A newly released audit casts wide blame on the top managers of Sweetwater Union High School District and says they may have committed criminal fraud by lying about their finances to the district’s board of trustees and a credit rating agency.
The audit, performed by the state Fiscal Crisis and Management Assistance Team, which investigates school finance, specifically points to the district’s current superintendent, Karen Janney, its past chief financial officer and director of fiscal services, as well as an outside financial adviser as those who may have broken the law. The findings of the audit will be presented to the San Diego County district attorney, who must decide whether to bring charges.
The audit comes after a series of stories by Voice of San Diego revealed mismanagement and deceptive practices within the district. The district unexpectedly came up $30 million short in September 2018. Reporting showed that the district previously approved across-the-board raises even though some administrators knew doing so could lead the district to go bust. High-level administrators also knew the budget was much worse off than public documents actually showed.
The director of financial services, Doug Martens, told some of his colleagues that he knew the budget was in bad shape during the 2017-18 school year – even as the budget continued to look good on paper.
“‘It’s just so bad,’ he kept saying,” then-internal auditor Frances Martinez previously told VOSD. “‘Next year is gonna be so bad. It’s gonna be so bad. There’s going to be layoffs.’ It was weird. I didn’t know what he meant at the time.”
“We obviously know what he meant now,” she said.
Both Martens and Karen Michel, the district’s previous chief financial officer, refused to participate in the fiscal crisis team’s investigation. They both retired from their positions just before the true state of the district’s finances came to light.
The most damning section of the audit suggests that district administrators knowingly deceived a credit rating agency just before they issued millions of dollars in bonds.
The U.S. Securities and Exchange Commission, which handles financial crimes related to stocks and bonds, has been investigating Sweetwater’s finances. The SEC has previously fined and helped prosecute government officials who purposefully misstated financial information related to bond transactions.
“In February 2018, the CFO and financial advisor took a course of action that was designed to avoid disclosure of information to the credit rating agencies,” the report reads.
The audit suggests that certain internal reports showing the district’s deteriorating financial position were not fully communicated to Fitch, a credit rating agency that was responsible for evaluating the Sweetwater’s finances ahead of the bond issuance.
To the extent SEC investigators believe Sweetwater’s managers lied to their credit rating agency and investors, “they will go after it,” said Matt Fabian, who researches municipal bond markets for Municipal Market Analytics. In Miami, Florida, and Ramapo, New York, the SEC has fined and helped prosecute government officials involved in bond-market fraud.
“Even when the person had nothing to gain personally, nothing to gain but hiding information on behalf of their government that can be enough to cause them a life-changing series of events,” said Fabian. By life-changing series of events, he meant large fines and even jail time.
Another central part of the fiscal crisis team’s investigation examined 5.25 percent across-the-board raises approved in 2017.
Janney and Michel presented “incomplete and inaccurate financial information” to the district’s board of trustees when they were deciding whether to approve the raises, the report concludes. Information presented to the board “significantly understated the projected cost” and “significantly distorted the district’s fiscal position.”
Due to the raises, Sweetwater ultimately overspent by more than $30 million in the 2017-18 school year. That has led to a budget crisis and tens of millions of dollars in ongoing cuts that continue to impact students in Sweetwater, which is San Diego County’s second largest school district with roughly 39,000 students.
Any charges related to bond sales would likely fall under federal securities law and need to be pursued by the SEC. Some state criminal statutes could also allow San Diego’s district attorney to press charges.
State law charges government officers with safeguarding public money. When a government officer “fraudulently alters, falsifies, conceals, destroys, or obliterates any account” they can be prosecuted.
It is unclear if the SEC or district attorney will pursue interviews with Martens and Michel, who declined to be interviewed by the fiscal crisis team.
The audit also calls out the San Diego County Office of Education, which is charged with fiscal oversight of local school districts. State investigators said the County Office of Education should have caught some of Sweetwater’s errors, particularly related to the raises.
“The county office failed to identify, effectively evaluate and comment on” the proposed raises, the report notes. But it says the County Office of Education did not play any role “in the misrepresentation of the district’s financial position or other potential fraud.”
Janney and board members made few comments on the audit Monday night, which they had not seen prior to the board meeting. County Office of Education Superintendent Paul Gothold briefly presented the report, but did not go into detail. He only told board members that “there is significant evidence to indicate that fraud … may have occurred by current and former employees.”
He then emailed the report to Sweetwater’s board and superintendent.
Janney, who was implicated in the report, listened straight-faced. “We take the findings presented today very seriously, ” she said. “We will take the time necessary to fully digest and read through the 80-page report and determine the best course of action.”