The Mt. Diablo 2010 Measure C Bond Oversight Committee will hold a special meeting at 7 p.m. Monday in the district office board room to discuss concerns raised by recently-appointed taxpayer representative Alicia Minyen.
I am writing a story about Minyen’s concerns, which should be published in the Times before the meeting. With Minyen’s permission, I am posting a July 25 e-mail to her fellow committee members, as well as a letter she presented to the school board on Aug. 9. She has asked that these be included in the agenda packet for the meeting, so the public is aware of her concerns.
“From: Alicia Minyen
Sent: Mon, 25 Jul 2011 19:38:23
Subject: Multiple Issues with MDUSD’s Bond Issuances
Hello John and Bond Oversight Committee (“BOC”) Members:
In order to be a more effective BOC member, I’ve been researching the applicable laws pertaining to school district general obligation bonds found under Proposition 39, the Education Code, and California Constitution. In addition, I have been researching Proposition 55, and the MDUSD’s 1989 Measure A and 2002 Measure C since each of these have their own specific mandates, and Pete Pedersen indicated that the remaining funds from these sources of revenue would be used for current projects listed.
I have uncovered many issues and red flags that raise serious concerns of noncompliance with virtually every MDUSD measure and Proposition 55. I have outlined these issues and red flags below for your consideration, some of which require immediate action and full disclosure to the public. Accordingly, I believe the BOC should meet as soon as possible to address the issues below.
1. 1989 Measure A Community Facilities District Mello Roos Bonds
A. In November 7, 1989, the voters authorized the MDUSD to issue $90 million in bonds ‘to finance all or a portion of the facilities for the Community Facilities District.’ According to the California Debt & Investment Advisory Commission, the MDUSD to date has issued $201.5 million in Measure A CFD bonds.
B. It appears that in 2002, 2005, and 2006, the MDUSD issued illegal ‘cash out refundings’ where the MDUSD refunded amounts above what was owed on the outstanding bonds and took additional cash out beyond what was authorized by the voters. (See State Attorney General Opinion 06-1102: ‘Without voter-approval, no cash-out refunding bonds. Absent the required voter approval from a school district’s voters, a school district may not issue refunding bonds at a price or at an interest rate that will generate proceeds in excess of the amount needed to retire the designated outstanding bonds (i.e., cash-out refunding bonds).’)
C. MDUSD board minutes indicate cash out refundings occurred, e.g., board minutes dated May 10, 2005, Mayo states, ‘due to current low interest rates, the District may refinance 1995 Measure A Bonds, creating additional fund for Measure A projects at no additional cost to taxpayers.’ MDUSD financial statement footnotes in the audit reports also imply cash out refundings occurred.
D. I made public comment to Greg Rolen and the MDUSD board on June 28, 2011, addressing this issue and asked that they cease and desist in the expenditure of Measure A funds until this issue is resolved. I have had no response to this issue.
2. 2002 Measure C General Obligation Bonds Subject to Proposition 39
A. Proposition 39 requires 2 separate audits, a ‘performance audit’ and a ‘financial audit.’ The financial audits were never obtained for the 2002 Measure C bonds. In addition, in lieu of a ‘performance’ audit, the MDUSD engaged Perry Smith LLP to perform ‘agreed-upon procedures,’ where the MDUSD and prior 2002 Committee determined the scope of the engagement and the sample size, thus compromising the integrity of the results. The State Controller, John Chiang’s, Audit Division issued an opinion where he said “agreed-upon procedures” does not meet the ‘performance audit’ requirement or the intent of Proposition 39. Therefore, the taxpayers in the MDUSD have absolutely no assurance that the bond proceeds were expended in accordance Proposition 39 and applicable laws. Please see language below directly from Proposition 39 regarding the two audit requirements under Section 4:
-A requirement that the school district board, community college board, or county office of education conduct an annual, independent performance audit to ensure that the funds have been expended only on the specific projects listed.
– A requirement that the school district board, community college board, or county office of education conduct an annual, independent financial audit of the proceeds from the sale of the bonds until all of those proceeds have been expended for the school facilities projects.
B. I spoke with the Bureau Chief at the State Controller’s Audit Division charged with Proposition 39 audits, and they confirmed that agreed-upon procedures does not meet the performance audit requirement. The State Controller and founder of California League of Bond Oversight Committees confirmed the requirement for a separate financial audit, which was never performed. Instead, it the MDUSD is relying on their combined school audit, and this is not appropriate since additional test procedures are required by the independent accountant to address general obligation bonds.
