San Diego County Office of Education – San Ysidro Elementary School District Report

San Diego County Office of Education Extraordinary Audit of the San Ysidro Elementary School District Revised Final Report July 8, 2019 Michael H. Fine Chief Executive Officer Revised July 8, 2019 Paul Gothold, Ed.D., Superintendent San Diego County Office of Education 6401 Linda Vista Road San Diego, CA 92111-7319 Dear Superintendent Gothold: In April 2018, the Fiscal Crisis and Management Assistance Team (FCMAT) and the San Diego County Office of Education entered into an agreement for FCMAT to provide an Assembly Bill 139 extraordinary audit of the San Ysidro Elementary School District, in accordance with Education Code Section 1241.5 (b). The county office had received allegations that possible fraud, misappropriation of funds or other illegal fiscal practices may have occurred at the San Ysidro Elementary School District. The county office requested that FCMAT review transactions and relevant internal controls related to procurement and contractual commitments for facilities modernization and new construction projects. The period reviewed begins with fiscal year 2012-13 and continues through May of fiscal year 2017-18. Based on a sample of transactions and records tested for this period, the review results are intended to provide reasonable but not absolute assurance regarding the accuracy of the district’s financial transac- tions. The study agreement states that FCMAT will focus on the following: 1. Project scope, authorization, project delivery method and procurement practices. 2. Bid processes including contractor and subcontractor selection and subsequent school board approval. 3. Method and application of contractor payments including internal auditing and school board approval. The study agreement also states that FCMAT will perform the following: 1. Evaluate policies, procedures and internal controls for purchasing, contractual commitments, and vendor payments. Sample selections will include, but not be limited to, documents related to the bond program and construction management contracts. 2. Review sample selections of vendor payments and supporting documentation and verify compliance with established policy, procedures and applicable laws. 3. Review the source and use of bond proceeds and transactions, including any other debt instruments, and support documentation related to the source and use of these funds as considered necessary. 4. Determine if any of the San Ysidro School District local public officials, designated employees or “consultants to the organization who makes, participates in making, or acts in a staff capacity for making governmental decisions” as defined in the Political Reform Act (PRA) of 1974 (Government Code Sections 81000-91014) violated any conflict of interest disclosure regarding California conflict-of-interest laws. Review applicable PRA Form 700 filings for 2012-13 through 2017-18. The study agreement also describes the transaction testing procedures used and details specific audit objectives, and is in Appendix C of this report. This is a revised report issued subsequent to the receipt of additional information. FCMAT’s original report on this subject was dated and delivered to the San Diego COE on May 8, 2019. The COE made the report public on May 9, 2019, and FCMAT posted the report on its website on May 10, 2019. Within hours of the initial posting, FCMAT removed the report from its website to provide time to review concerns expressed by several individuals and entities who initially contacted FCMAT on May 10, 2019 and continued contact through late June, 2019. These individuals and entities took exception to portions of the report; some provided additional and clarifying information in support of their objec- tions. It is important for readers to understand the purpose, scope, perspective, testing methodology and threshold of a review such as this. Studies, reviews and audits performed by FCMAT are based on a specific scope agreed upon between FCMAT and its client. In the case of an AB 139 extraordinary audit, the client is always a county super- intendent of schools. Allegations that prompt an AB 139 review are based on a district or charter school’s operation. Although outside parties may be involved, the perspective and approach FCMAT takes in conducting its work is through the lens of legal and best practices related to the district’s governance and operations. For example, if a vendor is selected by the district because there is a pre-existing relationship rather than as a result of a competitive process, the vendor is not FCMAT’s focus and should not be faulted. FCMAT’s identification and discussion of a deficiency is focused on the district’s governance, policies and procedures that allowed for and facilitated such a selection and approval process. The specific scope points for this report are outlined above. It is FCMAT’s obligation to constrain its review and reporting to the parameters of the scope. Although FCMAT’s review may identify additional allegations and information that is possibly true, any such alle- gation or information needs to be measured against the scope and evaluated to determine if it is critical to reaching the conclusion FCMAT is tasked with in the applicable Education Codes and study agreement. To accomplish this review’s objectives, several common testing and analytical procedures were used to help analyze and understand the allegations and potential outcomes. Fieldwork consisted of gathering documents and other information pertaining to specific allegations, and interviewing potential witnesses and others with knowledge about the district’s policies and procedures. FCMAT visited the district to conduct interviews, collect data and review documents. The FCMAT study team interviewed district board members, current administrative personnel and business office staff to obtain information related to general business practices and events that transpired during the period under review, including poten- tial financial mismanagement, abuse, or fraud. During interviews, FCMAT asked questions about the allegations; policies and procedures; transactions and activities; authorization levels; job duties; and the internal control structure including control activities, lines of authority, and oversight of district business activities. Open-ended questions were designed to elicit information about other possible irregularities related to the scope of the audit. FCMAT’s work focused on determining whether there is sufficient evidence to indicate that fraud, misap- propriation of funds, or other illegal fiscal activities may have occurred. To investigate the allegations, the team evaluated policies, procedures and other internal control activities, and tested transactions recorded by the district to verify the compliance and effectiveness of those controls. Sample testing and examination results are intended to provide reasonable but not absolute assurance about whether transactions and financial activity are accurate and whether fraud, misappropriation of funds or other illegal fiscal activities may have taken place during the period under review. FCMAT does not reach a conclusion, nor report, on information from one source alone. FCMAT seeks to triangulate information from multiple sources, identifying similarities and consistency in data and information that demonstrate a pattern. This is especially true when conducting interviews and relying on information provided in an interview setting. This process and standard were followed for this report. Despite well-practiced testing practices, FCMAT may not be able to corroborate allegations others may make in an interview setting. FCMAT does not possess subpoena power or the ability to require inter- viewees to speak under oath. Irrespective of the similarities and consistency of information collected, it is FCMAT’s duty to ensure all perspectives are heard and considered. Subsequent to the issuance of the original report, FCMAT received information from others expressing a different viewpoint. In response, FCMAT conducted additional fieldwork and an interview. FCMAT has considered those alternative viewpoints and additional information in revising its report. The purpose of an AB 139 review is to determine whether sufficient evidence exists to support the asser- tion that fraud, misappropriation of funds or other illegal fiscal activities may have occurred that should be reported to the local district attorney’s office for further investigation. This is a relatively low threshold and is based on the expert judgment of the study team that conducts the review in accordance with the agreed upon scope. FCMAT is clear in its reports that the existence of fraud, misappropriation of funds, or other illegal practices are solely the purview of the courts. This report notes that many deficiencies in governance, policy and procedures existed at the district during the timeframe reviewed. In this regard, FCMAT serves as a reporting party only. Based on additional information provided since FCMAT’s original report was issued on May 8, 2019, FCMAT has made certain revisions, rejected some contentions, and, where appropriate, provided clari- fying language. With these changes, the report is now reissued and reposted. Highlights of the revisions are provided below. • Pages 47-48 — Minor revisions for clarity were made to the discussion about the contracting for, and use of general obligation bond proceeds for, a power purchase agreement and the subsequent early termination fees paid under that agreement. • Pages 48-49 — As part of FCMAT’s analysis of sampled expenditures, the report refers to a contract the district had with California Financial Services to reconstruct financial data extending back to 2004. In the original report FCMAT questioned whether a reconstruction extending that far back in time provided any meaningful value to the district, but ultimately that determination is the district’s responsibility, not FCMAT’s. However, several irregularities are noteworthy in the context of the scope of the review related to contractual commitments, vendor payment procedures and use of bond proceeds. One of FCMAT’s concerns is that a partial year of data was used, creating a potential immediate conflict with annual reports the district made. The district’s general ledger is always the official record of accounts. The district was unable to produce the reconstructed data provided by California Financial Services. FCMAT noted that although California Financial Services, in its report of completed work, stated that it had reconstructed data back to May 1, 2004, it billed for work extending back an additional two years and two months, to March 1, 2002. It is the 2002 date that supports the total amount that was paid to the vendor, based on the agreed annual contract fee. The vendor states that it completed all the work back to the 2002 date, despite the 2004 date appearing on supporting paperwork. The discrepancy in the amount of work is further complicated by the district’s lack of issuance of a properly approved purchase order at the time the work commenced. Instead, the district issued the purchase order after the invoice from the vendor was received, matching the purchase order to the invoice. FCMAT’s main concerns are that the description of completed work did not match the invoice, and that the district paid for it without proper purchasing procedures. Finally, FCMAT questioned the propriety of using general obligation bond funds to pay for work not specifically related to authorized bond projects. Again, the source of funds used to meet an obligation is not the vendor’s responsibility, but that of the district’s governing board. • Pages 64-66 — EcoBusiness Alliance, later (and for all further purposes) known as Manzana Energy, has been a vendor to the district for a solar energy project. After the district terminated its original contract with the firm, Manzana Energy sued for wrongful contract termination and obtained a substantial judgment. Subsequently, through negotiation and mediation, the parties entered into a contract addendum for the solar energy project. FCMAT reviewed the revised agreement with regard to the district’s business processes and judgment. Solar energy projects do not require sealed, competitive bidding; however, the law allows and sound business practice supports a request for competitive proposals, which the district did not use. This includes each of the parties involved in the transaction, such as financial advisors, legal counsel and other consultants. Based on FCMAT’s analysis, the price per unit of energy under the revised agreement was significantly more than other districts have been paying. The basis for the higher-than-market value was not determined for the original report. Subsequently, FCMAT interviewed Mr. Castanares, president of Manzana Energy, who stated the additional cost was due to a variety of reasons, including the loss of benefits to Manzana Energy such as tax incentives and rebates that would have accrued during the 25-year term of the agreement, sunk costs and carrying costs from the original 2008 agreement, and redesign costs. The decision to enter into the original power purchase agreement in October 2008 and the subsequent decision to terminate the agreement early in 2011 were the responsibility of the district. The district’s inadequate management of the contract terms resulted in questionably high costs. Further, as detailed in the original report, FCMAT believes that the use of the district’s general obligation bond funds may not have been proper. • Pages 65, 75-76 — The report refers to interviews with multiple individuals who have alleged that Mr. Castanares made, or through influence with the San Ysidro Education Association (a district employee union) caused to be made, contributions to two individuals who became district board members. FCMAT’s practice is to state when allegations are made by multiple individuals and then to research facts associated with the allegations. However, the implication that some may draw from the allegations is that FCMAT is suggesting that these board members were elected and then pressured or encouraged the contract addendum approval as a result of these alleged contributions. Mr. Castanares, one of the two board members, and the Association leadership categorically deny these allegations. Additionally, as noted in the original report, the extent of any documentation to corroborate such allegations that FCMAT found in the course of research was that the Association had created a political action committee and provided funding to the two board members in question. As further noted in the original report, none of the district’s vendors (including Manzana Energy) or individuals associated with vendors (including Mr. Castanares) were identified as having made political contributions to any board member candidates in any of the elections that occurred during the five years reviewed. According to Mr. Castanares, the extent of his involvement in the campaigns was to provide advice and to support the efforts of the two board member candidates, but he reports that he neither made any monetary contributions nor indirectly influenced to whom the Association’s monetary contributions were provided. FCMAT did not obtain any campaign finance disclosure reports that indicate monetary contributions were made from Manzana Energy or its president. Further, Mr. Castanares reported that he was asked about the same or similar topics during a district attorney’s office investigation and at a county grand jury hearing, and in both cases he denied all such allegations. FCMAT is unaware of any resolution or final determination as to those inquiries and/or investigations. FCMAT is unable to resolve the conflict between the allegations shared with us and the denials. However, FCMAT found no corroborating evidence that supports the allegations against Mr. Castanares, the board members or the Association. Clarity regarding the findings is included in this revised report. As a result, FCMAT does not accuse Mr. Castanares, the Association or the district’s board members of any wrongdoing with regard to any campaign contributions or undue political pressure. Finally, FCMAT does not have any basis to contend that Mr. Castanares’ purchase of a local newspaper, its reporting and its editorial content, were used to improperly influence any board member to approve the revised solar energy contract addendum or to work for or against the election of any board candidate for that purpose. The original reference to the acquisition of the newspaper is immaterial to FCMAT’s findings and is removed from this revised report. This revised final report contains the study team’s findings and recommendations. We appreciate the opportunity to serve you, and we extend thanks to all the staff of the San Diego County Office of Education and the San Ysidro Elementary School District for their cooperation and assistance during fieldwork. Sincerely, Michael H. Fine Chief Executive Officer i TABLE OF CONTENTS Table of Contents About FCMAT .........................................................................................iii Introduction ............................................................................................1 Background ......................................................................................................1 Study Guidelines (AB 139 Audit Authority) ............................................1 Study Team.......................................................................................................2 Scope, Procedures and Fieldwork ...................................................3 Procedures .......................................................................................................3 Fieldwork ..........................................................................................................3 Definitions of Fraud, Occupational Fraud, and Internal Control ................................................................5 Fraud ..................................................................................................................5 Occupational Fraud .......................................................................................5 Internal Control ...............................................................................................5 Findings ....................................................................................................9 Debt Issuance Practices ...............................................................................9 Financing Transactions ............................................................................................9 Certificates of Participation Analysis .................................................................15 General Obligation Bonds Analysis ..................................................................25 Facilities Fund Expenditures .....................................................................43 General Obligation Bond Funds .........................................................................43 Development Impact Fees ..................................................................................44 Funds from Certificates of Participation .........................................................44 Funds from Community Facilities Districts .....................................................45 Substantive Testing .....................................................................................46 Analysis of Expenditures ......................................................................................46 San Diego County offiCe of eDuCation ii TABLE OF CONTENTS Procedures ...................................................................................................................46 Project Expenditures ................................................................................................46 Solar Project by Manzana Energy .........................................................................47 Furniture Purchases ..................................................................................................48 School Funding Reconstruction Services by California Financial Services ............................................................................48 Wire Transfers ..............................................................................................................49 Bids, Requests for Proposals, and Other Procurement Practices ............50 Bid File Document Testing ......................................................................................51 Request for Proposal (RFP) Testing .......................................................................53 Vendor Payment Transaction Testing ..................................................................55 Other Irregular Practices ............................................................................61 Payment Practices ...................................................................................................61 La Mirada and Smythe Elementary School Modernizations ....................62 Solar Project Contract and Pricing ...................................................................64 Citizens’ Oversight Committee ..........................................................................66 Maintenance, Warehouse, and Facilities .........................................................66 Internal Controls ...........................................................................................68 Operational Policies and Procedures ...............................................................68 Ethical Values and Fiduciary Duties ..................................................................70 Failure of Board Policy, and Organizationwide Deficiency of Care ........................................................................................72 Political Reform Act — Disclosure, Conflicts of Interest and Enforcement ..........................................................................................74 Conclusion .............................................................................................77 Potential for Fraud .......................................................................................77 Judgments Regarding Guilt or Innocence ...........................................77 Recommendation ........................................................................................77 Appendices ............................................................................................79 Fiscal crisis & ManageMent assistance teaM iii ABOUT FCMAT About FCMAT FCMAT’s primary mission is to assist California’s local K-14 educational agencies to identify, prevent, and resolve financial, human resources and data management challenges. FCMAT provides fiscal and data management assistance, professional development training, product development and other related school business and data services. FCMAT’s fiscal and manage- ment assistance services are used not just to help avert fiscal crisis, but to promote sound financial practices, support the training and development of chief business officials and help to create efficient organizational operations. FCMAT’s data management services are used to help local educational agencies (LEAs) meet state reporting responsibilities, improve data quality, and inform instructional program decisions. FCMAT may be requested to provide fiscal crisis or management assistance by a school district, charter school, community college, county office of education, the state Superintendent of Public Instruction, or the Legislature. When a request or assignment is received, FCMAT assembles a study team that works closely with the LEA to define the scope of work, conduct on-site fieldwork and provide a written report with findings and recommendations to help resolve issues, overcome challenges and plan for the future. FCMAT has continued to make adjustments in the types of support provided based on the changing dynamics of K-14 LEAs and the implementation of major educational reforms. Studies by Fiscal Year 90 80 70 60 50 40 30 20 10 0 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 FCMAT also develops and provides numerous publications, software tools, workshops and professional development opportunities to help LEAs operate more effectively and fulfill their fiscal oversight and data management responsibilities. The California School Information Services (CSIS) division of FCMAT assists the California Department of Education with the implementation of the California Longitudinal Pupil Achievement Data System (CALPADS). CSIS also hosts and maintains the Ed-Data website (www.ed-data.org) and provides technical expertise to the Ed-Data partnership: the California Department of Education, EdSource and FCMAT. FCMAT was created by Assembly Bill (AB) 1200 in 1992 to assist LEAs to meet and sustain their financial obligations. AB 107 in 1997 charged FCMAT with responsibility for CSIS and its state- wide data management work. AB 1115 in 1999 codified CSIS’ mission. San Diego County offiCe of eDuCation seidutS fo rebmuN iv ABOUT FCMAT AB 1200 is also a statewide plan for county offices of education and school districts to work together locally to improve fiscal procedures and accountability standards. AB 2756 (2004) provides specific responsibilities to FCMAT with regard to districts that have received emergency state loans. In January 2006, Senate Bill 430 (charter schools) and AB 1366 (community colleges) became law and expanded FCMAT’s services to those types of LEAs. On September 17, 2018 AB 1840 was signed into law. This legislation changed the how fiscally insolvent districts are administered once an emergency appropriation has been made, shifting the former state-centric system to be more consistent with the principles of local control, and providing new responsibilities to FCMAT associated with the process. Since 1992, FCMAT has been engaged to perform more than 1,000 reviews for LEAs, including school districts, county offices of education, charter schools and community colleges. The Kern County Superintendent of Schools is the administrative agent for FCMAT. The team is led by Michael H. Fine, Chief Executive Officer, with funding derived through appropriations in the state budget and a modest fee schedule for charges to requesting agencies. Fiscal crisis & ManageMent assistance teaM 1 INTRODUCTION Introduction Background The San Ysidro Elementary School District is located south of San Diego along the southern border of California and serves approximately 4,578 students in grades K-8 at five elementary schools, two middle schools and one preschool and child development program. The district includes San Ysidro and some adjacent areas of San Diego. According to data from the California Department of Education (CDE), student enrollment decreased each year from 2012-13 through 2018-19, from 5,235 students in 2012-13 to 4,578 students in 2018-19. For 2017-18, 90.02% of the district’s students qualified for free or reduced-priced meals, were English learners, or were foster youth. The district has a five-member governing board whose members are elected to four-year terms that are staggered so that two or three members are on the general election ballot every two years. The district has had nine superintendents and interim superintendents over the last decade. The majority of these leadership changes happened abruptly, with interim superintendents entering during a challenging time, followed by appointment of a permanent superintendent. Superintendents appointed as interim and permanent have typically begun working on whatever issues appeared urgent at the time, without full institutional knowledge or the ability