An audit released Wednesday of the Cesar Chavez Schools Network depicts rampant nepotism, unchecked credit-card spending and total pay topping $300,000 for top executives – even as teachers faced furlough days and budget reserves dipped below legally and contractually required balances.

Lawrence and Annette Hernandez, the co-founders of the original Cesar Chavez Academy in Pueblo, a school once lauded by President Bush, hired at least 20 relatives between 2000 and 2008, auditors said, as they expanded the single campus to six and spread into Colorado Springs and Denver.

At one point, Lawrence Hernandez held six credit cards on school accounts and used them to pay the cell phone bills for two of his stepchildren, the audit found, though most of the money was later reimbursed. It also said his wife’s stepbrother, a member of the network’s governing board, received more than $140,000 one year in school contracts for his janitorial and lawn service.

“The leaders of Cesar Chavez School Network squandered taxpayer money, ignored basic legal requirements, overcompensated senior staff, engaged in nepotism and failed to provide accountability over the resources entrusted to them,” state education Commissioner Dwight Jones said in a statement accompanying the audit’s release Wednesday morning. “The results demand swift action.”

Hernandez, who with his wife was fired in October from the network they founded, said the audit is “completely full of blatant falsehoods, lies, inaccuracies.” In fact, one page of the audit refers to his wife’s stepbrother as having a conflict of interest because of his board service and janitorial company while another page refers to the man as her brother-in-law.

“I don’t put any credibility whatsoever in the document they created,” Hernandez said. “The inflammatory language that the commissioner used in his press release – it’s clear that it’s very personal and an attempt to detract from the fact our state hasn’t made any academic improvement under his tenure.”

Hernandez said he has lodged a federal complaint against Jones and other state education officials for “consistent and widespread racism” and is suing Chavez board members for unlawful termination.

The son of a Pueblo steelworker, Hernandez earned a doctorate in education from Stanford and taught at Harvard before returning to his hometown to open the first Chavez school in 2001. He sold his recently built home after his firing, moved to Denver and is now “doing everything you can think of to make a living,” he said Wednesday.

Pueblo officials have turned the audit over to prosecutors and will cooperate with the Internal Revenue Service, said Stephanie Garcia, president of the Pueblo City Schools board, which holds the charter for the original Cesar Chavez Academy, a K-8 school, and Dolores Huerta Preparatory High, another network school.

“The apparent magnitude of egregious misappropriation and mismanagement of the public’s money is shocking,” Garcia said. “We will be examining all legal remedies at our disposal to address the inappropriate actions of those responsible for this obscene abuse of taxpayer monies.”

Donielle Gonzales, recently named president of the Chavez network governing board, told reporters during a brief afternoon press conference that leadership at the schools has changed and the board recognizes concerns raised in the audit should be immediately addressed. See story here.

The 193-page financial and organizational audit was completed by MGT of America, a California firm hired in December by Pueblo City Schools, the Colorado Department of Education and the state Charter School Institute. The three groups commissioned the audit after years of rumors of financial misdoings, various media reports of high salaries paid to top Chavez executives and, in June, a plea from departing Pueblo City Schools Superintendent John Covington to Jones to investigate the network.

Though the financial audit only covers the period of July 1, 2008 to June 30, 2009, the findings “raise enough questions that additional scrutiny is warranted,” Jones said, encouraging the IRS and the local district attorney to consider possible expansion to other years.

“For a charter school to spend money so freely on non-student needs – at a time when the school knew that formal oversight was getting underway – strongly suggests that a more detailed audit is in order,” the commissioner said.

Among key findings in the audit:

— Lawrence Hernandez received total compensation of $339,732 in 2008-09, including base salary, additional pay, bonuses, mileage and retirement benefits, while chief operating officer Annette Hernandez, his wife, received $201,215. Chief finance officer Jason Guerrero received $321,585.

The base pay alone of the three “greatly exceeded the average” in a salary survey conducted by the Charter School Growth Fund, the audit found, and network officials initially underreported the salaries to the state by more than 20 percent. Consider that Lawrence Hernandez’ base pay was $239,908 to run up to six schools that year while Tom Boasberg, who runs Denver’s 140 schools, was paid $180,000.

— Five of the six schools had 26 credit cards issued to 17 people in 2008-09 who rang up a total tab of $399,402.08. Lawrence Hernandez is listed as the cardholder on six cards while his wife had two. But Guerrero, the CFO, said the cards were not necessarily used solely by the cardholder because schools allowed employees to “check out” the cards to make purchases and did not adequately track who was using the cards.

Among the charges cited as concerns by auditors was $133,079.33 in travel, including $279 per night plus $32 per day valet parking at the Ritz Carlton in New Orleans, and nearly $1,000 in cell phone fees for Annette Hernandez’ son and daughter. Auditors said it appeared the network billed Lawrence Hernandez for many of the children’s cell phone charges but that no other employees had the option of charging family members’  fees to school credit cards and that, in some cases, repayment came several months later.

— Included in the 20 relatives hired by Lawrence and Annette Hernandez were his father, her mother, her father and stepmother, along with brothers, a sister, in-laws, an aunt, nephews, a niece and cousins. The total pay for the ten relatives on the Chavez payroll in 2008-09 was $186,818.03 for jobs such as coach and classroom aide. Auditors charted the relationships on page 72 of the report.