C. On June 22, 2011, I wrote to Greg Rolen and the school board to inform them of this issue and asked that a cease and desist from expending the remaining 2002 Measure C monies be placed on the board Agenda. Greg Rolen did not respond to me until minutes before the MDUSD board meeting on June 28th, and he refused to comply and informed me that he consulted with their accountancy firm and bond counsel and thought there is no issue. However, I called Christy White and they said agreed upon procedures is not appropriate. I asked Greg Rolen to provide me with documentary evidence to support an opinion that supersedes the State Controller, and he never responded. Further, the Contra Costa Times heard my public comments on June 28th meeting, and an impending newspaper article may be on the way soon.
D. I’m asking the BOC and BOC chairperson to ask the MDUSD to pay for a performance and financial audit for all periods of the 2002 Measure C. A qualified auditor should be engaged immediately to perform these required audits. The audits should be performed before any remaining 2002 Measure C funds are fully expended.
3. Proposition 55 (MDUSD received over $100 million state matching funds)
A. In reviewing the MDUSD’s financial audit report for the year-ended June 30, 2008, I noticed an irregular $14 million interfund transfer from the County Schools Facilities fund (containing Proposition 55 funds) to the Building Fund (containing 2002 Measure C funds) to ‘cover increased costs.’ I confirmed with the California State division of General Services, who oversees Proposition 55 expenditures, and they believe that this $14 million is not an appropriate expenditure under Proposition 55.
B. I noticed in the 2002 BOC minutes for 2005, that Proposition 55 reimbursement funds would be used to pay principal on 2002 Measure C funds. I’m not sure if funds were used in his manner, however, I confirmed with the California State division of General Services, that this use of funds is prohibited.
C. Until these potential issues involving Proposition 55 funds are resolved, there should be a cease and desist on the expenditure of any remaining funds. Furthermore, the State auditor informed me that any savings from Proposition 55 funds must be used only on ‘high priority’ urgent need projects only, e.g., removal of asbestos, within 3 years for elementary school projects and 4 years for high schools.
4. 2010 Measure C
A. Proposition 39 requires that projects funded with Measure C bond proceeds must be spent on projects that will result in smaller class sizes and safer schools. As you know a massive solar installation project is underway. The State Controller said that this solar project may not be allowed if the disclosure was not adequate in the full text 2010 Measure C, and it does not result in smaller class sizes and safer schools. It does not appear that the disclosure was adequate, especially in light of the solar project’s magnitude and significant use of bond proceeds.
B. The State Attorney General has prohibited the use of bond proceeds to pay for salaries and general operating expenses. Generally, what you cannot do directly your cannot do indirectly. With that in mind, using bond proceeds to pay for solar panels, a revenue generating equipment arrangement, may be prohibited. The State Controller informed me that the MDUSD cannot keep the CSI rebates for the general fund. Such an act is prohibited and goes against accounting principles. The rebates must remain with the 2010 Measure C fund.
C. Further, Eberhart has stated that the MDUSD is trying to obtain federal tax incentives. These tax incentives, which now can be received via cash grants, are available to ‘for profit’ entities under the American Reinvestment Recovery Act (“ARRA”). The ARRA specifically excludes government entities, municipalities and school districts from receiving these federal tax credits because government entities are not subject to tax. I’ve requested records from Greg Rolen to determine the status of federal tax incentives 10 days ago, and I’ve obtained no response. My concern is that the receipt of the tax credits is illegal, will be misused, and the IRS may institute clawbacks of such credits if deemed illegal, placing the MDUSD at financial risk to the extent they are relying on such revenue.
D. $59 million in Clean Renewable Energy Bonds (CREB) were issued in September 2010 to partially fund the solar project. The IRS provides lump sum ‘subsidy payments’ or tax credits, depending on the situation. I’ve asked Greg Rolen several questions about the CREBS and related tax incentives, but he will not answer my questions regarding the CREBS. Further, when the MDUSD applied for the CREB bonds, an application describing the proposed project was submitted to the IRS. According to IRS rules, the solar project cannot deviate from what was proposed on the application. I believe the BOC should be made aware of those expenses that attributable to complying with the IRS rules pursuant to CREBS.
E. The voters were told that for the combined 2002 and 2010 Measure C, taxes would not exceed $60 per $100k of assessed valuation. The MDUSD reached the $60 cap in September 2010; however, the MDUSD issued an additional $10.9 million in bonds in March 2011. So absent the MDUSD issuing nontraditional termed bonds, the MDUSD may have exceeded this cap. It appears this $60 cap is the result of the most recent bond offers aggregating $10.9 million, and may explain the June 21, 2011, refunding of 2002 Measure C bonds in the amount of $37 million. I asked Greg Rolen for the calculation of the $60 assessment, and he will not provide me the records. In addition, my concern is that the MDUSD is paying exorbitant legal and underwriting fees as a result of the $60 cap, and there is another $220 million left to be issued on 2010 Measure C offering. I don’t know how the project timeline can be met given the $60 restriction. Further, I’m concerned that the MDUSD will exceed the cap when it may not be lawful to do so. The BOC is responsible for ensuring that legal costs and professional fees be kept to a minimum.