to gather insight from the prior leadership. The district has had no strategic vision in place to ensure conti- nuity. In May 2016, a report released by the San Diego County Grand Jury found that the district failed to implement a strong system of internal controls, that board members disregarded their fiduciary responsibilities, and that there was no oversight of expenditures of funds from general obligation bonds and certificates of participation. The grand jury also found that the district had amassed millions of dollars of long-term debt but had little to show for it. One of the grand jury’s recommendations was to conduct an audit of the district’s finances. In April 2018, the San Diego County Office of Education requested that FCMAT conduct an Assembly Bill (AB) 139 extraor- dinary audit to determine if fraud, misappropriation of funds or other illegal fiscal activities may have occurred at the district. Study Guidelines (AB 139 Audit Authority) Education Code Section 1241.5(b) permits a county superintendent of schools to review or audit the expenditures and internal controls of any school district in his or her county if he or she has reason to believe that fraud, misappropriation of funds or other illegal fiscal practices may have occurred that merit examination. On completion of the audit, if evidence exists that fraud or misappropriation of funds may have occurred, Education Code Section 42638(b) states, “…the county superintendent shall notify the governing board of the school district, the State Controller, the Superintendent of Public Instruction, and the local district attorney.” The purpose of a fraud audit is to determine whether sufficient evidence exists to support the assertion that fraud, misappropriation of funds or other illegal fiscal activities may have occurred that should be reported to the local district attorney’s office for further investigation. Based on allegations and information provided to the San Diego County Office of Education, the county office asked FCMAT to assign professionals to conduct an AB 139 extraordinary San Diego County offiCe of eDuCation 2 INTRODUCTION audit under the provisions of Education Code Section 1241.5(b). FCMAT and the county office entered into an agreement for these services on April 11, 2018. As part of the review, FCMAT reviewed documents and interviewed district management, staff and board members to deter- mine whether fraud, misappropriation of funds or other illegal fiscal practices may have occurred that warrant further investigation by the local district attorney’s office. FCMAT visited the district on August 28-30, 2018 to conduct interviews, collect data and review documents. Following fieldwork, FCMAT continued to review and analyze documents. This report is the result of those activities. In writing its reports, FCMAT uses the Associated Press Stylebook, a comprehensive guide to usage and accepted style that emphasizes conciseness and clarity. In addition, this guide empha- sizes plain language, discourages the use of jargon and capitalizes relatively few terms. Study Team The study team was composed of the following members: Jennifer Noga, CFE Melinda Pure* FCMAT Intervention Specialist FCMAT Consultant Lori Raineri Keith Weaver President Client Services Director Government Financial Strategies Government Financial Strategies John Lotze FCMAT Technical Writer Each team member reviewed the draft report to confirm accuracy and achieve consensus on the final recommendation. Fiscal crisis & ManageMent assistance teaM 3 SCOPE, PROCEDURES AND FIELDWORK Scope, Procedures and Fieldwork Fraud audits have many components including obtaining and examining original source docu- ments; corroborating documents and information through third-party sources when possible; interviewing potential witnesses; gaining an understanding of internal controls applicable to the scope of the fieldwork; and assessing factors such as intent, capability, opportunity, and possible pressures or motive. There are many different types of fraud. Occupational fraud, including asset misappropriation and corruption, may occur when employees are in positions of trust and have access to assets. Embezzlement occurs when someone who is lawfully entrusted with property takes it for his or her personal use. Common elements in all fraud include the following: • Intent, or knowingly committing a wrongful act • Misrepresentation to accomplish the act • Reliance on weaknesses in the internal control structure • Concealment of the act The focus of this review is to determine, and report to the county office, whether the district has adequate management controls for reporting and monitoring financial transactions and whether fraud, misappropriation of funds or other illegal fiscal activities may have occurred during the period under review. Procedures To accomplish this review’s objectives, several testing and analytical procedures were developed to help analyze and understand the allegations and potential outcomes. FCMAT reviewed, analyzed and tested business records including cash disbursements, general ledger activity, vendor payment history, financial reports (including disclosures made to the bond market and a sample ballot containing Proposition C, the district’s bond measure), board policies and administrative regula- tions, board meeting agenda materials and meeting minutes, bid documents, contracts, County of San Diego election and tax records, and other relevant documents. The district’s detailed general ledger, warrant register and other reports containing detailed trans- action data for fiscal years 2012-13, 2013-14, 2014-15, 2015-16, 2016-17 and 201718 (through May 21, 2018) were exported from the PeopleSoft and Legacy financial systems, and obtained directly from the county office. FCMAT reviewed both specifically selected (based on informa- tion from interviews) and randomly selected disbursement checks from accounting reports, as well as supporting documents requested. Fieldwork Fieldwork consists of gathering documents and other information pertaining to specific allega- tions, establishing an audit plan, interviewing potential witnesses and assembling evidence from internal and external sources, performing various audit procedures to determine whether fraud may have occurred, evaluating the loss associated with the alleged fraud, and determining who was involved and how it may have occurred. FCMAT visited the district on August 28-30, 2018 to conduct interviews, collect data and review documents. The FCMAT study team interviewed district board members, current San Diego County offiCe of eDuCation 4 SCOPE, PROCEDURES AND FIELDWORK administrative personnel and business office staff to obtain information related to general business practices and events that transpired during the period under review, including potential financial mismanagement, abuse or fraud. During interviews, FCMAT asked questions about the allegations; policies and procedures; transactions and activities; authorization levels; job duties; and the internal control structure including control activities, lines of authority, and oversight of district business activities. Open-ended questions were designed to elicit information about other possible irregularities related to the scope of the audit. FCMAT’s work focused on determining whether there is sufficient evidence to indicate that fraud, misappropriation of funds, or other illegal fiscal activities may have occurred. To investi- gate the allegations, the team evaluated policies, procedures and other internal control activities, and tested transactions recorded by the district to verify the compliance and effectiveness of those controls. Sample testing and examination results are intended to provide reasonable but not absolute assurance about whether transactions and financial activity are accurate and whether fraud, misappropriation of funds or other illegal fiscal activities may have taken place during the period under review. Testing procedures and noted exceptions are detailed in the Substantive Testing section of this report. Fiscal crisis & ManageMent assistance teaM 5 DEFINITIONS OF FRAUD, OCCUPATIONAL FRAUD, AND INTERNAL CONTROL Definitions of Fraud, Occupational Fraud, and Internal Control Fraud Fraud can include an array of irregularities and illegal acts characterized by intentional deception and misrepresentations of material facts. Occupational Fraud Occupational fraud and abuse is defined as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” (Corporate Fraud Handbook: Prevention and Detection, 2nd Ed., 2007, by Joseph T. Wells). The three main types of occupational fraud are asset misappropriation, corruption, and financial statement fraud. Asset misappropriation includes cash skimming, falsifying expense reports, payroll, accounts payable or inventory documents, or forging company checks. Corruption schemes involve one or more employees using their influence in business transactions to obtain a personal benefit that violates their duty to the employer or the organization; conflicts of interest fall into this category. Financial statement fraud includes the intentional misstatement or omission of material informa- tion in financial reports. Occupational fraud is one of the most difficult types of fraud to detect. The most common method of detection is receiving tips from employees, customers, and anonymous sources; this accounts for 40% of all fraud detection. According to the 2018 Report to the Nations on Occupational Fraud and Abuse, prepared by the Association of Certified Fraud Examiners, Inc. (ACFE), corruption schemes for local entities accounted for 31% of occupational fraud cases reported, with a median loss of $92,000. Survey responses on page 31 of the above-mentioned ACFE report indicate that in 30% of all cases, “a simple lack of controls was the main factor that enabled the fraud to occur, while another 19% of cases occurred because the perpetrator was able to override the controls that had been put in place.” Internal Control Internal controls are among the most important aspects of any fraud prevention program. Managers in a position of authority have a higher standard of care to establish the ethical tone and serve as examples to other employees. Employees with administrative responsibilities have a fiduciary duty to the organization to ensure that activities are conducted in compliance with all applicable board policies, laws, regulations and standards of conduct. Management personnel are entrusted to safeguard assets and ensure that internal controls function as intended. The accounting industry defines “internal control” as it applies to organizations, including school agencies, as follows: . . . a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of San Diego County offiCe of eDuCation 6 DEFINITIONS OF FRAUD, OCCUPATIONAL FRAUD, AND INTERNAL CONTROL objectives relating to operations, reporting, and compliance. [Committee of Sponsoring Organizations of the Treadway Commission - May 2013] The reference to achievement of objectives refers to an organization’s planning, organizing, directing and performing of routine tasks related to operations, and monitoring performance. An organization establishes control over its operations by setting goals, objectives, budgets and performance expectations. Several factors influence the effectiveness of internal controls, including the social environment and how it affects employees’ behavior, the availability and quality of information used to monitor the organization’s operations, and the policies and proce- dures that guide the organization. Internal controls help an organization obtain timely feedback on its progress in meeting operational goals and guiding principles, producing reliable financial reports, and ensuring compliance with applicable laws and regulations. Internal controls are the principal mechanism for preventing and/or deterring fraud or illegal acts. Illegal acts, misappropriation of assets or other fraudulent activities can include an assort- ment of irregularities characterized by intentional deception and misrepresentation of material facts. Effective internal controls provide reasonable assurance that operations are effective and efficient, financial information is reliable, and the organization complies with all applicable laws and regulations. Internal controls provide the framework for an effective fraud prevention program. An effective internal control structure includes board policies and administrative regulations established by the governing board and operational procedures used by staff, adequate accounting and informa- tion systems, the work environment, and the professionalism of employees. The five components of internal control and summaries of the characteristics of each are shown in the table below. Internal Control Component Characteristics The set of standards, processes and structures that provide the basis for carrying out internal control across an organization. This includes the integrity and ethical values of the organization. Commonly referred to as the moral tone of the organization, the control environment includes a code of ethical conduct; ethics Control Environment policies; hiring and promotion guidelines; proper assignment of authority and responsibility; oversight by management, the board or an audit committee; investigation of reported concerns; and effective disciplinary action for violations. Identification and assessment of events that could hinder or prevent achievement of the organization’s objec- Risk Assessment tives, and development of strategies to react in a timely manner. Actions established by policies and procedures to enforce the governing board’s directives. These include Control Activities actions by management to prevent and identify misuse of the district’s assets, including preventing employees from overriding controls in the system. Ensures that employees receive information regarding policies and procedures and understand their respon- Information and sibility for internal control. Provides opportunity to discuss ethical dilemmas. Establishes clear means of Communication communication within an organization to report suspected violations. Ongoing monitoring to ascertain whether all components of internal control are present and functioning, Monitoring Activities and to ensure deficiencies are evaluated and corrective actions are implemented. Each of the five components listed above and their related principles must be present and functioning in an integrated manner to be effective. An effective system of internal controls can provide reasonable but not absolute assurance that the organization will achieve its objectives. Control Environment The internal control environment establishes an organization’s moral tone. Though intangible, it begins with the leadership and consists of employees’ perception of the ethical conduct displayed by the governing board and executive management. Fiscal crisis & ManageMent assistance teaM 7 DEFINITIONS OF FRAUD, OCCUPATIONAL FRAUD, AND INTERNAL CONTROL The control environment is a prerequisite that enables other components of internal control to be effective in achieving the organization’s goals and objectives and preventing and/or deterring fraud and illegal acts. It sets the tone for the organization, provides discipline and control, and includes factors such as integrity, ethical values, and competence of employees. The control environment can be weakened significantly by a lack of experience in financial management and/or lack of knowledge of internal control. Control Activities Control activities are a fundamental element of internal control and are a direct result of policies and procedures designed to prevent and detect misuse of a district’s assets, including preventing any employee from overriding system controls. Transaction control activities are implemented to reduce the risk in specific business processes. Examples of control and transaction control activi- ties include the following: 1. Performance reviews, which compare actual data with expectations. In accounting and business offices this most often occurs when budgeted amounts are compared with actual expenditures to identify variances, and then followed up on with budget transfers to prevent overspending. 2. Information processing, which includes the approvals, authorizations, verifications and reconciliations needed to ensure that transactions are valid, complete and accurate. 3. Physical controls, which are the processes and procedures designed to safe- guard and secure assets and records. 4. Supervisory controls, which assess whether the transaction control activities performed are accurate and in accordance with established policies and proce- dures. 5. Segregation of duties, which consists of processes and procedures that ensure no employee or group is placed in a position to be able to commit and conceal errors or fraud in the normal course of duties. This includes separating the custody of assets, the authorization or approval of transactions affecting those assets, the recording or reporting of related transactions, and the execution of the transactions. Adequate segregation of duties reduces the likelihood that errors will remain undetected by providing for separate processing by different individuals at various stages of a transaction, and for independent review of the work. Independent financial auditors’ reports on internal control over financial reporting are based on an audit of financial statements performed in accordance with government auditing standards. In planning and performing independent financial audits, auditors consider internal control over financial reporting to determine audit procedures that are appropriate to the circumstances. Therefore, an auditor may express an opinion on the financial statements but not on the effec- tiveness of an organization’s internal controls. The auditor’s consideration of internal controls is not designed to identify all deficiencies in internal controls that might be significant or constitute a material weakness. Therefore, material weaknesses or significant deficiencies may exist that were not discovered during the audit. San Diego County offiCe of eDuCation 8 DEFINITIONS OF FRAUD, OCCUPATIONAL FRAUD, AND INTERNAL CONTROL A deficiency in internal controls exists when the design or operation of a control does not allow management or employees, in the normal course their assigned duties, to prevent, detect and/ or correct misstatements in a timely manner. A material weakness is a deficiency or combination of deficiencies in internal controls, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or not be detected and corrected in a timely manner. A significant deficiency is an internal control deficiency or combination of deficiencies that is less severe than a material weakness yet important enough to merit attention from those charged with governance. The following is a partial list of deficiencies and omissions that can cause internal control failures: 1. Failure to adequately segregate duties and responsibilities related to authoriza- tion. 2. Failure to limit access to assets or sensitive data (e.g., cash, fixed assets, personnel records). 3. Failure to record transactions, resulting in lack of accountability and the possibility of theft. 4. Failure to reconcile assets with the correct records. 5. Failure to detect unauthorized transactions, resulting in skimming, embezzle- ment or larceny. 6. Lack of monitoring or implementation of internal controls by the governing board and management, or because personnel are not qualified. 7. Collusion among employees where little or no supervision exists. An effective system of internal controls will include what are typically referred to as hard controls, such as segregation of duties, limiting access to cash, management review and approval, and reconciliations, as well as soft controls such as management tone, performance evaluations, training programs, and maintaining established policies, procedures and standards of conduct. Although all employees in a school district have some responsibility for internal controls, the superintendent, governing board and other key management personnel have a fiduciary duty and responsibility to safeguard the district’s assets and thus should have the highest of ethical standards. Fiscal crisis & ManageMent assistance teaM 9 DEBT ISSUANCE PRACTICES Findings Debt Issuance Practices Financing Transactions During a special election in March 1997, voters in the San Ysidro Elementary School District approved Proposition C, which authorized the sale of $250 million in general obligation bonds for the purpose of acquiring and improving real property for authorized school purposes. Since then, the district has issued long-term debt 17 times via publicly-offered securities, both as issu- ances of bonds authorized by Proposition C and as separate non-voter-approved debt instru- San Ysidro Elementary School District ments. The timeline below shows the issuances from 1997 through 2017. Proposition C (voter-approved) and Subsequent Debt Issuances 10 1997 to Present 9 Mar 1997 8 M $ e 2 S a 5 u s 0 c u ,0 c r e 0 e s 0 s C ,0 f , u , 0 l G 0 O , M $2 e 9 a J 2 . s 8 u 0 6 C n 1 M , 2 2 G 0 O R I 1 s f B s g 2 o u n e d d s $1 2 4 A 0 . u 0 1 g M 7 2 C I 0 ss O 1 u P 7 ed Jan 2005 2005 COP Aug 1997 $17.0M Issued 7 Series 1997 Meas C,GO Bonds $10.59MIssued 6 Oct 1998 S S e e p r 2 ie 0 s 0 C 4 M $2 e 8 a M . s 9 S a 9 C e y M , r i G e 2 O s 0 I s 1 G B s 2 o u n e d d s 2 $ 0 6 S 1 .5 e 6 M p R 2 f Is g 0 s 1 u C 6 e O d P 1998 COP Meas C,GO Bonds $3.05M Issued $15.88MIssued 5 Dec 2007 2007 COP $7.33M Issued 4 Jan2012 2012 COP Jun 2001 $10.41M Issued 20 A 1 u 5 g R 2 fg 0 1 C 5 OP 2001 COP Dec 2007 $21.59M Issued 3 $7.08M Issued Series E Meas C,GO Bonds $33.95MIssued 2 Jun 2001 Feb 2005 Jun 2011 Jun 2015 Series B Series D Series F 2015 Rfg Meas C,GO Bonds Meas C,GO Bonds Meas C,GO Bonds Meas C,GO Bonds $9.89MIssued $24.62MIssued $17.6MIssued $45.64MIssued 1 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Data from Official Statements. Fiscal Year Beg July 1 (Key to abbreviations: GO = general obligation bond; Rfg = refinancing; COP = certificate of participation) The frequency of issuances raises the question of whether the district performed sufficient long- term financial planning regarding its facilities needs so debt could be issued efficiently and appro- priately. In addition, issuing bonds frequently rather than infrequently typically increases the cost of issuance because it prevents a district from benefiting from economy of scale. These 17 issuances included 13 issuances that borrowed new money (rather than refinancing existing debt) as outlined in the chart below, which generated almost $200 million for facilities ($141.3 million from general obligation bonds and $57.6 million from certificates of participa- tion), as well as four refinancings. San Diego County offiCe of eDuCation 10 DEBT ISSUANCE PRACTICES Debt issuance totals differ slightly from debt proceeds totals because issuance totals indicate the amount a district borrows, while proceeds totals indicate the amount a district actually receives after paying various costs. San Ysidro School District The State of California’s Office of Public School Construction’s School Facility Program Handbook, published in April 2018, indicates that the current new construction basic grant amount is $11,567 per elementary pupil and $12,234 per middle school pupil, which is to represent 50% of the cost of new construction; thus, the full cost would be approximately $23,134 per elemen- tary student and $24,468 per middle school student. Based on these state funding figures, local educational agencies could expect today’s base funding amounts for new school construction for elementary and middle school students to be less than $25,000 per student. School Facility Program base funding amounts do not include funding for site development, automatic fire detectors, alarms and sprinklers, multilevel construction, therapy areas, or special education class- rooms. Many districts find that their costs exceed state funding amounts. Therefore, base funding amounts should not be viewed as cost estimates but as an approximate guide against which costs can be compared. Even though new construction funding is for enrollment growth, if one uses the district’s 2017-18 total student enrollment of 4,733, not accounting for any other funding, the $200 million in proceeds from general obligation bonds and certificates of participation (COPs) over the past 21 years amounts to $42,256 in school facilities per current student in nominal dollars (that is, dollars at their worth in the present economy, without taking into account inflation). This amount per student, invested over 21 years, is approximately 169% of the state’s current estimated funding amounts for new construction. The district’s expenditures may have included costs for site acquisition, site preparation and other such items. If the $42,256 were adjusted for Fiscal crisis & ManageMent assistance teaM 000,095,01$ 776,407,9$ 000,578,51$ 363,916,42$ 147,259,33$ 326,995,71$ 488,099,82$ 782,233,141$ 803,295,2$ 054,947,6$ 967,045,61$ 872,339,6$ 487,478,9$ 019,809,41$ 994,995,75$ Proceeds $198.93 Million in Proceeds from GO Bonds and Certificates of Participation $150,000,000 $140,000,000 $130,000,000 GO Bonds Certificates Proceeds $120,000,000 GO Bonds: $141,332,287 $110,000,000 Certificates: $57,599,499 $100,000,000 Total: $198,931,786 $90,000,000 $80,000,000 $70,000,000 General obligation bonds'debt service is paid by taxpayers via property taxes. Certificates are repaid by CFD 1, 2, & 3 $60,000,000 taxes, and potentially by the General Fund. $50,000,000 $40,000,000 $30,000,000 $20,000,000 $10,000,000 $0 M S O e (P a t f s a f r i u o t c r e c i e a m e C l M e e G d e n O s a t s B s f u r o . r o n ) e d m C s S G e O M r i B e e s o a n s 1 d u 9 s r 9 e S 7 e C r i G e O s M B B e o a (2 n s d u 0 s r 0 e S 1 C e ) r G ie O s M B C e o ( a n 2 s d 0 u s 0 r e S 4 e ) C r i G es O M D B e o ( a 2 n s 0 d u s 0 r e 5 S ) e C r i G e O s M E B e ( a o 2 n s 0 u ds 0 re 7 S C ) e r G ie O s B F o ( n 2 M d 0 s 1 e S 1 a e s ) r u i r e e s C G G (2 O 0 B 1 o 2 n ) ds M Ce ea rt s if u c r a e t e C s of C P e ar rt t i i f c c ip a a te ti s o n o f 1 C P 9 e a 9 r rt t 8 i i f c c C ip a O a te P ti s o n o f 2 C P 0 e a 0 r rt t 1 i i f c c C ip a O a te P ti s o n o f 2 C P 0 e a 0 r rt t 5 i i f c c C ip a O a te P ti s o n o f 2 C P 0 e a 0 r rt t 7 i i f c c C ip a O a te P ti s o n o f 2 P 0 a 1 rt 2 ic C C ip e O a r P t t i i f o c n a t 2 e 0 s 1 o 7 f P C a O r P ticip I a s ti s o ( u n D a C e n O b c P t e s s) 11 DEBT ISSUANCE PRACTICES inflation to make these expenditures more comparable to today’s estimated costs, the disparity between the district’s expenditures and industry averages would be even greater. The district issued both general obligation bonds ($142 million) and certificates of participation ($59 million) to generate the nearly $200 million in proceeds. As shown in the chart below, the district’s total ratio of debt service (repayment) to principal borrowed is almost 3-to-1, which is high. San Ysidro School District Issuances/Proceeds Ratio of Debt Service to Principal Borrowed is Approximately 3-to-1 & Debt Service $650,000,000 $597,285,848 $600,000,000 $550,000,000 District Payments, $115,355,554 $500,000,000 GO Bonds and Certificates $450,000,000 Debt Service: $597,285,848 $400,000,000 Issuances: ÷ $200,377,325 Debt Service to Debt Ratio: 2.98 : 1 $350,000,000 $300,000,000 $250,000,000 Taxpayer Payments, $200,377,325 $198,931,786 $481,930,294 $200,000,000 COP Issuances, $58,864,715 COP Proceeds, $57,599,499 $150,000,000 $100,000,000 GO Issuances, $141,512,610 GO Proceeds, $141,332,287 $50,000,000 $0 Debt Proceeds from