In addition, the auditors cite several potential conflicts of interest with board members, including Annette Hernandez’ stepbrother, who received five janitorial and lawn contracts totaling more than $140,000 in 2008-09, and a board president who received more than $61,000 in school funds for his insurance and limousine businesses that year. Both board members have stepped down.

Lawrence Hernandez angrily denied the allegations in interviews on Wednesday, saying he believes Jones and Pueblo district officials are guilty of “corruption” as well as racism.

Lawrence Hernandez listens to comments at a Sept. 25 public meeting in Pueblo. He was ousted from the Cesar Chavez network the next month.

He said he was contacted by someone from MGT after their report was completed and that he was told by the person that “I’m basically going to write what they tell me to write.”

“It’s basically a write-up that they paid for,” he said. “Really, what’s the purpose? I’m no longer employed at the school.”

Hernandez and Cesar Chavez Academy were lauded in the school’s initial years for high test scores, earning them an invite from the White House as a school successfully raising achievement for its mostly Latino students. He began expanding with the Huerta high school in 2004.

But the outspoken schools founder also has battled with Pueblo district officials for years, exchanging barbs in the media and lawsuits in the courts. He has also sued the state of Colorado, former parents and teachers, and a community activist who publicly criticized him for, among other things, nepotism.

That activist, Alvin Rivera, recently was awarded attorneys’ fee in the case – seven years after it began.

State officials agreed to investigate claims of cheating on state tests and allegations of financial abuses in July and, in October, Hernandez and his wife were ousted by the Chavez network board. Guerrero, the CFO, has submitted a resignation effective in June.

Of the six schools that once fell under the Chavez network, one has closed and two have severed all ties. A fourth school, Cesar Chavez Academy in Denver, is operated by an independent governing board that contracts with the network to provide administrative services such as accounting.

Ryan Lucas, the director of the Denver campus, said the school is paying 8 percent of its per-pupil operating revenue, or $193,556, to the Chavez network this year. But he said the school has asked the network to return half of that amount because it is not providing the agreed-upon services.

The network did not fill the spots vacated by Hernandez and his wife and it announced a $1.5 million shortfall in November. The audit found that, as early as February 2009, the network board was worried enough about money that it authorized furloughs for teachers and other staff.

It also found that, for the fiscal year that ended June 30, CCA in Pueblo was more than $200,000 short of the 5 percent fund balance required by debt agreements with its bond issuer, the Colorado Educational and Cultural Facilities Authority. And Huerta high school did not have the emergency reserves required by the Taxpayer’s Bill of Rights or TABOR.

Lucas, in Denver, said the school had to hire another dean and shift responsibilities to cover the gaps left in the services that were supposed to be provided by the network. George Solorzano, the president of the Denver school’s governing board, said the network has not yet responded to its refund request.

Solorzano said the board also has sought estimates of costs from other vendors for similar services and will decide by May 30 whether to end the annual contract with the Chavez network.

Lucas said reports emanating out of Pueblo have sparked uneasy questions from parents and he takes pains to assure them of the separation. Third-graders at the high-poverty school outperformed district averages on their first state exams, with 60 percent reading at grade level.

“I say to them, what happened in Pueblo stays in Pueblo,” Lucas said of his talks with parents. “That’s why we have our own independent board.”

Pueblo’s school board will consider revoking the charters for CCA and Huerta, which are not up for renewal until 2012 and 2014 respectively, said district spokesman Greg Sinn.

Pueblo Superintendent Kathy West has assigned administrative staff to the two schools for “support” all day starting Monday and through the end of the school year, said Garcia, the board president.

“We want to make sure instruction is still happening in the schools and the students’ days are not disrupted,” she said.

Gonzales, in a written response included in the audit report, said the board already is working to address many of the concerns raised, including the adoption of clear conflict of interest and nepotism policies. She also said all credit cards were discontinued in October 2009 and will not be reinstated.

An audit of testing practices at Cesar Chavez Academy in Pueblo, released in December, found “excessively high” numbers of test-takers were given extra time to complete state tests though there was no conclusive evidence of cheating. Wednesday, state officials said the school had submitted an acceptable plan for the spring testing cycle.

Concerns about irregularities at the Chavez network were at least partially responsible for legislation introduced this session by House Speaker Terrance Carroll, D-Denver, which sought to allow an outside entity to intervene in a charter school in emergency situations. But that’s been revised to propose an appointed commission study issues of charter school and authorizer standards for a year.

Garcia believes it may take changes in state law to prevent a recurrence of what’s happened at the Chavez network.

“The whole idea behind charters is to give them the necessary waivers and to give them the freedom to extend their day, extend their year, to be creative in curriculum and not let statutes or contracts hold them back,” she said. “But at the end of the day, this is still taxpayer money and there needs to be accountability for those funds …

“It’s very sad that it has all come to this,” Garcia said, “but they brought it on themselves.”

Click here to see the financial audit. Read the state Department of Education press release here, the Pueblo City Schools’ press release here and Lawrence and Annette Hernandez’s press release here. And see prior coverage of Cesar Chavez schools here.