An Omaha Public Schools board member wants the district to seek an independent investigation to determine whether the district can recover legal damages over mismanagement of its troubled pension fund.
Lou Ann Goding believes the school board has a fiduciary responsibility to explore whether any professional firms or individuals have legal liability for their roles in creation of the fund’s $800 million-plus shortfall, which was the subject of a World-Herald investigation earlier this year.
“Providing the public and all stakeholders with an independent report would show taxpayers, our staff and retirees we have fulfilled our fiduciary responsibility in attempting to protect them and recapture all funds lost possible,” Goding said in an email to OPS Superintendent Cheryl Logan and other district leaders.
However, Goding hasn’t been able to get district leaders to support launching an investigation into the actions of the Omaha School Employees Retirement System, or OSERS. School board members have declined to even put the issue up for debate.
Logan declined to be interviewed on why she’s not supporting a district investigation. But in an email to Goding, she suggested that the ongoing U.S. Department of Justice investigation launched in the wake of the newspaper’s series makes a district investigation unnecessary.
“With an active DOJ investigation, the federal government is conducting a full examination of OSERS transactions,” she wrote to Goding.
Only one OPS board member agreed to comment on the issue. Ben Perlman said such an investigation could be both expensive and messy.
The cost of such an investigation has been estimated at up to $1 million. And it would potentially involve examining the actions of current and former board personnel, as well as the law firm that has long served as outside counsel to the school district.
David Karnes, an Omaha attorney who has discussed the potential for recovery litigation with district officials, and other legal experts say it’s doubtful the federal investigation would give the district the information and documentation it would need to consider proceeding with litigation. The federal probe’s scope is unknown, and it’s unlikely the full details will ever be released publicly.
There is also precedent for conducting such an investigation and bid for recovery in the wake of a pension scandal. The City of San Diego just over a decade ago recovered at least $13 million in litigation with actuarial, law and accounting firms that had a role in leaving the city’s pension system woefully underfunded.
The debate comes in the wake of a World-Herald investigation earlier this year that revealed mismanagement and bad investment decisions by OSERS that cost the school district hundreds of millions of dollars.
The paper revealed cozy relationships between OSERS leaders and the firms they did business with and potential conflicts of interest related to the fund’s longtime primary adviser, Connecticut-based Atlantic Asset Management.
Atlantic persuaded the OSERS trustees — largely made up of school district personnel — to invest more than half the fund’s $1.2 billion in assets directly with Atlantic or with other firms tied to Atlantic. Often what Atlantic pitched were types of investments in which it had no prior experience, and the advising firm partnered with another firm to sell the investment to OSERS and share in the fees.
The paper’s investigation also revealed that after OSERS — on the advice of Atlantic — pulled a large portion of its portfolio out of stocks in the wake of the 2008 market crash, the fund’s chief administrator and trustees did not follow proper procedures in choosing new investments for the money.
OSERS guidelines called for using an outside consultant to vet new investments and for trustees to interview multiple candidates, but nearly all the money was invested in exotic investments offered up by firms OSERS was already doing business with, including Atlantic. Many of the investments proved big losers.
The World-Herald calculated that bad decisions and mismanagement by OSERS officials cost the pension fund some $500 million, a figure that grows each year as the fund remains locked into millions of dollars in poor investments. The huge shortfall is now forcing OPS and its taxpayers to make tens of millions of dollars in extra annual payments to bring the fund back to solvency.
In examining potential liability for losses, Atlantic would certainly be among the firms OPS could seek to recover from. However, that effort could be hampered by the fact the firm is now defunct.
Atlantic’s principal owners sold the firm in 2015. The new owners were fronts for crooks who immediately defrauded OSERS out of more than $16 million through a bogus bond scheme. After those behind the theft were indicted, the firm went into receivership and was dissolved.
Legal experts say it’s conceivable OSERS could still seek recovery from Atlantic’s former owners or the former firm’s insurance carrier. OSERS already collected a $250,000 settlement from an Atlantic insurer related to the fraud, as well as $173,000 from Atlantic’s dissolution. But this potential recovery would go beyond the fraud case to examine the hundreds of millions of other investments the firm sold to OSERS.