Debt Service Issuances Debt Issuances as of July 1, 2018 Issuances, proceeds, & debt service from Official Statements.Please note, data above reflects debt service currently owed, which incorporates refinancings of prior issuances. Without refinancings, total debt service would be $664,424,444 ($545,625,974 for Proposition C GO Bonds and $118,798,471 for certificates of participation). By comparison, for a fully amortized 30-year mortgage with monthly payments to have a repay- ment ratio of 3-to-1, funds would have to be borrowed at an annual interest rate of 9.4%. Since March 4, 1997, when the district’s Proposition C general obligation measure passed, 30-year mortgage rates have been as high as 8.64% and as low as 3.31% (per the St. Louis Federal Reserve’s published data titled, “30-Year Fixed Rate Mortgage Average in the United States.” During the same time period, the Bond Buyer’s 20-Bond Index (a standard municipal bond benchmark) had a high of 6.11% and a low of 2.80%. The chart below compares the average 30-year fixed rate mortgage with the Bond Buyer’s 20-Bond Index. San Diego County offiCe of eDuCation 12 DEBT ISSUANCE PRACTICES San Ysidro School District Rate Mortgage Rates and Municipal Borrowing Rates 9.00% Maximum30-year fixed rate mortgage -8.64%, May 19, 2000 8.00% MaximumBond Buyer 20-Bond Index -6.11%, Average30-year Jan 13, 2000 fixed rate mortgage 7.00% 6.00% 5.00% Bond Buyer 4.00% 20-Bond Index 3.00% Minimum30-year fixed rate mortgage -3.31%, 2.00% Nov 21, 2012 MinimumBond Buyer 20-Bond Index -2.80%, Jul 7 & 14, 2016 1.00% 0.00% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year The 20-Bond Index is the average yield on the 20th year maturity for 20 general obligation bonds with an average rating equivalent to Moody's Investors Service's "Aa2" rating and Standard & Poor's Rating Service "AA". The Index is weekly as of each Thursday. Mortgage rate data from St Louis Fedwebsite (https://fred.stlouisfed.org/series/mortgage30us/#0). Municipal bond rates are typically lower than mortgage rates because municipal bonds are tax-ex- empt to the lender. Furthermore, as shown in the chart below, although market interest rates have generally declined over the past 21 years, the district’s borrSoanw Yisnidgr oc Socshtoso lh Daisvteri cntot consistently followed this trend. Debt Service No Direct Correlation Between Debt Service to Principal Ratio & Market Interest Rates Bond Buyer to Principal 20-Bond Index 4.50 : 1 16.00% Debt Service : Principal, GO Bonds - New $ 13.12-to-1 ratio for Series 4.00 : 1 F (June 2011) not shown 15.00% Debt Service : Principal, GO Bonds - Refi 4.04 : 1 3.50 : 1 Debt Service : Principal, COPs - New $ 3.83 : 1 14.00% 3.00 : 1 Debt Service : Principal, COPs - Refi 13.00% 2.50 : 1 12.00% 2.00 : 1 1.97 : 1 2.25 : 1 2.26 : 1 2.17 : 1 2.16 : 1 11.00% 1.92 : 1 1.97 : 1 1.50 : 1 1.83 : 1 1.88 : 1 1.74 : 1 10.00% 1.00 : 1 1.62 : 1 1.31 : 1 1.43 : 1 1.52 : 1 9.00% Debt service to principal 0.50 : 1 8.00% trend line for all issuances 0.00 : 1 7.00% -0.50 : 1 6.00% -1.00 : 1 5.00% -1.50 : 1 Bond Buyer 4.00% 20-Bond Index -2.00 : 1 3.00% -2.50 : 1 Bond Buyer20-Bond 2.00% Index trend line -3.00 : 1 1.00% -3.50 : 1 0.00% 199719981999 2000 2001200220032004 2005200620072008 2009201020112012 201320142015 2016 20172018 Calendar Year Debtservice to principal ratio from Official Statements. The 20-Bond Index is the average yield on the 20th year maturity for 20 general obligation bonds with an average rating equivalent to Moody's Investors Service's "Aa2" rating and Standard & Poor's Rating Service's "AA" rating. The Index is weekly as of each Thursday. Fiscal crisis & ManageMent assistance teaM 13 DEBT ISSUANCE PRACTICES This chart also shows that the district’s ratio of debt service to principal ranged from a low of 1.31-to-1 to a high of 13.12-to-1. The chart below shows the assigned underlying credit ratings as shown in the Official Statement for each financing. Credit ratings on the district’s securities (general obligation bonds and certif- icates of participation) at the time of issuance generally increased from the first issuance through the 2012 general obligation bond issuance. In 2015, the district’s general obligation ratings from Moody’s Investors Service and Standard & Poor’s Global Ratings differed (known as a split in the finance industry), which happens occasionally; however, the difference was two full levels (or notches, in finance industry terms), which is rare. From 2015 through 2017, the district obtained underlying ratings only from Moody’s for three issuances of certificates of participation (COPs). As shown in the chart below, Moody’s upgraded the district’s COPs rating for the 2016 COPs refinancing. Moody’s August 12, 2016 rating rationale attributed the upgrade to the pledge of community facilities district (CFD) revenues. According to the Official Statements, all CFD revenues had been pledged to COPs issuances since at least 2007 (this is discussed in more detail later in this report), so the rating upgrade in 2016 appears unusual. Although the district’s credit ratings increased overall from the first general obligation bond issue in 1997 as shown below, the higher credit ratings have not resulted in lower debt service costs, as indicated earlier and shown in the chart above. San Ysidro School District 9 8 7 6 5 4 3 2 1 0 In 2017, the district received three rating opinions from Moody’s Investors Service and Standard & Poor’s Global Ratings. On July 17, 2017, Moody’s Investors Service assigned an A2 rating to the proposed issuance of $14,000,000 of COPs (as shown in the chart above), affirmed the A2 San Diego County offiCe of eDuCation 7991 seireS - OG 8991 - POC B seireS - OG 1002 - POC C seireS - OG 5002 - POC D seireS - OG E seireS - OG 7002 - POC F seireS - OG 2102 - POC G seireS - OG gfR 2102 - OG gfR 5102 - OG gfR 5102 - POC gfR 6102 - POC 7102 - POC Rating District Debt Issuance Ratings Since 1998 S&P & Fitch = AAA Moody's = Aaa GO Bond Rating - S&P S&P M & o F o it d c y h 's = = A A A a1 + GO Bond Rating - Fitch GO Bond Rating - Moody's S&P M & oo F d i y t ' c s h = = A A a A 2 COP Rating - S&P COP Rating - Fitch S&P & Fitch = AA- Moody's = Aa3 COP Rating - Moody's S&P & Fitch = A+ Moody's = A1 S&P & Fitch = A Moody's = A2 S&P & Fitch = A- Moody's = A3 S&P & Fitch = BBB+ Non-equivelant Moody's = Baa1 ratings received S&P & Fitch = BBB Non-equivelant Moody's = Baa2 ratings received S&P & Fitch = BBB- Moody's = Baa3 Debt Issuances Ratingsare the underlyng ratings from the Official Statements. Series 1997 GO bonds did not list an underlying rating. 14 DEBT ISSUANCE PRACTICES rating on all outstanding certificates of participation, and noted the A1 rating on the district’s general obligation bonds. On September 27, 2017, S&P Global Ratings, citing the district’s failure to make the scheduled September 1, 2017 COP debt service payment, placed both of the district’s credit ratings (which were A for general obligation bonds and A- for COPs) on “CreditWatch with negative implica- tions,” and stated: The CreditWatch placement reflects our potential changed view of the district’s management practices and internal controls. If we discover that the district’s manage- ment practices have weakened significantly or if a decline in internal controls, flexi- bility, or liquidity has contributed to the interest payment delinquency, we could take a negative rating action. A negative rating action came on December 21, 2017: S&P Global Ratings lowered the district’s credit ratings two notches. The general obligation bond rating was lowered to BBB+, and the certificates of participation rating was lowered to BBB, with negative outlook. S&P Global Ratings stated the following: . . . the conditions that precipitated the delayed payment raise significant concerns about the district’s prior management and historical control processes and the potential for additional problems being uncovered going forward. and . . . the negative outlook reflects our view of the risk that unforeseen events stemming from decisions made by the prior administration could pose fiscal stress or hinder the district’s ability to make timely debt service payments going forward. The district has a lengthy continuing record of noncompliance with requirements for disclosures related to its outstanding municipal securities, and since 2015 (during which time there have been four financings in just three years) Official Statements for the financings have noted that the district has not complied with its securities disclosure responsibilities. Some of these failures also occurred before 2015, and they remain ongoing. As recently as September 19, 2018, the district’s dissemination agent posted a notice on the Municipal Securities Rulemaking Board’s EMMA website (the official location for such disclosures) regarding a credit rating downgrade related to a bond insurer. The event being noticed occurred on January 17, 2018. Securities law requires timely disclosure, and the general practice is to make such notices within 10 days. The time lag in this case was more than eight months. Fiscal crisis & ManageMent assistance teaM 15 DEBT ISSUANCE PRACTICES Certificates of Participation Analysis Since 1998, the district has issued COPs eight times: six issues of new money borrowing totaling $58.9 million, and two refinancings, or refundings. The district issued COPs in fiscal years 2015-16, 2016-17 and 2017-18. Although two of these transactions refinanced existing debt and resulted in savings, the district did not consolidate $4,000,000 its issuances and thus may have missed opportunities to achieve economies of scale that could reduce costs. $3,500,000 For fiscal year 2018-19, the district’s total COP debt service cost is almost $3.3 million and is sc$h3,e00d0u,0l0e0d to increase to as much as $3.7 million in 2030-31, as shown in the table below. The frequency and amounts of the district’s COPs borrowing is highly unusual, particularly because it h$a2d,5 0o0n,0g00oing and available revenue for facilities from Proposition C. $2,000,000 $1,500,000 $1,000,000 $500,000 $0 San Diego County offiCe of eDuCation 9991 0002 1002 2002 3002 4002 5002 6002 7002 8002 9002 0102 1102 2102 3102 4102 5102 6102 7102 8102 9102 0202 1202 2202 3202 4202 5202 6202 7202 8202 9202 0302 1302 2302 3302 4302 5302 6302 7302 8302 9302 0402 1402 2402 3402 4402 5402 6402 7402 8402 San Ysidro School District District's Use of COPs Since 1998 10 9 Aug 2017 2017 COP $14.0M Issued 8 Oct 1998 1998 COP $3.05M Issued Dec 2007 7 2007 COP $7.33M Issued Jun 2001 Sep 2016 6 2001 COP 2016 Rfg COP $7.08M Issued $6.5M Issued 5 Jan 2005 2005 COP $17.0M Issued 4 Aug 2015 2015 Rfg COP $21.59M Issued 3 Jan2012 2012 COP $10.41M Issued 2 1 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Data from Official Statements. Fiscal Year Beg July 1 COP Debt Service has Continued to Increase; Exceeds COP Net $3 Million Annually through 2035-36 Debt Service $3,732,468 Jun 2011 $3,281,731 Maximum Debt Series F FY 2018-19 Service -FY 2030- $17.6MIssued Debt Service 31 Dec 2007 Series E $33.95MIssued 2017 COP May 2012 Series G $28.99MIssued Feb 2005 Series D $24.62MIssued 2012 COP Sep 2004 Series C $15.88MIssued 2016 Rfg 2007 COP Jun 2001 Series B $9.89MIssued 2005 COP 2015 Rfg 2001 COP 1998 COP Fiscal Year Beg July 1 Data from Official Statements. 16 DEBT ISSUANCE PRACTICES The district’s 2018-19 budget states in its criteria and standards that its annual debt service is $3,746,741 from 2017-18 through 2020-21. This figure does not correspond to a specific debt service amount, but the budget is sufficient to cover the scheduled annual debt service. As shown in the table below, it appears that the certificates of participation were issued primarily to capitalize future expected special tax revenue from CFDs 1, 2 or 3, and by the 2007 borrowing, all three. In 2012, the Official Statement specifically described redevelopment revenue as a source of repayment. For all COPs issued, if the identified sources of repayment were insufficient, the district had an obligation to budget for payments, which placed at risk both the district’s general fund and its financial condition. Revenue Source Designated for Repayment of Borrowing CFD #2 CFD #3 Redevelopment Covenant to Budget COP CFD #1 Revenue Revenue Revenue Revenue Lease Payments 1998 X X 2001 X X X 2005 X X X 2007 X X X X 2012 X X X X X 2015 Rfg X X X X 2016 Rfg X X X X 2017 X Revenue sources as described in Official Statements. Arrows denote refinancings: 1998, 2001, & 2005 COPs refinanced by 2015 refinancing COP; 2007 COP refinanced by 2016 refinancing COP. All three CFDs were formed to include specific newly developing areas. Community Facilities District 1 has a base year of 1992-93, with taxation started in 1998-99; CFD 2 has base years of 1997-98 and 2000-01 (the second date is due to an annexation), and taxation began in 2001- 02; and CFD 3 has a base year of 1998-99, with first taxation in 1999-00. These CFDs were intended to generate special tax revenue to address the need for facilities to serve students coming from the newly developing areas. The district receives redevelopment revenue in accordance with state law from areas within the district subject to diversion of general property tax revenues for redevelopment purposes. With respect to CFDs, it is more typical to issue special tax bonds payable only from special tax revenues, though it is not uncommon for COPs to be used to capi- talize redevelopment revenues. In the district’s case, it appears that redevelopment revenue was an added source of repayment to allow the district to continue borrowing despite financial stress. However, repayment sources for the COP are not limited to the identified budget resources, and they created significant liabilities affecting overall financial condition and in particular put the district’s general fund at risk. Fiscal crisis & ManageMent assistance teaM 17 DEBT ISSUANCE PRACTICES The chart below shows the district’s projection of the identified funds available. $4,500,000 $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 The chart below shows that prior to the issuance of the 2017 COPs, the district’s annual revenue projection was sufficient to cover debt service in all but two years, and those two deficiencies were minimal. However, the fact that there appears to be more than sufficient revenue to prepay some of the existing certificates using cash (thus eliminating the projected shortfall and reducing interest costs overall) raises questions about how the district’s management was planning to budget these revenue sources. San Diego County offiCe of eDuCation 8102 9102 0202 1202 2202 3202 4202 5202 6202 7202 8202 9202 0302 1302 2302 3302 4302 5302 6302 7302 8302 9302 0402 1402 Projected CFD & Redevelopment Revenue Through 2041-42 Projected Revenue Projected Redevelopment Revenue CFD #3 Net Available Special Tax Revenue CFD #2 Net Available Special Tax Revenue CFD #1 Net Available Special Tax Revenue Fiscal Year Beg July 1 Projected tax & redevelopment revenue from CFD No. 1, 2, & 3's Annual Special Tax Report, dated June 30, 2018, produced by Key Analytics. Tax revenue only listed through 2040-41. 18 DEBT ISSUANCE PRACTICES With the exception of the 2017 COPs, which are discussed later in this report, most of the district’s certificates were issued with 10-year call options. This does not indicate a plan to use the projected revenue to reduce debt as soon as possible. In addition, both the 2015 and 2016 refundings maintained the same final terms as the original certificates, which means the district missed opportunities to schedule faster repayment in accord with its revenue projection. $4,500,000 $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 Because of the risk COPs pose to fiscal solvency, a school district is prohibited from issuing them in any fiscal year in which it has a qualified or negative budget certification for the current or prior year, unless the county office of education determines that repayment is probable. Education Code 42133 states the following: (a) A school district that has a qualified or negative certification in any fiscal year may not issue, in that fiscal year or in the next succeeding fiscal year, certificates of participa- tion, tax anticipation notes, revenue bonds, or any other debt instruments that do not require the approval of the voters of the district, nor may the district cause an informa- tion report regarding the debt instrument to be submitted pursuant to subdivision (e) of Section 149 of Title 26 of the United States Code, unless the county superintendent of schools determines, pursuant to criteria established by the Superintendent of Public Instruction, that the district’s repayment of that indebtedness is probable. In addition, since January 2009 all school districts have been required to notify the county office of education and the county auditor at least 30 days before their governing board approves an issuance of COPs. The county office of education and the county auditor may then comment publicly to the governing board regarding the district’s ability to repay the obligation (Education Code 17150.1). Fiscal crisis & ManageMent assistance teaM 8102 9102 0202 1202 2202 3202 4202 5202 6202 7202 8202 9202 0302 1302 2302 3302 4302 5302 6302 7302 8302 9302 0402 1402 Projected Revenue & Excluding 2017 COP, Projected CFD & Redevelopment Revenue Exceeded Debt Service COP Debt Service in All But 2 Years (2034-35 & 3038-39) Total projected CFD tax & redevelopment Per Official Statement for 2012 COP, "all special taxes levied, collected revenue available for COP payments and received by CFD No. 1, CFD No. 2 and CFD No. 3, after deduction of annual administrative expenses of the respective community facilities districts, are irrevocably pledged by the District, pursuant to the Pledge Agreements, as amended and supplemented, to the payment of the 2012 Lease Payments for the 2012 Certificates (and for the 1998 Certificates, the 2001 Certificates, the 2005 Certificates, and the 2007 Certificates)." Debt service exceeds projected revenue in 2034-35 and 2038-39 District had no revenue projected from 2041- 2016 Rfg COP Debt Service 42 onward 2015 Rfg COP Debt Service 2012 COP Debt Service Fiscal Year Beg July 1 Debt Service from Official Statements; projected tax & redevelopment revenue from CFD No. 1, 2, & 3's Annual Special Tax Report, dated June 30, 2018, produced by Key Analytics. Tax revenue only listed through 2040-41. Debt service is based on certificate year (ending September 1) for cash flowpurposes. 19 DEBT ISSUANCE PRACTICES The chart below shows that 11 of the district’s 16 budget certifications during fiscal years 2007-08 through 2014-15 were qualified or negative, indicating financial challenges during this time. San Ysidro School District 3.0 2.0 1.0 San Diego County offiCe of eDuCation 5002 6002 7002 8002 9002 0102 1102 2102 3102 4102 5102 6102 7102 Budget San Ysidro School District Budget Certifications, 1995-96 through 2017-18 Certification Positive Qualified Negative Fiscal Year Beg July 1 Notes: two certifications are shown each year listed because eachyear has a "first interim" certification and a "second interim" certification. Year indicates fiscal year beginning July 1. Per California Department of Education Certification of Interim Financial Reports (www.cde.ca.gov/fg/fi/ir/interimstatus.asp). 20 DEBT ISSUANCE PRACTICES The majority of the district’s general fund revenue is based on student attendance, and its nega- tive and qualified budget certifications occurred during periods of declining enrollment, as shown in the chart below. San Ysidro School District 6,000 5,000 4,000 3,000 2,000 1,000 0 During this eight-year period (fiscal years 2007-08 through 2014-15) there were two issuances of new money COPs (2007 and 2012) that totaled more than $17.74 million and added $37.04 million of COPs payment liabilities to the district’s balance sheets. The 2012 COPs included convertible capital appreciation bonds with a conversion date of September 1, 2026. The use of capital appreciation bonds, even with a conversion to current interest bonds, is both expensive and a sophisticated transaction. As shown in the chart above, based on the district’s budget certifications, the county superinten- dent of schools was required to determine whether repayment was probable for the issuance of the 2012 and 2015 certificates before the issuances could proceed. FCMAT’s review of documentation confirms that the county superintendent of schools reviewed the district’s 2012 COPs prior to issuance. However, that review did not include a finding that the repayment was probable; rather, it confirmed that two of the assumptions were reasonable. For the 2015 COPs, which were a refinancing of existing debt, the county superintendent of schools determined that repayment was probable. In 2016, the district issued COPs to refinance existing debt. The San Diego County Office of Education reviewed this in accordance with Education Code 42133 and found that the district had the ability to repay the obligation. In 2017, the district issued COPs for $14 million, with annual payments beginning at $700,000 per year and increasing each year to almost $1.5 million in the 30th year. FCMAT reviewed four documents that describe the plan for this borrowing and the borrowing itself. These are listed in the table below with pertinent information from each. Fiscal crisis & ManageMent assistance teaM 5002 6002 7002 8002 9002 0102 1102 2102 3102 4102 5102 6102 7102 8102 Enrollment Budget Certification Rated Negative or Qualified During Times of Decreasing Enrollment Enrollment Negative or Qualified Budget certification Fiscal Year Beg July 1 Enrollment data from 2007-08 to 2017-18 from California Department of Education (http://dq.cde.ca.gov/dataquest/content.asp); data from 1987-88 to 2006-07 from Series G Official Statement, citing San Ysidro School District. 21 DEBT ISSUANCE PRACTICES Information Provided to District Regarding 2017 Certificates of Participation Date May 5, 2017 July 7, 2017 August 24, 2017 January, 2018 School Facilities Funding Letter from Deputy Programs, Funding Superintendent Credit Rating 2017 Certificates of Program Budget Sanchez-Macias Presentation Prepared Source Document Participation Official Overview and Payment to Interim County by California Financial Statement Amounts Prepared Superintendent Services by CFS’ Key Analytics Velasquez Division Funding Needed $ 13,400,000 $ 13,400,000 $ 14,908,910 Principal to be Borrowed $ 12,600,000 $ 14,000,000 $ 14,000,000 $ 14,000,000 Annual Debt Service Minimum (1st Year) $ 630,000 $ 630,000 $ 713,611 $ 700,000 Maximum (30th Year) $ 1,338,750 $ 1,338,750 $ 1,491,000 $ 1,455,500 Shortfall to be Budgeted in 1st Year $ 450,000 $ 295,000 N/A $ 455,000 “The District will covenant to budget - State Matching and appropriate Lease Grants Payments in each - State Grants Prepayment Sources - 2018 Bond Measure year...from any source - 2018 Bond Measure - Remaining 1997 G.O. of legally available Bonds funds, and...include all Lease Payments in its annual budgets...” - Remaining CFD - RDA Tax Increment Special Tax Revenues Revenues - Other Capital - Remaining RDA - RDA Revenues Annual Payment Sources Facilities Revenues Tax Increment - Annual Appropriation - General Fund Revenues - Surplus General Revenues - General Fund Balance Fund Annual - Other District Revenues Revenue Contributions Data Listed by: Debt Service Year Debt Service Year Debt Service Year Fiscal Year As the table above shows, neither the intended sources of repayment nor the payment amounts were presented consistently, which led to a lack of clarity. It appears that the district viewed this borrowing as bridge financing to possibly be repaid early from two or three sources. One source for prepayment of the certificates, though insufficient for full prepayment, was $5.7 million in potential state grant funding. In the preceding table, California Financial Services describes the district as being eligible for these funds, but it is not clear whether the district had applied for them. Two other repayment sources cited in the above chart were the unused general obligation bond authority from 1997’s Proposition C and a not yet called for new bond measure in 2018. In 2017, the district was operating on a waiver of Education Code 15268, which limits all bonds outstanding to no more than 1.25% of the assessed value of the tax base. The waiver in place at that time allowed the district to go as high as 3% through fiscal year 2021-22. In 2017, the district was at 2.23%. Tax rates were higher than the $100 limit stated in Proposition C, at $102.66 per $100,000 of assessed value. Thus it was questionable whether the district would be able to issue enough bonds from Proposition C or from a new measure (which would have to be approved by the governing board for the ballot and then approved by voters). None of the mate- rial presented related to the repayment plan for the 2017 certificates discussed these questions. San Diego County offiCe of eDuCation 22 DEBT ISSUANCE PRACTICES Because of the uncertainty about the potential prepayment sources and the lack of probability analysis, referring to this borrowing as a bridge financing seems inappropriate. In addition, the first call date on the certificates is September 1, 2022, five years after issuance, despite representa- tions that the possible sources of prepayment would be available in 2018 or 2019; this indicates some doubt about the prepayment sources. Moody’s Investors Service’s Credit Opinion dated July 17, 2017 acknowledged this uncertainty, noting the “inability to issue future GO debt to refund outstanding COPs in accordance with the district’s financing plan” and stating, “debt service coverage for COPs falls below sufficient amount and or general fund support is needed.” Moody’s stated that both these factors could lead to a credit rating downgrade, and noted that there were no applicable factors that could lead to an upgrade. This raises doubts about whether the district’s governing board was given sufficient information to approve the borrowing. The district’s ability to borrow for the early repayment of the 2017 certificates, or any other reason, was severely impaired by its credit downgrade following its missed payment on other outstanding COPs (discussed earlier) just one month after the 2017 sale. In May and July 2017, when the borrowing was under consideration, the first year debt service was presented as $630,000, although it turned out to be $700,000 (111% of the estimate) when the certificates were sold in August. However, interest rates were declining as the sale date approached: the Bond Buyer’s 20-Bond Index was at 3.82% at the beginning of May 2017, dropped to 3.52% by the end of July, and ranged from 3.57% to 3.50% in August. In accordance with Education Code 17150.1, the district provided a 30-day notice to the interim county superintendent of schools. The county superintendent of schools’ letter in response, dated June 1, 2017, stated, “the district might need to make expenditure reductions to offset the cost of the loan repayment.” The importance of this is brought into focus by the questions raised by the district’s 2017-18 adopted budget (discussed below). As the chart on the following page shows, because of the uncertainty about the possible early repayment of the 2017 certificates, the question of affordability depended on the district’s ability to make payments from its general fund, or from other revenue not yet identified. Fiscal crisis & ManageMent assistance teaM 23 DEBT ISSUANCE PRACTICES $4,500,000 $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 San Diego County offiCe of eDuCation 8102 9102 0202 1202 2202 3202 4202 5202 6202 7202 8202 9202 0302 1302 2302 3302 4302 5302 6302 7302 8302 9302 0402 1402 2402 3402 4402 5402 6402 7402 Projected Revenue & District 2017 COPs Debt Service Exceeds Available Revenue Sources, Including CFD COP Debt Service and Redevelopment Revenues Total projected CFD tax and redevelopment revenue available for COPs payments COP debt service exceeds projected revenue in all years beginning with 2023-24. 