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If you read my book, How Social Security Picks Your Pocket, you know about the outrageous scandal in Texas, where a few tiny school districts hired thousands of retiring teachers
to work (pose?) as "janitors" for a single day. This was done to exploit a loophole in Social Security law. Essentially,
the loophole worked like this: If a retiring teacher paid FICA tax related to his last day of earnings (prior to retirement),
and he or she was also covered by the Texas Teacher Retirement System (the state governmental pension plan), that person would
be eligible to "double dip" for Social Security benefits. Specifically, he or she could collect his normal government
pension while simultaneously collecting spousal or survivor Social Security benefits. This loophole gave the retiring teachers
benefits that 96% if American workers can never qualify for. And, in many cases, the retiring teachers received the benefits
after a lifetime of NOT paying any FICA tax, whatever.
Indeed, many teachers paid just $2.31 in FICA tax related
to their one-day stints as "custodians." Often, that was the only amount paid during their entire careers because
Texas teachers are normally exempt from Social Security tax. As a result of this little farce, these teachers will collect,
on average, $113,000 in extra benefits - each! In total, the Social Security trust fund will lose $2.5 billion.
Why did the school districts create these one-day janitor mills? Perhaps it was due to the huge "payroll processing
fees" they collected from the teachers. A retiring teacher would pay as much as $1,200 for the privilege of working a
single day as a custodian at minimum wage. Some school districts hired thousands of "custodians" and several collected
over $1,000,000 in fees, in just a few months. Also, there were some individuals within the school districts who personally
made thousands of quick bucks due to these bogus hiring practices. For example, in a 30-day period the ex-superintendent of
one school district, and his family, made over $60,000 in program administration fees.
After writing my book, I investigated many of the school districts, using the audit skills I have developed as a veteran
CPA. Working with the Public Program Testing Organization (PPTO) I produced a 63-page outline of fraud, which was presented to Social Security Inspector General Patrick O'Connell in October, 2005. This triggered a lengthy
OIG audit culminating in a Report that confirmed nearly every allegation. Although the OIG urged the Social Security Administration to take action, none has
been taken thus far. Instead, SSA has adopted a defensive attitude and an unwillingness to acknowledge the huge financial
scandal that took place in its programs. We are awaiting responses to Freedom of Information Requests to determine exactly
what remedial action, if any, has been taken by SSA.
With the help of Kreindler and Associates, a Houston-based law firm specializing in "whistle-blower" cases, the PPTO and I have attempted to hold the guilty
parties accountable in federal courts. Thus far, this has been an up-hill battle, with the cases being challenged on jurisdictional
grounds related to our alleged lack of "legal standing" to represent the federal government. But, we intend to fight
on. See update, below.
Link to the Inspector General report issued in 2007
Link to overview by David Hogberg, Ph.D., published by the National Center for Public Policy Research
Link to the Public Program Testing Organization
Update - May 2008: Although
the Office of Inspector General confirmed our allegations and the essential role those allegations had in triggering their
own investigation, our legal complaints were dismissed. Specifically, our
complaints against the West and Hudson Independent School Districts were dismissed because the Public Program Testing Organization
(PPTO) and I were unable to persuade the courts that we had "legal standing" to represent the federal government.
With regard to the West complaint, the 5th Circuit Court of Appeals concluded
that "the potential for abuse by Texas school districts ... was well known" before the PPTO and I got involved.
A lower court issued a similar ruling with regard to Hudson. On this matter the courts were clearly confused because
the earlier public controversies, and references to "abuse," concerned the cost and fairness of a legal loophole
and whether the law should be changed to eliminate it. In contrast, we alleged illegal conduct. That is, some
of the school districts could not legally give the FICA coverage to their one-day workers because of special agreements they
had executed decades earlier. These agreements barred the provision of FICA to workers in part-time positions -
the definition of which included the one-day workers. None of these matters was mentioned in any public document
or contemplated by any agency of the government.
OIG Agreed with us The OIG, the sole governmental entity to investigate our claims, agreed that
our allegations were vital and unique, and the lead auditor for the OIG audit stated this
under oath. OIG understood the distinction between the earlier public controversy about an unfair but legal loophole
and our claims that certain districts did not, in actuality, qualify to use that (otherwise legal) loophole. On page
2 of its Audit Report OIG stated: "We found that individuals employed as 1-day workers by the seven Texas school
districts did not appear to meet the requirements to receive a [legal] GPO exemption"
(emphasis added).
In addition, OIG concluded:
- the
federal government was in the process of paying out over $2 billion to ineligible beneficiaries, and
- the government discovered this wrong-doing solely because of the allegations brought
forth by the PPTO and myself.