A key question would be whether Atlantic officials offered full financial disclosures in its dealings with OSERS, something only a thorough investigation could determine. It would also need to be determined whether the previous settlement with the Atlantic insurer absolves the firm from being sued for any other wrongdoing.
In addition, OSERS did business with numerous other professional firms whose actions could be explored for possible liability in the district’s losses.
The pension fund contracted with a second investment advising firm for reviews on how investments were performing. OSERS also contracted with an actuarial firm, had its finances audited annually by an accounting firm, and received legal services from the school district’s outside counsel. Questions would include whether the oversight firms were raising red flags when they should have.
It’s also possible recovery could be sought related to actions of OSERS trustees themselves. It’s unclear whether trustees in their official capacities were covered by insurance.
Goding said in an interview she was not at liberty to discuss her push to explore recovery of OSERS funds.
Goding had served on the OSERS trustees beginning in 2013, ultimately helping to make district officials aware of the pension fund’s mismanagement and leading the Legislature in 2016 to essentially fire the trustees as investors of OSERS funds. Given the current federal investigation of OSERS and her role on the board of trustees, she said she’s been advised not to publicly discuss OSERS matters.
However, at the start of a July 15 school board meeting, Goding announced she had requested an item related to OSERS and the board’s fiduciary responsibility to be placed on the agenda. She asked board members to join her in making the request. No one responded.
After the meeting, The World-Herald made public records requests to the district seeking to learn more about what Goding was proposing. Records produced, and subsequent interviews, show Goding’s push for an investigation had been going on for months.
Karnes, a former U.S. senator for Nebraska, said that when he read The World-Herald’s series earlier this year, he was concerned about the huge loss of public funds.
“As a former public official concerned about taxpayers, stakeholders, the citizens of Omaha and OPS, I was curious what steps might be taken,” he said in an interview. He wondered about whether there was a way to take legal action against “bad actors” and recapture lost funds.
Karnes knew Goding, so he contacted her. As an accountant, Goding, too, was concerned about whether there was potential for recovery, and believed the board had an obligation to pensioners and taxpayers to look into it.
Karnes told Goding that his law firm, Kutak Rock, has a division in its Phoenix-area office with expertise in pension law. Kutak attorney Marc Lieberman subsequently was asked to review the newspaper’s series.
Lieberman said he thought there was potential to seek recovery from OSERS advisers and other professional firms it did business with. However, the newspaper’s reports could not be used as a legal basis for seeking recovery. The findings would need to be legally affirmed and documented.
That led to an April 9 meeting in Omaha of Karnes, Lieberman, Goding and Superintendent Logan on the possibility of the district initiating a legal investigation into what happened at OSERS.
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Karnes said his firm was interested in being considered for the investigative job. But it was also understood that if the district decided to pursue the matter, the work would be put out to bid to any interested firms.
In the meeting, Lieberman shared information on San Diego’s efforts to recover lost funds after a pension scandal in the early 2000s. The circumstances in San Diego differed, as the wrongdoing discovered didn’t relate to investments but to intentionally misleading financial statements that covered up the fund’s huge shortfall.
The total amount San Diego collected is difficult to determine because the various claims were settled out of court.
But published reports indicate the city received at least $13.4 million in settlements with law firms, an actuary and others. As is typical in such cases, the actual payments came from the firms’ liability insurance carriers.
In addition, the city agreed to pay $130 million into the pension fund to address previous underpayments that resulted from the misleading statements.
Lieberman estimated that if OPS took up an investigation, it would take six months to a year and cost up to $1 million. After the results of the investigation were provided, the board could then decide whether to engage another firm to initiate litigation seeking recovery. Separating the litigation role would help ensure an independent investigation. Lieberman said Kutak had no interest in pursuing any of the legal claims.
Karnes said given that OPS and all other school districts are creatures of the state, it’s possible any firm investigating OSERS could seek subpoena power from the State Attorney General’s Office. That could allow the investigator to get testimony and documents unavailable to the newspaper.
Logan’s meeting with Karnes and Lieberman later led to a second meeting April 23, this time with Marque Snow, president of the school board, and Shavonna Holman, board vice president.
But from there, the proposal seemed to die.
On June 17, Goding asked Snow, who as president officially sets the board agenda, to set the investigation proposal for the July 15 board meeting. On July 2, she made the same request in an email to both Snow and Logan.
