LINCOLN — State Treasurer Don Stenberg has been keeping more than $2.6 million in an off-the-books account, according to a new state audit.

The audit, released this week by State Auditor Charlie Janssen’s office, said the funds have been building up in an account at First National Bank of Omaha since 2010. The money came from administrative fees paid by people participating in Nebraska’s college savings plans.

The account earned no interest and was not recorded in the state’s accounting system, included in the state budgeting process or reflected in the state’s comprehensive annual financial report.

Auditors labeled the practice as “material noncompliance and a material weakness” in the Treasurer’s Office accounting.

Jana Langemach, a spokeswoman for Stenberg, said the fund had been created under a contract signed by former State Treasurer Shane Osborn.

She said Stenberg maintained the account “in the good faith belief that the account met legal requirements.” He argued that because it held fees paid by savings plan participants, the account was not public money and did not have to follow the usual requirements governing public money.

But Stenberg closed the account on July 23, after Attorney General Doug Peterson’s office concluded that the funds are public and that Stenberg did not have authority to maintain and use such an account.

The attorney general weighed in after the other two officeholders agreed to seek his opinion about the fund.

According to the audit report, the account came to light April 30 as state auditors were doing a routine examination of the State Treasurer’s Office finances.

The account had been little known until then. Even the treasury management program director in the State Treasurer’s Office did not know of its existence, the audit report said.

That director is in charge of ensuring that all state bank accounts are protected from loss through a sufficient amount of pledged collateral. Because she did not know about the account, the state had not arranged such protection.

That risk was among several concerns raised by the state auditors. Among others:

» The account did not earn interest, which meant that the state lost out on an estimated $51,507 during 2017 alone. The loss was estimated using earnings on other state funds, which are invested by the State Investment Officer.

» The funds were never reported to the Department of Administrative Services or the State Legislature, a practice that the audit said “not only conflicts with statute but also effectively hinders the full legislative appropriation process.”

» The authorized signature card for the account contained only the names of First National Bank employees, not state employees. “Having a bank hold funds in trust on behalf of the state is, to say the least, highly unusual,” the audit report said.

» Expenditures made from the fund were done outside the budgeting process. Stenberg’s office spent $173,136 from the account in 2017, including for a birthday baby scholarship promotion and the college savings program director’s travel.

» Stenberg’s office used $150,000 from the account to provide a financial literacy program free to Nebraska high school students and their families. The audit said the program, while “a worthy endeavor,” did not fit the purposes for the administrative fee as set out in state law.

In comments included with the audit report, Stenberg said state law allows the fees to be used for advertising and promotion of the savings program. He said the financial literacy program had been the most successful advertising and promotional activity.

He also said the administrative fees charged to savings plan participants are being reduced by one-third this month because current fees bring in more money than needed to pay the expenses of operating the program.

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Martha Stoddard keeps legislators honest from The World-Herald's Lincoln bureau, where she covers news from the State Capitol. Follow her on Twitter @StoddardOWH. Phone: 402-473-9583.

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