AG, treasurers warn CA schools about mishandling construction bonds [misspent proceeds]

California Watch ^ | June 17, 2011 | Corey G. Johnson

[DeaconBenjamin]

California school districts are using construction bond money to cover day-to-day operations and in other ways that regulators say misuse taxpayer money and violate state and federal law.

In recent weeks, the state attorney general's office and county treasurers have issued warning letters to school officials after seeing an uptick in unauthorized district bond deals that saddle communities with higher debt payments.

Two audits at the Sweetwater Union High School District in Chula Vista, for example, found the district borrowed and repaid $40 million from its construction bond money in the 2009-10 school year and is looking to borrow $58 million for the current school year.

The fiscal watchdogs also are questioning some districts' practice of using general obligation bond funds – money generally raised for construction – to plug holes in their daily budgets. State law bans the use of construction funds for school operations.

During a survey, Los Angeles County Treasurer and Tax Collector Mark Saladino found many other school districts "borrowing" construction funds. Sweetwater officials maintain what they did was legal. Nevertheless, they pledged to stop borrowing after news reports triggered outrage.

If such practices continue, Saladino wrote in a letter in May, districts could be inviting citizen lawsuits and investigations from federal and state authorities. His letter went to state Treasurer Bill Lockyer, state Attorney General Kamala Harris and State Superintendent of Public Instruction Tom Torlakson, according to news reports. He wrote:

While debt issuance can be part of a larger fiscal plan, the use of general obligation bonds to solve budget problems can pose a serious risk to school and community college districts. We recommend that districts take a conservative approach when issuing GO bonds in order to avoid any violations of State and Federal law.

Glenn Byers, Los Angeles County's assistant treasurer and tax collector, told Capitol Weekly that Saladino's letter has been favorably received so far.

Harris' office already had blown the whistle at the Poway Unified School District in March. Poway triggered the attorney general's interest by entering into an agreement with its bond attorneys to pump up the interest rate on a bond sale in exchange for upfront cash. State law requires the cash to be put into an account to pay investors. Instead, Poway intended to use the money to pay its attorneys, underwriters and advisers.

The attorney general's office slammed the move, calling it illegal.

In a March 1 letter, Deputy Attorney General Constance L. LeLouis told attorneys working on the Poway bond deal:

Thus, by diverting premium to unauthorized uses and by artificially inflating interest rates to generate premium, the School District is not acting consistent with statutory law, and is also incurring debt beyond what the voters authorized in violation of the California Constitution. ...

Although we are mindful of the costs of litigation to school districts and municipalities around the state, we will scrutinize proposed bond issues such as this in the future. Should such practices continue, we may be compelled to intervene.

Byers said he understands that many districts are suffering from state budget cuts and declining revenue due to the housing crisis. Still, Byers was dismayed by how several county offices of education had “actively promoted” several of the exotic transactions that left taxpayers "hosed." He threatened to publicly identify school districts, bond attorneys, underwriters and others if the shaky deals continue. Byers said to Capitol Weekly last month:

L.A. County, but I would like to see this stopped everywhere in the state tomorrow. Avoiding the practices and bond structures that we have listed in our white paper will do two things. They will help keep districts in compliance with state law and out of trouble with the I.R.S., and it helps protect the taxpayers in each of their districts from having to pay for costly and abusive transactions that were not contemplated by the original bond measures approved by the voters.