In her July email, Goding expressed concern that if the district waits too long, there could be statute of limitation issues that would bar recovery from some parties.
“Time is of the essence,” Goding wrote.
When the district leaders declined to put the issue on the agenda, Goding then brought it up publicly at the July 15 meeting. Even if the president is opposed, an item can be added to the district agenda if three board members agree. Goding asked board members that night to contact her if they would support it.
Her request was greeted by silence. There are still no indications any other board members support an investigation.
Given board members’ silence on the issue, it’s difficult to discern the exact reasons for their opposition.
Perlman, the one board member who did agree to speak after all were contacted by The World-Herald last week, cited as his primary reason the fact that Logan and the two other board members who heard the proposal are opposed to it. He said he has not been personally briefed on it. Without the support of district administration, he said, it’s unlikely to pass.
Logan declined to be interviewed. The district instead issued a statement noting the DOJ investigation and saying the district was cooperating with it.
Logan similarly cited the investigation in a July 3 email to Goding and Snow. She also noted that OSERS “is currently suing U.S. Bank to recover from one of those losses.”
The pending suit against U.S. Bank is limited in scope, seeking recovery from the bank that served as trustee on the fraudulent bonds. The suit has nothing to do with the actions of any of the firms OSERS directly did business with.
Perlman, who works as a prosecutor in Sarpy County, agreed it’s questionable the district could rely on the federal probe as a basis for recovery of lost funds. “That’s a fair point,” he said.
Nonetheless, Perlman said he at this point doesn’t feel he has enough information to launch an investigation.
The investigation would also be costly, he said, and current and former school board members and OSERS trustees could be subjects of the investigation. He said that includes Goding herself, who after joining the trustees did not immediately recognize the problems and backed some of the questionable investments.
“I appreciate that Lou Ann threw up the red flag and put a stop to this,” Perlman said. “Can she unwittingly end up on the wrong side of a lawsuit because of her desire to have a lawsuit?”
The request for the investigation could also be politically sensitive within the district for another reason: It would potentially include looking into the work of longtime OPS legal counsel Baird Holm. The Omaha law firm, which has done legal work for the district since at least the 1970s, handled matters related to OSERS.
In fact, in Logan’s July 3 email, she calls what Karnes and Lieberman proposed in the April 9 meeting “an independent investigation of our outside legal counsel” — an apparent reference to Baird Holm.
Karnes said Baird Holm was never specifically mentioned in the meeting. The only discussion was a general one on the types of professional firms the district could potentially seek recovery from, among them law firms.
“We weren’t targeting anybody at all,” Karnes said. “We never had those discussions with Cheryl or Marque or anyone.”
Given the amount recovered in the San Diego litigation, it’s fair to question whether an investigation would be financially worth pursuing. If the district were to recover similar amounts, it would still pale in comparison to OSERS losses.
The cost of the investigation — as well as the contingency fees to attorneys that would be paid out of any legal settlement — would have to be weighed against potential recovery, Karnes agreed. Conversely, the potential for recovery also can’t be known unless what happened at OSERS is formally investigated.
Karnes said in his conversations with Goding, her support for an investigation is based more on principle than dollars.
“Her concern was not so much in recovering money,” he said. “If this (pension shortfall) is going to be a problem down the road, we owe it to the taxpayers and citizens of OPS to do a complete investigation.”
Gazing across the luxurious green river valley where the Santee Sioux Reservation lies, one’s troubles can melt away.
But these days, Santee resident Brishandre Bearing is feeling a little anxious.
Her 5-year-old daughter Djai, a busy bundle of energy, will start kindergarten tomorrow.
Bearing, 27, hopes Djai will have a better experience than her own in the Santee Community Schools. She dropped out of Santee High School a decade ago and has regretted it ever since.
“I want her to do better than what I did,” Bearing said.
The Nebraska Department of Education will spend time and money to make sure she does — at least it will try.
Department officials are intensifying their intervention this year in the small northeast Nebraska school district in hopes of moving the dial on achievement.
An initial intervention into Santee Middle School launched in 2016 failed to produce enough improvement to satisfy state officials.
So last spring, members of the Nebraska State Board of Education declared all three Santee schools — elementary, middle and high school — as “priority schools” among the lowest-performing in the state and in need of improvement. Total enrollment is nearly 200 students.