2017 COPs sold Aug 2, 2017 with an Aug 24, 2017 date. Per prior Official Statements for COPs issuances, the district irrevocably pledged all net special tax revenue for CFDs No. 1, 2, and 3 for the payment of the 1998, 2001 2005 Certificates, 2007, and 2012 COPs. The Official Statement for the 2017 COPs states, "the District is obligated under the Lease to pay the Lease Payments, Reserve Replenishment Rent and Additional Payments from any source of legally available funds..." 2017 COP Debt Service District had no revenue 2016 Rfg COP Debt Service projected from 2041-42 onward 2015 Rfg COP Debt Service 2012 COP Debt Service Fiscal Year Beg July 1 Debt Service from Official Statements; projected tax and redevelopment revenue from CFD No. 1, 2, & 3's Annual Special Tax Report, dated June 30, 2018 produced by Key Analytics. Tax revenue only listed through 2040-41, while debt service for 2017 COP ends Sept. 2047. Debt service is based on certificate year (ending September 1) for cash flow purposes. The district’s 2017-18 adopted budget raises a question of whether the district had sufficient understanding of the commitment it was making at the time of borrowing. The budget did not accurately show the expected debt service for the COPs. As the prior chart indicates, annual debt service was approaching $3.5 million, but the amount shown in the budget for 2017-18 through 2019-20 was less than $2.7 million. The district also stated that the funding sources used to pay long-term commitments would not decrease or expire before the end of the long-term commit- ment. This was questionable for an adopted budget as of July 1, given the clear intent to issue COPs that extended long-term commitments beyond the possible expected term of the funding sources. The chart below is based on the district’s 2018 revenue projection and shows that the district’s expected shortfall of available funds for payment on outstanding COPs is substantial and could reach a cumulative total of approximately $8 million during fiscal years 2023-24 through 2040-41. 24 DEBT ISSUANCE PRACTICES $200,000 $0 ($200,000) ($400,000) ($600,000) ($800,000) ($1,000,000) ($1,200,000) ($1,400,000) Fiscal crisis & ManageMent assistance teaM 8102 9102 0202 1202 2202 3202 4202 5202 6202 7202 8202 9202 0302 1302 2302 3302 4302 5302 6302 7302 8302 9302 0402 Annual Surplus COPs Debt Service Payments Will Require Revenue Source In Addition to CFD 1, 2, and /Shortfall 3 and Projected Redevelopment Revenue Additional $8 million in revenue needed for 2017 COP debt service if CFD & redevelopment revenue were used. Annual Surplus Annual Shortfall Fiscal Year Beg July 1 Debt Service from Official Statements; projected tax & redevelopment revenue from CFD No. 1, 2, & 3's Annual Special Tax Report, dated June 30, 2018, produced by Key Analytics. Tax revenue only listed through 2040-41, while debt service for 2017 COP ends Sep 2047. Debt service is based on certificate year (ending September 1) for cash flow purposes. Many school districts take on long-term debt to meet their facility needs. However, when a school district has a substantial general obligation bond program (substantial in that the district is exceeding its general obligation bond capacity and has a high tax rate), it is unexpected to see the general fund put at risk for facilities funding purposes. 25 DEBT ISSUANCE PRACTICES General Obligation Bonds Analysis District voters approved Proposition C in 1997 by the then-required two-thirds majority; the measure was presented to voters in the ballot question below. The district put forth the measure with a tax rate limit of $0.10 per $100 of assessed value (equivalent to $100 per $100,000 of assessed value, as it is more commonly expressed today). However, the chart below shows that actual tax rates have exceeded $100 per $100,000 five times since 1997. San Diego County offiCe of eDuCation 26 DEBT ISSUANCE PRACTICES San Ysidro School District Fiscal crisis & ManageMent assistance teaM 91.36$ 55.38$ 00.06$ 45.15$ 77.47$ 23.07$ 30.35$ 00.001$ 99.47$ 37.95$ 23.98$ 00.001$ 00.001$ 00.001$ 66.601$ 00.001$ 79.511$ 98.511$ 56.701$ 39.69$ 66.201$ 97.79$ Tax Rates per $100,000 of AV District Tax Levy Rates $120.00 $110.00 $100 maximum levy $100.00 conveyed to voters $90.00 $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 19961997199819992000200120022003200420052006200720082009201020112012201320142015201620172018 Debt Issuances Taxlevies for 1997-98 to 2002-03 from Official Statements citing California Municipal Statistics; levies for 2003-04 to 2018-19 from County Tax Rate Resolutions. In addition, the district has issued only 57% of the bonds authorized by Proposition C, as shown in the chart below. San Ysidro School District Authorization After 21 Years, Proposition C Only 57% Realized & Issuances $275,000,000 $250,000,000 $225,000,000 $200,000,000 Remaining Authorization, $108,487,390 $175,000,000 $150,000,000 $125,000,000 Authorization, $250,000,000 Series G, $28,990,884 Series F, $17,599,623 $100,000,000 $75,000,000 Series E, $33,952,741 $141,512,610 = Proposition C bonds issued $50,000,000 Series D, $24,619,363 $25,000,000 Series C, $15,875,000 Series B, $9,885,000 Series 1997, $10,590,000 $0 Authorization - Issuances - Proposition C Proposition C Authorization and Issuances from Official Statements. Values rounded. 27 DEBT ISSUANCE PRACTICES At the same time, as shown in the chart below, the district has required bond taxes that are the highest of all elementary school districts in the county. San Diego County Elementary School Districts' Tax Levy Rates, 2005 to Present Tax Levies per $100,000 of AV $140 SAN YSIDRO ALPINE CAJON VALLEY CARDIFF CHULA VISTA $130 DEHESA ENCINITAS ESCONDIDO FALLBROOK JAMUL-DULZURA LA MESA-SPRING VALLEY LAKESIDE LEMON GROVE NATIONAL RANCHO SANTA FE $120 SAN PASQUAL SANTEE SOUTH BAY $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Fiscal Year Beg Jul 1 Data from San Diego County Auditor and Controller's Department (www.sandiegocounty.gov/content/sdc/auditor/taxratebook.html).InFeb 2013, San Diego County Board of Supervisors created a unified district within the boundaries of Bonsall Union School District, thus is shown in unified school chart. Affiliated (feeder) districts and SFIDs derived from California State Board of Equalization Districts with TRAs and Maps for the 2018/19 Board Roll of State-Assessed Properties for San Diego County. In addition, when combined with bond taxes for the Sweetwater Union High School District, which encompasses the San Ysidro Elementary School District’s boundaries and provides secondary education to its students, bond tax rates for San Ysidro taxpayers have been the highest of all school districts in San Diego County since 2005, as shown in the following chart. San Diego County offiCe of eDuCation 28 DEBT ISSUANCE PRACTICES San Diego County School Districts' Tax Levy Amounts, 2005 to Present Tax Levies per $100,000 of AV $300 SAN YSIDRO / SWEETWATER ALPINE / GROSSMONT BONSALL $280 CAJON VALLEY / GROSSMONT CARDIFF / SAN DIEGUITO CARLSBAD CHULA VISTA / SWEETWATER CORONADO DEHESA / GROSSMONT DEL MAR / SAN DIEGUITO ENCINITAS / SAN DIEGUITO ENCINITAS / SAN DIEGUITO / SAN MARCOS SFID 1 $260 ESCONDIDO / ESCONDIDO FALLBROOK / FALLBROOK JAMUL-DULZURA / GROSSMONT JULIAN / JULIAN LA MESA/SPRING VALLEY / GROSSMONT LAKESIDE / GROSSMONT $240 LEMON GROVE / GROSSMONT MOUNTAIN EMPIRE NATIONAL / SWEETWATER OCEANSIDE POWAY POWAY / POWAY SFID 2002-1 POWAY / POWAY SFID 2002-1 / POWAY SFID 2007-1 POWAY / POWAY SFID 2007-1 RANCHO SANTA FE / SAN DIEGUITO $220 SAN DIEGO SAN MARCOS SAN MARCOS / SAN MARCOS SFID 1 SAN PASQUAL / ESCONDIDO SANTEE / GROSSMONT SOLANA BEACH / SAN DIEGUITO $200 SOLANA BEACH / SAN DIEGUITO / SOLANA BEACH SFID 2016-1 SOUTH BAY / SWEETWATER SPENCER VALLEY / JULIAN VALLECITOS / FALLBROOK VALLEY CENTER-PAUMA VISTA $180 VISTA / SAN MARCOS SFID 1 $160 $140 $120 $100 $80 $60 $40 $20 $0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Fiscal Year Beg Jul 1 Data from San Diego County Auditor and Controller's Department (www.sandiegocounty.gov/content/sdc/auditor/taxratebook.html).InFeb 2013, San Diego County Board of Supervisors created a unified district within the boundaries of Bonsall Union School District. Affiliated (feeder) districts and SFIDs derived from California State Board of Equalization Districts with TRAs and Maps for the 2018/19 Board Roll of State-Assessed Properties for San Diego County. In addition to relatively high general obligation bond taxes, almost 40% of properties in the district are subject to taxes from CFDs. The lowest special tax rate for any of these properties in the district is more than $600 annually, as shown in the table below. Some owners of multifamily properties are paying hundreds of thousands of dollars in CFD taxes annually. Community Facilities Districts Parcels in District 7,351 Taxable Minimum Total Parcels Parcels Maximum Tax Tax CFD #1 578 499 $ 1,235.02 $ 707.06 CFD #2 928 877 $ 1,057.90 $ 971.64 CFD #3 1,726 1,488 $ 217,385.78 $ 637.34 3,232 2,864 % of District Parcels in CFD #1 7.9% 6.8% % of District Parcels in CFD #2 12.6% 11.9% % of District Parcels in CFD #3 23.5% 20.2% 44.0% 39.0% Projected tax and redevelopment revenue from CFD No. 1, 2, and 3’s Annual Special Tax Report, dated June 30, 2018, produced by Key Analytics. Fiscal crisis & ManageMent assistance teaM 29 DEBT ISSUANCE PRACTICES In 1997 the district expected to issue all of the $250 million in general obligation bonds from Proposition C by 2023-24, as evidenced by the district’s Tax Rate Statement from the sample ballot in 1997. The Proposition C bond authorization greatly exceeded the district’s bonding capacity when it was approved by voters. Education Code 15268 states that a nonunified school district may not have outstanding bonds in excess of 1.25% of assessed taxable property value. San Diego County offiCe of eDuCation 30 DEBT ISSUANCE PRACTICES San Ysidro School District Bonding Capacity/ Proposition C Authorization vs. District Bonding Capacity Proposition C Authorization $260,000,000 $240,000,000 $220,000,000 $914,308,618 = 1996-97 assessed value X 1.25% = union district statutory bondingcapacity $200,000,000 $11,428,858 = 1996-97 bonding capacity $180,000,000 $160,000,000 $140,000,000 $238,571,142 = Bonding authorization above bonding capacity $250,000,000 $120,000,000 $100,000,000 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $11,428,858 $0 as of 1996-97 Bonding Capacity Authorization Measure C Bonding capacity is as of 1996-97,based on the most recently available AV at the time of the election. Statutory bonding capacity for a union district is 1.25%of total assessed value. Outstanding bonds from Official Statements. The bonding capacity limit is tested when bonds are sold. The chart below shows that for the district to have expected $250 million in bonding capacity by fiscal year 2023-24, it would have had to assume an annual growth rate of 12.11%. San Ysidro School District $260,000,000 $240,000,000 $220,000,000 $200,000,000 $180,000,000 $160,000,000 $140,000,000 $120,000,000 $100,000,000 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $0 Fiscal crisis & ManageMent assistance teaM 6991 7991 8991 9991 0002 1002 2002 3002 4002 5002 6002 7002 8002 9002 0102 1102 2102 3102 4102 5102 6102 7102 8102 9102 0202 1202 2202 3202 Increase in Total Assessed Value Needed to Produce $250 Million Bonding Capacity by Bonding Capacity Planned Final Issuance in 2023-24 $250,000,000 = Proposition C authorization initially planned with a final issuance in 2023-24 Total AV would need to grow at 12.11% annual rate to achieve $250 million in bonding capacity in 2023-24 -the last planned sale of bonds per the Tax Rate Statement $11,428,858 = actual bonding capacity attime of election Fiscal Year Beg July 1 Bonding capacity is as of 1996-97,based on the most recently available AV at the time of the election. Statutory bonding capacity for a union district is 1.25%of total assessed value. Outstanding bonds from Official Statements. Analysis does not take into consideration repayment of existing bonds prior to 2023-24 which would reduce needed bonding capacity. AV provided by San Diego County Auditor-Controller's Department. 31 DEBT ISSUANCE PRACTICES From fiscal year 1979-80 (when Proposition 13 was implemented) to fiscal year 1996-97, the district’s tax base grew at a rate of 11.4%. Had the district had this same compound annual growth rate following the passage of Proposition C, the district’s bonding capacity would have reached almost $211 million by fiscal year 2023-24, which was identified in the Tax Rate Statement as the fiscal year following the Slaans Yts isdarol eSc hoofo l bDiostnricdts. The chart below shows this data. $260,000,000 $240,000,000 $220,000,000 $200,000,000 $180,000,000 $160,000,000 $140,000,000 $120,000,000 $100,000,000 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $0 It is reasonable to think that there would have been some planned amortization of the principal, so it is conceivable that there was a plan that justified the issuance of $250 million in bonds by fiscal year 2023-24. However, such a plan would have had to ignore the most recent trends in the tax base, which included a decline in the tax base in each of the three years immediately preceding the election, as shown in the chart below. San Diego County offiCe of eDuCation 6991 7991 8991 9991 0002 1002 2002 3002 4002 5002 6002 7002 8002 9002 0102 1102 2102 3102 4102 5102 6102 7102 8102 9102 0202 1202 2202 3202 Annual Growth of 12.11% in Assessed Value Needed For District to Have $250 Million Bonding Capacity in General Obligation Bonding Capacity by 2023-24 $250,000,000 = PropositionC authorization initially planned with a final issuance in 2023-24 If Total AV grew at 11.4% compounded annual growth rate (compoundedannual growth rate for Total AV from 1979-80 through 1996-97, the last planned sale of bonds per the Tax Rate Statement) bonding capacity would only be at $210,815,714 Total AV would need to grow at 12.11% annual rate to achieve $250 million in bonding capacity in 2023-24 -the last planned sale of bonds per the Tax Rate Statement $11,428,858 = actual bonding capacity attime of election Actual bonding capacity, at statutory 1.25% of Total AV, through 2018-19 Fiscal Year Beg July 1 Bonding capacity is as of 1996-97,based on the most recently available AV at the time of the election. Statutory bonding capacity for a union district is 1.25%of total assessed value. Outstanding bonds from Official Statements. Analysis does not take into consideration repayment of existing bonds prior to 2023-24 which would reduce needed bonding capacity. 32 DEBT ISSUANCE PRACTICES San Ysidro School District Total AV Increases and Decreases in Total Assessed Value, 1979-1996 $1,100,000,000 2.20% 4.87% 10.27% - $1,000,000,000 13.78% - 25.26% 10.31%-2.46% $900,000,000 -1.43% 11.40% $800,000,000 20.32% $700,000,000 12.21% $600,000,000 30.14% $500,000,000 18.48% $400,000,000 12.00% 6.09% 14.22% $300,000,000 20.09% 25.05%15.66% $200,000,000 $100,000,000 $0 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Fiscal Year Beg July 1 Assessed value providedby San Diego County Auditor-Controller's Department. The tax base decline abated in the year after the election and continued to do so until fiscal year 2009-10, when it began a decline so severe that it did not rise above the fiscal year 2008-09 level until fiscal year 2016-17, as shown in theS acnh Yasidrrto bScehloool wDi.s trict $6,000,000,000 $5,500,000,000 $5,000,000,000 $4,500,000,000 $4,000,000,000 $3,500,000,000 $3,000,000,000 $2,500,000,000 $2,000,000,000 $1,500,000,000 $1,000,000,000 $500,000,000 $0 Fiscal crisis & ManageMent assistance teaM 6991 7991 8991 9991 0002 1002 2002 3002 4002 5002 6002 7002 8002 9002 0102 1102 2102 3102 4102 5102 6102 7102 8102 Total AV Increases and Decreases in Total Assessed Value, 1997 to Present 4.90% 8.96% 8.77% 15.34% 0.14% 2.91% -0.61% -1.72% 3.48% 9.55% -5.73%-0.13% 19.47% 8.80% 16.98% 16.47% 19.70% 16.27% 19.26% 19.40% 18.07% 10.15% -1.00% Fiscal Year Beg July 1 Assessed value providedby San Diego County Auditor-Controller's Department. 33 DEBT ISSUANCE PRACTICES The planning for Proposition C appears to have been flawed from the beginning, because the district required bonding capacity waivers from the State Board of Education in 2001, 2004 and 2012, each of which allowed the district successively greater bonding capacity, as shown in the San Ysidro School District chart below. The district’s high use of bonding capacity means that it would likely be able to apply and qualify for financial hardship status from the Office of Public School Construction to generate additional state facilities grants. However, FCMAT found no evidence that the district had submitted such an application. In addition to having overly optimistic estimates of tax base growth, the district issued its general obligation bonds at a high cost. As the chart below shows, the district’s general obligation repay- ment ratio (that is, the ratio of total debt service to principal) exceeds 3.4-to-1. San Diego County offiCe of eDuCation %71.1 %40.1 %68.0 %04.1 %61.1 %89.0 %08.0 %71.2 %28.1 %05.1 %61.2 %58.1 %38.1 %61.2 %97.2 %58.2 %97.2 %79.2 %08.2 %05.2 %32.2 %50.2 Bonding District's Bonds vs. District's Bonding Capacity, 1997-present Capacity 3.50% 3.00% = waiver #62-12-2011 obtained Mar 2012, valid through Jun 2022 3.00% 2.50% 2.15% = waiver #19-7-2004 obtained Sep 2004 2.00% 1.56% = waiver #19-1-2001 obtained in 2001 1.25% = statutory 1.50% bonding capacity for union district 1.00% 0.50% Outstanding Bonds as % of Total AV 0.00% 19961997199819992000200120022003200420052006200720082009201020112012201320142015201620172018 As of Aug 20 of each year. Bonding capacity is as of August 20 when assessed value becomes "equalized." Statutory bonding capacity for a unified district is 1.25% of total assessed value. Outstanding bonds from Official Statements. 34 DEBT ISSUANCE PRACTICES San Ysidro School District Issuances/Proceeds General Obligation Bond Debt Service Repayment-to-Principal Ratio & Debt Service $550,000,000 $500,000,000 $450,000,000 $400,000,000 GO Bonds Debt Service: $481,930,294 $350,000,000 Issuances: ÷ $141,512,610 Debt Service-to-Debt Ratio: 3.41-to-1 $300,000,000 $250,000,000 Taxpayer Payments, $481,930,294 $200,000,000 $150,000,000 $100,000,000 GO Issuances, $141,512,610 GO Proceeds, $141,332,287 $50,000,000 $0 Debt Proceeds from Debt Service Issuances Debt Issuances as of July 1, 2018 Issuances, proceeds, & debt Service from Official Statements.Debt service after new money sales (without refinancings) was $545,625,974, for PropositionC GO Bonds. As mentioned previously, for a fully amortized 30-year mortgage with monthly payments to have a repayment ratio of 3-to-1, the annual interest rate would have to be 9.4%. Since March 4, 1997, when the district’s Proposition C general obligation measure passed, 30-year mortgage rates have had a high of 8.64% and a low of 3.31% (per the St. Louis Federal Reserve’s published “30-Year Fixed Rate Mortgage Average in the United States”). During the same time period, the Bond Buyer’s 20-Bond Index (a standard municipal bond benchmark) had a high of 6.11% and a low of 2.80%. The district has issued Proposition C general obligation bonds nine times in 21 years, as shown in the chart below. This frequency is high given that the Internal Revenue Code provides for tax-exempt bonds to be issued to address three years of intended expenditures. The missed oppor- tunities for economies of scale are even greater from September 2004 through December 2007, during which time the district issued general obligation bonds three times, and from June 2011 through June 2015, when the district issued bonds four times, including two issuances within 30 days (May 31, 2012 and June 27, 2012). Fiscal crisis & ManageMent assistance teaM 35 DEBT ISSUANCE PRACTICES San Ysidro School District New Issuances and Refinancings of Proposition C 10 General Obligaion Bonds 8 9 $2 P M S 5 r u 0 o a c , r p 0 c e 0 1 C s 0 9 , s , G 9 0 fu O 7 0 l , 0 P $ r 2 o 9 J p 2 .8 u 0 C 6 n 1 , M 2 G 2 O 0 R I 1 s B f s g 2 o u n e d d s Aug 1997 7 Series 1997 Prop C,GO Bonds $10.59MIssued May 2012 6 Series G Sep 2004 Prop C,GO Bonds Series C $28.99MIssued Prop C,GO Bonds $15.88MIssued 5 4 Dec 2007 3 Series E Prop C,GO Bonds $33.95MIssued 2 Jun 2001 Feb 2005 Jun 2011 Jun 2015 Series B Series D Series F 2015 Rfg PropC,GO Bonds Prop C,GO Bonds Prop C,GO Bonds Prop C,GO Bonds 1 $9.89MIssued $24.62MIssued $17.6MIssued $45.64MIssued 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Data from Official Statements. Fiscal Year Beg July 1 With such frequent issuances, the district had the opportunity to compare costs and perhaps reduce them. Instead, as shown in the chart below, its costs of issuance fluctuated widely and increased overall beginning in 2007, andS man Yosrider os Soc hbooyl D 2ist0ri1ct2. San Diego County offiCe of eDuCation 800,48$ 000,001$ 000,611$ 000,67$ 009,011$ 181,932$ 089,032$ 474,281$ 060,932$ 000,761$ 000,541$ 004,651$ 181,291$ 857,681$ 269,342$ 626,302$ 005,381$ Percentage Expensive Issuances with Fluctuating Underwriters' Discounts Issuance of Issuance Costs 1.75% $350,000 Issuance Costs 1.50% Underwriter's Discount 1.60% $300,000 1.25% $250,000 1.00% 1.12% 1.10% $200,000 1.00% 1.00% 1.00% 1.00% 0.75% 0.85% 0.82% 0.84% 0.85% $150,000 0.80% 0.63% 0.50% 0.60% $100,000 0.44% 0.41% 0.25% 0.34% $50,000 0.00% $0 Series Series BSeries CSeries DSeries ESeries FSeries G 2012 2015 1998 2001 2005 2007 2012 2015 2016 2017 1997 (2001) (2004) (2005) (2007) (2011) (2012) Rfg Rfg COP COP COP COP COP Rfg Rfg COP New $ Refi New $ Refi New $ General Obligation Bonds - 1997 Election Certificates of Participation Debt Issuances Costbreakouts from Official Statementsand California Treasurer's website (www.debtwatch.treasurer.ca.gov/government/cda-all-data/yng6-vaxy/data). 36 DEBT ISSUANCE PRACTICES In addition, over the past 21 years, underwriting discounts dropped from an average of 0.72% to an average of 0.48% nationwide, yet the district was paying up to three times the national San Ysidro School District average, as shown in the chart below. Fiscal crisis & ManageMent assistance teaM %27.0 %27.0 %96.0 %76.0 %56.0 %46.0 %75.0 %65.0 %55.0 %45.0 %15.0 %35.0 %46.0 %36.0 %16.0 %16.0 %55.0 %25.0 %15.0 %94.0 %84.0 %84.0 Underwriter's District's Underwriters' Discounts vs. National Average Discount 1.75% 1.60% Education Bonds SYSD GO Bonds - New $ 1.50% SYSD GO Bonds - Refi SYSD COPs - New $ SYSD COPs - Refi 1.25% 1.12% 1.10% 1.00% 1.00% 1.00% 1.00% 1.00% 0.84% 0.85% 0.85% 0.75% 0.82% 0.63% 0.80% 0.60% 0.50% 0.44% 0.41% 0.34% 0.25% 0.00% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Calendar Year Underwriter'sdiscounts for San Ysidro SD from Official Statementsand California Treasurer's website (www.debtwatch.treasurer.ca.gov/government/cda-all-data/yng6- vaxy/data). Underwriter's spreads for Education bonds from 2016 in Statistics & 2018 in Statistics(Midyear Review) from The Bond Buyer. 37 DEBT ISSUANCE PRACTICES In 2012 and 2015, the district refinanced outstanding general obligation bonds well ahead of the initial call dates, incurring significant negative arbitrage. The refinancing of the Series F bonds San Ysidro School District occurred more than six years ahead of the call date, as shown in the chart below. 10 9 8 7 6 5 4 3 2 1 0 FCMAT reviewed various presentations from public finance professionals to the district’s governing board and found no evidence that the presentations included the cost of negative arbi- trage or the value of waiting to refinance until closer to the call date. The Government Finance Officers Association’s recommended best practice for refunding municipal bonds includes specific recommendations regarding negative arbitrage efficiency, rate efficiency/sensitivity analysis, and refinancing analysis. At the time of the 2015 refinancing, the county superintendent of schools had a fiscal advisor in place at the district and provided the district with a written analysis more than two months prior to the refinancing. That analysis pointed out several questions that should be addressed and best practices to be considered. FCMAT found no evidence of any changes in the district’s practices as a result of the county superintendent of schools’ advice. For the general obligation bond refinancing in 2015, the public finance professionals offered the district two alternatives: one maintained the original term with proportional savings and had a projected savings of $51.3 million; the other shortened the term and had a projected savings of $71.8 million. The district chose the latter, and the bonds were refinanced for a shorter term, with a net savings of $61 million. When the results were presented to the board, the actual result of $61 million in savings was compared with the $51 million estimate; however, the appropriate comparison would have been to the $71.8 million projected savings. FCMAT noted other discrepancies, but this appeared most significant because of the misrepresentation. The graphic below shows the tables from that presentation. San Diego County offiCe of eDuCation 6991 7991 8991 9991 0002 1002 2002 3002 4002 5002 6002 7002 8002 9002 0102 1102 2102 3102 4102 5102 6102 7102 8102 9102 0202 1202 Disrict's Refinancing of General Obligation Bonds Long Before Initial Call Date Led to Inefficiencies June 2012 2012 Rfg Circle denotes initialcall M Pr a o r p . 