in the form of typed statements Lindale's Chief Financial Officer (CFO).  NOTE: THE CFO IS NOT ENTIRELY SURE OF THE NUMBER OF ONE-DAY WORKERS.  IT COULD BE AS LOW AS 3480, OR AS HIGH AS 4137.  THE 3800 AMOUNT IS AN AVERAGE.

[24] Per inspection of the Section 218 agreement between Texas and the school district, and inspection of the relevant modification to the original Section 218 agreement between Texas and HEW.

[25] Beck made reference to part-time cafeteria workers because Lindale has no part-time custodial workers, at the moment.

[26] Nevertheless, most part-time employees at Lindale do get Social Security coverage under the mandatory coverage rules, because most of the (real) part-time workers are not in a government pension plan (TRS).  Those who are in TRS (such as the 3800 retiring teachers who each worked a day) do not qualify for Social Security coverage under Lindale's Section 218 agreement, and are not subject to the mandatory coverage rules.  In other words, there is no lawful basis for extending Social Security coverage to Lindale's part-time workers who are TRS members.

[27]Ibid., Social Security Ruling SSR 76-13a.

[28] This information was provided in the form of a written statement from Beck.

[29] The amounts were hand-written by Lindale's CFO, in answer to one of our information requests.    

[30] Ibid., DistrictBug.org @ http://www.districtbug.org/state-TX.html. 

[31] The number of workers was estimated from information provided to us in written statements made by the district's business manager.  

[32] Per inspection of the Section 218 agreement between Texas and the school district, and inspection of the relevant modification to the original Section 218 agreement between Texas and HEW.

[33] Ibid., Social Security Ruling SSR 76-13a

[34] Estimated by dividing the total net fee income for the year by the per unit net fee (i.e., by $500 fee - $40 wage)

[35] Ibid., DistrictBug.org @ http://www.districtbug.org/state-TX.html. 

[36] This information was obtained from documents provided by Coleman's superintendent.

[37] This information was obtained from documents provided by Coleman's superintendent.

[38] This information was obtained from documents provided by Coleman's superintendent.

[39] Per inspection of the Section 218 agreement between Texas and the school district, and inspection of the relevant modification to the original Section 218 agreement between Texas and HEW.

[40] This information was obtained from documents provided by Coleman's superintendent.

[41] Although we were unable to established the number of full-time custodians at Coleman, it is likely to be a very small number, as this is a tiny district with only 1019 students, in total.  It doesn't seem possible that the regular custodians could require 1000 or more substitutes per year.

[42] This information was obtained from documents provided by Coleman's superintendent.

[43] Ibid., Social Security Ruling SSR 76-13a

[44] The $38.63 amount was calculated by multiplying 7.5 hours (per document given by Coleman) times minimum wage.

[45] This information was obtained from documents provided by Coleman's superintendent.

[46] Of course, whether the fee was for processing or not, the employee lost money by working.  This, in itself, means the employment was not bona fide.

[47] This information was obtained from documents provided by Coleman's superintendent.

[48] This information was obtained from documents provided by Coleman's superintendent.