Mecklenburg County mental health director Grayce Crockett resigned Tuesday on the heels of a scandal involving a major contractor her department was supposed to oversee.

Crockett's resignation, effective Jan. 11, follows a host of revelations about Mecklenburg Open Door, one of the county's largest mental health contractors.

Ed Payton, the nonprofit's former executive director, has been accused of embezzling more than $145,000. A federal grand jury indicted Payton in November, two months after the Observer reported allegations that he has misused Open Door's money.

Carlos Hernandez, deputy director of the county's mental health department, will continue to serve as interim director while the county searches for a new leader. Hernandez has led the department since September, when county manager Harry Jones put Crockett on leave amid questions about her department's handling of Open Door.

Mecklenburg commissioners also learned at their meeting Tuesday that the U.S. Department of Housing and Urban Development will ask the county to repay $465,000 it had received to manage a federal mental health program.

In an audit of how the department oversaw the federal Shelter Plus Care program, HUD found "significant failures," county general manager Michelle Lancaster told commissioners.

Included in the money HUD seeks to recover is $25,000 from what it determined to be unsupported charges, plus $440,000 in administrative costs that lacked supporting documentation, such as timesheets, Lancaster said.

"We had employees who simply weren't following the policies and procedures regarding appropriate documentation," Lancaster said.

Open Door has been responsible for managing the Shelter Plus Care program for the county. Jones told commissioners that the county should try to recover money from Open Door's board of directors - and any insurance policy that covers them.

Lancaster said she learned what the county will probably owe in a conversation with HUD auditors. The county will try to reduce the amount it owes by providing additional documentation, Lancaster said.

HUD, which had previously faulted the mental health department for failing to hold Open Door accountable, is expected to present its formal findings in late January.

The federal agency has raised no concerns about the quality of services the department provides, Lancaster said.

Earlier this year, the county severed its ties with Open Door and turned over many of its responsibilities to a new contractor.

Overhaul recommended

A consultant hired by the county, meanwhile, has concluded the mental health department needs major restructuring.

With a staff of 99, the department is responsible for overseeing, paying and assisting dozens of contractors that provide mental health services to county residents.

The review, conducted by former state mental health director Mike Moseley, found that the staff responsible for managing contracts is overworked and that some jobs receive inadequate attention.

Jones told commissioners he plans to consolidate the financial management functions of all county human services departments - including the health and mental health departments and the Department of Social Services - into one division. That would improve the county's ability to monitor contract performance, he said. Now, each of the departments oversees its own contractors.

That financial division will be headed by deputy county finance director Gail Murchison, who will devise a plan for implementing the change over the next three months.

In the meantime, Jones said, the mental health department will tighten its oversight of contractors. Elizabeth Nurkin, the department's legal counsel, will serve as the agency's interim deputy director, with responsibility for contract compliance.

Moseley, the consultant, also found:

Mental health doesn't regularly re-bid contracts to determine whether other companies would be able to do the work more effectively. That results in "repeated complaints from providers ... feeling that they are being intentionally shut out of the system," Moseley wrote.

He recommended that contracts funded with state or local money be rebid every three to five years.

The same division is responsible for supporting contractors and holding them accountable. The consultant recommended that those functions be carried out by different divisions to avoid conflicts.

Many staffers interviewed said power is concentrated at the department's top, and that suggestions by lower-level employees rarely get to top management. "Several interviewees made comments such as 'this is a top-down organization' and 'everything starts at the top,'" Moseley wrote.

At the same time, Moseley recommended that the role of one top manager - the deputy director - be expanded.

Hernandez, the department's interim director, said in a memo Tuesday that the agency planned to implement all of Moseley's recommendations.

Moseley, who served as North Carolina's mental health leader for four years, resigned from that job in 2008 following reports in the (Raleigh) News & Observer about widespread failures in the state's mental health system.

'Herculean task'

Crockett, who earned about $159,000 annually, has led the mental health department since 2001.

At Tuesday's meeting, Mecklenburg commissioner Dumont Clarke said he did not want Crockett's legacy to be defined solely by the potential liabilities the county now faces from the federal government.

Clarke said Crockett should be commended for leading the agency through a period of change as it contracted out more mental health services to independent providers.

"It was a herculean task and I know she worked tirelessly at it," Clarke said.

But Clarke and other commissioners said the lapses also serve as a warning that not all government services should be privatized.

Said chairman Jennifer Roberts: "Privatization is not a panacea."