1 C 9 , G 9 O 7 , P $ r 2 o 9 p .8 C 6 , M GO Is B s o u n e d d s date a . c D tu ia a m l c o a n ll d d a de te n . otes $250,000,000 Successful May 2012 Feb. 2005 Series G Series D Prop C,GO Bonds Prop C,GO Bonds $28.99MIssued $24.62MIssued Sep. 2004 Series C Series D (CIBs) refi occurred2.1 years Prop C,GO Bonds before initial call date (Aug. 2014) $15.88MIssued Series B refi occurred 10 months after initial June 2001 call date (Aug 2011) Series 1997 & C refies occurred1.1 years Series B before initial call dates (Aug. 2013) Prop C,GO Bonds $9.89MIssued Aug. 1997 Series 1997 Prop C,GO Bonds Dec. 2007 $10.59MIssued Series E Prop C,GO Bonds $33.95MIssued Series E refi occurred2.2 years before initial call date (Aug. 2017) June 2015 2015 Rfg June 2011 PropC,GO Bonds Series F $45.64MIssued Prop C,GO Bonds $17.6MIssued Series F refi occurred6.2 years before initial call date (Aug. 2021) Data from Official Statements. Fiscal Year Beginning July 1 38 DEBT ISSUANCE PRACTICES Estimated savings – Feb 12, 2015 Actual Savings Proportional From Reduced Reduced Term – Savings (p 8 of 9) Term (p 9 of 9) Dec 10, 2015 ( p6 of 15) When interviewed for this report, the district’s former assistant superintendent of business services stated that material from public finance professionals was routinely presented to the board without having been reviewed by staff and that she did not participate in the district’s issuance of securities. However, she made extensive comments about the matter to the press at the time of this particular financing (https://www.kpbs.org/news/2015/feb/25/school-bonds- debt-burden-san-diego-county/). Although he was at the district for less than two months, the district’s interim superintendent at the time brought in a new set of public finance professionals and expressed satisfaction with this particular financing because it reduced the use of capital appreciation bonds. ** FCMAT’s interviews with the former interim superintendent and former assistant superintendent of business services revealed that neither executive understood the options available to the district and neither properly scrutinized the information received from public finance professionals regarding bond structure, timing, costs, and alternatives. From 2015 through 2017, the district used RBC Capital Markets as its underwriter, Isom Advisors and then California Financial Services as its financial advisor, and Dannis Woliver Kelley as bond and disclosure counsel, for four securities offerings in 14 months. The previously mentioned written advice that the district’s interim superintendent received from the county office of education in March 2015 also described concerns with the district’s method of contracting, specific objectionable provisions of the contracts, the financial advice being provided, and the lack of accurate and detailed information being provided to the district’s governing board. ** Appendix A contains a list of district superintendents’ and board members’ dates of service. Fiscal crisis & ManageMent assistance teaM 39 DEBT ISSUANCE PRACTICES However, the district’s poor management of public finance professionals was not new. In 2011 and 2012, the district used De La Rosa as underwriter, Dolinka Group as financial advisor, and in most cases used Best, Best & Krieger as bond counsel, disclosure counsel and district counsel. With this team, the district issued securities four separate times in less than one year; two of these four were general obligation bond issues sold less than one month apart. Specifically, on May 31, 2012, the district sold Series G bonds under Proposition C, and on June 27, 2012 it sold bonds to refinance the first through fourth series of Proposition C bonds (these were called Series 1997, and Series B, C, and D). To demonstrate the value of consolidation, FCMAT analyzed what the result would have been if these two general obligation bond sales had been combined. FCMAT’s model includes both the new money borrowing and refinancing in one bond issue. The chart below shows the results of this analysis. $17,500,000 $15,000,000 $12,500,000 $10,000,000 $7,500,000 $5,000,000 $2,500,000 $0 San Diego County offiCe of eDuCation 1102 2102 3102 4102 5102 6102 7102 8102 9102 0202 1202 2202 3202 4202 5202 6202 7202 8202 9202 0302 1302 2302 3302 4302 5302 6302 7302 8302 9302 0402 1402 Actual and Possible Alternative Refinancing and Costs Debt Service Series G Series 1997, B, Alternate Fiscal Year Actual C & D Actual Actual Scenario Beg July 1 Debt Service Debt Service Debt Service Debt Service Coverage 2011-12 $0 $700,056 $700,056 $696,352 $3,704 2 2 0 0 1 1 2 3 - - 1 1 3 4 $ $ 0 0 $ $ 1 2, , 6 7 8 45 7 , , 1 8 1 63 3 $ $ 1 2 , , 7 6 4 8 5 7 , , 1 8 1 6 3 3 $ $ 1 2 , , 7 6 4 8 3 6 , , 9 1 6 0 6 6 $ $ 1 1 , , 1 7 4 5 6 6 Alternate issuance 2 2 0 0 1 1 4 5 - - 1 1 5 6 $ $ 0 0 $ $ 4 4 , , 0 2 5 2 1 9 , , 2 6 0 1 0 5 $ $ 4 4 , , 0 2 5 2 1 9 , , 2 6 0 1 0 5 $ $ 4 4 , , 0 2 4 2 6 6 , , 8 1 5 0 6 6 $ $ 4 3 , , 3 5 4 0 4 9 scenario 2016-17 $0 $2,719,424 $2,719,424 $2,714,356 $5,067 2017-18 $0 $2,771,161 $2,771,161 $2,768,156 $3,005 2018-19 $0 $2,815,755 $2,815,755 $2,811,956 $3,799 2019-20 $0 $2,863,049 $2,863,049 $2,860,956 $2,092 2020-21 $0 $2,916,455 $2,916,455 $2,912,856 $3,599 2021-22 $0 $2,145,818 $2,145,818 $2,142,231 $3,586 2022-23 $0 $2,201,525 $2,201,525 $2,200,731 $794 2023-24 $0 $2,249,188 $2,249,188 $2,248,319 $869 2024-25 $0 $2,305,578 $2,305,578 $2,302,569 $3,009 2025-26 $0 $1,303,940 $1,303,940 $1,300,544 $3,396 2026-27 $0 $1,335,340 $1,335,340 $1,335,019 $321 2027-28 $0 $1,366,690 $1,366,690 $1,361,956 $4,734 2028-29 $0 $1,393,175 $1,393,175 $1,388,750 $4,425 2029-30 $505,000 $0 $505,000 $501,350 $3,650 2030-31 $535,000 $0 $535,000 $532,550 $2,450 2031-32 $560,000 $0 $560,000 $556,950 $3,050 2032-33 $11,750,000 $0 $11,750,000 $11,748,675 $1,325 2033-34 $12,340,000 $0 $12,340,000 $12,340,000 $0 2034-35 $12,955,000 $0 $12,955,000 $12,955,000 $0 2035-36 $13,605,000 $0 $13,605,000 $13,605,000 $0 2036-37 $14,285,000 $0 $14,285,000 $14,285,000 $0 2037-38 $15,000,000 $0 $15,000,000 $15,000,000 $0 2038-39 $15,750,000 $0 $15,750,000 $15,750,000 $0 2039-40 $16,535,000 $0 $16,535,000 $16,535,000 $0 2040-41 $3,205,000 $0 $3,205,000 $3,205,000 $0 2041-42 $0 $0 $0 $0 $0 $117,025,000 $41,800,943 $158,825,943 $158,762,312 $63,630 Actual debt service -Series G Actual refundeddebt service - Series 1997, B, C,& D Fiscal Year Beg July 1 Actual Series1997, B, C, & D debt service from Official Statements. Projected debt service for "Alternate Scenario" based on MMD "AAA" interest rates as of May 15, 2012 (sale of Series G); CABs use same spreads as Series G, CIBs use same spread as 2012 Refunding, though 2012 Refunding hadfinal maturity of 2029 and "Alternate" CIBs extend longer, thus maturities beyond 2029 use same spread as 2029. 40 DEBT ISSUANCE PRACTICES The consolidated approach in FCMAT’s model shows that the district could have received an additional $2.2 million in new money proceeds with lower debt service. The chart below compares the district’s actual bond issuances and refinancing to FCMAT’s combined issuance model. Issuing 2012 Refunding Bonds Concurrent with Series G Could have Issuances/Proceeds Debt Service Increased Issuance and Proceeds, Reduced Debt Service $200,000,000 The Districtcould have Netting additionalproceeds With a debt service issued an additional for projects of reductionof $175,000,000 $1,937,667 $2,194,720 $63,630 $150,000,000 $125,000,000 $100,000,000 $158,825,943 $158,762,312 $75,000,000 $50,000,000 $58,850,884 $60,788,550 $25,000,000 $28,990,884 $31,185,604 $0 Actual Alternate Actual Alternate Actual Alternate Scenario Scenario Scenario Issuance Proceeds for Projects Debt Service Actual SeriesG and 2012 Refunding Bonds' sources and uses from Official Statements, with cost breakouts from California Treasurer's website (www.debtwatch.treasurer.ca.gov/government/cda-all-data/yng6-vaxy/data). Projected issuances for "Alternate Scenario" based on MMD "AAA" interest rates as of May 15, 2012 (sale of Series G); CABs use same spreads as Series G, CIBs use same spread as 2012 Refunding, though 2012 Refunding had final maturity of 2029 and "Alternate" CIBs extend longer, thus maturities beyond 2029 use same spread as 2029. Sources and uses for "Alternate Scenario" assumes same costs of issuance for Series G, and 2012 Refunding, less $20,000 for bond counsel and less $14,000 for rating fee. Underwriter's discount and bond insurance use the samepercentage as the actual Series G and 2012 Refunding: underwriter's discount is 0.85% of issuance amount for Series G and 0.82% for 2012 Refunding, while bond insurance is 0.38% of gross debt service for Series G and 0.32% for 2012 Refunding. Fiscal crisis & ManageMent assistance teaM 41 DEBT ISSUANCE PRACTICES More details are shown in the table below. Actual Sources and Issuance for Series G & 2012 Alternate Scenario for Series G & 2012 Refunding Refunding Actual Alternate Series G 2012 Refunding Series G 2012 Rfg Change Combined Combined Sources = Additional principal Principal $ 28,990,883.60 $ 29,860,000.00 $ 58,850,883.60 $ 31,183,550.20 $ 29,605,000.00 $ 60,788,550.20 $ 1,937,666.60 issued = Additional premium Premium $ 925,828.10 $ 1,867,465.70 $ 2,793,293.80 $ 956,680.20 $ 2,063,783.30 $ 3,020,463.50 $ 227,169.70 received Total Sources $ 29,916,711.70 $ 31,727,465.70 $ 61,644,177.40 $ 32,140,230.40 $ 31,668,783.30 $ 63,809,013.70 $ 2,164,836.30 Uses = Additional Funds for funds for Projects $ 28,990,883.60 $ 28,990,883.60 $ 31,185,603.54 $ 31,185,603.54 $ 2,194,719.94 projects = Reduced Escrow escrow deposit Deposit $ 30,880,396.90 $ 30,880,396.90 $ 30,857,690.42 $ 30,857,690.42 ($ 22,706.48) required = Additional Debt Service funds for debt Fund $ 299,639.46 $ 299,639.46 $ 300,776.41 $ 300,776.41 $ 1,136.95 service = Reduced Costs of costs of Issuance $ 234,710.60 $ 182,473.77 $ 417,184.37 $ 234,710.60 $ 148,473.77 $ 383,184.37 ($ 34,000.00) issuance = Increased Underwriter’s Discount due Underwriter’s to increased Discount $ 246,422.50 $ 238,880.00 $ 485,302.50 $ 265,060.18 $ 236,840.00 $ 501,900.18 $ 16,597.68 issuance = Increased Bond Insurance Bond due to larger Insurance $ 444,695.00 $ 126,075.57 $ 570,770.57 $ 454,856.08 $ 125,002.70 $ 579,858.78 $ 9,088.21 issuance Total Uses $ 29,916,711.70 $ 31,727,465.70 $ 61,644,177.40 $ 32,140,230.40 $ 31,668,783.30 $ 63,809,013.70 $ 2,164,836.30 Actual Series G and 2012 Refunding Bonds’ sources and uses from Official Statements, with cost breakouts from California Treasurer’s website (www.debtwatch.treasurer.ca.gov/government/cda-all-data/yng6-vaxy/data). Projected sources and uses for “Alternate Scenario” assumes same costs of issuance for Series G, and 2012 Refunding, less $20,000 for bond counsel and less $14,000 for rating fee. Underwriter’s discount and bond insurance use the same percentage as the actual Series G and 2012 Refunding: underwriter’s discount is 0.85% of issuance amount for Series G and 0.82% for 2012 Refunding, while bond insurance is 0.38% of gross debt service for Series G and 0.32% for 2012 Refunding. In 2017, the district took on additional liability by issuing COPs (questionably referred to as bridge financing) that its budget could not fully support at the time. Had the district optimized its Proposition C bond issuances, there may have been less motivation to take on as much addi- tional debt. This is an example of how efficiencies could be gained through better public finance practices. The scope of this study did not allow FCMAT to develop alternate scenarios for every financing; however, the frequency of issuances, high costs of issuances and high underwriting discounts indicate that the district could have done significantly better. As the findings above show, the district’s financings have been unnecessarily costly to taxpayers, and the district has taken on debt that poses a risk to its solvency, a step that seems unnecessary for a district with more than $100 million in authorized but unused bonding authority. At the San Diego County offiCe of eDuCation 42 DEBT ISSUANCE PRACTICES same time, the district’s taxpayers are burdened with the highest school bond taxes in the county, and almost 40% of its taxpayers also bear the burden of relatively high special taxes (Mello-Roos). The poor financing practices have extended through multiple administrations and governing boards. The district’s executive leaders have allowed inaccurate and misleading information to be presented to the governing board. Fiscal crisis & ManageMent assistance teaM 43 FACILITIES FUND EXPENDITURES Facilities Fund Expenditures FCMAT reviewed the district’s facilities program for fiscal year 2012-13 through May of fiscal year 2017-18, specifically whether all expenditures of facility funds were in compliance with authorized purposes. The review focused on authorization; FCMAT did not examine any promises that may have been made to voters in campaign materials, ballot arguments and related materials. As previously noted, the district has outstanding bonds from Proposition C, a bond measure its voters approved by the required two-thirds majority on March 4, 1997, that authorized $250 million in bonds. In addition, the district has outstanding debt from four COPs financings, issued in 2012, 2015, 2016 and 2017. The Official Statement of the 2012 COPs identifies the repayment source as community facilities district (CFD) tax revenue. The Official Statement of the 2017 COPs identifies them as bridge funding. A presentation by California Financial Services dated July 7, 2017 lists the sources of funding to which the COPs are a bridge as follows: 1) State matching funds, 2) 2018 new GO bond measure, and 3) Remaining 1997 GO bond measure To date, as shown on the Electronic Municipal Market Access (EMMA) website, none of these sources has been successful in repaying the financing, so the district continues to rely on CFD revenue, redevelopment revenue, and other district revenue as needed to cover the debt service payments. The first chart in the Debt Issuance Practices section earlier in this report shows the timing of the district’s general obligation (GO) bonds and COPs debt issuances during the period under review (2012 through 2018). General Obligation Bond Funds Authorized expenditures of bond funds are governed by Article XIII A of the California Constitution and by the applicable bond ballot measure. California Constitution, Article XIII The California Constitution, Article XIII A, defines the allowable purposes for the expenditure of bond funds for a bond measure approved by two-thirds of voters. Section 1(b)(2) authorizes “the acquisition or improvement of real property.” Real property usually means land and buildings. Unlike bond measures approved by 55% of voters, the authorized purposes for a measure approved by two-thirds of voters do not include the furnishing and equipping of school facilities. However, building fixtures and service systems are considered real property, and the 2016 edition of the California School Accounting Manual published by the California Department of Education defines these items based on the following criteria: 1. The item is attached permanently to the building. 2. The item functions as part of the building. 3. Removal of the item would result in appreciable damage to the building or would impair the designed use of the facility. San Diego County offiCe of eDuCation 44 FACILITIES FUND EXPENDITURES 4. The item is generally accepted as real property (not personal property). 5. The item loses identity as a separate unit. The California School Accounting Manual cites as examples of building fixtures bleachers installed in a gymnasium, built-in cabinetry, and walk-in freezers. Examples of service systems are air conditioning systems and intercommunication systems. The California Debt Issuance Primer (California Debt and Investment Advisory Commission, 2006 Edition) includes the following commentary on real property: There is general agreement among practitioners and issuers that the limitation to “real property” means that vehicles, equipment, furnishings, supplies, and labor may not be financed with general obligation bonds. Generally, anything that is truly portable or can be removed from land or a building without causing damage to the land or building, may not be financed. Bond Ballot Measure Each bond ballot measure describes its authorized purposes. Proposition C asked voters to approve the following on March 4, 1997: Shall the San Ysidro School District incur bonded indebtedness for the purpose of acquiring and improving real property for authorized school purposes; provided, that at the time any series of bonds is issued the highest tax rate required to service that series and all outstanding bonds authorized by this measure shall not exceed $0.10 per $100 in assessed value, with the maximum principal amount of such bonds not to exceed $250,000,000? Development Impact Fees Education Code Section 17620(a)(1) states that development impact fees are to be used for “construction or reconstruction of school facilities.” Government Code Section 65995(g)(3) defines school facilities as “relating to a school district’s ability to accommodate enrollment.” The following uses are specifically prohibited: regular maintenance and routine repair, asbestos inspection and removal, and deferred maintenance (Education Code section 17620). Deferred maintenance is defined as major repair or replacement of plumbing, heating, air conditioning, electrical, roofing and floors; painting; asbestos inspection and removal; lead inspection and removal; and any other items of maintenance (Education Code Section 17582). Funds from Certificates of Participation Funds from COPs are to be spent “solely for capital outlay purposes, including the acquisition of real property for intended use as a schoolsite and the construction, reconstruction, and reno- vation of school facilities” (Education Code section 17456(c)(1)). In addition, Education Code Section 17457 states, “no proceeds obtained by the school district… shall be used for general operating purposes of the school district.” Fiscal crisis & ManageMent assistance teaM 45 FACILITIES FUND EXPENDITURES Funds from Community Facilities Districts The district has three CFDs with the following tax information for fiscal year 2017-18: CFD #1: covers 578 parcels (499 taxable and 79 exempt) and levied $483,557 in taxes CFD #2: covers 928 parcels (877 taxable and 51 exempt) and levied $875,171 in taxes CFD #3: covers 1,726 parcels (1,488 taxable and 238 exempt) and levied $1,588,948 in taxes Government Code Section 53313.5 states that funds from CFDs are to be spent for: the purchase, construction, expansion, improvement, or rehabilitation of any real or other tangible property with an estimated useful life of five years or longer or may finance planning and design work that is directly related to the purchase, construction, expansion, or rehabilitation of any real or tangible property. The facilities need not be physically located within the district. In addition, resolutions associated with the formation of CFDs may further restrict the use of funds. The district’s CFDs were formed in 1992, 1998, and 1999, and the district was not able to locate any original resolutions. However, a July 12, 2018 presentation by the district’s CFD consultant, California Financial Services, stated that the allowable facilities expenditures were those identified in statute, without any further limitation or modification. Although the district is authorized to issue CFD bonds to be repaid by the CFD taxes, it has not issued any such bonds to date; instead, it has relied on the CFD taxes to repay COPs. San Diego County offiCe of eDuCation 46 SUBSTANTIVE TESTING Substantive Testing Analysis of Expenditures Procedures FCMAT analyzed expenditures from the district’s facilities funds using the district’s financial records exported and provided by the San Diego County Office of Education for the period of July 1, 2012 through May 21, 2018. The analysis included and used a review of the full detail general ledger database and the vendor payment history database. The recording of expenditures, according to the California School Accounting Manual, includes two types of codes that provide insight into whether the expenditures relate to facilities or opera- tions: • Function Codes (the activity of the expenditure) • Object Codes (the type of item purchased or service obtained) The district accounts for facilities funds using the following fund designations: • Fund 21 (Building Fund): GO bond funds • Fund 25 (Capital Facilities Fund): development impact fees • Fund 40 (Special Reserve Fund for Capital Outlay Projects): interest earnings were the only facilities funding source/revenue received during review • Fund 49 (Capital Projects Fund for Blended Component Units): CFD and COP funds • Fund 52 (Debt Service Fund for Blended Component Units): COP payments In addition, Fund 01 (General Fund) may include facilities expenditures, so the expenditures classified as facilities from this fund were included in the review. Specifically, funds classified by object code as capital outlay (6000-6999) were reviewed in detail. Project Expenditures FCMAT’s review of documents and transactions indicates that expenditures for many of the following projects were likely not in compliance with bond requirements. • Solar project by Manzana Energy (formerly known as EcoBusiness Alliance) • Furniture purchases from: • Culver-Newlin • Crawford & Company • Nelson Adams • Virco • Magnum Drywall • Robinson Steel • School funding program reconstruction services by California Financial Services • Wire transfers Fiscal crisis & ManageMent assistance teaM 47 SUBSTANTIVE TESTING Solar Project by Manzana Energy The district and Manzana Energy entered into a solar power and services agreement dated October 8, 2008 and a first addendum dated April 9, 2015. The contract was set up as a power purchase agreement, under which the district would purchase the power produced by the solar system over 25 years, and Manzana Energy would own, operate and maintain the system during that time. At the end of 25 years, Manzana Energy could either remove the system from the district’s property and retain ownership, or the district could purchase the system at fair market value. Over the course of approximately three years following approval of the first addendum dated April 9, 2015, Manzana Energy received payments totaling $23,792,605 for an early termination fee, meaning that the district terminated the agreement before the end of the 25-year term and assumed the responsibility to own, operate and maintain the system. Manzana Energy was contracted to receive $23,762,915 in accordance with the first addendum. However, the district’s total actual payments were $23,792,605, or $29,690 more than the amount in the addendum. The actual payment amounts and dates were as follows: Date Payment Fund 4/23/15 $ 3,564,437 21 5/8/15 $ 7,128,875 21 11/23/15 $ 600,000 21 3/7/16 $ 2,376,292 21 12/13/16 $ 2,376,292 21 5/11/17 $ 2,376,292 21 8/16/17 $ 2,376,292 21 10/20/17 $ 2,376,292 21 3/8/18 $ 617,836 40 Total $ 23,792,605* *Rounding used in calculations Section 3.06 of the original agreement provides for removal of the systems at expiration of the agreement. Specifically, upon expiration or certain other terms of the agreement (such as early termination or contract default), the solar provider was to “remove all of its tangible property comprising the Systems from the Premises.” Although the amended agreement made some changes to the term and termination provisions, it did not alter Section 3.06. This raises the question of whether using GO bond funds to pay for such equipment was in compliance with the bond measure, which was “for the purpose of acquiring and improving real property,” given how real property is defined by both the California School Accounting Manual and California Debt Issuance Primer. The district rightly decided to request a legal opinion on whether GO bond funds could be used to pay for the solar project. It received a legal opinion from a law firm, dated March 3, 2015. The district announced in open session at its board meeting on April 9, 2015 that it had received such a legal opinion and provided this legal opinion to a third-party, the San Diego County Office of Education, as support for justifying the use of general obligation bond funds for the solar project. However, the legal opinion has many failings, including the following: 1. The opinion fails to state how the solar project meets the allowable expendi- ture requirements under the California Constitution. San Diego County offiCe of eDuCation 48 SUBSTANTIVE TESTING 2. The opinion discusses how the solar project meets the allowable expenditure requirements under Education Code 15100; however, the Education Code is superseded by the California Constitution. 3. The opinion fails to consider the specifics of the agreement between Manzana Energy and the district. For example, the opinion concludes, “the District’s Bond proceeds may be expended for a payment towards the construction and purchase of a solar power system.” However, pursuant to the agreement, the district was not paying for construction (which was not complete); rather, it was paying for early termination of a solar power and services agreement. 4. The opinion refers to another lawyer’s opinion, which could not be obtained due to attorney-client privilege. In light of these factors, the early termination fee may not have been a permissible expenditure of GO bond funds. Furniture Purchases The district paid for furniture as follows: Vendor Amount Paid Fund Payment Date(s) Items Purchased Culver-Newlin $ 1,512,011 21 9/2017-1/2018 chairs, desks, tables Crawford & Company $ 161,479 21 10/2017 chairs, desks, tables Nelson Adams $ 62,886 21 9/2017 in-wall tables and benches Virco $ 16,424 21 9/2017 desk and chair Magnum Drywall $ 3,798 21 9/2017 metal lockers Robinson Steel $ 2,632 21 9/2017 locker room benches Total $ 1,759,230 The use of GO bond funds to pay for such furniture may not have been in compliance with the bond measure. School Funding Reconstruction Services by California Financial Services The district paid California Financial Services $233,285 from Fund 21 for “School Funding Reconstruction Services” in September 2016. The project involved uploading expenditure data from the district’s financial system and republishing the data in the financial reporting system California Financial Services used to track facilities-related activity. In addition, California Financial Services performed a sorting analysis of the data. Payment for this project had several irregular factors: 1. According to documentation, California Financial Services reconstructed data for the period from May 1, 2004 to June 30, 2015 (11 years, two months) (see further information about the time period below). The district’s general ledger is the official accounting record, and all subsidiary information should balance back to the district’s ledgers, on an annual basis. It is noteworthy that 1) the reconstruction did not extend back to the beginning of the 1997 general obligation bond, and 2) that a partial year of reconstruction was performed even though accounting records are based on a fiscal year. Fiscal crisis & ManageMent assistance teaM 49 SUBSTANTIVE TESTING 2. California Financial Services was paid based on the number of years for which it reconstructed expenditure data ($17,500 per year). On July 7, 2016, California Financial Services reported completion of its reconstruction of data for May 1, 2004 through June 30, 2015 (11 years, two months), but the firm invoiced the district for reconstructing data for March 1, 2002 to June 30, 2015 (13 years, 4 months), or two years and two months more than stated in the vendor’s description of completed services. California Financial Services has clarified that the additional two years and two months of data were reconstructed and included in the data provided to the district. There are differences between the documentation reported to the district, the work completed, and the amount paid. The district issued a purchase order for the work after the invoice was received, not at the time the work was authorized; this makes it impossible to determine the planned scope of work. 3. The project included a review of multiple funds (i.e., funds 21, 25, 35, 49, and trustee-maintained accounts) and multiple funding sources (GO bond funds, state funds, CFD funds, COP funds, developer fee funds, and quali- fied zone academy bond (QZAB) funds). However, the district used general obligation bond funds to pay for the entire cost of the project, which is likely not in compliance with the bond measure. Wire Transfers Many wire transfers were made from Fund 49 from October 2012 through November 2016 for COP payments. FCMAT requested supporting documents for some of the wire transfers, but the district had difficulty providing some of them and was unable to provide others. FCMAT received some supporting documents, which confirmed that the transfers were for COP payments. However, for many of these wire transactions the district had no record of payee, amounts and other information. The San Diego County Office of Education is the final approver for wire transfers through the County of San Diego treasury. The county office reviews documen- tation received from the school district prior to approval. However, retention of payment records associated with wire transfers is the responsibility of the district. FCMAT’s finding regarding wire transfers is substantially the same as that of the San Diego County Grand Jury’s audit of the district dated April 2016 and published by the Auditor and Controller, Office of Audits and Advisory Services (https://www.sandiegocounty.gov/content/ dam/sdc/grandjury/reports/2015-2016/SanYsidroAudit.pdf). San Diego County offiCe of eDuCation 50 BIDS, REQUESTS FOR PROPOSALS, AND OTHER PROCUREMENT PRACTICES Bids, Requests for Proposals, and Other Procurement Practices The San Diego County Office of Education provided FCMAT with detailed general ledger and vendor history data from the district’s financial systems for fiscal year 2012-13 through May of fiscal year 2017-18. FCMAT performed the following procedures: • Analyzed data in vendor history reports and selected individual transactions for review. • Requested from the district all supporting documents for each selected transaction. • Reviewed documents for each transaction to determine the following: 1. Whether authorization was obtained and documented in advance of the expenditure. 