Ruling: Auditor didn't have sufficient cause to dismiss Kathleen Davies

A new Department of Labor decision says state Auditor Tom Wagner did not have sufficient cause for firing his No. 2, Kathleen Davies, in late 2017, because the evidence he cited in her discharge letter consisted largely of hearsay and personal opinion.

John Fluharty, Wagner's spokesman, said state regulations prohibit him from commenting on personnel issues. In July 2016, the News Journal reported Davies, of Dover, had been put on paid administrative leave after complaints surfaced she deviated from state guidelines on travel expenses. 

She was dismissed by Wagner on Dec. 20, 2017, and is now running against Dennis E. Williams and Kathy McGuiness to be Delaware's next state auditor. Wagner in February announced that after nearly 30 years in office he will not be seeking re-election this fall due to serious health concerns. 

The Department of Labor decision does not mean Davies will get her job back. The Merit Employee Relations Board, responsible for grievances and appeals involving state employees, will make its own determination regarding Davies' dismissal.

It met last week to consider a "motion to quash" a subpoena, but it is unclear what documents Wagner's office wanted withheld from the deliberations. Deborah Murray-Sheppard, administrator of the Merit Employee Relations Board, said Davies' hearing will be held July 19-20 and will not be public unless Davies requests that it is. 

The Department of Labor decision is separate from the pending Merit Board decision and was issued by the Division of Unemployment Insurance in late May. 

Davies was initially denied unemployment benefits, the "referee's decision" says, because she was terminated for violating generally accepted government auditing standards, among other things. Davies appealed that decision in January. 

An unemployment division tribunal found very little hard evidence in the case, the decision says. Also, Wagner offered "confusing, circular" testimony about Davies' firing and his own responsibilities regarding cash, travel and other expenditures. 

Though Wagner hired an independent outside firm, Grant Thornton, to investigate allegations made against Davies by another employee, he was unable to produce a complete copy of the report to place into evidence, according to the referee's decision.

Davies on Monday did not immediately respond to a request for the Grant Thornton document, which, if it exists, would be exempt from the Freedom of Information Act because it involves a personnel matter.  

"Although he signed a six-page letter on Oct. 11, 2017, recommending (Davies) for discharge, the auditor frequently responded 'I don't know' to questions relating to the specifics ...," the unemployment decision says. "In addition, the auditor in his letter of Oct. 11, 2017, appears to rely more heavily on the opinions, assertions and allegations of the (Office of Auditor of Accounts) staff rather than on actual findings by Grant Thornton or on his own personal knowledge of events." 

There was one staff member in particular that made allegations about Davies, the unemployment decision says, an "audit manager" who is not named. 

The document says the manager disagreed with certain decisions and discretionary judgments made by Davies in Wagner's absence. In March 2011, the auditor had executed a "delegation of authority," giving Davies the power to handle the department's affairs and assume his responsibilities if he was out of the office. He also forwarded his mail and calls to Davies and gave her access to his email account. 

"It is undisputed that the auditor was frequently absent from the office," the decision said. 

In 2015, instead of taking her complaints directly to Davies or Wagner, the audit manager approached the Office of Management and Budget. The manager's reasoning was that she did not know the status of the relationship between Davies and Wagner, the decision says. 

After expressing her concerns to the state budget office, the manager decided she needed evidence, the decision says. She decided to conduct her own personal investigation on Davies, without any authority or instruction to do so and without anyone else's knowledge, according to the unemployment decision. 

She presented the results of that investigation to the state budget office, alleging that Davies had violated government auditing standards, as well as other rules. For one, the manager told the budget office that Davies had attended an AFL-CIO union conference in Pittsburgh without Wagner's approval. 

But evidence given at a hearing showed Wagner did indeed sign off on the trip, and there was no evidence Davies misled him regarding the topic of the conference. 

The Department of Labor discounted much of the evidence produced by the audit manager, saying it was "rife with hearsay, speculation and subtle misleading representations of the contents of evidentiary documents and interpretations of policies and professional standards." 

The tribunal also looked into an incident in which Davies sent a draft report of a unit count audit to state Rep. Kim Williams, D-Newport. The annual audit examines whether or not schools are reporting accurate enrollment numbers, which affects how much state funding they receive. 

Davies had recently been at the center of a debate over the auditing process for charter schools. In a rash of scandals, several charter school leaders were found to be using taxpayer money for personal purchases, using funds for questionable reasons or not keeping track of financial records.

Davies made several appearances in the Legislature to testify in support of a bill sponsored by Williams that would give the state auditor authority to select the firms that audit charter schools, which unlike traditional schools, work out their own contracts. 

Wagner's termination letter said Davies had erred in disclosing the unit count audit to Williams. But the Department of Labor determined Davies had the authority to do so, and that sending the audit to Williams did not amount to misconduct.

State auditors are allowed to send drafts to various officials for comment, and Williams is vice chair of the House Education Committee in the General Assembly. 

Williams openly supports Davies in her race for state auditor and is helping run her campaign. 

The Office of Budget and Management informed Wagner of the allegations made against Davies on March 21, 2016, at which point he began actively ignoring her, according to the unemployment decision. He put her on paid administrative leave on May 17, 2016, the day after the unit count audit was released. 

He did not discuss the allegations with Davies and did not ask questions about the audit. She did not receive a disciplinary report or warning and had not for the two years before she was fired, according to the referee's decision. 

Davies said as a merit employee — who earns their position through competition versus their political connections — she was unable to contest her firing until just recently. 

"Merit employees are subject to a process that is controlled and driven by the state," she explained in an email. "Hence, I had to follow the state’s guidelines and processes, which meant I had to stay on paid leave as long as the state kept me there in order to exercise my merit and legal remedies. I and other merit employees have suffered through this process with no option other than to engage legal counsel and wait."

Davies said she was abruptly put on paid administrative leave without evidence of wrongdoing or any opportunity to respond. Employees in her position go through their day-to-day with no information about what the concerns are or when they will get an opportunity to defend themselves, she said. They must retain and pay for their own legal counsel while wading through the various steps, filings and requirements for the administrative and legal proceedings. 

"The state chose to keep me on paid leave for the 19 months before I could move forward with the merit and legal process," Davies said. "My legal representation, as is the case with other merit employees, is at my own expense. Had I resigned from my position during the 19 months, I would have lost my rights to these remedies."           

Davies worked as the chief administrative auditor in the Delaware Auditor's Office for more than six years, and before that was deputy director for the New Jersey Office of the State Comptroller.

She has filed as a Democrat, as have McGuiness and Williams, which means they will face off in a primary election on Sept. 6. 

State Rep. John Kowalko, D-Newark, recently endorsed Davies, as did Delaware United, which describes itself as a non-partisan "group of united people, from all walks of Delaware, that has the goal of pushing forward on a path to change our state, and point it in the right direction." 

Unemployment benefits decision

Merit Board hearing

Contact Jessica Bies at (302) 324-2881 or jbies@delawareonline.com. Follow her on Twitter @jessicajbies.

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