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The state will pay two consultants, hired last spring, to work in the schools. One will focus on improving school board leadership, the other on curriculum including the alignment of what’s taught from grade to grade.
A new superintendent came on board July 1, Justin Hayes, who previously worked in the Omaha Public Schools. There’s also a new high school principal and special-education director.
The challenges for Hayes and school leaders abound: geographic isolation, meth-addicted parents, severe entrenched poverty and one of the state’s highest rates of student mobility, a statistic that reflects unstable residency.
The mobility rate indicates such things as evictions, family strife and child welfare issues. The Santee rate was more than 2.5 times the state average in 2017-18.
“We have some grandparents raising children. We have homelessness. We have other social and emotional issues,” Hayes said describing mobility. “Sometimes that means maybe I go live with mom, dad, grandpa, grandma in Sioux City, and I come back when it’s feasible, when I can. And so, when you get a lot of those moving-arounds, you get gaps in learning.”
If kids aren’t enrolled quickly, time elapses, and pretty soon the missed time adds up, he said.
The reservation is the only part of the Great Sioux Nation in Nebraska, according to Redwing Thomas, a language specialist who is assisting at the school.
The people of the reservation, he said, are Dakota, though some other tribes have probably married in.
Thomas said the band living on the reservation is the “mother band” of all seven bands of the Great Sioux Nation.
“I don’t think even all of our children know that,” he said. “And because they are the mother band, they are literally the highest on the totem. If they knew that, the behavior would probably really rise.”
The tribe’s original homelands were in Minnesota. After a conflict with white settlers in 1862, they were forcibly removed to Crow Creek, South Dakota, and subsequently walked to their location in Santee, he said.
A tribal leader gave Hayes a book about the tribe’s history: “38 Nooses: Lincoln, Little Crow and the Beginning of the Frontier’s End.”
The Scott W. Berg book details the events surrounding the forced relocation and the hanging of 38 tribal leaders.
The reservation lies on the bank of the Missouri River at the foot of rounded grassy hills resembling Nebraska’s Sand Hills. Here the river runs braided. It is a beautiful, but isolated, spot.
To reach the reservation, you drive 10 miles north on the curvy Nebraska 54D Spur that branches north off the Outlaw Scenic Byway. The only other road in is dirt.
The biggest town is the village of Santee with an estimated 340 people, according to the census. Jobs are hard to come by. Among the biggest employers are the school district, health center and Ohiya Casino Resort out on the highway. Those lucky enough to have jobs hold onto them fiercely.
Brishandre Bearing said she was two classes and six credits away from graduating when she dropped out.
“It was really stupid of me,” she said.
She had bounced from high school to high school, a stressful experience she hopes her daughter won’t repeat. She went from Santee to Boys Town to a South Dakota boarding school, and back to Santee for 10th grade.
Back in school, she said, she didn’t want to listen and was bored. She went to Boys Town for behavioral problems to “help me focus.”
Bearing, who said she’s half Santee, said that as a dropout, she has trouble finding jobs. She has thought about getting her GED.
“I can’t really get the jobs that I’d like, like office jobs or anything. But I’ve been able to hold jobs, just like customer service stuff,” she said.
Meth is the most popular drug on the street, and “really bad,” she said.
When parents do it, kids get “mixed up,” she said.
“Not everybody’s parents are sober and stuff, so they don’t really have a good support system,” she said.
School board President Steve Moose said his own family was impacted by substance abuse.
His father, he said, was an alcoholic.
He said he grew up poor, and his grandmother and her mother primarily raised him.
Moose describes himself as a “very old-school guy.”
He said he did not go to college. After graduating from Santee High School, he worked various jobs, including 16 or 17 years as a school paraprofessional, he said.
Since 2013, he has worked at the health center.
The nearest hospital is 45 miles away in Yankton, South Dakota. The center offers medical, dental, physical therapy, a pharmacy and psychological services, and an eye doctor once or twice a month.
When the state labeled Santee Middle as a priority school, people saw it as a “black mark” against the school, he said. But he said the intervention is a way to use the resources the state’s offering to make the schools a better place.
He said he doesn’t believe the challenges on the reservation are unique.
“Poverty is poverty no matter where you live,” he said.
Poverty, though, can be overwhelming, he said.