2. Whether the expenditure was appropriate, in accordance with district policy, allowable by law and, if applicable, an appropriate expenditure of bond funds. 3. Whether goods or services were received and an obligation was incurred. 4. Whether transactions were processed accurately and in a timely manner, and properly recorded. FCMAT asked the district for lists of bids and requests for proposals (RFPs) for each fiscal year under review. FCMAT received a master list with information from fiscal year 2004-05 to 2017-18. Because only six bids took place during the years under review in FCMAT’s scope of study, FCMAT requested all files including supporting documents. However, the district could provide supporting documents for only the most recent bid. For the items reviewed, the district used two different selection processes: public bidding, and requests for proposals (RFPs). Public Bidding Public bidding is commonly known as the lowest bidder process: a district selects the lowest responsive and responsible bidder, in accordance with Public Contract Code 20111. Public bids must be advertised, and if a job walk to view the work location is conducted, a sign-in sheet should confirm attendance. If a job walk is held, the sign-in sheet is a required item in the bid file documents, showing that the bidder attended the job walk. If the job walk is mandatory, attendance is required for the bidder to be eligible to bid. Bids are opened and read aloud, and the bidder’s name and bid amount is entered on the opening list. Bids consist of several forms, including a list of subcontractors, a bid bond, and other required items. When the governing board awards a bid, an agreement is signed and the selected bidder (contractor) provides a performance bond, payment bond, and insurance certificate. If the project is for public work, the district completes form PWC-100 to register the project with the Department of Industrial Relations so they can track the payment of prevailing wages. The district gives the contractor a notice to proceed. After completion of the work, the district’s governing board approves a notice of completion that is filed with the county of jurisdiction. Fiscal crisis & ManageMent assistance teaM 51 BIDS, REQUESTS FOR PROPOSALS, AND OTHER PROCUREMENT PRACTICES Requests for Proposals Requests for Proposals are used for some professional services. Government Code 53060 creates an exception to public bidding requirements for “special services and advice” regarding financial, economic, accounting, engineering, legal, or administra- tive matters, if such persons are “specially trained and experienced and competent to perform the special services required.” Government Code 4526 requires particular selection criteria for “private architectural, landscape architectural, engineering, environmental, land surveying or construction project management” services. The selection must be made based on demonstrated competence and professional qual- ifications, at fair and reasonable prices. In addition, the selection process must ensure maximum small business participation. Requests for Proposals are typically used when selecting these professional services. An RFP may be advertised generally or targeted to a selected number of firms. All documents related to the selection process, including proposal, board approval, signed contract, and insurance certificates, are required to be kept on file. Bid File Document Testing School districts are required to keep on file documents related to all procurement activities. Education Code Section 35250 states, “The governing board of every school district shall… (b) keep an accurate account of the receipts and expenditures of school moneys.” In addition, the district’s Board Policy 3300 states that the superintendent “shall ensure that records of expendi- tures and purchases are maintained in accordance with law.” The district maintains a master bid list with information from fiscal year 2004-05 to the present. During fiscal years 2012-13 through 2017-18, the period reviewed for this audit, the district issued six bids: four for technology items and two that were facilities-related. As stated earlier, FCMAT requested all files including supporting documentation for all bids awarded during the review period. However, the district provided records for only the most recent bid award, which occurred on June 14, 2018 and was for installation of portable classrooms. The district was unable to produce records for five out of six bids, or 83%. FCMAT tested documents for the June 14, 2018 bid to determine whether they included 14 documents essential to such a file. Because this project was not yet completed, the notice of completion was considered not applicable at the time of testing, reducing the expected docu- ments to 13. Three of the 13 expected documents, or 23%, were missing. The district’s inability to produce complete records for the recent six-year time period indicates poor recordkeeping and/or record retrieval practices. The lack of bid records also calls into question whether required legal procedures were followed. A table showing the bid testing results is provided on the following page. San Diego County offiCe of eDuCation 52 BIDS, REQUESTS FOR PROPOSALS, AND OTHER PROCUREMENT PRACTICES Fiscal crisis & ManageMent assistance teaM tcirtsiD loohcS yratnemelE ordisY naS gnitseT diB 81-7102 hguorht 31-2102 sraeY lacsiF egatnecreP noitpecxE slatoT noitpecxE dnuoF snoitpecxE oN noitelpmoC fo ecitoN deecorP ot ecitoN 001-CWP etacfiitreC ecnarusnI dnoB ecnamrofreP ,dnoB tnemyaP tnemeerga dengiS drawa draoB tsil rotcartnocbuS dnoB diB mrof diB tsil gninepo diB teehs ni-ngis klaw boJ tnemesitrevdA tsil retsaM #diB no detsiL dedivorP stnemucoD oN cxE % TOT EN 41# cxE 31# cxE 11# cxE 01# cxE 9# cxE 8# cxE 7# cxE 6# cxE 5# cxE 4# cxE 3# cxE 2# cxE 1# cxE LLA-cxE noitpircseD diB .oN diB # 21# %001 41 1 stnemevorpmI dnuorgyalP 433/31-21 1 ,secivreS krowteN dna tnempiuqE ,ecnanetniaM %001 41 1 61 raeY etaR-E rof noitallatsnI 533/31-21 2 lacol dna snoitacinummoceleT rof secivres ecnatsid gnol dna %001 41 1 61 raeY etaR-E 633/31-21 3 krowteN aerA ediW edargpU tiucriC tenrehtE etarE rof ssecca tenretnI dna %001 41 1 gnidnuF 733/51-41 4 ,krowteN ,sseleriW dna tnempiuqE ,ecnanetniaM %001 41 1 etarE rof noitallatsnI 833/51-41 5 noitiddA elbatroP etiS 2 8102 atsiV dna slliH weiV naecO - ]31/3[ %32 3 A/N 1 1 1 tcejorP SM raM leD 933/81-71 6 YB SNOITPECXE LATOT 0 0 0 1 0 0 0 0 0 0 0 1 0 1 0 5 EPYT ON FO EGATNECREP %38 NOITATNEMUCOD 53 BIDS, REQUESTS FOR PROPOSALS, AND OTHER PROCUREMENT PRACTICES Request for Proposal (RFP) Testing The district’s Board Policy 7140 states, “The Superintendent or designee shall devise a compet- itive process for the selection of architects and structural engineers,” and its Administrative Regulation 7140 further requires “contractors for any architectural, landscape architectural, engineering, environmental, land surveying or construction project management services” to be selected as required by Government Code 4526. The district does not issue tracking numbers for RFPs and does not keep an RFP master list. Therefore, FCMAT was not able to ascertain whether the district provided records of all RFPs issued between 2012-13 and 2017-18. FCMAT reviewed RFPs provided as well as any documents provided regarding contracting with private architectural, landscape architectural, engineering, environmental, land surveying or construction project management services for which an RFP should have been issued. In seven of the 11 such instances reviewed, there was no evidence of an RFP or other selection process that included the required criteria. Every instance reviewed had one or more exceptions of some type, including documents that were missing or not provided. The number of exceptions found indicates that the district has insufficient document retention practices, and may indicate that the district does not have a comprehensive RFP selection process, does not follow its own processes, and/or does not fully document processes used. This calls into question whether the district’s RFP procedures and executed contracts and payments were in compliance with legal requirements. The table below shows the number of times an exception occurred in each area listed for 11 RFPs or instances in which an RFP should have been issued. In the four cases in which an RFP was completed, at least 36% of necessary documents were missing. In seven instances (64% of the time) an RFP should have been completed but was not. This demonstrates a lack of knowledge of professional services procurement requirements. San Diego County offiCe of eDuCation 54 BIDS, REQUESTS FOR PROPOSALS, AND OTHER PROCUREMENT PRACTICES Fiscal crisis & ManageMent assistance teaM tcirtsiD loohcS yratnemelE ordisY naS gnitseT PFR 81-7102 hguorht 31-2102 sraeY lacsiF egatnecreP snoitpecxE PFR snoitpecxE latoT dnuoF snoitpecxE oN tnemeergA dengiS lavorppa tnem -eerga draoB noitcel -es-drawa draoB stnemucod gnitar/noitaulavE slasoporP/sQOS ’smriF rehtO lasoporP/QOS s’mrfi lufsseccuS tsil smrfi gnittimbuS /detseretnI tnemu -cod PFR/QFR tnemesitrevdA PFR /QFR eussi ot lavorppa draoB tsil #/retsaM PFR /QFR no detsiL enod PFR oN ON fo epyT lacsiF 11/# =% TOT EN 11# cxE 01# cxE 9# cxE 8# cxE 7# cxE 6# cxE 5# cxE 4# cxE 3# cxE 2# cxE 1# cxE rodneV etiS # PFR ecivreS raeY BLL %63 4 1 1 1 1 cfiicaP -ohcE reyeB noitcurtsnoC 31-2102 1 APL ,ML ,reyeB %54 5 1 1 1 1 1 stcetihcrA SMYS ,ehtymS erutcetihcrA 31-2102 2 razalaS 1 1 gniyevruS reyeB gniyevruS 31-2102 3 adiuG ,ehtymS ,ML 1 1 gniyevruS SMYS gniyevruS 41-3102 4 & raliugA edahS MDV 1 1 setaicossA erutcurtS erutcetihcrA 51-4102 5 ,ehtymS ,ML noitcurtsnoC %63 4 1 1 1 1 yttaeB ruoflaB rehto ,wolliW tnemeganaM 61-5102 6 ,ehtymS ,ML ygrenE %63 4 1 1 1 1 ocsremA OD ,SMYS secivreS 61-5102 7 & raliugA ehtymS ,ML 1 1 setaicossA snoitazinredoM erutcetihcrA 71-6102 8 & raliugA HVO ,MDV 1 1 setaicossA noitarugfinoceR erutcetihcrA 71-6102 9 EWB HVO ,MDV 1 1 gnireenignE selbatroP gniyevruS 81-7102 01 rekaB HVO ,MDV 1 1 ikciwoN selbatroP erutcetihcrA 81-7102 11 0 1 2 0 1 4 2 1 0 2 0 4 7 EPYT YB SNOITPECXE LATOT %46 ]11/7[ ”ENOD PFR ON“ FO EGATNECREP %0 %52 %05 %0 %52 %001 %05 %52 %0 %05 %0 %001 ]4/#[ SNOITPECXE REHTO FO EGATNECREP 55 BIDS, REQUESTS FOR PROPOSALS, AND OTHER PROCUREMENT PRACTICES Although all areas of exception raise concern, those that occur often are typically indicative of significant deficiencies in the district’s process and/or recordkeeping. Vendor Payment Transaction Testing FCMAT selected 64 payment transactions made during fiscal years 2012-13 through 2017-18 for a review of the district’s vendor payment and documentation processes. FCMAT requested invoices and all other supporting documents for each payment transaction selected. The district provided documents for 56 of the 64 transactions, or 88%. The district should have been able to provide records for all selected transactions. The inability to produce the requested records indicates a lack of proper payment processing, and/or insufficient recordkeeping. The criteria for testing the selected transactions were as follows: • The payment represented a true and accurate obligation of the district. • The payment amount was accurate. • The timing of the payment was appropriate. • District-established payment procedures were followed. Each transaction was traced to supporting documents including: • Purchase order • Agreements and/or proposals • Invoice • Schedule of values • Payment log The district changed its financial system in mid-2015, and thus changed its vendor payment process. Before that time, purchase orders were printed on NCR carbonless paper forms using an impact printer. The accounting copies of the purchase orders provided for fiscal year 2012-13 through a portion of fiscal year 2015-16 were illegible in some cases and only partially legible in many others. FCMAT treated illegible information as missing information. The table on the following pages shows the exceptions found during testing, including the total number and percentage of exceptions in each area. San Diego County offiCe of eDuCation 56 BIDS, REQUESTS FOR PROPOSALS, AND OTHER PROCUREMENT PRACTICES Fiscal crisis & ManageMent assistance teaM tcirtsiD loohcS yratnemelE ordisY naS gnitseT noitcasnarT rodneV detceleS 81-7102 hguorht 31-2102 sraeY lacsiF dnuoF snoitpecxE oN tciflnoc ni OP & lasoporp detpeccA tciflnoc $/snoitpircs -ed OP & eciovnI laitini tuohtiw se -gnahc nettirw dnaH eciovni retfa detad redrO esahcruP gnissim serutangis lavorppA etaruccani/etauq -edani liated eciovnI teehs gnikcart yrotsih tnemyaP oN tnemyap noitneter fi delfi CON oN )elbacilppa sa( pukcab/seulaV fo eludehcS oN eludehcS / etouQ / lasoporP / tnemeergA oN detad/dengis ton OP RO ypoc OP oN eciovnI oN dedivorP stnemucoD oN tnemucoD EN 31# cxE 21# cxE 11# cxE 01# cxE 9# cxE 8# cxE 7# cxE 6# cxE 5# cxE 4# cxE 3# cxE 2# cxE 1# cxE tnuomA noitpircseD / rodneV rodneV etaD dnuF rebmuN CIFICAP OHCE NOITCURTSNOC 1 1 000,001$ DDAPXE79504AP OHCE CNI 21/81/01 12 10 RT CIFICAP OHCE NOITCURTSNOC 1 1 1 1 1 000,01$ DDAPXE43304AP OHCE CNI 21/92/01 12 20 RT CIFICAP OHCE NOITCURTSNOC 1 1 1 1 1 000,01$ DDAPXE43304AP OHCE CNI 21/92/01 12 30 RT CIFICAP OHCE NOITCURTSNOC 1 1 1 1 1 000,01$ DDAPXE43304AP OHCE CNI 21/92/01 12 40 RT CIFICAP OHCE NOITCURTSNOC 1 1 1 1 1 000,01$ DDAPXE43304AP OHCE CNI 21/92/01 12 50 RT CIFICAP OHCE NOITCURTSNOC 1 1 1 1 1 000,01$ DDAPXE43304AP OHCE CNI 21/92/01 12 60 RT CIFICAP OHCE NOITCURTSNOC 1 1 1 1 1 658,5$ DDAPXE43304AP OHCE CNI 21/92/01 12 70 RT CIFICAP OHCE NOITCURTSNOC 1 1 1 1 1 393,3$ DDAPXE43304AP OHCE CNI 21/92/01 12 80 RT CIFICAP OHCE NOITCURTSNOC 1 1 1 1 1 009,833$ DDAPXE91003AP OHCE CNI 31/41/3 12 90 RT CIFICAP OHCE NOITCURTSNOC 1 1 1 1 1 236,364$ DDAPXE29103AP OHCE CNI 31/9/4 12 01 RT 57 BIDS, REQUESTS FOR PROPOSALS, AND OTHER PROCUREMENT PRACTICES dnuoF snoitpecxE oN tciflnoc ni OP & lasoporp detpeccA tciflnoc $/snoitpircs -ed OP & eciovnI laitini tuohtiw se -gnahc nettirw dnaH eciovni retfa detad redrO esahcruP gnissim serutangis lavorppA etaruccani/etauq -edani liated eciovnI teehs gnikcart yrotsih tnemyaP oN tnemyap noitneter fi delfi CON oN )elbacilppa sa( pukcab/seulaV fo eludehcS oN eludehcS / etouQ / lasoporP / tnemeergA oN detad/dengis ton OP RO ypoc OP oN eciovnI oN dedivorP stnemucoD oN San Diego County offiCe of eDuCation tnemucoD EN 31# cxE 21# cxE 11# cxE 01# cxE 9# cxE 8# cxE 7# cxE 6# cxE 5# cxE 4# cxE 3# cxE 2# cxE 1# cxE tnuomA noitpircseD / rodneV rodneV etaD dnuF rebmuN & SSALG L DNA A SSALG L & A 1 1 128,31$ RORRIM RORRIM DNA 41/8/01 10 11 RT 1 1 437,3$ GNIROOLF S&A GNIROOLF S & A 51/71/3 10 21 RT 1 522,31$ GNIROOLF S&A GNIROOLF S & A 51/02/4 10 31 RT CGR NOITCURTSNOC 1 876,31$ DDAPXE87307AOC CGR CNI 51/41/01 10 41 RT CGR NOITCURTSNOC 1 1 054,4$ DDAPXE83407AOC CGR CNI 51/7/21 10 51 RT & ENACIRRUH ECNEF YAWOP 799,41$ DDAPXE15407ACIRRUH YNAPMOC 61/9/2 10 61 RT AINROFILAC LAICNANIF 1 1 582,332$ 900-AINROFILAC SECIVRES 61/91/8 12 71 RT NGIS EMITYNA 1 882$ 100-IS EMITYNA SNOITULOS 71/21/6 12 81 RT 1 1 618,4$ 100-GNIGAMI 2C GNIGAMI 2C 71/42/8 12 91 RT SMADA NOSLEN 1 688,26$ 100-ADA NOSLEN OCAN 71/41/9 12 02 RT ,NILWEN-REVLUC 313,537$ 100-WEN-REVLUC CNI 71/41/9 12 12 RT ,NILWEN-REVLUC 243,215$ 100-WEN-REVLUC CNI 71/51/9 12 22 RT 625,18$ 100-DROFWARC OC & DROFWARC 71/6/01 12 32 RT 822,08$ 100-DROFWARC OC & DROFWARC 71/6/01 12 42 RT MUNGAM 1 1 1 897,3$ 100-MUNGAM LLAWYRD 71/31/01 12 52 RT 295,92$ 100-ROTCEV ASU ROTCEV 71/81/21 12 62 RT 1 1 1 013,4$ DDAPXE CNI OCRIV CNI OCRIV 21/32/8 94 72 RT AINROFILAC 1 1 1 1 1 669$ DDAPXE28404AOFILAC TSURT & KNAB 21/52/9 12 82 RT 58 BIDS, REQUESTS FOR PROPOSALS, AND OTHER PROCUREMENT PRACTICES dnuoF snoitpecxE oN tciflnoc ni OP & lasoporp detpeccA tciflnoc $/snoitpircs -ed OP & eciovnI laitini tuohtiw se -gnahc nettirw dnaH eciovni retfa detad redrO esahcruP gnissim serutangis lavorppA etaruccani/etauq -edani liated eciovnI teehs gnikcart yrotsih tnemyaP oN tnemyap noitneter fi delfi CON oN )elbacilppa sa( pukcab/seulaV fo eludehcS oN eludehcS / etouQ / lasoporP / tnemeergA oN detad/dengis ton OP RO ypoc OP oN eciovnI oN dedivorP stnemucoD oN Fiscal crisis & ManageMent assistance teaM tnemucoD EN 31# cxE 21# cxE 11# cxE 01# cxE 9# cxE 8# cxE 7# cxE 6# cxE 5# cxE 4# cxE 3# cxE 2# cxE 1# cxE tnuomA noitpircseD / rodneV rodneV etaD dnuF rebmuN ETAGROBRA 1 002,4$ DDAPXE10014AGROBRA GNITLUSNOC 31/62/2 12 92 RT ADIUG 084,4$ DDAPXE15305A ADIUG GNIYEVRUS 31/01/21 12 03 RT & LLAH CIRE 1 1 1 1 493$ DDAPXE76014AH CIRE SETAICOSSA 41/61/6 12 13 RT 1 1 1 1 002,6$ DDAPXE21306AIC EHT RERUSAERT YTIC 41/72/8 12 23 RT 1 1 1 1 1 1 1 000,581$ TNARRAW LECNAC NWONKNU 41/41/8 94 33 RT 1 1 1 029,1$ DDAPXE19706A APL APL 51/9/2 12 43 RT 1 1 1 857,2$ DDAPXE16307A& LAEL OJERT & LAEL 51/4/9 12 53 RT 1 1 037,93$ DDAPXE81407AES AYK SECIVRES AYK 51/32/01 10 63 RT 1 1 1 1 1 1 214,84$ SREFSNART ERIW NWONKNU 61/61/11 94 73 RT 1 1 1 1 1 1 018,551$ tseretnI - ecivreS tbeD NWONKNU 71/03/6 94 83 RT - ecivreS tbeD rehtO 1 1 1 1 1 1 000,048$ lapicnirP NWONKNU 71/03/6 94 93 RT DNALHTUOS 1 1 865,54$ 100- DNALHTUOS YGOLONHCET 61/4/01 10 04 RT 1 1 108,675$ 100-OCSEREMA OCSEREMA 61/72/01 10 14 RT ,NILWEN-REVLUC 1 1 1 1 1 1 253,381$ 100-WEN-REVLUC CNI 71/32/1 10 24 RT & RALIUGA 1 616,896$ 100- & RALIUGA SETAICOSSA 71/52/4 12 34 RT ,YTTAEB RUOFLAB 1 1 199,326,8$ 100-RUOFLAB CNI 71/42/7 12 44 RT FO KNAB EHT KROY WEN 1 1 1 495,492,1$ 100-KNAB EHT NOLLEM 71/81/8 94 54 RT ANAZNAM 1 1 1 1 1 292,673,2$ 100-NE ANAZNAM YGRENE 71/02/01 12 64 RT KNAB .S.U LANOITAN 1 1 1 1 466,280,1$ 200-KNAB .S.U NOITAICOSSA 81/03/1 94 74 RT 59 BIDS, REQUESTS FOR PROPOSALS, AND OTHER PROCUREMENT PRACTICES dnuoF snoitpecxE oN tciflnoc ni OP & lasoporp detpeccA tciflnoc $/snoitpircs -ed OP & eciovnI laitini tuohtiw se -gnahc nettirw dnaH eciovni retfa detad redrO esahcruP gnissim serutangis lavorppA etaruccani/etauq -edani liated eciovnI teehs gnikcart yrotsih tnemyaP oN tnemyap noitneter fi delfi CON oN )elbacilppa sa( pukcab/seulaV fo eludehcS oN eludehcS / etouQ / lasoporP / tnemeergA oN detad/dengis ton OP RO ypoc OP oN eciovnI oN dedivorP stnemucoD oN San Diego County offiCe of eDuCation tnemucoD EN 31# cxE 21# cxE 11# cxE 01# cxE 9# cxE 8# cxE 7# cxE 6# cxE 5# cxE 4# cxE 3# cxE 2# cxE 1# cxE tnuomA noitpircseD / rodneV rodneV etaD dnuF rebmuN AINROFILAC LAICNANIF 1 1 1 000,02$ 900-AINROFILAC SECIVRES 81/31/2 94 84 RT ANAZNAM 1 1 1 1 1 1 638,716$ 100-NE ANAZNAM YGRENE 81/8/3 04 94 RT 1 017,71$ 100-M & OYNIN EROOM & OYNIN 81/02/4 04 05 RT 1 415,64$ 100-REKAB IKCIWON REKAB 81/42/4 52 15 RT AINROFILAC LAICNANIF 1 1 1 057,51$ 900-AINROFILAC SECIVRES 81/03/4 52 25 RT KEERC REVLIS 1 1 465,63$ 100-REVLIS CNI ,SEIRTSUDNI 81/7/5 52 35 RT 1 1 1 1 1 1 1 599,42$ REFSNART ERIW GUA NWONKNU 21/1/01 94 45 RT 1 1 1 1 1 1 1 592,08$ REFSNART ERIW GUA NWONKNU 21/1/01 94 55 RT 1 1 1 1 1 1 1 792,67$ SREFSNART ERIW NWONKNU 31/21/2 94 65 RT 1 1 1 1 1 1 1 792,67$ REFSNART ERIW NWONKNU 31/61/8 94 75 RT 1 1 1 1 1 1 1 000,031$ REFSNART ERIW NWONKNU 31/61/8 94 85 RT JMJ 1 1 1 525,57$ DDAPXE URTSNOC JMJ NOITCURTSNOC 31/71/1 94 95 RT 1 1 1 1 1 633,01$ DDAPXE22004AKNILOD PUORG AKNILOD 21/12/8 12 06 RT 1 1 1 1 077,72$ DDAPXE29016A& LAEL OJERT & LAEL 51/71/4 12 16 RT ANAZNAM 1 1 1 1 578,821,7$ DDAPXE70216ANAZNAM YGRENE 51/8/5 12 26 RT 1 1 1 1 1 1 1 830,44$ FBR FBR 51/03/6 12 36 RT 1 1 1 1 1 1 1 830,44$ FBR FBR 51/03/6 12 46 RT LATOT 2 4 41 2 81 8 51 54 31 52 73 71 21 8 SNOITPECXE %3 %6 %22 %3 %82 %31 %32 %07 %02 %93 %85 %72 %91 %31 60 BIDS, REQUESTS FOR PROPOSALS, AND OTHER PROCUREMENT PRACTICES All areas of exception warrant attention, but those that occur often are unlikely to be random errors and more likely to indicate weaknesses in the district’s procedures for verification before payment and/or recordkeeping. For contracts for which multiple invoices were paid, the district did not provide any documents to show that the department responsible for approving a particular invoice tracks invoices paid against a particular contract. Without a tracking mechanism, overpayments are possible. Creating a single purchase order for the full contract amount at the beginning of the contract helps limit the amount paid to the value of the contract; however, the district does not always do this. In some instances, the district did not issue a purchase order for a contract until it was needed to pay the first invoice or a subsequent invoice. This is not a best business practice. Once a contract is approved by a district’s governing board and signed, the next step in the process should be to issue a purchase order. Issuing a purchase order records the financial obligation of the contract and encumbers funds for this obligation. In addition, a district can usually pay invoices more promptly when they are received with a purchase order already in place. In one instance, the district issued a separate purchase order for each payment under a contract. This is a not a best business practice because it negates the purchase recording, tracking and limiting functions of a purchase order. The copies of purchase orders the district provided from its previous financial system listed the account number of the source of funding. The copies of purchase orders from the new financial system do not list the source of funding. This is not a good business practice because it reduces the openness and availability of information, which prevents those who review purchase orders from verifying the source of funding and increases the possibility of undetected errors. Fiscal crisis & ManageMent assistance teaM 61 OTHER IRREGULAR PRACTICES Other Irregular Practices Payment Practices Some of the documents received for the 64 transactions mentioned above related to payment of an invoice for furniture and included packing slips with notations that some furniture items were backordered or missing. No follow-up documents were found to indicate that these items were later received before the invoice was paid. Based on the file records, this appears to be an instance of incomplete due diligence on the part of both the department responsible for receiving the furniture and the Accounts Payable Department. Individuals who subsequently received the backordered or missing items should have documented the receipt of the items and provided this documentation to the Accounts Payable Department. The Accounts Payable Department should not have paid the invoices in the full amount without documents that showed receipt of all items. It is possible but not probable that the lack of documentation is due to poor record- keeping, because the original delivery receipt was well documented and was provided to accounts payable. On February 7, 2015 the district’s governing board held a special meeting for two purposes: 1) to approve a legal services agreement with Leal & Trejo, PC, and 2) to conduct a closed session conference with legal counsel regarding pending litigation against the district by EcoBusiness Alliance. The minutes of that meeting state that the board approved the agreement with Leal & Trejo, PC, effective February 7, 2015. Leal & Trejo, PC was approved as legal counsel, and then apparently immediately following that approval went into closed session with the board to advise the board about pending litigation with EcoBusiness Alliance. It is highly unusual to have a newly hired law firm immediately advise a district on a litigation issue without advance preparation. Leal & Trejo, PC subsequently submitted an invoice dated April 3, 2015. That invoice contains 25 billing entries totaling $5,618 from January 23 through February 5, 2015, all related to the litigation. Thus Leal & Trejo, PC were working on this issue before the closed session conference. However, Leal & Trejo, PC was not approved to do work until February 7, 2015. The effective date of February 7, 2015 was explicitly stated in the board approval, which indicates it was intentional. If retroactive approval was desired, the board could have passed the approval as a ratification. However, because that was not done, any work done prior to February 7, 2015 was not authorized and was therefore not compensable. Leal & Trejo, PC should not have billed for this work, and the district should not have paid for it. The district should seek reimbursement for these improper payments. At its August 23, 2016 meeting, the district’s governing board approved the use of a so-called “piggyback” bid from the Hawthorne School District for the purchase of furniture from Culver- Newlin. Piggyback contracting is the use of a public bid previously awarded by another agency. In piggyback contracting, the agency originating the bid issues a bid that states it can be piggy- backed. The governing board of the originating agency approves the bid with a specified period of validity. Other agencies that wish to use the bid by piggybacking on it may do so during the period for which it is valid. The governing board of the agency that piggybacks on a bid must approve the use of the piggy- back bid. Typically, a board approves use of its bid for a period of time, such as for the fiscal year. The approval is then valid for any purchases that the district may desire to make using that bid. The district’s board approved an agreement with Culver-Newlin valid from July 1, 2016 San Diego County offiCe of eDuCation 62 OTHER IRREGULAR PRACTICES through June 30, 2017. No dollar amount was given in the board item, but the funding source was specified as “General Fund/Redevelopment Fund.” The district then issued a purchase order on September 22, 2016 in the amount of $183,352.12 to Culver-Newlin for furniture for the district office, funded by the general fund. This purchase order was in compliance with the August 23, 2016 board approval. On May 23, 2017 the district issued two purchase orders to Culver-Newlin for furniture for La Mirada Elementary School ($512,342.31) and Smythe Elementary School ($738,821.82). No documents were provided to show that these purchase orders had a separate board approval. Therefore, they were likely relying on the prior board approval. However, these two purchase orders were funded from Fund 21, — monies from the 1997 bond — which is not a source authorized in the board approval. Thus, these two purchase orders did not use a funding source approved at the August 23, 2016 board meeting. In addition, as mentioned previously in this report, furniture is not an allowable use of the 1997 bond funds. The district’s Board Policy 3314 states: The Superintendent or designee shall . . . ensure that warrants have appropriate docu- mentary support verifying that all goods and services to be paid for have been delivered or rendered in accordance with the purchase agreement. District personnel responsible for confirming and documenting delivery or receipt of goods or services have not done so routinely, nor have they routinely confirmed that services received and contracting performed matched board-approved contract requirements. La Mirada and Smythe Elementary School Modernizations It is common for a school district to contract with a general contractor for construction projects. This is done through a sealed bid process, in which one general contractor with the lowest responsive and responsible bid is awarded the contract. The general contractor uses subcon- tractors for specific trades (e.g., electrical, plumbing) and may also perform work themselves. A general contractor manages the