F. I’ve asked Greg Rolen if the June 21, 2011, 2002 Measure C refunding was a ‘cash out.’ He will not answer my question.
G. Bond counsel has informed me that they believe using 2010 Measure C funds to pay off prior long term debt in the form of certificates of participation and lease obligations is acceptable since “acquisitions” took place upon payoff. However, when I asked Greg Rolen for records to prove that an acquisition took place, including title transfer records, and he did not provide the records to me since he believes the district does not maintain such records. I find this implausible. Further, I believe the disclosure in the 2010 Measure C full text language does not adequately disclose this type of transaction. I noted that investors to the 2010 Measure C bond were told specifically that bond proceeds would be used to pay prior long-term debt, but that same language in the bond offering statement was not made to the voters in the 2010 Measure C full text. So this may also turnout to be a prohibited use of funds.
A. Pursuant to California Legislature 1908, all BOC reporting should be posted on the internet. We may not be in compliance with Proposition 39, AB 1908, since not all the board minutes are posted on the internet, and written materials provided to BOC members during our meetings are also not posted on the internet.
B. 2002 Measure C performance and financial audit is not posted for 2009. Perhaps there is no audit?
C. Greg Rolen’s overall response to my records requests is disconcerting. I asked for specific records pertaining to expenses for the 2010 Measure C, I was accused of burdening his staff and abusing the spirit of the public records act. Pete Pederson to date has provided us only with expense information in general categories and aggregate balances. According to AB 1908, the BOC should be provided with appropriate financial records, and the California League of Bond Oversight Committees states that it is highly unusual for BOC’s not to receive detailed expense information like date, description, payee, and amount of each expense by project. At a minimum we should be reviewing the general ledger and related invoices. It is very disturbing that the MDUSD’s general counsel is pushing back on my request, and I find it impossible for the BOC to be able to attest to the appropriateness of expenses when the BOC has not seen detailed expenditures. This should be incorporated as part of our regular review, in addition, we should be making regular site visits to verify the work being done. Has anyone made site visits that would very the expenditures to date?
D. The projects list that was filed with the Board of Education should be brought to the BOC meetings so we can ensure that expenditures are for the “projects listed”.
E. Furthermore, I believe that posting the meeting Agendas should also be made on the internet. It is confusing when we have a website for 2010 Measure C, but it is not being updated, while Agendas are being posted outside of the Dent center making the public have to drive quite a distance to view the Agenda.
So I hope you all realize that the manner in which the MDUSD has been funding its projects complicates the ability to ensure that expenditures are appropriate, and we need to take immediate action, where necessary, to protect bond proceeds and ensure that MDUSD is in compliance with applicable laws. John, please advise on how you will proceed.
Also, to the extent the Greg Rolen does cooperate and provides me with the financial records I requested, is there anyone on the BOC who is willing to help with the review? Perhaps a sub-committee should be formed to address audit and financial budget issues. I welcome any opinions from other members, however, please keep in mind that what is discussed via email must be disclosed in a public forum to avoid Brown Act violations.
Here is the letter Minyen submitted to the board on Aug. 9, during the public comment period. It includes a list of questions she wants the bond counsel to answer at the Monday meeting:
“Date: August 9, 2011
To: Members of the Board; Superintendent Lawrence; and Greg Rolen, General Counsel
From: Alicia Minyen, CPA
Member of the 2010 Measure C Citizen’s Oversight Committee
Please have bond counsel ready by August 22, 2011, to respond to the following concerns and questions regarding the use of 2010 Measure C bond funds to pay for 1998 refunded certificates of participation totaling about $5 million. In addition, please have bond counsel ready to address concerns in my July 25, 2011, email I sent to all 2010 Measure C Committee members.
Further, I wanted to ensure that the use of 2010 bond proceeds were appropriate to payoff 2006 and 2007 lease obligations totaling about $8.7 million. I had asked the district under a public records request dated July 6, 2011, to provide copies of the lease agreements, description of collateral/property leased, and documents evidencing title transfer, among other things. The district has not provided these records. In order for the 2010 Citizen’s Bond Oversight Committee to make a determination of the appropriateness of paying off long-term lease obligations totaling about $14 million, please provide the records I had requested prior to August 22, 2011, so I have sufficient time to review. Please note that I already have a copy of agreements pertaining to the 1994 and 1998 certificate of participations.
