Internal auditor finds no wrongdoing after TSTC bought furniture from store owned by CFO

"Texas State Technical College bought furniture from store owned by CFO and his wife" was first published by The Texas Tribune, a nonprofit, nonpartisan media organization that informs Texans — and engages with them — about public policy, politics, government and statewide issues.

When Texas State Technical College renovated its administrative offices in Waco a few years ago, a recently opened local antique shop — James & Reid — was selected to furnish some $200,000 worth of decorations and furniture.

Among other items, the store provided an antique neoclassical double pedestal mirror ($595), a Henri II-style bookcase ($1,650), a chandelier ($598), a variety of apothecary tins and jars ($1,480), and more than $67,500 worth of hand-woven antique, Persian or Turkish rugs, according to state comptroller documents and receipts viewed by The Texas Tribune.

The college paid directly for more than $50,000 of the purchases, and the nonprofit TSTC Foundation kicked in another $149,000.

James & Reid is owned by TSTC’s chief financial officer and vice chancellor, Jonathan Hoekstra, and his wife, Melissa. But college officials say they were aware of the potential conflict at the time and that Jonathan Hoekstra was not involved in deciding what and whether to buy from his wife’s store.

In response to a complaint, the school’s internal auditor looked into the purchases and found no wrongdoing or misuse of funds.

“We knew that it could create an optics issue," said TSTC Chancellor Mike Reeser. “But … beyond optics, what we were looking for is: Is this legal? Does it pass muster? Does it comply with all the state laws and rules? And we got an affirmative answer in every case.

“I vehemently object with any allegation that there was any wrongdoing or improprieties. In fact, I would welcome further investigation if forensic folks would like to come in and look it over.”

Texas State Technical College offers two-year associate degrees and certificates at 10 locations across the state. It enrolls about 10,000 students, 4,200 or so on a campus in Waco, with dozens of programs like aircraft pilot training technology and cloud computing. Part of the school’s state funding is based on graduates’ employment outcomes, and the college offers a money-back guarantee for students in certain programs who can’t find jobs within six months of graduating.

The college’s operating budget is $240 million this fiscal year.

Before administrative offices were moved to the third floor of the John B. Connally building, the Waco headquarters were in an old Air Force facility that TSTC inherited in the 1960s. The office was “plagued by varmint infestations,” according to the auditor’s report, and “reflected its age” in its outdated “façade, layout, and electrical and mechanical systems.”

After a consolidation merged the system’s four colleges into one in 2015, the administrative offices were moved. Meeting areas, a conference center, a state-of-the-art boardroom and “a space to court substantial donors,” were created, the auditor's report said. Photos posted on the design website Behance show the refurbished area is modern, with exposed brick walls, winged armchairs and intricately patterned rugs.

College officials sought a specific aesthetic that “looked like a converted industrial space,” Reeser said, “because heavy industry is the core part of our business.”

They had been “disappointed” with the work of past designers, he said, but were familiar with James & Reid and “knew that they would be able to provide the results we were seeking so that the money we spent was well spent.” The store was asked to make a bid.

The process was done with “total transparency,” Reeser said. The third-floor renovation cost $2.97 million in all, including the construction, furnishings and IT infrastructure.

James & Reid was formed shortly before the renovation, according to state business records. A 2017 feature on the store published in a Waco outlet notes that “Melissa and her husband, Jonathan, chief financial officer for Texas State Technical College, carefully considered where they would open” the shop.

When Jonathan Hoekstra learned James & Reid was being considered for some of the TSTC renovation business, he disclosed his interest in the company to the college’s conflict-of-interest committee and recused himself from decisions related to the renovation, the internal auditor's report said.

According to Reeser, the purchases from James & Reid were vetted by legal counsel, auditors and the college’s board of regents; the Hoekstras’ ownership was disclosed; and the college used its revenue from the bookstore and similar sources — not state appropriations — for the purchases.

Typically “you could count on somewhere between 10% and 20% of the project being furnishings and things like that,” Reeser said. “The reason it wasn’t that high is because we brought a lot of legacy furniture with us and because the foundation donated most of what we have here. So from a college standpoint, our investment in the furnishings was very, very low for a project this scale.”

Any accoutrements that might “exceed a normal state standard” were donated by the TSTC Foundation, he said. The foundation is an independent nonprofit that “supports the critical needs of students” and offers funding to “enhance our ability to provide new and emerging technical programs to support the Texas workforce,” according to its website.