Although the evidence in support of these OIG assertions
was overwhelming and undisputed, it was completed ignored by the courts. Support for OIG assertion no. 1, above, is
documented in the OIG Audit Report and, with respect to West ISD, additional support is found on another page of this Web site. Support for OIG assertion no. 2 (the role of the PPTO and myself in identifying the wrong-doing) is presented
below:
Uncontested evidence supporting our role in identifying the illegality
First, there is the letter written to me in October 2005 by Steven L. Schaeffer, the Assistant Inspector General for
Audit of the OIG. He stated:
Dear Mr. Fried:
This is in response to your October 7, 2005 letter to the Inspector General
concerning the application of Government Pension Offset for Social Security beneficiaries who were previously employed by
several Texas school districts. Your letter states that approximately 22,000 individuals
may have been improperly exempted from Government Pension Offset. You also estimated that this will result in the improper
payment of $2 billion in Social Security trust funds.
We take your concern seriously and will
open an audit to verify the facts presented in your letter. We will contact you to discuss our planned review and request
evidence gathered during your audit (emphasis added).
Notice that
the references in Mr. Schaeffer's letter directly match statements made 15 months later on page 2 of the OIG's January 2007 audit report (where the unauthorized payments were outlined):
In October
2005, we received an allegation that approximately 22,000 individuals who retired from
15 Texas independent school districts before July 1, 2004 may have been improperly exempted from GPO because they did not
meet the last day of employment provision. Specifically, the allegation stated the 22,000 individuals paid the school
districts fees to work for 1 day as a non-professional employee. According to the allegation, the imporoper exemptions
granted to these individuals will cost the Social Security Trust Fund $2.1 billion
(emphasis added).
Even more compelling is the sworn declaration of James Klein,
the lead auditor who investigated the Texas school districts on behalf of the Office of Inspector General. On page 3
of his declaration, which is linked below, Mr. Klein stated:
Joseph Fried and the Public Program Testing Organization (PPTO) were the source of the allegations and information referred
to in the paragraph quoted above [the cited paragraph from the OIG's January 2007 Audit Report]. At the time the
allegations were received, we had no plan or request to audit any Texas independent
school district. Had the allegations and information not been brought to our attention, OIG would not have audited any
of the Texas school districts (emphasis added).
In dismissing our complaints, the
courts noted that some of the evidence accumulated in the PPTO audit of school districts was acquired through Freedom
of Information Requests (FOIR). In the 5th Circuit, FOIR requests of any type (even
for perfunctory documents such as employee time cards or paystubs) are construed to be government "reports," and
as such make it more difficult to show legal standing. In our case, however, none of the FOIR requests, alone or in combination, alluded
to wrongdoing of any kind. The PPTO and I were the original (and sole) sources of the allegations.
The
courts also noted that the government already knew that school districts were hiring teachers as nonprofessionals for a single
day, and should have been able to figure out that some districts might be giving Social Security coverage improperly.
While it is true that the government knew of the one-day hiring, the government was clueless with regard to the fact that
some school districts were giving unauthorized Social Security coverage for that one day of work. This was noted by
OIG Auditor James Klein, who said that the prior public documentation:
"...did not address the allegations made by Mr. Fried and PPTO, including whether
(a) certain Texas independent school districts violated their Section 218 Agreements by providing Social Security coverage
to employees who did not qualify for such coverage, (b) some school districts disregarded the exclusion of part-time employuees
contained in the Section 218 Agreements, (c) the sheer number and concentration of one-day workers hired by certain school
districts demonstrated that their employment was questionable, and (d) fees charged to the one-day workers by certain school
districts were used to reimburse the cost of wages paid.
The defendants were unable to produce a single public or governmental reference to alleged illegality. In addition,
the government's desire and ability to eventually detect the fraud is highly doubtful, given the conclusion reached by
OIG auditor James Klein. As noted, he stated: "Had
the allegations and information not been brought to our attention, OIG would not have audited any of the Texas school districts."
In light of the evidence supporting our "legal standing," it is
difficult to understand the courts' rulings. We can only surmise that the standards imposed by the courts were
particularly stringent due to the nature of the defendants. After all, our complaints were against school districts
- not Haliburton. And, opposing counsel did not hesitate to remind the courts of the huge financial burden our case could
impose on their clients, and on the communities they serve.
After receiving adverse rulings with respect to our
complaints against West and Hudson, we dropped all other cases.
Despite the unsuccessful outcome, I want
to express my deep thanks and admiration for the legal work done by Mitch Kreindler of Kreindler & Associates. He wrote many brilliant briefs but they seemed to fall on deaf ears.
Links to some of the cited documents and other information are found below.
Letter from Steven Schaeffer, thanking Fried for his allegations
The OIG's Audit Report, confirming the allegations made by Fried and the PPTO
Declaration of OIG lead auditor James Klein
Link to information about West ISD
Update - June 2008 As noted, I have sent Freedom of Information Requests to the Social Security Administration, asking for documents
related to any actions they have taken in response to the January 2007 report by the Office of Inspector General. The response will be posted when it is received.
Any thoughts? I'd like to hear them?
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