When responding to the questions below, please keep in mind the requirements of Proposition 39 and its related laws (i.e., the expense must result in smaller classes and safer schools). Also keep in mind the State Attorney General’s opinion 04-0110, which states that bond proceeds cannot be used for general operating expenses.
1. Please explain why the debt service associated with the 1998 certificates of participation (COP), which are securities, do not constitute general operating expenses. Please also note that the 2010 Facilities Master Update refers to the COPs and Lease Obligations paid for with 2010 Measure C funds as ‘General Fund Relief and Debt Retirement.’
2. You have stated in the past that with respect to using 2010 Measure C bond proceeds to pay for COPs and Lease Obligation, that you are relying on the following ballot disclosure: A) ‘Acquisition of any of the facilitates on the bond project list through temporary lease or lease purchase arrangements, or execute purchase option under leases for any of these authorized facilities; and B) acquisition of leasehold interest on facilities currently subject to lease.’
It appears to me that the disclosure in A and B above would apply to new transactions (transactions subsequent to the passing of 2010 Measure C. Please explain why disclosures under A and B above would be relevant and apply to old COP transactions, i.e., a structure located at 2344 Bisso Lane, Concord, CA, built in 1994 subject to a COP, which was refunded in 1998.
Further, in my review of the COP, I do not find language that would define that an acquisition took place. For example, the COP states that the District retains title to the subject property at all times. Please identify the language that supports an acquisition took place by the district as a result of payoff. Also, identify language that would address a purchase option.
I did notice prepayment language; however, it simply said that if a prepayment occurred, the interest in the property would be vested. Perhaps I missed something. Please point out the language in the 1998 COP that states upon prepayment the District acquires a leasehold interest.
3. Please identify the facility located at 2344 Bisso Lane, Concord, on the projects listed. Please also explain how this facility results in smaller class sizes and safer schools.
4. Please explain if the district can enter into a new COP transaction using the same facility as used in the 1998 COP in the future…is there any waiting period since the time it was paid off?
5. In 1998, the COP was refunded and generated about $500,000 extra money to be used for additional acquisitions. Please describe what type of assets that were acquired with the $500,000. Also, please show the 2010 Committee if such assets are on the projects listed.
6. The 2010 Committee should consider the amount of professional fees paid for using bond proceeds. In light of this, please explain whether premiums/penalties were charged for prepayment of the 1998 COP.
7. Was there an appraisal obtained on the property located at 2344 Bisso Lane. What was the current market value of property in 1998 and was the market value below the amount raised from the sale of certificates (i.e., $7,760,000)? Was a new appraisal obtained just prior to the time of payoff? If so, did the appraisal support the amount outstanding?
8. I noticed that the 1994 COP agreement says it is a ‘project lease’ and the 1998 COP states it is a ‘lease purchase.’ Please explain the differences in these two types of leases.
9. I searched the county’s clerk & recorder’s records and couldn’t find that MDUSD held the 2344 Bisso Lane property. Please show the deed/title and owner of this property. If someone other than the district owned the property, provide evidence that the district was allowed to enter into the lease associated with the 1998 COP. Also, please explain this facilities current use and whether it is fully occupied.
10. Please explain why the prepayment of the COPs was a priority vs. using the bond proceeds to fund more urgent projects that may jeopardize the safety of children.
11. The counter- party to the 1998 COP is Mt. Diablo Unified School District Education Facilitates Financing Corporation. Was this related non-profit corporation created solely for the purpose of the COPs? Does the district use this corporation for any other purpose that may relate to the 2010 Measure C?”
[END OF MINYEN’S LETTER]
Minyen has also sent additional e-mails and Public Records Act requests to district officials, beginning June 6. Rolen initially responded that her requests for information were overly burdensome to staff, that the district might not have the records she sought, that he wasn’t sure he was required to release some of the records and that her requests were an abuse of the Public Records Act.
Today, however, he informed her that “information responsive” to her requests would be made available at the Monday meeting.
“If you wish to receive them in advance, or, review them at your leisure there are 1,496 pages of documents the district has copied,” he wrote. “The generally excepted (sic) $.10 copying fee will be required prior to receipt. Accordingly, if you wish to receive the documents either before or after the meeting, please remit $149.60 to Bryan Richards in the Fiscal Department.”
Do you believe a board-appointed member of a Bond Oversight Committee should be required to pay for documents related to his or her duties as a volunteer on the legally required committee?