construction project and all the subcontractors. A district has a contract only with the general contractor. Another method of contracting for construction work is known as multi-prime contracting. This is when a district contracts directly and separately with all contractors in each major trade (e.g., electrical, plumbing and others) using a sealed bidding process to select the lowest responsive and responsible bidder. The contractor for each trade is considered a prime contractor and not a subcontractor. Because this method does not use a general contractor to manage the prime contractors, a district needs to manage the prime contractors itself or hire a firm to do the management. As described in Government Code 4525, construction management services manage and super- vise the construction contractors that perform the work. Pursuant to Government Code 4526, construction management services are considered professional services and therefore, as discussed earlier in this report, they are selected through a competitive process that is competence-based, such as an RFP, not based on the lowest bid. In October 2015 the district’s governing board approved issuing an RFP for “Construction Management Multi-Prime Services” for site modernization projects at La Mirada and Smythe elementary schools, Willow Middle School, and “Multi-Projects.” This RFP document describes the services needed as construction management of multi-prime construction projects. Fiscal crisis & ManageMent assistance teaM 63 OTHER IRREGULAR PRACTICES On December 12, 2015 the governing board approved Balfour Beatty as the firm to manage these multi-prime modernization projects. On April 14, 2016 the board approved a lease-leaseback agreement with Balfour Beatty for “construction management of modernization projects” at La Mirada and Smythe elementary schools. Balfour Beatty Timeline for La Mirada and Smythe Elementary Schools Date Source Type Description 10/22/2015 Board Item Approve issuance of RFP for Construction Management Multi-Prime Services 12/12/2015 Board Item Approve Balfour Beatty “as the firm that will manage multi-prime modernization projects” 4/14/2016 Board Item Adopt Resolution 15/16-3126 authorizing Supt/designee to execute/deliver Lease-Leaseback agreement with Balfour Beatty relating to the multiprime modernization projects at La Mirada and Smythe elementary schools 4/14/2016 Minutes 11.5: Resolution 15/16-3126 Approving the Lease-Leaseback Agreement with Balfour Beatty for the Multi-Prime Construction Projects 4/14/2016 Board Item Approve the Site Lease and Facilities Lease Agreement with Balfour Beatty for construction management of modernization projects at La Mirada and Smythe elementary schools 4/14/2016 Minutes Revised Consent Calendar item 12B.5 Lease/Leaseback Agreement with Balfour Beatty Construction and changed to: SITE LEASE AND FACILITIES LEASE AGREEMENTS WITH BALFOUR BEATTY FOR MANAGEMENT OF MULTI-PRIME PROJECTS 11/10/2016 Board Item Revise Site Lease/Facility Lease: Amend GMP from $3M to $18,918,073 6/2/2017 Board Item Approve the amendment to the Guaranteed Maximum Price [to $22,945,064] A lease-leaseback agreement is another method of contracting for construction work. Under this method, the contractor (sometimes called the developer) is selected through a competitive RFP process. The selection is made based on criteria focused on the best value, and there is not a requirement to select the lowest bidder. The lease-leaseback contractor hires subcontractors as required, functions as a general contractor, and manages the project. The district contracts only with the lease-leaseback contractor. Lease-leaseback agreements are for construction services. By contrast, construction management services agreements are for professional services, and construction management firms are prohib- ited from performing construction services on projects to which they are assigned as construction managers. Documents suggest that sometime between the district’s December 2015 and April 2016 board meetings, the district determined that, for modernizations at La Mirada and Smythe elementary schools, it wanted to use the lease-leaseback method of contracting for construction instead of the construction management multi-prime method. At its April 14, 2016 meeting, the district’s governing board adopted Resolution 15/16-3126, which authorized the superintendent or superintendent’s designee to execute and deliver a lease-leaseback agreement with Balfour Beatty for the multi-prime modernization projects at La Mirada and Smythe elementary schools. If the district uses a lease-leaseback to contract for construction with a single entity that acts as a general contractor, it is by definition not using a multi-prime construction delivery method. Misleading language in the resolution may have had the purpose or effect of avoiding conducting another RFP process. Education Code 17406 is the statutory authority for the lease-leaseback method of contracting for construction services. Education Code 17406(a)(1) requires the lessee “. . . to construct on the demised premises, or provide for the construction thereon of, a building or buildings for the San Diego County offiCe of eDuCation 64 OTHER IRREGULAR PRACTICES use of the school district during the term of the lease . . .” The district’s RFP for multi-prime construction management services does not mention construction services, yet its lease-leaseback agreement requires construction services. The district awarded a lease-leaseback agreement for construction work based on an RFP for professional construction management services. In January 2014, the Legislature established a requirement in Public Contract Code 20111.6 for prequalification of general contractors and electrical, mechanical, and plumbing subcontractors for projects for which an entity intends to request state school bond funding and that have a projected cost of $1 million or more. In January 2015, the Legislature clarified that lease-lease- back agreements were included in this requirement. Assembly Bill 566, effective January 2016, implemented the prequalification requirement for lease-leaseback projects, regardless of the funding source. No records were provided that indicate the district prequalified Balfour Beatty as a general contractor before it awarded Balfour Beatty a lease-leaseback agreement on April 14, 2016, even though the district had communicated with its law firm on the matter. Specifically, according to billing statement 15872 for March 2016 – Facilities from the law firm of Leal & Trejo, the district’s Business Services Division communicated with the law firm “regarding Lease-leaseback agreements” on March 7, 2016, and according to the law firm’s billing 15930 for April 2016, the firm conferred with the district’s former maintenance, operations, transportation and facilities director on April 11, 2016 regarding “findings on bidding procedures for construction manage- ment services.” The district’s Board Policy 3311 states, “The Superintendent or designee shall develop procedures to be used for rating bidders for award of contracts which, by law or Board policy, require prequalification.” When the district amended the lease-leaseback agreement on June 2, 2017, it included in the amendment the prequalification requirements in Public Contract Code 20111.6 concerning subcontractors. These actions indicate that the district was likely aware of the requirements when it was amended in June 2017. Solar Project Contract and Pricing Contracting As referenced earlier in this report, the district and Manzana Energy entered into a solar power and services agreement dated October 8, 2008 and a first addendum dated April 9, 2015. The contract was set up as a power purchase agreement, under which the district would purchase the power produced by the solar system over 25 years, and Manzana Energy would own, operate and maintain the system during that time. At the end of 25 years, Manzana Energy could either remove the system from the district’s property and retain ownership, or the district could purchase the system at fair market value. The district terminated the contract in October 2011 for lack of performance because no solar systems had been built in three years. Manzana Energy alleged that the district terminated the contract only 15 days into a 30-day termination notice and did not enter into good faith negotiations and binding arbitration, which led to the wrongful termination lawsuit in April 2012. In February 2014, a judgment was awarded against the district in favor of Manzana Energy for wrongful termination. The contract addendum was submitted to the district’s governing board for consideration and approval, and was explained to the board by the interim superintendent, the president of Fiscal crisis & ManageMent assistance teaM 65 OTHER IRREGULAR PRACTICES Manzana Energy, and the partner and a former attorney from the law firm of Leal & Trejo. The solar contract was on the board agenda for three meetings in a row (February 28, March 12, and March 26, 2015), but was tabled at each of these meetings. The board ultimately received and approved the addendum to the contract with Manzana Energy on April 9, 2015 at a special board meeting. The addendum with Manzana Energy was approved unanimously by the district’s governing board. In interviews, multiple individuals confirmed that board members felt contract approval was the best option at this point, given that Manzana Energy had been awarded a judgment against the district in February 2014 in the amount of $12 million. In the board’s view, the only alternative to approving the addendum with Manzana Energy would have been to pay the judg- ment, which the district could not afford to do at the time. Although the judgment was reduced following approval of the addendum, the district was still required to pay $1.6 million, purportedly for legal fees, pursuant to a settlement and mutual release eventually entered into on July 15, 2015. Two days later, the district executed a prom- issory note for this amount, payable to Manzana Energy within five years at a 5% interest rate. Then, on November 12, 2015, the district paid Manzana Energy $600,000 to resolve the settle- ment and mutual release, pursuant to the district’s Board Resolution No. 15/16-3125. For illustration, Appendix B of this report contains a timeline of the events related to the solar project. Pricing On the surface, the solar project contract pricing appears to be far higher than the market rates for similar projects. According to project contract documents, and as noted in the discussion of bond spending earlier in this report, Manzana Energy was to be paid $23,762,915 for early termination of the contract, pursuant to the solar power and services agreement first addendum, dated April 9, 2015. Manzana Energy contracted out the work to Cenergy Power, the primary subcontractor, for $4,400,000 according to a letter dated April 11, 2018 from the CEO of Cenergy Power to the president of Manzana Energy and applicable district representatives. The letter was titled, “Re. San Ysidro School District Solar Projects – Notice of Default, Stop Notice and Request for Meeting.” Absent other expenses, this would result in significant profit for Manzana Energy. Manzana Energy was required to install a solar system that produced 3,763,000 kilowatt hours (kWh) of electricity annually, per the contract addendum. Based on a conservative assumption of 1,500 kWh annually per kilowatt of generating capacity, this would result in a system size esti- mated on the high end to be 2.5 megawatts (MW). A conservative estimate of the average price many other school districts pay as a result of using a competitive RFP process is approximately $3.50 per watt. Many school districts pay less than this for carport solar projects at multiple school sites, and San Ysidro Elementary School District’s project included a significant quantity of ground-mounted systems, which cost even less than carports. FCMAT’s estimates are based on conservative pricing in 2015; many large multisite solar projects bid within the last year have received pricing from multiple vendors in the range of $2.50 to $3.00 per watt. FCMAT’s conservative estimates in this report are based on consultation with a principal at ARC Alternatives, an energy consulting firm with expertise and experience imple- menting solar energy projects. San Diego County offiCe of eDuCation 66 OTHER IRREGULAR PRACTICES Based on the price the San Ysidro Elementary School District paid for solar installations from Manzana Energy, FCMAT estimates that the district paid at least $9.50 per watt, and possibly more. If it had paid the average market rate of $3.50 per watt, its cost for the solar project would have been $8,750,000; however, it paid Manzana Energy $15,012,915 more than this. There may be a variety of reasons for the higher price, including the 2008 basis of costs when the original power purchase agreement was approved (as opposed to 2015); potential design, engineering, redesign and reengineering (including compliance with new building code require- ments); the loss of benefits to the contractor, such as tax incentives and rebates that would have accrued during the 25-year term of the agreement; sunk costs by the contractor from the original 2008 contract; and potential carrying costs by the contractor over the seven-year delay. Citizens’ Oversight Committee The district’s bond measure in 1997, Proposition C, was issued under the authority of Proposition 46 (1986). This type of bond requires the approval of two-thirds of voters but does not require a citizens’ oversight committee; however, a district may establish one if desired. In April 2016, the San Diego County Grand Jury issued an audit report that faulted the district for lack of transparency in its bond program and COPs management. Approximately four months later, at its August 23, 2016 meeting, the district’s governing board approved a resolu- tion of intent to establish a citizens’ oversight committee. Then, at its October 13, 2016 board meeting, the board approved a resolution to establish the committee and approved the policy under which the committee would operate. The district began advertising for members of the committee in May 2017, and it began receiving applications for membership toward the end of July 2017. At the beginning of September 2017, the superintendent at that time was terminated, and no further work was done to fill positions on the committee. At the time of this audit, more than a year later, no committee members have been appointed. In 2000, the voters of California passed Proposition 39, which established another type of bond that requires approval from 55% of voters to pass and requires a citizens’ oversight committee, an annual report, and annual financial and performance audits. Proposition 39 includes specific requirements regarding the duties and membership of the citizens’ oversight committee. Because a committee is not required for bonds passed under Proposition 46, such as the district’s Proposition C bond, there are no requirements regarding the duties or membership of such a committee other than those a school district’s governing board establishes. When the San Ysidro Elementary School District established the requirements for its citizens’ oversight committee, the governing board included some of the same requirements as Proposition 39 specifies including membership requirements, some duties, an annual report, and an annual financial audit. The district has now hired a permanent superintendent and a permanent chief business official, and has engaged a facilities consultant through the San Diego County Office of Education. It would benefit the district to recruit members and form a citizens’ oversight committee that meets regularly. It would be best to give this priority and to move deliberately through the process without rushing and with sufficient administrative support. Maintenance, Warehouse, and Facilities The district recently eliminated the position of director of maintenance, operations, transpor- tation, and facilities (MOTF). These departments now report to the chief business official. The Fiscal crisis & ManageMent assistance teaM 67 OTHER IRREGULAR PRACTICES district has also contracted with a facilities consultant through the San Diego County Office of Education. In interviews, the district’s lead maintenance personnel exhibited an exceptional depth of knowl- edge and sense of personal responsibility for the performance of their jobs. One senior individual reported having an engineering degree and exhibited good working knowledge of building trades. Another individual was knowledgeable about required annual pesticide and chemical training, and one reported taking personal vacation time to attend a trade convention at his own expense to become better informed about current industry practices and equipment, because the district would not pay for such training. In addition, maintenance personnel expressed a need for safety and other training, and stated that they were not involved in bids. Some larger issues and tasks may exceed these lead staff members’ abilities and may require the knowledge and experience of a director. The warehouse distribution associate indicated that since the MOTF director left, direction has been received from either the lead maintenance worker or the chief business official. The district needs to clarify who is the direct supervisor of this position. Warehouse personnel reported that inventory is done once per year, that there have been no thefts, and that warehouse drivers are being trained on PeopleSoft software to help record items. Cross training such as this is usually beneficial. However, multiple staff are now sharing individual PeopleSoft accounts; it is best practice to issue each user a separate account and password to ensure proper accountability. In interviews, some individuals indicated that facilities functions have been severely neglected. The individual in the facilities administrative secretary II position, who was assigned to the prior MOTF director, reported that she had no involvement with new construction or modernization; rather, she worked on maintenance, operations, and transportation. Individuals also report that the former superintendent and deputy superintendent made decisions about landscape design and other issues, bypassing the director of MOTF. The contracted facilities consultant from the San Diego County Office of Education reported that the facilities department has severe defi- ciencies in its structure and systems, bond accounting, facilities contracting, work flow process documentation, and recordkeeping. The district’s former assistant superintendent of business reported that she did not have directors who reported to her for many business functions, and therefore had to perform the work that otherwise would have been the responsibility of the directors. As a result, she stated she was barely able to keep up with the duties and responsibilities of the position. The district has not replaced its director of purchasing since 2008, and its controller position has not been filled since the last controller resigned in April 2018. The district has a history of not replacing business and operations department heads, and of overworking its chief business official by assigning departmental work to that person. The current repetition of this pattern places the district at risk. A chief business official may not have the in-depth background needed to provide the detailed direction required by various departments. A chief business official cannot effectively directly supervise the personnel in multiple depart- ments while properly managing the district’s business affairs. The district has acted prudently in contracting with the county office of education for the services of a facilities consultant. The district should also consider employing a maintenance, operations, and transportation (MOT) director or manager. Knowledgeable management personnel and effective management can help ensure that best business practices are implemented and that district policies are followed. Conversely, insufficient management can increase the risk of fraud, theft, or mismanagement of the district’s resources. San Diego County offiCe of eDuCation 68 INTERNAL CONTROLS Internal Controls Operational Policies and Procedures Board policies and administrative regulations are based on laws and regulations in numerous documents, including the California Constitution, Education Code, Code of Regulations, Government Code, federal regulations, case law, and industry practice. Board policies and regula- tions provide guidelines and directives for district operation and are a key component of internal controls. It is important to ensure that board policies are updated to reflect changes in legislation. When adopting board policy, a district should carefully consider the specific guidelines that promote behavior that secures district assets from misuse or fraud. As a part of this review, FCMAT requested copies of the district’s board policies and administrative regulations. Debt Issuance FCMAT found no evidence that the district has had a policy to govern its 16 debt issuances in the past 21 years. The district adopted Board Policy 3470, Debt Issuance Management, on May 30, 2017. This policy should have governed its 2017 issuance of COPs. However, the policy is severely deficient in that it fails to assign responsibly for determining affordability or making timely debt service payments. In the section of the policy titled “Goals,” the district identified 10 items required when issuing debt; one of the items states that the debt: 9. Preserves the availability of the district’s general fund for operating purposes and other purposes that are not funded by the issuance of voter-approved debt. Yet, as discussed earlier in the report, for the COPs issued in August 2017, three months after this policy was approved, the district proceeded with financing but did not demonstrate a suffi- cient amount of repayment from other financing means and will therefore need to use money from its general fund in the future to repay this debt. In addition, Education Code Section 17150.1(a) states: No later than 30 days before the approval by the governing board of the school district to proceed with the issuance of certificates of participation and other debt instruments that are secured by real property and do not require approval of the voters of the school district, the school district shall notify the county superintendent of schools and the county auditor. The superintendent of the school district shall provide information necessary to assess the anticipated effect of the debt issuance, including the repayment schedules for that debt obligation, evidence of the ability of the school district to repay that obligation, and the issuance costs, to the county auditor, the county superinten- dent, the governing board, and the public. Within 15 days of the receipt of the infor- mation, the county superintendent of schools and the county auditor may comment publicly to the governing board of the school district regarding the capability of the school district to repay that debt obligation. As discussed earlier in this report, the district did not submit the proper paperwork to the county office of education and therefore did not receive the benefit of public comment, which could have helped its governing board understand the proposed financing. In interviews with numerous individuals and a review of documents and activities, FCMAT identified actions and characteristics that are indicative of a lack of adherence to professional standards and a lack of formal processes and procedures. Specific areas in which these deficiencies were apparent are summarized below. Fiscal crisis & ManageMent assistance teaM 69 INTERNAL CONTROLS Vendor Payments The district’s Board Policy (BP) 3314 states: The Superintendent or designee shall…ensure that warrants have appropriate docu- mentary support verifying that all goods and services to be paid for have been delivered or rendered in accordance with the purchase agreement. District personnel responsible for confirming delivery or receipt of goods or services have not done so routinely and have not properly documented the receipt. In addition, district personnel failed to routinely confirm that services received matched the board-approved contract require- ments, and that contracting was done in accordance with board-approved parameters. Bid and RFP Processes District personnel did not have a clear understanding of who was responsible for bidding. Most staff were under the impression that the buyer position was responsible for bidding, yet the buyer stated that the former purchasing director handled all the bidding, and that since that person left bids have been done through the North County Purchasing Consortium, which is the local joint powers authority (JPA). The new CBO confirmed that vendors go through the North County Purchasing Consortium. However, the recent bid for installation of portables was done by the former interim CBO. The district’s Board Policy 3311 relates to bids and states the following: The Superintendent or designee shall establish comprehensive bidding procedures for the district in accordance with law. The district’s Administrative Regulation 3311 reinforces Board Policy 3311 with further detail and direction on the requirements and process for competitive bidding. The district should determine its bidding practices and procedures and then communicate these procedures to all departments. The district’s Board Policy 7140 states: The Superintendent or designee shall devise a competitive process for the selection of architects and structural engineers. The district’s Administrative Regulation 7140 further requires that “contractors for any architec- tural, landscape architectural, engineering, environmental, land surveying or construction project management services” are to be selected as required by Government Code 4526. FCMAT reviewed RFPs and contracts for the services in the administrative regulations above. As discussed earlier in this report, the district did not use the RFP process in a number of cases for which it was required. This shows that the district either does not have or does not follow established procedures to ensure that it uses best practices and follows board policy, administra- tive regulations and other government codes as legally required. Recordkeeping The district does not maintain complete facilities and procurement files and/or cannot locate documents and records. The district should develop document file checklists for each type of procurement method. It is essential to the improvement of internal control that the district establish and communicate recordkeeping procedures for facilities projects and accounts payable payment files for facilities bids, RFPs and contracts. San Diego County offiCe of eDuCation 70 INTERNAL CONTROLS A weakness in or lack of internal control elements has resulted in a high risk for fraud and misuse of district assets. FCMAT found material weaknesses in the district’s internal control system. Weaknesses in each component of internal control were evident including lack of the following: • Moral tone • Board policy and administrative regulation • Operational procedures related to the management and oversight of business processes • Oversight or monitoring of internal controls Ethical Values and Fiduciary Duties A fiduciary duty is the highest standard of care. The person who has a fiduciary duty is called the fiduciary, and the person to whom he or she owes the duty is typically referred to as the principal or the beneficiary (https://www.law.cornell.edu/wex/fiduciary_duty). A fiduciary also may be a person who holds a legal or ethical relationship of trust