Lack of Federal Audit Costs Hermandad Grant

Hermandad Mexicana Nacional will not receive a $2.1-million federal grant to teach English and citizenship classes for immigrants because the embattled Latino rights group failed to submit an audit proving it is financially sound, state education officials said Wednesday.

“They’re not eligible” to receive the money, said Gabriel Cortina, deputy superintendent of the state Department of Education, which distributes the federal funds. “They have not submitted a required federal audit showing financial stability and soundness.”

Ted Zimmerman, who oversees the state’s adult education division, added: “Our obligation to the federal government is to shut them off.”

Bert Corona, executive director of Hermandad, agreed with the state that the required audit has not been submitted. But he said the group is owed at least $1 million because it has taught English language and citizenship classes since July and has been assured repeatedly that it would be paid as soon as its audit was submitted.

“If they want to shut us off, we can prevent it,” Corona said. “We can fight back. We can go to court. We can go to the state Legislature. We can go to pickets. We’re not afraid. We need the money and we’re entitled to it and we’re going to fight for it.”

The state’s action comes just two months after it completed a review of finances at Hermandad’s Santa Ana and North Hollywood offices, concluding that the organization was heavily in debt.

“It did not have enough revenue to meet its expenses and debt,” said Roger Blanco, the state auditor who performed the examination.

Blanco said he found that workers in the North Hollywood office had not been paid for months, that Hermandad owed hundreds of thousands of dollars in federal taxes and state unemployment benefit repayments, and that it was liable for huge loan repayments.

Corona said he had not been notified of the state’s decision to withhold the funds, which he blamed in part on the publicity surrounding a criminal investigation by the Orange County district attorney’s office and the California secretary of state. State officials said there is no need for them to notify Hermandad because its application was never completed.

Investigators are trying to determine whether Hermandad illegally helped register 227 noncitizen students in its Santa Ana classes last year, some of whom then cast ballots in last November’s election. State education officials said the denial of funds was not related to the criminal investigation.

Hermandad applied in May for the $2.1-million grant to finance classes during the 1996-97 fiscal year. Corona said an average of 2,500 students a month are being taught at 70 sites across Southern California.

Hermandad was the second largest recipient in the state of public funds for the classes in recent years, with only the Los Angeles Unified School District receiving more, a state official said.

Corona acknowledged that the organization is in debt, owes back federal taxes and is behind on various loan payments. The organization needs the federal grant money to pay its bills, Corona said, but he added that Hermandad’s situation is not unusual.

“We’ve been after that money since December,” he said. “The state keeps the money. They pay us late after we provide the services. So of course we accumulated other debts. This is the plight of the nonprofits.”

Cortina, the deputy superintendent of education, said the decision not to fund Hermandad for 1996-97 was not made in haste. He said Hermandad failed to submit an independent audit that was due to the state nine months ago or to address other concerns about its finances in writing. Cortina said that even if Hermandad produced the audit immediately, it is “highly implausible” that it would receive funds for this year.

Corona said the audit has been delayed because Hermandad couldn’t afford to pay its former auditor and a replacement is inexperienced.

Jim Balbin, the independent certified public accountant hired by Hermandad in September to perform the audit, said he had not been able to complete it because he had not received necessary documents for Hermandad’s Santa Ana and North Hollywood offices. But he expects a draft to be finished by next week.

The independent audit is required by the federal Office of Management and Budget for any nonprofit agency that receives public funds. State documents show that state officials made repeated efforts to obtain the missing audit so the funds could be approved and released.

Cortina said he finally directed his staff this week to “allocate any remaining monies for this year” to programs that were already approved to provide the badly needed classes.

State education officials Blanco and Zimmerman said they were concerned that a portion of the $2.1-million grant might end up being used to pay off Hermandad’s debt rather than provide classes. Last week, for instance, the state Department of Education paid $178,000 in overdue state payroll taxes for Hermandad, using funds owed Hermandad for classes from fiscal year 1995-96.