“You look at someone who makes 13, 14 bucks an hour, struggling to get by with what they make, because they have kids and they have extended families and they have other things to take care of,” he said.
Drug and alcohol abuse on the reservation “is running rampant,” he said.
According to the U.S. Justice Department, meth has disproportionately impacted Native Americans.
Mexican drug cartels have targeted reservations, and Native Americans experience the highest meth usage rates of any ethnic group. Meth seizures in Nebraska and surrounding states are up.
Moose said the days when people left doors unlocked and felt comfortable riding around town at night are gone.
When it comes to children, he said a lot of respect has “gone out the window these days with kids.”
“We had that old-fashioned parenting. ... They don’t have that today,” he said. “You used to be able to look at your child and say ‘You’re not going to do that or you’re going to get a spanking.’ Spanking is different than beating in my book.”
He said every generation is different, though, and his focus is to get the current one “moving in the right direction,” he said.
Commissioner Matt Blomstedt said he’s aware of the social issues impacting the community.
While the state’s improvement plan does not deal directly with the social issues, officials are aware that changing the educational environment is a challenge when “everything else is stacked against you.”
He said Moose has done a “remarkable job of hanging in there as a leader.”
“You’re dealing with poverty among community members and board members, too. It’s a lot of stress for them.”
Superintendent Hayes said that for the first time anyone can recall, the schools are fully staffed.
He sees a promising glint in the test scores last year.
While students’ state scores are low compared with peer districts, about three-quarters of kids made progress on their school-based interim assessments, he said.
This year the focus will be on reducing absenteeism, improving literacy and helping to smooth out the transitions kids encounter, whether between grades or caused by mobility.
The district will intensify phonics instruction and implement a new K-12 math curriculum and K-8 English language arts program. They are looking at piloting some science curriculum this year and adopting it next year, he said.
Change must be systemic, and not a “fad diet,” he said.
“I applied here because I wanted to be here,” Hayes said, “because I love when people say it can’t be done.”
LINCOLN — Legalization of industrial hemp is causing headaches for prosecutors across the state, prompting some counties to suspend prosecution of possession of small amounts of its look-alike — and high-inducing — cousin, marijuana.
Under the state’s new hemp law passed in May, cannabis with a THC level of less than .3% is deemed legal.
That’s forced some prosecutors to believe that now they must prove, through testing and court testimony, that marijuana seized by law enforcement is above that THC limit, and is illegal marijuana and not legal hemp.
Proving that a plant is illegal marijuana requires testing not available currently in Nebraska, and some prosecutors say it would be cost prohibitive to bring out-of-state lab technicians in to testify in court that the substance seized is illegal because it tested above the .3% threshold.
Lancaster County Attorney Pat Condon estimated that it would cost between $1,500 and $2,000 to bring someone in from Pennsylvania, where the closest testing lab is located, an expense that pales in comparison with the typical fine for possession of pot, about $300.
“We’re trying to figure out how to go forward with this,” Condon said. “It is causing problems.”
Sarpy County Attorney Lee Polikov expressed similar concerns. “Before you get any kind of conviction, you need a good lab report,” Polikov said. “Our problem right now is we don’t have access to a state laboratory or sheriff’s lab that will test it.”
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Not all prosecutors agree with that analysis, which has prompted Lancaster County and reportedly several other Nebraska counties to suspend, for the time being, prosecutions for small amounts of marijuana.
Douglas County Attorney Don Kleine said his office continues to prosecute marijuana cases by using a previous state law that allowed only University of Nebraska-Lincoln researchers to possess hemp. If a person cannot prove they’re with UNL and authorized to carry or plant hemp, then the cannabis they’re carrying is considered illegal marijuana, he said, and charges will be filed.
But even Kleine acknowledged that the new hemp law has left prosecutors in “limbo” until clearer state guidelines are adopted and that the approach taken in Douglas County may not stand up in court.
“We’ll see what the judges do with it,” Kleine said. “If they ask for something different, we’ll deal with that.”
Confusion began to creep into marijuana prosecutions shortly after a new federal farm bill was passed in December, allowing farmers to plant and harvest low-THC hemp, which can be used in a variety of products, from clothing to cosmetics and medications. The bill allowed states to adopt rules and regulations for hemp cultivation.