with one or more other parties and who is responsible for taking care of money or other assets that belong to the other party or parties. District board members, administrators and management all have fiduciary duties. The Cornell Legal Information Institute linked to above also describes several components of fiduciary duties, which FCMAT summarizes and applies to districts as follows: Duty of Care: Before making a decision, perform due diligence by collecting and reviewing all evidence and information available. Do not simply accept the information as it is presented. Assess information critically and ask who?, what?, when?, and where? A fiduciary’s responsibility is to protect the assets of the district. Duty of Loyalty: Do not use your position in the organization to further your private interests. Avoid anything that might injure the district. Duty of Good Faith: Advance the interests of the district. Do not violate the law. Fulfill your duties and responsibilities. Duty of Confidentiality: Keep confidential matters confidential; never disclose confidential infor- mation. Avoid personal liability. Duty of Prudence: Be trustworthy, using a degree of care and skill that a prudent board member, member of management, or fiduciary would exercise. Prudence means acting with wisdom and care, including exercising good judgment. Duty of Disclosure: Act with complete candor. Be open, sincere, honest and transparent. Disclose all financial interests on Form 700, Statement of Economic Interests. A strong system of internal control is among the most important aspects of any fraud prevention program. Superintendents, CBOs and other senior administrators are in positions of authority and therefore are responsible for exercising a higher standard of care and for establishing a district’s ethical tone and serving as examples to other employees. Employees with administrative responsibility have a fiduciary duty to the district to ensure that activities are conducted in compliance with all applicable board policies, laws, and regulations. The control environment is an essential component of internal control. It includes the ethical tone and example set by management, and it results in a workplace where employees feel safe expressing concerns. Based on interviews and documentation reviewed, such an environment was not present in the district. Fiscal crisis & ManageMent assistance teaM 71 INTERNAL CONTROLS The district’s Board Policy 3400 states that the board recognizes its fiduciary responsibility to effectively manage and safeguard the district’s assets and resources, and that it relies on the super- intendent or superintendent’s designee to ensure that internal controls help prevent and detect fraud, financial impropriety or irregularities in the district. Most people in an organization are responsible for internal controls in some capacity because almost everyone either produces information used by the internal control system or is responsible for taking actions to implement internal controls. School administrators, governing board members, and auditors have additional responsibility to ensure that an organization’s internal controls are effective. The governing board is intended to work as a group to provide governance, guidance and over- sight. Individual board members can improve the control environment when they are inquisitive, free from bias, informed, and conduct themselves in an ethical manner. Board members, management and employees with oversight and administrative responsibility have a fiduciary duty to ensure that activities are conducted in compliance with all applicable board policies, laws, regulations, and standards of conduct. Because internal controls include policies, procedures, and checks and balances, if those entrusted to set the oversight and ethical tone fail, the entire organization may be compromised. The board has a fiduciary duty to protect taxpayer interests and ensure that the district generates maximum value from its available resources to carry out its educational mission. As discussed earlier in this report, the district has the highest bond tax rates in the county, has the highest repayment ratios on all of its borrowing (GO bonds and COPs), has failed to generate maximum proceeds from financing transactions, and has a level of indebtedness that places its general fund at risk. The lack of evidence of due diligence on the part of the district (e.g., the failure to verify information and to identify risks) implies that business decisions were made without an appropriate level of understanding or a holistic strategy. These factors together indi- cate that the district’s leaders have not fulfilled their fiduciary duties. San Diego County offiCe of eDuCation 72 INTERNAL CONTROLS Failure of Board Policy, and Organizationwide Deficiency of Care Comments made by multiple individuals during interviews portrayed the district’s culture as one in which employees have become accustomed to complying with whatever direction is provided and not asking questions. Among long-term staff, there was little evidence of any knowledge of due diligence or checks and balances. With the exception of the M&O supervisors cited above, there were no examples of instances in which individuals took initiative or assumed personal responsibility when following up on procedural questions concerning the propriety or impropriety of what they were directed to do. Numerous individuals indicated that checking on particular items was probably someone else’s responsibility, or that they assumed that checking had been done already by someone else. As indicated in the Maintenance, Warehouse and Facilities section of this report above, the district’s former assistant superintendent of business services, who was at the district from July 2010 through August 2015, was overworked because the district did not have employees in many of its director positions, including purchasing, accounting, food service, and eventually MOTF. As a result, this individual reportedly had to do much of the work that these directors normally would have performed. If her account is accurate, she was of necessity working more as a manager or director than fulfilling the typical responsibilities of an assistant superintendent. Based on FCMAT’s experience, districts of comparable size to the San Ysidro Elementary School District often have one director-level position in the business office, one in MOT, and one in food service. It would benefit the district to complete a staffing comparison of similar districts. The former assistant superintendent also indicated that she did not work with or collaborate with the financial advisors and bond consultants concerning bond financing and restructuring, other than to provide data as requested. However, she wrote a highly detailed and complimentary letter of recommendation for the Dolinka Group, a firm that provided financial advisory services regarding bonds. This letter referenced how wonderful her interaction with Dolinka staff had been. It is difficult to understand why the former assistant superintendent would write such a letter if she did not have direct personal knowledge of the firm’s work and direct interaction with the firm’s staff. When interviewed, the former assistant superintendent indicated that the letter was simply a professional courtesy and its only purpose was to verify that the firm provided services to the district and that the services were satisfactory. However, because the text of the letter contains significantly more detail than her statement, the former assistant superintendent’s role appears to have been more involved. The letter references facilitation of general obligation bond and COP issuances, credit rating increase, a California Department of Education waiver, and other technical services provided by Dolinka, and the benefits of such services. These details imply personal knowledge of these finance issues. The letter also states that the former assistant superintendent was responsible for “assembling the team” to provide facilities program assistance. In addition, the former assistant superintendent was listed as the contact person for RFPs issued for facilities work in 2012, and the Dolinka Group was the consultant responsible for conducting the RFPs. The former assistant superinten- dent either had a greater role in interacting with bond consultants than the statements made in her interview indicate, or she signed a letter that included statements about which she had little or no personal knowledge. Either possibility indicates there was insufficient oversight of district business operations. Fiscal crisis & ManageMent assistance teaM 73 FAILURE OF BOARD POLICY, AND ORGANIZATIONWIDE DEFICIENCY OF CARE The former assistant superintendent did corroborate what multiple other individuals had stated about the district’s culture being one in which employees received and implemented directions without questioning, and she commented that people who are still at the district and do not have other employment options “just keep their heads down to keep their jobs.” District personnel interviewed stated that they learned their jobs mostly by doing them and that they have been provided with little or no training. A few individuals had received some training from their predecessors. When asked, almost every person interviewed responded that they needed and wanted training. One employee, who is responsible for reviewing contracts, was asked how they would know if a contract was good or bad and whether it was under the required bid limit threshold. The response was that someone would have to inform them; they would not be able to discern this on their own. Similarly, another employee, who is responsible for processing purchase orders, stated that they have been provided with no training or professional development and that the director who used to supervise them has not been replaced. This individual has to direct any purchasing questions to financial personnel: either the controller (who was recently placed on leave) or the CBO (who was recently hired). Another employee was asked if an item was questioned before it was processed. The answer given was that there were concerns but that the person assumed it was someone else’s responsibility to question the item. Only one employee mentioned that if they had questions or concerns about an answer or directive they would request the direction in writing. The district’s administrative culture seems to be one that prioritizes processing of paperwork, compartmentalizes duties, expects little knowledge of legal requirements and industry best prac- tices, and does not foster a sense of individual responsibility for checks and balances in job duties. The district’s superintendent and governing board need to work to create a culture of openness that fosters and expects proper business procedures. The district office has experienced a great deal of turnover in its leadership in the past decade, including three business office directors, an interim CBO, and six interim superintendents. This has had a significant impact on the employees’ working environments and revealed the need for cross training, desk procedure manuals, and department policies and procedures manuals. San Diego County offiCe of eDuCation 74 FAILURE OF BOARD POLICY, AND ORGANIZATIONWIDE DEFICIENCY OF CARE Political Reform Act — Disclosure, Conflicts of Interest, and Enforcement The Political Reform Act (PRA) was enacted by Proposition 9 in June 1974 and revised in 2015 with several significant changes to the conflict of interest rules, which became effective November 17, 2016. The stated intent of the act was to establish a process and requirement for most state and local officials as well as certain designated employees to publicly disclose their personal income and assets as follows: § 81002. Purposes of Title(c) Assets and income of public officials which may be materially affected by their official actions should be disclosed and in appropriate circumstances the officials should be disqualified from acting in order that conflicts of interest may be avoided. Source: http://www.fppc.ca.gov/content/dam/fppc/NS-Documents/LegalDiv/The%20Political%20 Reform%20Act/2018_Act_FINAL.pdf The act’s provisions are enforced by the Fair Political Practices Commission (FPPC) and supported by the Government Code. The act requires every state and local government agency to adopt a conflict of interest code. The FPPC is the state agency responsible for interpreting the provisions of the law and issuing California Form 700 – Statement of Economic Interests. Because school district governing board members are considered public officials and governing boards are considered legislative bodies, board members and certain other designated individuals must file Form 700 annually, when they take office or begin in a position, and upon leaving office. Form 700 for a given calendar year must usually be filed by April 1 of the subsequent calendar year and within 30 days of assuming or leaving office or a position, unless an exception applies. In addition, the district’s Board Bylaws 9000 Series document states on page 56 that a consultant to the organization “who makes, participates in making, or acts in a staff capacity for making governmental decisions” may be required to complete a Form 700. The district’s governing board originally adopted Board Bylaw 9270, Conflict of Interest, on October 19, 1987. This bylaw was subsequently updated in 2014 and 2015. The bylaw includes a comprehensive conflict of interest code that adopts the PRA and California Government Code and designates positions that must complete conflict of interest Form 700. The disclosure requirement is fulfilled through the annual submission of Form 700. Full disclosure using this form is required of the board, superintendent and chief business official; a lesser degree of disclo- sure is required of some other district administrators. The district was able to demonstrate due diligence in complying with the conflict of interest code for all designated positions as outlined in its Board Bylaw 9270. However, for fiscal years 2012-13 through 2014-15 the district had statement of economic interest forms from various employees of its legal counsel, Artiano Shinoff & Holtz, and in fiscal year 2015-16 the disclosure forms for most of the same personnel showed that they were leaving office. As discussed earlier in the report, the district approved a contract with Leal and Trejo, PC as legal counsel in February 2015. Therefore, FCMAT expected to see disclosure forms for Leal and Trejo, PC’s personnel when they began working on behalf of the district; however, FCMAT could find no records of such forms from this legal firm. Fiscal crisis & ManageMent assistance teaM 75 POLITICAL REFORM ACT — DISCLOSURE, CONFLICTS OF INTEREST AND ENFORCEMENT Possible Conflicts of Interest When faced with questions regarding possible conflicts of interest on the part of a public official such as a school board member, administrator or consultant, it is important to consider the legal and ethical standards and review applicable board policies that may be even more restrictive than the statutory mandates. The board and management should demonstrate financial integrity, and regulation is extremely important. Corruption does not have to involve two or more parties; a single employee in a position of trust can exercise authority for his or her own personal gain. Every conflict of interest issue requires one party to be in a position of trust, and every instance of corruption requires both a conflict of interest and a breach of that trust. FCMAT reviewed the district’s Board Bylaw 9270, Conflict of Interest, and Board Policy 4119.21, Professional Standards, to evaluate board members, staff and consultants regarding conflict of interest issues. Statutes that govern conflicts of interest include the Political Reform Act, Government Code 1090, Government Codes 87100, 87302, 87306, and 87500, Corporations Code Section 5233 for nonprofit organizations, and Education Code Section 35107(e). Government Code Section 1090 is an absolute prohibition against financial interests by board members, officers or employees in contracts “made by them in their official capacity, or by any body or board of which they are members” (GC 1090(a)). If an employee prepares or negotiates a contract or recom- mends its approval, this prohibition applies to him or her. The prohibition makes no exceptions, and if a conflict of interest exists, the contract is voidable and has no legal effect. It is not legally possible to abstain from a contract that violates 1090 unless the contract is a “remote interest” as defined under Government Code 1091 or a “non-interest” as defined under 1091.5. As revised, Board Bylaw 9270 states: Governing Board members, candidates, and committees are prohibited from accepting gifts and contributions from any employee, agent, independent contractor, represen- tative of any person or entity that is engaged in business with the San Ysidro School District at the time the contribution is made. Multiple individuals interviewed stated that at least one vendor and individuals associated with at least one vendor engaged in business with the district provided funding for the election campaigns of the individuals who shortly afterward became the district’s board vice president and board clerk. The allegations were that the funds were provided directly to or through indirect influence on the San Ysidro Education Association Political Action Committee (SYEA PAC). FCMAT reviewed campaign finance disclosure documents and verified that the SYEA PAC provided approximately 70% - 80% of the total contributions to those two board member campaigns. However, FCMAT did not obtain any campaign finance disclosure documents that corroborate the allegations shared with the FCMAT study team. Furthermore, subsequent to the release of the first version of this report, FCMAT conducted additional work, including inter- viewing and receiving written communication from some involved parties who categorically deny the allegations. FCMAT does not accuse any vendor, individuals associated with vendors, SYEA or the board members of any wrongdoing with regard to any alleged contributions. While there is no substantiation of the allegations made to FCMAT’s study team, the topic of inappropriate influence and pay-to-play through financial contributions to political and local bond campaigns is a worthy topic for the district to be conscientious about in its purchasing policies and practices. San Diego County offiCe of eDuCation 76 POLITICAL REFORM ACT — DISCLOSURE, CONFLICTS OF INTEREST AND ENFORCEMENT Political Contributions FCMAT reviewed campaign finance documents obtained from the County of San Diego for the prior five years, which included the 2014 and 2016 board member elections involving the following individuals: Marcos Diaz — 2014 campaign Luciana Corrales — 2014 campaign Rodolfo Linares — 2014 campaign Jason Wells — 2014 campaign Steve Kinney — 2016 campaign Irene Lopez — 2016 campaign Antonio Martinez — 2016 campaign Rosaleah Pallasigue — 2016 campaign None of the district’s vendors or individuals associated with vendors were identified as having made political contributions to candidates in any of the above elections. In addition, FCMAT obtained campaign finance documents from the district for the election in which its Proposition C bond measure was approved by voters. Several firms that made political contributions at the time were identified as also having been the district’s vendors. There is no legal prohibition against vendors making political contributions, though such contributions may be indicative of pay-to-play activity if the vendor is hired or retained as a result of their contribu- tion. These firms and the amount of each firm’s contribution are highlighted in the table below: Firms That Made Campaign Contributions Name Contribution Pardee Construction Co. $ 5,000.00 Coup & Smith Architects $ 2,000.00 Miracle Play Systems $ 1,500.00 Puhnau Associates $ 1,500.00 Detel System Inc. $ 1,000.00 Kadie-Jensen, Johnson, & Bodnar $ 1,000.00 American Asphalt & Concrete, Inc. $ 750.00 T.M.P. Homes $ 750.00 S.D.C.G. Associates L.D. $ 500.00 Southland Geotechnical, Inc. $ 500.00 Wow Wee Impact Wear $ 500.00 Orrick, Herrington & Sutcliff $ 250.00 Brothers Market, Inc. $ 200.00 MCI Foods Inc. $ 200.00 Hollandia Dairy $ 100.00 San Diego Restaurant Supply $ 100.00 D. Sellers Associates $ 50.00 Highlighted rows indicate firms that were the district’s vendors. Fiscal crisis & ManageMent assistance teaM 77 POLITICAL REFORM ACT — DISCLOSURE, CONFLICTS OF INTEREST AND ENFORCEMENT Conclusion Potential for Fraud Based on the findings in this report, there is sufficient evidence to demonstrate that fraud, misappropriation of funds and/or assets, or other illegal fiscal activities may have occurred in the specific areas reviewed. Deficiencies and exceptions noted during FCMAT’s review of the district’s financial records and internal control environment increase the probability of fraud, mismanagement and/or misappropriation of the district’s assets. These findings should be of great concern to the San Ysidro Elementary School District and the San Diego County Office of Education and require immediate intervention to limit the risk of fraud, mismanagement and/or misappropriation of assets, or other illegal fiscal activities in the future. Judgments Regarding Guilt or Innocence The existence of fraud, misappropriation of funds and/or assets, or other illegal fiscal activities is solely the purview of the courts and juries. FCMAT is not making statements that could be construed as a conclusion that fraud, misappropriation of funds and/or assets, or other illegal fiscal activities have occurred. These terms are a broad legal concept, and auditors do not make legal determinations regarding whether illegal activity has occurred. In accordance with Education Code Section 42638(b), action by the county superintendent shall include the following: If the county superintendent determines that there is evidence that fraud or misappro- priation of funds has occurred, the county superintendent shall notify the governing board of the school district, the State Controller, the Superintendent of Public Instruction, and the local district attorney. In accordance with Education Code Section 1241.5(b), the county superintendent is required to report the findings and recommendations to the district’s governing board at a regularly scheduled board meeting within 45 days of completing the audit. Within 15 days of receipt of the report, the governing board is required to notify the county superintendent of its proposed actions regarding the county superintendent’s recommendations. Recommendation The county superintendent should: 1. Notify the governing board of the San Ysidro Elementary School District, the State Controller, the Superintendent of Public Instruction and the local district attorney that sufficient evidence exists to indicate that fraud or misap- propriation of district funds and/or assets, or other illegal fiscal activities, may have occurred. San Diego County offiCe of eDuCation 78 Fiscal crisis & ManageMent assistance teaM 7799 APPENDICDERSAFT Appendices San Diego County offiCe of eDuCation 80 Fiscal crisis & ManageMent assistance teaM 8811 APPENDICDERSAFT Appendix A District Superintendents’ and Board Members’ Dates of Service Administrators Position Name From To Superintendent Manuel H. Paul 11/9/2007 6/30/13* Superintendent Designee Gloria Madera 1/17/2013 6/30/13 Interim Superintendent Gloria Madera 7/1/13 3/31/14 Interim Superintendent George Cameron 4/24/14 1/30/15 Interim Superintendent Edward Velasquez 2/2/15 6/30/15 Superintendent Julio Fonseca 7/1/15 9/1/17 Interim Superintendent Arturo Sanchez Macias 9/1/17 11/3/17 Interim Superintendent Mary Willis 11/9/17 11/6/17 Interim Superintendent Edward Velasquez 3/12/18 4/12/18 Superintendent Gina A. Potter 514/18 Present *Official leave date Board Members Fiscal Year Name Notes 2012-13 Yolanda Hernandez Jean A. Romero Jason M-B Wells Antonio Martinez Assuming Office: 12/20/12 Jose F. Barajas Assuming Office: 12/20/12 2013-14 Yolanda Hernandez Resigned: 4/30/14 Jean A. Romero Resigned: 4/1/14 Jason M-B Wells Antonio Martinez Jose F. Barajas Luciana Corrales Assuming Office: 6/26/14 2014-15 Jason M-B Wells Leaving Office: 12/11/14 Antonio Martinez Jose F. Barajas Luciana Corrales Marcos Diaz Assuming Office: 12/11/14 Rodolfo Linares Assuming Office: 12/11/14 2015-16 Antonio Martinez Marcos Diaz Rodolfo Linares San Diego County offiCe of eDuCation 8822 DRAAFPTPENDICES Fiscal Year Name Notes Jose F. Barajas Resigned: 8/1/15 Luciana Corrales Resigned: 11/17/15 Steven Kinney Assuming Office: 9/30/15 Rosaleah Pallasigue Assuming Office: 12/10/15 2016-17 Antonio Martinez Marcos Diaz Rodolfo Linares Rosaleah Pallasigue Irene Lopez Assuming Office: 12/14/16 Steven Kinney Leaving Office: 12/14/16 2017-18 Antonio Martinez Marcos Diaz Rodolfo Linares Rosaleah Pallasigue Irene Lopez 2018-19 Antonio Martinez Marcos Diaz Leaving Office: 12/13/18 Rodolfo Linares Leaving Office: 12/13/18 Rosaleah Pallasigue Irene Lopez Humberto Gurmilan Assuming Office: 12/13/18 Rudy Lopez Assuming Office: 12/13/18 Fiscal crisis & ManageMent assistance teaM 8833 APPENDICDERSAFT Appendix B Solar ProjecSt TYimSeDli nSeolar Project Timeline Oct 2008 Oct 08 2008 District and Manzana Energy Oct 2011 (EcoBusiness Alliance) entered into a District terminated the contract with solar power and service agreement Manzana Energy Apr 2012 Lawsuit filed by Manzana Energy Feb 11 2014 against the SYSD for wrongful Judgement against the SYSD termination of their contract awarding Manzana Energy $12 M Dec 14 2014 - Dec 16 2014 Board Vice-President and Clerk met Jan 10 2015 new Interim Superintendent at CSBA Following request of Board Vice- Conference President and Clerk, Interim Superintendent at the time resigns at Jan 22 2015 Special Board Meeting New Interim Superintendent Interviewed Jan 27 2015 New Interim Superintendent hired Feb 02 2015 during board meeting New Interim Superintendent start date Feb 07 2015 Partner at Law Firm Leal & Trejo Feb 12 2015 hired, including for purpose of Managing Director at RBC Capital reinstatement of Manzana Energy Markets presents on bonds contract. Board Directed New Interim Superintendent to discuss a resolution with Manzana Energy Feb 28 2015 MOU with Manzana Energy on board Mar 12 2015 agenda but tabled to a future meeting Special board meeting (prior to regular board meeting closed session) Mar 26 2015 to discuss holding a public hearing Public hearing and reinstatement of and discuss reinstatement of contract contract and addendum on agenda, and addendum, but appears tabled to but tabled to a future meeting a future meeting Apr 09 2015 Special board meeting where board Jul 15 2015 approves reinstatement of contract Settlement and mutual release and addendum entered into, reducing settlement amount to $1.6 M Jul 17 2015 District incurs promissory note for Nov 12 2015 $1.6 M payable to Manzana Energy District adopts resolution No. 15/16- within 5 years at 5% interest 3125 for a one-time $600,000 payment to Manzana Energy to fully satisfy the promissory note Created with Timeline Maker Pro v4. Produced on Jun 27 2019. San Diego County offiCe of eDuCation 8844 DRAAFPTPENDICES Fiscal crisis & ManageMent assistance teaM 8855 APPENDICDERSAFT Appendix C Study Agreement San Diego County offiCe of eDuCation 8866 DRAAFPTPENDICES Fiscal crisis & ManageMent assistance teaM 8877 APPENDICDERSAFT San Diego County offiCe of eDuCation 8888 DRAAFPTPENDICES Fiscal crisis & ManageMent assistance teaM 8899 APPENDICDERSAFT San Diego County offiCe of eDuCation 9900 DRAAFPTPENDICES Fiscal crisis & ManageMent assistance teaM 9911 APPENDICDERSAFT San Diego County offiCe of eDuCation