Regulators crack down on schools’ borrowing

The Los Angeles County Treasurer and Tax Collector warned local school finance managers this week that a number of common internal borrowing practices are dishonest to taxpayers and prohibited by law. 

The news arrives as Gov. Jerry Brown’s revised state budget proposal offers schools an unexpected $3 billion next year and seemingly an easing of the crisis for now.

But Brown’s plan assumes lawmakers will agree to tax extensions before June 30 and ratification by voters sometime later – both of which are rife with uncertainty.

Thus, the letter by the Los Angeles County treasurer highlights the often extreme maneuvers that districts have applied in order to cover cash flow and the prospect of new restrictions fast approaching.

Indeed, one district – Inglewood Unified – already initiated the process for a state takeover last week.

The letter outlines several unacceptable financing practices that include borrowing from bond project funds, using a joint powers authority to augment Qualified School Construction Bonds, and issuing capital appreciation bonds with maturities over 25 years.

“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,” wrote County Treasurer and Tax Collector Mark Saladino. “We recommend that districts take a conservative approach when issuing GO bonds in order to avoid any violations of State and Federal law.”

After surveying other counties, the treasurer found that many of the practices were common across the state and in some cases were “actively promoted” by county offices of education, said Glenn Byers, assistant treasurer and tax collector.

“We don’t have any control outside of the borders of L.A. County, but I would like to see this stopped everywhere in the state tomorrow,” he said.

To gain traction elsewhere, the letter was also sent to the California Association of County Treasurers and Tax Collectors, state Treasurer Bill Lockyer, state Attorney General Kamala Harris, and State Superintendent of Public Instruction Tom Torlakson.

According to Byers, borrowing from local general obligation bonds to cover cash flow violates state and federal tax laws limiting bond proceeds to property and facility upgrades.

Under federal tax law, explained Byers, money taken out of a bond fund is considered spent, and the Internal Revenue Service could impose fines on the district and declare all the bonds taxable due to the ineligible expenditures.

If that happens, investors could be required to pay income taxes on any interest received from the bonds, and could sue the school district, he explained.

“Avoiding the practices and bond structures that we have listed in our white paper will do two things,” said Byers.

“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.”

School districts have adopted myriad borrowing practices in recent years while they navigate state payment deferrals and other reductions that can stem from decreases in pupil enrollment.  

Inglewood Unified, which last week took its first step into requesting an emergency state loan, has for years been unable to balance internal cuts with state reductions.   

The district is now relying on borrowing from state school facility dollars, which is still allowable under the county treasurer’s guidelines, said a spokesman from the Los Angeles County Office of Education.

Nonetheless, a credit report issued last week by Standard and Poor’s rating agency dropped the districts’ rating from ‘A’ to ‘BBB+’.

According to the credit report, Inglewood Unified has run at a deficit for three consecutive years. In 2010, the deficit was nearly $11 million, or roughly 9 percent of operating expenditures.

Further complicating the district budget, Average Daily Attendance has also declined at Inglewood in recent years at an annual average of 5 percent.

District officials attribute the deficit to the lowered revenues “in addition to planned expenditure cuts not materializing,” said the report.

It continued, “Given the constrained state budget environment and what we consider substantial projected budget shortfalls, we believe the district will continue to face fiscal challenges during the next two years,” said the report. 

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(Ed’s Note: This story appears courtesy of Cabinet Report, a subscription-based education news service published by School Innovations & Advocacy. To learn more visit:http://www.siacabinetreport.com/home.aspx Contact reporter Allen Young at: alleny@sia-us.com)