Nebraska lawmakers did that, passing Legislative Bill 657, which became law on May 30 with the signature of Gov. Pete Ricketts. So far, the state has moved slowly, allowing only 10 Nebraska farmers, selected through a lottery, to plant and cultivate “industrial hemp.”
Before LB 657, marijuana prosecutions were relatively easy — any pot found, regardless of its THC content, was considered illegal, and no tests were required to prove it was illicit weed.
But at least some of the state’s prosecutors say the new law has changed that, and with none of the state’s three crime labs currently set up to test THC levels in cannabis, they’re left in a quandary.
State Sen. Justin Wayne, the chief sponsor of the hemp bill, said he is mystified by the prosecutors’ confusion.
He said that his legislation was amended at the last minute, at the request of county prosecutors, to provide a different way to prosecute marijuana possession cases.
The amendment requires anyone who was transporting or in possession of hemp to prove it, by presenting a state bill of lading, indicating the grower of the hemp and its destination, and either providing proof that it has been tested and is below the .3% THC threshold or presenting documents showing it was produced legally under federal law.
Wayne, who is a defense attorney, said that anyone who failed to present such proof could be charged with a misdemeanor, which is punishable by a fine of up to $1,000, which is considerably higher than that for “a simple weed charge.”
“We gave prosecutors a different option to prosecute,” the senator said. “They can still prosecute. It’s just a different law.”
Polikov said he hasn’t considered the option suggested by Wayne for possession of a small amount of cannabis, figuring it would be more applicable to large shipments of hemp. “What do I do with the guy who has a taillight out and there’s a suspicion he has a smoke-able hemp cigarette?” he asked.
Condon, the Lancaster County prosecutor, said he suspects that any trial over the lack of a bill of lading would eventually get back to the issue of whether someone had legal hemp or illegal marijuana.
Confusion and concern about prosecuting marijuana cases since the legalization of hemp is not unique to Nebraska.
In Texas, more than 200 misdemeanor marijuana cases were dismissed in June in Fort Worth due to the same issue causing consternation in Nebraska — the lack of tests to prove that the pot was really pot.
Some truckers hauling hemp from state to state have been stopped and arrested because hemp looks and smells just like its illegal cousin, even to drug-detecting dogs. Polikov said that happened once in Sarpy County recently, but the drivers were ultimately released after showing that they were hauling legal hemp seed.
In Nebraska, the issue has been discussed with Attorney General Doug Peterson, who did not respond to requests for comment. The Nebraska State Patrol has sent out a survey to the state’s 93 county attorneys to discern how they are reacting to the new hemp law.
The three labs in the state that do forensic drug testing — the State Patrol, Douglas County and the University of Nebraska Medical Center in Omaha — are all in the process of validating testing procedures so that they can perform the necessary THC tests that will stand up in court.
Justin Aumann, the forensics services director for Douglas County, said that the validation process may take six to nine months, which leaves the state in limbo for now.
“It’s kind of a nationwide issue for labs,” Aumann said. “All of us are trying to develop the necessary testing.”
Kleine said his office began working with UNMC to validate their testing procedures shortly after Congress passed the farm bill, so that lab may be ahead of the others.
Wayne said that efforts were made in the Legislature to appropriate $250,000 to obtain new THC testing equipment for the State Patrol lab to handle the anticipated crush of new test requests, but that the patrol turned the offer down. Cody Thomas, a patrol spokesman, said the agency is using existing equipment in its effort to get its testing validated internally, and then approved by a national crime lab association.
Polikov, the prosecutor in Sarpy County, said that county attorneys are trying to get some “commonality” established among counties on how to handle marijuana cases until adequate testing is available, so that cases in Scottsbluff are handled the same way as cases in other counties.
He emphasized that the problem is primarily about small amounts of marijuana or pot residue, not about big busts or seizures of big shipments coming across Interstate 80. If those happen, prosecutors will find a way to get the tests done, Polikov said. He added that it’s not uncommon for people caught with marijuana to self-incriminate, thus no testing might be needed.
Kleine said he expected that problems will work themselves out as Nebraska’s crime labs get authorized to do THC testing. It will also help, he said, when the state completes a required state plan for regulating hemp, which will include procedures for testing the THC content and rules for transporting it. That plan is due by the end of the year.
“The bottom line is marijuana is still illegal here,” Kleine said.