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Sweetwater Union High School District officials have denied repeatedly they knew anything about the district’s overspending until it suddenly came to light last September. But a new state report suggests some district employees may have committed criminal fraud.
During a strange and dramatic board meeting Monday night – with reshuffled agenda items and a damning government report – state officials accused Sweetwater Union High School District employees of knowingly covering up the district’s ongoing financial crisis, triggered by massive overspending.
District officials have denied repeatedly they knew anything about the district’s overspending until it suddenly came to light last September. They have described it as an accident that could be attributed to innocent accounting errors and inefficient budget software. But the new report, from the state’s Fiscal Crisis and Management Assistance Team, challenges that narrative. It suggests some district employees may have committed criminal fraud.
FCMAT’s chief executive officer Michael Fine told board members that 302 entries in the district’s accounting system were doctored to create the impression the district had more money than it really did. “That my friends and colleagues, is a cover-up,” he said, eliciting an audible gasp from board members and others in the room.
Sweetwater’s superintendent Karen Janney refused to comment when I asked her about the suggestion of fraud. “We have a lot of work to do,” she said. When pressed again, she said, “I’m not gonna comment on that right now,” and walked out of the board’s public meeting room.
Fine did not speculate on who might have been behind the alleged cover-up. Several of Sweetwater’s top financial workers, including chief financial officer Karen Michel, retired over the summer. A Sweetwater spokesman told me previously those retirements were pre-planned.
Officials from the state financial agency attended Monday’s board meeting to present a risk analysis that suggested Sweetwater is in danger of going bankrupt and being taken over by the state in the coming weeks and months, as VOSD’s reporting previously made clear. A state takeover happens when a district can no longer make its payroll.
“I don’t know if you’ve already triggered that, or if it’s coming in two days, or it’s coming in two months, or it’s coming in June,” Fine said, regarding a state takeover.
Fine said the current crisis is the result of years and maybe decades of mismanagement and poor leadership. He noted the only person in the room with clean hands was chief financial officer Jenny Salkeld, who took the helm days before the budget crisis was discovered.
Responsibility for the district “rests with you and no one else,” Fine said, chastising the board. “You are 100 percent responsible. The fiduciary and moral responsibility for this district is your sole role as a trustee.”
The fiscal crisis team’s report rated the district as a “high risk” of becoming insolvent.
Fine indicated that district officials are likely illegally borrowing from development fees – known as Mello-Roos – to keep afloat. Their borrowing will soon exceed state education code requirements. The district’s loan balance is set to reach nearly $70 million by the end of the school year. But it’s unclear how long the fund will have enough money in it to keep the district afloat, assuming state officials don’t step in to stop the borrowing.
“By June, you will have exceeded those [education code] standards with no apparent ability to pay [the money] back,” Fine said.
If the district can’t pay the money back, and can’t make payroll, then it will ultimately be taken over the state. Only 10 school districts in the state have ever been taken over.
Monday night’s board meeting was also dominated by last-minute theatrics that may have affected the outcome of a controversial vote to approve an early retirement plan for 308 school district employees, which is projected to save a relatively small amount over the coming years.
At the last minute, the board decided to move the vote on its early retirement plan to the top of the meeting, even though it had previously been scheduled for after Fine’s presentation.
Had Fine been allowed to present first, he indicated he would have likely suggested the board not approve the early retirement plan. San Diego County Office of Education officials also sent a letter earlier in the day urging Sweetwater’s board trustees not to approve the plan.
The board, however, approved the early retirement plan unanimously, at Janney’s urging. The plan will save the district roughly $7 million between this year and next. But district officials need to cut $42 million from next year’s budget. The early retirement plan also included a rider that commits the district to no teacher layoffs this year or next.
Janney called it the most “humane” way for the district to achieve savings.
But Fine and county officials believe the district may now have eliminated its only option for bailing itself out of the current crisis.
“You spend 90 cents of every dollar on people. It will be difficult to solve all of this without touching people, and you have eliminated that as a tool,” Fine said.
If the district can’t make the needed cuts and can no longer borrow from its Mello-Roos fund, state officials would likely neuter the board, taking away its decision-making power.
County officials said in a statement Monday night they will begin a fraud audit of the district as soon as possible. Sweetwater filed erroneous financial information with the federal government and its credit rating agency in April when it sold $28 million worth of bonds. If investigators determine it was purposeful, it would likely be considered securities fraud – a crime that could warrant jail time.
Financial workers had dozens of opportunities throughout last year to notice the $30 million hole in the district’s books.
“This is not a surprise. We’ve been talking about it for weeks,” Fine said about the possibility of a cover-up. “It may be a surprise to you but that would be unfortunate,” he told the board.