Zimmerman joined the Department of Education last November and learned at that time that Hermandad was being sued by its own bank for nonpayment of loans and that it owed nearly $200,000 in overdue state payroll taxes. He ordered the review of Hermandad’s finances at the organization’s Santa Ana and North Hollywood offices.

Blanco, who performed the review, said he found a number of problems after visiting the Hermandad offices between Dec. 2 and Dec. 6 and inspecting the organization’s accounting systems.

There were “bits and pieces” of a general ledger, of receipts and bills, he said. Poor accounting methods were being used throughout the organization, Blanco said.

One of the problems, Blanco said, was that one set of accounting books was kept at the Santa Ana office, run by Nativo V. Lopez, and another set was kept at the North Hollywood office, run by Corona, then combined at year’s end, making them difficult to reconcile. Each office also used different corporate names and federal identification numbers.

Corona said the books are being combined at the state’s request.

The reviewers also went to class sites in North Hollywood and in Orange County, and discovered that there was no classroom monitor, as required, to oversee the several dozen sites where Hermandad holds its classes. That meant there was no guarantee classes were being taught properly, and there was no expert that teachers or students could go to with questions or complaints.

Corona said the reviewers were “lying.” He said there were monitors at all times for the classes.

At a class they visited in Anaheim, reviewers said, there were no attendance sheets for students to sign, making it difficult to accurately track how many students were taking the classes.

“That raises a red flag because those sign-in sheets are our means for ensuring the accuracy of hours charged to the program under our contract,” Blanco said.

Hermandad, like other schools and nonprofit organizations receiving federal funds to hold classes, is required to submit records showing how many students have received instruction and when they received it. The organization is then paid each quarter, after the classes are held.

Corona said he couldn’t comment on classes held in Orange County but said it would be unusual that attendance sheets wouldn’t be used, because they wouldn’t receive reimbursement. Lopez, who runs the operations for Orange, Riverside and San Diego counties, did not respond to telephone calls or faxed requests for comment.

After completing his weeklong review in December, Blanco said, he and Zimmerman sat down with Corona, Lopez and Montano, Hermandad’s accountant. The state officials warned that the problems had to be corrected “as soon as possible” if they wanted to receive any funds for the current year, or the balance of funding due them for 1995-96, which totaled $238,263.60.

Hermandad was ordered to make a number of remedies, including handing in its overdue audit as soon as possible and completing a detailed monthly plan to show how the organization would resolve its debt. Corona said the state’s recommendations are being followed.

The organization was told to resolve the lawsuit filed against it by Union Bank, so the bank cannot legally seize grant money from the organization that should have gone for classes. Union Bank sued Hermandad in July 1996 after the bank gave the group a $999,000 line of credit and Hermandad failed to repay bills charged to it.

Court records show the lawsuit was settled Jan. 9. Corona said Hermandad spent $650,000 of the loan and was unable to repay it. But, he said, the bank and Hermandad have agreed on a 20-year repayment plan with the first payment due in June.

Education officials said they had not notified Hermandad of the decision in writing, and that there was no need to do so.

A letter signed by Zimmerman was express-mailed to Corona last Friday, but the letter informing him that most of the money still due Hermandad from its 1995-96 grant was being used to pay the overdue state payroll taxes. It also said Hermandad’s 1996-97 grant application was being “reviewed” in light of the auditor’s findings in December.

Cortina, of the education department, said part of the reason Hermandad would not receive its grant is because there are more than 400 other organizations in California that hold classes for immigrants, had properly completed their applications and could use the money instead.

Officials said other groups that provide such classes have lost their funding. He said the demand for classes from immigrants is at a record high because of feared cuts in benefits and it makes no sense to hold up the funds any longer.

He also said he doubted the organization would be able to straighten out its tangled finances in time to apply for renewed class funding for the 1997-98 fiscal year. That application is due in May.

Times staff writers Dexter Filkins and John Gonzalez contributed to this report.

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