A TSTC auditor opened an investigation after the state auditor’s office received an anonymous complaint about the use of the company in 2017 and found “no evidence that [Jonathan Hoekstra] violated the requirements set forth” by the committee.

“We determined that the CFO did not participate in any aspect of the hiring or paying of James & Reid. In what appears to be an overabundance of caution, he disclosed his relationship to the college’s conflict-of-interest committee, who then required he remain distant from any procedures or decisions related to the vendor,” reads the auditor’s report, which was sent to members of the college’s board and to the state auditor’s office. (The auditor reports to the board, not the chancellor.)

Further, the college bought items like “office chairs, lower priced rugs, mirrors, and other decorative pieces” that are “typical after remodel and new construction projects,” and similar in quality to those “commonly seen in executive offices and meeting places” at other state agencies and educational institutions, the report said. Bids offered by competitors were almost always more expensive and of worse quality, the report said.

Since the 2016 renovation began, TSTC appears to have spent at least $65,000 at James & Reid, including to buy an antique book press ($365), porcelain jars ($550.16), nine brass valet hooks ($950.40) and several decorative mirrors worth more than $3,000.

In one document included among the receipts, college officials argued James & Reid was the only appropriate vendor for certain items, in part because they were “antique furniture, which is the style selected for this building.”

“The furniture and fixtures that were selected for the JBC building were carefully selected to have a similar aesthetic,” reads the Procurement Justification Form, which was provided under open-records laws. “Prices were compared with at least 3 other vendors that provide similar items, based on the country of origin, time period and features. Additional sources were also used; however, they did not offer all the pieces that were needed.”

The college also argued James & Reid offered the best value, as the company could deliver the items right away to help “meet the timeline for this project,” would not require additional shipping or installation charges, and had previously provided TSTC with “excellent service,” the form says.

Melissa Hoekstra said she selected the items with the chancellor and his assistant, and didn’t charge the college or its foundation for the “significant” cost of design and installation services. Her husband, Jonathan Hoekstra, helped with the installation, she said.

Roughly $149,00 worth of furniture and decor was purchased from James & Reid by the nonprofit TSTC Foundation and donated to the school.

Many universities have similar foundations. TSTC’s “exists to raise and manage private resources supporting the mission and priorities of TSTC and to provide a margin of institutional excellence unavailable with state funds,” said Beth Wooten, chief executive officer of the foundation. There are no restrictions on how it spends its money, beyond those imposed by donors.

Mandatory tax filings show the foundation received $26.6 million in the fiscal year ending in August 2018 from contributions and grants and had $18.6 million in expenses — including $853,000 spent on student scholarships and $17 million on providing “classrooms and support for training and educating students.” It had far smaller figures the previous year; a tax filing covering fiscal year 2017 shows the foundation received $4.8 million in contributions and grants and had $1.8 million in expenses.

Asked how he would respond to criticism that the foundation could have spent the $150,000 on scholarships or other services, Reeser said it “provides ample scholarships to our students” and that the college was “not aware of unmet need that the foundation doesn’t fulfill.”

“I think you'll find that private donations and foundation donations are a material part of all higher ed efforts,” he said.

There are restrictions on what vendors public colleges and universities can use.

A state law passed in 2015 specifically bars agencies from contracting with a vendor if certain agency employees — the “governing official, executive director, general counsel, chief procurement officer, or procurement director of the agency” — have family members with financial interest in that vendor.

Michael A. Olivas, a recently retired University of Houston law professor and an expert in higher education law, said there are several safeguards in place to prevent procurement fraud at universities, including annual disclosure requirements.

But he suggested that what appears to be a conflict of interest “on paper” may turn out to be kosher — if the university official does not have direct decision-making authority over the purchases.

“I could imagine being in a small town where you have one vendor — let's say that you have your fleet of automobiles that you rent or lease. … Your wife has the only car dealership in town, and you're the person that has to make those decisions. You'd have to do a workaround on that,” said Olivas, who does not know the specifics of the Texas State Technical College purchases but spoke broadly about procurement practices. “I could imagine both where a CFO actually had a conflict of interest or where he or she was one removed and simply oversaw the accounting part of it as opposed to [making] the choice among vendors.”

Disclosure: The Texas State Technical College System Board of Regents has been a financial supporter of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations and corporate sponsors. Financial supporters play no role in the Tribune's journalism. Find a complete list of them here.